SSB BANCORP, INC. General
Management's discussion and analysis of financial condition atJune 30, 2018 andDecember 31, 2017 and results of operations for the three and six months endedJune 30, 2018 and 2017 is intended to assist in understanding the financial condition and results of operations ofSSB Bank . The information contained in this section should be read in conjunction with the unaudited financial statements and the notes thereto appearing in Part I, Item 1, of this Quarterly Report on Form 10-Q/A. Financial information for the periods before the Company's Reorganization onJanuary 24, 2018 is that ofSSB 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: ? 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;
? 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;
? 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;
33
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
Cautionary Note Regarding Forward-Looking Statements (Continued)
? adverse changes in the 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.
34
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
Critical Accounting Policies
Critical accounting estimates are necessary in the application of certain accounting policies and procedures and are particularly susceptible to significant change. Critical accounting policies are defined as those involving significant judgments and assumptions by management that could have a material impact on the carrying value of certain assets or on income under different assumptions or conditions. Management believes the accounting policies discussed below to be the most critical accounting policies, which involve the most complex or subjective decisions or assessments. Allowance for Loan Losses. The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to income. Loan losses are charged against the allowance when management believes that specific loans, or portions of loans, are uncollectible. The allowance for loan losses is evaluated on a regular basis, and at least quarterly, by management. Management reviews the nature and volume of the loan portfolio, local and national conditions that may adversely affect the borrower's ability to repay, loss experience, the estimated value of any underlying collateral, and other relevant factors. The evaluation of the allowance for loan losses is characteristically subjective as estimates are required that are subject to continual change as more information becomes available. The allowance consists of general and specific reserve components. The specific reserves are related to loans that are considered impaired. Loans that are classified as impaired are measured in accordance with accounting guidance (ASC 310-10-35). The general reserve is allocated for non-impaired loans and includes evaluation of changes in the trend and volume of delinquency, our internal risk rating process and external conditions that may affect credit quality. A loan is considered impaired when, based on current information and events, it is probable that we will be unable to collect the scheduled principal and interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status and the financial condition of the borrower. Loans that experience payment shortfalls and insignificant payment delays are typically not considered impaired. Management looks at each loan individually and considers all the circumstances around the shortfall or delay including the borrower's prior payment history, borrower contact regarding the reason for the delay or shortfall and the amount of the shortfall. Collateral dependent loans are measured against the fair value of the collateral, while other loans are measured by the present value of expected future cash flows discounted at the loan's effective interest rate. All loans are measured individually. Loan segments are reviewed and evaluated for impairment based on the segment's characteristic loss history and local economic conditions and trends within the segment that may affect the repayment of the loans. From time to time, we may choose to restructure the contractual terms of certain loans either at the borrower or Bank'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. 35
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
Critical Accounting Policies (Continued)
Troubled debt restructured loans are considered to be impaired.
Income Taxes.SSB Bank accounts for income taxes in accordance with accounting guidance (ASC 740, Income Taxes). The income tax accounting guidance results in two components of income tax expense: current and deferred. Current income tax reflects taxes to be paid or refunded for the current period by applying the provisions of the enacted tax law to the taxable income or excess of deductions over revenues.U.S. GAAP requires that we use the Balance Sheet Method to determine the deferred income, which affects the differences between the book and tax bases of assets and liabilities, and any changes in tax rates and laws are recognized in the period in which they occur. Deferred taxes are based on a valuation model and the determination on a quarterly basis whether all or a portion of the deferred tax asset will be recognized. Fair Value Measurements. The fair value of a financial instrument is defined as the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale.SSB Bank 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 bySSB Bank can be found in Note 14 to the 2017 Financial Statements included in the Company's Annual Report on Form 10-K filed onApril 17, 2018 .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. AtJune 30, 2018 , 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. 36
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
Comparison of Financial Condition at
Total Assets. Total assets increased by$520,000 , or 0.3% from$171.9 million atDecember 31, 2017 to$172.4 million atJune 30, 2018 . The increase was due primarily to an increase in net loans of$9.8 million , or 7.0% to$150.3 million atJune 30, 2018 from$140.6 million atDecember 31, 2017 . There were also small increases to certificates of deposit, securities available for sale,Federal Home Loan Bank stock, premises and equipment, bank-owned life insurance, the deferred tax asset, and other assets. The increases were partially offset by a decrease in cash and cash equivalents of$9.2 million , or 55.8%, from$16.5 million atDecember 31, 2017 , to$7.3 million atJune 30, 2018 . Also, prepaid reorganization and stock issuance costs decreased from$838,000 atDecember 31, 2017 to zero dollars atJune 30, 2018 , as the stock issuance was completed
in 2018. Cash and Cash Equivalents. Cash and cash equivalents decreased by$9.2 million , or 55.8%, to$7.3 million atJune 30, 2018 from$16.5 million atDecember 31, 2017 . The decrease in cash was the result of using excess liquidity to fund
loan demand.
