UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
| Quarterly Report Pursuant To Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For
the quarterly period ended
OR
| Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from _______________ to _______________
Commission
File No.
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification Number) |
| (Address of Principal Executive Offices) | Zip Code |
(Registrant’s telephone number, including area code):
Securities registered pursuant to Section 12(b) of the Act: None
| Title of Each Class | Trading Symbol(s) | Name of each exchange on which registered | ||
| (Not Applicable) | (Not Applicable) | (Not Applicable) |
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01 per share
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ NO ☐
Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files). ☒ NO ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ☐ | Accelerated filer ☐ |
| Smaller
reporting company | |
| Emerging
growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13 (a) of the Exchange Act. ☐
Indicate
by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ☐
As of November 10, 2023, there were issued and outstanding shares of the Registrant’s Common Stock.
Vecta Inc.
Form 10-Q
Index
| i |
Part I. – Financial Information
| Item 1. | Financial Statements |
VECTA INC. AND SUBSIDIARY
Condensed CONSOLIDATED StatementS of Financial Condition
| September 30, | December 31, | |||||||
| 2023 | 2022 | |||||||
| (Unaudited) | ||||||||
| Assets | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Certificates of deposit | ||||||||
| Securities held to maturity, net | ||||||||
| Securities available for sale, at fair value | ||||||||
| Loans receivable, net | ||||||||
| Premises and equipment, net | ||||||||
| Federal Home Loan Bank of New York and other stock, at cost | ||||||||
| Accrued interest receivable | ||||||||
| Cash surrender value of life insurance | ||||||||
| Goodwill | ||||||||
| Core deposit intangible | ||||||||
| Other assets | ||||||||
| Total assets | $ | $ | ||||||
| Liabilities and Stockholder’s Equity | ||||||||
| Liabilities: | ||||||||
| Deposits | $ | $ | ||||||
| Advances from borrowers for taxes and insurance | ||||||||
| Other liabilities | ||||||||
| Total liabilities | ||||||||
| Commitments and contingencies | ||||||||
| Stockholder’s equity: | ||||||||
| Serial preferred stock; par value $, shares authorized, shares issued or outstanding | ||||||||
| Common stock; par value $, shares authorized; (September 30, 2023), (December 31, 2022) shares issued and outstanding | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Accumulated other comprehensive loss | ( | ) | ( | ) | ||||
| Total stockholder’s equity | ||||||||
| Total liabilities and stockholder’s equity | $ | $ | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements (unaudited).
| 1 |
Vecta Inc. AND SUBSIDIARY
Condensed CONSOLIDATED Statements of Operations (Unaudited)
| Three Months | Three Months | Nine Months | Four Months | |||||||||||||
| Ended September 30 | Ended September 30 | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Interest and dividend income: | ||||||||||||||||
| Loans | $ | $ | $ | $ | ||||||||||||
| Investment securities | ||||||||||||||||
| Mortgage-backed securities | ||||||||||||||||
| Federal funds sold and other earning assets | ||||||||||||||||
| Total interest and dividend income | ||||||||||||||||
| Interest expense: | ||||||||||||||||
| Deposits | ||||||||||||||||
| Borrowings | ||||||||||||||||
| Total interest expense | ||||||||||||||||
| Net interest income | ||||||||||||||||
| Provision for credit losses | ||||||||||||||||
| Net interest income after provision for credit losses | ||||||||||||||||
| Non-interest income: | ||||||||||||||||
| Fees and service charges | ||||||||||||||||
| Income on bank owned life insurance | ||||||||||||||||
| Total non-interest income | ||||||||||||||||
| Non-interest expense: | ||||||||||||||||
| Compensation and benefits | ||||||||||||||||
| Occupancy and equipment, net | ||||||||||||||||
| Data processing service fees | ||||||||||||||||
| Merger related expenses | ||||||||||||||||
| Professional fees | ||||||||||||||||
| Federal deposit insurance premiums | ||||||||||||||||
| Amortization of core deposit intangible | ||||||||||||||||
| Advertising and promotion | ||||||||||||||||
| Other | ||||||||||||||||
| Total non-interest expense | ||||||||||||||||
| (Loss) income before income tax | ( | ) | ( | ) | ( | ) | ||||||||||
| Income tax expense (benefit) | ( | ) | ||||||||||||||
| Net (loss) income | ( | ) | $ | ( | ) | ( | ) | |||||||||
| Basic and diluted net loss per share | $ | ) | $ | $ | ) | $ | ) | |||||||||
| Weighted average shares outstanding, basic and diluted | ||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements (unaudited).
| 2 |
Vecta Inc. AND SUBSIDIARY
CONDENSED CONSOLIDATED Statements of Comprehensive LOSS
(Unaudited)
| Three Months | Three Months | Nine Months | Four Months | |||||||||||||
| Ended September 30 | Ended September 30 | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Net loss | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | ||||||
| Other comprehensive income (loss), before taxes: | ||||||||||||||||
| Defined benefit pension plan: | ||||||||||||||||
| Amortization of loss | ||||||||||||||||
| Unrealized gains (losses) on securities available for sale: | ||||||||||||||||
| Unrealized holding gains (losses) arising during the period | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other comprehensive income (loss), before tax | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Income tax expense (benefit) related to items of other comprehensive income (loss) | ( | ) | ( | ) | ||||||||||||
| Other comprehensive income (loss), net of tax | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Comprehensive loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements (unaudited).
| 3 |
VECTA INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER’S EQUITY
(Unaudited)
| Accumulated | ||||||||||||||||||||
| Additional | Other | |||||||||||||||||||
| Common | Paid-in | Accumulated | Comprehensive | Total | ||||||||||||||||
| Stock | Capital | Deficit | Loss | Equity | ||||||||||||||||
| Three Months Ended September 30, 2023 | ||||||||||||||||||||
| Balance at June 30, 2023 | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||
| Net loss for the three months ended September 30, 2023 | ( | ) | ( | ) | ||||||||||||||||
| Net proceeds from the sale of common stock | ||||||||||||||||||||
| Other comprehensive loss | ( | ) | ( | ) | ||||||||||||||||
| Balance at September 30, 2023 | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||
| Nine Months Ended September 30, 2023 | ||||||||||||||||||||
| Balance at December 31, 2022 | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||
| Net loss for the nine months ended September 30, 2023 | ( | ) | ( | ) | ||||||||||||||||
| Net proceeds from the sale of common stock | ||||||||||||||||||||
| Other comprehensive income | ( | ) | ( | ) | ||||||||||||||||
| Balance at September 30, 2023 | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements (unaudited).
| 4 |
VECTA INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER’S EQUITY
(Unaudited)
| Accumulated | ||||||||||||||||||||
| Additional | Other | |||||||||||||||||||
| Common | Paid-in | Accumulated | Comprehensive | Total | ||||||||||||||||
| Stock | Capital | Deficit | Loss | Equity | ||||||||||||||||
| Three months ended September 30, 2022 | ||||||||||||||||||||
| Balance at June 30, 2022 | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||
| Net income for the three months ended September 30, 2022 | ||||||||||||||||||||
| Other comprehensive income (loss), net of tax | ( | ) | ( | ) | ||||||||||||||||
| Balance at September 30, 2022 | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||
| Four months ended September 30, 2022 | ||||||||||||||||||||
| Balance at June 1, 2022 | $ | $ | $ | $ | $ | |||||||||||||||
| Net loss for the four months ended September 30, 2022 | ( | ) | ( | ) | ||||||||||||||||
| Net proceeds from the sale of stock | ||||||||||||||||||||
| Other comprehensive income (loss), net of tax | ( | ) | ( | ) | ||||||||||||||||
| Balance at September 30, 2022 | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements (unaudited).
