Company Quick10K Filing
Quick10K
SSB Bancorp
10-Q 2019-03-31 Quarter: 2019-03-31
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
8-K 2019-06-01 Officers, Exhibits
8-K 2019-05-22 Shareholder Vote
8-K 2019-05-03 Officers
8-K 2018-06-13 Accountant
8-K 2018-06-06 Accountant, Exhibits
8-K 2018-05-23 Shareholder Vote
8-K 2018-04-25 Officers, Exhibits
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NOW ServiceNow 50,180
NBL Noble Energy 11,640
LXP Lexington Realty Trust 2,140
SRI Stoneridge 826
DZSI Dasan Zhone Solutions 204
SMIT Schmitt Industries 9
HICKA Hickok 0
CCPTV Cole Credit Property Trust V 0
FHLBT Federal Home Loan Bank of Topeka 0
SSBP 2019-03-31
Item 1. Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II - Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6.Exhibits
EX-31.1 ex31-1.htm
EX-31.2 ex31-2.htm
EX-32.1 ex32-1.htm
EX-32.2 ex32-2.htm

SSB Bancorp Earnings 2019-03-31

SSBP 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 form10-q.htm

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
  For the quarterly period ended March 31, 2019

 

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)

 

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 reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

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

 

Securities registered pursuant to Section 12(b) of the Act: None

 

As of May 13, 2019, there were 2,248,250 outstanding shares of the registrant’s common stock, of which 1,236,538 shares are owned by SSB Bancorp, MHC.

 

 

 

   
 

 

SSB Bancorp, Inc.

Form 10-Q

 

Table of Contents

 

    Page
PART I. FINANCIAL INFORMATION  
     
Item 1. Financial Statements (unaudited)  
     
  Consolidated Balance Sheets as of March 31, 2019 and December 31, 2018 3
     
  Consolidated Statements of Net Income for the Three Months Ended March 31, 2019 and 2018 4
     
  Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2019 and 2018 5
     
  Consolidated Statements of Changes in Stockholders’ Equity for the Three Months Ended March 31, 2019 6
     
  Consolidated Statements of Cash Flows for Three Months Ended March 31, 2019 and 2018

7

     
  Notes to Consolidated Financial Statements 8
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 33
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 42
     
Item 4. Controls and Procedures 42
     
PART II. OTHER INFORMATION  
     
Item 1. Legal Proceedings 43
     
Item 1A. Risk Factors 43
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 43
     
Item 3. Defaults Upon Senior Securities 43
     
Item 4. Mine Safety Disclosures 43
     
Item 5. Other Information 44
     
Item 6. Exhibits 44
     
  SIGNATURES 45

 

 2 
 

 

Item 1. Financial Statements

 

SSB Bancorp, Inc.

CONSOLIDATED BALANCE SHEETS

 

   March 31, 2019   December 31, 2018 
   (unaudited)     
ASSETS          
Cash and due from banks  $2,315,615   $2,428,542 
Interest-bearing deposits with other financial institutions   18,020,415    6,605,528 
Cash and cash equivalents   20,336,030    9,034,070 
           
Certificates of deposit   1,245,000    846,000 
Securities available for sale   8,709,848    9,068,101 
Securities held to maturity (fair value of $5,808, and $6,478, respectively)   5,743    6,394 
Loans   155,021,747    159,654,582 
Allowance for loan losses   (1,119,225)   (1,124,925)
Net loans   153,902,522    158,529,657 
Accrued interest receivable   662,147    639,474 
Federal Home Loan Bank stock, at cost   2,715,700    2,651,400 
Premises and equipment, net   4,341,183    4,335,514 
Bank-owned life insurance   2,445,134    2,429,014 
Deferred tax asset, net   283,803    312,623 
Prepaid reorganization and stock issuance costs   -    - 
Other assets   940,081    940,098 
TOTAL ASSETS  $195,587,191   $188,792,345 
           
LIABILITIES          
Deposits:          
Noninterest-bearing demand  $5,769,171   $5,698,782 
Interest-bearing demand   9,019,635    8,386,431 
Money market   18,610,278    16,020,446 
Savings   13,921,975    12,883,970 
Time   95,212,834    93,119,137 
Total deposits   142,533,893    136,108,766 
           
