Company Quick10K Filing
SSB Bancorp
Price-0.00 EPS0
Shares2 P/E-0
MCap-0 P/FCF-0
Net Debt-19 EBIT3
TEV-19 TEV/EBIT-6
TTM 2019-09-30, in MM, except price, ratios
10-Q 2020-03-31 Filed 2020-05-13
10-K 2019-12-31 Filed 2020-03-30
10-Q 2019-09-30 Filed 2019-11-14
10-Q 2019-06-30 Filed 2019-08-14
10-Q 2019-03-31 Filed 2019-05-13
10-K 2018-12-31 Filed 2019-03-29
10-Q 2018-09-30 Filed 2018-11-13
10-Q 2018-06-30 Filed 2018-08-14
10-Q 2018-03-31 Filed 2018-05-15
10-K 2017-12-31 Filed 2018-04-17
10-Q 2017-09-30 Filed 2017-12-28
8-K 2020-05-20
8-K 2019-08-09
8-K 2019-06-01
8-K 2019-05-22
8-K 2019-05-03
8-K 2018-06-13
8-K 2018-06-06
8-K 2018-05-23
8-K 2018-04-25

SSBP 10Q Quarterly Report

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 2020-03-31

Balance SheetIncome StatementCash Flow
205164123824102017201820192020
Assets, Equity
0.30.20.20.10.10.02016201720182020
Rev, G Profit, Net Income
1593-3-9-152017201820192020
Ops, Inv, Fin

10-Q 1 form10q.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, 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 Class   Trading 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 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. [  ]

 

As of May 11, 2020, there were 2,276,891 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, 2020 and December 31, 2019 4
     
  Consolidated Statements of Net Income for the Three Months Ended March 31, 2020 and 2019 5
     
  Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2020 and 2019 6
     
  Consolidated Statements of Changes in Stockholders’ Equity for the Three Months Ended March 31, 2020 7
     
  Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2020 and 2019 8
     
  Notes to Consolidated Financial Statements 9
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 36
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 47
     
Item 4. Controls and Procedures 47
     
     
PART II. OTHER INFORMATION
     
Item 1. Legal Proceedings 47
     
Item 1A. Risk Factors 47
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 49
     
Item 3. Defaults Upon Senior Securities 49
     
Item 4. Mine Safety Disclosures 49
     
Item 5. Other Information 49
     
Item 6. Exhibits 50
     
  SIGNATURES 51

 

   
 

 

Item 1. Financial Statements

 

SSB Bancorp, Inc.

CONSOLIDATED BALANCE SHEETS

 

   March 31,   December 31, 
   2020   2019 
   (unaudited)     
ASSETS        
Cash and due from banks  $6,902,759   $10,610,445 
Interest-bearing deposits with other financial institutions   17,607,894    11,270,343 
Cash and cash equivalents   24,510,653    21,880,788 
           
Certificates of deposit   4,444,000    2,465,000 
Securities available for sale   8,395,742    9,849,599 
Securities held to maturity (fair value of $3,374, and $3,932, respectively)   3,323    3,879 
Loans   159,963,384    157,295,376 
Allowance for loan losses   (1,195,761)   (1,183,261)
Net loans   158,767,623    156,112,115 
Accrued interest receivable   808,168    673,026 
Federal Home Loan Bank stock, at cost   3,046,900    2,924,600 
Premises and equipment, net   4,282,919    4,234,676 
Bank-owned life insurance   3,271,781    3,249,430 
Deferred tax asset, net   316,202    296,955 
Other assets   766,932    941,669 
TOTAL ASSETS  $208,614,243   $202,631,737 
           
LIABILITIES          
Deposits:          
Noninterest-bearing demand  $7,282,956   $5,519,219 
Interest-bearing demand   24,692,640    18,218,407 
Money market   30,465,007    30,129,370 
Savings   1,336,342    1,314,513 
Time   91,027,286    93,839,220 
Total deposits   154,804,231    149,020,729 
           
