UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q/A

(Amendment No. 1)10-Q

 

[X]QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2018March 31, 2020

 

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. 000-55898

 

SSB Bancorp, Inc.

(Exact Name of Registrant as Specified in Its Charter)

 

Maryland 82-2776224

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

   

8700 Perry Highway

Pittsburgh, Pennsylvania

 

 

15237

(Address of Principal Executive Offices) (Zip Code)

 

(412) 837-6955

(Registrant’s Telephone Number, Including Area Code)

 

N/A

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

Securities registered pursuant to Section 12(b) of the Act:

Title of Each ClassTrading Symbol(s)Name of Each Exchange on Which Registered

 

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 requirements for the past 90 days.

YES [X] 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 during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

YES [X] 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 smallerreporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one)

 

Large accelerated filer[  ] Accelerated filer[  ]
Non-accelerated filer  [X][X] Smaller reporting company  [X][X]
  Emerging growth company [X]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

YES [  ] NO [X]

 

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. [  ]

 

As of November 13, 2018,May 11, 2020, there were 2,248,2502,276,891 outstanding shares of the registrant’s common stock, of which 1,236,538 shares are owned by SSB Bancorp, MHC.

 

 

 

 
 

Explanatory Note

The purpose of this amendment on Form 10-Q/A to the Quarterly Report on Form 10-Q of SSB Bancorp, Inc. (the “Company”) for the period ended September 30, 2018 is to restate the Company’s consolidated financial statements for the three- and nine-month periods ended September 30, 2018, and as of September 30, 2018, and related disclosures. Additional information about the decision to restate these financial statements can be found in our Current Report on Form 8-K, filed with the SEC on August 13, 2019.

This Form 10-Q/A does not modify or update other disclosures presented in the original report on Form 10-Q, except as required to reflect the effects of the restatement. The Form 10-Q/A does not reflect events occurring after the filing of the Form 10-Q or modify or update those disclosures, including the exhibits to the Form 10-Q affected by subsequent events. Information not affected by the restatement is unchanged and reflects the disclosures made at the time of the original filing of the Form 10-Q on November 13, 2018. Accordingly, this Form 10-Q/A should be read in conjunction with the Company’s filings made with the Securities and Exchange Commission subsequent to the filing of the original Form 10-Q, including any amendments to those filings. The following items have been amended as a result of the restatement:

Part I - Item 1 - Financial Statements
Part I - Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations

Description of Restatement

During the 4th quarter of 2018, the Company identified and corrected an error related to its accounting treatment of accrued interest on investor sold loans and loan participations affecting the 2nd and 3rd quarters of 2018. Prior period accrued interest receivable accounts were overstated for the three- and six-month periods ended June 30, 2018, and at June 30, 2018, as well as the three- and nine- months ended September 30, 2018, and at September 30, 2018. The Company was able to identify the sources of the issues and it resulted in the Company correcting interest income and the provision for income taxes for the 2nd and 3rd quarters of 2018. On the corresponding balance sheet, the Company’s accrued interest receivable was overstated and income taxes receivable was understated. The net effect was an overstatement of total assets and total liabilities and stockholders’ equity at June 30, 2018 and September 30, 2018.

As a result of the above items, the cumulative effect of the restatement through the third quarter of 2018 was a decrease in accrued interest receivable of $335,000, an increase in tax receivable of $83,000, and a decrease in retained earnings of $252,000. Consequently, for the three-month period ended September 30, 2018, the restatement shows a decrease in interest income on loans of $134,000, a decrease in the provision for income taxes of $40,000, and a decrease in net income of $95,000. For the nine-month period ending September 30, 2018, the restatement shows a decrease in interest income on loans of $335,000, a decrease in the provision for income taxes of $83,000, and a decrease in net income of $252,000.

 
 

 

SSB Bancorp, Inc.

Form 10-Q/A

(Amendment No. 1)10-Q

 

Table of Contents

 

  Page
PART I. FINANCIAL INFORMATION
   
Item 1.Financial Statements (unaudited) 
   
 Consolidated Balance Sheets as of September 30, 2018March 31, 2020 and December 31, 201720194
   
 Consolidated Statements of Net Income for the Three Months Ended September 30, 2018March 31, 2020 and 2017, and the Nine Months Ended September 30, 2018 and 201720195
   
 Consolidated Statements of Comprehensive Income for the Three Months Ended September 30, 2018March 31, 2020 and 2017, and the Nine Months Ended September 30, 2018 and 201720196
   
 Consolidated Statements of Changes in Stockholders’ Equity for the NineThree Months Ended September 30, 2018March 31, 20207
   
 

Consolidated Statements of Cash Flows for Ninethe Three Months Ended September 30, 2018March 31, 2020 and 20172019

8

   
 Notes to Consolidated Financial Statements9
   
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations3436
   
Item 3.Quantitative and Qualitative Disclosures About Market Risk4547
   
Item 4.Controls and Procedures4547
  
   
PART II. OTHER INFORMATION
   
Item 1.Legal Proceedings4647
   
Item 1A.Risk Factors4647
   
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds4649
   
Item 3.Defaults Upon Senior Securities4649
   
Item 4.Mine Safety Disclosures4649
   
Item 5.Other Information4649
   
Item 6.Exhibits4650
   
 SIGNATURES51

 47

Item 1. Financial Statements

 

SSB Bancorp, Inc.

CONSOLIDATED BALANCE SHEETS

 

 September 30, December 31,  March 31, December 31, 
 2018 2017  2020 2019 
 (unaudited)    (unaudited)   
ASSETS             
Cash and due from banks $2,312,211  $2,558,134  $6,902,759  $10,610,445 
Interest-bearing deposits with other financial institutions  3,563,205   13,919,932   17,607,894   11,270,343 
Cash and cash equivalents  5,875,416   16,478,066   24,510,653   21,880,788 
                
Certificates of deposit  846,000   943,000   4,444,000   2,465,000 
Securities available for sale  8,922,885   2,616,350   8,395,742   9,849,599 
Securities held to maturity (fair value of $8,095, and $9,494, respectively)  7,109   9,797 
Securities held to maturity (fair value of $3,374, and $3,932, respectively)  3,323   3,879 
Loans  157,715,438   141,615,982   159,963,384   157,295,376 
Allowance for loan losses  (1,101,600)  (1,041,445)  (1,195,761)  (1,183,261)
Net loans  156,613,838   140,574,537   158,767,623   156,112,115 
Accrued interest receivable  557,291   476,417   808,168   673,026 
Federal Home Loan Bank stock, at cost  2,614,900   2,162,600   3,046,900   2,924,600 
Premises and equipment, net  4,371,213   4,358,006   4,282,919   4,234,676 
Bank-owned life insurance  2,411,888   2,358,519   3,271,781   3,249,430 
Deferred tax asset, net  320,101   328,169   316,202   296,955 
Prepaid reorganization and stock issuance costs  -   837,944 
Other assets  976,873   762,086   766,932   941,669 
TOTAL ASSETS $183,517,514  $171,905,491  $208,614,243  $202,631,737 
                
LIABILITIES                
Deposits:                
Noninterest-bearing demand $491,252  $440,871  $7,282,956  $5,519,219 
Interest-bearing demand  14,098,425   23,167,923   24,692,640   18,218,407 
Money market  15,113,363   14,597,811   30,465,007   30,129,370 
Savings  13,752,379   12,524,304   1,336,342   1,314,513 
Time  87,910,953   81,699,115   91,027,286   93,839,220 
Total deposits  131,366,372   132,430,024   154,804,231   149,020,729 
                
Federal Home Loan Bank advances  31,374,500   26,416,200   31,374,500   31,374,500 
Advances by borrowers for taxes and insurance  317,744   688,451   752,566   712,189 
Accrued interest payable  245,098   206,597   311,648   331,133 
Other liabilities  114,918   52,621   339,310   309,988 
TOTAL LIABILITIES  163,418,632   159,793,893   187,582,255   181,748,539 
                
STOCKHOLDERS’ EQUITY                
Preferred Stock: $0.01 par value per share: 5,000,000 shares authorized and no shares issued or outstanding  -   -   -   - 
Common Stock: 20,000,000 shares authorized and        
2,248,250 shares issued and outstanding at $0.01 par value  22,483   - 
Common Stock: 20,000,000 shares authorized and 2,276,891 shares issued and outstanding at $0.01 par value  22,769   22,769 
Paid-in capital  8,693,940   -   8,719,033   8,707,184 
Retained earnings  12,333,474   12,135,085   13,150,177   12,951,846 
Unearned Employee Stock Ownership Plan (ESOP)  (848,261)  - 
Unearned compensation - Employee Stock Ownership Plan (ESOP)  (782,163)  (793,180)
Accumulated other comprehensive loss  (102,754)  (23,487)  (77,828)  (5,421)
TOTAL NET STOCKHOLDERS’ EQUITY  20,098,882   12,111,598 
TOTAL STOCKHOLDERS’ EQUITY  21,031,988   20,883,198 
                
TOTAL LIABILITIES AND STOCKHOLERS’ EQUITY $183,517,514  $171,905,491 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $208,614,243  $202,631,737 

 

See accompanying notes to the unaudited consolidated financial statements.

 

SSB Bancorp, Inc.

CONSOLIDATED STATEMENTS OF NET INCOME

 

  Three months ended
September 30,
  Nine months ended
September 30,
 
  2018  2017  2018  2017 
  (unaudited)  (unaudited) 
INTEREST INCOME                
Loans, including fees $1,683,360  $1,525,013  $4,771,307  $4,554,854 
Interest-bearing deposits with other financial institutions  25,985   17,738   59,892   35,193 
Certificates of deposit  3,801   4,780   11,295   18,799 
Investment securities:  -   -   -   - 
Taxable  66,977   27,578   153,804   77,084 
Exempt from federal income tax  8,202   8,652   25,081   28,081 
Total interest income  1,788,325   1,583,761  5,021,379   4,714,011 
                 
INTEREST EXPENSE                
Deposits  578,042   444,654   1,551,743   1,281,868 
Federal Home Loan Bank advances  177,220   140,062   486,861   400,191 
Total interest expense  755,262   584,716  2,038,604   1,682,059 
                 
NET INTEREST INCOME  1,033,063   999,045   2,982,775   3,031,952 
Provision for loan losses  50,000   61,050   115,000   181,043 
                 
NET INTEREST INCOME AFTER PROVISION FORLOAN LOSSES  983,063   937,995   2,867,775   2,850,909 
                 
NONINTEREST INCOME                
Securities gains, net  -   -   -   350 
Provision for loss on loans held for sale  -   -   -   - 
Gain on sale of loans  62,873   82,552   157,552   272,259 
Loan servicing fees  35,047   27,802   103,876   67,057 
Earnings on bank-owned life insurance  18,110   12,338   53,368   36,273 
Other  18,632   7,266   46,327   18,307 
Total noninterest income  134,662   129,958   361,123   394,246 
                 
NONINTEREST EXPENSE                
Salaries and employee benefits  458,104   433,990   1,285,699   1,144,645 
Occupancy  93,123   67,082   280,232   187,631 
Professional fees  144,514   152,307   557,113   272,901 
Federal deposit insurance  41,000   25,500   129,500   87,500 
Data processing  93,487   71,980   243,573   209,710 
Director fees  41,153   20,938   111,441   58,478 
Contributions and donations  23,027   12,980   55,877   40,381 
Other  110,114   99,542   347,937   267,476 
Total noninterest expense  1,004,522   884,319   3,011,372   2,268,722 
                 
Income before income taxes  113,203   183,634   217,526   976,433 
Provision for income taxes  18,369   60,760   19,137   346,867 
                 
NET INCOME $94,834  $122,874  $198,389  $629,566 
                 
EARNINGS PER COMMON SHARE                
Basic $0.04  $N/A  $N/A  $N/A 
Diluted $0.04  $N/A  $N/A  $N/A 
                 
AVERAGE COMMON SHARES OUTSTANDING                
Basic  2,162,873   N/A   N/A   N/A 
Diluted  2,162,873   N/A   N/A   N/A 
DIVIDENDS DECLARED PER COMMON SHARE $-   $ N/A  $N/A  $N/A 
COMPREHENSIVE INCOME $38,803  $123,526  $119,122  $664,999 

  Three months ended March 31,
  2020  2019 
  (unaudited)
INTEREST INCOME        
Loans, including fees $1,888,087  $1,832,246 
Interest-bearing deposits with other financial institutions  90,215   65,334 
Certificates of deposit  18,917   4,317 
Investment securities:        
Taxable  94,939   109,164 
Exempt from federal income tax  5,216   8,233 
Total interest income  2,097,374   2,019,294 
         
INTEREST EXPENSE        
Deposits  714,504   709,108 
Federal Home Loan Bank advances and other bank obligations  203,271   216,640 
Total interest expense  917,775   925,748 
         
NET INTEREST INCOME  1,179,599   1,093,546 
Provision for loan losses  12,500   45,500 
         
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES  1,167,099   1,048,046 
         
NONINTEREST INCOME        
Securities gains, net  35,567   5,791 
Provision for loss on loans held for sale  -   - 
Gain on sale of loans  119,172   64,631 
Loan servicing fees  47,729   39,414 
Earnings on bank-owned life insurance  22,350   16,120 
Other  15,938   13,322 
Total noninterest income  240,756   139,278 
         
NONINTEREST EXPENSE        
Salaries and employee benefits  557,703   462,627 
Occupancy  90,630   100,352 
Professional fees  142,593   132,675 
Federal deposit insurance  43,000   49,000 
Data processing  97,183   96,342 
Director fees  32,494   32,494 
Contributions and donations  14,800   17,519 
Other  174,986   150,315 
Total noninterest expense  1,153,389   1,041,324 
         
Income before income taxes  254,466   146,000 
Provision for income taxes  56,135   33,287 
         
NET INCOME $198,331  $112,713 
         
EARNINGS PER COMMON SHARE        
Basic $0.09  $0.05 
Diluted $0.09  $0.05 
         
AVERAGE COMMON SHARES OUTSTANDING        
Basic  2,171,861   2,165,076 
Diluted  2,172,602   2,165,076 
DIVIDENDS DECLARED PER COMMON SHARE $-  $- 
COMPREHENSIVE INCOME $125,924  $221,132 

 

See accompanying notes to the unaudited consolidated financial statements.

 

5

SSB Bancorp, Inc.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

 Three months ended
September 30,
  Nine months ended
September 30,
  Three months ended March 31,
 2018 2017 2018 2017   2020   2019 
 (unaudited) (unaudited)  (unaudited)
Net income $94,834  $122,874  $198,389  $629,566  $198,331  $112,713 
Other comprehensive income (loss):                        
Net change in unrealized gain (loss) on available-for-sale securities  (70,926)  988   (100,739)  53,686   (56,087)  143,030 
Income tax effect  14,895   (336)  21,472   (18,022)  11,778   (30,036)
                        
Reclassification adjustment for net securities (gains) losses recognized in income  -   -   -   (350)  (35,567)  (5,791)
Income tax effect included in provision for income taxes  -   -   -   119   7,469   1,216 
                        
Other comprehensive income (loss), net of tax  (56,031)  652   (79,267)  35,433   (72,407)  108,419 
                        
Total comprehensive income $38,803  $123,526  $119,122  $664,999  $125,924  $221,132 

 

See accompanying notes to the unaudited consolidated financial statements.

 

SSB Bancorp, Inc.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(unaudited)

 

  Common Stock  Paid-in capital  Retained earnings  Unearned Employee Stock Ownership Plan  Accumulated other comprehensive loss  Total 
Balance as of January 1, 2017 $-  $-  $11,542,127  $-  $(47,388) $11,494,739 
                         
Reclassification of certain income tax effects from accumulated other comprehensive loss  -   -   3,860   -   (3,860)  - 
                         
Net income  -   -   589,098   -   -   589,098 
                         
Other comprehensive income  -   -   -   -   27,761   27,761 
                         
Balance as of January 1, 2018  -   -   12,135,085   -   (23,487)  12,111,598 
                         
Net income  -   -   198,389   -   -   198,389 
                         
Other comprehensive loss  -   -   -   -   (79,267)  (79,267)
                         
Net proceeds from stock offering (2,248,250 shares issued)  22,483   8,696,044   -   -   -   8,718,527 
                         
Purchase of ESOP shares (88,131 shares purchased)  -   -   -   (881,310)  -   (881,310)
                         
Amortizaton of ESOP  -   (2,104)  -   33,049   -   30,945 
                         
Balance as of September 30, 2018 $22,483  $8,693,940  $12,333,474  $(848,261) $(102,754) $20,098,882 

  Common
Stock
  Paid-in
capital
  Retained
earnings
  Unearned
Compensation -
ESOP
  Accumulated
other
comprehensive
(gain) loss
  Total 
                   
Balance as of January 1, 2019 $22,483  $8,692,971  $12,515,501  $(837,245) $(74,623) $20,319,087 
                         
Net income  -   -   436,345   -   -   436,345 
                         
Other comprehensive income  -   -   -   -   69,202   69,202 
                         
Refund on offering expenses  -   1,005   -   -   -   1,005 
           -   -   -   - 
Stock compensation plan  286   20,875   -       -   21,161 
                         
Amortizaton of ESOP  -   (7,667)  -   44,065   -   36,398 
                         
Balance as of January 1, 2020  22,769   8,707,184   12,951,846   (793,180)  (5,421)  20,883,198 
                         
Net income  -   -   198,331   -   -   198,331 
                         
Other comprehensive income  -   -   -   -   (72,407)  (72,407)
                         
Stock compensation plan  -   14,350   -   -   -   14,350 
                       - 
Amortizaton of ESOP  -   (2,501)  -   11,017   -   8,516 
                         
Balance as of March 31, 2020 $22,769  $8,719,033  $13,150,177  $(782,163) $(77,828) $21,031,988 

7

SSB Bancorp, Inc.

