Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
General
Management’s
discussion and analysis of financial condition at June 30, 2019 and December 31, 2018 and results of operations for the three
and six months ended June 30, 2019 and 2018 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. Financial information
for the periods before the Reorganization on January 24, 2018 is that of SSB Bank only.
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:
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statements
of our goals, intentions and expectations;
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statements
regarding our business plans, prospects, growth and operating strategies;
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statements
regarding the quality of our loan and investment portfolios; and
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estimates
of our risks and future costs and benefits.
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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:
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general
economic conditions, either nationally or in our market areas, that are worse than expected;
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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;
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our
ability to access cost-effective funding;
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fluctuations
in real estate values and both residential and commercial real estate market conditions;
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demand
for loans and deposits in our market area;
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our
ability to continue to implement our business strategies;
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competition
among depository and other financial institutions;
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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;
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Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Cautionary
Note Regarding Forward-Looking Statements (Continued)
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adverse
changes in the credit and/or securities markets;
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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;
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our
ability to manage market risk, credit risk and operational risk in the current economic conditions;
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our
ability to enter new markets successfully and capitalize on growth opportunities;
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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;
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changes
in consumer spending, borrowing and savings habits;
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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;
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our
ability to retain key employees;
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our
compensation expense associated with equity allocated or awarded to our employees;
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changes
in the financial condition, results of operations or future prospects of issuers of securities that we own;
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political
instability;
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changes
in the quality or composition of our loan or investment portfolios;
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technological
changes that may be more difficult or expensive than expected;
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failures
or breaches of our IT security systems;
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the
inability of third-party providers to perform as expected; and
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our
ability to successfully introduce new products and services, enter new markets, and capitalize on growth opportunities.
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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.
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 SSB Bank’s request.
We review all scenarios to determine the best payment structure with the borrower to improve the likelihood of repayment. Management
reviews modified loans to determine if the loan should be classified as a trouble debt restructuring. A trouble debt restructuring
is when a creditor, for economic or legal reasons related to a debtor’s financial difficulties, grants a concession to the
borrower that it would not otherwise consider. Management considers the borrower’s ability to repay when a request to modify
existing loan terms is presented. A transfer of assets to repay the loan balance, a modification of loan terms or a combination
of these may occur. If an appropriate arrangement cannot be made, the loan is referred to legal counsel, at which time foreclosure
will begin. If a loan is accruing at the time of restructuring, we review the loan to determine if it should be placed on non-accrual.
It is our policy to keep a troubled debt restructured loan on non-accrual status for at least six months to ensure the borrower
can repay, at that time management may consider its return to accrual status. Troubled debt restructured loans are classified
as impaired loans.
Item
2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Critical
Accounting Policies (Continued)
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 16 to the 2018 Financial Statements included in the Company’s Annual Report on Form
10-K filed on March 29, 2019.
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 June 30, 2019, we believe the unrealized losses
are primarily a result of increases in market yields from the time of purchase. In general, as market yields rise, the fair value
of securities will decrease; as market yields fall, the fair value of securities will increase. Management generally views changes
in fair value caused by changes in interest rates as temporary; therefore, these securities have not been classified as other-than-temporarily
impaired. 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.
Item
2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Comparison
of Financial Condition at June 30, 2019 and December 31, 2018
Total
Assets
. Total assets increased by $7.1 million, or 3.8%, from $188.8 million at December 31, 2018 to $195.9 million at
June 30, 2019. The increase was due primarily to an increase in cash and cash equivalents of $8.9 million, or 99.0%, to $18.0
million at June 30, 2019 from $9.0 million at December 31, 2018. The increase was caused by the increase in total deposits of
$6.2 million.
Cash
and Cash Equivalents
. Cash and cash equivalents increased by $8.9 million, or 99.0%, to $18.0 million at June 30, 2019
from $9.0 million at December 31, 2018. The increase in cash was caused by an $8.2 million increase in interest-bearing
deposits with other financial institutions. This increase was caused by a $3.6 million sale of commercial mortgage loans and a
$3.6 million decrease in securities which included a $2.9 million sale of corporate bonds and a municipal bond.
Net
Loans
. Net loans decreased $254,000, or 0.2%, to $158.3 million at June 30, 2019, from $158.5 million at December 31,
2018. This was caused by decreases in one-to-four family and commercial mortgage loan of $3.1 million and $616,000, respectively.