Net Loans. Net loans increased$9.8 million , or 7.0%, to$150.3 million atJune 30, 2018 , from$140.6 million atDecember 31, 2017 . This was driven by increases in commercial mortgage loans and commercial and industrial loans. Commercial mortgages increased$4.6 million , or 9.1%, from$50.1 million atDecember 31, 2017 to$54.7 million atJune 30, 2018 . Commercial and industrial loans increased$5.3 million , or 46.7%, from$11.5 million atDecember 31, 2017 to$16.8 million atJune 30, 2018 . Available forSale Securities . Securities available for sale increased by$368,000 , or 14.1%, to$3.0 million atJune 30, 2018 , from$2.6 million atDecember 31, 2017 . The increase was due to the purchase of a collateralized mortgage obligation of$542,000 . The increase was offset by the maturity of one municipal bond of$85,000 as well as$27,000 in gross unrealized losses during the period.
Deposits. Total deposits decreased to$124.9 million atJune 30, 2018 from$132.4 million atDecember 31, 2017 . The decrease of$7.5 million , or 5.7%, was mostly because of a decrease in interest-bearing demand accounts to$12.9 million atJune 30, 2018 from$23.2 million atDecember 31, 2017 . This decrease was due primarily toSSB Bancorp stock subscription funds having been deposited in a business checking account pending the completion of the Reorganization inJanuary 2018 . Money market accounts decreased by$891,000 to$13.7 million atJune 30, 2018 from$14.6 million atDecember 31, 2017 . Partially offsetting the decreases, savings accounts increased$1.8 million , or 14.5%, to$14.3 million atJune 30, 2018 from$12.5 million atDecember 31, 2017 . Also, time deposits increased by$1.8 million , or 2.2% to$83.5 million atJune 30, 2018 , from$81.7 million atDecember 31, 2017 . Federal Home Loan Bank Advances.Federal Home Loan Bank advances decreased by$250,000 , or 1.0% to$26.2 million atJune 30, 2018 , from$26.4 million atDecember 30, 2017 . OneFederal Home Loan Bank advance of$6.3 million matured during the period and was replaced with anotherFederal Home Loan Bank advance of$6.0 million . Stockholders' Equity. Stockholders' equity increased by$8.0 million , or 66.1%, to$20.1 million atJune 30, 2018 from$12.1 million atDecember 31, 2017 . The increase was due to$8.8 million of paid in capital from the net proceeds of the stock offering completed onJanuary 24, 2018 . Additionally, retained earnings increased by$104,000 or 0.9%, to$12.2 million atJune 30, 2018 , from$12.1 million atDecember 31, 2017 . The increase was partially offset by$859,000 in unearned compensation related to the Employee Stock Ownership Plan and an additional$23,000 in accumulated other comprehensive loss. 37
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
Comparison of Operating Results for the Three Months Ended
Net Income. Net income totaled$56,000 for the three months endedJune 30, 2018 , compared to net income of$210,000 for the three months endedJune 30, 2017 , a decrease of$154,000 or 73.0%. The decrease was driven by an increase in non-interest expense of$201,000 , or 25.1%, from$800,000 for the three months endedJune 30, 2017 , to$1.0 million for the three months endedJune 30, 2018 . The increases in noninterest expense were mainly in salary and benefits from increasing staff, occupancy expense from moving to a new headquarters, and professional fees in relation to the stock offering. Additionally, there was a decrease in net interest income of$56,000 , or 5.6%, to$938,000 for the three months endedJune 30, 2018 , from$994,000 for the three months endedJune 30, 2017 . Also, non-interest income decreased$63,000 from$197,000 for the three months endedJune 30, 2017 to$135,000 for the three months endedJune 30, 2018 . Offsetting these decreases to net income was a decrease in the provision for loan losses of$70,000 , or 73.7%. Also, for the three months endedJune 30, 2018 , there was a tax benefit of$9,000 , while for the three months endedJune 30, 2017 , there was a tax provision of$86,000 , a decrease in tax expense of$96,000 , or 110.8%. Interest and Dividend Income. Interest and dividend income increased$41,000 , or 2.7%, and remained at$1.6 million for the three