Federal Home Loan Bank advances   31,374,500    31,374,500 
Advances by borrowers for taxes and insurance   796,446    685,195 
Accrued interest payable   258,091    255,486 
Other liabilities   73,442    49,311 
TOTAL LIABILITIES   175,036,372    168,473,258 
           
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    22,483 
Paid-in capital   8,692,555    8,692,971 
Retained earnings   12,628,214    12,515,501 
Unearned Employee Stock Ownership Plan (ESOP)   (826,229)   (837,245)
Accumulated other comprehensive gain (loss)   33,796    (74,623)
TOTAL STOCKHOLDERS’ EQUITY   20,550,819    20,319,087 
           
TOTAL LIABILITIES AND STOCKHOLERS’ EQUITY  $195,587,191   $188,792,345 

 

See accompanying notes to the unaudited consolidated financial statements.

 

 3 
 

 

SSB Bancorp, Inc.

CONSOLIDATED STATEMENTS OF NET INCOME

 

   Three months ended March 31, 
   2019   2018 
   (unaudited) 
INTEREST INCOME          
Loans, including fees  $1,832,246   $1,568,981 
Interest-bearing deposits with other financial institutions   65,334    11,879 
Certificates of deposit   4,317    3,270 
Investment securities:   -    - 
Taxable   109,164    42,147 
Exempt from federal income tax   8,233    8,585 
Total interest income   2,019,294    1,634,862 
           
INTEREST EXPENSE          
Deposits   709,108    469,038 
Federal Home Loan Bank advances   216,640    154,053 
Total interest expense   925,748    623,091 
           
NET INTEREST INCOME   1,093,546    1,011,771 
Provision for loan losses   45,500    40,000 
           
NET INTEREST INCOME AFTER PROVISION FOR          
LOAN LOSSES   1,048,046    971,771 
           
NONINTEREST INCOME          
Securities gains, net   5,791    - 
Provision for loss on loans held for sale   -    - 
Gain on sale of loans   64,631    24,020 
Loan servicing fees   39,414    34,720 
Earnings on bank-owned life insurance   16,120    17,432 
Other   13,322    15,582 
Total noninterest income   139,278    91,754 
           
NONINTEREST EXPENSE          
Salaries and employee benefits   462,627    375,533 
Occupancy   100,352    91,061 
Professional fees   132,675    249,197 
Federal deposit insurance   49,000    45,000 
Data processing   96,342    77,073 
Director fees   32,494    32,494 
Contributions and donations   17,519    16,300 
Other   150,315    119,546 
Total noninterest expense   1,041,324    1,006,204 
           
Income before income taxes   146,000    57,321 
Provision for income taxes   33,287    10,071 
           
NET INCOME  $112,713   $47,250 
           
EARNINGS PER COMMON SHARE          
Basic  $0.05   $N/A 
Diluted  $0.05   $N/A 
           
AVERAGE COMMON SHARES OUTSTANDING          
Basic   2,165,076    N/A 
Diluted   2,165,076    N/A 
DIVIDENDS DECLARED PER COMMON SHARE  $-    $N/A 
COMPREHENSIVE INCOME  $221,132   $24,401 

 

See accompanying notes to the unaudited consolidated financial statements.

 

 4 
 

 

SSB Bancorp, Inc.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

   Three months ended March 31, 
   2019   2018 
   (unaudited) 
         
Net income  $112,713   $47,250 
Other comprehensive income (loss):          
Net change in unrealized gain (loss) on available-for-sale securities   143,030    (28,922)
Income tax effect   (30,036)   6,073 
           
Reclassification adjustment for net securities gains recognized in income   (5,791)   - 
Income tax effect included in provision for income taxes   1,216    - 
           
Other comprehensive income (loss), net of tax   108,419    (22,849)
           
Total comprehensive income  $221,132   $24,401 

 

See accompanying notes to the unaudited consolidated financial statements.

