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SSBP SSB Bancorp

Filed: 13 Nov 20, 3:44pm

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

[X]QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
  
 For the quarterly period ended September 30, 2020

 

OR

 

[  ]TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
  
 For the transition period from _______________ to _______________

 

Commission File No. 000-55898

 

SSB Bancorp, Inc.

(Exact Name of Registrant as Specified in Its Charter)

 

Maryland 82-2776224
(State or Other Jurisdiction of Incorporation or Organization) (I.R.S. Employer Identification No.)
   

8700 Perry Highway

Pittsburgh, Pennsylvania

 

 

15237

(Address of Principal Executive Offices) (Zip Code)

 

(412) 837-6955

(Registrant’s Telephone Number, Including Area Code)

 

N/A

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

 

Securities registered pursuant to Section 12(b) of the Act:

 

     
Title of Each Class Trading Symbol(s) Name of Each Exchange on Which Registered

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such requirements for the past 90 days.

YES [X] NO [  ]

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

YES [X] NO [  ]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

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

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

YES [  ] NO [X]

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [  ]

 

As of November 13, 2020, there were 2,279,191 outstanding shares of the registrant’s common stock, of which 1,236,538 shares are owned by SSB Bancorp, MHC.

 

 

 

 

 

 

SSB Bancorp, Inc.

Form 10-Q

 

Table of Contents

 

    Page
PART I. FINANCIAL INFORMATION
     
Item 1. Financial Statements (unaudited) 3
     
  Consolidated Balance Sheets as of September 30, 2020 and December 31, 2019 3
     
  Consolidated Statements of Net Income for the Three Months Ended September 30, 2020 and 2019, and the Nine Months Ended September 30, 2020 and 2019 4
     
  Consolidated Statements of Comprehensive Income for the Three Months Ended September 30, 2020 and 2019, and the Nine Months Ended September 30, 2020 and 2019 5
     
  Consolidated Statements of Changes in Stockholders’ Equity for the Nine Months Ended September 30, 2020 6
     
  

Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2020 and 2019

 

7

   
  Notes to Consolidated Financial Statements 8
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 37
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 50
     
Item 4. Controls and Procedures 50
     
PART II. OTHER INFORMATION
     
Item 1. Legal Proceedings 50
     
Item 1A. Risk Factors 50
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 52
     
Item 3. Defaults Upon Senior Securities 52
     
Item 4. Mine Safety Disclosures 52
     
Item 5. Other Information 52
     
Item 6. Exhibits 53
     
  SIGNATURES 54

 

2
 

 

Item 1. Financial Statements

 

SSB Bancorp, Inc.

CONSOLIDATED BALANCE SHEETS

 

  September 30,  December 31, 
  2020  2019 
  (unaudited)    
ASSETS        
Cash and due from banks $7,708,313  $10,610,445 
Interest-bearing deposits with other financial institutions  28,455,956   11,270,343 
Cash and cash equivalents  36,164,269   21,880,788 
         
Certificates of deposit  3,955,000   2,465,000 
Securities available for sale  7,475,676   9,849,599 
Securities held to maturity (fair value of $2,422, and $3,932, respectively)  2,374   3,879 
Loans  167,382,846   157,295,376 
Allowance for loan losses  (1,521,026)  (1,183,261)
Net loans  165,861,820   156,112,115 
Accrued interest receivable  1,132,240   673,026 
Federal Home Loan Bank stock, at cost  3,849,200   2,924,600 
Premises and equipment, net  4,210,761   4,234,676 
Bank-owned life insurance  3,317,083   3,249,430 
Deferred tax asset, net  251,407   296,955 
Other assets  1,134,609   941,669 
TOTAL ASSETS $227,354,439  $202,631,737 
         
LIABILITIES        
Deposits:        
Noninterest-bearing demand $12,459,130  $5,519,219 
Interest-bearing demand  30,744,537   18,218,407 
Money market  36,951,284   30,129,370 
Savings  1,911,716   1,314,513 
Time  80,731,928   93,839,220 
Total deposits  162,798,595   149,020,729 
         
Federal Home Loan Bank advances  24,250,000   31,374,500 
Paycheck Protection Program Liquidity Facility advances  17,292,786   - 
Advances by borrowers for taxes and insurance  206,674   712,189 
Accrued interest payable  288,725   331,133 
Other liabilities  317,305   309,988 
TOTAL LIABILITIES  205,154,085   181,748,539 
         
STOCKHOLDERS’ EQUITY        
Preferred Stock: $0.01 par value per share: 5,000,000 shares authorized and no shares issued or outstanding  -   - 
Common Stock: 20,000,000 shares authorized and 2,276,891 shares issued and outstanding at $0.01 par value  22,769   22,769 
Paid-in capital  8,740,925   8,707,184 
Retained earnings  14,030,864   12,951,846 
Unearned Employee Stock Ownership Plan (ESOP)  (760,131)  (793,180)
Accumulated other comprehensive income (loss)  165,927   (5,421)
TOTAL STOCKHOLDERS’ EQUITY  22,200,354   20,883,198 
         
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $227,354,439  $202,631,737 

 

See accompanying notes to the unaudited consolidated financial statements.

 

3
 

 

SSB Bancorp, Inc.

CONSOLIDATED STATEMENTS OF NET INCOME

 

  Three months ended September 30,  Nine months ended September 30, 
  2020  2019  2020  2019 
  (unaudited)  (unaudited) 
INTEREST INCOME                
Loans, including fees $1,955,900  $1,927,847  $5,871,635  $5,599,418 
Interest-bearing deposits with other financial institutions  41,465   64,691   187,839   225,805 
Certificates of deposit  25,260   18,795   70,681   29,993 
Investment securities:                
Taxable  84,363   88,971   249,355   284,799 
Exempt from federal income tax  3,389   6,880   12,165   22,389 
Total interest income  2,110,377   2,107,184   6,391,675   6,162,404 
                 
INTEREST EXPENSE                
Deposits  598,911   738,586   1,952,918   2,155,630 
Federal Home Loan Bank advances and other bank obligations  189,969   225,762   604,214   647,510 
Total interest expense  788,880   964,348   2,557,132   2,803,140 
                 
NET INTEREST INCOME  1,321,497   1,142,836   3,834,543   3,359,264 
Provision for loan losses  99,999   53,000   340,299   148,500 
                
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES  1,221,498   1,089,836   3,494,244   3,210,764 
                 
NONINTEREST INCOME                
Securities gains, net  -   -   35,567   50,593 
Gain on sale of loans  629,200   85,485   1,409,595   221,946 
Loan servicing fees  69,098   42,485   164,211   122,162 
Earnings on bank-owned life insurance  22,838   16,549   67,652   49,112 
Other  22,854   13,862   54,402   45,409 
Total noninterest income  743,990   158,381   1,731,427   489,222 
                 
NONINTEREST EXPENSE                
Salaries and employee benefits  676,328   518,544   1,858,570   1,579,202 
Occupancy  87,067   94,440   316,965   294,278 
Professional fees  151,694   167,427   453,826   430,712 
Federal deposit insurance  45,000   44,500   133,000   153,500 
Data processing  119,427   119,227   320,925   326,123 
Director fees  35,995   33,194   99,583   97,142 
Contributions and donations  14,775   16,750   42,075   53,469 
Other  189,434   133,963   547,115   399,295 
Total noninterest expense  1,319,720   1,128,045   3,772,059   3,333,721 
                 
Income before income taxes  645,768   120,172   1,453,612   366,265 
Provision for income taxes  169,716   30,619   374,594   59,429 
                 
NET INCOME $476,052  $89,553  $1,079,018  $306,836 
                 
EARNINGS PER COMMON SHARE                
Basic $0.22  $0.04  $0.50  $0.14 
Diluted $0.22  $0.04  $0.50  $0.14 
                 
AVERAGE COMMON SHARES OUTSTANDING                
Basic  2,176,919   2,167,659   2,174,400   2,166,221 
Diluted  2,176,919   2,167,659   2,174,400   2,166,442 
DIVIDENDS DECLARED PER COMMON SHARE $-  $-  $-  $- 
COMPREHENSIVE INCOME $507,261  $49,448  $1,250,366  $394,363 

 

See accompanying notes to the unaudited consolidated financial statements.