months endedJune 30, 2018 . Interest income on loans increased$11,000 , or 0.7%. This increase is primarily attributable to an increase in the average balance of net loans of$14.1 million , or 10.6%. The average balances increased from$133.7 million to$147.8 million when comparing the three months endedJune 30, 2017 with the three months endedJune 30, 2018 . Additionally, interest from interest-bearing deposits with other financial institutions increased by$13,000 when comparing the three months endedJune 30, 2018 with the three months endedJune 30, 2017 , due to increases in both volume and yield of deposits. Lastly, interest income from investment securities increased by$18,000 when comparing the three months endedJune 30, 2018 with the three months endedJune 30, 2017 . Interest Expense. Total interest expense increased$97,000 , or 17.3%, to$660,000 for the three months endedJune 30, 2018 , compared to$563,000 for the three months endedJune 30, 2017 . Interest expense on deposit accounts increased$77,000 , or 18.1%, to$505,000 for the three months endedJune 30, 2018 , compared to$427,000 for the three months endedJune 30, 2017 . The increase was primarily due to an increase in the average balance of interest-bearing deposits of$8.7 million , or 7.6%, from$113.8 million for the three months endedJune 30, 2017 , to$122.5 million for the three months endedJune 30, 2018 . Among interest bearing deposits, the largest impact is from a$8.2 million , or 11.1%, increase in time deposits. Additionally, the cost of funds associated with interest-bearing deposits increased 14 basis points from 1.51% for the three months endedJune 30, 2017 , to 1.65% for the three months endedJune 30, 2018 , primarily due to a necessary rise in all deposit rates in order to remain competitive. Interest expense onFederal Home Loan Bank advances increased$20,000 or 14.9%, to$156,000 for the three months endedJune 30, 2018 , from$135,000 for the three months endedJune 30, 2017 . The increase was driven by the increase in the average balance of advances of$275,000 , or 1.1%, from$25.9 million for the three months endedJune 30, 2017 to$26.2 million for the three months endedJune 30, 2018 . The average cost of these borrowings increased 29 basis points from 2.09% for the three months endedJune 30, 2017 to 2.38% for the three months endedJune 30, 2018 . Net Interest Income. Net interest income decreased$56,000 , or 5.6%, when comparing the two periods. This was due to an increase in interest expense of$97,000 when comparing the two periods, while interest income increased by$41,000 over the two periods. Average interest-earning assets for the three months endedJune 30, 2017 was$143.9 million , and it increased$15.5 million to$159.4 million for the three months endedJune 30, 2018 , an increase of 10.8%. Average net interest earning assets increased$6.5 million , or 158.4%, to$10.6 million for the three months endedJune 30, 2018 , from$4.1 million for the three months endedJune 30, 2017 . Additionally, interest rate spread decreased 48 basis points from 2.72% to 2.24%, and net interest margin decreased 41 basis points from 2.77% to 2.36% when comparing the two periods. 38
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
Comparison of Operating Results for the Three Months Ended
Provision for Loan Losses. The provision for loan losses decreased$70,000 , or 73.7%, to$25,000 for three months endedJune 30, 2018 , from$95,000 for the three months endedJune 30, 2017 . During the three months endedJune 30, 2017 , the bank made an adjustment to the allowance for the loan losses due to a management change to FAS 5 factors. This resulted in a larger than typical provision of$95,000 which accounts for the significant decrease in the provision when comparing the two periods. The allowance for loan losses reflects the estimate we believe appropriate 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 decreased$63,000 , or 31.7% to$135,000 for the three months endedJune 30, 2018 , from$197,000 for the comparable three months endedJune 30, 2017 . The decrease was primarily due to a decrease in gains on sale of loans of$85,000 , or 54.7%, to$71,000 