 

 5 
 

 

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, 2018  $-   $-   $12,135,085   $-   $(23,487)  $12,111,598 
                               
Net income   -    -    380,416    -    -    380,416 
                               
Other comprehensive loss   -    -    -    -    (51,136)   (51,136)
                               
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   -    (3,073)   -    44,065    -    40,992 
                               
Balance as of January 1, 2019   22,483    8,692,971    12,515,501    (837,245)   (74,623)   20,319,087 
                               
Net income   -    -    112,713    -    -    112,713 
                               
Other comprehensive income   -    -    -    -    108,419    108,419 
                               
Refund on offering expenses   -    1,005    -    -    -    1,005 
                               
Amortizaton of ESOP   -    (1,421)   -    11,016    -    9,595 
                               
Balance as of March 31, 2019  $22,483   $8,692,555   $12,628,214   $(826,229)  $33,796   $20,550,819 

 

See accompanying notes to the unaudited consolidated financial statements.

 

 6 
 

 

SSB Bancorp, Inc.

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

   Three months ended March 31, 
   2019   2018 
         
OPERATING ACTIVITIES          
Net income  $112,713   $47,250 
Adjustments to reconcile net income to net cash provided by operating activities:          
Provision for loan losses   45,500    40,000 
Depreciation   41,025    36,258 
Net amortization of investment securities   6,622    1,958 
Loss on sale of portfolio loans   12,178    - 
Origination of loans held for sale   (3,255,550)   (1,763,700)
Proceeds from sale of loans   3,332,359    1,787,720 
Gain on sale of loans   (76,809)   (24,020)
Deferred income tax provision   -    6,074 
Gain on sale of investments   (5,791)   - 
Increase in accrued interest receivable   (22,673)   (36,788)
Increase (decrease) in accrued interest payable   2,605    (3,246)
Amortization of ESOP   9,595    - 
Increase in bank owned life insurance   (16,120)   (17,432)
Other, net   24,148    783,022 
Net cash provided by (used in) operating activities   209,802    857,096 
           
INVESTING ACTIVITIES          
Purchase of certificates of deposit   (747,000)   - 
Redemption of certificates of deposit   348,000    100,000 
Investment securities available for sale:          
Proceeds from sales   254,377    - 
Proceeds from principal repayments, calls, and maturities   240,284    72,093 
Investment securities held to maturity:          
Proceeds from principal repayments, calls, and maturities   651    984 
Redemption of Federal Home Loan Bank stock   5,000    4,500 
Purchase of Federal Home Loan Bank stock   (69,300)   (66,500)
Purchases of loans   (382,000)   (2,026,514)
Decrease (increase) in loans receivable, net   1,381,930    (858,107)
Proceeds from sale of portfolio loans   3,569,527    - 
Purchases of premises and equipment   (46,694)   (46,741)
Net cash (used for) provided by investing activities   4,554,775    (2,820,285)
           
FINANCING ACTIVITIES          
Increase (decrease) in deposits, net   6,425,127    (14,037,287)
Increase in advances by borrowers for taxes and insurance   111,251    19,125 
Net proceeds from stock offering   -    7,900,968 
Refund on offering expenses   1,005    - 
Net cash provided by (used in) financing activities   6,537,383    (6,117,194)
           
Increase (decrease) in cash and cash equivalents   11,301,960    (8,080,383)
           
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD   9,034,070    16,478,066 
           
CASH AND CASH EQUIVALENTS AT END OF PERIOD  $20,336,030   $8,397,683 
           
SUPPLEMENTAL CASH FLOW DISCLOSURES          
Cash paid during the year for:          
Interest  $923,143   $626,337 
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.

 

 7 
 

 

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 Pink Market on January 25, 2018, under the symbol “SSBP”. Also, in connection with the Reorganization, the 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 financial statements at March 31, 2019, and for the three months ended March 31, 2019 and 2018, 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 months ended March 31, 2019, are not necessarily indicative of the results to be achieved for the remainder of the year ending December 31, 2019, or any other period. The financial statements at December 31, 2018, are audited.

 

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 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, 2018.

 

The consolidated financial statements include the accounts of SSB Bancorp, Inc. and SSB 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.

 

 8 
 

 

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 an “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 has elected to take advantage of the benefits of extended transition periods. Accordingly, the Company’s consolidated financial statements may not be comparable to those of public companies that adopt 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 is not expected to have a significant impact on the Company’s consolidated financial statements.

 

 9 
 

 

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 have a significant impact on the Company’s consolidated financial statements.