| 5 |
VECTA INC. AND SUBSIDIARY
Condensed cONSOLIDATED Statements of Cash Flows
(Unaudited)
| Nine Months Ended | Four Months Ended | |||||||
| September 30, | September 30, | |||||||
| 2023 | 2022 | |||||||
| Cash flows from operating activities: | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation expense | ||||||||
| Amortization of premiums and accretion of discounts, net | ( | ) | ( | ) | ||||
| Amortization of deferred loan fees and costs, net | ( | ) | ||||||
| Amortization of core deposit intangible | ||||||||
| Provision for credit losses | ||||||||
| (Increase) decrease in accrued interest receivable | ( | ) | ||||||
| Increase in cash surrender value of life insurance | ( | ) | ( | ) | ||||
| Increase in other assets | ( | ) | ( | ) | ||||
| Increase in other liabilities | ||||||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| Cash flows from investing activities: | ||||||||
| Repayments and maturities of securities held to maturity | ||||||||
| Repayments and maturities of securities available for sale | ||||||||
| Loans purchased | ( | ) | ||||||
| Loan originations, net of principal repayments | ( | ) | ||||||
| Purchase of premises and equipment | ( | ) | ( | ) | ||||
| Redemption of FHLB stock | ||||||||
| Cash paid for acquisition, net of cash acquired | ( | ) | ||||||
| Net cash provided by (used in) investing activities | ( | ) | ||||||
| Cash flows from financing activities: | ||||||||
| Net decrease in deposits | ( | ) | ( | ) | ||||
| Net decrease in advances from borrowers for taxes and insurance | ( | ) | ( | ) | ||||
| Repayment of long-term borrowings | ( | ) | ||||||
| Proceeds from sale of stock | ||||||||
| Net cash (used in) provided by financing activities | ( | ) | ||||||
| Net (decrease) increase in cash and cash equivalents | ( | ) | ||||||
| Cash and cash equivalents at beginning of period | ||||||||
| Cash and cash equivalents at end of period | $ | $ | ||||||
| Supplemental disclosures of cash flow information: | ||||||||
| Cash paid for: | ||||||||
| Interest | $ | $ | ||||||
| Income taxes | $ | $ | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements (unaudited).
| 6 |
Vecta Inc. AND SUBSIDIARY
Condensed cONSOLIDATED Statements of Cash Flows
(Unaudited) (CONT’D)
| Four Months Ended | ||||
| September 30, | ||||
| 2022 | ||||
| Supplemental schedule of non-cash investing activities: | ||||
| Acquisition: | ||||
| Non-cash assets acquired: | ||||
| Certificates of Deposit | $ | |||
| Securities Held to Maturity | ||||
| Securities Available for Sale | ||||
| Loans receivable, net | ||||
| Premises and equipment | ||||
| Federal Home Loan Bank of New York and other stock, at cost | ||||
| Accrued interest receivable | ||||
| Cash surrender value of life insurance | ||||
| Goodwill | ||||
| Core deposit intangible | ||||
| Other assets | ||||
| Total non-cash assets acquired | ||||
| Liabilities assumed: | ||||
| Deposits | ||||
| Borrowings | ||||
| Advances from borrowers for taxes and insurance | ||||
| Other liabilities | ||||
| Total liabilities assumed | ||||
| Net non-cash assets acquired | $ | |||
| Cash and cash equivalents acquired in acquisition, net | $ | |||
| Cash paid for acquisition, net of transaction costs | $ | |||
The accompanying notes are an integral part of these condensed consolidated financial (unaudited).
| 7 |
Vecta Inc. AND SUBSIDIARY
Form 10-Q
Notes to Condensed Consolidated Financial Statements (Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Corporate History, Nature of Business and Merger Acquisition
Vecta Inc. (formerly known as Sunnyside Bancorp, Inc.) (“Vecta”, “Vecta Inc.” or the “Company”) was incorporated in the State of Maryland in March 2013 for the purpose of becoming the savings and loan holding company for Sunnyside Federal Savings and Loan Association of Irvington (“Sunnyside Federal” or the “Bank”), a federally-chartered savings and loan association founded in 1930, and the wholly-owned subsidiary of Vecta Inc. upon consummation of Sunnyside Federal’s mutual to stock conversion. The Bank conversion was consummated in July 2013, at which time Sunnyside Bancorp, Inc. became the registered savings and loan holding company of the Bank. Prior to the Closing Date (as referenced below) of the Merger (as referenced below), other than holding all of the issued and outstanding stock of Sunnyside Federal and making a loan to the Sunnyside Federal’s employee stock ownership plan, Vecta Inc. has not engaged in any material business.
On June 1, 2022 (the “Closing Date”), Vecta Partners LLC (formerly known as Rhodium BA Holdings LLC), a Delaware limited liability company (“Vecta Partners”), completed its acquisition of Vecta Inc., pursuant to the Agreement and Plan of Merger, dated as of June 16, 2021, as amended on August 26, 2021 (the “Merger Agreement”), by and among Vecta Partners, Rhodium BA Merger Sub, Inc., a Maryland corporation (“Merger Sub”), Mark Silber, Vecta Inc. and Sunnyside Federal. Pursuant to the Merger Agreement and subject to the terms and conditions thereof, on the Closing Date, Merger Sub merged with and into Vecta Inc. (the “Merger”), with Vecta Inc. continuing as the surviving corporation and a wholly-owned subsidiary of Vecta Partners.
The Merger was accounted for under the acquisition method of accounting and accordingly the results of Vecta Inc.’s operations were included in Vecta Inc.’s December 31, 2022 consolidated financial statements from the date of acquisition, or June 1, 2022.
On
June 1, 2022, the Board of Directors of Vecta Inc. authorized and approved a
On
June 29, 2022, Vecta Partners made an additional capital contribution of $
On July 18, 2022, Vecta Inc. also increased its authorized shares of common stock to par value $, and increased its authorized shares of preferred stock to par value $. As of September 30, 2023, Vecta Inc. had shares of common stock outstanding and shares of preferred stock outstanding.
On July 18, 2022, Vecta Inc. also amended its Articles of Incorporation to change its name from “Sunnyside Bancorp, Inc.” to Vecta Inc. The name change was effected pursuant to the filing of Articles of Amendment to Vecta Inc.’s Articles of Incorporation with the Maryland State Department of Assessments and Taxation.