CONSOLIDATED STATEMENTS OF CASH FLOWS

  Three months ended March 31,
  2020  2019 
  (unaudited)
OPERATING ACTIVITIES        
Net income $198,331  $112,713 
Adjustments to reconcile net income to net cash provided by operating activities:        
Provision for loan losses  12,500   45,500 
Depreciation  41,731   41,025 
Net amortization of investment securities  25,801   6,622 
Loss on sale of portfolio loans  -   12,178 
Origination of loans held for sale  (3,754,600)  (3,255,550)
Proceeds from sale of loans  3,873,772   3,332,359 
Gain on sale of loans  (119,172)  (76,809)
Amortization of net deferred loan origination costs  9,356   - 
Gain on sale of investments  (35,567)  (5,791)
Increase in accrued interest receivable  (135,142)  (22,673)
Increase (decrease) in accrued interest payable  (19,485)  2,605 
Stock compensation expense  14,350   - 
Amortization of ESOP  8,516   9,595 
Increase in bank owned life insurance  (22,351)  (16,120)
Other, net  151,768   24,148 
Net cash provided by (used in) operating activities  249,808   209,802 
         
INVESTING ACTIVITIES        
Purchase of certificates of deposit  (1,979,000)  (747,000)
Redemption of certificates of deposit  -   348,000 
Investment securities available for sale:        
Purchases  (1,118,359)  - 
Proceeds from sales  1,043,999   254,377 
Proceeds from principal repayments, calls, and maturities  1,446,329   240,284 
Investment securities held to maturity:        
Proceeds from principal repayments, calls, and maturities  556   651 
Redemption of Federal Home Loan Bank stock  27,900   5,000 
Purchase of Federal Home Loan Bank stock  (150,200)  (69,300)
Purchases of loans  (1,355,440)  (382,000)
Decrease (increase) in loans receivable, net  (1,321,924)  1,381,930 
Proceeds from sale of portfolio loans  -   3,569,527 
Proceeds from sale of other real estate owned  44,397   - 
Purchases of premises and equipment  (82,080)  (46,694)
Net cash (used for) provided by investing activities  (3,443,822)  4,554,775 
         
FINANCING ACTIVITIES        
Increase in deposits, net  5,783,502   6,425,127 
Increase in advances by borrowers for taxes and insurance  40,377   111,251 
Net proceeds from stock offering  -   - 
Refund on offering expenses  -   1,005 
Net cash provided by (used in) financing activities  5,823,879   6,537,383 
         
Increase (decrease) in cash and cash equivalents  2,629,865   11,301,960 
         
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD  21,880,788   9,034,070 
         
CASH AND CASH EQUIVALENTS AT END OF PERIOD $24,510,653  $20,336,030 
         
SUPPLEMENTAL CASH FLOW DISCLOSURES        
Cash paid during the year for:        
Interest $937,260  $923,143 
Income taxes  -   - 
         
Noncash investing activities:        
Loans held for investment transferred to loans held for sale  -   3,581,705 

 

See accompanying notes to the unaudited consolidated financial statements.

 

8

SSB Bancorp, Inc.

CONSOLIDATED STATEMENTS OF CASH FLOWS

  Nine months ended September 30, 
  2018  2017 
  (unaudited) 
OPERATING ACTIVITIES        
Net income $198,389  $629,566 
Adjustments to reconcile net income to net cash provided by operating activities:        
Provision for loan losses  115,000   181,043 
Provision for loss on loans held for sale  -   - 
Depreciation  115,201   36,488 
Net amortization of investment securities  -   - 
Amortization (accretion) of security premiums and discounts  5,699   (8,584)
Origination of loans held for sale  (8,134,750)  (10,549,730)
Proceeds from sale of loans  8,292,303   10,821,989 
Gain on sale of loans  (157,553)  (272,259)
Deferred income tax provision (benefit)  (14,646)  39,232 
Investment securities gains, net  -   (350)
(Increase) decrease in accrued interest receivable  (80,874)  45,709 
Increase (decrease) in accrued interest payable  38,501   15,230 
Amortization of ESOP  30,945   - 
Increase in bank owned life insurance  (53,369)  (36,273)
Other, net  729,640   94,979 
Net cash provided by (used in) operating activities  1,084,486   997,040 
         
INVESTING ACTIVITIES        
Purchase of certificates of deposit  (248,000)  - 
Redemption of certificates of deposit  345,000   250,000 
Investment securities available for sale:        
Purchases  (6,651,661)  - 
Proceeds from sales  -   313,643 
Proceeds from principal repayments, calls, and maturities  238,688   215,862 
Investment securities held to maturity:        
Proceeds from principal repayments, calls, and maturities  2,688   3,398 
Redemption of Federal Home Loan Bank stock  174,400   741,300 
Purchase of Federal Home Loan Bank stock  (626,700)  (1,412,300)
Purchases of loans  -   (9,104,155)
Increase in loans receivable, net  (16,154,301)  (12,214,538)
Proceeds from sale of portfolio loans  -   6,934,868 
Proceeds from sale of other real estate owned  -   - 
Purchases of premises and equipment  (128,408)  (2,670,421)
Net cash (used for) provided by investing activities  (23,048,294)  (16,942,343)
         
FINANCING ACTIVITIES        
(Decrease) increase in deposits, net  (1,063,652)  9,549,204 
Decrease in advances by borrowers for taxes and insurance  (370,707)  (571,503)
Net proceeds from stock offering  8,718,527   - 
Purchase of ESOP shares  (881,310)  - 
Repayment of Federal Home Loan Bank advance  (9,291,700)  (2,000,000)
Proceeds from Federal Home Loan Bank advances  14,250,000   9,291,700 
Increase in prepaid reorganization and stock issuance costs  -   (837,944)
Net cash provided by (used in) financing activities  11,361,158   15,431,457 
         
Increase (decrease) in cash and cash equivalents  (10,602,650)  (513,846)
         
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD  16,478,066   6,831,479 
         
CASH AND CASH EQUIVALENTS AT END OF PERIOD $5,875,416  $6,317,633 
         
SUPPLEMENTAL CASH FLOW DISCLOSURES        
Cash paid during the year for:        
Interest $2,000,103  $1,666,827 
Income taxes  101,562   462,019 

See accompanying notes to the unaudited financial statements.

SSB Bancorp, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

1.NATURE OF OPERATIONS AND BASIS OF PRESENTATION

 

SSB Bancorp, Inc.

 

SSB Bancorp, Inc. (the “Company”) was incorporated on August 17, 2017 to serve as the subsidiary stock holding company for SSB Bank upon the reorganization of SSB Bank into a mutual holding company structure (the “Reorganization”). The Reorganization was completed effective January 24, 2018, with SSB Bank becoming the wholly-owned subsidiary of SSB Bancorp, Inc., and SSB Bancorp, Inc. becoming the majority-owned subsidiary of SSB Bancorp, MHC. In connection with the Reorganization, the Company sold 1,011,712 shares of common stock at an offering price of $10 per share. The Company’s stock began being quoted for listing on the OTC Bulletin BoardPink Market on January 25, 2018, under the symbol “SSBP”. Also, in connection with the Reorganization, theSSB Bank established an employee stock ownership plan (the “ESOP”), which purchased 88,131 shares of the Company’s common stock at a price of $10 per share. In the Reorganization, the Company also issued 1,236,538 shares of its common stock to SSB Bancorp, MHC.

 

SSB Bank

 

SSB Bank (the “Bank”) provides a variety of financial services to individuals and corporate customers through its offices in Pittsburgh, Pennsylvania. The Bank’s primary deposit products are passbook savings accounts, money market accounts, and certificates of deposit. Its primary lending products are commercial mortgage loan and single-family residential loans. The Bank is subject to regulation and supervision by the Federal Deposit Insurance Corporation (FDIC) and the Pennsylvania Department of Banking and Securities.

 

The interim consolidated financial statements at September 30, 2018,March 31, 2020, and for the three and nine months ended September 30, 2018March 31, 2020 and 2017,2019, are unaudited and reflect all normal recurring adjustments that are, in the opinion of management, necessary for a fair presentation of the results for the interim periods presented. Such adjustments are the only adjustments reflected in the accompanying interim financial statements. The results of operations for the three or nine months ended September 30, 2018,March 31, 2020, are not necessarily indicative of the results to be achieved for the remainder of the year ending December 31, 2018,2020, or any other period. The financial statements at December 31, 2017,2019, are audited.derived from the audited consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the Consolidated Balance Sheet and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

For further information, refer to the audited consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.2019.

 

The consolidated financial statements include the accounts of SSB Bancorp, Inc. and SSBthe Bank. All significant intercompany accounts and transactions have been eliminated in consolidation.

Financial information for the periods before the Reorganization on January 24, 2018 is that of SSB Bank only.

 

2.RECENT ACCOUNTING STANDARDS

 

On April 5, 2012, the Jumpstart Our Business Startups Act (the “JOBS Act”) was signed into law. The JOBS Act contains provisions that among other things, reduce certain reporting requirements for qualifying public companies and define anand “emerging growth company.” As an emerging growth company, the Company may delay adoption of new or revised financial accounting standards until such date that the standards are required to be adopted by non-issuer companies. If such standards would not apply to non-issuer companies, no deferral would be applicable. The Company hasWe have elected to take advantage of the benefits of extended transition periods. Accordingly, the Company’sour consolidated financial statements may not be comparable to those of public companies that adopt the new or revised financial accounting standards as of an earlier date. The effective dates of the following recent accounting standards reflect those that relate to non-issuer companies.

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09,Revenue from Contracts with Customers (Topic 606). The amendments in this Update create Topic 606,Revenue from Contracts with Customers, and supersede the revenue recognition requirements in Topic 605, Revenue Recognition, including most industry-specific revenue recognition guidance throughout the Industry Topics of the Codification. The core principle of Topic 606 is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve the core principle, a company should apply a five-step approach to revenue recognition. The amendments in this Update are effective for annual reporting periods beginning after December 15, 2018, and interim periods within annual periods beginning after December 15, 2019. Early application is permitted, but only for annual reporting periods beginning after December 15, 2016. The Update is not expected to have a significant impact on the Company’s consolidated financial statements.

 

In January 2016, the FASB issued ASU 2016-01,Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. This Update applies to all entities that hold financial assets or owe financial liabilities and is intended to provide more useful information on the recognition, measurement, presentation, and disclosure of financial instruments. Among other things, this Update (a) requires equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income; (b) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment; (c) eliminates the requirement to disclose the fair value of financial instruments measured at amortized cost for entities that are not public business entities; (d) eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; (e) requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; (f) requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements; and (g) clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. The amendments in this Update are effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. Entities may adopt the amendments in this Update earlier as of the fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Update ishas not expected to have a significant impact on the Company’s consolidated financial statements.

2.RECENT ACCOUNTING STANDARDS (Continued)

In February 2016, the FASB issued ASU 2016-02,Leases (Topic 842). The standard requires lessees to recognize the assets and liabilities that arise from leases on the balance sheet. A lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. A short-term lease is defined as one in which (a) the lease term is 12 months or less and (b) there is not an option to purchase the underlying asset that the lessee is reasonably certain to exercise. For short-term leases, lessees may elect to recognize lease payments over the lease term on a straight-line basis. The amendments in this Update are effective for fiscal years beginning after December 15, 2019, and for interim periods within fiscal years beginning after December 15, 2020. The amendments should be applied at the beginning of the earliest period presented using a modified retrospective approach with earlier application permitted as of the beginning of an interim or annual reporting period. The Update is not expected to havehad a significant impact on the Company’s consolidated financial statements.

 

In SeptemberJune 2016, the FASB issued ASU 2016-13,Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments, which changes the impairment model for most financial assets. This Update is intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. The underlying premise of the Update is that financial assets measured at amortized cost should be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis. The allowance for credit losses should reflect management’s current estimate of credit losses that are expected to occur over the remaining life of a financial asset. The income statement will be effected for the measurement of credit losses for newly recognized financial assets, as well as the expected increases or decreases of expected credit losses that have taken place during the period. ASU 2016-13 is effective for public business entities that meet the definition of a Securities and Exchange Commission (SEC) filer, for fiscal years beginning after the date on which the national emergency concerning the novel coronavirus (COVID-19) outbreak declared by the President on March 13, 2020 terminates, or December 31, 2020, including interim periods within those fiscal years. For public business entities that do not meet the definition of ana “smaller reporting company” under the rules and regulations of the SEC, filer, ASU 2016-13 is effective for fiscal years beginning after December 15, 2021,2022, including interim periods within those fiscal years. With certain exceptions, transition to the new requirements will be through a cumulative effect adjustment to opening retained earnings as of the beginning of the first reporting period in which the guidance is adopted. The Company expects to recognize a one-time cumulative effect adjustment to the allowance for loan losses as of the beginning of the first reporting period in which the new standard is effective, but cannot yet determine the magnitude of any such one-time adjustment or the overall impact of the new guidance on the financial statements, as any adjustment will be dependent on the composition of the loan portfolio at the time of adoption. The Company is currently in the early stages of implementing processes to comply with the requirements of the Update.

 

In January 2017, the FASB issued ASU 2017-03,Accounting Changes and Error Corrections (Topic 250) and Investments—Equity Method and Joint Ventures (Topic 323), Amendments to SEC Paragraphs Pursuant to Staff Announcements at the September 22, 2016 and November 17, 2016 EITF Meetings. This Update adds an SEC paragraph to the Codification following an SEC Staff Announcement about applying Staff Accounting Bulletin Topic 11.M. Specifically, this announcement applies to ASU 2014-09, Revenue from Contracts with Customers (Topic 606);ASU 2016-02, Leases (Topic 842);and ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. A registrant should evaluate Updates that have not yet been adopted to determine the appropriate financial statement disclosures about the potential material effects of those Updates on the financial statements when adopted. If a registrant does not know or cannot reasonably estimate the impact that adoption of the Updates referenced in this announcement are expected to have on the financial statements, then in addition to making a statement to that effect, that registrant should consider additional qualitative financial statement disclosures to assist the reader in assessing the significance of the impact that the standard will have on the financial statements of the registrant when adopted. In this regard, the SEC staff expects the additional qualitative disclosures to include a description of the effect of the accounting policies that the registrant expects to apply, if determined, and a comparison to the registrant’s current accounting policies. Also, a registrant should describe the status of its process to implement the new standards and the significant implementation matters yet to be addressed. The amendments in this Update are effective immediately.

2.RECENT ACCOUNTING STANDARDS (Continued)

 

In March 2017, the FASB issued ASU 2017-08,Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20). The amendments in this Update shorten the amortization period for certain callable debt securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. Theamendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. The amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. An entity should apply

the amendments in this Update on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. Additionally, in the period of adoption, an entity should provide disclosures about a change in accounting principle. The Update is not expected to have a significant impact on the Company’s consolidated financial statements.

On January 1, 2019, the Company adopted ASU 2014-09Revenue from Contracts with Customers and all subsequent amendments to the ASU (collectively, “ASC 606”) which (i) creates a single framework for recognizing revenue from contract with customers that fall within its scope and (ii) revises when it is appropriate to recognize a gain (loss) from the transfer of nonfinancial assets, such as OREO. The majority of the Company’s revenues come from the interest income and other sources, including loans, leases, and securities, that are outside the scope of ASC 606. The Company’s services that fall within the scope of ASC 606 are presented within Non-Interest Income and are recognized as revenue as the Company satisfies its obligation to the customer. Services within the scope of ASC 606 include deposit service charges on deposits, interchange income, and the sale of OREO. Refer to Note 17 –Revenue Recognition for further discussion on the Company’s accounting policies for revenue sources within the scope of ASC 606.

 

In February 2018,On December 31, 2019, the FASB issuedCompany adopted ASU No. 2016-02 “Leases (Topic 842)” and subsequent amendments thereto, which requires the Company to recognize most leases onto the balance sheet. The Company adopted the standard under a modified retrospective approach as of the date of adoption and elected to apply several of the available practical expedients, including:

Carry over of historical lease determination and lease classification conclusions
Carry over of historical initial direct cost balances for existing leases
Accounting for lease and non-lease components in contracts in which the Company is a lessee as a single lease component

Adoption of the leasing standard resulted in the recognition of operating right-of-use assets of $7,895 and operating lease liabilities of $7,895 as of March 31, 2020. These amounts were determined based on the present value of remaining minimum lease payments, discounted using the Company’s incremental borrowing rate as of the date of adoption. There was no material impact to the timing of expense or income recognition in the Company’s Consolidated Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. ASU 2018-02 provides the option to reclassify certain stranded income tax effects in accumulated other comprehensive income resulting from the Tax CutsStatement. Prior periods were not restated and Jobs Act of 2017 (Tax Reform Act), enacted on December 22, 2017. ASU 2018-02 was issued in response to concerns regarding current guidance in GAAP that requires deferred tax liabilities and assetscontinue to be adjusted forpresented under legacy GAAP. Disclosures about the effect of a changeCompany’s leasing activities are presented in tax laws or rates with the effect included in income from continuing operations in the reporting period that includes the enactment date, even in situations in which the related income tax effects were originally recognized in other comprehensive income, rather than net income, and as a result the stranded tax effects would not reflect the appropriate tax rate. The amendments of ASU 2018-02 allow an entity to make a reclassification from accumulated other comprehensive income to retained earnings for the stranded tax effects, which is the difference between the historical corporate income tax rate of 34.0 percent and the newly enacted corporate income tax rate of 21.0 percent. ASU 2018-02 is effective for fiscal years, and interim periods within those years, beginning after December 31, 2018; however, entities are allowed to early adopt the amendments of ASU 2018-02 in any interim period for which the financial statements have not yet been issued. The amendments of ASU 2018-02 may be applied either at the beginning of the period (annual or interim) of adoption or retrospectively to each of the period(s) in which the effect of the change in the U.S. federal corporate tax rate in the Tax Reform Act is recognized. The Company chose to early adopt the new standard for the year ended December 31, 2017, as allowed. The amount of the reclassification for the Company was $3,860.Note 16 –Leases.

3.SECURITIES AVAILABLE FOR SALE

 

The amortized cost, gross unrealized gains and losses, and fair values of securities available for sale are as follows:

 

 September 30, 2018 (unaudited)  March 31, 2020 (unaudited)
   Gross Gross      Gross Gross 
 Amortized Unrealized Unrealized Fair  Amortized Unrealized Unrealized Fair
 Cost Gains Losses Value  Cost Gains Losses Value
Mortgage-backed securities in government-sponsored entities $4,021,797  $279  $(46,885) $3,975,191 
Mortgage-backed securities of government-sponsored entities $4,361,843  $45,915  $(817) $    4,406,941
Obligations of state and political subdivisions  1,540,374   171   (52,406)  1,488,139  837,674   737   -  838,411
Corporate bonds  3,298,437   -   (31,514)  3,266,923   3,295,143   359   (145,112) 3,150,390
U.S. treasury securities  192,746   29   (143)  192,632 
Total $9,053,354  $479  $(130,948) $8,922,885  $8,494,660  $47,011  $(145,929) $    8,395,742

 

 December 31, 2017  December 31, 2019
   Gross Gross      Gross Gross 
 Amortized Unrealized Unrealized Fair  Amortized Unrealized Unrealized Fair
 Cost Gains Losses Value  Cost Gains Losses Value
Mortgage-backed securities in government-sponsored entities $524,873  $-  $(5,615) $519,258 
Mortgage-backed securities of government-sponsored entities $5,303,817  $19,894  $(42,383) $    5,281,328
Obligations of state and political subdivisions  1,626,608   852   (27,582)  1,599,878   1,363,535   2,174   (4) 1,365,705
Corporate bonds  300,952   1,399   (453)  301,898   3,189,510   24,963   (11,907) 3,202,566
U.S. treasury securities  193,647   1,669   -   195,316 
Total $2,646,080  $3,920  $(33,650) $2,616,350  $9,856,862  $47,031  $(54,294) $    9,849,599

 

The amortized cost and fair value of investment securities available for sale by contractual maturity are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Mortgage-backed securities provide for periodic payments of principal and interest and have contractual maturities ranging from less than 1 year to 2530 years. Due to expected repayment terms being significantly less than the underlying mortgage pool contractual maturities, estimated lives of these securities could be significantly shorter.