 

In September 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. For public business entities that do not meet the definition of an SEC filer, ASU 2016-13 is effective for fiscal years beginning after December 15, 2021, 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.

 

 10 
 

 

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. The amendments 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.

 

In February 2018, the FASB issued 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 Cuts 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 assets to be adjusted for the effect of a change 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.

 

 11 
 

 

3. SECURITIES AVAILABLE FOR SALE

 

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

 

   March 31, 2019 (unaudited) 
  

Amortized

Cost

  

Gross Unrealized

Gains

   Gross Unrealized Losses  

Fair

Value

 
Mortgage-backed securities in government-sponsored entities  $3,736,580   $12,590   $(8,290)  $3,740,880 
Obligations of state and political subdivisions   1,539,748    762    (7,176)   1,533,334 
Corporate bonds   3,198,997    44,880    (244)   3,243,633 
U.S. treasury securities   192,145    -    (144)   192,001 
Total  $8,667,470   $58,232   $(15,854)  $8,709,848 

 

   December 31, 2018 
  

Amortized

Cost

  

Gross

Unrealized

Gains

   Gross Unrealized Losses  

Fair

Value

 
Mortgage-backed securities in government-sponsored entities  $3,883,220   $495   $(18,635)  $3,865,080 
Obligations of state and political subdivisions   1,540,053    153    (38,244)   1,501,962 
Corporate bonds   3,547,246    -    (38,511)   3,508,735 
U.S. treasury securities   192,443    5    (124)   192,324 
Total  $9,162,962   $653   $(95,514)  $9,068,101 

 

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 25 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.

 

   March 31, 2019 (unaudited) 
  

Amortized

Cost

  

Fair

Value

 
         
Due within one year or less  $347,634   $347,233 
Due after one year through five years   3,146,476    3,184,338 
Due after five years through ten years   1,495,551    1,496,983 
Due after ten years   3,677,809    3,681,294 
Total  $8,667,470   $8,709,848 

 

 12 
 

 

3. SECURITIES AVAILABLE FOR SALE (Continued)

 

For the three months ended March 31, 2019, there was 1 corporate bond 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. For the three months ended March 31, 2018, there were no sales of investment securities available for sale.

 

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, 2019 (unaudited) 
  

Amortized

Cost

  

Gross

Unrealized

Gains

  

Gross

Unrealized

Losses

  

Fair

Value

 
Mortgage-backed securities in government-sponsored entities  $5,743   $65   $-   $5,808 
Total  $5,743   $65   $-   $5,808 

 

   December 31, 2018 
   Amortized Cost   Gross Unrealized Gains  

Gross

Unrealized

Losses

  

Fair

Value

 
Mortgage-backed securities in government-sponsored entities  $6,394   $84   $-   $6,478 
Total  $6,394   $84   $-   $6,478 

 

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 9 years. Due to expected repayment terms being less than the underlying mortgage pool contractual maturities, estimated lives of these securities could be significantly shorter.

 

   March 31, 2019 (unaudited) 
  

Amortized

Cost

  

Fair

Value

 
         
Due within one year or less  $-   $- 
Due after one year through five years   4,313    4,334 
Due after five years through nine years   1,430    1,474 
           
Total  $5,743   $5,808 

 

 13 
 

 

5. UNREALIZED LOSSES ON SECURITIES

 

The following tables show the Company’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:

 

   March 31, 2019 (unaudited) 
   Less than Twelve Months   Twelve Months or Greater   Total 
   Fair
Value
   Gross Unrealized
Losses
   Fair
Value
   Gross Unrealized
Losses
   Fair
Value
   Gross Unrealized
Losses
 
                         
U.S. treasury securities  $106,002   $(64)  $86,000   $(80)  $192,002   $(144)
Mortgage-backed securities in government-sponsored entities   -    -    802,705    (8,290)   802,705    (8,290)
Obligations of state and political subdivisions   30,273    (20)   1,287,048    (7,156)   1,317,321    (7,176)
Corporate bonds   -    -    99,762    (244)   99,762    (244)
Total  $136,275   $(84)  $2,275,515   $(15,770)  $2,411,790   $(15,854)

 

   December 31, 2018 
   Less than Twelve Months   Twelve Months or Greater   Total 
   Fair
Value
   Gross
Unrealized
Losses
   Fair
Value
   Gross
Unrealized
Losses
   Fair
Value
   Gross
Unrealized
Losses
 