On
June 30, 2023, Vecta Partners made an additional capital contribution of $
Sunnyside Federal is a community-oriented savings institution whose primary business is accepting deposits from customers within its market area (Westchester County, New York) and investing those funds in mortgage loans secured by one-to-four family residences, multi-family and commercial real estate properties. To a lesser extent, funds are invested in commercial loans, small business administration (“SBA”) loans, consumer loans and mortgage-backed securities and other securities. Customer deposits are insured up to applicable limits by the Federal Deposit Insurance Corporation (“FDIC”). As a federally-chartered savings association, Sunnyside Federal’s primary regulator is the Office of the Controller of the Currency (the “OCC”).
| 8 |
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont’d)
Basis of Financial Statement Presentation
The unaudited consolidated financial statements of Vecta Inc. are comprised of the accounts of Vecta Inc., a registered bank holding company under the Bank Holding Company Act of 1956, and its wholly owned subsidiary, Sunnyside Federal. The accounting and reporting policies of Vecta conform to accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10-01 of Regulation S-X. Accordingly, they do not include all of the information and accompanying notes required by GAAP for complete financial statements. In the opinion of management, all adjustments necessary for a fair presentation of the financial position and the results of operations for the periods presented have been included in the consolidated financial statements. All intercompany balances and transactions have been eliminated in consolidation. Prior period amounts have been reclassified when necessary to conform to the current period’s presentation. Such reclassifications did not have an impact on the operating results or financial position of Vecta. The operating results and financial position of Vecta for the three and nine months ended September 30, 2023 may not be indicative of future results of operations and financial position that may be expected for the current year ending December 31, 2023. The financial data presented herein should be read in conjunction with the audited consolidated finanical statements and accompanying notes as of and for the period from June 1, 2022 through December 31, 2022 included in the Annual Report on Form 10-K for the period ended December 31, 2022 (“2022 Form 10-K”).
Significant Estimates:
In preparing the unaudited consolidated financial statements in conformity with GAAP, management has made estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated statements of financial condition and results of operations for the periods indicated. Material estimates that are particularly susceptible to change in the near term are the allowance for credit losses (“ACL”), securities’ valuation and evaluation for credit impairment, the evaluation of goodwill and other intangible assets for impairment and income taxes. Estimates and assumptions are reviewed periodically, and the effects of revisions are reflected in the consolidated financial statements in the period they are deemed necessary. While management uses its best judgment, actual amounts or results could differ significantly from those estimates. The current economic environment has increased the degree of uncertainty inherent in these material estimates. Actual results may differ from those estimates.
In making estimates, Vecta has evaluated events and transactions occurring subsequent to September 30, 2023, the balance sheet date, for items that could potentially be recognized or disclosed in these consolidated financial statements. The evaluation was conducted through the issuance date of these consolidated financial statements.
In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company’s ACL. Such agencies may require the Company to recognize additions to the allowance based on their judgments about information available to them at the time of their examination.
The disclosures below update and supplement the accounting policies previously disclosed in Note 1, “Summary of Significant Accounting Policies” included the 2022 Form 10-K and reflect the adoption of Accounting Standards Update (“ASU”) 2016-13, Financial Instruments – Credit Losses (Topic 326): “Measurement of Credit Losses on Financial Instruments,” by Vecta on January 1, 2023. ASU 2016-13 is also commonly referred to as Accounting Standards Codification (“ASC”) 326 or Current Expected Credit Loss (“CECL”) model.
ACL on Debt Securities:
Upon adoption of ASU 2016-13, management no longer evaluates securities for other than temporary impairment, as ASC Subtopic 326-30, “Financial Instruments—Credit Losses—Available-for-Sale Debt Securities,” changes the accounting for recognizing impairment on available-for-sale debt securities. Each quarter management evaluates impairment where there has been a decline in fair value below the amortized cost basis of a security to determine whether there is a credit loss associated with the decline in fair value. Management considers the nature of the collateral, potential future changes in collateral values, default rates, delinquency rates, third-party credit support, credit ratings, interest rate changes since purchase, volatility of the security’s fair value and historical loss information for financial assets secured with similar collateral among other factors. Credit losses are calculated individually, rather than collectively, using a discounted cash flow (“DCF”) method, whereby management compares the present value of expected cash flows with the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance on available-for-sale debt securities is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an allowance is recognized in other comprehensive (loss) income.
| 9 |
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont’d)
Vecta’s estimate of expected credit losses includes a measure of the expected risk of credit loss even if that risk is remote. However, Vecta does not measure expected credit losses on an investment security in which historical credit loss information adjusted for current conditions and reasonable and supportable forecast results is an expectation that nonpayment of the amortized cost basis is zero. Management does not expect nonpayment of the amortized cost basis to be zero solely on the basis of the current value of collateral securing the security but, instead, also considers the nature of the collateral, potential future changes in collateral values, default rates, delinquency rates, third-party guarantees, credit ratings, interest rate changes since purchase, volatility of the security’s fair value and historical loss information for financial assets secured with similar collateral. Vecta performed an analysis that determined that the following securities have a zero expected credit loss: U.S. government agencies, mortgage-backed securities of U.S. government and government-sponsored agencies, as all of the U.S. government agencies and U.S. government agency backed securities have the full faith and credit backing of the United States Government or one of its agencies.
The allowance on available-for-sale debt securities may be in full or a portion thereof, and is recorded as an expense (credit) within the provision for credit losses on the consolidated statements of income. Losses are charged against the allowance when management believes the uncollectibility of an available-for-sale debt security is confirmed based on the above-described analysis. As of September 30, 2023, and January 1, 2023 (i.e. ASU 2016-13 adoption), there was no allowance established for Vecta’s available-for-sale debt securities.
Loans:
Vecta reports loans and leases held for sale in the portfolio at amortized cost. Amortized cost is the principal balance outstanding net of the unamortized balance of any deferred fees or costs and the unamortized balance of any premiums or discounts on loans purchased through third-party originators.
Generally, for originated loans, loan fees and certain direct origination costs are deferred and amortized into interest income over the contractual term of the loan using the level-yield method over the estimated lives of the related loans. When a loan is paid off, the unamortized portion of deferred fees or costs are recognized in interest income. Interest income on originated loans is accrued based upon the daily principal amount outstanding except for loans on non-accrual status.
For purchased loans, interest income is accrued based upon the daily principal amount outstanding and is then further adjusted by the accretion of any discount or amortization of any premium associated with the loan that was recognized based on the acquisition date fair value. When a loan is paid off, the unamortized portion of any premiums or discounts on loans are recognized in interest income.
ACL on Loans:
An ACL is maintained at a level, to the best of management’s knowledge, to cover all known and inherent losses in the portfolio that are both probable and reasonable to estimate. Management of the Company, in determining the provision for loan losses considers the risks inherent in its loan portfolio and changes in the nature and volume of its loan activities, along with the general economic and real estate market conditions.
On January 1, 2023, the Company adopted Financial Accounting Standards Board (“FASB”) ASU 2016-13 Financial Instruments - Credit Losses (“Topic 326”), which replaced the incurred loss methodology for determining our allowance for credit losses and related provision for credit losses with an expected loss methodology that is referred to as the CECL model. CECL is a significant accounting estimate used in the preparation of the Company’s consolidated financial statements. Upon adoption of ASU 2016-13, the Company replaced the incurred loss impairment model that recognizes losses when it becomes probable that a credit loss will be incurred, with a requirement to recognize lifetime expected credit losses immediately when a financial asset is originated or purchased. CECL is a valuation account that is deducted from the amortized cost basis of loans to present the net amount expected to be collected on the loans. Loans, or portions thereof, are charged off against the allowance when they are deemed uncollectible. The allowance is comprised of reserves measured on a collective (pool) basis based on a lifetime loss-rate model when similar risk characteristics exist. Loans that do not share risk characteristics are evaluated on an individual basis. Arriving at an appropriate level of credit losses involves a high degree of judgment. While management uses available information to recognize losses on loans, changing economic conditions and the economic prospects of the borrowers may necessitate future additions or reductions to the allowance.
| 10 |
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont’d)
Management has determined that peer loss experience provides the best basis for its assessment of expected credit losses to determine expected credit losses. The Company utilizes peer data to measure historical credit loss experience with similar risk characteristics within the segments over an economic cycle.