 

4
 

 

SSB Bancorp, Inc.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

  Three months ended September 30,  Nine months ended September 30, 
  2020  2019  2020  2019 
  (unaudited)  (unaudited) 
             
Net income $476,052  $89,553  $1,079,018  $306,836 
Other comprehensive income (loss):                
Net change in unrealized gain (loss) on available-for-sale securities  39,505   (50,766)  252,463   161,387 
Income tax effect  (8,296)  10,661   (53,017)  (33,891)
                 
Reclassification adjustment for net securities (gains) losses recognized in income  -   -   (35,567)  (50,593)
Income tax effect included in provision for income taxes  -   -   7,469   10,624 
                 
Other comprehensive income (loss), net of tax  31,209   (40,105)  171,348   87,527 
                 
Total comprehensive income $507,261  $49,448  $1,250,366  $394,363 

 

See accompanying notes to the unaudited consolidated financial statements.

 

5
 

 

SSB Bancorp, Inc.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(unaudited)

 

  Common Stock  Paid-in capital  Retained earnings  Unearned Employee Stock Ownership Plan  Accumulated other comprehensive (gain) loss  Total 
Balance as of January 1, 2019 $22,483  $8,692,971  $12,515,501  $                   (837,245) $                     (74,623) $20,319,087 
Net income  -   -   436,345   -   -   436,345 
Other comprehensive income  -   -   -   -   69,202   69,202 
Refund on offering expenses  -   1,005   -   -   -   1,005 
Stock compensation plan  286   20,875   -       -   21,161 
Amortization of ESOP  -   (7,667)  -   44,065   -   36,398 
                         
Balance as of January 1, 2020  22,769   8,707,184   12,951,846   (793,180)  (5,421)  20,883,198 
Net income  -   -   1,079,018   -   -   1,079,018 
Other comprehensive income  -   -   -   -   171,348   171,348 
Stock compensation plan  -   43,050   -   -   -   43,050 
Amortization of ESOP  -   (9,309)  -   33,049   -   23,740 
                         
Balance as of September 30, 2020 $22,769  $8,740,925  $14,030,864  $(760,131) $165,927  $22,200,354 

 

See accompanying notes to the unaudited consolidated financial statements.

 

6
 

 

SSB Bancorp, Inc.

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

  Nine months ended September 30, 
  2020  2019 
  (unaudited) 
OPERATING ACTIVITIES        
Net income $1,079,018  $306,836 
Adjustments to reconcile net income to net cash provided by operating activities:        
Provision for loan losses  340,299   148,500 
Depreciation  178,488   127,543 
Net amortization of investment securities  82,023   30,163 
Loss (gain) on sale of portfolio loans  (85,758)  12,178 
Origination of loans held for sale  (38,676,995)  (8,340,950)
Proceeds from sale of loans  40,086,590   8,575,074 
Gain on sale of loans  (1,409,595)  (234,124)
Gain on other real estate owned  -   (380)
Amortization (accretion) of net deferred loan origination costs  (27,171)  52,832 
Gain on sale of investments  (35,567)  (50,593)
Increase in accrued interest receivable  (459,214)  (36,602)
Increase (decrease) in accrued interest payable  (42,408)  31,055 
Stock compensation expense  43,050   9,662 
Amortization of ESOP  23,740   27,827 
Increase in bank owned life insurance  (67,653)  (49,112)
Other, net  (234,978)  255,282 
Net cash provided by operating activities  793,869   865,191 
         
INVESTING ACTIVITIES        
Purchase of certificates of deposit  (1,979,000)  (2,217,000)
Redemption of certificates of deposit  489,000   348,000 
Investment securities available for sale:        
Purchases  (2,596,548)  (3,582,107)
Proceeds from sales  1,044,000   2,943,675 
Proceeds from principal repayments, calls, and maturities  4,096,911   1,303,279 
Investment securities held to maturity:        
Proceeds from principal repayments, calls, and maturities  1,505   1,878 
Redemption of Federal Home Loan Bank stock  610,800   168,200 
Purchase of Federal Home Loan Bank stock  (1,535,400)  (362,500)
Purchases of loans  (8,903,507)  (2,388,950)
Decrease (increase) in loans receivable, net  (6,876,509)  (2,072,356)
Proceeds from sale of portfolio loans  5,802,941   3,569,527 
Proceeds from sale of other real estate owned  44,397   60,312 
Net cash (used in) investing activities  (9,951,025)  (2,293,807)
         
FINANCING ACTIVITIES        
Increase in deposits, net  13,777,866   11,920,071 
Decrease in advances by borrowers for taxes and insurance  (505,515)  (292,971)
Proceeds from PPPLF advances  17,307,882   - 
Repayment of PPPLF advances  (15,096)  - 
Refund on offering expenses  -   1,005 
Repayment of Federal Home Loan Bank advances  (7,124,500)  - 
Net cash provided by financing activities  23,440,637   11,628,105 
         
Increase in cash and cash equivalents  14,283,481   10,199,489 
         
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD  21,880,788   9,034,070 
         
CASH AND CASH EQUIVALENTS AT END OF PERIOD $36,164,269  $19,233,559 
         
SUPPLEMENTAL CASH FLOW DISCLOSURES        
Cash paid during the year for:        
Interest $2,514,724  $2,772,085 
Income taxes  256,000   - 
         
Noncash investing activities:        
Loans held for investment transferred to loans held for sale  5,717,183   3,581,705 

 

See accompanying notes to the unaudited consolidated financial statements.

 

7
 

 

SSB Bancorp, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

1.NATURE OF OPERATIONS AND BASIS OF PRESENTATION

 

SSB Bancorp, Inc.

 

SSB Bancorp, Inc. (the “Company”) was incorporated on August 17, 2017 to serve as the subsidiary stock holding company for SSB Bank upon the reorganization of SSB Bank into a mutual holding company structure (the “Reorganization”). The Reorganization was completed effective January 24, 2018, with SSB Bank becoming the wholly-owned subsidiary of SSB Bancorp, Inc., and SSB Bancorp, Inc. becoming the majority-owned subsidiary of SSB Bancorp, MHC. In connection with the Reorganization, the Company sold 1,011,712 shares of common stock at an offering price of $10 per share. The Company’s stock began being quoted for listing on the OTC Pink Market on January 25, 2018, under the symbol “SSBP”. Also, in connection with the Reorganization, SSB Bank established an employee stock ownership plan (the “ESOP”), which purchased 88,131 shares of the Company’s common stock at a price of $10 per share. In the Reorganization, the Company also issued 1,236,538 shares of its common stock to SSB Bancorp, MHC.

 

SSB Bank

 

SSB Bank (the “Bank”) provides a variety of financial services to individuals and corporate customers through its offices in Pittsburgh, Pennsylvania. The Bank’s primary deposit products are passbook savings accounts, money market accounts, and certificates of deposit. Its primary lending products are commercial mortgage loan and single-family residential loans. The Bank is subject to regulation and supervision by the Federal Deposit Insurance Corporation (FDIC) and the Pennsylvania Department of Banking and Securities.

 

The interim consolidated financial statements at September 30, 2020, and for the three and nine months ended September 30, 2020 and 2019, are unaudited and reflect all normal recurring adjustments that are, in the opinion of management, necessary for a fair presentation of the results for the interim periods presented. Such adjustments are the only adjustments reflected in the accompanying interim financial statements. The results of operations for the three and nine months ended September 30, 2020, are not necessarily indicative of the results to be achieved for the remainder of the year ending December 31, 2020, or any other period. The financial statements at December 31, 2019, are derived from the audited consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the Consolidated Balance Sheet and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

For further information, refer to the audited consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.

 

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

 

8
 

 

2.RECENT ACCOUNTING STANDARDS

 

On April 5, 2012, the Jumpstart Our Business Startups Act (the “JOBS Act”) was signed into law. The JOBS Act contains provisions that among other things, reduce certain reporting requirements for qualifying public companies and define an “emerging growth company.” As an emerging growth company, the Company may delay adoption of new or revised financial accounting standards until such date that the standards are required to be adopted by non-issuer companies. If such standards would not apply to non-issuer companies, no deferral would be applicable. We have elected to take advantage of the benefits of extended transition periods. Accordingly, our consolidated financial statements may not be comparable to those of public companies that adopt the new or revised financial accounting standards as of an earlier date. The effective dates of the following recent accounting standards reflect those that relate to non-issuer companies.