                         
U.S. treasury securities  $159,275   $(124)  $-   $-   $159,275   $(124)
Mortgage-backed securities in government-sponsored entities   3,458,555    (7,806)   341,423    (10,829)   3,799,978    (18,635)
Obligations of state and political subdivisions   55,708    (34)   1,397,740    (38,210)   1,453,448    (38,244)
Corporate bonds   3,309,271    (37,959)   199,464    (552)   3,508,735    (38,511)
Total  $6,982,809   $(45,923)  $1,938,627   $(49,591)  $8,921,436   $(95,514)

 

Management reviews the Bank’s investment positions monthly. There were 12 investments that were temporarily impaired as of March 31, 2019, with aggregate depreciation of less than 1 percent of the Bank’s amortized cost basis. There were 25 investments that were temporarily impaired as of December 31, 2018, with aggregate depreciation of less than 2 percent from the Company’s amortized cost basis. Management has asserted that at March 31, 2019 and December 31, 2018, the declines outlined in the above table represent temporary declines and the Bank 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 Company has concluded that any impairment of its investment securities portfolio outlined in the above table is not other-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.

 

 14 
 

 

6. LOANS

 

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

 

   March 31, 2019   December 31, 2018 
   (unaudited)     
Mortgage loans:          
One-to-four family  $72,575,461   $75,520,850 
Commercial   56,801,968    59,494,384 
    129,377,429    135,015,234 
           
Commercial and industrial   19,603,251    19,166,207 
Consumer   5,984,579    5,404,216 
    154,965,259    159,585,657 
           
Third-party loan acquisition and other net origination costs   249,953    268,101 
Discount on loans previously held for sale   (193,465)   (199,176)
Allowance for loan losses   (1,119,225)   (1,124,925)
           
Total  $153,902,522   $158,529,657 

 

The Bank’s primary business activity is with customers located in Pittsburgh and surrounding communities. The Bank’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’s underwriting policies.

 

During the normal course of business, the Bank 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 Bank had transferred $11.0 million and $7.5 million in participation loans as of March 31, 2019 and December 31, 2018, respectively, to other financial institutions. As of March 31, 2019, and December 31, 2018, all these loans were being serviced by the Bank.

 

 15 
 

 

7. ALLOWANCE FOR LOAN LOSSES

 

The allowance 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 ended March 31, 2019 (unaudited) and 2018 (unaudited), respectively:

 

Three months ended
March 31, 2019:
  Mortgage
One-to-Four
Family
   Mortgage
Commercial
   Commercial
and
Industrial
   Consumer
and
HELOC
   Total 
Allowance for loan losses:                         
Beginning balance  $422,539   $393,900   $263,721   $44,765   $1,124,925 
Charge-offs   (28,268)   (22,932)   -    -    (51,200)
Recoveries   -    -    -    -    - 
Provision (credit)   42,304    4,175    (2,706)   1,727    45,500 
Ending balance  $436,575   $375,143   $261,015   $46,492   $1,119,225 

 

Three months ended
March 31, 2018:
  Mortgage
One-to-Four
Family
   Mortgage
Commercial
   Commercial
and
Industrial
   Consumer
and
HELOC
   Total 
Allowance for loan losses:                         
Beginning balance  $513,846   $383,535   $80,854   $63,210   $1,041,445 
Charge-offs   (16,429)   -    -    -    (16,429)
Recoveries   -    -    -    -    - 
Provision (credit)   17,312    26,592    5,248    (9,152)   40,000 
Ending balance  $514,729   $410,127   $86,102   $54,058   $1,065,016 

 

 16 
 

 

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 March 31, 2019 (unaudited), and December 31, 2018.

