SSB BANCORP, INC. General
Management's discussion and analysis of financial condition atJune 30, 2020 andDecember 31, 2019 and results of operations for the three and six months endedJune 30, 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;
37
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.
38
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 Company 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
customers to the drive-through when possible, and allowing customers into the
branches on an appointment basis.
? We had moved all regular Board of Directors' Meetings from physical meetings
to virtual meetings during the "red" and "yellow" phases as determined by the
Directors' Meetings have returned to physical meetings.
? We had limited the number of employees in our locations during the "red" and
"yellow" phases. Those employees that could work from home were asked to do so
on a rotating basis to keep the number of employees in the office at one time
at or below ten. During the "green" phase, all employees are working from
their office locations or normal while practicing all of the guidelines of the
? We have provided payment deferrals or interest-only periods on all types of
loans to loan customers adversely affected by COVID-19. These modifications
were originally in force for 90 days and most have already expired. As of
original 90-day period, or have been granted an extension. These modifications
have not resulted in classification as Troubled Debt Restructurings, but they
are being tracked by management throughout and after the deferral and
interest-only phases. Additionally, management has determined to increase many
of the qualitative factors used in the calculation of the allowance for loan
losses. The table below details the volume and number of loans modified as
well as the expiration of their respective modifications as of August 12,
2020 .
Deferrals Interest-Only Total
Month of Expiration Loans Amount Loans Amount Loans Amount
August 2020 (1) 31 $ 3,317,138 1 $ 31,118 32 $ 3,348,256
September 2020 (1) 32 $ 6,419,098 - $ - 32 $ 6,419,098
Total 63 9,736,236 1 31,118 64 9,767,354
(1) Modifications may be extended on a month-by-month basis.
? We are participating in the Paycheck Protection Program (PPP) to assist local
businesses in keeping their employees on payroll. As of
have originated 340 PPP loans totaling $20.1 million .
39
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Coronavirus Update (Continued)
? The following table provides additional information with respect to the
Company's commercial and industrial and commercial mortgage loans by type at
June 30, 2020 : June 30, 2020 Type of Loan Number of Loans Balance (in thousands) Energy and construction 26 $ 8,377 Retail 23 4,159 Restaurants 20 3,551 Hospitality and tourism 14 3,316
Health and other professional services 31
3,175
Residential 1-4 family and mixed use real estate 313
35,296
Commercial real estate 46 10,552
Multi-Family 29 5,949
Commercial construction 10 2,985
Total 512 $ 77,360 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. 40
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Critical Accounting Policies (Continued)
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. 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. AtJune 30, 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. 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. 41
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$39.7 million , or 19.6%, from$202.6 million atDecember 31, 2019 to$242.3 million atJune 30, 2020 . The increase was primarily attributable to an increase in cash and cash equivalents of$27.1 million , an increase in net loans of$11.2 million , and an increase in certificates of deposit of$2.0 million . Offsetting the increases was a decrease in securities available for sale of$1.8 million , or 18.8%. Funding the growth in assets was an increase in total deposits of$21.5 million and an increase in Paycheck Protection Program Liquidity Facility (PPPLF) advances of$17.3 million . Cash and Cash Equivalents. Cash and cash equivalents increased by$27.1 million , or 123.9%, to$49.0 million atJune 30, 2020 from$21.9 million atDecember 31, 2019 . The increase in cash and cash equivalents was caused by a$29.4 million increase in interest-bearing deposits with other financial institutions, which was offset by a$2.3 million decrease in cash and due from banks. The increase was primarily attributable to an increase in total deposits of$21.5 million as well as an increase in PPPLF advances of$17.3 million . Net Loans. Net loans increased$11.2 million , or 7.2%, to$167.4 million atJune 30, 2020 , from$156.1 million atDecember 31, 2019 . This was caused primarily by increases in commercial and industrial loans of$19.7 million . The increase was primarily due to$19.3 million in Paycheck Protection Program loans that were funded during the six months endedJune 30, 2020 . These increases were offset by decreases in one-to-four family and commercial mortgages of$3.9 million and$4.1 million , respectively. The decrease in one-to-four family and commercial mortgage loans was due to payoffs and repayments outpacing originations as well as the sale of$5.7 million in commercial mortgage loans, with servicing retained. The sale was executed to lessen the concentration of commercial mortgage loans within the Company's loan portfolio. Available forSale Securities . Securities available for sale decreased by$1.8 million or 18.8%, to$8.0 million atJune 30, 2020 , from$9.8 million atDecember 31, 2019 . The decrease is primarily due to prepayments on mortgage-backed securities, the sale of$1,000,000 in corporate bonds, a$500,000 municipal bond that was called, and$75,000 in municipal bonds that matured. Offsetting these decreases was the purchase of$2.0 million in corporate and municipal bonds. Deposits. Total deposits increased to$170.5 million atJune 30, 2020 from$149.0 million atDecember 31, 2019 . The increase of$21.5 million , or 14.4%, was primarily due to an increase in interest-bearing demand deposits of$19.0 million , or 104.4%. The increase was primarily due to expansion of existing key relationships. Offsetting the increase was a decrease in time deposits of$5.0 million , or 5.4%. As part of our strategic plan, we are focused on growing core deposits and decreasing brokered time deposits.