 

In January 2016, the FASB issued ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. This Update applies to all entities that hold financial assets or owe financial liabilities and is intended to provide more useful information on the recognition, measurement, presentation, and disclosure of financial instruments. Among other things, this Update (a) requires equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income; (b) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment; (c) eliminates the requirement to disclose the fair value of financial instruments measured at amortized cost for entities that are not public business entities; (d) eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; (e) requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; (f) requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements; and (g) clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. The amendments in this Update are effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. The Update has not had a significant impact on the Company’s consolidated financial statements.

 

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments, which changes the impairment model for most financial assets. This Update is intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. The underlying premise of the Update is that financial assets measured at amortized cost should be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis. The allowance for credit losses should reflect management’s current estimate of credit losses that are expected to occur over the remaining life of a financial asset. The income statement will be effected for the measurement of credit losses for newly recognized financial assets, as well as the expected increases or decreases of expected credit losses that have taken place during the period. ASU 2016-13 is effective for public business entities that meet the definition of a Securities and Exchange Commission (SEC) filer, for fiscal years beginning after December 31, 2019, including interim periods within those fiscal years. For public business entities that meet the definition of a “smaller reporting company” under the rules and regulations of the SEC, ASU 2016-13 is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. With certain exceptions, transition to the new requirements will be through a cumulative effect adjustment to opening retained earnings as of the beginning of the first reporting period in which the guidance is adopted. The Company expects to recognize a one-time cumulative effect adjustment to the allowance for loan losses as of the beginning of the first reporting period in which the new standard is effective, but cannot yet determine the magnitude of any such one-time adjustment or the overall impact of the new guidance on the financial statements, as any adjustment will be dependent on the composition of the loan portfolio at the time of adoption. The Company is currently in the early stages of implementing processes to comply with the requirements of the Update.

 

9
 

 

2.RECENT ACCOUNTING STANDARDS (Continued)

 

In March 2017, the FASB issued ASU 2017-08, Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20). The amendments in this Update shorten the amortization period for certain callable debt securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. The amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. An entity should apply the amendments in this Update on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. Additionally, in the period of adoption, an entity should provide disclosures about a change in accounting principle. The Update is not expected to have a significant impact on the Company’s consolidated financial statements.

 

On January 1, 2019, the Company adopted ASU 2014-09 Revenue from Contracts with Customers and all subsequent amendments to the ASU (collectively, “ASC 606”) which (i) creates a single framework for recognizing revenue from contract with customers that fall within its scope and (ii) revises when it is appropriate to recognize a gain (loss) from the transfer of nonfinancial assets, such as OREO. The majority of the Company’s revenues come from the interest income and other sources, including loans, leases, and securities, that are outside the scope of ASC 606. The Company’s services that fall within the scope of ASC 606 are presented within Non-Interest Income and are recognized as revenue as the Company satisfies its obligation to the customer. Services within the scope of ASC 606 include deposit service charges on deposits, interchange income, and the sale of OREO. Refer to Note 17 – Revenue Recognition for further discussion on the Company’s accounting policies for revenue sources within the scope of ASC 606.

 

On December 31, 2019, the Company adopted ASU No. 2016-02 “Leases (Topic 842)” and subsequent amendments thereto, which requires the Company to recognize most leases onto the balance sheet. The Company adopted the standard under a modified retrospective approach as of the date of adoption and elected to apply several of the available practical expedients, including:

 

 Carry over of historical lease determination and lease classification conclusions
 Carry over of historical initial direct cost balances for existing leases
 Accounting for lease and non-lease components in contracts in which the Company is a lessee as a single lease component

 

Adoption of the leasing standard resulted in the recognition of operating right-of-use assets of $4,957 and operating lease liabilities of $4,957 as of September 30, 2020. These amounts were determined based on the present value of remaining minimum lease payments, discounted using the Company’s incremental borrowing rate as of the date of adoption. There was no material impact to the timing of expense or income recognition in the Company’s Consolidated Income Statement. Prior periods were not restated and continue to be presented under legacy GAAP. Disclosures about the Company’s leasing activities are presented in Note 16 – Leases.

 

10
 

 

3.SECURITIES AVAILABLE FOR SALE

 

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

 

  September 30, 2020 (unaudited) 
     Gross  Gross    
  Amortized  Unrealized  Unrealized  Fair 
  Cost  Gains  Losses  Value 
Mortgage-backed securities in government-sponsored entities $2,231,569  $6,110  $(6,662) $2,231,017 
Obligations of state and political subdivisions  1,254,735   38,580   -   1,293,315 
Corporate bonds  3,779,740   171,604   -   3,951,344 
Total $7,266,044  $216,294  $(6,662) $7,475,676 

 

  December 31, 2019 
     Gross  Gross    
  Amortized  Unrealized  Unrealized  Fair 
  Cost  Gains  Losses  Value 
Mortgage-backed securities in government-sponsored entities $5,303,817  $19,894  $(42,383) $5,281,328 
Obligations of state and political subdivisions  1,363,535   2,174   (4)  1,365,705 
Corporate bonds  3,189,510   24,963   (11,907)  3,202,566 
Total $9,856,862  $47,031  $(54,294) $9,849,599 

 

The amortized cost and fair value of investment securities available for sale by contractual maturity are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Mortgage-backed securities provide for periodic payments of principal and interest and have contractual maturities ranging from less than 1 year to 30 years. Due to expected repayment terms being significantly less than the underlying mortgage pool contractual maturities, estimated lives of these securities could be significantly shorter.

 

  September 30, 2020 (unaudited) 
  Amortized  Fair 
  Cost  Value 
       
Due within one year or less $100,008   100,169 
Due after one year through five years  1,839,162   1,886,613 
Due after five years through ten years  3,125,461   3,287,985 
Due after ten years  2,201,413   2,200,909 
Total $7,266,044  $7,475,676 

 

11
 

 

3.SECURITIES AVAILABLE FOR SALE (Continued)

 

There were no sales of investment securities in the three months ended September 30, 2020, or in the three months ended September 30, 2019.

 

For the nine months ended September 30, 2020, there were 2 corporate bonds sold with a total amortized cost of $1,008,433 and an associated gain on sale of $35,567. The proceeds of the sale were $1,044,000. For the nine months ended September 30, 2019, there were 6 corporate bonds sold with a total amortized cost of $2,751,221 and an associated gain on sale of $49,454. The proceeds of the sale were $2,800,675. There was also 1 municipal bond sold with an amortized cost of $141,861 and an associated gain on sale of $1,139. The proceeds of the sale were $143,000.

 

4.SECURITIES HELD TO MATURITY

 

The amortized cost, gross unrealized gains and losses, and fair values of securities held to maturity are as follows:

 

  September 30, 2020 (unaudited) 
     Gross  Gross    
  Amortized  Unrealized  Unrealized  Fair 
  Cost  Gains  Losses  Value 
Mortgage-backed securities in government-sponsored entities $2,374  $48  $-  $2,422 
Total $2,374  $48  $-  $2,422 

 

  December 31, 2019 
     Gross  Gross    
  Amortized  Unrealized  Unrealized  Fair 
  Cost  Gains  Losses  Value 
Mortgage-backed securities in government-sponsored entities $3,879  $53  $-  $3,932 
Total $3,879  $53  $-  $3,932 

 

The amortized cost and fair value of mortgage-backed securities by contractual maturity are shown below. Mortgage-backed securities provide for periodic payments of principal and interest and have contractual maturities ranging up to 8 years. Due to expected repayment terms being less than the underlying mortgage pool contractual maturities, estimated lives of these securities could be significantly shorter.

 

  September 30, 2020 (unaudited) 
  Amortized  Fair 
  Cost  Value 
       
Due within one year or less $665  $665 
Due after one year through five years  640   648 
Due after five years through nine years  1,069   1,109 
         
Total $2,374  $2,422 

 

12
 

 

5.UNREALIZED LOSSES ON SECURITIES

 

The following tables show the Company’s gross unrealized losses and fair value, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position:

 

  September 30, 2020 (unaudited) 
  Less than Twelve Months  Twelve Months or Greater  Total    
     Gross     Gross     Gross 
  Fair  Unrealized  Fair  Unrealized  Fair  Unrealized 
  Value  Losses  Value  Losses  Value  Losses 
                   
Mortgage-backed securities in government-sponsored entities $    1,747,155  $              (6,662) $ -  $-  $1,747,155  $(6,662)
Obligations of state and political subdivisions  -   -   -   -   -   - 
Corporate bonds  -   -   -         -   -   - 
Total $1,747,155  $(6,662) $-  $-  $1,747,155  $(6,662)

 

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

 

Management reviews the Company’s investment positions monthly. There were 6 investments that were temporarily impaired as of September 30, 2020, with aggregate depreciation of 0.1 percent of the Company’s amortized cost basis. There were 11 investments that were temporarily impaired as of December 31, 2019, with aggregate depreciation of 0.6 percent of the Company’s amortized cost basis. Management has asserted that at September 30, 2020 and December 31, 2019, the declines disclosed in the above table represent temporary declines and the Company does not intend to sell and does not believe it will be required to sell these securities before recovery of their cost basis, which may be at maturity.