Management also considers certain qualitative factors in its evaluation of expected credit losses including lending practices, ability and experience of the credit staff, the overall lending environment and external factors such as the regulatory environment and competition.
Individually Evaluated Loans:
Prior to the adoption of ASU 2016-13 on January 1, 2023, a loan was individually evaluated when the loan was considered impaired. A loan was considered to be impaired when based on current information and events, it was probable that the Company would not be able to collect all amounts due from the borrower in accordance with the contractual terms of the loan, including scheduled interest payments.
With the adoption of ASU 2016-13, loans that do not share risk characteristics with existing pools are evaluated on an individual basis. The Company considers a loan to be collateral dependent when management has determined that foreclosure of the collateral is probable, or where the borrower is experiencing financial difficulty and repayment of the financial asset is expected to be provided substantially through the operation or sale of the collateral. When repayment is expected to be from the operation of the collateral, the specific credit loss reserve is calculated as the amount by which the amortized cost basis of the financial asset exceeds the net present value (“NPV”) from the operation of the collateral. When repayment is expected to be from the sale of the collateral, the specific credit loss reserve is calculated as the amount by which the amortized cost basis of the financial asset exceeds the fair value of the underlying collateral less estimated cost to sell. The allowance may be zero if the fair value of the collateral at the measurement date exceeds the amortized cost basis of the financial asset.
Upon
completion of the Merger on June 1, 2022, the Company recorded the fair value of loans which included the elimination of the allowance
for loan losses and the establishment of a credit mark. For purposes of the credit mark, the loan portfolio was segregated into performing
and non-performing loans. The credit component of total loans reflected an aggregate pre-tax discount of $
The credit mark is reduced by charge-offs and amortization based on the proportionate reduction in the principal of the loans acquired.
Cash and Cash Equivalents
For purposes of reporting cash flows, the Company considers all cash and amounts due from depository institutions and interest-bearing deposits in other depository institutions with original maturities of three months or less to be cash equivalents.
Investment and Mortgage-Backed Securities
Securities that the Company has the positive intent and ability to hold to maturity are classified as held-to-maturity securities and reported at amortized cost. Securities classified as available-for-sale securities are reported at fair value, with unrealized holding gains or losses reported in stockholder’s equity as accumulated other comprehensive income (loss). As of September 30, 2023, the Company had no securities classified as held for trading.
| 11 |
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont’d)
Premiums on securities are amortized to the earliest of call date or maturity and discounts on securities are amortized by use of the level-yield method, over the life of the individual securities. Gain or loss on sales of securities is based upon the specific identification method.
Federal Home Loan Bank of New York Stock
As a member of the Federal Home Loan Bank of New York (“FHLB”), the Company is required to acquire and hold shares of FHLB Class B stock. The holding requirement varies based on the Company’s outstanding borrowings with the FHLB and residential loan balances. The investment in FHLB stock is carried at cost. The Company conducts a periodic review and evaluation of its FHLB stock to determine if any impairment exists.
Premises and Equipment
Premises and equipment are comprised of land, building, and furniture, fixtures, and equipment, at cost, less accumulated depreciation. Depreciation charges are computed on the straight-line method over the following estimated useful lives:
| Building and improvements | |
| Furniture, fixtures and equipment |
Bank-Owned Life Insurance
Bank-owned life insurance (“BOLI”) is accounted for in accordance with FASB ASC 325-30” Investments in Insurance Contracts”. The cash surrender value of BOLI is recorded on the statement of financial condition as an asset and the change in the cash surrender value is recorded as non-interest income. The amount by which any death benefits received exceeds a policy’s cash surrender value is recorded in non-interest income at the time of receipt. A liability is also recorded on the statement of financial condition for postretirement death benefits provided by the split-dollar endorsement policy. A corresponding expense is recorded in non-interest expense for the accrual of benefits over the period during which employees provide services to earn the benefits.
Income Taxes
Federal and state income taxes have been provided on the basis of reported income. The amounts reflected on the tax return differ from these provisions due principally to temporary differences in the reporting of certain items for financial reporting and income tax reporting purposes. The tax effect of these temporary differences is accounted as deferred taxes applicable to future periods. Deferred income tax expense or benefit is determined by recognizing deferred tax assets and liabilities for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in earnings in the period that includes the enactment date. The realization of deferred tax assets is assessed and a valuation allowance provided, when necessary, for that portion of the asset which is not likely to be realized.
The
Company accounts for uncertainty in income taxes recognized in the financial statements in accordance with accounting guidance which
prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position
taken or expected to be taken in a tax return, and also provides guidance on de-recognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition. As a result of the Company’s evaluation, no significant income tax uncertainties
have been identified. Therefore, the Company recognized
| 12 |
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont’d)
Employee Benefits
Defined Benefit Plans:
The accounting guidance related to retirement benefits requires an employer to: (a) recognize in its statement of financial position an asset for a plan’s overfunded status or a liability for a plan’s underfunded status; (b) measure a plan’s assets and its obligations that determine its funded status as of the end of the employer’s fiscal year; and (c) recognize, in comprehensive income, changes in the funded status of a defined benefit postretirement plan in the year in which the changes occur. The accounting guidance requires that plan assets and benefit obligations be measured as of the date of the employer’s fiscal year-end statement of financial condition.
401(k) Plan:
The
Company has a 401(k) plan covering substantially all employees. The Company matches
Equity Incentive Plan:
The Company maintains an equity incentive plan (the “Stock Incentive Plan”). Stock options and restricted stock may be granted to directors, officers and other employees of the Company. The maximum number of shares which may be issued upon exercise of the options under the plan cannot exceed shares. The maximum number of shares of stock that may be issued as restricted stock awards cannot exceed .
The Stock Incentive Plan will remain in effect as long as any awards under it are outstanding; however, no awards may be granted under the Stock Incentive Plan on or after the 10-year anniversary of the effective date of the Stock Incentive Plan or July 17, 2024. Under FASB ASC Topic 718, the Company will recognize compensation expense on its statement of operations over the requisite service period or performance period based on the grant date fair value of stock options and other equity-based compensation (such as restricted stock).
Comprehensive Income (Loss)
Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income (loss). Although certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities, and the actuarial gains and losses of the pension plan, are reported as a separate component of the equity section of the statement of financial condition, such items, along with net income (loss), are components of comprehensive income (loss).
Concentration of Credit Risk and Interest-Rate Risk
Financial instruments which potentially subject the Company to concentrations of credit risk consist of cash and cash equivalents, investment and mortgage-backed securities and loans. Cash and cash equivalents include amounts placed with highly rated financial institutions. Investment securities include securities backed by the U.S. Government and other highly rated instruments. The Company’s lending activity is primarily concentrated in loans collateralized by real estate in the State of New York. As a result, credit risk is broadly dependent on the real estate market and general economic conditions in the State.
The Company is principally engaged in the business of attracting deposits from the general public and using these deposits, together with borrowings and other funds, to make loans secured by real estate in the State of New York.