The decrease in one-to-four mortgage loans was due to payoffs and repayments outpacing originations. The decrease in commercial
mortgage loans is the result of the $3.6 million sale. These decreases were offset by increases in commercial and industrial loans
and consumer loans of $2.2 million and $1.3 million, respectively.
Available
for Sale Securities
. Securities available for sale decreased by $3.6 million or 39.3%, to $5.5 million at June 30, 2019,
from $9.1 million at December 31, 2018. The decrease is primarily due the sale of $2.9 million in securities including $2.8 million
in corporate bonds and $143,000 in municipal bonds. Contributing to the decrease was the maturity of $200,000 in corporate bonds
and $192,000 in U.S. treasury securities.
Deposits
.
Total deposits increased to $142.3 million at June 30, 2019 from $136.1 million at December 31, 2018. The increase of $6.2 million,
or 4.5%, was primarily due to an increase in savings and money market deposits of $2.9 million, an increase in interest-bearing
demand deposits of $2.5 million, and an increase in noninterest-bearing demand deposits of $2.0 million. These increases were
offset by a decrease in time deposits of $1.2 million. As part of its strategic plan, SSB Bank is 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 June 30, 2019 and
December 31, 2018.
Stockholders’
Equity
. Stockholders’ equity increased by $369,000, or 1.8%, to $20.7 million at June 30, 2019 from $20.3
million at December 31, 2018. The increase was due to the Company’s net income of $217,000 over the 6 month period.
Contributing to the increase in stockholders’ equity was an increase in accumulated other comprehensive income of $128,000.
The increase in accumulated other comprehensive income was due to the increases of the fair values of the securities available
for sale.
Item
2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Comparison
of Operating Results for the Three Months Ended June 30, 2019 and 2018
Net
Income
. Net income increased by $33,000, or 46.2% to $105,000 for the three months ended June 30, 2019,
from $72,000 for the three months ended June 30, 2018. The increase was primarily due to an increase in net interest income after
provision of $160,000, or 17.5%, to $1.1 million for the three months ended June 30, 2019, from $913,000 for the three months
ended June 30, 2018. Noninterest income increased $57,000 to $192,000 for the three months ended June 30, 2019, from $135,000
for the three months ended June 30, 2018. Offsetting these increases in income was a $164,000 increase in noninterest expense
and a $20,000 increase in the income tax provision.
Interest
and Dividend Income
. Interest and dividend income increased $438,000, or 27.4%, to $2.0 million for the three months ended
June 30, 2019, from $1.6 million for the three months ended June 30, 2018. Interest income on loans increased $320,000, or 21.1%.
This increase is attributable to an increase in the average balance of net loans of $8.9 million, or 6.0%, from $147.8 million
in the three months ended June 30, 2018, to $156.8 million in the three months ended June 30, 2019. Further, the yield on net
loans increased 4 basis points from 4.62% for the three months ended June 30, 2018 to 4.66% for the three months ended June 30,
2019, primarily due to a rise in adjustable rate loan indexes and higher rates on new loans. Interest-income on interest bearing
deposits increased by $74,000 due to a rise both volume and rate in interest-bearing deposits with other financial institutions.
Also, interest from investment securities increased by $42,000 both due to a $3.8 million increase in average investments and
a 46-basis point increase in yield from investment securities.
Interest
Expense
. Total interest expense increased $253,000, or 38.3%, to $913,000 for the three months ended June 30, 2019, compared
to $660,000 for the three months ended June 30, 2018. Interest expense on deposit accounts increased $203,000, or 40.3%, to $708,000
for the three months ended June 30, 2019, compared to $505,000 for the three months ended June 30, 2018. The increase was primarily
due to an increase in the average balance of interest-bearing deposits of $18.3 million, or 15.4%, from $118.7 million for the
three months ended June 30, 2018, to $136.9 million for the three months ended June 30, 2019. The increase in deposits is primarily
due to a $10.7 million increase in certificates of deposit, followed by a $4.8 million increase in savings and money market deposits,
and a $2.7 million increase in interest-bearing demand deposits. The total average yield of deposits increased by 37 basis points
from 1.70% for the three months ended June 30, 2018, to 2.07% for three months ended June 30, 2019.
Interest
expense on Federal Home Loan Bank advances increased $50,000 or 31.8%, to $205,000 for the three months ended June 30, 2019, from
$156,000 for the three months ended June 30, 2018. The increase was primarily due to an increase in the average balance of advances
of $5.2 million, or 19.7%, from $26.2 million for the three months ended June 30, 2018 to $31.4 million for the three months ended
June 30, 2019. The average cost of these borrowings increased 23 basis points from 2.38% for the three months ended June 30, 2018
to 2.61% for the three months ended June 30, 2019. The increase in cost is due to higher interest rates on new borrowings and
borrowing that repriced within the two periods.