 

   Mortgage
One-to-Four Family
   Mortgage Commercial   Commercial and Industrial   Consumer and HELOC   Total 
March 31, 2019                    
Allowance for loan losses:                         
Loans deemed impaired   42,961    -    -    -    42,961 
                          
Loans not deemed impaired   393,614    375,143    261,015    46,492    1,076,264 
                          
Ending Balance   436,575    375,143    261,015    46,492    1,119,225 
                          
March 31, 2019                         
Loans:                         
Loans deemed impaired   2,000,151    1,763,219    155,660    6,195    3,925,225 
                          
Loans not deemed impaired   70,575,310    55,038,749    19,447,591    5,978,384    151,040,034 
                          
Ending Balance   72,575,461    56,801,968    19,603,251    5,984,579    154,965,259 

 

   Mortgage One-to-Four Family   Mortgage Commercial   Commercial and Industrial   Consumer and HELOC   Total 
December 31, 2018                    
Allowance for loan losses:                         
Loans deemed impaired   28,136    -    -    -    28,136 
                          
Loans not deemed impaired   394,403    393,900    263,721    44,765    1,096,789 
                          
Ending Balance   422,539    393,900    263,721    44,765    1,124,925 
                          
December 31, 2018                         
Loans:                         
Loans deemed impaired   2,486,210    1,768,845    155,660    1,195    4,411,910 
                          
Loans not deemed impaired   73,034,640    57,725,539    19,010,547    5,403,021    155,173,747 
                          
Ending Balance   75,520,850    59,494,384    19,166,207    5,404,216    159,585,657 

 

 17 
 

 

7. ALLOWANCE FOR LOAN LOSSES (Continued)

 

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

 

   March 31, 2019 (unaudited)   December 31, 2018 
   Recorded
Investment
   Unpaid
Principal
Balance
   Related
Allowance
   Recorded
Investment
   Unpaid
Principal
Balance
   Related
Allowance
 
                         
With no allowance recorded:                              
Mortgage loans:                              
One-to-four family  $1,833,610   $1,833,610   $-   $2,211,525   $2,211,525   $- 
Commercial  $1,763,219   $1,763,219    -   $1,768,845   $1,768,845    - 
Commercial and Industrial  $155,660   $155,660    -   $155,660   $155,660    - 
Consumer and HELOC  $6,195   $6,195    -   $1,195   $1,195    - 
                               
With an allowance recorded:                              
Mortgage loans:                              
One-to-four family   166,541    166,541    42,961    274,685    274,685    28,136 
Commercial   -    -    -    -    -    - 
Commercial and Industrial   -    -    -    -    -    - 
Consumer and HELOC   -    -    -    -    -    - 
                               
Total mortgage loans:                              
One-to-four family   2,000,151    2,000,151    42,961    2,486,210    2,486,210    28,136 
Commercial   1,763,219    1,763,219    -    1,768,845    1,768,845    - 
Commercial and Industrial   155,660    155,660    -    155,660    155,660    - 
Consumer and HELOC   6,195    6,195    -    1,195    1,195    - 
                               
Total  $3,925,225   $3,925,225   $42,961   $4,411,910   $4,411,910   $28,136 

 

 18 
 

 

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

March 31, 2019

  

Three Months Ended

March 31, 2018

 
   (unaudited)   (unaudited) 
   Average
Recorded
Investment
   Interest
Income
Recognized
   Average
Recorded
Investment
   Interest
Income
Recognized
 
                 
With no allowance recorded:                    
Mortgage loans:                    
One-to-four family  $1,789,634   $14,931   $1,889,111   $432 
Commercial   1,764,581    9,295    1,119,960    466 
Commercial and industrial   155,660    -    144,486    - 
Consumer and HELOC   6,195    -    14,006    - 
                     
With an allowance recorded:                    
Mortgage loans:                    
One-to-four family   308,916    810    398,413    3,419 
Commercial   -    -    -    - 
Commercial and industrial   -    -    -    - 
Consumer and HELOC   -    -    29,245    - 
                     
Total mortgage loans:                    
One-to-four family   2,098,550    15,741    2,287,524    3,851 
Commercial   1,764,581    9,295    1,119,960    466 
Commercial and industrial   155,660    -    144,486    - 
Consumer and HELOC   6,195    -    43,251    - 
                     
Total  $4,024,986   $25,036   $3,595,221   $4,317 

 

 19 
 

 

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:

 

   March 31, 2019 (unaudited) 
   30-59 Days
Past Due
   60-89 Days
Past Due
   90 Days
or Greater
Past Due
   Total Past
Due
   Current   Total Loans
Receivable
   90 Days or
Greater Still
Accruing
 