 

The Company has concluded that any impairment of its investment securities portfolio disclosed in the above table is not other-than-temporary and the declines are the result of interest rate changes, sector credit rating changes, or company-specific rating changes that are not expected to result in the non-collection of principal and interest during the period.

 

13
 

 

6.LOANS

 

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

 

  September 30,  December 31, 
  2020  2019 
  (unaudited)    
Mortgage loans:        
One-to-four family $67,431,099  $70,511,775 
Commercial  49,890,849   57,117,861 
   117,321,948   127,629,636 
         
Commercial and industrial  44,389,902   23,990,540 
Consumer  6,114,586   5,690,941 
   167,826,436   157,311,117 
         
Third-party loan acquisition and other net origination costs  (310,452)  147,441 
Discount on loans previously held for sale  (133,138)  (163,182)
Allowance for loan losses  (1,521,026)  (1,183,261)
         
Total $165,861,820  $156,112,115 

 

The Company’s primary business activity is with customers located in Pittsburgh and surrounding communities. The Company’s loan portfolio consists predominantly of one-to-four family mortgage and commercial mortgage loans. These loans are typically secured by first-lien positions on the respective real estate properties and are subject to the Company’s underwriting policies.

 

During the normal course of business, the Company may sell a portion of a loan as a participation loan in order to manage portfolio risk. In order to be eligible for sales treatment, all cash flows from the loan must be divided proportionately, the rights of each loan holder must have the same priority, the loan holders must have no recourse to the transferor other than standard representations and warranties, and no loan holder can have the right to pledge or exchange the entire loan. The Company sold $13.8 million and $9.9 million in participation loans as of September 30, 2020 and December 31, 2019, respectively, to other financial institutions. The increase was due to a $5.7 million loan pool that was participated during the nine months ended September 30, 2020. As of September 30, 2020, and December 31, 2019, all these loans were being serviced by the Company.

 

14
 

 

7.ALLOWANCE FOR LOAN LOSSES

 

The allowance for loan losses reflects management’s estimate of loan losses inherent in the loan portfolio at the balance sheet date. The following tables present, by portfolio segment, the changes in the allowance for loan losses and the recorded investment in loans for the three and nine months ended September 30, 2020 (unaudited) and 2019 (unaudited), respectively:

 

  Mortgage     Commercial  Consumer    
Three months ended One-to-Four  Mortgage  and  and    
September 30, 2020: Family  Commercial  Industrial  HELOC  Total 
Allowance for loan losses:               
Beginning balance $621,527  $442,659  $291,790  $67,585  $1,423,561 
Charge-offs  -   -   -   (2,534)  (2,534)
Recoveries  -   -   -   -   - 
Provision (credit)  83,118   10,310   (1,053)  7,624   99,999 
Ending balance $704,645  $452,969  $290,737  $72,675  $1,521,026 

 

Three months ended
September 30, 2019:
 
 
 
Mortgage
One-to-Four
Family
 
 
 
 
 
 
 
Mortgage
Commercial
 
 
 
 
 
 
Commercial
and
Industrial
 
 
 
 
 
 
Consumer
and
HELOC
 
 
 
 
 
 
 
 Total
 
 
 
Allowance for loan losses:               
Beginning balance $446,697  $386,720  $276,496  $47,196  $1,157,109 
Charge-offs  -   -   (50,652)  -   (50,652)
Recoveries  -   -   -   -   - 
Provision (credit)  (28,069)  106,147   (4,155)  (20,923)  53,000 
Ending balance $418,628  $492,867  $221,689  $26,273  $1,159,457 

 

Nine months ended
September 30, 2020:
 
 
 
Mortgage
One-to-Four
Family
 
 
 
 
 
 
 
Mortgage
Commercial
 
 
 
 
 
 
Commercial
and
Industrial
 
 
 
 
 
 
Consumer
and
HELOC
 
 
 
 
 
 
 
 
Total
 
 
 
Allowance for loan losses:               
Beginning balance $543,090  $443,897  $170,769  $25,505  $1,183,261 
Charge-offs  -   -   -   (2,534)  (2,534)
Recoveries  -   -   -   -   - 
Provision (credit)  161,555   9,072   119,968   49,704   340,299 
Ending balance $704,645  $452,969  $290,737  $72,675  $1,521,026 

 

Nine months ended
September 30, 2019:
 
 
 
Mortgage
One-to-Four
Family
 
 
 
 
 
 
 
Mortgage
Commercial
 
 
 
 
 
 
Commercial
and
Industrial
 
 
 
 
 
 
Consumer
and
HELOC
 
 
 
 
 
 
 
 
Total
 
 
 
Allowance for loan losses:               
Beginning balance $422,539  $393,900  $263,721  $44,765  $1,124,925 
Charge-offs  (28,268)  (22,932)  (50,652)  (13,189)  (115,041)
Recoveries  -   -   1,073   -   1,073 
Provision (credit)  24,357   121,899   7,547   (5,303)  148,500 
Ending balance $418,628  $492,867  $221,689  $26,273  $1,159,457 

 

15
 

 

7.ALLOWANCE FOR LOAN LOSSES (Continued)

 

The following tables summarize the loan portfolio and allowance for loan losses by the primary segments of the loan portfolio as of September 30, 2020 (unaudited), and December 31, 2019.

 

  Mortgage One-to-Four Family  Mortgage Commercial  Commercial and Industrial  Consumer and HELOC  Total 
September 30, 2020                    
Allowance for loan losses:                    
Loans deemed impaired $226,509  $40,029  $-  $8,607  $275,145 
                     
Loans not deemed impaired  478,136   412,940   290,737   64,068   1,245,881 
                     
Ending Balance $704,645  $452,969  $290,737  $72,675  $1,521,026 
                     
September 30, 2020                    
Loans:                    
Loans deemed impaired $3,666,672  $2,603,114  $1,618,200  $150,092  $8,038,078 
                     
Loans not deemed impaired  63,764,427   47,287,735   42,771,702   5,964,494   159,788,358 
                     
Ending Balance $67,431,099  $49,890,849  $44,389,902  $6,114,586  $167,826,436 

 

  Mortgage One-to-Four Family  Mortgage Commercial  Commercial and Industrial  Consumer and HELOC  Total 
December 31, 2019                    
Allowance for loan losses:                    
Loans deemed impaired $43,180  $-  $-  $-  $43,180 
                     
Loans not deemed impaired  499,910   443,897   170,769   25,505   1,140,081 
                     
Ending Balance $543,090  $443,897  $170,769  $25,505  $1,183,261 
                     
December 31, 2019                    
Loans:                    
Loans deemed impaired $3,912,297  $2,472,890  $1,398,286  $188,060  $7,971,533 
                     
Loans not deemed impaired  66,599,478   54,644,971   22,592,254   5,502,881   149,339,584 
                     
Ending Balance $70,511,775  $57,117,861  $23,990,540  $5,690,941  $157,311,117 

 

16
 

 

7.ALLOWANCE FOR LOAN LOSSES (Continued)

 

The following tables present impaired loans by class as of September 30, 2020, and December 31, 2019, segregated by those for which a specific allowance was required and those for which a specific allowance was not necessary.