Net
Interest Income
. Net interest income increased $185,000, or 19.7%, when comparing the two periods. This was due to an
increase in interest income of $438,000 when comparing the two periods, while interest expense increased only by $253,000 when
comparing the two periods. Average interest-earning assets for the three months ended June 30, 2018 was $159.4 million, and it
increased $25.7 million to $185.1 million for the three months ended June 30, 2019, an increase of 16.1%. Net interest earning
assets increased $2.3 million, or 15.8%, to $16.8 million for the three months ended June 30, 2019, from $14.5 million for the
three months ended June 30, 2018. Offsetting this growth is a decrease in net interest margin of 43 basis points from 2.86% for
the three months ended June 30, 2018, to 2.43% for the three months ended June 30, 2019.
Item
2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Comparison
of Operating Results for the Three Months Ended June 30, 2019 and 2018 (Continued)
Provision
for Loan Losses
. The provision for loan losses increased $25,000, or 100.0%, to $50,000 for the three months ended June
30, 2019, from $25,000 for the three months ended June 30, 2018. The large increase in provision for loan losses can be attributed
to the increase in the size of the loan portfolio. Average net loans for the three months ended June 30, 2018 was $147.8 million
and it increased $8.9 million to $156.8 million for the three months ended June 30, 2019.
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 $57,000, or 42.2% to $192,000 for the three months ended June 30, 2019, from $135,000
for the comparable three months ended June 30, 2018. The increase was primarily due to an increase in securities gains from $0
for the three months ended June 30, 2018 to $45,000 for the three months ended June 30, 2019. There were small increases in gains
on sale of loans and loan servicing fees of $1,000 and $6,000, respectively.
Non-Interest
Expense.
Non-interest expense increased $164,000, or 16.4%, to $1.2 million for the three months ended June
30, 2019, compared to $1.0 million for the three months ended June 30, 2018. Salaries and employee benefits increased $146,000,
or 32.3%, to $598,000 for the three months ended June 30, 2019 from $452,000 for the three months ended June 30, 2018.
The increase was associated with a severance accrual as well as the addition of staff and yearly pay raises. Data processing
increased by $38,000 as SSB Bank has expanded capabilities with its core processor. There were also increases in occupancy, federal
deposit insurance, and contributions and donations of $3,000, $17,000, and $3,000, respectively. Offsetting the increases were
decreases in professional fees, director fees, and other noninterest expenses of $33,000, $6,000, and $3,000, respectively.
Income Taxes.
The Company
has recorded an income tax benefit of $4,000 for the three months ended June 30, 2019, a decrease $20,000, or 81.8%, of the tax
benefit of $25,000 recorded in the 3 months ended June 30, 2018.
Comparison
of Operating Results for the Six Months Ended June 30, 2019 and 2018
Net
Income
. Net income was $217,000 for the six months ended June 30, 2019, compared to net income of $119,000 for
the six months ended June 30, 2018, an increase of $98,000 or 82.9%. The increase was primarily due to an increase in net
interest income after provision of $236,000, or 12.5%, to $2.1 million for the six months ended June 30, 2019, from $1.9 million
for the six months ended June 30, 2018. Noninterest income increased $104,000 to $331,000 for the six months ended June 30, 2019,
from $226,000 for the six months ended June 30, 2018. Offsetting these increases in income was a $199,000 increase in noninterest
expense and a $43,000 increase in the income tax provision.
Item
2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Comparison
of Operating Results for the Six Months Ended June 30, 2019 and 2018 (Continued)
Interest
and Dividend Income
. Interest and dividend income increased $822,000, or 25.4%, to $4.1 million for the six months ended
June 30, 2019, from $3.2 million for the six months ended June 30, 2018. Interest income on loans increased $584,000, or 18.9%.
This increase is attributable to an increase in the average balance of net loans of $11.6 million, or 8.0%. The average balances
increased to $156.7 million from $145.1 million when comparing the six months ended June 30, 2019 with the six months ended June
30, 2018. The weighted average yield on net loans increased 12 basis points from 4.57% for the six months ended June 30, 2018
to 4.69% for the six months ended June 30, 2019, primarily due to a rise in adjustable rate loan indexes and higher rates on new
loans. Interest-income on interest bearing deposits increased by $127,000 due to an increase in average balance of interest-bearing
deposits of $7.6 million. Additionally, yield on interest-bearing deposits increased 123 basis points due to a general rise interest
rates. Also, interest from investment securities (not including Federal Home Loan Bank stock dividends) increased
by $77,000 both due to a $5.1 million increase in average investments and a 38-basis point increase in yield from investment securities.