Federal Home Loan Bank advances   31,374,500    31,374,500 
Advances by borrowers for taxes and insurance   752,566    712,189 
Accrued interest payable   311,648    331,133 
Other liabilities   339,310    309,988 
TOTAL LIABILITIES   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 2,276,891 shares issued and outstanding at $0.01 par value   22,769    22,769 
Paid-in capital   8,719,033    8,707,184 
Retained earnings   13,150,177    12,951,846 
Unearned compensation - Employee Stock Ownership Plan (ESOP)   (782,163)   (793,180)
Accumulated other comprehensive loss   (77,828)   (5,421)
TOTAL STOCKHOLDERS’ EQUITY   21,031,988    20,883,198 
           
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY  $208,614,243   $202,631,737 

 

See accompanying notes to the unaudited consolidated financial statements.

 

 4 
 

 

SSB Bancorp, Inc.

CONSOLIDATED STATEMENTS OF NET INCOME

 

   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 March 31,
    2020    2019 
    (unaudited)
Net income  $198,331   $112,713 
Other comprehensive income (loss):          
Net change in unrealized gain (loss) on available-for-sale securities   (56,087)   143,030 
Income tax effect   11,778    (30,036)
           
Reclassification adjustment for net securities (gains)  losses recognized in income   (35,567)   (5,791)
Income tax effect included in provision for income taxes   7,469    1,216 
           
Other comprehensive income (loss), net of tax   (72,407)   108,419 
           
Total comprehensive income  $125,924   $221,132 

 

See accompanying notes to the unaudited consolidated financial statements.

 

 6 
 

 

SSB Bancorp, Inc.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(unaudited)

 

   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.

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, SSB 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 March 31, 2020, and for the three months ended March 31, 2020 and 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 months ended March 31, 2020, are not necessarily indicative of the results to be achieved for the remainder of the year ending December 31, 2020, or any other period. The financial statements at December 31, 2019, are 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, 2019.

 

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

 

 9 
 

 

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 and “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. We have elected to take advantage of the benefits of extended transition periods. Accordingly, our 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 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. The Update has not had a significant impact on the Company’s consolidated financial statements.

 

In June 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 meet the definition of a “smaller reporting company” under the rules and regulations of the SEC, ASU 2016-13 is effective for fiscal years beginning after December 15, 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.

 

 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.

 

On January 1, 2019, the Company adopted ASU 2014-09 Revenue 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.

 

On December 31, 2019, the Company 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. Prior periods were not restated and continue to be presented under legacy GAAP. Disclosures about the Company’s leasing activities are presented in Note 16 – Leases.

 

 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, 2020 (unaudited)
        Gross   Gross     
    Amortized   Unrealized   Unrealized   Fair
    Cost   Gains   Losses   Value
Mortgage-backed securities of government-sponsored entities   $4,361,843   $45,915   $(817)  $    4,406,941
Obligations of state and political subdivisions    837,674    737    -   838,411
Corporate bonds    3,295,143    359    (145,112)  3,150,390
Total   $8,494,660   $47,011   $(145,929)  $    8,395,742

 

   December 31, 2019
       Gross   Gross     
   Amortized   Unrealized   Unrealized   Fair
   Cost   Gains   Losses   Value
Mortgage-backed securities of government-sponsored entities  $5,303,817   $19,894   $(42,383)  $    5,281,328
Obligations of state and political subdivisions   1,363,535    2,174    (4)  1,365,705
Corporate bonds   3,189,510    24,963    (11,907)  3,202,566
Total  $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 30 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, 2020 (unaudited) 
  Amortized   Fair 
  Cost   Value 
        
Due within one year or less $149,881    150,298 
Due after one year through five years  1,064,656    1,052,448 
Due after five years through ten years  2,957,307    2,825,273 
Due after ten years  4,322,815    4,367,723 
Total $8,494,659   $8,395,742 

 

 12 
 

 