The potential for interest-rate risk exists as a result of the shorter duration of the Company’s interest-sensitive liabilities compared to the generally longer duration of interest-sensitive assets. In a rising rate environment, liabilities will reprice faster than assets, thereby reducing net interest income. For this reason, management regularly monitors the maturity structure of the Company’s assets and liabilities in order to measure its level of interest-rate risk and to plan for future volatility.
| 13 |
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont’d)
Advertising Costs
It
is the Company’s policy to expense advertising costs in the period in which they are incurred. For the three and nine month periods
ended September 30, 2023, the Company expensed advertising cost totaling $
Goodwill
Intangible assets resulting from acquisitions under the acquisition method of accounting consist of goodwill and other intangible assets (see the section titled “Core Deposit Intangible” below). Goodwill represents the excess of the cost of businesses acquired over the fair value of the net assets acquired and is not amortized. The initial recording of goodwill and other intangible assets requires subjective judgments concerning estimates of the fair value of the acquired assets and assumed liabilities.
During the second quarter of 2023,Vecta performed the annual goodwill impairment test at its annual measurement date of May 31. The results of the 2023 annual impairment test under a qualitative analysis resulted in no triggering events that would more likely than not reduce the fair value Vecta’s only reporting unit, Sunnyside Federal and require a formal quantitative impairment analysis.
Core Deposit Intangible
The
core deposit intangible is the portion of an acquisition purchase price which represents value assigned to the existing deposit base
and is amortized on a straight line basis over a
Leases
The Company leases an office facility that is not significant. For operating leases other than those considered to be short-term, defined as leases of 12 months or less, the Company recognizes operating lease right-of-use (“ROU”) assets and related lease liabilities at the time of lease commencement. ROU assets represent the Company’s right to use the underlying asset for the lease term and the lease liabilities represent the Company’s obligation to make lease payments under the leases. ROU assets and operating lease liabilities are reported as components of other assets and other liabilities, respectively, on our accompanying consolidated balance sheets. Leases with terms of 12 months or less are recognized in the income statement over the lease term.
In recognizing ROU assets and related lease liabilities, the Company accounts for lease and non-lease components (such as taxes, insurance, and common area maintenance costs) separately as such amounts are generally readily determinable under our lease contracts. To estimate the present value of lease payments over the expected lease term, the Company uses interest rates on advances from the FHLB at the time of commencement. The Company’s lease term may include options to extend or terminate the leases when it is reasonably certain that the option will be exercised. Lease expense is recognized on a straight-line basis over the lease term and is included in net occupancy expense in the consolidated statements of operations.
Durning
the quarter ended March 31, 2023, the Company entered into
Business Combinations
Business combinations are accounted for under the acquisition method of accounting. Acquired assets, including separately identifiable intangible assets, and assumed liabilities are recorded at their acquisition-date estimated fair values. The excess of the cost of acquisition over these fair values is recognized as goodwill. During the measurement period, which cannot exceed one year from the acquisition date, changes to estimated fair values are recognized as an adjustment to goodwill. Certain transaction costs are expensed as incurred.
| 14 |
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont’d)
Basic earnings (loss) per share is computed by dividing net income (loss) for the period by the weighted average number of shares of common stock. Diluted earnings (loss) per share is computed by adjusting the weighted average number of shares of common stock outstanding to include the effect of outstanding stock options and compensation grants, if dilutive, using the treasury stock method.
Recent Accounting Pronouncements
In March 2022, the FASB issued ASU 2022-02, Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures (“ASU 2022-02”). The amendments in ASU 2022-02 eliminate the accounting guidance for troubled debt restructurings (“TDRs”) by creditors while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty. Specifically, rather than applying the recognition and measurement guidance for TDRs which includes an assessment of whether the creditor has granted a concession, an entity must evaluate whether the modification represents a new loan or a continuation of an existing loan.
The amendments enhance existing disclosure requirements and introduce new requirements related to certain modifications of receivables made to borrowers experiencing financial difficulty. Additionally, for public business entities, ASU 2022-02 requires that an entity disclose current-period gross write-offs by year of origination for financing receivables and net investments in leases within the scope of Subtopic 326-20, Financial Instruments Credit Losses-Measured at Amortized Cost in the vintage disclosures required by paragraph 326-20-50-6. ASU 2022-02 is effective for the Company for fiscal years beginning after December 15, 2022. The Company may elect to apply the updated guidance on TDR recognition and measurement by using a modified retrospective transition method, which would result in a cumulative-effect adjustment to retained earnings, or to adopt the amendments prospectively. The Company intends to elect to adopt the updated guidance on TDR recognition and measurement prospectively; therefore, the guidance will be applied to modifications occurring after the date of adoption. The amendments on TDR disclosures and vintage disclosures must be adopted prospectively. The adoption of this guidance on January 1, 2023 did not have a material impact on the Company’s consolidated financial statements.
In June, 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses” (Topic 326), which introduces new guidance for the accounting for credit losses on instruments within its scope. The new guidance introduces an approach based on expected losses to estimate credit losses on certain types of financial instruments. It also modifies the impairment model for available-for-sale (AFS) debt securities and provides for a simplified accounting model for purchased financial assets with credit deterioration since their origination. In April, 2019, FASB issued ASU 2019-04, “Codification Improvements to Topic 326, Financial Instruments—Credit Losses”. ASU 2019-04 made amendments to the following categories in ASU 2016-13 which include Accrued interest, transfers between classifications or categories for loans and debt securities, recoveries, reinsurance recoverables, projections of interest rate environments for variable-rate financial instruments, costs to sell when foreclosure is probable, consideration of expected prepayments when determining the effective interest rate, vintage disclosures and extension and renewal options. In May, 2019, FASB issued ASU 2019-05, “Financial Instruments –Credit Losses (Topic 326); Targeted Transition Relief”, ASU 2019-05 allows the Company to irrevocably elect, upon adoption of ASU 2016-13, the fair value option on financial instruments that (1) were previously recorded at amortized cost and (2) are within the scope of Topic 326 if the instruments are eligible for the fair value option under authoritative guidance for fair value. The fair value option election does not apply to held-to-maturity debt securities. We are required to make this election on an instrument-by-instrument basis. This ASU was effective for public business entities that are a smaller reporting company in fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The adoption of this guidance on January 1, 2023 did not have a material impact on the Company’s consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04, Intangibles—Goodwill and Other (Topic 350)—Simplifying the Test for Goodwill Impairment (“ASU 2017-04”). ASU 2017-04 simplifies the accounting for goodwill impairments by eliminating the requirement to compare the implied fair value of goodwill with its carrying amount as part of step two of the goodwill impairment test referenced in ASC 350, Intangibles - Goodwill and Other (“ASC 350”). As a result, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value. However, the impairment loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. ASU 2017-04, as amended, was effective for annual reporting periods beginning after December 15, 2022. The adoption of this guidance on January 1, 2023 did not have a material impact on the Company’s consolidated financial statements.
| 15 |
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont’d)
Subsequent Events
The Company evaluated its September 30, 2023 unaudited condensed consolidated financial statements for subsequent events through the date the unaudited condensed consolidated financial statements were issued and has determined that there are no subsequent events that require accounting or disclosure.