Interest
Expense
. Total interest expense increased $555,000, or 43.3%, to $1.8 million for the six months ended June 30, 2019,
compared to $1.3 million for the six months ended June 30, 2018. Interest expense on deposit accounts increased $443,000, or 45.5%,
to $1.4 million for the six months ended June 30, 2019, compared to $974,000 for the six months ended June 30, 2018. The increase
was primarily due to an increase in the average balance of interest-bearing deposits of $13.3 million, or 10.9%, from $122.2 million
for the six months ended June 30, 2018, to $135.5 million for the six months ended June 30, 2019. Average balance of certificates
of deposit increased $11.4 million while cost increased by 43 basis points. The average balance of savings and money market deposits
increased by $5.1 million while cost increased by 64 basis points. Interest expense on interest-bearing demand deposits increased
by only $1,000, however the average balance had dropped by $3.2 million while cost increased by 18 basis points. The cost of all
deposits has risen due to competition for core deposits among competitors in the market.
Interest
expense on Federal Home Loan Bank advances increased $112,000 or 36.2%, to $422,000 for the six months ended June 30, 2019, from
$310,000 for the six months ended June 30, 2018. The increase was primarily due to an increase in the average balance of advances
of $5.1 million, or 19.2%, from $26.3 million for the six months ended June 30, 2018 to $31.4 million for the six months ended
June 30, 2019. The average cost of these borrowings increased 34 basis points from 2.35% for the six months ended June 30, 2018
to 2.69% for the six months ended June 30, 2019 primarily due to a rise in advance interest rates when comparing the two periods
and the repricing of advances since June 30, 2018.
Net
Interest Income
. Net interest income increased $267,000, or 13.7%, when comparing the two periods. This was due to an
increase in interest income of $822,000 when comparing the two periods, while interest expense increased by only $555,000 over
the two periods. Average interest-earning assets for the six months ended June 30, 2018 were $158.3 million, and it increased
$24.9 million to $183.2 million for the six months ended June 30, 2019, an increase of 15.7%. Net interest earning assets increased
$6.5 million, or 66.8%, to $16.3 million for the six months ended June 30, 2019, from $9.8 million for the six months ended June
30, 2018. Offsetting this growth is a decrease in net interest margin of 30 basis points from 2.72% for the six months ended June
30, 2018, to 2.42% for the six months ended June 30, 2019. The decrease in net interest margin is primarily due to the rises in
short-term interest rates causing the yield curve to flatten.
Provision
for Loan Losses
. The provision for loan losses increased $31,000, or 46.9%, to $96,000 for the six months ended June 30,
2019, from $65,000 for the six months ended June 30, 2018. The increase in provision for loan losses can be attributed to the
increase in the size of the total loan portfolio as well as the shift in loan mix when comparing the two periods. Most of the
loan growth is in commercial mortgage loans and commercial and industrial loans while the one-to-four mortgage portfolio has decreased
in size over the two periods. Average net loans for the six months ended June 30, 2018 was $145.1 million and it increased $11.6
million to $156.7 million for the six months ended June 30, 2019.
Item
2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Comparison
of Operating Results for the Six Months Ended June 30, 2019 and 2018 (Continued)
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 $104,000, or 46.1% to $331,000 for the six months ended June 30, 2019, from $226,000
for the six months ended June 30, 2018. The increase was primarily due to the gains on sales of securities of $51,000 for the
six months ended June 30, 2019. There were no securities sold in the six months ended June 30, 2018. Additionally, there was a
$42,000 increase in gains on sale of loans from $95,000 for the six months ended June 30, 2018 to $136,000 for the six months
ended June 30, 2019. There were increases in loan servicing fees and other non-interest income of $11,000 and $4,000, respectively.