3. SECURITIES AVAILABLE FOR SALE (Continued)

 

For the three months ended March 31, 2020, there were 2 corporate bonds sold with a total amortized cost of $1,008,433 and an associated gain on sale of $35,567. The proceeds of the sale were $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  

 

    December 31, 2019  
          Gross    Gross         
     Amortized    Unrealized    Unrealized     Fair  
     Cost    Gains    Losses     Value  
Mortgage-backed securities of government-sponsored entities   $3,879   $53   $-   $ 3,932  
Total   $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 8 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, 2020 (unaudited) 
   Amortized   Fair 
   Cost   Value 
         
Due within one year or less  $80   $80 
Due after one year through five years   2,036    2,049 
Due after five years through nine years   1,207    1,245 
           
Total  $3,323   $3,374 

 

 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, 2020 (unaudited) 
   Less than Twelve Months   Twelve Months or Greater   Total 
       Gross           Gross       Gross 
   Fair   Unrealized     Fair     Unrealized   Fair   Unrealized 
   Value   Losses     Value     Losses   Value   Losses 
                         
Mortgage-backed securities of government-sponsored entities   $350,298   $(817)  $-   $-   $350,298   $(817)
                               
Obligations of state and political subdivisions   -    -    -    -    -    - 
Corporate bonds   3,049,915    (145,112)   -    -    3,049,915    (145,112)
U.S. treasury securities   -    -    -    -    -    - 
Total  $3,400,213   $(145,929)  $-   $-   $3,400,213   $(145,929)

 

   December 31, 2019  
   Less than Twelve Months   Twelve Months or Greater   Total  
         Gross       Gross       Gross  
     Fair     Unrealized   Fair   Unrealized   Fair   Unrealized  
     Value     Losses   Value   Losses   Value   Losses  
                          
Mortgage-backed securities of government-sponsored entities   $3,005,336   $(40,992)  $273,818   $(1,391)  $3,279,154   $(42,383)
Obligations of state and political subdivisions   24,996    (4)   -    -    24,996    (4)
Corporate bonds   2,068,955    (11,907)   -    -    2,068,955    (11,907)
Total  $5,099,287   $(52,903)  $273,818   $(1,391)  $5,373,105   $(54,294)

 

Management reviews the Company’s investment positions monthly. There were 7 investments that were temporarily impaired as of March 31, 2020, with aggregate depreciation of 1.7 percent of the Company’s amortized cost basis. There were 11 investments that were temporarily impaired as of December 31, 2019, with aggregate depreciation of 0.6 percent of the Company’s amortized cost basis. Management has asserted that at March 31, 2020 and December 31, 2019, the declines disclosed in the above table represent temporary declines and the Company 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 disclosed 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 Company’s loan portfolio summarized by category is as follows:

 

   March 31,   December 31, 
   2020   2019 
   (unaudited)     
Mortgage loans:          
One-to-four family  $69,475,072   $70,511,775 
Commercial   59,571,468    57,117,861 
    129,046,540    127,629,636 
           
Commercial and industrial   24,737,887    23,990,540 
Consumer   6,234,988    5,690,941 
    160,019,415    157,311,117 
           
Third-party loan acquisition and other net origination costs   101,571    147,441 
Discount on loans previously held for sale   (157,602)   (163,182)
Allowance for loan losses   (1,195,761)   (1,183,261)
           
Total  $158,767,623   $156,112,115 

 

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

 

During the normal course of business, the Company 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 Company had transferred $9.0 million and $9.9 million in participation loans as of March 31, 2020 and December 31, 2019, respectively, to other financial institutions. As of March 31, 2020, and December 31, 2019, all these loans were being serviced by the Company.