 

 September 30, 2020 (unaudited)  December 31, 2019    
     Unpaid        Unpaid    
  Recorded  Principal  Related  Recorded  Principal  Related 
  Investment  Balance  Allowance  Investment  Balance  Allowance 
                   
With no allowance recorded:                        
Mortgage loans:                        
One-to-four family $2,153,472  $2,669,430  $-  $3,753,813  $3,785,265  $- 
Commercial  1,597,110   1,606,218   -   2,472,890   2,497,469   - 
Commercial and Industrial  1,618,200   1,635,286   -   1,398,286   1,465,938   - 
Consumer and HELOC  150,092   158,341   -   188,060   194,255   - 
                         
With an allowance recorded:                        
Mortgage loans:                        
One-to-four family  1,513,200   1,515,745   226,509   158,484   158,547   43,180 
Commercial  1,006,004   1,034,020   40,029   -   -   - 
Commercial and Industrial  -   -   -   -   -   - 
Consumer and HELOC  -   -   8,607   -   -   - 
                         
Total mortgage loans:                        
One-to-four family  3,666,672   4,185,175   226,509   3,912,297   3,943,812   43,180 
Commercial  2,603,114   2,640,238   40,029   2,472,890   2,497,469   - 
Commercial and Industrial  1,618,200   1,635,286   -   1,398,286   1,465,938   - 
Consumer and HELOC  150,092   158,341   8,607   188,060   194,255   - 
                         
Total $8,038,078  $8,619,040  $275,145  $7,971,533  $8,101,474  $43,180 

 

17
 

 

7.ALLOWANCE FOR LOAN LOSSES (Continued)

 

The following table presents the average recorded investment in impaired loans and related interest income recognized for the periods indicated.

 

  

Three Months Ended

September 30, 2020

  

Three Months Ended

September 30, 2019

 
 (unaudited)  

(unaudited)

 
  Average  Interest  Average  Interest 
  Recorded  Income  Recorded  Income 
  Investment  Recognized  Investment  Recognized 
             
With no allowance recorded:                
Mortgage loans:                
One-to-four family $2,169,928  $25,242  $3,592,680  $12,468 
Commercial  1,589,065   22,583   2,292,069   13,511 
Commercial and industrial  1,618,200   24,105   541,458   - 
Consumer and HELOC  151,268   1,209   6,195   - 
                 
With an allowance recorded:                
Mortgage loans:                
One-to-four family  1,514,346   16,457   161,372   766 
Commercial  985,620   7,500   -   - 
Commercial and industrial  -   -   -   - 
Consumer and HELOC  -   -   -   - 
                 
Total mortgage loans:                
One-to-four family  3,684,274   41,699   3,754,052   13,234 
Commercial  2,574,685   30,083   2,292,069   13,511 
Commercial and industrial  1,618,200   24,105   541,458   - 
Consumer and HELOC  151,268   1,209   6,195   - 
                 
Total $8,028,427  $97,096  $6,593,774  $26,745 

 

  

Nine Months Ended

September 30, 2020

  

Nine Months Ended

September 30, 2019

 
  (unaudited)  (unaudited) 
  Average  Interest  Average  Interest 
  Recorded  Income  Recorded  Income 
  Investment  Recognized  Investment  Recognized 
             
With no allowance recorded:                
Mortgage loans:                
One-to-four family $2,329,534  $43,041  $2,655,914  $42,401 
Commercial  1,553,074   59,962   2,044,432   37,417 
Commercial and industrial  1,618,257   88,600   284,259   - 
Consumer and HELOC  153,595   4,752   6,195   - 
                 
With an allowance recorded:                
Mortgage loans:                
One-to-four family  1,474,758   34,873   163,879   2,372 
Commercial  968,159   7,500   -   - 
Commercial and industrial  -   -   -   - 
Consumer and HELOC  16,146   -   -   - 
                 
Total mortgage loans:                
One-to-four family  3,804,292   77,914   2,819,793   44,773 
Commercial  2,521,233   67,462   2,044,432   37,417 
Commercial and industrial  1,618,257   88,600   284,259   - 
Consumer and HELOC  169,741   4,752   6,195   - 
                 
Total $8,113,523  $238,728  $5,154,679  $82,190 

 

18
 

 

7.ALLOWANCE FOR LOAN LOSSES (Continued)

 

Aging Analysis of Past-Due Loans by Class

 

Management further monitors the performance and credit quality of the loan portfolio by analyzing the age of the portfolio as determined by the length of time a recorded payment is past due. The following tables present the classes of the loan portfolio summarized by the aging categories at the dates indicated:

 

  September 30, 2020 (unaudited) 
  30-59 Days  60-89 Days Past  90 Days or Greater  Total Past     Total Loans  90 Days or Greater Past Due And 
  Past Due  Due  Past Due  Due  Current  Receivable  Still Accruing 
                     
Mortgage loans:                            
One-to-four family $296,689         -   1,136,268   1,432,957  $65,998,142  $67,431,099  $- 
Commercial  665,250   -   848,685   1,513,935   48,376,914   49,890,849   656,176 
Commercial and industrial  -   -   220,000   220,000   44,169,902   44,389,902   - 
Consumer and HELOC  87,015   -   -   87,015   6,027,571   6,114,586   - 
Total $1,048,954  $-  $2,204,953  $3,253,907  $164,572,529  $167,826,436  $656,176 

 

  December 31, 2019 
        90 Days           90 Days or 
  30-59 Days  60-89 Days  or Greater  Total Past     Total Loans  Greater Still 
  Past Due  Past Due  Past Due  Due  Current  Receivable  Accruing 
                      
Mortgage loans:                            
One-to-four family $338,997   856,490   1,799,005   2,994,492  $67,517,283  $70,511,775  $- 
Commercial  280,198   138,256   823,417   1,241,871   55,875,990   57,117,861   645,201 
Commercial and industrial  32,261   220,000   -   252,261   23,738,279   23,990,540   - 
Consumer and HELOC  4,512   -   38,864   43,376   5,647,565   5,690,941   - 
Total $655,968  $1,214,746  $2,661,286  $4,532,000  $152,779,117  $157,311,117  $645,201 

 

The decrease in total past due of $1.3 million from December 31, 2019 to September 30, 2020 was primarily due to addition of personnel specializing in collections. The volume of past-due loans has been trending downward since the hiring of the new personnel.

 

19
 

 

7.       ALLOWANCE FOR LOAN LOSSES (Continued)

 

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

 

  September 30,  December 31, 
  2020  2019 
  (unaudited)    
Mortgage loans:        
One-to-four family $1,743,765  $2,045,845 
Commercial  249,375   1,055,876 
Commercial and industrial  219,914   74,864 
Consumer and HELOC  896   38,864 
Total $2,213,950  $3,215,449 

 

Credit Quality Information

 

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes commercial loans individually by classifying the loans as to their credit risk. The Company uses a nine-grade internal loan rating system for commercial mortgage loans and commercial and industrial loans as follows:

 

 Loans rated 1, 2, 3, 4, and 5: Loans in these categories are considered “pass” rated loans with low to average risk.
 Loans rated 6: Loans in this category are considered “special mention.” These loans have a potential weakness that deserves management’s close attention. If left uncorrected, these weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.
 Loans rated 7: Loans in this category are considered “substandard.” These loans have a well-defined weakness based on objective evidence that jeopardize the liquidation of the debt. These loans are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.
 Loans rated 8: Loans in this category are considered “doubtful” and have all the weaknesses inherent in a loan rated 7. In addition, these weaknesses make collection or liquidation in full highly questionable and improbable, based on existing circumstances.
 Loans rated 9: Loans in this category are considered “loss” and are considered to be uncollectible or of such value that continuance as an asset is not warranted.

 

20
 

 

7.ALLOWANCE FOR LOAN LOSSES (Continued)

 

Credit Quality Information (Continued)

 

The risk category of loans by class is as follows at the dates indicated:

 

  September 30, 2020 (unaudited)  December 31, 2019 
  Mortgage  Commercial and  Mortgage  Commercial and 
  Commercial  Industrial  Commercial  Industrial 
             
Loans rated 1 - 5 $47,426,565  $42,704,132  $54,749,767  $23,848,823 
Loans rated 6  16,285   1,543,337   24,658   - 
Loans rated 7  2,447,999   142,433   2,343,436   141,717 
Ending balance $49,890,849  $44,389,902  $57,117,861 $23,990,540 

  

There were no loans classified as doubtful or loss at September 30, 2020, or December 31, 2019.

 

For one-to-four family mortgage loans and consumer and HELOC loans, the Company evaluates credit quality based on whether the loan is considered to be performing or nonperforming. Loans are generally considered to be nonperforming when they are placed on nonaccrual or become 90 days past due. The following table presents the balances of loans by class based on payment performance:

 

  September 30, 2020 (unaudited)  December 31, 2019 
  Mortgage  Consumer  Mortgage  Consumer 
  One-to-Four  and  One-to-Four  and 
  Family  HELOC  Family  HELOC 
             
Performing $65,687,334  $6,113,690  $68,465,930  $5,652,077 
Nonperforming  1,743,765   896   2,045,845   38,864 
Total $67,431,099  $6,114,586  $70,511,775  $5,690,941 

 

Troubled Debt Restructurings

 

There was one loan modified as a troubled debt restructuring during the nine months ended September 30, 2020. The loan was a one-to-four family mortgage loan with a balance of $323,140 at the date of the modification. The concession granted by the Company was an extension of the maturity date and a decrease in the interest rate. There were no loans modified as troubled debt restructurings during the nine months ended September 30, 2019.