Non-Interest
Expense
. Non-interest expense increased $199,000, or 9.9%, to $2.2 million for the six months ended June 30, 2019,
compared to $2.0 million for the six months ended June 30, 2018. Salaries and employee benefits increased $233,000, or 28.2%,
to $1.1 million for the six months ended June 30, 2019 from $828,000 for the six months ended June 30, 2018. The
increase was associated with a severance accrual as well as the addition of staff and yearly pay raises. Data processing increased
by $57,000 as SSB Bank has expanded capabilities with its core processor. There were also increases in occupancy, federal deposit
insurance, director fees, and other noninterest expense of $13,000, $21,000, $4,000, and $28,000, respectively. These increases
were offset by a decrease of $149,000 in professional fees, from $413,000 in the six months ended June 30, 2018 to $263,000 in
the six months ended June 30, 2019. The decrease in professional fees is primarily due to a change in auditing firms.
Income
Taxes
. The income tax provision increased by $43,000 to $39,000 for the six months ended June 30, 2019 from a $14,000
tax benefit for the six months ended June 30, 2018, an increase of $44,000. The difference is primarily due to an increase in
pre-tax income. The effective tax rate was 22.8% for the six months ended June 30, 2019.
Revision
of Prior Period Financial Statements
During
the 4th quarter of 2018, the Company identified and corrected an error related to its accounting treatment of accrued interest
on investor sold loans and loan participations affecting the 2nd quarter of 2018. Prior period accrued interest receivable accounts
were overstated at June 30, 2018 by $140,000. The Company was able to identify the sources of the issues and it resulted in the
Company correcting interest income and provision for income taxes for the 2nd quarter of 2018. On the corresponding balance sheet,
the Company’s accrued interest receivable and income taxes receivable were understated. The net effect was an overstatement
of total assets and total liabilities and stockholders’ equity at June 30, 2018.
Since
the errors happened in the 2nd quarter of 2018, the Company has revised its financial statements as of and for the six months
and three months ended June 30, 2018. As a result, the comparative data that is presented for the three and six months ended June
30, 2018, contains the revised information. The tables below show the originally reported and revised income and balance sheet
information.
Item
2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Revision
of Prior Financial Statements (Continued)
|
|
At or For the Three Months Ended June 30, 2018
|
|
|
|
As Initially Reported
|
|
|
As Revised
|
|
|
|
(In thousands)
|
|
Statement of income information:
|
|
|
|
|
|
|
Interest income from loans, including fees
|
|
$
|
1,719
|
|
|
$
|
1,519
|
|
Total interest income
|
|
$
|
1,799
|
|
|
$
|
1,598
|
|
Net interest income
|
|
$
|
1,138
|
|
|
$
|
938
|
|
Net interest income after provision for loan losses
|
|
$
|
1,113
|
|
|
$
|
913
|
|
Income before income taxes
|
|
$
|
248
|
|
|
$
|
47
|
|
Provision (benefit) for income taxes
|
|
$
|
34
|
|
|
$
|
(25
|
)
|
Net income
|
|
$
|
214
|
|
|
$
|
72
|
|
|
|
|
|
|
|
|
|
|
Balance sheet information:
|
|
|
|
|
|
|
|
|
Accrued interest receivable
|
|
$
|
612
|
|
|
$
|
472
|
|
Other assets
|
|
$
|
844
|
|
|
$
|
908
|
|
Total assets
|
|
$
|
172,583
|
|
|
$
|
172,511
|
|
Retained earnings
|
|
$
|
12,396
|
|
|
$
|
12,254
|
|
Total net worth
|
|
$
|
20,271
|
|
|
$
|
20,129
|
|
Total liabilities and stockholders’ equity
|
|
$
|
172,583
|
|
|
$
|
172,511
|
|
|
|
|
|
|
|
|
|
|
Book value per share (2,248,250 shares issued)
|
|
$
|
9.02
|
|
|
$
|
8.95
|
|
|
|
At or For the Six Months Ended June 30, 2018
|
|
|
|
As Initially Reported
|
|
|
As Revised
|
|
|
|
(In thousands)
|
|
Statement of income information:
|
|
|
|
|
|
|
Interest income from loans, including fees
|
|
$
|
3,288
|
|
|
$
|
3,088
|
|
Total interest income
|
|
$
|
3,434
|
|
|
$
|
3,233
|
|
Net interest income
|
|
$
|
2,150
|
|
|
$
|
1,950
|
|
Net interest income after provision for loan losses
|
|
$
|
2,085
|
|
|
$
|
1,885
|
|
Income before income taxes
|
|
$
|
305
|
|
|
$
|
104
|
|
Provision (benefit) for income taxes
|
|
$
|
44
|
|
|
$
|
(15
|
)
|
Net income
|
|
$
|
261
|
|
|
$
|
119
|
|
|
|
|
|
|
|
|
|
|
Balance sheet information:
|
|
|
|
|
|
|
|
|
Accrued interest receivable
|
|
$
|
612
|
|
|
$
|
472
|
|
Other assets
|
|
$
|
844
|
|
|
$
|
908
|
|
Total assets
|
|
$
|
172,583
|
|
|
$
|
172,511
|
|
Retained earnings
|
|
$
|
12,396
|
|
|
$
|
12,254
|
|
Total net worth
|
|
$
|
20,271
|
|
|
$
|
20,129
|
|
Total liabilities and stockholders’ equity
|
|
$
|
172,583
|
|
|
$
|
172,511
|
|
|
|
|
|
|
|
|
|
|
Book value per share (2,248,250 shares issued)
|
|
$
|
9.02
|
|
|
$
|
8.95
|
|
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.