 

 15 
 

 

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 months ended March 31, 2020 (unaudited) and 2019 (unaudited), respectively:

 

Three months ended March 31, 2020:  Mortgage       Commercial   Consumer     
  One-to-Four   Mortgage   and   and     
Allowance for loan losses:  Family   Commercial   Industrial   HELOC   Total 
                              
Beginning balance  $543,090   $443,897   $170,769   $25,505   $1,183,261 
Charge-offs   -    -    -    -    - 
Recoveries   -    -    -    -    - 
Provision (credit)   (50,460)   12,461    38,006    12,493    12,500 
Ending balance  $492,630   $456,358   $208,775   $37,998   $1,195,761 

 

Three months ended March 31, 2019:  Mortgage       Commercial   Consumer     
   One-to-Four   Mortgage   and   and     
Allowance for loan losses:  Family   Commercial   Industrial   HELOC   Total 
                         
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 

 

 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, 2020 (unaudited), and December 31, 2019.

 

   Mortgage One-to-Four Family   Mortgage Commercial   Commercial and Industrial   Consumer and HELOC   Total 
March 31, 2020                         
Allowance for loan losses:                         
Loans deemed impaired  $128,163   $2,511   $-   $8,607   $139,281 
                          
Loans not deemed impaired   364,467    453,847    208,775    29,391    1,056,480 
                          
Ending Balance  $492,630   $456,358   $208,775   $37,998   $1,195,761 
                          
March 31, 2020                         
Loans:                         
Loans deemed impaired  $3,960,838   $2,479,102   $1,618,286   $188,060   $8,246,286 
                          
Loans not deemed impaired   65,514,234    57,092,366    23,119,601    6,046,928    151,773,129 
                          
Ending Balance  $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 
December 31, 2019                         
Allowance for loan losses:                         
Loans deemed impaired  $43,180   $-   $-   $-   $43,180 
                          
Loans not deemed impaired   499,910    443,897    170,769    25,505    1,140,081 
                          
Ending Balance  $543,090   $443,897   $170,769   $25,505   $1,183,261 
                     
December 31, 2019                    
Loans:                    
Loans deemed impaired  $3,912,297   $2,472,890   $1,398,286   $188,060   $7,971,533 
                          
Loans not deemed impaired   66,599,478    54,644,971    22,592,254    5,502,881    149,339,584 
                          
Ending Balance  $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 March 31, 2020, and December 31, 2019, segregated by those for which a specific allowance was required and those for which a specific allowance was not necessary.

 

   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 

 

 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, 2020
   Three Months Ended
March 31, 2019
 
   (unaudited)   (unaudited) 
   Average   Interest   Average   Interest 
   Recorded   Income   Recorded   Income 
   Investment   Recognized   Investment   Recognized 
                 
With no allowance recorded:                    
Mortgage loans:                    
One-to-four family  $2,796,121   $8,876   $1,789,634   $14,931 
Commercial   2,293,382    18,691    1,764,581    9,295 
Commercial and industrial   1,618,286    33,829    155,660    - 
Consumer and HELOC   151,732    1,772    6,195    - 
                     
With an allowance recorded:                    
Mortgage loans:                    
One-to-four family   1,024,834    9,209    308,916    810 
Commercial   191,501    -    -    - 
Commercial and industrial   -    -    -    - 
Consumer and HELOC   36,328    -    -    - 
                     
Total mortgage loans:                    
One-to-four family   3,820,955    18,085    2,098,550    15,741 
Commercial   2,484,883    18,691    1,764,581    9,295 
Commercial and industrial   1,618,286    33,829    155,660    - 
Consumer and HELOC   188,060    1,772    6,195    - 
                     
Total  $8,112,184   $72,377   $4,024,986   $25,036 

 

 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, 2020 (unaudited) 
                          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  $382,031    669,338    1,564,580    2,615,949   $66,859,123   $69,475,072   $24,926 
Commercial   380,408    302,092    879,290    1,561,790    58,009,678    59,571,468    663,131 
Commercial and industrial   1,563,532    1,604,225    220,000    3,387,757    21,350,130    24,737,887    - 
Consumer and HELOC   57,314    -    42,918    100,232    6,134,756    6,234,988    4,054 
Total  $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.