 

 September 30, 2018 (unaudited) March 31, 2020 (unaudited) 
 Amortized Fair Amortized Fair 
 Cost Value Cost Value 
         
Due within one year or less $392,831  $392,013 $149,881   150,298 
Due after one year through five years  2,687,988   2,657,569  1,064,656   1,052,448 
Due after five years through ten years  2,021,327   1,968,980  2,957,307   2,825,273 
Due after ten years  3,951,208   3,904,323  4,322,815   4,367,723 
Total $9,053,354  $8,922,885 $8,494,659  $8,395,742 

 

1312
 

 

3.SECURITIES AVAILABLE FOR SALE (Continued)

 

For the three months ended September 30, 2018 and 2017, there were no sales of investment securities available for sale.

For the nine months ended September 30, 2018, there were no sales of investment securities available for sale. For the nine months ended September 30, 2017,March 31, 2020, there were 2 municipalcorporate bonds sold with a total amortized cost of $315,811$1,008,433 and an associated gain on sale of $350.$35,567. The proceeds of the sale were $313,643.$1,044,000. For the three months ended March 31, 2019, one corporate bond was sold with a total amortized cost of $248,584 and an associated gain on sale of $5,791. The proceeds of the sale were $254,375.

 

4.SECURITIES HELD TO MATURITY

 

The amortized cost, gross unrealized gains and losses, and fair values of securities held to maturity are as follows:

 

  March 31, 2020 (unaudited) 
       Gross   Gross     
   Amortized   Unrealized   Unrealized   Fair 
   Cost   Gains   Losses   Value 
Mortgage-backed securities of government-sponsored entities $3,323  $51  $-  $3,374 
Total $3,323  $51  $-  $3,374 

 

  September 30, 2018 (unaudited) 
     Gross  Gross    
  Amortized  Unrealized  Unrealized  Fair 
  Cost  Gains  Losses  Value 
Mortgage-backed securities in government-sponsored entities $7,109  $87  $          -  $7,196 
Total $7,109  $87  $-  $7,196 

 December 31, 2017  December 31, 2019 
   Gross Gross    Gross Gross  
 Amortized Unrealized Unrealized Fair   Amortized   Unrealized   Unrealized   Fair 
 Cost Gains Losses Value   Cost   Gains   Losses   Value 
Mortgage-backed securities in government-sponsored entities $9,797  $     -  $(303) $9,494 
Mortgage-backed securities of government-sponsored entities $3,879  $53  $-  $3,932 
Total $9,797  $-  $(303) $9,494  $3,879  $53  $-  $3,932 

 

The amortized cost and fair value of mortgage-backed securities by contractual maturity are shown below. Mortgage-backed securities provide for periodic payments of principal and interest and have contractual maturities ranging up to 108 years. Due to expected repayment terms being less than the underlying mortgage pool contractual maturities, estimated lives of these securities could be significantly shorter.

 

 September 30, 2018 (unaudited)  March 31, 2020 (unaudited) 
 Amortized Fair  Amortized Fair 
 Cost Value  Cost Value 
          
Due within one year or less $30  $30  $80  $80 
Due after one year through five years  5,545   5,585   2,036   2,049 
Due after five years through ten years  1,534   1,581 
Due after five years through nine years  1,207   1,245 
                
Total $7,109  $7,196  $3,323  $3,374 

 

1413
 

 

5.UNREALIZED LOSSES ON SECURITIES

 

The following tables show the Bank’sCompany’s gross unrealized losses and fair value, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position:

 

 September 30, 2018 (unaudited)  March 31, 2020 (unaudited) 
 Less than Twelve Months Twelve Months or Greater Total  Less than Twelve Months Twelve Months or Greater Total 
   Gross   Gross   Gross    Gross    Gross   Gross 
 Fair Unrealized Fair Unrealized Fair Unrealized  Fair Unrealized  Fair  Unrealized Fair Unrealized 
 Value Losses Value Losses Value Losses  Value Losses  Value  Losses Value Losses 
                          
U.S. treasury securities $159,530  $(143) $-  $-  $159,530  $(143)
Mortgage-backed securities in government-sponsored entities  3,548,709   (33,886)  355,614   (12,999)  3,904,323   (46,885)
Mortgage-backed securities of government-sponsoredentities $350,298  $(817) $-  $-  $350,298  $(817)
                        
Obligations of state and political subdivisions  1,046,166   (17,428)  393,718   (34,978)  1,439,884   (52,406)  -   -   -   -   -   - 
Corporate bonds  3,266,923   (31,514)  -   -   3,266,923   (31,514)  3,049,915   (145,112)  -   -   3,049,915   (145,112)
U.S. treasury securities  -   -   -   -   -   - 
Total $8,021,328  $(82,971) $749,332  $(47,977) $8,770,660  $(130,948) $3,400,213  $(145,929) $-  $-  $3,400,213  $(145,929)

 

 December 31, 2017  December 31, 2019 
 Less than Twelve Months Twelve Months or Greater Total  Less than Twelve Months Twelve Months or Greater Total 
   Gross   Gross   Gross    Gross   Gross   Gross 
 Fair Unrealized Fair Unrealized Fair Unrealized   Fair Unrealized Fair Unrealized Fair Unrealized 
 Value Losses Value Losses Value Losses   Value  Losses Value Losses Value Losses 
                          
Mortgage-backed securities in government-sponsored entities $519,258  $(5,615) $9,494  $(303) $528,752  $(5,918)
Mortgage-backed securities of government-sponsoredentities $3,005,336  $(40,992) $273,818  $(1,391) $3,279,154  $(42,383)
Obligations of state and political subdivisions  1,044,275   (7,238)  405,521   (20,344)  1,449,796   (27,582)  24,996   (4)  -   -   24,996   (4)
Corporate bonds  199,898   (453)  -   -   199,898   (453)  2,068,955   (11,907)  -   -   2,068,955   (11,907)
Total $1,763,431  $(13,306) $415,015  $(20,647) $2,178,446  $(33,953) $5,099,287  $(52,903) $273,818  $(1,391) $5,373,105  $(54,294)

 

Management reviews the Bank’sCompany’s investment positions monthly. There were 247 investments that were temporarily impaired as of September 30, 2018,March 31, 2020, with aggregate depreciation of less than 21.7 percent of the Bank’sCompany’s amortized cost basis. There were 2011 investments that were temporarily impaired as of December 31, 2017,2019, with aggregate depreciation of less than 20.6 percent fromof the Bank’sCompany’s amortized cost basis. Management has asserted that at September 30, 2018March 31, 2020 and December 31, 2017,2019, the declines outlineddisclosed in the above table represent temporary declines and the BankCompany does not intend to sell and does not believe it will be required to sell these securities before recovery of their cost basis, which may be at maturity.

 

The BankCompany has concluded that any impairment of its investment securities portfolio outlineddisclosed in the above table is not other than temporaryother-than-temporary and the declines are the result of interest rate changes, sector credit rating changes, or company-specific rating changes that are not expected to result in the non-collection of principal and interest during the period.

 

1514
 

 

6.LOANS

 

The Bank’sCompany’s loan portfolio summarized by category is as follows:

 

 September 30, December 31,  March 31, December 31, 
 2018 2017  2020 2019 
 (unaudited)    (unaudited)   
Mortgage loans:                
One-to-four family $75,617,401  $75,858,226  $69,475,072  $70,511,775 
Commercial  58,702,797   50,122,058   59,571,468   57,117,861 
  134,320,198   125,980,284   129,046,540   127,629,636 
                
Commercial and industrial  18,118,214   11,455,554   24,737,887   23,990,540 
Consumer  5,177,999   4,014,258   6,234,988   5,690,941 
  157,616,411   141,450,096   160,019,415   157,311,117 
                
Third-party loan acquisition and other net origination costs  304,708   385,883   101,571   147,441 
Discount on loans previously held for sale  (205,681)  (219,997)  (157,602)  (163,182)
Allowance for loan losses  (1,101,600)  (1,041,445)  (1,195,761)  (1,183,261)
                
Total $156,613,838  $140,574,537  $158,767,623  $156,112,115 

 

The Bank’sCompany’s primary business activity is with customers located in Pittsburgh and surrounding communities. The Bank’sCompany’s loan portfolio consists predominantly of one-to-four family mortgage and commercial mortgage loans. These loans are typically secured by first-lien positions on the respective real estate properties and are subject to the Bank’sCompany’s underwriting policies.

 

During the normal course of business, the BankCompany may sell a portion of a loan as a participation loan in order to manage portfolio risk. In order to be eligible for sales treatment, all cash flows from the loan must be divided proportionately, the rights of each loan holder must have the same priority, the loan holders must have no recourse to the transferor other than standard representations and warranties, and no loan holder can have the right to pledge or exchange the entire loan. The BankCompany had transferred $7,606,923$9.0 million and $8,129,670$9.9 million in participation loans as of September 30, 2018March 31, 2020 and December 31, 2017,2019, respectively, to other financial institutions. As of September 30, 2018,March 31, 2020, and December 31, 2017,2019, all these loans were being serviced by the Bank.Company.

 

1615
 

 

7.ALLOWANCE FOR LOAN LOSSES

 

The allowance for loan losses reflects management’s estimate of loan losses inherent in the loan portfolio at the balance sheet date. The following tables present, by portfolio segment, the changes in the allowance for loan losses and the recorded investment in loans for the three and nine months ended September 30, 2018March 31, 2020 (unaudited) and 20172019 (unaudited), respectively:

 

Three months ended March 31, 2020: Mortgage   Commercial Consumer   
 Mortgage   Commercial Consumer    One-to-Four Mortgage and and   
Three months ended One-to-Four Mortgage and and   
September 30, 2018: Family Commercial Industrial HELOC Total 
Allowance for loan losses:            Family Commercial Industrial HELOC Total 
 
Beginning balance $471,438  $437,619  $134,880  $46,079  $1,090,016  $543,090  $443,897  $170,769  $25,505  $1,183,261 
Charge-offs  -   -   (9,270)  (29,146)  (38,416)  -   -   -   -   - 
Recoveries  -   -   -   -   -   -   -   -   -   - 
Provision (credit)  (33,194)  (46,940)  104,987   25,147   50,000   (50,460)  12,461   38,006   12,493   12,500 
Ending balance $438,244  $390,679  $230,597  $42,080  $1,101,600  $492,630  $456,358  $208,775  $37,998  $1,195,761 

 

 Mortgage     Commercial  Consumer    
Three months ended One-to-Four  Mortgage  and  and    
September 30, 2017: Family  Commercial  Industrial  HELOC  Total 
Allowance for loan losses:               
Beginning balance $488,009  $324,941  $70,466  $57,316  $940,732 
Charge-offs  -   -   -   -   - 
Recoveries  -   -   -   -   - 
Provision (credit)  2,495   12,352   15,186   31,017   61,050 
Ending balance $490,504  $337,293  $85,652  $88,333  $1,001,782 

 Mortgage     Commercial  Consumer    
Nine months ended One-to-Four  Mortgage  and  and    
September 30, 2018: Family  Commercial  Industrial  HELOC  Total 
Allowance for loan losses:               
Beginning balance $513,846  $383,535  $80,854  $63,210  $1,041,445 
Charge-offs  (16,429)  -   (9,270)  (29,146)  (54,845)
Recoveries  -   -   -   -   - 
Provision (credit)  (59,173)  7,144   159,013   8,016   115,000 
Ending balance $438,244  $390,679  $230,597  $42,080  $1,101,600 

Three months ended March 31, 2019: Mortgage   Commercial Consumer   
 Mortgage   Commercial Consumer    One-to-Four Mortgage and and   
Nine months ended One-to-Four Mortgage and and   
September 30, 2017: Family Commercial Industrial HELOC Total 
Allowance for loan losses:            Family Commercial Industrial HELOC Total 
                    
Beginning balance $498,410  $228,763  $59,439  $34,127  $820,739  $422,539  $393,900  $263,721  $44,765  $1,124,925 
Charge-offs  -   -   -   -   -   (28,268)  (22,932)  -   -   (51,200)
Recoveries  -   -   -   -   -   -   -   -   -   - 
Provision (credit)  (7,906)  108,530   26,213   54,206   181,043   42,304   4,175   (2,706)  1,727   45,500 
Ending balance $490,504  $337,293  $85,652  $88,333  $1,001,782  $436,575  $375,143  $261,015  $46,492  $1,119,225 

 

7.ALLOWANCE FOR LOAN LOSSES (Continued)

 

The following tables summarize the loan portfolio and allowance for loan losses by the primary segments of the loan portfolio as of September 30, 2018March 31, 2020 (unaudited), and December 31, 2017.2019.

 

 Mortgage One-to-Four Family Mortgage Commercial Commercial
and
Industrial
 Consumer
and
HELOC
 Total  Mortgage One-to-Four Family Mortgage Commercial Commercial and Industrial Consumer and HELOC Total 
September 30, 2018                    
March 31, 2020                    
Allowance for loan losses:                                        
Loans deemed impaired  33,422   -   -   -   33,422  $128,163  $2,511  $-  $8,607  $139,281 
                                        
Loans not deemed impaired  404,822   390,679   230,597   42,080   1,068,178   364,467   453,847   208,775   29,391   1,056,480 
                                        
Ending Balance  438,244   390,679   230,597   42,080   1,101,600  $492,630  $456,358  $208,775  $37,998  $1,195,761 
                                        
September 30, 2018                    
March 31, 2020                    
Loans:                                        
Loans deemed impaired  2,492,049   1,779,350   155,660   11,747   4,438,806  $3,960,838  $2,479,102  $1,618,286  $188,060  $8,246,286 
                                        
Loans not deemed impaired  73,125,352   56,923,447   17,962,554   5,166,252   153,177,605   65,514,234   57,092,366   23,119,601   6,046,928   151,773,129 
                                        
Ending Balance  75,617,401   58,702,797   18,118,214   5,177,999   157,616,411  $69,475,072  $59,571,468  $24,737,887  $6,234,988  $160,019,415 

 

 Mortgage One-to-Four Family Mortgage Commercial Commercial and Industrial Consumer
and
HELOC
 Total  Mortgage One-to-Four Family Mortgage Commercial Commercial and Industrial Consumer and HELOC Total 
December 31, 2017                    
December 31, 2019                    
Allowance for loan losses:                                        
Loans deemed impaired  23,870   -   -   -   23,870  $43,180  $-  $-  $-  $43,180 
                                        
Loans not deemed impaired  489,976   383,535   80,854   63,210   1,017,575   499,910   443,897   170,769   25,505   1,140,081 
                                        
Ending Balance  513,846   383,535   80,854   63,210   1,041,445  $543,090  $443,897  $170,769  $25,505  $1,183,261 
                               
December 31, 2017                    
December 31, 2019           
Loans:                               
Loans deemed impaired  2,508,658   1,122,740   8,251   29,245   3,668,894  $3,912,297  $2,472,890  $1,398,286  $188,060  $7,971,533 
                                        
Loans not deemed impaired  73,349,568   48,999,318   11,447,303   3,985,013   137,781,202   66,599,478   54,644,971   22,592,254   5,502,881   149,339,584 
                                        
Ending Balance  75,858,226   50,122,058   11,455,554   4,014,258   141,450,096  $70,511,775  $57,117,861  $23,990,540  $5,690,941  $157,311,117 

17

 

7.ALLOWANCE FOR LOAN LOSSES (Continued)

 

The following tables present impaired loans by class as of September 30, 2018 (unaudited),March 31, 2020, and December 31, 2017,2019, segregated by those for which a specific allowance was required and those for which a specific allowance was not necessary.

 

  September 30, 2018  December 31, 2017 
     Unpaid        Unpaid    
  Recorded  Principal  Related  Recorded  Principal  Related 
  Investment  Balance  Allowance  Investment  Balance  Allowance 
                   
With no allowance recorded:                        
Mortgage loans:                        
One-to-four family $2,137,668  $2,137,668  $-  $2,356,007  $2,356,007  $- 
Commercial $1,779,350  $1,779,350   -   1,122,740   1,122,740   - 
Commercial and Industrial $155,660  $155,660   -   8,251   8,251   - 
Consumer and HELOC $11,747  $11,747   -   29,245   29,245   - 
                         
With an allowance recorded:                        
Mortgage loans:                        
One-to-four family  354,381   354,381   33,422   152,651   152,651   23,870 
Commercial  -   -   -   -   -   - 
Commercial and Industrial  -   -   -   -   -   - 
Consumer and HELOC  -   -   -   -   -   - 
                         
Total mortgage loans:                        
One-to-four family  2,492,049   2,492,049   33,422   2,508,658   2,508,658   23,870 
Commercial  1,779,350   1,779,350   -   1,122,740   1,122,740   - 
Commercial and Industrial  155,660   155,660   -   8,251   8,251   - 
Consumer and HELOC  11,747   11,747   -   29,245   29,245   - 
                         
Total $4,438,806  $4,438,806  $33,422  $3,668,894  $3,668,894  $23,870 

  March 31, 2020 (unaudited)  December 31, 2019 
     Unpaid        Unpaid    
  Recorded  Principal  Related  Recorded  Principal  Related 
  Investment  Balance  Allowance  Investment  Balance  Allowance 
                   
With no allowance recorded:                        
Mortgage loans:                        
One-to-four family $2,936,004  $2,988,612  $-  $3,753,813  $3,785,265  $- 
Commercial  2,287,601   2,325,216   -   2,472,890   2,497,469   - 
Commercial and Industrial  1,618,286   1,635,286   -   1,398,286   1,465,938   - 
Consumer and HELOC  151,732   151,732   -   188,060   194,255   - 
                         
With an allowance recorded:                        
Mortgage loans:                        
One-to-four family  1,024,834   1,024,834   128,163   158,484   158,547   43,180 
Commercial  191,501   192,509   2,511   -   -   - 
Commercial and Industrial  -   -   -   -   -   - 
Consumer and HELOC  36,328   36,328   8,607   -   -   - 
                         
Total mortgage loans:                        
One-to-four family  3,960,838   4,013,446   128,163   3,912,297   3,943,812   43,180 
Commercial  2,479,102   2,517,725   2,511   2,472,890   2,497,469   - 
Commercial and Industrial  1,618,286   1,635,286   -   1,398,286   1,465,938   - 
Consumer and HELOC  188,060   188,060   8,607   188,060   194,255   - 
                         
Total $8,246,286  $8,354,517  $139,281  $7,971,533  $8,101,474  $43,180 

 

1918
 

 

7.ALLOWANCE FOR LOAN LOSSES (Continued)

 

The following table presents the average recorded investment in impaired loans and related interest income recognized for the periods indicated.