for the three months endedJune 30, 2018 , from$156,000 for the three months endedJune 30, 2017 . This is due to the decrease in one-to-four family mortgage refinances due to a rise in interest rates. Partially offsetting this decrease was a$14,000 increase in loan servicing fees, a$2,000 increase in earnings on bank-owned life insurance, and an$8,000 increase in other noninterest income when comparing the two periods. Non-Interest Expense. Non-interest expense increased$201,000 , or 25.1%, to$1.0 million for the three months endedJune 30, 2018 , compared to$800,000 for the three months endedJune 30, 2017 . Professional fees increased$51,000 to$163,000 for the three months endedJune 30, 2018 , from$112,000 for the comparable three months endedJune 30, 2017 . The increase is principally due to additional accounting and auditing expenses associated with our public company reporting requirements. Salaries and employee benefits increased$64,000 , or 16.5%, to$452,000 for the three months endedJune 30, 2018 from$388,000 for the three months endedJune 30, 2017 . The increase was associated with the addition of staff due to the opening of a new branch and increased staffing in lending, business development, and marketing. Additionally, due to the addition of a second branch occupancy expenses increased$37,000 , or 61.8%, to$96,000 for the three months endedJune 30, 2018 , from$59,000 for the three months endedJune 30, 2017 . Lastly, director fees increased by$18,000 to$38,000 from$20,000 when comparing the two periods.
Income Taxes. For the three months ended
Comparison of Operating Results for the Six Months Ended
Net Income. Net income totaled$104,000 for the six months endedJune 30, 2018 , compared to net income of$507,000 for the six months endedJune 30, 2017 , a decrease of$403,000 or 79.6%. The decrease was driven by an increase in noninterest expense of$622,000 , or 45.0%, to$2.0 million for the six months endedJune 30, 2018 , from$1.4 million for the six months endedJune 30, 2017 . There was also a decrease in noninterest income of$38,000 , or 14.3%, to$226,000 for the six months endedJune 30, 2018 , from$264,000 for the six months endedJune 30, 2017 . There was also a decrease in net interest income of$83,000 , or 4.1%, to$1.9 million for the six months endedJune 30, 2018 , from$2.0 million for the six months endedJune 30, 2017 . Also, the provision for income taxes decreased by$285,000 , or 99.7%, to$1,000 for the six months endedJune 30, 2018 , from$286,000 for the six months endedJune 30, 2017 . 39
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
Comparison of Operating Results for the Six Months Ended
Interest and Dividend Income. Interest and dividend income increased$103,000 , or 3.3%, to$3.2 million for the six months endedJune 30, 2018 , from$3.1 million for the six months endedJune 30, 2017 . Interest income on loans increased$58,000 , or 1.9%. This increase is primarily attributable to an increase in the average balance of net loans of$14.4 million , or 11.0%. The average balance of net loans increased from$130.7 million to$145.1 million when comparing the six months endedJune 30, 2017 with the six months endedJune 30, 2018 . Partially offsetting the increase in volume, the weighted average yield on net loans decreased 11 basis points from 4.65% for the six months endedJune 30, 2017 to 4.54% for the six months endedJune 30, 2018 , primarily due to a$93,000 interest recovery inJanuary 2017 . Interest Expense. Total interest expense increased$186,000 , or 17.0%, to$1.3 million for the six months endedJune 30, 2018 , compared to$1.1 million for the six months endedJune 30, 2017 . Interest expense on deposit accounts increased$136,000 , or 16.3%, to$974,000 for the six months endedJune 30, 2018 , compared to$837,000 for the six months endedJune 30, 2017 . The increase was primarily due to an increase in the average balance of interest-bearing deposits of$10.1 million , or 9.0%, from$112.1 million for the six months endedJune 30, 2017 , to$122.2 million for the six months endedJune 30, 2018 . Among interest bearing deposits, the largest impact is from a$9.3 million , or 12.7%, increase