 

 20 
   

 

7. ALLOWANCE FOR LOAN LOSSES (Continued)

 

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

 

   March 31,   December 31, 
   2020   2019 
   (unaudited)     
Mortgage loans:          
One-to-four family  $2,349,834   $2,045,845 
Commercial   980,927    1,055,876 
Commercial and industrial   -    74,864 
Consumer and HELOC   38,864    38,864 
Total  $3,369,625   $3,215,449 

 

Credit Quality Information

 

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

 

 21 
   

 

7. ALLOWANCE FOR LOAN LOSSES (Continued)

 

Credit Quality Information (Continued)

 

The risk category of loans by class is as follows:

 

   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 March 31, 2020, or December 31, 2019.

 

For one-to-four family mortgage loans and consumer and HELOC loans, the Company 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, 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 were no loans modified as troubled debt restructurings during the three months ended March 31, 2020 or 2019.

 

As of March 31, 2020, and December 31, 2019, the Company allocated $139,281 and $43,180, respectively, within the allowance for loan losses related to all loans modified as troubled debt restructurings.

 

As 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.

 

 22 
   

 

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, 2020, the Company recognized $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 

 

 23 
   

 

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 options granted 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 Company 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.

 

Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required.

 

 24 
   

 

10. REGULATORY CAPITAL REQUIREMENTS (Continued)

 

As of 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%
                     

 

 25 
   

 

10. REGULATORY CAPITAL REQUIREMENTS (Continued)

 

The Bank’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  $17,490,586    11.34%  $17,287,045    11.59%
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  $17,490,586    11.34%  $17,287,045    11.59%
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  $18,686,347    12.12%  $18,470,306    12.38%
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  $17,490,586    8.42%  $17,287,045    8.83%
For capital adequacy purposes   8,313,200    4.00%   7,834,797    4.00%
To be well capitalized   10,391,500    5.00%   9,793,496    5.00%

 

 

11. COMMITMENTS

 

In the normal course of business, the Company makes various commitments that are not reflected in the Company’s consolidated financial statements. The Company 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 Company’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 Company 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, 
   2020 
   (unaudited) 
     
Commitments to extend credit  $5,141,132 
Construction unadvanced funds   3,413,015 
Unused lines of credit   8,908,264 
Letters of credit   5,163,454 
      
   $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 agreement. These commitments consisted primarily of mortgage loan commitments. The Company uses the same credit policies in making loan commitments and conditional obligations as it does for on-balance sheet instruments. The Company 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 Company’s lending policy guidelines.

 

The Company and certain executives are parties to employment agreements 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 
   

  

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 March 31, 2020 and December 31, 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 
   

 

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.

 

   March 31, 2020 (unaudited) 
   Level I   Level II   Level III   Total 
                 
Fair value measurements on a recurring basis:                    
Mortgage-backed securities of government-sponsored entities  $-   $4,406,941   $-   $4,406,941 
Obligations of state and political subdivisions   -    838,411    -    838,411 
Corporate bonds   -   3,150,390    -    3,150,390 
Mortgage servicing rights   -    -    321,999    321,999 
Impaired loans with reserve   -    -    1,113,383    1,113,383 

 

    December 31, 2019 
    Level I    Level II    Level III    Total 
                     
Fair value measurements on a recurring basis:                    
Mortgage-backed securities of government-sponsored entities  $-   $5,281,328   $-   $5,281,328 
Obligations of state and political subdivisions   -    1,365,705    -    1,365,705 
Corporate bonds   -   3,202,566    -    3,202,566 
Mortgage servicing rights   -    -    317,939    317,939 
Impaired loans with reserve   -    -    115,304    115,304 

 

   March 31, 2020 (unaudited) 
   Level I   Level II   Level III   Total 
                 
Fair value measurements on a nonrecurring basis:                    
Other real estate owned  $-   $-   $-   $- 
                     
    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 

 

 28 
   

  