 

  Three Months Ended
September 30, 2018
  Three Months Ended
September 30, 2017
 
  (unaudited)  (unaudited) 
  Average  Interest  Average  Interest 
  Recorded  Income  Recorded  Income 
  Investment  Recognized  Investment  Recognized 
             
With no allowance recorded:                
Mortgage loans:                
One-to-four family $2,051,434  $8,881  $1,832,617  $52,335 
Commercial  1,555,260   5,125   200,988   803 
Commercial and industrial  142,033   -   -   - 
Consumer and HELOC  23,461   298   -   - 
                 
With an allowance recorded:                
Mortgage loans:                
One-to-four family  355,222   1,902   138,910   2,273 
Commercial  -   -   -   - 
Commercial and industrial  -   -   -   - 
Consumer and HELOC  -   -   16,699   - 
                 
Total mortgage loans:                
One-to-four family  2,406,656   10,783   1,971,527   54,608 
Commercial  1,555,260   5,125   200,988   803 
Commercial and industrial  142,033   -   -   - 
Consumer and HELOC  23,461   298   16,699   - 
                 
Total $4,127,410  $16,206  $2,189,214  $55,411 

 Nine Months Ended
September 30, 2018
 Nine Months Ended
September 30, 2017
  Three Months Ended
March 31, 2020
 Three Months Ended
March 31, 2019
 
 (unaudited) (unaudited)  (unaudited) (unaudited) 
 Average Interest Average Interest  Average Interest Average Interest 
 Recorded Income Recorded Income  Recorded Income Recorded Income 
 Investment Recognized Investment Recognized  Investment Recognized Investment Recognized 
                  
With no allowance recorded:                                
Mortgage loans:                                
One-to-four family $1,961,587  $9,313  $1,788,550  $76,546  $2,796,121  $8,876  $1,789,634  $14,931 
Commercial  1,262,149   6,669   202,584   96,606   2,293,382   18,691   1,764,581   9,295 
Commercial and industrial  105,142   -   -   -   1,618,286   33,829   155,660   - 
Consumer and HELOC  38,063   505   -   -   151,732   1,772   6,195   - 
                                
With an allowance recorded:                                
Mortgage loans:                                
One-to-four family  374,613   7,622   141,029   6,254   1,024,834   9,209   308,916   810 
Commercial  -   -   -   -   191,501   -   -   - 
Commercial and industrial  -   -   -   -   -   -   -   - 
Consumer and HELOC  -   -   5,566   -   36,328   -   -   - 
                                
Total mortgage loans:                                
One-to-four family  2,336,200   16,935   1,929,579   82,800   3,820,955   18,085   2,098,550   15,741 
Commercial  1,262,149   6,669   202,584   96,606   2,484,883   18,691   1,764,581   9,295 
Commercial and industrial  105,142   -   -   -   1,618,286   33,829   155,660   - 
Consumer and HELOC  38,063   505   5,566   -   188,060   1,772   6,195   - 
                                
Total $3,741,554  $24,109  $2,137,729  $179,406  $8,112,184  $72,377  $4,024,986  $25,036 

 

7.ALLOWANCE FOR LOAN LOSSES (Continued)

 

Aging Analysis of Past-Due Loans by Class

 

Management further monitors the performance and credit quality of the loan portfolio by analyzing the age of the portfolio as determined by the length of time a recorded payment is past due. The following tables present the classes of the loan portfolio summarized by the aging categories at the dates indicated:

  September 30, 2018 (unaudited)  
  30-59 Days 60-89 Days 90 Days
or Greater
 Total Past   Total Loans 90 Days or
Greater Still
  Past Due Past Due Past Due Due Current Receivable Accruing
               
Mortgage loans:                            
One-to-four family $223,534   294,661   1,636,601   2,154,796  $73,462,605  $75,617,401  $       - 
Commercial  794,525   -   1,054,164   1,848,689   56,854,108   58,702,797   - 
Commercial and industrial  -   -   155,660   155,660   17,962,554   18,118,214   - 
Consumer and HELOC  10,547   -   1,200   11,747   5,166,252   5,177,999   - 
Total $1,028,606  $294,661  $2,847,625  $4,170,892  $153,445,519  $157,616,411  $- 

 

 March 31, 2020 (unaudited) 
 December 31, 2017              90 Days or 
 30-59 Days 60-89 Days 90 Days
or Greater
 Total Past   Total Loans 90 Days or
Greater Still
 30-59 Days 60-89 Days 90 Days or Greater Total Past   Total Loans Greater Still 
 Past Due Past Due Past Due Due Current Receivable Accruing Past Due Past Due Past Due Due Current Receivable Accruing 
                             
Mortgage loans:                                                        
One-to-four family $982,168  $399,992  $1,900,116  $3,282,276  $72,575,950  $75,858,226  $     -  $382,031   669,338   1,564,580   2,615,949  $66,859,123  $69,475,072  $24,926 
Commercial  656,640   -   1,122,740   1,779,380   48,342,678   50,122,058   -   380,408   302,092   879,290   1,561,790   58,009,678   59,571,468   663,131 
Commercial and industrial  301,783   -   8,251   310,034   11,145,519   11,455,554   -   1,563,532   1,604,225   220,000   3,387,757   21,350,130   24,737,887   - 
Consumer and HELOC  662   14,386   29,245   44,293   3,969,965   4,014,258   -   57,314   -   42,918   100,232   6,134,756   6,234,988   4,054 
Total $1,941,253  $414,378  $3,060,352  $5,415,983  $136,034,112  $141,450,096  $-  $2,383,285  $2,575,655  $2,706,788  $7,665,728  $152,353,687  $160,019,415  $692,111 
                            

  December 31, 2019 
                   90 Days or 
  30-59 Days  60-89 Days  90 Days or Greater  Total Past     Total Loans  Greater Still 
  Past Due  Past Due  Past Due  Due  Current  Receivable  Accruing 
                      
Mortgage loans:                            
One-to-four family $338,997   856,490   1,799,005   2,994,492  $67,517,283  $70,511,775  $- 
Commercial  280,198   138,256   823,417   1,241,871   55,875,990   57,117,861   645,201 
Commercial and industrial  32,261   220,000   -   252,261   23,738,279   23,990,540   - 
Consumer and HELOC  4,512   -   38,864   43,376   5,647,565   5,690,941   - 
Total $655,968  $1,214,746  $2,661,286  $4,532,000  $152,779,117  $157,311,117  $645,201 

The increase in total past due of $3.1 million from December 31, 2019 to March 31, 2020 was primarily due to two commercial and industrial relationships that became delinquent during the quarter ended March 31, 2020. Management believes that this delinquency is temporary and will continue to monitor the relationships.

7.ALLOWANCE FOR LOAN LOSSES (Continued)

 

The following table presents the loans on nonaccrual status, by class:

 

 September 30, December 31,  March 31, December 31, 
 2018 2017  2020 2019 
 (unaudited)    (unaudited)   
Mortgage loans:                
One-to-four family $2,210,273  $2,108,086  $2,349,834  $2,045,845 
Commercial  1,102,106   1,122,740   980,927   1,055,876 
Commercial and industrial  155,660   8,251   -   74,864 
Consumer and HELOC  11,747   29,245   38,864   38,864 
Total $3,479,786  $3,268,322  $3,369,625  $3,215,449 

 

Credit Quality Information

 

The BankCompany categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The BankCompany analyzes commercial loans individually by classifying the loans as to their credit risk. The BankCompany uses a nine-grade internal loan rating system for commercial mortgage loans and commercial and industrial loans as follows:

 

Loans rated 1, 2, 3, 4, and 5: Loans in these categories are considered “pass” rated loans with low to average risk.
Loans rated 6: Loans in this category are considered “special mention.” These loans have a potential weakness that deserves management’s close attention. If left uncorrected, these weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.
Loans rated 7: Loans in this category are considered “substandard.” These loans have a well-defined weakness based on objective evidence that jeopardize the liquidation of the debt. These loans are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.
Loans rated 8:Loans in this category are considered “doubtful” and have all the weaknesses inherent in a loan rated 7. In addition, these weaknesses make collection or liquidation in full highly questionable and improbable, based on existing circumstances.
Loans rated 9: Loans in this category are considered “loss” and are considered to be uncollectible or of such value that continuance as an asset is not warranted.

 

2221
 

 

7.ALLOWANCE FOR LOAN LOSSES (Continued)

 

Credit Quality Information (Continued)

 

The risk category of loans by class is as follows:

 

  September 30, 2018 (unaudited)  December 31, 2017 
  Mortgage  Commercial and  Mortgage  Commercial and 
  Commercial  Industrial  Commercial  Industrial 
          
Loans rated 1 - 5 $56,971,390  $13,980,085  $48,764,928  $11,434,756 
Loans rated 6  -   3,982,469   234,390   20,798 
Loans rated 7  1,731,407   155,660   1,122,740   - 
Ending balance $58,702,797  $18,118,214  $50,122,058  $11,455,554 

  March 31, 2020 (unaudited)  December 31, 2019 
  Mortgage  Commercial and  Mortgage  Commercial and 
  Commercial  Industrial  Commercial  Industrial 
             
Loans rated 1 - 5 $57,194,085  $23,052,748  $54,749,767  $23,848,823 
Loans rated 6  24,658   1,543,422   24,658   - 
Loans rated 7  2,352,725   141,717   2,343,436   141,717 
Ending balance $59,571,468  $24,737,887  $57,117,861  $23,990,540 

 

There were no loans classified as doubtful or loss at September 30, 2018,March 31, 2020, or December 31, 2017.2019.

 

For one-to-four family mortgage loans and consumer and HELOC loans, the BankCompany evaluates credit quality based on whether the loan is considered to be performing or nonperforming. Loans are generally considered to be nonperforming when they are placed on nonaccrual or become 90 days past due. The following table presents the balances of loans by class based on payment performance:

 

  September 30, 2018 (unaudited)  December 31, 2017 
  Mortgage  Consumer  Mortgage  Consumer 
  One-to-Four  and  One-to-Four  and 
  Family  HELOC  Family  HELOC 
             
Performing $73,541,731  $5,166,252  $73,750,140  $3,985,013 
Nonperforming  2,075,670   11,747   2,108,086   29,245 
Total $75,617,401  $5,177,999  $75,858,226  $4,014,258 

   March 31, 2020 (unaudited)  December 31, 2019 
   Mortgage  Consumer  Mortgage  Consumer 
   One-to-Four  and  One-to-Four  and 
   Family  HELOC  Family  HELOC 
              
Performing  $67,125,238  $6,196,124  $68,465,930  $5,652,077 
Nonperforming   2,349,834   38,864   2,045,845   38,864 
Total  $69,475,072  $6,234,988  $70,511,775  $5,690,941 

 

Troubled Debt Restructurings

 

There was one loan modified as a troubled debt restructuring during the three months ended September 30, 2018 (unaudited). The loan was a one-to-four family mortgage and had a pre- and post-modification balance of $146,053. The concession granted by the Bank was an extension of the maturity date. There were no additional loans modified as troubled debt restructurings induring the ninethree months ended September 30, 2018.

During the nine months ended September 30, 2017, the Bank modified three loans as troubled debt restructurings. The loans were all one-to-four family mortgages and had a pre- and post-modification aggregate balance of $207,967. The concession granted by the Bank was an extension of the maturity date for all three of the loans noted.March 31, 2020 or 2019.

 

As of September 30, 2018,March 31, 2020, and December 31, 2017,2019, the BankCompany allocated $7,266$139,281 and $23,870,$43,180, respectively, within the allowance for loan losses related to all loans modified as troubled debt restructurings.

 

The Bank did not have anyAs of March 31, 2020, the Company had four loans modified as a troubled debt restructuring in the preceding 12 months that subsequently defaulted in the current reporting period. One of the defaulted troubled debt restructurings is a commercial mortgage totaling $24,658. Three of the defaulted troubled debt restructurings are commercial and industrial loans totaling $1,323,422. The three commercial and industrial loans are classified as “special mention.” thus carry greater weight when calculating the allowance for loan losses. Management believes a full recovery of principal will be made on these loans. The commercial mortgage has been tested for impairment and it does not have a shortage, thus it is removed from the allowance for loan losses calculation.

8.EMPLOYEE STOCK OWNERSHIP PLAN

 

The Bank established a tax qualified Employee Stock Ownership Plan (“ESOP”) for the benefit of its employees in conjunction with the Reorganization effective on January 24, 2018. Eligible employees become 20% vested in their accounts after two years of service, 40% after three years of service, 60% after four years of service, 80% after five years of service, and 100% after six years of service, or earlier, upon death, disability or attainment of normal retirement age.

 

The ESOP purchased 88,131 shares of Company common stock, which was funded by a loan from the Company. Unreleased ESOP shares collateralize the loan payable, and the cost of the shares is recorded as a contra-equity account in the stockholders’ equity of the Company. Shares are to be released as debt payments are made by the ESOP to the loan. The ESOP’s sources of repayment of the loan can include dividends, if any, on the unallocated stock held by the ESOP and discretionary contributions from the Company to the ESOP and earnings thereon.

 

Compensation expense is equal to the fair value of the shares committed to be released and unallocated ESOP shares are excluded from outstanding shares for purposes of computing earnings per share. During the three months ended September 30, 2018,March 31, 2020, the Company recognized $10,322 in compensation expense and during the nine months ended September 30, 2018, the Company recognized $30,945$8,516 in compensation expense.

 

9.STOCK COMPENSATION PLAN

In May 2019, the Company’s board adopted, and its shareholders approved, the SSB Bancorp, Inc. 2019 Equity Incentive Plan (the “Plan”) authorizing the grant of options or restricted stock covering 154,229 shares of common stock. The maximum number of shares of stock that may be delivered under the Plan pursuant to the exercise of stock options is 110,164 and the maximum number of shares of stock that may be issued as restricted stock awards, restricted stock units, and performances shares is 44,065. Under the Plan, options or restricted stock can be granted to directors, officers, and employees that provide services to the Company, as selected by the compensation committee of the Board. The option price at which a granted stock option may be exercised will not be less than 100% of the fair market value per share of common stock on the grant date. The maximum term of any option granted under the Plan cannot exceed 10 years.

On May 23, 2019, 11,015 shares of restricted stock and 27,540 stock options were awarded to directors under the Plan. The shares of restricted stock and stock options vest at a rate of 20% per year commencing on May 23, 2020, and the related expense is being recognized straight-line over the 60-month period. Additionally, on November 20, 2019, 17,626 shares of restricted stock and 44,066 stock options were awarded to certain executives under the Plan. The shares of restricted stock and stock options vest at a rate of 20% per year commencing on November 20, 2020, and the related expense is being recognized straight-line over the 60-month period. At March 31, 2020, there were 15,424 shares of stock and 38,558 stock options available to be issued under the Plan.

The following tables summarize transactions regarding the restricted stock under the Plan for the three months ended March 31, 2020.

      Weighted average 
   Number of  grant date price 
   restricted shares  per share 
Non-vested shares at December 31, 2019   28,641  $7.89 
Granted   -   - 
Vested   -   - 
Forfeited   -   - 
Non-vested shares at March 31, 2020   28,641   7.89 

9.STOCK COMPENSATION PLAN (Continued)

A summary of the status of the awarded stock options at March 31, 2020, and changes during the three months ended March 31, 2020 is presented in the tables and narrative following:

  Three months ended 
  March 31, 2020 
  Shares  Weighted Average Exercise Price  Weighted Average Fair Value 
Outstanding at January 1, 2020  71,606  $7.89  $0.95 
Granted  -   -   - 
Exercised  -   -   - 
Forfeited  -   -   - 
Outstanding at March 31, 2020  71,606   7.89   0.95 
Exercisable at March 31, 2020  -   -   - 
Weighted average of optionsgranted in current year     $N/A   N/A 

At March 31, 2020, none of the 71,606 options outstanding were exercisable. Of the 71,606 options that are not yet exercisable, 27,540 have an exercise price of $8.35, and 44,066 have an exercise price of $7.60. The weighted average remaining contractual life of the 71,606 options is 9.5 years. The fair value of each option grant is estimated on the date of grant using the Binomial or Black-Scholes option pricing model. There were no shares granted during the three months ended March 31, 2020.

The Company uses the modified prospective method for accounting for stock-based compensation. For the three months ended March 31, 2020, the Company recognized $11,000 and $3,000 of pretax compensation expense related to restricted stock awards and stock option awards, respectively. As of March 31, 2020, there was $198,000 of unrecognized compensation expense related to restricted stock awards, and $54,000 of unrecognized compensation expense related to stock option awards, that will be recognized over the remaining vesting periods.

No stock options had been exercised as of March 31, 2020.

10.REGULATORY CAPITAL REQUIREMENTS

 

The Bank is subject to various regulatory capital requirements administered by federal and state banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the BankCompany must meet specific capital guidelines that involve quantitative measure of the Bank’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. The net unrealized gain or loss on available for sale securities is not included in computing regulatory capital.

 

ThePrompt corrective action regulations require a minimum ratio of common equity Tier 1 capitalprovide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to risk-weighted assets of 4.5%, a minimum ratio of Tier 1 capitalrepresent overall financial condition. If adequately capitalized, regulatory approval is required to risk-weighted assets of 6%, a minimum total capital ratio of 8%, and a minimum leverage ratio of 4% for all banking organizations. Additionally, community banking institutions must maintain a capital conservation buffer of common equity Tier 1 capital in an amount greater than 2.5% of total risk-weighted assets to avoid being subject to limitations onaccept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and discretionary bonuses. Theexpansion, and capital conservation buffer and certain deductions from and adjustments to regulatory capital and risk-weighted assetsrestoration plans are being phased in over several years. The required minimum conservation buffer was 1.875% as of January 1, 2018 and will increase to 2.5% on January 1, 2019. Management believes that the Bank’s capital levels will remain characterized as “well-capitalized” throughout the phase-in periods.

required.

9.10.REGULATORY CAPITAL REQUIREMENTS (Continued)

 

As of September 30, 2018,March 31, 2020, the most recent notification from the Federal Deposit Insurance Corporation categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum capital ratios as set forth in the following table. There are no conditions or events since the notification that management believes have changed the Bank’s category. Management believes that the Bank meets all capital adequacy requirements to which it is subject. Although the Company is not subject to regulatory capital requirements because its total consolidated assets are less than $3.0 billion, the Company’s actual capital amounts and ratios are presented in the table below.

  March 31,  December 31, 
  2020  2019 
  Amount  Ratio  Amount  Ratio 
  (unaudited)       
Common Equity Tier 1 capital (to risk-weighted assets)                
Actual $  21,109,816   13.69% $  20,888,619   14.00%
For capital adequacy purposes  6,939,990   4.50%  6,714,585   4.50%
To be well capitalized  10,024,430   6.50%  9,698,845   6.50%
                 
Tier 1 capital (to risk-weighted assets)                
Actual $21,109,816   13.69% $20,888,619   14.00%
For capital adequacy purposes  9,253,320   6.00%  8,952,780   6.00%
To be well capitalized  12,337,760   8.00%  11,937,040   8.00%
                 
Total capital (to risk-weighted assets)                
Actual $22,305,577   14.46% $22,071,880   14.79%
For capital adequacy purposes  12,337,760   8.00%  11,937,040   8.00%
To be well capitalized  15,422,200   10.00%  14,921,300   10.00%
                 
Tier 1 capital (to average assets)                
Actual $21,109,816   10.16% $20,888,619   10.66%
For capital adequacy purposes  8,313,378   4.00%  7,834,802   4.00%
To be well capitalized  10,391,722   5.00%  9,793,503   5.00%
                 

10.REGULATORY CAPITAL REQUIREMENTS (Continued)

The Bank’s actual capital amounts and ratios are also presented in the table below.