 

As of September 30, 2020, and December 31, 2019, the Company allocated $204,202 and $43,180, respectively, within the allowance for loan losses related to all loans modified as troubled debt restructurings.

 

The Company had three loans modified as a troubled debt restructuring in the preceding 12 months that subsequently defaulted in the nine months ended September 30, 2020. The three defaulted troubled debt restructurings are commercial and industrial loans totaling $1,323,422. As of September 30, 2020, the three commercial and industrial loans were classified as “special mention,” which classification carries greater weight when calculating the allowance for loan losses. At September 30, 2020, management believes a full recovery of principal will be made on these loans.

 

The Company had no loans modified as troubled debt restructurings in the preceding 12 months that subsequently defaulted in the three months ended September 30, 2020.

 

21
 

 

8.EMPLOYEE STOCK OWNERSHIP PLAN

 

The Bank established a tax qualified Employee Stock Ownership Plan (“ESOP”) for the benefit of its employees in conjunction with the Reorganization effective on January 24, 2018. Eligible employees become 20% vested in their accounts after two years of service, 40% after three years of service, 60% after four years of service, 80% after five years of service, and 100% after six years of service, or earlier, upon death, disability or attainment of normal retirement age.

 

The ESOP purchased 88,131 shares of Company common stock, which was funded by a loan from the Company. Unreleased ESOP shares collateralize the loan payable, and the cost of the shares is recorded as a contra-equity account in the stockholders’ equity of the Company. Shares are to be released as debt payments are made by the ESOP to the loan. The ESOP’s sources of repayment of the loan can include dividends, if any, on the unallocated stock held by the ESOP and discretionary contributions from the Company to the ESOP and earnings thereon.

 

Compensation expense is equal to the fair value of the shares committed to be released and unallocated ESOP shares are excluded from outstanding shares for purposes of computing earnings per share. During the three and nine months ended September 30, 2020, the Company recognized $7,678 and $23,740, respectively, in compensation expense.

 

9.STOCK COMPENSATION PLAN

 

In May 2019, the Company’s board of directors adopted, and the Company’s shareholders approved, the SSB Bancorp, Inc. 2019 Equity Incentive Plan (the “Plan”) authorizing the grant of options or restricted stock covering 154,229 shares of common stock. The maximum number of shares of stock that may be delivered under the Plan pursuant to the exercise of stock options is 110,164 and the maximum number of shares of stock that may be issued as restricted stock awards, restricted stock units, and performances shares is 44,065. Under the Plan, options or restricted stock can be granted to directors, officers, and employees that provide services to the Company, as selected by the compensation committee of the Board. The option price at which a granted stock option may be exercised will not be less than 100% of the fair market value per share of common stock on the grant date. The maximum term of any option granted under the Plan cannot exceed 10 years.

 

On May 23, 2019, 11,015 shares of restricted stock and 27,540 stock options were awarded to directors under the Plan. The shares of restricted stock and stock options vest at a rate of 20% per year and the vesting commenced on May 23, 2020, and the related expense is being recognized straight-line over the 60-month period. Additionally, on November 20, 2019, 17,626 shares of restricted stock and 44,066 stock options were awarded to certain executives under the Plan. The shares of restricted stock and stock options vest at a rate of 20% per year commencing on November 20, 2020, and the related expense is being recognized straight-line over the 60-month period. At September 30, 2020, there were 15,424 shares of stock and 38,558 stock options available to be issued under the Plan.

 

22
 

 

9.STOCK COMPENSATION PLAN (Continued)

 

The following tables summarize transactions regarding the restricted stock under the Plan for the three and nine months ended September 30, 2020.

 

  Three months ended 
  September 30, 2020 
     Weighted average 
  Number of  grant date price 
  restricted shares  per share 
Non-vested shares at July 1, 2020  26,438  $7.85 
Granted      -   - 
Vested      -   - 
Forfeited      -   - 
Non-vested shares at September 30, 2020  26,438   7.85 

 

  Nine months ended 
  September 30, 2020 
     Weighted average 
  Number of  grant date price 
  restricted shares  per share 
Non-vested shares at January 1, 2020  28,641  $7.89 
Granted      -   - 
Vested      2,203   8.35 
Forfeited      -   - 
Non-vested shares at September 30, 2020  26,438   7.85 

 

23
 

 

9.STOCK COMPENSATION PLAN (Continued)

 

A summary of the status of the awarded stock options at September 30, 2020, and changes during the three and nine months ended September 30, 2020 is presented in the tables and narrative following:

 

  Three months ended 
  September 30, 2020 
  Shares   Weighted Average Exercise Price  Weighted Average Fair Value 
Outstanding at July 1, 2020  71,606  $7.89 $0.95 
Granted  -   -   - 
Exercised  -   -   - 
Forfeited  -   -   - 
Outstanding at September 30, 2020  71,606   7.89   0.95 
Exercisable at September 30, 2020  5,508   8.35   0.97 

Weighted average of options granted in

current year

  -  $N/A    N/A 

 

  Nine months ended 
  September 30, 2020 
  Shares   Weighted Average Exercise Price  Weighted Average Fair Value 
Outstanding at January 1, 2020  71,606  $7.89 $0.95 
Granted  -   -   - 
Exercised  -   -   - 
Forfeited  -   -   - 
Outstanding at September 30, 2020  71,606   7.89   0.95 
Exercisable at September 30, 2020  5,508   8.35   0.97 
Weighted average of options granted in current year  -  $N/A    N/A 

 

At September 30, 2020, 5,508 of the 71,606 options outstanding were exercisable. Of the 66,098 options that are not yet exercisable, 22,032 have an exercise price of $8.35, and 44,066 have an exercise price of $7.60. The weighted average remaining contractual life of the 71,606 options is 9.0 years. The fair value of each option grant is estimated on the date of grant using the Binomial or Black-Scholes option pricing model. There were no shares granted during the three months or nine months ended September 30, 2020.

 

The Company uses the modified prospective method for accounting for stock-based compensation. The Company recognized $11,000 and $34,000 of pretax compensation expense related to restricted stock awards in the three and nine months ended September 30, 2020, respectively. The Company recognized $3,000 and $9,000 of pretax compensation expense related to stock option awards in the three and nine months ended September 30, 2020, respectively. As of September 30, 2020, there was $176,000 of unrecognized compensation expense related to restricted stock awards, and $48,000 of unrecognized compensation expense related to stock option awards, that will be recognized over the remaining vesting periods.

 

No stock options had been exercised as of September 30, 2020.

 

24
 

 

10.REGULATORY CAPITAL REQUIREMENTS

 

The Bank is subject to various regulatory capital requirements administered by federal and state banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company must meet specific capital guidelines that involve quantitative measure of the Bank’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. The net unrealized gain or loss on available for sale securities is not included in computing regulatory capital.

 

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

 

As of September 30, 2020, the most recent notification from the Federal Deposit Insurance Corporation categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum capital ratios as set forth in the following table. There are no conditions or events since the notification that management believes have changed the Bank’s category. Management believes that the Bank meets all capital adequacy requirements to which it is subject. Although the Company is not subject to regulatory capital requirements because its total consolidated assets are less than $3.0 billion, the Company’s actual capital amounts and ratios are presented in the table below.

 

  September 30,  December 31, 
  2020  2019 
  Amount  Ratio  Amount  Ratio 
  (unaudited)       
Common Equity Tier 1 capital                
(to risk-weighted assets)                
Actual $22,034,427   14.47% $20,888,619   14.00%
For capital adequacy purposes  6,850,305   4.50%  6,714,585   4.50%
To be well capitalized  9,894,885   6.50%  9,698,845   6.50%
                 
Tier 1 capital                
(to risk-weighted assets)                
Actual $22,034,427   14.47% $20,888,619   14.00%
For capital adequacy purposes  9,133,740   6.00%  8,952,780   6.00%
To be well capitalized  12,178,320   8.00%  11,937,040   8.00%
                 
Total capital                
(to risk-weighted assets)                
Actual $23,555,453   15.47% $22,071,880   14.79%
For capital adequacy purposes  12,178,320   8.00%  11,937,040   8.00%
To be well capitalized  15,222,900   10.00%  14,921,300   10.00%
                 
Tier 1 capital                
(to average assets)                
Actual $22,034,427   9.85% $20,888,619   10.66%
For capital adequacy purposes  8,950,287   4.00%  7,834,802   4.00%
To be well capitalized  11,187,859   5.00%  9,793,503   5.00%

 

25
 

 

10.REGULATORY CAPITAL REQUIREMENTS (Continued)

 

The Bank’s actual capital amounts and ratios are presented in the table below.