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 
   March 31,      Valuation  (Weighted 
   2020   Valuation Techniques  Unobservable Inputs  Average) 
   (unaudited)           
Other real estate owned  $-   Appraised collateral values  Discount for time since appraisal   10%
               (10%)
           Selling costs   10%
               (10%)
Impaired loans with reserve   1,113,383   Discounted cash flows  Discount for evaluation   10%
               (10%)
           Selling costs   10%
               (10%)
Mortgage servicing rights   321,999   Discounted cash flows  Loan prepayment speeds   8.49% - 10.52% 
               (9.41%) 

 

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

 

 29 
   

 

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    - 

 

    December 31, 2019 
    

Carrying

Value

    

Fair

Value

    Level I    Level II    Level III 
                          
Financial assets:                         
Cash and cash equivalents  $21,880,788   $21,880,788   $21,880,788   $-   $- 
Certificates of deposit   2,465,000    2,576,000    -    2,576,000    - 
Investment securities:                         
Available for sale   9,849,599    9,849,599    -    9,849,599    - 
Held to maturity   3,879    3,932    -    3,932    - 
Loans, net   156,112,115    163,239,115    -    -    163,239,115 
Accrued interest receivable   673,026    673,026    -    673,026    - 
FHLB Stock   2,924,600    2,924,600    -    -    2,924,600 
                          
Financial liabilities:                         
Deposits   149,020,729    150,700,557    55,206,337    -    95,494,220 
FHLB advances   31,374,500    31,773,500    -    31,773,500    - 
Accrued interest payable   331,133    331,133    -    331,133    - 

 

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.

 

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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 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.

 

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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 11.

 

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) 
   on Securities 
   Three months ended March 31, 
   2020   2019 
    (unaudited) 
Accumulated other comprehensive income (loss), beginning of period  $(5,421)  $(74,623)
Other comprehensive income (loss) on securities before reclassification, net of tax   (44,309)   112,994 
Amounts reclassified from accumulated other comprehensive income (loss), net of tax   (28,098)   (4,575)
Net other comprehensive income (loss)   (72,407)   108,419 
Accumulated other comprehensive income (loss), end of period  $(77,828)  $33,796 

  

 32 
   

 

15. EARNINGS PER SHARE

 

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

 

     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 

 

 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 rate   1.87%

 

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.

 

 34 
   

 

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 

  

 35 
   

 

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

 

General

 

Management’s discussion and analysis of financial condition at March 31, 2020 and December 31, 2019 and results of operations for the three months ended March 31, 2020 and 2019 is intended to assist in understanding the consolidated financial condition and consolidated results of operations of 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.

 

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;

 

 36 
   

 

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;
     
  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.

 

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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 

 

 38 
   

 

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 the 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.

 

 39 
   

 

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

 

Critical Accounting Policies (Continued)

 

Income Taxes. The 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. The 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 the Company can be found in Note 12 to the Consolidated Financial Statements included in this Quarterly Report on Form 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 March 31, 2020, we believe the unrealized losses are primarily a result of increases in market interest rates from the time of purchase. In general, as market interest rates rise, the fair value of securities will decrease; as market interest 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.

 

 40 
   

 

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

 

Comparison of Financial Condition at March 31, 2020 and December 31, 2019

 

Total Assets. Total assets increased by $6.0 million, or 3.0%, from $202.6 million at December 31, 2019 to $208.6 million at March 31, 2020. The increase was primarily attributable to an increase in net loans of $2.7 million, an increase in cash and cash equivalents of $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 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 $149.0 million at December 31, 2019.

 

Cash and Cash Equivalents. Cash and cash equivalents increased by $2.6 million, or 12.0%, to $24.5 million at March 31, 2020 from $21.9 million at December 31, 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 primarily attributable to an increase in total deposits of $5.8 million.

 

Net Loans. Net loans increased $2.7 million, or 1.7%, to $158.8 million at March 31, 2020, from $156.1 million at December 31, 2019. This was caused primarily by increases in commercial mortgage loans and commercial and industrial loans of $2.5 million and $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 sale of $3.8 million in one-to-four mortgage loans, with servicing retained.