 

 September 30, December 31,  March 31, December 31, 
 2018 2017  2020 2019 
 Amount Ratio Amount Ratio  Amount Ratio Amount Ratio 
 (unaudited)      (unaudited)     
Common Equity Tier 1 capital                
(to risk-weighted assets)                
Common Equity Tier 1 capital (to risk-weighted assets)                
Actual $20,201,636   14.16% $12,135,085   9.47% $17,490,586   11.34% $17,287,045   11.59%
For capital adequacy purposes  6,419,565   4.50%  5,718,465   4.50%  6,939,990   4.50%  6,714,585   4.50%
To be well capitalized  9,272,705   6.50%  8,325,005   6.50%  10,024,430   6.50%  9,698,845   6.50%
                                
Tier 1 capital                
(to risk-weighted assets)                
Tier 1 capital (to risk-weighted assets)                
Actual $20,201,636   14.16% $12,135,085   9.47% $17,490,586   11.34% $17,287,045   11.59%
For capital adequacy purposes  8,559,420   6.00%  7,684,620   6.00%  9,253,320   6.00%  8,952,780   6.00%
To be well capitalized  11,412,560   8.00%  10,246,160   8.00%  12,337,760   8.00%  11,937,040   8.00%
                                
Total capital                
(to risk-weighted assets)                
Total capital (to risk-weighted assets)                
Actual $21,303,236   14.93% $13,176,530   10.29% $18,686,347   12.12% $18,470,306   12.38%
For capital adequacy purposes  11,412,560   8.00%  10,246,160   8.00%  12,337,760   8.00%  11,937,040   8.00%
To be well capitalized  14,265,700   10.00%  12,807,700   10.00%  15,422,200   10.00%  14,921,300   10.00%
                                
Tier 1 capital                
(to average assets)                
Tier 1 capital (to average assets)                
Actual $20,201,636   11.71% $12,135,085   7.85% $17,490,586   8.42% $17,287,045   8.83%
For capital adequacy purposes  6,903,532   4.00%  6,186,160   4.00%  8,313,200   4.00%  7,834,797   4.00%
To be well capitalized  8,629,416   5.00%  7,732,700   5.00%  10,391,500   5.00%  9,793,496   5.00%

 

10.11.COMMITMENTS

 

In the normal course of business, the BankCompany makes various commitments that are not reflected in the Bank’sCompany’s consolidated financial statements. The BankCompany offers such products to enable its customers to meet their financing objectives. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized on the balance sheets. The Bank’sCompany’s exposure to credit loss in the event of nonperformance by the other parties to the financial instruments is represented by the contractual amounts as disclosed. The BankCompany minimizes its exposure to credit loss under these commitments by subjecting them to credit approval and review procedures and collateral requirements as deemed necessary.

 

Off-balance sheet commitments consist of the following:

 

 September 30,  March 31, 
 2018  2020 
 (unaudited)  (unaudited) 
      
Commitments to extend credit $1,804,500  $5,141,132 
Construction unadvanced funds  3,835,392   3,413,015 
Unused lines of credit  7,401,838   8,908,264 
Letters of credit  5,163,454 
        
 $13,041,730  $22,625,865 

 

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the loan agreement. These commitments consisted primarily of mortgage loan commitments. The BankCompany uses the same credit policies in making loan commitments and conditional obligations as it does for on-balance sheet instruments. The BankCompany evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, as deemed necessary, is based upon management’s credit evaluation in compliance with the Bank’sCompany’s lending policy guidelines.

 

In August 2017, the Bank entered intoThe Company and certain executives are parties to employment agreements with three executives that provide for a base salary and certain other benefits. The initial terms of the agreements are for three years with annual renewals thereafter. In the event of the executive’s termination without cause, as defined, the executive will receive a lump-sum cash payment equal to the amount remaining under the contract. Additional benefits are payable upon a change in control, as defined.

26

11.12.FAIR VALUE MEASUREMENTS

 

The following disclosures show the hierarchal disclosure framework associated with the level of pricing observations utilized in measuring assets and liabilities at fair value. The three broad pricing levels are as follows:

 

Level I:Quoted prices are available in active markets for identical assets or liabilities as of the reported date.
  

Level II:

Pricing inputs are other than the quoted prices in active markets, which are either directly or indirectly observable as of the reported date. The nature of these assets and liabilities includes items for which quoted prices are available but traded less frequently and items that are fair-valued using other financial instruments, the parameters of which can be directly observed.
  
Level III:Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.

 

This hierarchy requires the use of observable market data, when available.

 

Fair values for securities are determined by obtaining quoted prices on nationally recognized securities exchanges or matrix pricing, which is a mathematical technique that is widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark-quoted securities. Fair values of securities determined by quoted prices in active markets, when available, are classified as Level I. At September 30, 2018March 31, 2020 and December 31, 2017,2019, fair value measurements were obtained from a third-party pricing service and were not adjusted by management. Transfers are recognized at the end of the reporting period, as applicable.

 

27
 

 

11.12.FAIR VALUE MEASUREMENTS (Continued)

 

The following tables present the assets reported on the balance sheets at their fair value by level within the fair value hierarchy. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

 

 September 30, 2018 (unaudited) March 31, 2020 (unaudited) 
 Level I Level II Level III Total Level I Level II Level III Total 
                 
Fair value measurements on a recurring basis:                                
Mortgage-backed securities in government-sponsored entities $-  $3,975,191  $-  $3,975,191 
Mortgage-backed securities of government-sponsored entities $-  $4,406,941  $-  $4,406,941 
Obligations of state and political subdivisions  -   1,488,139   -   1,488,139   -   838,411   -   838,411 
Corporate bonds  -   3,266,923   -   3,266,923   -  3,150,390   -   3,150,390 
U.S. treasury securities  192,632   -   -   192,632 
Mortgage servicing rights  -   -   240,747   240,747   -   -   321,999   321,999 
Impaired loans with reserve  -   -   320,959   320,959   -   -   1,113,383   1,113,383 

 

 December 31, 2017  December 31, 2019 
 Level I Level II Level III Total  Level I   Level II   Level III   Total 
                        
Fair value measurements on a recurring basis:                                
Mortgage-backed securities in government-sponsored entities $-  $519,258  $-  $519,258 
Mortgage-backed securities of government-sponsored entities $-  $5,281,328  $-  $5,281,328 
Obligations of state and political subdivisions  -   1,599,878   -   1,599,878   -   1,365,705   -   1,365,705 
Corporate bonds  -   301,898   -   301,898   -  3,202,566   -   3,202,566 
U.S. treasury securities  195,316   -   -   195,316 
Mortgage servicing rights  -   -   231,977   231,977   -   -   317,939   317,939 
Impaired loans with reserve  -   -   112,139   112,139   -   -   115,304   115,304 

 

 September 30, 2018 (unaudited)  March 31, 2020 (unaudited) 
 Level I Level II Level III Total  Level I Level II Level III Total 
                  
Fair value measurements on a nonrecurring basis:                                
Other real estate owned $     -  $      -  $59,932  $59,932  $-  $-  $-  $- 
                
  December 31, 2019 
  Level I   Level II   Level III   Total 
                
Fair value measurements on a nonrecurring basis:                
Other real estate owned $-  $-  $45,000  $45,000 

 

   December 31, 2017
   Level I   Level II   Level III   Total 
                 
Fair value measurements on a nonrecurring basis:                
Other real estate owned $-  $    -  $59,932  $59,932 

28

  

11.12.FAIR VALUE MEASUREMENTS (Continued)

 

Other Real Estate Owned

 

Other real estate owned is measured at fair value, less estimated cost to sell, at the date of foreclosure, which establishes a new cost basis. Subsequent to foreclosure, valuations are periodically performed by management. The assets are carried at fair value, less estimated cost to sell. Income and expense from operations and changes in valuation allowance are included in other noninterest expense.

 

Level III Inputs

 

The following table provides the significant unobservable inputs used in the fair value measurement process for items valued using Level III techniques:

 

 Fair Value at Range 
 Fair Value at    Range  March 31, Valuation (Weighted 
 September 30,
2018
 Valuation Techniques Valuation
Unobservable Inputs
 (Weighted
Average)
  2020 Valuation Techniques Unobservable Inputs Average) 
 (unaudited)        (unaudited)   
Other real estate owned $59,932   Appraised collateral values   Discount for time since appraisal   10% $-  Appraised collateral values Discount for time since appraisal  10%
             (10)%      (10%)
         Selling costs   10%     Selling costs  10%
             (10)%      (10%)
Impaired loans with reserve  320,959   Discounted cash flows   Discount for evaluation   10%  1,113,383  Discounted cash flows Discount for evaluation  10%
             (10)%      (10%)
         Selling costs   10%     Selling costs  10%
             (10)%      (10%)
Mortgage servicing rights  240,747   Discounted cash flows   Loan prepayment speeds   10.44%  321,999  Discounted cash flows Loan prepayment speeds  8.49% - 10.52% 
             (10.44)%          (9.41%) 

 

  Fair Value at       Range 
 Fair Value at    Range   December 31,  Valuation  (Weighted 
 December 31,
2017
 Valuation Techniques Valuation
Unobservable Inputs
 (Weighted
Average)
   2019  Valuation Techniques Unobservable Inputs  Average) 
                
Other real estate owned $59,932   Appraised collateral values   Discount for time since appraisal   10% $45,000  Appraised collateral values Discount for time since appraisal  10%
           (10)%      (10%)
        Selling costs   10%     Selling costs  10%
           (10)%      (10%)
Impaired loans with reserve  112,139   Discounted cash flows   Discount for evaluation   10%  115,304  Discounted cash flows Discount for evaluation  10%
           (10)%      (10%)
        Selling costs   10%     Selling costs  10%
           (10)%      (10%)
Mortgage servicing rights  231,977   Discounted cash flows   Loan prepayment speeds   8.67%  317,939  Discounted cash flows Loan prepayment speeds  8.49%-10.52% 
           (8.67)%      (9.38%)

 

29
 

 

11.12.FAIR VALUE MEASUREMENTS (Continued)

 

The estimated fair values of the Company’s financial instruments are as follows:

 

  March 31, 2020 (unaudited) 
  

Carrying

Value

  

Fair

Value

  Level I  Level II  Level III 
                
Financial assets:                    
Cash and cash equivalents $24,510,653  $24,510,653  $24,510,653  $-  $- 
Certificates of deposit  4,444,000   4,715,000   -   4,715,000   - 
Investment securities:                    
Available for sale  8,395,742   8,395,742   -   8,395,742   - 
Held to maturity  3,323   3,374   -   3,374   - 
Loans, net  158,767,623   173,079,623   -   -   173,079,623 
Accrued interest receivable  808,168   808,168   -   808,168   - 
FHLB Stock  3,046,900   3,046,900   -   -   3,046,900 
                     
Financial liabilities:                    
Deposits  154,804,231   158,529,231   63,776,945   -   94,752,286 
FHLB advances  31,374,500   32,791,500   -   32,791,500   - 
Accrued interest payable  311,648   311,648   -   311,648   - 

 September 30, 2018 (unaudited) 
 Carrying Fair      December 31, 2019 
 Value Value  Level I Level II Level III   

Carrying

Value

   

Fair

Value

   Level I   Level II   Level III 
                               
Financial assets:                                        
Cash and cash equivalents $5,875,416  $5,875,416  $5,875,416  $-  $-  $21,880,788  $21,880,788  $21,880,788  $-  $- 
Certificates of deposit  846,000   835,649   -   835,649   -   2,465,000   2,576,000   -   2,576,000   - 
Investment securities:                                        
Available for sale  8,922,885   8,922,885   192,632   8,730,253   -   9,849,599   9,849,599   -   9,849,599   - 
Held to maturity  7,109   7,196   -   7,196   -   3,879   3,932   -   3,932   - 
Loans, net  156,613,838   156,639,838   -   -   156,639,838   156,112,115   163,239,115   -   -   163,239,115 
Accrued interest receivable  557,291   557,291   -   557,291   -   673,026   673,026   -   673,026   - 
FHLB Stock  2,614,900   2,614,900   -   -   2,614,900   2,924,600   2,924,600   -   -   2,924,600 
                                        
Financial liabilities:                                        
Deposits  131,366,372   129,695,372   43,455,419   -   86,239,953   149,020,729   150,700,557   55,206,337   -   95,494,220 
FHLB advances  31,374,500   30,933,500   -   30,933,500   -   31,374,500   31,773,500   -   31,773,500   - 
Accrued interest payable  245,098   245,098   -   245,098   -   331,133   331,133   -   331,133   - 

 

  December 31, 2017
  Carrying  Fair       
  Value  Value  Level I  Level II  Level III 
                
Financial assets:                    
Cash and cash equivalents $16,478,066  $16,478,066  $16,478,066  $-  $- 
Certificates of deposit  943,000   946,497   -   946,497   - 
Investment securities:                    
Available for sale  2,616,350   2,616,350   195,316   2,421,034   - 
Held to maturity  9,797   9,494   -   9,494   - 
Loans, net  140,574,537   139,784,862   -   -   139,784,862 
Accrued interest receivable  476,417   476,417   -   476,417   - 
FHLB Stock  2,162,600   2,162,600   -   -   2,162,600 
                     
Financial liabilities:                    
Deposits  132,430,024   132,189,024   50,730,909   -   81,458,115 
FHLB advances  26,416,200   25,602,500   -   25,602,500   - 
Accrued interest payable  206,597   206,597   -   206,597   - 

Financial instruments are defined as cash, evidence of an ownership interest in an entity, or a contract which creates an obligation or right to receive or deliver cash or another financial instrument from/to a second entity on potentially favorable or unfavorable terms.

 

Financial instruments are defined as cash, evidence of an ownership interest in an entity, or a contract which creates an obligation or right to receive or deliver cash or another financial instrument from/to a second entity on potentially favorable or unfavorable terms.

Fair value is defined as the amount at which a financial instrument could be exchanged in a current transaction between willing parties other than in a forced or liquidation sale. If a quoted market price is available for a financial instrument, the estimated fair value would be calculated based upon the market price per trading unit of the instrument.

Fair value is defined as the amount at which a financial instrument could be exchanged in a current transaction between willing parties other than in a forced or liquidation sale. If a quoted market price is available for a financial instrument, the estimated fair value would be calculated based upon the market price per trading unit of the instrument.

12.13.FAIR VALUE OF FINANCIAL INSTRUMENTS

 

If no readily available market exists, the fair value estimates for financial instruments should be based upon management’s judgment regarding current economic conditions, interest rate risk, expected cash flows, future estimated losses, and other factors as determined through various option pricing formulas or simulation modeling. Since many of these assumptions result from judgments made by management based upon estimates which are inherently uncertain, the resulting estimated fair values may not be indicative of the amount realizable in the sale of a particular financial instrument. In addition, changes in the assumptions on which the estimated fair values are based may have a significant impact on the resulting estimated fair values.

 

Since certain assets, such as deferred tax assets and premises and equipment, are not considered financial instruments, the estimated fair value of financial instruments would not represent the full value of the Bank.Company.

 

Cash and Cash Equivalents, Accrued Interest Receivable, FHLB Stock, and Accrued Interest Payable

 

The fair value is equal to the current carrying value.

 

Certificates of Deposit

 

The fair values of certificates of deposit are based on the discounted value of contractual cash flows. The discount rates are estimated using rates currently offered for similar instruments with similar remaining maturities.

 

Securities

 

Fair values for securities are determined by obtaining quoted prices on nationally recognized securities exchanges or matrix pricing, which is a mathematical technique that is widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark-quoted securities. Fair values of securities determined by quoted prices in active markets, when available, are classified as Level I.

 

Loans, Net

 

The fair value is estimated by discounting future cash flows using current market inputs at which loans with similar terms and qualities would be made to borrowers of similar credit quality. Certain collateral dependent impaired loans have been adjusted to fair value based on the loan’s collateral. Fair value is generally determined based upon independent third-party appraisals of the properties, along with management’s assumptions in various factors, such as estimated selling costs and discounts for time since last appraised.

 

FHLB Advances

 

The fair value of FHLB advances is based on the discounted value of contractual cash flows. The discount rates are estimated using rates currently offered for similar instruments with similar remaining maturities.

 

Deposits

 

The fair values of certificates of deposit are based on the discounted value of contractual cash flows. The discount rates are estimated using rates currently offered for similar instruments with similar remaining maturities. Demand, savings, and money market deposit accounts are valued at the amount payable on demand as of the period end.

 

12. FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)

31

13.FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)

 

Commitments

 

These financial instruments are generally not subject to sale, and estimated fair values are not readily available. The carrying value, represented by the net deferred fee arising from the unrecognized commitment, and the fair value, determined by discounting the remaining contractual fee over the term of the commitment using fees currently charged to enter into similar agreements with similar credit risk, are not considered material for disclosure. The contractual amounts of unfunded commitments are presented in Note 10.11.

 

13. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

14.ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

 

The following table presents the changes in accumulated other comprehensive income (loss) by component, net of tax:

 

 Net Unrealized Gain (Loss)  Net Unrealized Gain (Loss) 
 on Securities  on Securities 
 Three months ended September 30,  Three months ended March 31, 
 2018 2017  2020 2019 
 (unaudited)   (unaudited) 
Accumulated other comprehensive income (loss), beginning of period $(46,722) $(12,607) $(5,421) $(74,623)
        
Other comprehensive income (loss) on securities before reclassification, net of tax  (56,031)  652   (44,309)  112,994 
        
Amounts reclassified from accumulated other comprehensive income (loss), net of tax  -   -   (28,098)  (4,575)
        
Net other comprehensive income (loss)  (56,031)  652   (72,407)  108,419 
        
Accumulated other comprehensive income (loss), end of period $(102,753) $(11,955) $(77,828) $33,796 

  

  Net Unrealized Gain (Loss) 
  on Securities 
  Nine months ended September 30, 
  2018  2017 
  (unaudited) 
Accumulated other comprehensive income (loss), beginning of period $(23,487) $(47,388)
         
Other comprehensive income (loss) on securities before reclassification, net of tax  (79,267)  35,664 
         
Amounts reclassified from accumulated other comprehensive income (loss), net of tax  -   (231)
         
Net other comprehensive income (loss)  (79,267)  35,433 
         
Accumulated other comprehensive income  (loss), end of period $(102,754) $(11,955)

14. EARNINGS PER SHARE

15.EARNINGS PER SHARE

 

Earnings per common share for the three months ended September 30, 2018March 31, 2020 and 2019, are represented in the following table.

 

Earnings per common share for the nine months ended September 30, 2018 is not presented as the Company’s initial public offering was completed on January 24, 2018; therefore, per share results would not be meaningful.