 

  September 30,  December 31, 
  2020  2019 
  Amount  Ratio  Amount  Ratio 
  (unaudited)       
Common Equity Tier 1 capital                
(to risk-weighted assets)                
Actual $18,384,574   12.08% $17,287,045   11.59%
For capital adequacy purposes  6,850,305   4.50%  6,714,585   4.50%
To be well capitalized  9,894,885   6.50%  9,698,845   6.50%
                 
Tier 1 capital                
(to risk-weighted assets)                
Actual $18,384,574   12.08% $17,287,045   11.59%
For capital adequacy purposes  9,133,740   6.00%  8,952,780   6.00%
To be well capitalized  12,178,320   8.00%  11,937,040   8.00%
                 
Total capital                
(to risk-weighted assets)                
Actual $19,905,600   13.08% $18,470,306   12.38%
For capital adequacy purposes  12,178,320   8.00%  11,937,040   8.00%
To be well capitalized  15,222,900   10.00%  14,921,300   10.00%
                 
Tier 1 capital                
(to average assets)                
Actual $18,384,574   8.22% $17,287,045   8.83%
For capital adequacy purposes  8,950,109   4.00%  7,834,797   4.00%
To be well capitalized  11,187,637   5.00%  9,793,496   5.00%

 

26
 

 

11.COMMITMENTS

 

In the normal course of business, the Company makes various commitments that are not reflected in the Company’s consolidated financial statements. The Company offers such products to enable its customers to meet their financing objectives. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized on the balance sheets. The Company’s exposure to credit loss in the event of nonperformance by the other parties to the financial instruments is represented by the contractual amounts as disclosed. The Company minimizes its exposure to credit loss under these commitments by subjecting them to credit approval and review procedures and collateral requirements as deemed necessary.

 

Off-balance sheet commitments consist of the following:

 

  September 30, 
  2020 
  (unaudited) 
    
Commitments to extend credit $9,065,490 
Construction unadvanced funds  5,167,309 
Unused lines of credit  10,266,618 
Letters of credit  4,776,766 
     
  $29,276,183 

 

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the agreement. These commitments consisted primarily of mortgage loan commitments. The Company uses the same credit policies in making loan commitments and conditional obligations as it does for on-balance sheet instruments. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, as deemed necessary, is based upon management’s credit evaluation in compliance with the Company’s lending policy guidelines.

 

The Company and certain executives are parties to employment agreements that provide for a base salary and certain other benefits. The initial terms of the agreements are for three years with annual renewals thereafter. In the event of the executive’s termination without cause, as defined, the executive will receive a lump-sum cash payment equal to the amount remaining under the contract. Additional benefits are payable upon a change in control, as defined.

 

27
 

 

12.FAIR VALUE MEASUREMENTS

 

The following disclosures show the hierarchal disclosure framework associated with the level of pricing observations utilized in measuring assets and liabilities at fair value. The three broad pricing levels are as follows:

 

 Level I:Quoted prices are available in active markets for identical assets or liabilities as of the reported date.
   
 Level II:Pricing inputs are other than the quoted prices in active markets, which are either directly or indirectly observable as of the reported date. The nature of these assets and liabilities includes items for which quoted prices are available but traded less frequently and items that are fair-valued using other financial instruments, the parameters of which can be directly observed.
   
 Level III:Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.

 

This hierarchy requires the use of observable market data, when available.

 

Fair values for securities are determined by obtaining quoted prices on nationally recognized securities exchanges or matrix pricing, which is a mathematical technique that is widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark-quoted securities. Fair values of securities determined by quoted prices in active markets, when available, are classified as Level I. At September 30, 2020 and December 31, 2019, fair value measurements were obtained from a third-party pricing service and were not adjusted by management. Transfers are recognized at the end of the reporting period, as applicable.

 

28
 

 

12.FAIR VALUE MEASUREMENTS (Continued)

 

The following tables present the assets reported on the balance sheets at their fair value by level within the fair value hierarchy. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

  

  September 30, 2020 (unaudited) 
  Level I  Level II  Level III  Total 
             
Fair value measurements on a recurring basis:                
Mortgage-backed securities in government-sponsored entities $-  $2,231,017  $-  $2,231,017 
Obligations of state and political subdivisions  -   1,293,315   -   1,293,315 
Corporate bonds  -   3,951,344   -   3,951,344 
Mortgage servicing rights  -   -   610,399   610,399 
Impaired loans with reserve  -   -   2,244,058   2,244,058 

 

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

 

  September 30, 2020 (unaudited) 
  Level I  Level II  Level III  Total 
        
Fair value measurements on a nonrecurring basis:            
Other real estate owned $-  $-  $-  $- 

 

  December 31, 2019       
  Level I  Level II  Level III  Total 
        
Fair value measurements on a nonrecurring basis:            
Other real estate owned $-  $-  $45,000  $45,000 

 

29
 

 

12.FAIR VALUE MEASUREMENTS (Continued)

 

Other Real Estate Owned

 

Other real estate owned is measured at fair value, less estimated cost to sell, at the date of foreclosure, which establishes a new cost basis. Subsequent to foreclosure, valuations are periodically performed by management. The assets are carried at fair value, less estimated cost to sell. Income and expense from operations and changes in valuation allowance are included in other noninterest expense.

 

Level III Inputs

 

The following table provides the significant unobservable inputs used in the fair value measurement process for items valued using Level III techniques:

 

  Fair Value at    Valuation Range 
  September 30,  Valuation Unobservable (Weighted 
  2020  Techniques Inputs Average) 
   (unaudited)         
Other real estate owned $-  Appraised collateral values Discount for time since appraisal  10%
           (10)%
        Selling costs  10%
           (10)%
Impaired loans with reserve  2,244,058  Discounted cash flows Discount for evaluation  10%
           (10)%
        Selling costs  10%
           (10)%
Mortgage servicing rights  610,399  Discounted cash flows Loan prepayment speeds  8.49% - 10.63%
           (10.02)%

 

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

 

30
 

 

12.FAIR VALUE MEASUREMENTS (Continued)

 

The estimated fair values of the Company’s financial instruments are as follows:

 

  September 30, 2020 (unaudited) 
  Carrying Value  Fair Value  Level I  Level II  Level III 
                
Financial assets:                    
Cash and cash equivalents $36,164,269  $36,164,269  $36,164,269  $-  $- 
Certificates of deposit  3,955,000   4,187,000   -   4,187,000   - 
Investment securities:                    
Available for sale  7,475,676   7,475,676   -   7,475,676   - 
Held to maturity  2,374   2,422   -   2,422   - 
Loans, net  165,861,820   174,018,820   -   -   174,018,820 
Accrued interest receivable  1,132,240   1,132,240   -   1,132,240   - 
FHLB Stock  3,849,200   3,849,200   -   -   3,849,200 
                     
Financial liabilities:                    
Deposits  162,798,595   166,010,595   82,066,667   -   83,943,928 
FHLB advances  24,250,000   25,702,000   -   25,702,000   - 
PPPLF advances  17,292,786   17,318,786   -   17,318,786   - 
Accrued interest payable  288,725   288,725   -   288,725   - 

 

  December 31, 2019 
  Carrying Value  Fair Value  Level I  Level II  Level III 
                
Financial assets:                    
Cash and cash equivalents $21,880,788  $21,880,788  $21,880,788  $-  $- 
Certificates of deposit  2,465,000   2,576,000   -   2,576,000   - 
Investment securities:                    
Available for sale  9,849,599   9,849,599   -   9,849,599   - 
Held to maturity  3,879   3,932   -   3,932   - 
Loans, net  156,112,115   163,239,115   -   -   163,239,115 
Accrued interest receivable  673,026   673,026   -   673,026   - 
FHLB Stock  2,924,600   2,924,600   -   -   2,924,600 
                     
Financial liabilities:                    
Deposits  149,020,729   150,700,557   55,206,337   -   95,494,220 
FHLB advances  31,374,500   31,773,500   -   31,773,500   - 
Accrued interest payable  331,133   331,133   -   331,133   - 

 

Financial instruments are defined as cash, evidence of an ownership interest in an entity, or a contract which creates an obligation or right to receive or deliver cash or another financial instrument from/to a second entity on potentially favorable or unfavorable terms.