 

Available for Sale Securities. Securities available for sale decreased by $1.5 million or 14.8%, to $8.4 million at March 31, 2020, from $9.8 million at December 31, 2019. The decrease is primarily due to prepayments on mortgage-backed securities as well as a $500,000 municipal bond that was called and a $25,000 municipal bond that matured.

 

Deposits. Total deposits increased to $154.8 million at March 31, 2020 from $149.0 million at December 31, 2019. The increase of $5.8 million, or 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 time deposits of $2.8 million, or 3.0%. As part of our strategic plan, we are focused on growing core deposits and decreasing brokered time deposits.

 

Federal Home Loan Bank Advances. Federal Home Loan Bank advances remained unchanged at $31.4 million at both March 31, 2020 and December 31, 2019.

 

Stockholders’ Equity. Stockholders’ equity increased by $149,000, or 0.7%, to $21.0 million at March 31, 2020 from $20.9 million at December 31, 2019. The increase was primarily due to net income of $198,000 for the three-month period, offset by an increase in accumulated other comprehensive 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.

 

 41 
   

 

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

 

Comparison of Operating Results for the Three Months Ended March 31, 2020 and 2019

 

Net Income. Net income increased by $85,000, or 76.0% to $198,000 for the three months ended March 31, 2020, from $113,000 for the three months ended March 31, 2019. The increase was primarily due to an increase in net interest income after provision of $119,000, or 11.4%, from $1.0 million for the three months ended March 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 $78,000, a decreased in interest expense of $8,000, and a decrease in the provision for loan losses of $33,000. Additionally, noninterest income increased by $101,000 due to increases in gains on sales of loans and securities. These increases were offset by an increase in noninterest expense of $112,000, which was primarily due to an increase in salaries and employee benefits of $95,000.

 

Interest and Dividend Income. Interest and dividend income increased $78,000, or 3.9%, to $2.1 million for the three months ended March 31, 2020, from $2.0 million for the three months ended March 31, 2019. Interest income on loans increased $56,000, or 3.0%. This increase is attributable to an increase in the yield on net loans of 19 basis points from 4.65% for the three months ended March 31, 2019, to 4.84% for the three months ended 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 decreased $8,000, or 0.9%, to $918,000 for the three months ended March 31, 2020, compared to $926,000 for the three months ended March 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 $5,000, or 0.8%, to $715,000 for the three months ended March 31, 2020, compared to $709,000 for the three months ended March 31, 2019. The increase was primarily due to an increase in the average balance of interest-bearing deposits of $13.0 million, or 9.7%, from $134.0 million for the three months ended March 31, 2019, to $147.0 million for the three months ended March 31, 2020. The average cost of deposits decreased by 20 basis points from 2.15% for the three months ended March 30, 2019, to 1.95% for the three months ended March 31, 2020, primarily as a result of decreases in market interest rates.

 

Net Interest Income. Net interest income increased $86,000, or 7.9%, when comparing the two periods. This was due to an increase in interest income of $78,000 when comparing the two periods, while interest expense decreased by $8,000 when comparing the two periods. Average interest-earning assets for the three months ended March 31, 2019 was $181.1 million, and it increased $6.9 million to $188.0 million for the three months ended March 31, 2020, an increase of 3.8%. The interest expense was driven by the decrease in cost of interest-bearing liabilities of 21 basis points from 2.27% to 2.06%.

 

 42 
   

 

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

 

Comparison of Operating Results for the Three Months Ended March 31, 2020 and 2019 (Continued)

 

Provision for Loan Losses. The provision for loan losses decreased $33,000, or 72,5%, to $13,000 for the three months ended March 31, 2020, from $46,000 for the three months ended March 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 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 $101,000, or 72.9% to $241,000 for the three months ended March 31, 2020, from $139,000 for the three months ended March 31, 2019. The increase was primarily due to an 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 of $8,000, $6,000, and $3,000, respectively.