                             
Mortgage loans:                                    
One-to-four family  $1,128,239    557,774    1,549,676    3,235,689   $69,339,772   $72,575,461   $- 
Commercial   321,358    -    941,072    1,262,430    55,539,538    56,801,968    - 
Commercial and industrial   145,260    -    155,660    300,920    19,302,331    19,603,251    - 
Consumer and HELOC   29,731    -    6,195    35,926    5,948,653    5,984,579    - 
Total  $1,624,588   $557,774   $2,652,603   $4,834,965   $150,130,294   $154,965,259   $- 

 

   December 31, 2018 
   30-59 Days
Past Due
   60-89 Days
Past Due
   90 Days
or Greater
Past Due
   Total Past
Due
   Current   Total Loans
Receivable
   90 Days or
Greater Still
Accruing
 
                             
Mortgage loans:                                     
One-to-four family  $305,412    624,784    1,701,044    2,631,240   $72,889,610   $75,520,850   $- 
Commercial   -    -    1,094,376    1,094,376    58,400,008    59,494,384    - 
Commercial and industrial   -    -    155,660    155,660    19,010,547    19,166,207    - 
Consumer and HELOC   -    -    1,195    1,195    5,403,021    5,404,216    - 
Total  $305,412   $624,784   $2,952,275   $3,882,471   $155,703,186   $159,585,657   $- 

 

 20 
 

 

7. ALLOWANCE FOR LOAN LOSSES (Continued)

 

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

 

   March 31,   December 31, 
   2019   2018 
   (unaudited)     
Mortgage loans:          
One-to-four family  $1,805,450   $2,302,267 
Commercial   895,386    1,094,376 
Commercial and industrial   155,660    155,660 
Consumer and HELOC   6,195    1,195 
Total  $2,862,691   $3,553,498 

 

Credit Quality Information

 

The Bank 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 Bank analyzes commercial loans individually by classifying the loans as to their credit risk. The Bank 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.

 

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7. ALLOWANCE FOR LOAN LOSSES (Continued)

 

Credit Quality Information (Continued)

 

The risk category of loans by class is as follows:

 

   March 31, 2019 (unaudited)   December 31, 2018 
   Mortgage   Commercial and   Mortgage   Commercial and 
   Commercial   Industrial   Commercial   Industrial 
         
Loans rated 1 - 5  $55,234,860   $15,465,122   $57,773,482   $15,028,078 
Loans rated 6   -    3,982,469    -    3,982,469 
Loans rated 7   1,567,108    155,660    1,720,902    155,660 
Ending balance  $56,801,968   $19,603,251   $59,494,384   $19,166,207 

 

There were no loans classified as doubtful or loss at March 31, 2019, or December 31, 2018.

 

For one-to-four family mortgage and consumer and HELOC loans, the Bank 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:

 

   March 31, 2019 (unaudited)   December 31, 2018 
   Mortgage   Consumer   Mortgage   Consumer 
   One-to-Four   and   One-to-Four   and 
   Family   HELOC   Family   HELOC 
                 
Performing  $70,770,011   $5,978,384   $73,218,583   $5,403,021 
Nonperforming   1,805,450    6,195    2,302,267    1,195 
Total  $72,575,461   $5,984,579   $75,520,850   $5,404,216 

 

Troubled Debt Restructurings

 

There were no loans modified as troubled debt restructurings during the three months ended March 31, 2019 or 2018.

 

As of March 31, 2019, and December 31, 2018, the Bank allocated $42,961 and $1,980, respectively, within the allowance for loan losses related to all loans modified as troubled debt restructurings.

 

The Bank did not have any loans modified as a troubled debt restructuring in the preceding 12 months that subsequently defaulted in the current reporting period.

 

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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 March 31, 2019, the Company recognized $9,595 in compensation expense.

 

9. 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 Bank 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 regulations require a minimum ratio of common equity Tier 1 capital to risk-weighted assets of 4.5%, a minimum ratio of Tier 1 capital 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 on capital distributions and discretionary bonuses. The capital conservation buffer and certain deductions from and adjustments to regulatory capital and risk-weighted assets are being phased in over several years. The required minimum conservation buffer was 1.875% as of January 1, 2018 and it increased to 2.5% on January 1, 2019.