Federal Home Loan Bank Advances.
Paycheck Protection Program Liquidity Facility Advances. PPPLF advances increased by$17.3 million to$17.3 million atJune 30, 2020 . The PPPLF advances are secured by PPP loans and was primarily utilized to directly fund the majority of the PPP loans originated during the period. The PPPLF advances have fixed interest rates and terms that match the term of the underlying secured PPP loans.
Stockholders' Equity. Stockholders' equity increased by$788,000 , or 3.8%, to$21.7 million atJune 30, 2020 from$20.9 million atDecember 31, 2019 . The increase was primarily due to net income of$603,000 for the six-month period, as well as an increase in accumulated other comprehensive income of$140,000 . The increase in accumulated other comprehensive income was due to the increases in the fair values of the securities available for sale. 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
Net Income. Net income increased by$300,000 , or 287.0% to$405,000 for the three months endedJune 30, 2020 , from$105,000 for the three months endedJune 30, 2019 . The increase was primarily due to an increase in noninterest income of$555,000 , or 289.8%, from$192,000 for the three months endedJune 30, 2019 , to$747,000 for the three months endedJune 30, 2020 . The increase in noninterest income was primarily due to an increase in gain on sale of loans of$589,000 , which was offset by a decrease in gain on sale of securities of$45,000 . The increase to noninterest income was offset by an increase in noninterest expense of$135,000 . Additionally, net interest income after provision increased$33,000 , or 3.1%. The increase was due to an increase of$148,000 in interest income, a decrease of$63,000 in interest expense, and an increase in provision for loan losses of$178,000 . Interest and Dividend Income. Interest and dividend income increased$148,000 , or 7.3%, to$2.2 million for the three months endedJune 30, 2020 , from$2.0 million for the three months endedJune 30, 2019 . Interest income on loans increased$188,000 , or 10.2%. This increase is attributable to an increase in the yield on net loans of 17 basis points from 4.71% for the three months endedJune 30, 2019 , to 4.88% for the three months endedJune 30, 2020 . Additionally, interest-income on certificates of deposit held with other financial institutions increased by$20,000 . Offsetting these increases were decreases in interest income from interest-bearing deposits with other financial institutions and investment securities of$40,000 and$20,000 , respectively. Interest Expense. Total interest expense decreased$63,000 , or 6.9%, to$850,000 for the three months endedJune 30, 2020 , compared to$913,000 for the three months endedJune 30, 2019 . The decrease was driven by a$68,000 decrease in interest expense on deposits. The decrease was primarily due to decreases in the average balances of money market accounts and time deposits of$9.5 million and$2.2 million , respectively. Offsetting these decreases was an increase in the average balance of interest-bearing demand accounts of$20.0 million . The yield on average deposits decreased by 43 basis points, from 2.07% for the three months endedJune 30, 2019 , to 1.64% for the three months endedJune 30, 2020 , as a result of decreases in market interest rates. Net Interest Income. Net interest income increased$211,000 , or 18.8%, when comparing the two periods. This was due to an increase in interest income of$148,000 when comparing the two periods, while interest expense decreased by$63,000 when comparing the two periods. Average interest-earning assets for the three months endedJune 30, 2019 was$185.1 million , and it increased$27.7 million to$212.9 million for the three months endedJune 30, 2020 , an increase of 15.0%. The interest expense was driven by the decrease in cost of interest-bearing deposits of 43 basis points from 2.07% to 1.64%, as a result of decreases in market interest rates. Provision for Loan Losses. The provision for loan losses increased$178,000 , or 355.6%, to$228,000 for the three months endedJune 30, 2020 , from$50,000 for the three months endedJune 30, 2019 . The increase in provision for loan losses was due to the loan payment deferrals due to the COVID-19 pandemic. 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$555,000 , or 289.9% to$747,000 for the three months endedJune 30, 2020 , from$192,000 for the three months endedJune 30, 2019 . The increase was primarily due to an increase in gain on sale of loans of$589,000 , from$72,000 for the three months endedJune 30, 2019 to$661,000 for the three months endedJune 30, 2020 . The increase in gain on sale of loans is due to a high volume of one-to-four mortgage refinances and purchases. This is primarily due to the low interest rate environment during the period. 43