 

Non-Interest Expense. Non-interest expense increased $112,000, or 10.8%, to $1.2 million for the three months ended March 31, 2020, compared to $1.0 million for the three months ended March 31, 2019. Salaries and employee benefits increased $95,000, or 20.6%, to $558,000 for the three months ended March 31, 2020 from $463,000 for the three months ended March 31, 2019. The increase was due to the addition of staff and yearly pay raises. Professional fees increased by $10,000, from $133,000 for the three months ended March 31, 2019, to $143,000 for the three months ended March 31, 2020. Other noninterest expense increased by $25,000. Offsetting the increases were decreases in occupancy, federal deposit insurance, and contributions and donations of $10,000, $6,000, and $3,000, respectively.

 

Income Taxes. The Company recorded an income tax provision of $56,000 for the three months ended March 31, 2020, an increase of $23,000, or 68.6%, from the tax provision of $33,000 recorded for the three months ended March 31, 2019 as a result of an increase in pre-tax income for the three months ended March 31, 2020. The effective tax rate for the three months ended March 31, 2020 was 22.1% compared to 22.8% for the three months ended March 31, 2019.

 

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

 

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
     
  diversifying our loan portfolio by adding more commercial 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 well 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 series of 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.

 

 44 
   

 

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 March 31, 2020. All estimated changes presented in the table are within the policy limits approved by our board of directors.

 

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  $21,658   $(6,233)   (22.35)%   10.77%   (1.73)%
+300bp   23,849    (4,042)   (14.49)%   11.53%   (0.97)%
+200bp   25,896    (1,995)   (7.15)%   12.18%   (0.32)%
+100bp   27,431    (460)   (1.65)%   12.56%   0.07%
0   27,891    -    0.00%   12.50%   0.00%
-100bp   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 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 March 31, 2020, the Company had cash and cash equivalents of $24.5 million. As of March 31, 2020, SSB Bank had $31.4 million in outstanding borrowings from the Federal Home Loan Bank of Pittsburgh and had $93.3 million of total borrowing capacity.

 

At March 31, 2020, the Company had $22.6 million of loan commitments outstanding which includes $8.9 million of unused lines of credit, $3.4 million of unadvanced construction funds, $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.

 

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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 March 31, 2020 totaled $28.6 million. If these deposits do not remain with us, we may 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 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 March 31, 2020, SSB Bancorp, Inc. (on an unconsolidated basis) had liquid assets of $3.6 million.

 

Capital Resources. At March 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.

 

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 
Contractual Obligations  Total   Less Than One Year   One to Three Years   Three to Five Years   More Than Five Years 
           (In thousands)         
At March 31, 2020:                    
Long-term debt obligations  $31,375   $7,125   $8,000   $6,250   $10,000 
                          
At December 31, 2019:                         
Long-term debt obligations  $31,375   $7,125   $8,000   $6,250   $10,000 

 

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.

 

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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. 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 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 report, our disclosure controls and procedures were effective.

 

Changes in Internal Control Over Financial Reporting

 

There were no changes made in our internal control over financial reporting during the quarter ended March 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. 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 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. Risk Factors

 

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.

 

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Item 1A. Risk Factors (Continued)

 

Credit Risk – Our risks of timely loan repayment and the value 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 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.

 

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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. 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 March 31, 2020.

 

Item 3. Defaults Upon Senior Securities

 

None.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other Information

 

None.

 

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Item 6. Exhibits

 

Exhibit    
Number   Description
     
3.1   Articles of Incorporation of SSB Bancorp, Inc. (1)
     
3.2   Bylaws of SSB Bancorp, Inc. (2)
     
10.1   SSB 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 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

 

 

(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) 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: May 13, 2020 /s/ J. Daniel Moon, IV
  J. Daniel Moon, IV
  President and Chief Executive Officer

 

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

 

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