   Three months ended Three months ended 
   March 31, 2020  March 31, 2019 
   (unaudited) 
        
Net Income  $198,331  $112,713 
          
Shares outstanding for basic EPS:         
Average shares outstanding   2,250,799   2,248,250 
Less: Average unearned ESOP shares   78,938   83,174 
          
Shares outstanding for basic EPS   2,171,861   2,165,076 
Additional dilutive shares   741   - 
          
Shares oustanding for diluted EPS   2,172,602   2,165,076 
          
Basic income per share  $0.09  $0.05 
Diluted income per share  $0.09  $0.05 

 

  Three months ended 
  September 30, 2018 
  (unaudited) 
    
Net Income $94,834 
     
Shares outstanding for basic EPS:    
Average shares outstanding  2,248,250 
Less: Average unearned ESOP shares  85,377 
   2,162,873 
Additional dilutive shares  - 
     
Shares outstanding for basic and diluted EPS  2,162,873 
     
Basic and diluted income per share $0.04 

33
 

16.LEASES

Due to the adoption of ASU 2016-02,Leases (Topic 842)on December 31, 2019, the Company completed a comprehensive review and analysis of all its property contracts. As a result of this review, it was determined that the Company leases parking spaces which qualifies as an operating lease. Several assumptions and judgments were made when applying the requirements of Topic 842 to the Company’s existing lease commitments, including the allocation of consideration in the contracts, the determination of the lease term and the determination of the discount rate used in calculating the present value of the lease payments. The lease did not include any nonlease components, such as common area maintenance charges, utilities, real estate taxes or insurance. Additionally, the lease did not include any renewal options as of March 31, 2020.

The discount rate utilized in calculating the present value of the remaining lease payments for the lease was the Federal Home Loan Bank of Pittsburgh advance rate corresponding to the remaining maturity of the lease. The following table presents the weighted-average lease term and discount rate for the lease outstanding at March 31, 2020.

Operating
Weighted-average remaining term (years)1.3
Weighted-average discount rate1.87%

The following table presents the undiscounted cash flows due to operating leases as of March 31, 2020, along with a reconciliation to the discounted amount recorded on the Consolidated Balance Sheets:

Undiscounted cash flows due: Operating 
Within 1 year $6,000 
After 1 year but within 2 years  2,000 
After 2 years  - 
Total undiscounted cash flows  8,000 
Discount on cash flows  (105)
Total lease liabilities $7,895 

Under Topic 842, the lessee can elect to not record on the Consolidated Balance Sheets a lease whose term is 12 months or less and does not include a purchase option that the lessee is reasonably certain to exercise. As of March 31, 2020, the Company had no leases that had a term of 12 months or less. The Company has recorded a right-of-use asset of $7,895 and a lease liability of $7,895 included with premises and equipment and other liabilities, respectively, on the Consolidated Balance Sheet as of March 31, 2020.

Rental expense under operating leases totaled $1,500 for each of the three months ended March 31, 2020 and 2019.

17.REVENUE RECOGNITION

Due to the Company’s adoption of ASC 606 on January 1, 2019, the Company conforms to the standard framework for recognizing revenue from contracts with customers. Interest income, net securities (losses) gains and bank-owned life insurance are not in scope of ASC 606. For the revenue streams within the scope of ASC 606, including service charges on deposits, electronic banking fees, mortgage banking income, and net gain or loss on sale of other real estate owned, there are no significant judgements related to the amount and timing of revenue recognition.

Service Charges on Deposits

There are monthly service charges for both commercial and personal banking customers, depending on their account types, which are earned over the month per the related fee schedule based on the customers’ level of deposits. There are also transaction-based fees, which are earned based on specific transactions or customer activity within the customers’ deposit accounts. These are earned at the time the transaction or customer activity occurs. The fees are debited from the customer account.

Electronic Banking Fees

Interchange fees are earned based on customer transactions. Revenue is recognized when the transaction is settled. The Company does not charge ATM fees.

Mortgage Banking Income

Income is earned when SSB Bank-originated loans are sold to an investor on the secondary market. The investors offer pricing for loans at least daily. The Company makes commitments to deliver loans when pricing is acceptable. After a salable loan is originated and delivery is committed, the loan is sold, loan documents are delivered to the investor, revenue is recognized, and the loan is derecognized from the Consolidated Balance Sheets. Typically this happens within days of consummation. Mortgage servicing rights are retained in most cases, and the value of the mortgage servicing rights is recognized as revenue at the time of the sale.

Net Gain or Loss on Sale of Other Real Estate Owned

Net gain or loss is recorded when other real estate owned is sold to a third party and the Company collects substantially all of the consideration to which the Company is entitled in exchange for the transfer of the property.

The following table summarizes the point of revenue recognition and the income recognized for each of the revenue streams for the three ended March 31, 2020 and 2019:

    For the three months ended March 31, 
Revenue Streams Point of revenue recognition 2020  2019 
         
Service charges on deposits At a point in time & over time $3,149  $1,730 
Electronic banking fees At a point in time $8,874  $6,077 
Mortgage banking income At a point in time $119,172  $76,809 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

General

 

Management’s discussion and analysis of financial condition at September 30, 2018March 31, 2020 and December 31, 20172019 and results of operations for the three and nine months ended September 30, 2018March 31, 2020 and 20172019 is intended to assist in understanding the consolidated financial condition and consolidated results of operations of SSB Bank.the Company. The information contained in this section should be read in conjunction with the unaudited financial statements and the notes thereto appearing in Part I, Item 1, of this Quarterly Report on Form 10-Q/A. Financial information for the periods before the Company’s Reorganization on January 24, 2018 is that of SSB Bank only.10-Q.

 

Cautionary Note Regarding Forward-Looking Statements

 

This quarterly report contains forward-looking statements, which can be identified by the use of words such as “estimate,” “project,” “believe,” “intend,” “anticipate,” “plan,” “seek,” “expect,” “will,” “may” and words of similar meaning. These forward-looking statements include, but are not limited to:

 

 statements of our goals, intentions and expectations;
   
 statements regarding our business plans, prospects, growth and operating strategies;
   
 statements regarding the quality of our loan and investment portfolios; and
   
 estimates of our risks and future costs and benefits.

 

These forward-looking statements are based on current beliefs and expectations of management and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change.

 

The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements:

 

 general economic conditions, either nationally or in our market areas, that are worse than expected;
   
 effect of the coronavirus (COVID-19) pandemic on the Company and its customers and on the local, regional, national, and world economies, including government and regulatory responses to the COVID-19 pandemic;
changes in the level and direction of loan delinquencies and charge-offs and changes in estimates of the adequacy of the allowance for loan losses;
   
 our ability to access cost-effective funding;
   
 fluctuations in real estate values and both residential and commercial real estate market conditions;
   
 demand for loans and deposits in our market area;
   
 our ability to continue to implement our business strategies;
   
 competition among depository and other financial institutions;

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

Cautionary Note Regarding Forward-Looking Statements (Continued)

 inflation and changes in the interest rate environment that reduce our margins and yields, reduce the fair value of financial instruments or reduce the origination levels in our lending business, or increase the level of defaults, losses and prepayments on loans we have made and make whether held in portfolio or sold in the secondary markets;

34
 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

Cautionary Note Regarding Forward-Looking Statements (Continued)

 adverse changes in the credit and/or securities markets;
   
 changes in laws or government regulations or policies affecting financial institutions, including changes in regulatory fees and capital requirements, including as a result of Basel III;
   
 our ability to manage market risk, credit risk and operational risk in the current economic conditions;
   
 our ability to enter new markets successfully and capitalize on growth opportunities;
   
 our ability to successfully integrate any assets, liabilities, customers, systems and management personnel we may acquire into our operations and our ability to realize related revenue synergies and cost savings within expected time frames and any goodwill charges related thereto;
   
 changes in consumer spending, borrowing and savings habits;
   
 changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board or the Securities and Exchange Commission;
   
 our ability to retain key employees;
   
 our compensation expense associated with equity allocated or awarded to our employees;
   
 changes in the financial condition, results of operations or future prospects of issuers of securities that we own;
 
political instability;
   
 changes in the quality or composition of our loan or investment portfolios;
   
 technological changes that may be more difficult or expensive than expected;
   
 failures or breaches of our IT security systems;
   
 the inability of third-party providers to perform as expected; and
   
 our ability to successfully introduce new products and services, enter new markets, and capitalize on growth opportunities.

 

Because of these and other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements. The Company is not obligated to update any forward-looking statements, except as may be required by applicable law or regulation.

35

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

 

Coronavirus Update

The coronavirus (COVID-19) pandemic has put health and economic strains across the globe. Concern about the spread of COVID-19 has caused and is likely to continue to cause business shutdowns, limitations on commercial activity, labor shortages, supply chain interruptions, increased unemployment, and commercial property vacancies – all of which can contribute to default on loan payments. Due to stay-at-home orders and the risks associated with entering a bank branch, COVID-19 can potentially affect the products and services offered by the Bank as well as how those products and services are distributed. Additionally, the Bank relies on many third-party vendors such as real estate appraisers, settlement companies, software vendors, and others to deliver products and services. The state of operations at these third-party vendors can affect the ability of the Bank to service its customers. With all of these associated risks, Management has implemented a number of procedures in response to the pandemic to support the safety and well-being of our employees, customers, and shareholders that continue through the date of this report:

We have addressed the safety of our two branches following the guidelines of the Center for Disease Control and the State of Pennsylvania, pushing most customers to the drive-though when possible, and allowing customers into the branches on an appointment basis.
We have moved all regular Board of Directors’ Meetings from physical meetings to virtual meetings.
We are limiting the number of employees in our locations. Those employees that can work from home are asked to do so on a rotating basis to keep the number of employees in the office at one time at or below ten.
We are providing payment deferrals on all types of loans to loan customers adversely affected by COVID-19. As of May 12, 2020, we have deferred payments on 205 loans totaling $40.9 million for 90 days. Also, we have converted 8 additional commercial loans totaling $1.4 million to interest-only payments for 90 days. These modifications have not resulted in classification as Troubled Debt Restructuring, but they are being tracked by management throughout and after the deferral and interest-only phases. Additionally, management will examine and assess the current allowance for loan loss qualitative factors in the second quarter as we will know more about the state of the pandemic and economic outlook at that time.
We are participating in the Paycheck Protection Program (PPP) to assist local businesses in keeping their employees on payroll. As of May 12, 2020, we have originated 217 PPP loans totaling $17.3 million.
The following table provides additional information with respect to the Company’s commercial and industrial and commercial mortgage loans by type at March 31, 2020 (dollars in thousands):

March 31, 2020
Type of Loan (1) Number of Loans  Balance 
     (in thousands) 
Energy and construction  23  $9,597 
         
Retail  20   3,524 
         
Restaurants  19   3,424 
         
Hospitality and tourism  14   3,400 
         
Health and other professional services  27   2,939 
         
Residential 1-4 family and mixed use real estate  317   40,443 
         
Commercial real estate  48   12,072 
         
Multi-Family  28   6,124 
         
Commercial construction  10   2,786 
         
Total  506  $84,309 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

Critical Accounting Policies

 

Critical accounting estimates are necessary in the application of certain accounting policies and procedures and are particularly susceptible to significant change. Critical accounting policies are defined as those involving significant judgments and assumptions by management that could have a material impact on the carrying value of certain assets or on income under different assumptions or conditions. Management believes the accounting policies discussed below to be the most critical accounting policies, which involve the most complex or subjective decisions or assessments.

 

Allowance for Loan Losses.The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to income. Loan losses are charged against the allowance when management believes that specific loans, or portions of loans, are uncollectible. The allowance for loan losses is evaluated on a regular basis, and at least quarterly, by management. Management reviews the nature and volume of the loan portfolio, local and national conditions that may adversely affect the borrower’s ability to repay, loss experience, the estimated value of any underlying collateral, and other relevant factors. The evaluation of the allowance for loan losses is characteristically subjective as estimates are required that are subject to continual change as more information becomes available.

 

The allowance consists of general and specific reserve components. The specific reserves are related to loans that are considered impaired. Loans that are classified as impaired are measured in accordance with accounting guidance (ASC 310-10-35). The general reserve is allocated for non-impaired loans and includes evaluation of changes in the trend and volume of delinquency, our internal risk rating process and external conditions that may affect credit quality.

 

A loan is considered impaired when, based on current information and events, it is probable that we will be unable to collect the scheduled principal and interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status and the financial condition of the borrower. Loans that experience payment shortfalls and insignificant payment delays are typically not considered impaired. Management looks at each loan individually and considers all the circumstances around the shortfall or delay including the borrower’s prior payment history, borrower contact regarding the reason for the delay or shortfall and the amount of the shortfall. Collateral dependent loans are measured against the fair value of the collateral, while other loans are measured by the present value of expected future cash flows discounted at the loan’s effective interest rate. All loans are measured individually.

 

Loan segments are reviewed and evaluated for impairment based on the segment’s characteristic loss history and local economic conditions and trends within the segment that may affect the repayment of the loans.

 

From time to time, we may choose to restructure the contractual terms of certain loans either at the borrower or Bank’sthe Company’s request. We review all scenarios to determine the best payment structure with the borrower to improve the likelihood of repayment. Management reviews modified loans to determine if the loan should be classified as a trouble debt restructuring. A trouble debt restructuring is when a creditor, for economic or legal reasons related to a debtor’s financial difficulties, grants a concession to the borrower that it would not otherwise consider. Management considers the borrower’s ability to repay when a request to modify existing loan terms is presented. A transfer of assets to repay the loan balance, a modification of loan terms or a combination of these may occur. If an appropriate arrangement cannot be made, the loan is referred to legal counsel, at which time foreclosure will begin. If a loan is accruing at the time of restructuring, we review the loan to determine if it should be placed on non-accrual. It is our policy to keep a troubled debt restructured loan on non-accrual status for at least six months to ensure the borrower can repay, at that time management may consider its return to accrual status. Troubled debt restructured loans are classified as impaired loans.

Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

 

Critical Accounting Policies (Continued)

 

Troubled debt restructured loans are considered to be impaired.

Income Taxes. SSB BankThe Company accounts for income taxes in accordance with accounting guidance (ASC 740, Income Taxes). The income tax accounting guidance results in two components of income tax expense: current and deferred. Current income tax reflects taxes to be paid or refunded for the current period by applying the provisions of the enacted tax law to the taxable income or excess of deductions over revenues. U.S. GAAP requires that we use the Balance Sheet Method to determine the deferred income, which affects the differences between the book and tax bases of assets and liabilities, and any changes in tax rates and laws are recognized in the period in which they occur. Deferred taxes are based on a valuation model and the determination on a quarterly basis whether all or a portion of the deferred tax asset will be recognized.

 

Fair Value Measurements. The fair value of a financial instrument is defined as the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. SSB BankThe Company estimates the fair value of a financial instrument and any related asset impairment using a variety of valuation methods. Where financial instruments are actively traded and have quoted market prices, quoted market prices are used for fair value. When the financial instruments are not actively traded, other observable market inputs, such as quoted prices of securities with similar characteristics, may be used, if available, to determine fair value. When observable market prices do not exist, we estimate fair value. These estimates are subjective in nature and imprecision in estimating these factors can impact the amount of revenue or loss recorded. A more detailed description of the fair values measured at each level of the fair value hierarchy and the methodology utilized by SSB Bankthe Company can be found in Note 1412 to the 2017Consolidated Financial Statements included in the Company’s Annualthis Quarterly Report on Form 10-K filed on April 17, 2018.10-Q.

 

Investment Securities. Available for sale and held to maturity securities are reviewed quarterly for possible other-than-temporary impairment. The review includes an analysis of the facts and circumstances of each individual investment such as the severity of loss, the length of time the fair value has been below cost, the expectation for that security’s performance, the creditworthiness of the issuer and our intent and ability to hold the security to recovery. A decline in value that is considered to be other-than-temporary is recorded as a loss within non-interest income in the statements of income. At September 30, 2018,March 31, 2020, we believe the unrealized losses are primarily a result of increases in market yieldsinterest rates from the time of purchase. In general, as market yieldsinterest rates rise, the fair value of securities will decrease; as market yieldsinterest rates fall, the fair value of securities will increase. Management generally views changes in fair value caused by changes in market interest rates as temporary; therefore, these securities have not been classified as other-than-temporarily impaired. Additionally, management believes that the onset of the COVID-19 pandemic has had a negative effect on the fair values of a portion of the investment securities portfolio, primarily affecting corporate bonds. Subsequent to March 31, 2020, the fair values of corporate bonds have increased to a level near the pre-pandemic fair values. Management has also concluded that based on current information we expect to continue to receive scheduled interest payments as well as the entire principal balance. Furthermore, management does not intend to sell these securities and does not believe it will be required to sell these securities before they recover in value.

 

3740
 

 

Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

 

Comparison of Financial Condition at September 30, 2018March 31, 2020 and December 31, 20172019

 

Total Assets. Total assets increased by $11.6$6.0 million, or 6.8%3.0%, from $171.9$202.6 million at December 31, 20172019 to $183.5$208.6 million at September 30, 2018.March 31, 2020. The increase was due primarily attributable to an increase in net loans of $16.0$2.7 million, or 11.4%, to $156.6 million at September 30, 2018 from $140.6 million at December 31, 2017. Securities available for sale also increased by $6.3 million from $2.6 million at December 31, 2017, to $8.9 million at September 30, 2018. The increases were partially offset by a decreasean increase in cash and cash equivalents of $10.6$2.6 million, and an increase in certificates of deposit of $2.0 million when comparing March 31, 2020, with December 31, 2019. Offsetting the increases was a decrease in securities available for sale of $1.5 million, or 64.3%,14.8%. Funding the growth in assets was an increase in deposits of $5.8 million to $154.8 million at March 31, 2020 from $16.5$149.0 million at December 31, 2017, to $5.9 million at September 30, 2018, as the cash was invested in securities and used to fund loans. Prepaid reorganization and stock issuance costs decreased from $838,000 at December 31, 2017 to zero dollars at September 30, 2018, as the stock issuance was completed in 2018.2019.

 

Cash and Cash Equivalents. Cash and cash equivalents decreasedincreased by $10.6$2.6 million, or 64.3%12.0%, to $5.9$24.5 million at September 30, 2018March 31, 2020 from $16.5$21.9 million at December 31, 2017.2019. The increase in cash was caused by a $6.3 million increase in interest-bearing deposits with other financial institutions, which was offset by a $3.7 million decrease in cash and due from banks. The increase was the result of theprimarily attributable to an increase in investments available for sale as well as funding loan demand.total deposits of $5.8 million.

 

Net Loans. Net loans increased $16.0$2.7 million, or 11.4%1.7%, to $156.6$158.8 million at September 30, 2018,March 31, 2020, from $140.6$156.1 million at December 31, 2017.2019. This was drivencaused primarily by increases in commercial mortgage loans and commercial and industrial loans. Commercial mortgages increased $8.6 million, or 17.1%, from $50.1 million at December 31, 2017 to $58.7 million at September 30, 2018. Commercial and industrial loans increased $6.7 million, or 58.2%, from $11.5 million at December 31, 2017 to $18.1 million at September 30, 2018. There was also an increase in consumer loans of $1.2$2.5 million duringand $747,000, respectively. These increases were offset by a decrease in one-to-four family mortgages of $1.0 million. The decrease in one-to-four mortgage loans was due to payoffs and repayments outpacing originations as well as the period.sale of $3.8 million in one-to-four mortgage loans, with servicing retained.

 

Available for Sale Securities. Securities available for sale increaseddecreased by $6.3$1.5 million or 241.0%14.8%, to $8.9$8.4 million at September 30, 2018,March 31, 2020, from $2.6$9.8 million at December 31, 2017. We purchased $3.7 million and $3.0 million of collateralized mortgage obligations and corporate bonds, respectively.2019. The increase was offset by the maturity of one municipal bond of $85,000decrease is primarily due to prepayments on mortgage-backed securities as well as $97,000 in gross unrealized losses during the period.a $500,000 municipal bond that was called and a $25,000 municipal bond that matured.