2. BUSINESS COMBINATION
On June 1, 2022, Vecta Partners completed its acquisition of Vecta Inc. pursuant to the Merger Agreement, by and among Vecta Partners, Merger Sub, Mark Silber, Vecta Inc. and Sunnyside Federal. Pursuant to the Merger Agreement and subject to the terms and conditions thereof, on the Closing Date, Merger Sub merged with and into Vecta Inc., with Vecta Inc continuing as the surviving corporation and a wholly-owned subsidiary of Vecta Partners.
Under
the terms of the Merger Agreement, as of the Closing Date and as a result of the Merger, Vecta Partners acquired all of the outstanding
common stock of Vecta Inc. at a price of $ per share in cash. The aggregate value of the Merger consideration was approximately
$
The Merger was accounted for under the acquisition method of accounting and accordingly the results of the Company’s consolidated operations have been included in the Company’s December 31, 2022 consolidated financial statements from the Closing Date of the Merger, or June 1, 2022.
The following table sets forth assets acquired, and liabilities assumed in connection with the Merger, at their estimated fair values as of the Closing Date of the Merger:
| ( In thousands) | ||||
| Assets acquired: | ||||
| Cash and cash equivalents | $ | |||
| Certificates of deposit | ||||
| Securities held to maturity | ||||
| Securities available for sale | ||||
| Loans receivable, net | ||||
| Premises and equipment | ||||
| Federal Home Loan Bank of New York and other stock, at cost | ||||
| Accrued interest receivable | ||||
| Cash surrender value of life insurance | ||||
| Goodwill | ||||
| Core deposit intangible | ||||
| Other assets | ||||
| Total assets Acquired | ||||
| Liabilities assumed: | ||||
| Deposits: | ||||
| Non-interest bearing | ||||
| Savings, NOW and money market | ||||
| Time deposits | ||||
| Total deposits | ||||
| Borrowings | ||||
| Advances from borrowers for taxes and insurance | ||||
| Other liabilities | ||||
| Total liabilities assumed | ||||
| Net assets acquired | ||||
| Transaction cost, net | ||||
| Price paid | $ | |||
| 16 |
2. Business combination (Cont’d)
The determination of the fair value of the assets acquired and liabilities assumed required management to make estimates about discount rates, future expected cash flows, market conditions, and other future events that are highly subjective in nature and subject to change. The fair value estimates are subject to change for up to one year after the closing date of the transaction if additional information (existing at the date of closing) relative to closing date fair values becomes available.
Fair Value Measurement of Assets Acquired and Liabilities Assumed:
Described below are the methods used to determine the fair values of the significant assets acquired and liabilities assumed in this acquisition.
Cash and cash equivalents - The estimated fair values of cash and cash equivalents approximate their stated face amounts, as these financial instruments are either due on demand or have short-term maturities.
Investment securities - The investment securities acquired were classified as either “available for sale” or “held to maturity” based on the Company’s intent at the acquisition date. The estimated fair values of the investment securities were calculated utilizing Level 2 inputs similar to the valuation techniques used for Vecta’s investment portfolios detailed in Note 11.
Loans
- The fair value of the performing loan portfolio includes both a yield component and a credit component. The yield component utilizes
a discounted cash flow analysis, including prepayment speed assumptions, to compare the difference between the present values of projected
cash flows of the loan portfolio at portfolio rates versus cash flows at current market rates. The yield component reflected a pre-tax
discount of $
Core
Deposit Intangible - Core deposit intangibles (CDI) are measures of the value of non-maturity checking, savings, NOW and money market
customer deposits that are acquired in a business combination. The fair value for CDI was estimated based on a discounted cash flow methodology
that gave appropriate consideration to expected customer attrition rates, net maintenance cost of the deposit base, alternative costs
of funds, and the interest costs associated with the customer deposits. The CDI is amortized over an estimated useful life of
Premises and equipment- The fair value of the office building and land was based on an appraisal using the income approach.
Deposits - The fair values of deposit liabilities with no stated maturity (i.e., non-interest bearing accounts and savings, NOW and money market accounts) are equal to the carrying amounts payable on demand. The fair values of certificates of deposit represent contractual cash flows, discounted to present value using interest rates currently offered on deposits with similar characteristics and remaining maturities
3. LIQUIDATION ACCOUNT
On July 15, 2013, the Bank completed a mutual-to-stock conversion and in accordance with applicable federal conversion regulations, at the time of the completion of the mutual-to-stock conversion, the holding company, Sunnyside Bancorp Inc., now Vecta Inc. established a liquidation account in the Bank in an amount equal to the Bank’s total retained earnings as of the latest balance sheet date in the final prospectus used in the Conversion. Each eligible account holder or supplemental account holder is entitled to a proportionate share of this liquidation account in the event of a complete liquidation of the Bank, and only in such event. This share is reduced if the eligible account holder’s or supplemental account holder’s deposit balance falls below the amounts on the date of record as of any December 31 and will cease to exist if the account is closed. The liquidation account will never be increased despite any increase after conversion in the related deposit balance. The Company may not declare, pay a dividend on, or repurchase any of its capital stock, if the effect thereof would cause its capital to be reduced below the liquidation account amount or regulatory capital requirements.
| 17 |
4. CERTIFICATES OF DEPOSIT
| September 30, | December 31, | |||||||
| 2023 | 2022 | |||||||
| Maturing in: | ||||||||
| After one to five years | $ | $ | ||||||
5. SECURITIES
| September 30, 2023 | ||||||||||||||||
| Amortized | Gross Unrealized | Fair | ||||||||||||||
| Cost | Gains | Losses | Value | |||||||||||||
| Securities held to maturity: | ||||||||||||||||
| State, county, and municipal obligations | $ | $ | $ | $ | ||||||||||||
| Mortgage-backed securities | ||||||||||||||||
| $ | $ | $ | $ | |||||||||||||
| Securities available for sale: | ||||||||||||||||
| U.S. government and agency obligations | $ | $ | $ | $ | ||||||||||||
| Mortgage-backed securities | ||||||||||||||||
| $ | $ | $ | $ | |||||||||||||
| December 31, 2022 | ||||||||||||||||
| Amortized | Gross Unrealized | Fair | ||||||||||||||
| Cost | Gains | Losses | Value | |||||||||||||
| Securities held to maturity: | ||||||||||||||||
| State, county, and municipal obligations | $ | $ | $ | $ | ||||||||||||
| Mortgage-backed securities | ||||||||||||||||
| $ | $ | $ | $ | |||||||||||||
| Securities available for sale: | ||||||||||||||||
| U.S. government and agency obligations | $ | $ | $ | $ | ||||||||||||
| Mortgage-backed securities | ||||||||||||||||
| $ | $ | $ | $ | |||||||||||||
Mortgage-backed
securities consist of securities guaranteed by Ginnie Mae, Fannie Mae and Freddie Mac with amortized costs of $
There
were
| 18 |
5. SECURITIES (Cont’d)
The following is a summary of the amortized cost and fair value of securities at September 30, 2023 and December 31, 2022 by remaining period to contractual maturity. Actual maturities may differ from these amounts because certain debt security issuers have the right to call or redeem their obligations prior to contractual maturity. In addition, mortgage backed securities that amortize monthly are listed in the period the security is legally set to pay off in full.