in time deposits. Additionally, the cost of funds associated with interest-bearing deposits increased 10 basis points from 1.51% for the six months endedJune 30, 2017 , to 1.61% for the six months endedJune 30, 2018 , due to a necessary rise in all deposit rates in order to stay competitive. Interest expense onFederal Home Loan Bank advances increased$50,000 or 19.0%, to$310,000 for the six months endedJune 30, 2018 , from$260,000 for the six months endedJune 30, 2017 . The increase was driven by the increase in the average balance of advances of$1.7 million , or 6.8%, from$24.6 million for the six months endedJune 30, 2017 to$26.3 million for the six months endedJune 30, 2018 . The average cost of these borrowings increased 24 basis points from 2.13% for the six months endedJune 30, 2017 to 2.37% for the six months endedJune 30, 2018 , primarily due to the replacement of a maturing lower-costFederal Home Loan Bank advance with a higher-cost advance. Net Interest Income. Net interest income decreased$83,000 , or 4.1%, when comparing the two periods. This was due to an increase in interest expense of$186,000 when comparing the two periods, while interest income increased by$103,000 over the two periods. Average interest-earning assets for the six months endedJune 30, 2017 was$141.4 million , and it increased$16.9 million to$158.3 million for the six months endedJune 30, 2018 , an increase of 11.9%. Net interest earning assets increased$5.1 million , or 108.5%, to$9.8 million for the six months endedJune 30, 2018 , from$4.7 million for the six months endedJune 30, 2017 . Additionally, interest rate spread decreased 22 basis points from 2.85% to 2.63%, and net interest margin decreased 16 basis points from 2.90% to 2.74% when comparing the two periods. Provision for Loan Losses. The provision for loan losses decreased$55,000 , or 45.8%, to$65,000 for six months endedJune 30, 2018 , from$120,000 for the six months endedJune 30, 2017 . During the six months endedJune 30, 2017 , the bank made some adjustments to the allowance for loan losses resulting in a larger than typical provision of$95,000 which accounts for the significant decrease in the provision when comparing the two periods. The allowance for loan losses reflects the estimate we believe appropriate 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. 40
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
Comparison of Operating Results for the Six Months Ended
Non-Interest Income. Non-interest income decreased$38,000 , or 14.3% to$226,000 for the six months endedJune 30, 2018 , from$264,000 for the comparable six months endedJune 30, 2017 . The decrease was primarily due to a decrease in gains on sale of loans of$95,000 , or 50.1%, to$95,000 for the six months endedJune 30, 2018 , from$190,000 for the six months endedJune 30, 2017 . Partially offsetting this decrease was a$30,000 increase in loan servicing fees, an$11,000 increase in earnings on bank-owned life insurance, and a$17,000 increase in other noninterest income when comparing the two periods. Non-Interest Expense. Non-interest expense increased$622,000 , or 45.0%, to$2.0 million for the six months endedJune 30, 2018 , compared to$1.4 million for the six months endedJune 30, 2017 . Professional fees increased$292,000 to$413,000 for the six months endedJune 30, 2018 , from$121,000 for the comparable six months endedJune 30, 2017 . The increase is principally due to additional accounting and auditing expenses associated with our public company reporting requirements. Salaries and employee benefits increased$117,000 , or 16.5%, to$828,000 for the six months endedJune 30, 2018 from$711,000 for the six months endedJune 30, 2017 . The increase was associated with the addition of staff due to the opening of a new branch and increased staffing in lending, business development, and marketing. Additionally, due to the addition of a second branch occupancy expenses increased$67,000 , or 55.2%, to$187,000 for the six months endedJune 30, 2018 , from$121,000 for the six months endedJune 30, 2017 . Lastly, director fees increased by$33,000 to$70,000 from$38,000 when comparing the two periods.