 

Deposits. Total deposits decreasedincreased to $131.4$154.8 million at September 30, 2018March 31, 2020 from $132.4$149.0 million at December 31, 2017.2019. The decreaseincrease of $1.1$5.8 million, or 0.8%3.9%, was primarily due to an increase in interest-bearing demand deposits of $6.5 million, or 35.5%. The increase was due to expansion of existing key relationships. Offsetting the increase was a decrease in interest-bearing demand accounts to $14.1 million at September 30, 2018 from $23.2 million at December 31, 2017. This decrease was due primarily to stock subscription funds having been deposited in a business checking account pending the completiontime deposits of the Reorganization in January 2018. Partially offsetting the decrease, money market accounts increased by $516,000 to $15.1 million at September, 2018 from $14.6 million at December 31, 2017; savings accounts increased $1.2$2.8 million, or 9.8%, to $13.8 million at September 30, 2018, from $12.5 million at December 31, 2017;3.0%. As part of our strategic plan, we are focused on growing core deposits and decreasing brokered time deposits increased by $6.2 million, or 7.6% to $87.9 million at September 30, 2018, from $81.7 million at December 31, 2017. The increase in time deposits was driven by loan demand.deposits.

 

Federal Home Loan Bank Advances. Federal Home Loan Bank advances increased by $5.0 million or 18.8% toremained unchanged at $31.4 million at September 30, 2018, from $26.4 million atboth March 31, 2020 and December 30, 2017. The increase in borrowings funded new investments and loans during the period.31, 2019.

 

Stockholders’ Equity. Stockholders’ equity increased by $8.0 million,$149,000, or 66.0%0.7%, to $20.1$21.0 million at September 30, 2018March 31, 2020 from $12.1$20.9 million at December 31, 2017.2019. The increase was primarily due to $8.7 millionnet income of paid-in capital from$198,000 for the net proceeds of the stock offering completed on January 24, 2018. Additionally, retained earnings increased by $198,000, or 1.6%, to $12.3 million at September 30, 2018, from $12.1 million at December 31, 2017. The increase was partiallythree-month period, offset by $848,000 in unearned compensation related to the Employee Stock Ownership Plan and an additional $79,000increase in accumulated other comprehensive loss.loss of $72,000. The increase in accumulated other comprehensive loss was due to the decreases in the fair values of the securities available for sale.

38

Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

 

Comparison of Operating Results for the Three Months Ended September 30, 2018March 31, 2020 and 20172019

 

Net Income. Net income totaled $95,000increased by $85,000, or 76.0% to $198,000 for the three months ended September 30, 2018, compared to net income of $123,000March 31, 2020, from $113,000 for the three months ended September 30, 2017, a decrease of $28,000 or 22.8%.March 31, 2019. The decreaseincrease was driven byprimarily due to an increase in totalnet interest expenseincome after provision of $171,000$119,000, or 29.2%, to $755,000 for the three months ended September 30, 2018, from $585,000 for the three months ended September 30, 2017. Noninterest expense increased $120,000, or 13.6%11.4%, from $884,000 for the three months ended September 30, 2017 to $1.0 million for the three months ended September 30, 2018. Offsetting these decreasesMarch 31, 2019, to $1.2 million for the three months ended March 31, 2020. The increase in net interest income after provision was due to an increase in interest income of $205,000, or 12.9%, from $1.6 million$78,000, a decreased in interest expense of $8,000, and a decrease in the provision for the three months ended September 30, 2017loan losses of $33,000. Additionally, noninterest income increased by $101,000 due to $1.8 million for the three months ended September 30, 2018. There was alsoincreases in gains on sales of loans and securities. These increases were offset by an increase in noninterest incomeexpense of $5,000 from $130,000 for the three months ended September 30, 2017$112,000, which was primarily due to $135,000 for the three months ended September 30, 2018.an increase in salaries and employee benefits of $95,000.

 

Interest and Dividend Income. Interest and dividend income increased $205,000,$78,000, or 12.9%3.9%, to $1.8$2.1 million for the three months ended September 30, 2018,March 31, 2020, from $1.6$2.0 million for the three months ended September 30, 2017.March 31, 2019. Interest income on loans increased $158,000,$56,000, or 10.4%, when comparing the three months ended September 30, 2018, with the three months ended September 30, 2017.3.0%. This increase is primarily attributable to an increase in the average balance ofyield on net loans of $19.0 million, or 14.2%. The average balance of net loans increased19 basis points from $133.9 million to $153.0 million when comparing the three months ended September 30, 2018 with the three months ended September 30, 2017. There was also an increase in the average balance of investment securities of $2.3 million, or 80.5%, from $2.8 million4.65% for the three months ended September 30, 2017,March 31, 2019, to $5.0 million4.84% for the three months ended September 30, 2018.March 31, 2020. Interest-income on interest bearing deposits increased by $25,000 due to an increase of $5.0 million in average balance of interest-bearing deposits with other financial institutions. Offsetting these increases was a decrease of $17,000 in interest income from investment securities due to a drop in average balance.

 

Interest Expense. Total interest expense increased $171,000,decreased $8,000, or 29.2%0.9%, to $755,000$918,000 for the three months ended September 30, 2018,March 31, 2020, compared to $585,000$926,000 for the three months ended September 30, 2017. InterestMarch 31, 2019. The decrease was driven by a $13,000 decrease in the average rate of Federal Home Loan Bank advances. The average balances of the advances remained static at $31.4 million but the average rate decreased 19 basis points from 2.80% to 2.61% due to maturing advances renewing at lower interest rates. Offsetting the decrease, interest expense on deposit accounts increased $133,000,$5,000, or 30.0%0.8%, to $578,000$715,000 for the three months ended September 30, 2018,March 31, 2020, compared to $445,000$709,000 for the three months ended September 30, 2017.March 31, 2019. The increase was primarily due to an increase in the average balance of interest-bearing deposits of $4.9$13.0 million, or 4.2%9.7%, from $115.5$134.0 million for the three months ended September 30, 2017,March 31, 2019, to $120.3$147.0 million for the three months ended September 30, 2018. Among interest bearing deposits, the largest impact is from an increase of $10.0 million, or 13.3%, in time deposits. Additionally, theMarch 31, 2020. The average cost of funds associated with interest-bearing deposits increased 39decreased by 20 basis points from 1.54%2.15% for the three months ended SeptemberMarch 30, 2017,2019, to 1.93%1.95% for the three months ended September 30, 2018,March 31, 2020, primarily due to increasesas a result of decreases in deposit rates in response to competition.market interest rates.

Interest expense on Federal Home Loan Bank advances increased $37,000 or 26.5%, to $177,000 for the three months ended September 30, 2018, from $140,000 for the three months ended September 30, 2017. The increase was driven by the increase in the average balance of advances of $2.9 million, or 11.1%, from $26.4 million for the three months ended September 30, 2017 to $29.4 million for the three months ended September 30, 2018. The average cost of these borrowings increased 29 basis points from 2.13% for the three months ended September 30, 2017 to 2.42% for the three months ended September 30, 2018.

 

Net Interest Income. Net interest income increased $34,000,$86,000, or 3.4%7.9%, when comparing the two periods. This was due to an increase in interest income of $205,000$78,000 when comparing the two periods, while interest expense increaseddecreased by $171,000 over$8,000 when comparing the two periods. Average interest-earning assets for the three months ended September 30, 2017March 31, 2019 was $146.0$181.1 million, and it increased $22.4$6.9 million to $168.4$188.0 million for the three months ended September 30, 2018,March 31, 2020, an increase of 15.4%3.8%. NetThe interest earning assets increased $14.6 million, or 358.9%,expense was driven by the decrease in cost of interest-bearing liabilities of 21 basis points from 2.27% to $18.7 million for the three months ended September 30, 2018, from $4.1 million for the three months ended September 30, 2017.2.06%.

Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

 

Comparison of Operating Results for the Three Months Ended September 30, 2018March 31, 2020 and 20172019 (Continued)

 

Provision for Loan Losses. The provision for loan losses decreased $11,000,$33,000, or 18.1%72,5%, to $50,000$13,000 for the three months ended September 30, 2018,March 31, 2020, from $61,000$46,000 for the three months ended September 30, 2017. Net loans increased $6.3 million duringMarch 31, 2019. At December 31, 2019, there was a surplus in the allowance for loan losses of $ 61,000, thus the provision in the three months ended September 30, 2018, compared to an increase of $7.1 million during the three months ended September 30, 2017, thus resulting in a slightly lower provision when comparing the two periods.March 31, 2020, was comparatively small.

 

The allowance for loan losses reflects the estimate we believe adequate to cover inherent probable losses. While we believe the estimates and assumptions used in our determination of the adequacy of the allowance are reasonable, such estimates and assumptions could change based upon the risk characteristics of the various portfolio segments, experience with losses, the impact of economic conditions on borrowers and other relevant factors.

 

Non-Interest Income. Non-interest income increased $5,000,$101,000, or 3.6%72.9% to $135,000$241,000 for the three months ended September 30, 2018,March 31, 2020, from $130,000$139,000 for the comparable three months ended September 30, 2017.March 31, 2019. The increase was primarily due to smallan increase in gain on sale of loans of $54,000, from $65,000 for the three months ended March 31, 2019 to $119,000 for the three months ended March 31, 2020, and an increase in gain on sale of securities of $30,000, from $6,000 for the three months ended March 31, 2019, to $36,000 for the three months ended March 31, 2020. There were also increases in loan servicing fees, earnings on bank-owned life insurance, and other noninterest income. These gains were partially offset by a decrease in gain on saleincome of loans of $20,000 when comparing the two periods. This is due to the decrease in one-to-four family mortgage refinances due to a rise in interest rates.$8,000, $6,000, and $3,000, respectively.

 

Non-Interest Expense. Non-interest expense increased $120,000,$112,000, or 13.6%10.8%, to $1.2 million for the three months ended March 31, 2020, compared to $1.0 million for the three months ended September 30, 2018, comparedMarch 31, 2019. Salaries and employee benefits increased $95,000, or 20.6%, to $884,000$558,000 for the three months ended September 30, 2017. Salaries and employee benefits increased $24,000, or 5.6%, to $458,000March 31, 2020 from $463,000 for the three months ended September 30, 2018March 31, 2019. The increase was due to the addition of staff and yearly pay raises. Professional fees increased by $10,000, from $434,000$133,000 for the three months ended September 30, 2017. The increase was associated with the addition of staff dedicatedMarch 31, 2019, to marketing, business development, and credit administration. Additionally, due to the addition of a second branch office, occupancy expenses increased $26,000, or 38.8%, to $93,000$143,000 for the three months ended September 30, 2018, from $67,000 forMarch 31, 2020. Other noninterest expense increased by $25,000. Offsetting the three months ended September 30, 2017. Federalincreases were decreases in occupancy, federal deposit insurance, data processing, director fees, and contributions and donations increased $16,000, $22,000, $20,000,of $10,000, $6,000, and $10,000,$3,000, respectively. A decrease in professional fees of $8,000 provided a small offset to the increases. The decrease in professional fees is due to a change in service provider.

 

Income Taxes. The Company recorded an income tax provision decreased from $61,000of $56,000 for the three months ended September 30, 2017 to $18,000March 31, 2020, an increase of $23,000, or 68.6%, from the tax provision of $33,000 recorded for the three months ended September 30, 2018,March 31, 2019 as a decreaseresult of $42,000 or 69.8%. The effective tax rate was 16.2%an increase in pre-tax income for the three months ended September 30, 2018, and 33.1%March 31, 2020. The effective tax rate for the three months ended September 30, 2017. The lower effective tax rateMarch 31, 2020 was a result of22.1% compared to 22.8% for the Job and Tax Cuts Act enacted into law in December 2017.three months ended March 31, 2019.

 

Comparison of Operating Results for the Nine Months Ended September 30, 2018 and 2017

43

 

Net Income. Net income totaled $198,000 for the nine months ended September 30, 2018, compared to net income of $630,000 for the nine months ended September 30, 2017, a decrease of $431,000 or 68.5%. The decrease was driven by an increase in noninterest expense of $743,000, or 32.7%, to $3.0 million for the nine months ended September 30, 2018, from $2.3 million for the nine months ended September 30, 2017. There was also a decrease in noninterest income of $33,000, or 8.4%, to $361,000 for the nine months ended September 30, 2018, from $394,000 for the nine months ended September 30, 2017. There was a decrease in net interest income of $49,000, or 1.6%, and it remained at $3.0 million for the nine months ended September 30, 2019.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

Comparison of Operating Results for the Nine Months Ended September 30, 2018 and 2017 (Continued)

Also, the provision for income taxes decreased by $328,000, or 94.5%, to $19,000 for the nine months ended September 30, 2018, from $347,000 for the nine months ended September 30, 2017.

Interest and Dividend Income. Interest and dividend income increased $307,000, or 6.5%, to $5.0 million for the nine months ended September 30, 2018, from $4.7 million for the nine months ended September 30, 2017. Interest income on loans increased $216,000, or 4.8%. This increase is primarily attributable to an increase in the average balance of net loans of $29.3 million, or 24.8%. The average balances of net loans increased from $118.4 million to $147.8 million when comparing the nine months ended September 30, 2017 with the nine months ended September 30, 2018.

Interest Expense. Total interest expense increased $357,000, or 21.2%, to $2.0 million for the nine months ended September 30, 2018, compared to $1.7 million for the nine months ended September 30, 2017. Interest expense on deposit accounts increased $270,000, or 21.1%, to $1.6 million for the nine months ended September 30, 2018, compared to $1.3 million for the nine months ended September 30, 2017. The increase was primarily due to an increase in the average balance of interest-bearing deposits of $5.0 million, or 4.4%, from $113.2 million for the nine months ended September 30, 2017, to $118.2 million for the nine months ended September 30, 2018. Among interest bearing deposits, the largest impact is from a $9.5 million, or 12.9%, increase in time deposits. Additionally, the cost of funds associated with interest-bearing deposits increased 24 basis points from 1.51% for the nine months ended September 30, 2017, to 1.75% for the nine months ended September 30, 2018, due to increases in deposit rates in response to competition.

Interest expense on Federal Home Loan Bank advances increased $87,000 or 21.7%, to $487,000 for the nine months ended September 30, 2018, from $400,000 for the nine months ended September 30, 2017. The increase was driven by the increase in the average balance of advances of $2.1 million, or 8.3%, from $25.2 million for the nine months ended September 30, 2017 to $27.3 million for the nine months ended September 30, 2018. The average cost of these borrowings increased 26 basis points from 2.12% for the nine months ended September 30, 2017 to 2.38% for the nine months ended September 30, 2018, primarily due to the replacement of a maturing lower-cost Federal Home Loan Bank advance with a higher-cost advance.

Net Interest Income. Net interest income decreased $49,000, or 1.6%, when comparing the two periods. This was due to an increase in interest expense of $357,000 when comparing the two periods, while interest income increased by $307,000 over the two periods. Average interest-earning assets for the nine months ended September 30, 2017 was $142.9 million, increasing $18.4 million to $161.4 million for the nine months ended September 30, 2018, an increase of 12.9%. Net interest earning assets increased $11.3 million, or 253.0%, to $15.8 million for the nine months ended September 30, 2018, from $4.5 million for the nine months ended September 30, 2017. Additionally, interest rate spread decreased 50 basis points from 2.79% to 2.29%, and net interest margin decreased 37 basis points from 2.84% to 2.47% when comparing the two periods.

Provision for Loan Losses. The provision for loan losses decreased $66,000, or 36.5%, to $115,000 for the nine months ended September 30, 2018, from $181,000 for the nine months ended September 30, 2017. During the nine months ended September 30, 2017, the bank made adjustments to FAS 5 factors resulting in a larger than typical provision which accounts for the significant decrease in the provision when comparing the two periods.

The allowance for loan losses reflects the estimate we believe adequate to cover inherent probable losses. While we believe the estimates and assumptions used in our determination of the adequacy of the allowance are reasonable, such estimates and assumptions could change based upon the risk characteristics of the various portfolio segments, experience with losses, the impact of economic conditions on borrowers and other relevant factors.

Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

Comparison of Operating Results for the Nine Months Ended September 30, 2018 and 2017 (Continued)

Non-Interest Income. Non-interest income decreased $33,000, or 8.4% to $361,000 for the nine months ended September 30, 2018, from $394,000 for the comparable nine months ended September 30, 2017. The decrease was primarily due to a decrease in gains on sale of loans of $115,000, or 42.1%, to $158,000 for the nine months ended September 30, 2018, from $272,000 for the nine months ended September 30, 2017. Partially offsetting this decrease was a $37,000 increase in loan servicing fees, a $17,000 increase in earnings on bank-owned life insurance, and a $28,000 increase in other noninterest income when comparing the two periods.

Non-Interest Expense. Non-interest expense increased $743,000, or 32.7%, to $3.0 million for the nine months ended September 30, 2018, compared to $2.3 million for the nine months ended September 30, 2017. Professional fees increased $284,000 to $557,000 for the nine months ended September 30, 2018, from $273,000 for the comparable nine months ended September 30, 2017. The increase is principally due to additional accounting and auditing expenses associated with the regulatory filings related to the Reorganization. Salaries and employee benefits increased $141,000, or 12.3%, to $1.3 million for the nine months ended September 30, 2018 from $1.1 million for the nine months ended September 30, 2017. The increase was associated with the addition of staff due to the opening of a new branch office and increased staffing in lending, business development, and marketing. Additionally, due to the addition of a second branch, occupancy expenses increased $93,000, or 49.4%, to $280,000 for the nine months ended September 30, 2018, from $188,000 for the nine months ended September 30, 2017. Lastly, federal deposit insurance, data processing, director fees, and other noninterest expense increased $42,000, $34,000, $53,000, and $80,000, respectively.

Income Taxes. The income tax provision decreased from $347,000 for the nine months ended September 30, 2017 to $19,000 for the nine months ended September 30, 2018, a decrease of $328,000 or 94.5%. The effective tax rate was 8.8% for the nine months ended September 30, 2018, and 35.5% for the nine months ended September 30, 2017. The lower effective tax rate was a result of the Job and Tax Cuts Act enacted into law in December 2017.

 

Management of Market Risk

 

General.Our most significant form of market risk is interest rate risk because, as a financial institution, the majority of our assets and liabilities are sensitive to changes in interest rates. Therefore, a principal part of our operations is to manage interest rate risk and limit the exposure of our financial condition and results of operations to changes in market interest rates. Our Asset/Liability Management Committee is responsible for evaluating the interest rate risk inherent in our assets and liabilities, for determining the level of risk that is appropriate, given our business strategy, operating environment, capital, liquidity and performance objectives, and for managing this risk consistent with the policy and guidelines approved by our board of directors. We currently utilize a third-party modeling program, prepared on a quarterly basis, to evaluate our sensitivity to changing interest rates, given our business strategy, operating environment, capital, liquidity and performance objectives, and for managing this risk consistent with the guidelines approved by the board of directors.