| September 30, 2023 | ||||||||||||||||
| Held to Maturity | Available for Sale | |||||||||||||||
| Amortized | Fair | Amortized | Fair | |||||||||||||
| Cost | Value | Cost | Value | |||||||||||||
| Within one year | $ | $ | $ | $ | ||||||||||||
| After one to five years | ||||||||||||||||
| After five to ten years | ||||||||||||||||
| After ten years | ||||||||||||||||
| $ | $ | $ | $ | |||||||||||||
| December 31, 2022 | ||||||||||||||||
| Held to Maturity | Available for Sale | |||||||||||||||
| Amortized | Fair | Amortized | Fair | |||||||||||||
| Cost | Value | Cost | Value | |||||||||||||
| Within one year | $ | $ | $ | $ | ||||||||||||
| After one to five years | ||||||||||||||||
| After five to ten years | ||||||||||||||||
| After ten years | ||||||||||||||||
| $ | $ | $ | $ | |||||||||||||
The following tables summarize the fair values and unrealized losses of securities with an unrealized loss at September 30, 2023 and December 31, 2022, segregated between securities that have been in an unrealized loss position for less than one year, or one year or longer, at the respective dates.
| September 30, 2023 | ||||||||||||||||
| Under One Year | One Year or More | |||||||||||||||
| Gross | Gross | |||||||||||||||
| Fair | Unrealized | Fair | Unrealized | |||||||||||||
| Value | Loss | Value | Loss | |||||||||||||
| Securities held to maturity: | ||||||||||||||||
| State, county, and municipal obligations | $ | $ | $ | $ | ||||||||||||
| Mortgage-backed securities | ||||||||||||||||
| Securities available for sale: | ||||||||||||||||
| U.S. government and agency obligations | ||||||||||||||||
| Mortgage-backed securities | ||||||||||||||||
| $ | $ | $ | $ | |||||||||||||
| 19 |
5. SECURITIES (Cont’d)
| December 31, 2022 | ||||||||||||||||
| Under One Year | One Year or More | |||||||||||||||
| Gross | Gross | |||||||||||||||
| Fair | Unrealized | Fair | Unrealized | |||||||||||||
| Value | Loss | Value | Loss | |||||||||||||
| Securities held to maturity: | ||||||||||||||||
| State, county, and municipal obligations | $ | $ | $ | $ | ||||||||||||
| Mortgage-backed securities | ||||||||||||||||
| Securities available for sale: | ||||||||||||||||
| U.S. government and agency obligations | ||||||||||||||||
| Mortgage-backed securities | ||||||||||||||||
| $ | $ | $ | $ | |||||||||||||
The unrealized losses are primarily due to changes in market interest rates subsequent to purchase. A total of 46 securities were in an unrealized loss position at September 30, 2023 (45 at December 31, 2022). The Company generally purchases securities issued by Government Sponsored Enterprises (“GSE”). Accordingly, it is expected that the GSE securities would not be settled at a price less than the Company’s amortized cost basis.
The Company does not consider these investments to be other-than-temporarily impaired at September 30, 2023 and at December 31, 2022 since the decline in market value is attributable to changes in interest rates and not credit quality and the Company has the intent and ability to hold these investments until there is a full recovery of the unrealized loss, which may be at maturity.
At
September 30, 2023 and December 31, 2022, securities available for sale with a carrying value of approximately $
| 20 |
6. LOANS RECEIVABLE, NET
| September 30, | December 31, | |||||||
| 2023 | 2022 | |||||||
| Mortgage loans: | ||||||||
| Residential 1-4 family | $ | $ | ||||||
| Commercial and multi-family | ||||||||
| Home equity lines of credit | ||||||||
| Other loans: | ||||||||
| Passbook | ||||||||
| Student | ||||||||
| Commercial | ||||||||
| Total loans | ||||||||
| Less: | ||||||||
| Purchase Accounting Credit Adjustment | ||||||||
| Purchase Accounting Discount | ||||||||
| Deferred loan fees (costs and premiums), net | ||||||||
| Allowance for credit losses | ||||||||
| $ | $ | |||||||
In
the ordinary course of business, the Company makes loans to its directors, executive officers, and their associates (related parties)
on the same terms as those prevailing at the time of origination for comparable loans with other borrowers. The unpaid principal balances
of related party loans were approximately $
As
a result of the acquisition of Sunnyside Federal, the loan portfolio was segregated into performing and non-performing loans to determine
the credit adjustment. The credit component of total loans reflected an aggregate original pre-tax discount of $
Activity in this credit adjustment is summarized as follows:
| Three months ended | ||||
| September 30, | ||||
| 2023 | ||||
| Balance at beginning of period | $ | |||
| Amortization | ( | ) | ||
| Charge -offs | ( | ) | ||
| Balance at end of period | $ | |||
| Nine months ended | ||||
| September 30, | ||||
| 2023 | ||||
| Balance at beginning of period | $ | |||
| Amortization | ( | ) | ||
| Charge -offs | ( | ) | ||
| Balance at end of period | $ | |||
In addition to the above credit adjustment, the Company maintains an ACL for new loans originated subsequent to the Merger and for qualitative changes in the existing loan portfolio.
| 21 |
6. LOANS RECEIVABLE, NET (Cont’d)
Activity in the ACL is summarized as follows:
| Three months ended | ||||
| September 30, | ||||
| 2023 | ||||
| Balance at beginning of period | $ | |||
| Provision for credit losses | ||||
| Recoveries | ||||
| Balance at end of period | $ | |||
| Nine months ended | ||||
| September 30, | ||||
| 2023 | ||||
| Balance at beginning of period | $ | |||
| Provision for credit losses | ||||
| Recoveries | ||||
| Balance at end of period | $ | |||
An ACL is maintained at a level, to the best of management’s knowledge, to cover all known and inherent losses in the portfolio that are both probable and reasonable to estimate. Management of the Company, in determining the ACL considers the risks inherent in its loan portfolio and changes in the nature and volume of its loan activities, along with the general economic and real estate market conditions.
On January 1, 2023, the Company adopted FASB ASU 2016-13 Financial Instruments - Credit Losses (“Topic 326”), which replaced the incurred loss methodology for determining our allowance for credit losses and related provision for credit losses with an expected loss methodology that is referred to as the CECL model. CECL is a significant accounting estimate used in the preparation of the Company’s consolidated financial statements. Upon adoption of ASU 2016-13, the Company replaced the incurred loss impairment model that recognizes losses when it becomes probable that a credit loss will be incurred, with a requirement to recognize lifetime expected credit losses immediately when a financial asset is originated or purchased. CECL is a valuation account that is deducted from the amortized cost basis of loans to present the net amount expected to be collected on the loans. Loans, or portions thereof, are charged off against the allowance when they are deemed uncollectible. The allowance is comprised of reserves measured on a collective (pool) basis based on a lifetime loss-rate model when similar risk characteristics exist. Loans that do not share risk characteristics are evaluated on an individual basis. Arriving at an appropriate level of credit losses involves a high degree of judgment. While management uses available information to recognize losses on loans, changing economic conditions and the economic prospects of the borrowers may necessitate future additions or reductions to the allowance.