Income Taxes. The income tax provision decreased from
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
41
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
Management of Market Risk (Continued)
? diversifying our loan portfolio by adding more commercial-related 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 better 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, 2018 . All estimated changes
presented in the table are within the policy limits approved by our board of
directors.
EVE as Percent of Economic
Basis Point ("bp") Estimated Increase (Decrease) in EVE Value of Assets
Change in Interest Estimated Dollar Percent
Rates (1) EVE Change Change EVE Ratio (2) Change
+400bp $ 14,636 $ (5,929 ) (28.83 )% 9.56 % (2.38 )%
+300bp 15,804 (4,761 ) (23.15 )% 10.05 % (1.90 )%
+200bp 17,403 (3,162 ) (15.38 )% 10.73 % (1.21 )%
+100bp 19,120 (1,445 ) (7.03 )% 11.43 % (0.51 )%
0 20,565 - 0.00 % 11.94 % 0.00 %
-100bp 20,790 225 1.09 % 11.82 % (0.12 )%
(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. 42
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
Management of Market Risk (Continued)
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 theFederal 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. AtJune 30,2018 , the Company had cash and cash equivalents of$7.3 million . As ofJune 30, 2018 , the Bank had$26.2 million in outstanding borrowings from theFederal Home Loan Bank of Pittsburgh and had$56.7 million of available borrowing capacity. AtJune 30, 2018 , the Bank had$16.5 million of loan commitments outstanding which includes$8.5 million of unused lines of credit and$3.7 million of unadvanced construction funds. 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 theFederal Home Loan Bank of Pittsburgh . Time deposits due within one year ofJune 30, 2018 totaled$23.3 million . If these deposits do not remain with us, we will be required to seek other sources of funds, including other time deposits andFederal 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 atJune 30, 2018 . 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 fromSSB 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 fromSSB Bank .SSB Bank's ability to pay dividends toSSB Bancorp, Inc. is governed by applicable laws and regulations. AtJune 30, 2018 ,SSB Bancorp, Inc. (on an unconsolidated basis) had liquid assets of$3.6 million . Capital Resources. AtJune 30, 2018 ,SSB Bank exceeded all regulatory capital requirements and it was categorized as "well capitalized." We are not aware of any conditions or events since the most recent notification that would change our category. 43
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
Contractual Obligations and Off-Balance Sheet Arrangements
Contractual Obligations. In the ordinary course of our operations, we enter into
certain contractual obligations. The following tables present our contractual
obligations as of the dates indicated.
Payments Due by Period
Less Than One to Three to Five More Than
Contractual Obligations Total One Year Three Years Years Five Years
(Inthousands)
AtJune 30, 2018 : Long-term debt obligations$ 26,166 $ 3,042 $ 13,124 $ -$ 10,000 AtDecember 31, 2017 : Long-term debt obligations$ 26,416 $ 9,292 $ 7,124 $ -$ 10,000 Operating lease obligations 4 4 - - - Off-Balance Sheet Arrangements. We are a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of our customers. These financial instruments include commitments to extend credit and unused lines of credit, which involve elements of credit and interest rate risk in excess of the amount recognized in the balance sheets. Our exposure to credit loss is represented by the contractual amount of the instruments. We use the same credit policies in making commitments as we do for on-balance sheet instruments.
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