 

Our interest rate risk profile is considered liability-sensitive, which means that if interest rates rise our deposits and other interest-bearing liabilities would be expected to reprice to higher interest rates faster than would our loans and other interest-earning assets. We have sought to manage our interest rate risk in order to minimize the exposure of our earnings and capital to changes in interest rates. In recent years, we have implemented the following strategies to manage our interest rate risk:

 

 ́increasing lower cost core deposits and limiting our reliance on higher cost funding sources, such as time deposits; and

Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

Management of Market Risk (Continued)

 diversifying our loan portfolio by adding more commercial-relatedcommercial and industrial loans, which typically have shorter maturities and/or balloon payments, and selling one- to four-family residential mortgage loans, which have fixed interest rates and longer terms.

 

By following these strategies, we believe that we are betterwell positioned to react to increases in market interest rates.

 

We do not engage in hedging activities, such as engaging in futures, options or swap transactions, or investing in high-risk mortgage derivatives, such as collateralized mortgage obligation residual interests, real estate mortgage investment conduit residual interests or stripped mortgage backed securities.

 

Economic Value of Equity.We analyze our sensitivity to changes in interest rates through an economic value of equity (“EVE”) model. EVE represents the difference between the present value of assets and the present value of liabilities. The EVE ratio represents the dollar amount of our EVE divided by the present value of our total assets for a given interest rate scenario. EVE attempts to quantify our economic value using a discounted cash flow methodology while the EVE ratio reflects that value as a form of capital ratio. We estimate what our EVE would be at a specific date. We then calculate what the EVE would be at the same date throughout a seriesof interest rate scenarios representing immediate and permanent, parallel shifts in the yield curve. We currently calculate EVE under the assumptions that interest rates increase 100, 200, 300 and 400 basis points from current market rates and that interest rates decrease 100 basis points from current market rates.

Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

Management of Market Risk (Continued)

 

The following table presents the estimated changes in our EVE that would result from changes in market interest rates at September 30, 2018.March 31, 2020. All estimated changes presented in the table are within the policy limits approved by our board of directors.

 

       EVE as Percent of Economic
 Estimated Increase (Decrease) in EVE Value of Assets
Basis Point (“bp”)          
Change in Interest
Rates (1)
 Estimated EVE Dollar Change Percent Change EVE Ratio (2) Change
Basis Point (“bp”)
Change in
    Estimated Increase (Decrease) in EVE  EVE as Percent of Economic
Value of Assets
 

Interest

Rates (1)

 Estimated EVE Dollar Change Percent Change EVE Ratio (2) Change 
                               
+400bp $14,387  $(7,120)  (33.11)%  8.91%  (2.82)% $21,658  $(6,233)  (22.35)%  10.77%  (1.73)%
+300bp  15,780   (5,727)  (26.63)%  9.49%  (2.24)%  23,849   (4,042)  (14.49)%  11.53%  (0.97)%
+200bp  17,654   (3,853)  (17.92)%  10.28%  (1.45)%  25,896   (1,995)  (7.15)%  12.18%  (0.32)%
+100bp  19,680   (1,827)  (8.49)%  11.09%  (0.65)%  27,431   (460)  (1.65)%  12.56%  0.07%
0  21,507   -   0.00%  11.73% ��0.00%  27,891   -   0.00%  12.50%  0.00%
-100bp  22,291   784   3.65%  11.87%  0.13%  27,325   (566)  (2.03)%  12.15%  (0.34)%

 

(1)Assumes instantaneous parallel changes in interest rates.
(2)EVE ratio represents the EVE divided by the economic value of assets.

 

Certain shortcomings are inherent in the methodologies used in the above interest rate risk measurements. Modeling requires making certain assumptions that may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. The above table assumes that the composition of our

Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

Management of Market Risk (Continued)

interest-sensitive assets and liabilities existing at the date indicated remains constant uniformly across the yield curve regardless of the duration or repricing of specific assets and liabilities. Accordingly, although the table provides an indication of our interest rate risk exposure at a particular point in time, such measurements are not intended to and do not provide a precise forecast of the effect of changes in market interest rates on our EVE and will differ from actual results.

 

Liquidity and Capital Resources

 

Liquidity.Liquidity is the ability to meet current and future financial obligations of a short-term nature that arise in the ordinary course of business. Liquidity is primarily needed to meet the borrowing and deposit withdrawal requirements of our customers and to fund investing activities and current and planned expenditures. Our primary sources of funds are deposits, principal and interest payments on loans and securities, proceeds from the sale of loans, and advances from the Federal Home Loan Bank of Pittsburgh. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions, and competition. Our most liquid assets are cash and short-term investments including interest-bearing deposits in other financial institutions. The levels of these assets are dependent on our operating, financing, lending, and investing activities during any given period. At September 30,2018,March 31, 2020, the Company had cash and cash equivalents of $5.9$24.5 million. As of September 30, 2018 theMarch 31, 2020, SSB Bank had $31.4 million in outstanding borrowings from the Federal Home Loan Bank of Pittsburgh and had $54.9$93.3 million of availabletotal borrowing capacity.

 

At September 30, 2018,March 31, 2020, the BankCompany had $13.0$22.6 million of loan commitments outstanding which includes $7.4$8.9 million of unused lines of credit, $3.8$3.4 million of unadvanced construction funds, and $1.8$5.1 million of commitments to extend credit, and $5.2 million in letters of credit. We have no other material commitments or demands that are likely to affect our liquidity. If loan demand was to increase faster than expected, or any unforeseen demand or commitment was to occur, we could access our borrowing capacity with the Federal Home Loan Bank of Pittsburgh.

Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

Liquidity and Capital Resources (Continued)

 

Time deposits due within one year of September 30, 2018March 31, 2020 totaled $26.5$28.6 million. If these deposits do not remain with us, we willmay be required to seek other sources of funds, including other time deposits and Federal Home Loan Bank of Pittsburgh advances. Depending on market conditions, we may be required to pay higher rates on such deposits or other borrowings than we paid on time deposits at September 30, 2018.March 31, 2020. We believe, however, based on past experience that a significant portion of our time deposits will remain with us. We have the ability to attract and retain deposits by adjusting the interest rates offered.

 

SSB Bancorp, Inc. is a separate legal entity from SSB Bank and must provide for its own liquidity to pay any dividends to its stockholders and for other corporate purposes. SSB Bancorp, Inc.’s primary source of liquidity is dividend payments it may receive from SSB Bank. SSB Bank’s ability to pay dividends to SSB Bancorp, Inc. is governed by applicable laws and regulations. At September 30, 2018,March 31, 2020, SSB Bancorp, Inc. (on an unconsolidated basis) had liquid assets of $3.5$3.6 million.

 

Capital Resources. At September 30, 2018, SSBMarch 31, 2020, the Bank exceeded all regulatory capital requirements and it was categorized as “well capitalized.” We are not aware of any conditions or events since the most recent notification that would change our category.

Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

 

Contractual Obligations and Off-Balance Sheet Arrangements

 

Contractual Obligations. In the ordinary course of our operations, we enter into certain contractual obligations. The following tables present our contractual obligations as of the dates indicated.

 

    Payments Due by Period  Payments Due by Period 
Contractual Obligations Total Less Than One Year One to
Three Years
 Three to
Five Years
 More Than Five Years  Total Less Than One Year One to Three Years Three to Five Years More Than Five Years 
 (In thousands)      (In thousands)     
At September 30, 2018:                    
At March 31, 2020:           
Long-term debt obligations $31,375  $6,250  $15,125  $-  $10,000  $31,375  $7,125  $8,000  $6,250  $10,000 
                                        
At December 31, 2017:                    
At December 31, 2019:                    
Long-term debt obligations $26,416  $9,292  $7,124  $-  $10,000  $31,375  $7,125  $8,000  $6,250  $10,000 
Operating lease obligations  4   4   -   -   - 

 

Off-Balance Sheet Arrangements.We are a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of our customers. These financial instruments include commitments to extend credit and unused lines of credit, which involve elements of credit and interest rate risk in excess of the amount recognized in the balance sheets. Our exposure to credit loss is represented by the

contractual amount of the instruments. We use the same credit policies in making commitments as we do for on-balance sheet instruments.

Item 3.Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

The information required by this item is included in Item 2 of this quarterly report under “Management of Market Risk.”

 

Item 4.Item 4. Controls and Procedures

 

Under the supervision and with the participation of our senior management, including our principal executive officer and principal financial officer, SSB Bancorp, Inc. evaluated the effectiveness of the design and operation of its disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10-Q.report. Based upon that evaluation, the principal executive officer and principal financial officer concluded that, as of the end of the period covered by this Quarterly Report on Form 10-Q,report, our disclosure controls and procedures were not effective because of the material weaknesses disclosed below. Discussed below are the remediation efforts regarding material weaknesses related to (1) the allowance for loan losses and the identification and reporting of problem loans, and (2) the recognition of interest income on loans that have been sold or participated out to others.

With the oversight and participation of senior management, we have taken steps to remediate the underlying causes of these material weaknesses as follows:effective.

 

Allowance for loan losses and the identification and reporting of problem loans – We have instituted a quarterly review and updating of the qualitative factors usedChanges in determining the allowance for loan losses, instituted a monthly review of changes to classified loans (including those designated as nonaccrual or as troubled debt restructurings) for accuracy and completeness and required that any changes to the allowance for loan losses be approved by the Chief Executive Officer and the ChiefInternal Control Over Financial Officer, among other steps.

Item 4. Controls and Procedures (Continued)Reporting

 

Recognition of interest income on sold and participated loans – We have created a contra-asset account to offset the daily accrual of interest income on sold and participated loans. We are also addressing with our core processor identified deficiencies related to report production inaccuracies and have agreed to utilize an upgraded application starting in March 2019. Until resolved to our satisfaction or until we change core processing applications, all fields and accrual information will be monitored monthly and documented within our financial reporting package.

Enhancing disclosure controls and procedures includes developing and/or revising formal policies and improving relevant procedures. The material weaknesses identified above will not be considered fully remediated until the new or revised policies and procedures have been in place and in operation for a sufficient time so that they may be tested and determined by senior management to be effective.

Except as disclosed above, thereThere were no other changes made in our internal control over financial reporting during the quarter ended September 30, 2018March 31, 2020 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

 

PART II – OTHER INFORMATION

 

Item 1.Item 1. Legal Proceedings

 

We are not involved in any pending legal proceedings as a plaintiff or a defendant other than routine legal proceedings occurring in the ordinary course of business. At September 30, 2018,March 31, 2020, we were not involved in any legal proceedings the outcome of which we believe would be material to our financial condition or results of operations.

 

Item 1A.Item 1A. Risk Factors

 

Not applicable,In addition to the other information disclosed in this quarterly report, particularly the disclosures under “Part I – Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Coronavirus Update”:

The COVID-19 pandemic has adversely impacted our business and financial results and that of many of our customers, and the ultimate impact will depend on future developments, which are highly uncertain, cannot be predicted and outside of our control, including the scope and duration of the pandemic and actions taken by governmental authorities in response to the pandemic.

The COVID-19 pandemic has created extensive disruptions to the global economy and to the lives of individuals throughout the world. Governments, businesses, and the public are taking unprecedented actions to contain the spread of COVID-19 and to mitigate its effects, including quarantines, travel bans, shelter-in-place orders, closures of businesses and schools, fiscal and monetary stimulus, and legislation designed to deliver financial aid and other relief. While the scope, duration, and full effects of COVID-19 are rapidly evolving and not fully known, the pandemic and the efforts to contain it have disrupted global economic activity, adversely affected the functioning of financial markets, impacted market interest rates, increased economic and market uncertainty, and disrupted trade and supply chains. If these effects continue for a prolonged period or result in sustained economic stress or recession, the effects of COVID-19 could have a material adverse impact on us in a number of ways as described in more detail below.

Item 1A.Risk Factors (Continued)

Credit Risk – Our risks of timely loan repayment and the Companyvalue of collateral supporting the loans are affected by the strength of our borrowers’ businesses. Concern about the spread of COVID-19 has caused and is likely to continue to cause business shutdowns, limitations on commercial activity and financial transactions, labor shortages, supply chain interruptions, increased unemployment and commercial property vacancy rates, reduced profitability and ability for property owners to make mortgage payments, and overall economic and financial market instability, all of which may cause our customers to be unable to make scheduled loan payments. Hotel and restaurant operators and others in the leisure, hospitality and travel industries and the agricultural industry, among other industries, have been particularly hurt by COVID-19. If the effects of COVID-19 result in widespread and sustained repayment shortfalls on loans in our portfolio, we could incur significant delinquencies, foreclosures and credit losses, particularly if the available collateral is insufficient to cover our credit exposure. The future effects of COVID-19 on economic activity could negatively affect the collateral values associated with our existing loans, the ability to liquidate the real estate collateral securing our residential and commercial real estate loans, our ability to maintain loan origination volume and to obtain additional financing, the future demand for or profitability of our lending and services, and the financial condition and credit risk of our customers. Further, in the event of delinquencies, regulatory changes and policies designed to protect borrowers may slow or prevent us from making our business decisions or may result in a “smaller reporting company.”delay in our taking certain remediation actions, such as foreclosure. In addition, we have unfunded commitments to extend credit to customers. During a challenging economic environment like now, our customers depend more on our credit commitments and increased borrowings under these commitments could adversely impact our liquidity. Furthermore, in an effort to support our communities during the pandemic, we are participating in the Paycheck Protection Program under the CARES Act whereby loans to small businesses are made and those loans are subject to the regulatory requirements that would require forbearance of loan payments for a specified time or that would limit our ability to pursue all available remedies in the event of a loan default. If the borrower under the PPP loan fails to qualify for loan forgiveness, we are at the heightened risk of holding these loans at unfavorable interest rates as compared to the loans to customers that we would have otherwise extended credit.

Strategic Risk – Our success may be affected by a variety of external factors that may affect the price or marketability of our products and services, changes in interest rates that may increase our funding costs, reduced demand for our financial products due to economic conditions and the various response of governmental and nongovernmental authorities. The COVID-19 pandemic has significantly increased economic and demand uncertainty and has led to disruption and volatility in the global capital markets. Furthermore, many of the governmental actions have been directed toward curtailing household and business activity to contain COVID-19. These actions have been rapidly expanding in scope and intensity. For example, in many of our markets, local governments have acted to temporarily close or restrict the operations of most businesses. The future effects of COVID-19 on economic activity could negatively affect the future banking products we provide, including a decline in originating loans.

Operational Risk – Current and future restrictions on our workforce’s access to our facilities could limit our ability to meet customer servicing expectations and have a material adverse effect on our operations. We rely on business processes and branch activity that largely depend on people and technology, including access to information technology systems as well as information, applications, payment systems and other services provided by third parties. In response to COVID-19, we have modified our business practices with a portion of our employees working remotely from their homes to have our operations uninterrupted as much as possible. Further, technology in employees’ homes may not be as robust as in our offices and could cause the networks, information systems, applications, and other tools available to employees to be more limited or less reliable than in our offices. The continuation of these work-from-home measures also introduces additional operational risk, including increased cybersecurity risk from phishing, malware, and other cybersecurity attacks, all of which could expose us to risks of data or financial loss and could seriously disrupt our operations and the operations of any impacted customers.

Item 1A. Risk Factors (Continued)

Moreover, we rely on many third parties in our business operations, including the appraiser of the real property collateral, vendors that supply essential services such as loan servicers, providers of financial information, systems and analytical tools and providers of electronic payment and settlement systems, and local and federal government agencies, offices, and courthouses. In light of the developing measures responding to the pandemic, many of these entities may limit the availability and access of their services. If the third-party service providers continue to have limited capacities for a prolonged period or if additional limitations or potential disruptions in these services materialize, it may negatively affect our operations.

Interest Rate Risk/Market Value Risk – Our net interest income, lending and investment activities, deposits and profitability could be negatively affected by volatility in interest rates caused by uncertainties stemming from COVID-19. In March 2020, the Federal Reserve lowered the target range for the federal funds rate to a range from 0% to 0.25%, citing concerns about the impact of COVID-19 on financial markets and market stress in the energy sector. A prolonged period of extremely volatile and unstable market conditions would likely increase our funding costs and negatively affect market risk mitigation strategies. Higher income volatility from changes in interest rates and spreads to benchmark indices could cause a loss of future net interest income and a decrease in prevailing fair market values of our investment securities and other assets, including our mortgage servicing rights. Fluctuations in interest rates will impact both the level of income and expense recorded on most of our assets and liabilities and the market value of all interest-earning assets and interest-bearing liabilities, which in turn could have a material adverse effect on our net income, operating results, or financial condition.

Because there have been no comparable recent global pandemics that resulted in similar global impact, we do not yet know the full extent of COVID-19’s effects on our business, operations, or the global economy as a whole. Any future development will be highly uncertain and cannot be predicted, including the scope and duration of the pandemic, the effectiveness of our work-from-home arrangements, third party providers’ ability to support our operations, and any actions taken by governmental authorities and other third parties in response to the pandemic. The uncertain future development of this crisis could materially and adversely affect our business, operations, operating results, financial condition, liquidity or capital levels.

 

Item 2.Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

(a) Not applicable.

(b) Not applicable.

(c) The Company did not repurchase any shares of its common stock during the quarter ended September 30, 2018.

(a)Not applicable.
(b)Not applicable.
(c)The Company did not repurchase any shares of its common stock during the quarter ended March 31, 2020.

 

Item 3.Defaults Upon Senior Securities

 

None.

 

Item 4.Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5.Item 5. Other Information

 

None.

Item 6.Item 6. Exhibits

 

Exhibit  
Number Description
   
3.1 Articles of Incorporation of SSB Bancorp, Inc.(1)
   
3.2 Bylaws of SSB Bancorp, Inc.(2)
   
10.1SSB Bancorp, Inc. 2019 Equity Incentive Plan (3)
31.1 

Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

   
31.2 Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
   
32.1 Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
   
32.2 

Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.0 The following materials for the quarter ended September 30, 2018,March 31, 2020, formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Statements of Financial Condition, (ii) the Consolidated Statements of Income, (iii) Consolidated Statements of Comprehensive Income (Loss), (iv) Consolidated Statements of Changes in Equity, (v) Consolidated Statements of Cash Flows, and (vi) Notes to Consolidated Financial Statements(3)

 

 

(1)Incorporated by reference to Exhibit 3.1 to the Company’s Registration Statement on Form S-1, as amended (Commission File No. 333-220403).
(2)Incorporated by reference to Exhibit 3.2 to the Company’s Registration Statement on Form S-1, as amended (Commission File No. 333-220403).
(3)Furnished, not filed.Incorporated by reference to Appendix A to the Revised Definitive Proxy Solicitation Materials for the 2019 Annual Meeting of Stockholders.

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 SSB BANCORP, INC.
  
Date: December 10, 2019May 13, 2020/s/ J. Daniel Moon, IV
 J. Daniel Moon, IV
 President and Chief Executive Officer

 

Date: December 10, 2019May 13, 2020/s/ /s/ Benjamin A. Contrucci
 Benjamin A. Contrucci
 Chief Financial Officer

51