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Comparison of Operating Results for the Three Months Ended
There were also increases in loan servicing fees and earnings on bank-owned life insurance of$7,000 and$6,000 , respectively. These increases were offset by a$45,000 decrease in gains on the sale of securities and a decrease in other noninterest income of$3,000 . Non-Interest Expense. Non-interest expense increased$135,000 , or 11.6%, to$1.3 million for the three months endedJune 30, 2020 , compared to$1.2 million for the three months endedJune 30, 2019 . Occupancy expenses increased$40,000 , from$99,000 for the three months endedJune 30, 2019 , to$139,000 for the three months endedJune 30, 2020 . There were also increases in professional fees and salaries and employee benefits of$29,000 and$27,000 , respectively. Offsetting the increases were decreases in federal deposit insurance, contributions and donations, and data processing expenses of$15,000 ,$7,000 , and$6,000 , respectively. Additionally, other noninterest expenses increased by$68,000 . Income Taxes. The Company recorded an income tax provision of$149,000 for the three months endedJune 30, 2020 , an increase of$153,000 , or 3,422.4%, from the tax benefit of$4,000 recorded for the three months ended June, 2019 as a result of an increase in pre-tax income for the three months endedJune 30, 2020 . The effective tax rate for the three months endedJune 30, 2020 was 26.9%.
Comparison of Operating Results for the Six Months Ended
Net Income. Net income increased by$386,000 , or 177.5% to$603,000 for the six months endedJune 30, 2020 , from$217,000 for the six months endedJune 30, 2019 . The increase was primarily due to an increase in noninterest income of$657,000 , or 198.5%, from$331,000 for the six months endedJune 30, 2019 , to$987,000 for the six months endedJune 30, 2020 . The increase in noninterest income was primarily due to an increase in gain on sale of loans of$644,000 , from$136,000 for the six months endedJune 30, 2019 , to$780,000 for the six months endedJune 30, 2020 . Additionally, net interest income after provision for loan losses increased by$152,000 , from$2.1 million for the six months endedJune 30, 2019 to$2.3 million for the six months endedJune 30, 2020 . These increases were offset by an increase in noninterest expense of$247,000 , which was primarily due to an increase in salaries and employee benefits of$122,000 . Interest and Dividend Income. Interest and dividend income increased$226,000 , or 5.6%, to$4.3 million for the six months endedJune 30, 2020 , from$4.1 million for the six months endedJune 30, 2019 . Interest income on loans increased$244,000 , or 6.7%. This increase is attributable to an increase in the yield on net loans of 16 basis points from 4.69% for the six months endedJune 30, 2019 , to 4.85% for the six months endedJune 30, 2020 . Interest income on certificates of deposit increased by$34,000 . Offsetting these increases were decreases in interest income from investment securities and interest-bearing deposits with other financial institutions of$38,000 and$15,000 , respectively. Interest Expense. Total interest expense decreased$71,000 , or 3.8%, to$1.8 million for the six months endedJune 30, 2020 , compared to$1.8 million for the six months endedJune 30, 2019 . The decrease was driven by a$63,000 decrease in interest expense on deposits. The decrease was primarily due to decreases in the average balances of certificates of deposit and savings accounts of$1.8 million and$90,000 , respectively. These decreases were offset by increases in average balances of interest-bearing demand accounts and money market accounts of$15.5 million and$2.8 million , respectively. The yield on average deposit accounts decreased by 31 basis points from 2.09% for the six months endedJune 30, 2019 , to 1.78% for the six months endedJune 30, 2020 , as a result of decreases in market interest rates. 44
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Comparison of Operating Results for the Six Months Ended