Item
2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Management
of Market Risk (Continued)
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.
The
following table presents the estimated changes in our EVE that would result from changes in market interest rates at June 30,
2019. All estimated changes presented in the table are within the policy limits approved by our board of directors.
Basis
Point (“bp”)
Change in Interest
|
|
|
|
Estimated
Increase (Decrease) in EVE
|
|
|
EVE
as Percent of Economic
Value of Assets
|
|
Rates
(1)
|
|
Estimated EVE
|
|
Dollar Change
|
|
|
Percent Change
|
|
|
EVE Ratio (2)
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
+400bp
|
|
$
|
18,477
|
|
$
|
(7,311
|
)
|
|
|
(28.35
|
)%
|
|
|
10.15
|
%
|
|
|
(2.48
|
)%
|
+300bp
|
|
|
20,637
|
|
|
(5,151
|
)
|
|
|
(19.97
|
)%
|
|
|
11.01
|
%
|
|
|
(1.63
|
)%
|
+200bp
|
|
|
22,591
|
|
|
(3,197
|
)
|
|
|
(12.40
|
)%
|
|
|
11.70
|
%
|
|
|
(0.93
|
)%
|
+100bp
|
|
|
24,319
|
|
|
(1,469
|
)
|
|
|
(5.70
|
)%
|
|
|
12.25
|
%
|
|
|
(0.39
|
)%
|
0
|
|
|
25,788
|
|
|
-
|
|
|
|
0.00
|
%
|
|
|
12.63
|
%
|
|
|
0.00
|
%
|
-100bp
|
|
|
26,406
|
|
|
618
|
|
|
|
2.40
|
%
|
|
|
12.63
|
%
|
|
|
(0.00
|
)%
|
(1)
|
Assumes
instantaneous parallel changes in interest rates.
|
(2)
|
EVE
ratio represents the EVE divided by the economic value of assets.
|
Item
2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Management
of Market Risk (Continued)
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 June 30, 2019, the Company had cash and cash
equivalents of $18.0 million. As of June 30, 2019, SSB Bank had $31.4 million in outstanding borrowings from the Federal Home
Loan Bank of Pittsburgh and had $96.0 million of total borrowing capacity.
At
June 30, 2019, SSB Bank had $15.3 million of loan commitments outstanding which includes $7.5 million of unused lines of credit,
$4.0 million of unadvanced construction funds, $1.0 million of commitments to extend credit, and $2.9 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.
Time
deposits due within one year of June 30, 2019 totaled $31.0 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
June 30, 2019. 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 June
30, 2019, SSB Bancorp, Inc. (on an unconsolidated basis) had liquid assets of $3.5 million.
Capital
Resources.
At June 30, 2019, SSB Bank exceeded all regulatory capital requirements and it was categorized as “well
capitalized.” We are not aware of any conditions or events since the most recent notification that would change our category.
Item
2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Contractual
Obligations and Off-Balance Sheet Arrangements
Contractual
Obligations.
In the ordinary course of our operations, we enter into certain contractual obligations. The following tables
present our contractual obligations as of the dates indicated.
|
|
|
|
|
Payments Due by Period
|
|
Contractual Obligations
|
|
Total
|
|
|
Less Than One Year
|
|
|
One to Three Years
|
|
|
Three to Five Years
|
|
|
More Than Five Years
|
|
|
|
(In thousands)
|
|
At June 30, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt obligations
|
|
$
|
31,375
|
|
|
$
|
6,250
|
|
|
$
|
15,125
|
|
|
$
|
-
|
|
|
$
|
10,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt obligations
|
|
$
|
31,375
|
|
|
$
|
6,250
|
|
|
$
|
15,125
|
|
|
$
|
-
|
|
|
$
|
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.