Management has determined that peer loss experience provides the best basis for its assessment of expected credit losses to determine expected credit losses. The Company utilizes peer data to measure historical credit loss experience with similar risk characteristics within the segments over an economic cycle.
| 22 |
6. LOANS RECEIVABLE, NET (Cont’d)
Management also considers certain qualitative factors in its evaluation of expected credit losses including:
| 1. | Lending policies and procedures, including underwriting standards and collection, charge-off, and recovery practices. |
| 2. | National, regional, and local economic and business conditions including the value of underlying collateral for collateral dependent loans. |
| 3. | Nature and volume of the portfolio and terms of loans. |
| 4. | Experience, ability, and depth of lending management and staff and the quality of the Company’s loan review system. |
| 5. | Volume and severity of past due, classified and nonaccrual loans. |
| 6. | Existence and effect of any concentrations of credit and changes in the level of such concentrations. |
| 7. | Effect of external factors, such as competition and legal and regulatory requirements. |
Each factor is assigned a value to reflect improving, stable or declining conditions based on management’s best judgment using relevant information available at the time of the evaluation. Adjustments to the factors are supported through documentation of changes in conditions in a narrative accompanying the allowance for credit loss calculation.
Individually Evaluated Loans: Prior to the adoption of ASU 2016-13 on January 1, 2023, a loan was individually evaluated when the loan was considered impaired. A loan was considered to be impaired when based on current information and events, it was probable that the Company would not be able to collect all amounts due from the borrower in accordance with the contractual terms of the loan, including scheduled interest payments.
With the adoption of ASU 2016-13, loans that do not share risk characteristics with existing pools are evaluated on an individual basis. The Company considers a loan to be collateral dependent when management has determined that foreclosure of the collateral is probable, or where the borrower is experiencing financial difficulty and repayment of the financial asset is expected to be provided substantially through the operation or sale of the collateral. When repayment is expected to be from the operation of the collateral, the specific credit loss reserve is calculated as the amount by which the amortized cost basis of the financial asset exceeds the NPV from the operation of the collateral. When repayment is expected to be from the sale of the collateral, the specific credit loss reserve is calculated as the amount by which the amortized cost basis of the financial asset exceeds the fair value of the underlying collateral less estimated cost to sell. The allowance may be zero if the fair value of the collateral at the measurement date exceeds the amortized cost basis of the financial asset.
Upon
completion of the merger on June 1, 2022, the Company recorded the fair value of loans which included the elimination of the Allowance
for Loan Losses and the establishment of a credit mark. For purposes of the credit mark, the loan portfolio was segregated into performing
and non-performing loans. The credit component of total loans reflected an aggregate pre-tax discount of $
The credit mark is reduced by charge-offs and amortization based on the proportionate reduction in the principal of the loans acquired.
| 23 |
6. LOANS RECEIVABLE, NET (Cont’d)
The allowance calculation methodology includes further segregation of loan classes into risk rating categories. The borrower’s overall financial condition, repayment sources, guarantors and value of collateral, if appropriate, are evaluated when credit deficiencies arise, such as delinquent loan payments. Credit quality risk ratings include regulatory classifications of pass, special mention, substandard, doubtful and loss.
Loan classifications are defined as follows:
| ● | Pass — These loans are well protected by the current net worth and paying capacity of the obligor (or guarantors, if any) or by the fair value, less cost to acquire and sell, of any underlying collateral in a timely manner. | |
| ● | Special Mention — These loans have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of repayment prospects. | |
| ● | Substandard — These loans are inadequately protected by the current net worth and paying capacity of the obligor or by the collateral pledged, if any. Assets so classified must have a well-defined weakness, or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. | |
| ● | Doubtful — These loans have all the weaknesses inherent in a loan classified substandard with the added characteristic that the weaknesses make the full recovery of our principal balance highly questionable and improbable on the basis of currently known facts, conditions, and values. The likelihood of a loss on an asset or portion of an asset classified as doubtful is high. Its classification as Loss is not appropriate, however, because pending events are expected to materially affect the amount of loss. | |
| ● | Loss — These loans are considered uncollectible and of such little value that a charge-off is warranted. This classification does not necessarily mean that an asset has no recovery or salvage value; but rather, there is much doubt about whether, how much, or when the recovery will occur. |
One of the primary methods the Company uses as an indicator of the credit quality of its portfolio is the regulatory classification system. The following table reflects the credit quality indicators by portfolio segment and class, at the dates indicated:
| September 30, 2023 | ||||||||||||||||||||||||
| Mortgage Loans | ||||||||||||||||||||||||
| Commercial | Commercial | |||||||||||||||||||||||
| Residential | Real Estate and | and | ||||||||||||||||||||||
| 1-4 Family | Multi-Family | Home Equity | Student | Other | Total | |||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||
| Pass | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Special Mention | ||||||||||||||||||||||||
| Substandard | ||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| 24 |
6. LOANS RECEIVABLE, NET (Cont’d)
| December 31, 2022 | ||||||||||||||||||||||||
| Mortgage Loans | ||||||||||||||||||||||||
| Commercial | Commercial | |||||||||||||||||||||||
| Residential | Real Estate and | and | ||||||||||||||||||||||
| 1-4 Family | Multi-Family | Home Equity | Student | Other | Total | |||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||
| Pass | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Special Mention | ||||||||||||||||||||||||
| Substandard | ||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
The following table provides information about loan delinquencies at the dates indicated:
| September 30, 2023 | ||||||||||||||||||||||||||||
| 90 Days | ||||||||||||||||||||||||||||
| or More | ||||||||||||||||||||||||||||
| 30-59 | 60-89 | 90 Days | Past Due | |||||||||||||||||||||||||
| Days | Days | or More | Total | Current | Total | and | ||||||||||||||||||||||
| Past Due | Past Due | Past Due | Past Due | Loans | Loans | Accruing | ||||||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||||||
| Residential 1-4 family | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
| Commercial real estate and multi-family | ||||||||||||||||||||||||||||
| Home equity lines of credit | ||||||||||||||||||||||||||||
| Student | ||||||||||||||||||||||||||||
| Commercial and other | ||||||||||||||||||||||||||||
| $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||
| December 31, 2022 | ||||||||||||||||||||||||||||
| 90 Days | ||||||||||||||||||||||||||||
| or More | ||||||||||||||||||||||||||||
| 30-59 | 60-89 | 90 Days | Past Due | |||||||||||||||||||||||||
| Days | Days | or More | Total | Current | Total | and | ||||||||||||||||||||||
| Past Due | Past Due | Past Due | Past Due | Loans | Loans | Accruing | ||||||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||||||
| Residential 1-4 family | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
| Commercial real estate and multi-family | ||||||||||||||||||||||||||||
| Home equity lines of credit | ||||||||||||||||||||||||||||
| Student | ||||||||||||||||||||||||||||
| Commercial and other | ||||||||||||||||||||||||||||
| $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||
| 25 |
6. LOANS RECEIVABLE, NET (Cont’d)
The following is a summary of loans, by loan type, on which the accrual of income has been discontinued and loans that are contractually past due 90 days or more but have not been classified as non-accrual at the dates indicated:
| September 30, | December 31, | |||||||
| 2023 | 2022 | |||||||
| (In thousands) | ||||||||
| Non-accrual loans: | ||||||||
| Residential 1-4 family | $ | $ | ||||||
| Commercial real estate and multi-family | ||||||||
| Home equity lines of credit | ||||||||
| Student | | |||||||
| Commercial and other | ||||||||
| Total non-accrual loans | ||||||||
| Accruing loans delinquent 90 days or more | ||||||||