Net Interest Income. Net interest income increased$297,000 , or 13.4%, when comparing the two periods. This was due to an increase in interest income of$226,000 when comparing the two periods, while interest expense decreased by$71,000 when comparing the two periods. Average interest-earning assets for the six months endedJune 30, 2019 was$183.2 million , and it increased$24.3 million to$207.5 million for the six months endedJune 30, 2020 , an increase of 9.5%. The interest expense was driven by the decrease in cost of interest-bearing liabilities of 31 basis points from 2.09% to 1.78%, as a result of decrease in market interest rates. Provision for Loan Losses. The provision for loan losses increased$145,000 , or 151.6%, to$240,000 for the six months endedJune 30, 2020 , from$96,000 for the six months endedJune 30, 2019 . The increase in the provision for loan losses was due to the loan payment deferrals due to the COVID-19 pandemic. 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$657,000 , or 198.5% to$987,000 for the six months endedJune 30, 2020 , from$331,000 for the six months endedJune 30, 2019 . The increase was primarily due to an increase in gain on sale of loans of$644,000 , from$136,000 for the six months endedJune 30, 2019 to$780,000 for the six months endedJune 30, 2020 . The increase in gain on sale of loans is due to a high volume of one-to-four mortgage refinances and purchases. This is primarily due to the low interest rate environment during the period. There were also increases in loan servicing fees and earnings on bank-owned life insurance of$15,000 ,$12,000 , respectively. The increases were offset by a decrease in securities gains of$15,000 . Non-Interest Expense. Non-interest expense increased$247,000 , or 11.2%, to$2.5 million for the six months endedJune 30, 2020 , compared to$2.2 million for the six months endedJune 30, 2019 . Salaries and employee benefits increased$122,000 , or 11.5%, to$1.2 million for the six months endedJune 30, 2020 from$1.1 million for the six months endedJune 30, 2019 . The increase was due to the addition of staff and yearly pay raises. Professional fees increased by$39,000 , from$263,000 for the six months endedJune 30, 2019 , to$302,000 for the six months endedJune 30, 2020 . Occupancy expenses increased by$30,000 and other noninterest expense increased by$92,000 . Offsetting the increases were decreases in federal deposit insurance, contributions and donations, and date processing of$21,000 ,$9,000 , and$5,000 , respectively. Income Taxes. The Company recorded an income tax provision of$205,000 for the six months endedJune 30, 2020 , an increase of$176,000 , or 611.1%, from the tax provision of$29,000 recorded for the six months endedJune 30, 2019 as a result of an increase in pre-tax income for the six months endedJune 30, 2020 . The effective tax rate for the six months endedJune 30, 2020 was 25.4% compared to 11.7% for the six months endedJune 30, 2019 . 45
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 marketrates. 46
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 atJune 30, 2020 . All estimated changes presented in the table are within the policy limits approved by our board of directors. Basis Point ("bp") EVE as Percent of Economic Change in Estimated Increase (Decrease) in EVE Value of Assets Interest Rates (1) Estimated EVE Dollar Change Percent Change EVE Ratio (2) Change +400bp$ 17,222 $ (2,385 ) (12.16 )% 7.48 % (0.39 )% +300bp 18,207 (1,400 ) (7.14 )% 7.75 % (0.13 )% +200bp 19,030 (577 ) (2.94 )% 7.93 % 0.06 % +100bp 19,553 (54 ) (0.28 )% 7.99 % 0.12 % 0 19,607 - 0.00 % 7.87 % 0.00 % -100bp 19,901 294 1.50 % 7.85 % (0.03 )%
(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 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, 2020 , the Company had cash and cash equivalents of$49.0 million . As ofJune 30, 2020 ,SSB Bank had$31.4 million in outstanding borrowings from theFederal Home Loan Bank of Pittsburgh and had$85.6 million of total borrowing capacity. 47
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Liquidity and Capital Resources (Continued)
AtJune 30, 2020 , the Company had$28.2 million of loan commitments outstanding which includes$10.2 million of unused lines of credit,$5.1 million of unadvanced construction funds,$7.8 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 theFederal Home Loan Bank of Pittsburgh . Time deposits due within one year ofJune 30, 2020 totaled$32.9 million . If these deposits do not remain with us, we may 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, 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 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, 2020 ,SSB Bancorp, Inc. (on an unconsolidated basis) had liquid assets of$3.6 million . Capital Resources. AtJune 30, 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 Less Than One to Three Three to Five More Than
Obligations Total One Year Years Years Five Years
(In thousands)
At June 30, 2020 :
Long-term debt
obligations $ 48,682 $ 13,125 $ 19,307 $ 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 dofor on-balance sheet instruments. 48
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