 

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9. REGULATORY CAPITAL REQUIREMENTS (Continued)

 

As of March 31, 2019, the most recent notification from the FDIC 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. The Bank’s actual capital amounts and ratios are also presented in the table below.

 

   March 31, 2019   December 31, 2018 
   Amount   Ratio   Amount   Ratio 
   (unaudited)         

Common Equity Tier 1 capital

(to risk-weighted assets)

                    
Actual  $20,517,023    14.45%  $20,393,710    14.22%
For capital adequacy purposes   6,389,910    4.50%   6,453,270    4.50%
To be well capitalized   9,229,870    6.50%   9,321,390    6.50%
                     

Tier 1 capital

(to risk-weighted assets)

                    
Actual  $20,517,023    14.45%  $20,393,710    14.22%
For capital adequacy purposes   8,519,880    6.00%   8,604,360    6.00%
To be well capitalized   11,359,840    8.00%   11,472,480    8.00%
                     

Total capital

(to risk-weighted assets)

                    
Actual  $21,636,248    15.24%  $21,518,635    15.01%
For capital adequacy purposes   11,359,840    8.00%   11,472,480    8.00%
To be well capitalized   14,199,800    10.00%   14,340,600    10.00%
                    

Tier 1 capital

(to average assets)

                    
Actual  $20,517,023    10.67%  $20,393,710    11.59%
For capital adequacy purposes   7,692,174    4.00%   7,036,287    4.00%
To be well capitalized   9,615,217    5.00%   8,795,358    5.00%

 

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10. COMMITMENTS

 

In the normal course of business, the Bank makes various commitments that are not reflected in the Company’s consolidated financial statements. The Bank 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’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 Bank 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:

 

   March 31, 2019 
   (unaudited) 
     
Commitments to extend credit  $2,544,500 
Construction unadvanced funds   4,421,435 
Unused lines of credit   7,802,387 
Letters of credit   2,861,135 
      
   $17,629,457 

 

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 Bank uses the same credit policies in making loan commitments and conditional obligations as it does for on-balance sheet instruments. The Bank 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’s lending policy guidelines.

 

In August 2017, the Bank entered into 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.

 

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11. 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 March 31, 2019 and December 31, 2018, fair value measurements were obtained from a third-party pricing service and not adjusted by management. Transfers are recognized at the end of the reporting period, as applicable.

 

 26 
 

 

11. 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.

 

   March 31, 2019 (unaudited) 
   Level I   Level II   Level III   Total 
                 
Fair value measurements on a recurring basis:                    
Mortgage-backed securities in government-sponsored entities  $-   $3,740,880   $-   $3,740,880 
Obligations of state and political subdivisions   -    1,533,334    -    1,533,334 
Corporate bonds   -   3,243,633    -    3,243,633 
U.S. treasury securities   192,001    -    -    192,001 
Mortgage servicing rights   -    -    269,435    269,435 
Impaired loans with reserve   -    -    123,580    123,580 

 

   December 31, 2018 
   Level I   Level II   Level III   Total 
                 
Fair value measurements on a recurring basis:                    
Mortgage-backed securities in government-sponsored entities  $-   $3,865,080   $-   $3,865,080 
Obligations of state and political subdivisions   -    1,501,962    -    1,501,962 
Corporate bonds   -    3,508,735    -    3,508,735 
U.S. treasury securities   192,324    -    -    192,324 
Mortgage servicing rights   -    -    234,344    234,344 
Impaired loans with reserve   -    -    246,549    246,549 

 

   March 31, 2019 (unaudited) 
   Level I   Level II   Level III   Total 
                 
Fair value measurements on a nonrecurring basis:                          
Other real estate owned  $-   $     -   $109,832   $109,832 

 

   December 31, 2018 
   Level I   Level II   Level III   Total 
                 
Fair value measurements on a nonrecurring basis:                                 
Other real estate owned  $-   $-   $138,100   $138,100 

 

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11. 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       Valuation   Range 
   March 31,   Valuation   Unobservable   (Weighted 
   2019   Techniques   Inputs   Average) 
   (unaudited)             
Other real estate owned  $109,832   Appraised collateral values   Discount for time since appraisal    10%
                 (10)%
            Selling costs    10%