 

Fair value is defined as the amount at which a financial instrument could be exchanged in a current transaction between willing parties other than in a forced or liquidation sale. If a quoted market price is available for a financial instrument, the estimated fair value would be calculated based upon the market price per trading unit of the instrument.

 

31
 

 

13.FAIR VALUE OF FINANCIAL INSTRUMENTS

 

If no readily available market exists, the fair value estimates for financial instruments should be based upon management’s judgment regarding current economic conditions, interest rate risk, expected cash flows, future estimated losses, and other factors as determined through various option pricing formulas or simulation modeling. Since many of these assumptions result from judgments made by management based upon estimates which are inherently uncertain, the resulting estimated fair values may not be indicative of the amount realizable in the sale of a particular financial instrument. In addition, changes in the assumptions on which the estimated fair values are based may have a significant impact on the resulting estimated fair values.

 

Since certain assets, such as deferred tax assets and premises and equipment, are not considered financial instruments, the estimated fair value of financial instruments would not represent the full value of the Company.

 

Cash and Cash Equivalents, Accrued Interest Receivable, FHLB Stock, and Accrued Interest Payable

 

The fair value is equal to the current carrying value.

 

Certificates of Deposit

 

The fair values of certificates of deposit are based on the discounted value of contractual cash flows. The discount rates are estimated using rates currently offered for similar instruments with similar remaining maturities.

 

Securities

 

Fair values for securities are determined by obtaining quoted prices on nationally recognized securities exchanges or matrix pricing, which is a mathematical technique that is widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark-quoted securities. Fair values of securities determined by quoted prices in active markets, when available, are classified as Level I.

 

Loans, Net

 

The fair value is estimated by discounting future cash flows using current market inputs at which loans with similar terms and qualities would be made to borrowers of similar credit quality. Certain collateral dependent impaired loans have been adjusted to fair value based on the loan’s collateral. Fair value is generally determined based upon independent third-party appraisals of the properties, along with management’s assumptions in various factors, such as estimated selling costs and discounts for time since last appraised.

 

FHLB Advances and PPPLF Advances

 

The fair value of FHLB advances and PPPLF advances is based on the discounted value of contractual cash flows. The discount rates are estimated using rates currently offered for similar instruments with similar remaining maturities.

 

Deposits

 

The fair values of certificates of deposit are based on the discounted value of contractual cash flows. The discount rates are estimated using rates currently offered for similar instruments with similar remaining maturities. Demand, savings, and money market deposit accounts are valued at the amount payable on demand as of the period end.

 

32
 

 

13.FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)

 

Commitments

 

These financial instruments are generally not subject to sale, and estimated fair values are not readily available. The carrying value, represented by the net deferred fee arising from the unrecognized commitment, and the fair value, determined by discounting the remaining contractual fee over the term of the commitment using fees currently charged to enter into similar agreements with similar credit risk, are not considered material for disclosure. The contractual amounts of unfunded commitments are presented in Note 11.

 

14.ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

 

The following table presents the changes in accumulated other comprehensive income (loss) by component, net of tax:

 

  Net Unrealized Gain (Loss) 
  on Securities 
  Three months ended September 30, 
  2020  2019 
  (unaudited) 
Accumulated other comprehensive income (loss), beginning of period $134,718  $53,009 
         
Other comprehensive income (loss) on securities before reclassification, net of tax  31,209   (40,105)
         
Amounts reclassified from accumulated other comprehensive income (loss), net of tax  -   - 
         
Net other comprehensive income (loss)  31,209   (40,105)
         
Accumulated other comprehensive income (loss), end of period $165,927  $12,904 

 

  Net Unrealized Gain (Loss) 
  on Securities 
  Nine months ended September 30, 
  2020  2019 
  (unaudited) 
       
Accumulated other comprehensive income (loss), beginning of period $(5,421) $(74,623)
         
Other comprehensive income (loss) on securities before reclassification, net of tax  199,446   127,496 
         
Amounts reclassified from accumulated other comprehensive income (loss), net of tax  (28,098)  (39,969)
         
Net other comprehensive income (loss)  171,348   87,527 
         
Accumulated other comprehensive income (loss), end of period $165,927  $12,904 

 

33
 

 

 

15.EARNINGS PER SHARE

 

Earnings per common share for the three and nine months ended September 30, 2020 and 2019, are represented in the following tables.

 

  Three months ended  Three months ended 
  September 30, 2020  September 30, 2019 
  (unaudited) 
       
Net Income $476,052  $89,553 
         
Shares outstanding for basic EPS:        
Average shares outstanding  2,253,658   2,248,805 
Less: Average unearned ESOP shares  76,739   81,146 
         
Shares outstanding for basic EPS  2,176,919   2,167,659 
Additional dilutive shares  -   - 
         
Shares oustanding for diluted EPS  2,176,919   2,167,659 
         
Basic income per share $0.22  $0.04 
Diluted income per share $0.22  $0.04 

 

  Nine months ended  Nine months ended 
  September 30, 2020  September 30, 2019 
  (unaudited) 
       
Net Income $1,079,018  $306,836 
         
Shares outstanding for basic EPS:        
Average shares outstanding  2,252,234   2,248,458 
Less: Average unearned ESOP shares  77,834   82,237 
         
Shares outstanding for basic EPS  2,174,400   2,166,221 
Additional dilutive shares  -   221 
         
Shares oustanding for diluted EPS  2,174,400   2,166,442 
         
Basic income per share $0.50  $0.14 
Diluted income per share $0.50  $0.14 

 

34
 

 

16.LEASES

 

Due to the adoption of ASU 2016-02, Leases (Topic 842) on December 31, 2019, the Company completed a comprehensive review and analysis of all its property contracts. As a result of this review, it was determined that the Company leases parking spaces which qualifies as an operating lease. Several assumptions and judgments were made when applying the requirements of Topic 842 to the Company’s existing lease commitments, including the allocation of consideration in the contracts, the determination of the lease term and the determination of the discount rate used in calculating the present value of the lease payments. The lease did not include any nonlease components, such as common area maintenance charges, utilities, real estate taxes or insurance. Additionally, the lease did not include any renewal options as of September 30, 2020.

 

The discount rate utilized in calculating the present value of the remaining lease payments for the lease was the Federal Home Loan Bank of Pittsburgh advance rate corresponding to the remaining maturity of the lease. The following table presents the weighted-average lease term and discount rate for the lease outstanding at September 30, 2020.

 

  Operating 
Weighted-average remaining term (years)  0.8 
Weighted-average discount rate  1.87%

 

The following table presents the undiscounted cash flows due to operating leases as of September 30, 2020, along with a reconciliation to the discounted amount recorded on the Consolidated Balance Sheets:

 

Undiscounted cash flows due:  Operating 
Within 1 year $5,000 
After 1 year but within 2 years  - 
After 2 years  - 
Total undiscounted cash flows  5,000 
Discount on cash flows  (43)
Total lease liabilities $4,957 

 

Under Topic 842, the lessee can elect to not record on the Consolidated Balance Sheets a lease whose term is 12 months or less and does not include a purchase option that the lessee is reasonably certain to exercise. As of September 30, 2020, the Company had no leases that had a term of 12 months or less. The Company has recorded a right-of-use asset of $4,957 and a lease liability of $4,957 included with premises and equipment and other liabilities, respectively, on the Consolidated Balance Sheet as of September 30, 2020.

 

Rental expense under operating leases totaled $1,500 for the three months ended September 30, 2020 and 2019, and $4,500 for each of the nine months ended September 30, 2020 and 2019.

 

35
 

 

17.REVENUE RECOGNITION

 

Due to the Company’s adoption of ASC 606 on January 1, 2019, the Company conforms to the standard framework for recognizing revenue from contracts with customers. Interest income, net securities (losses) gains and bank-owned life insurance are not in scope of ASC 606. For the revenue streams within the scope of ASC 606, including service charges on deposits, electronic banking fees, mortgage banking income, and net gain or loss on sale of other real estate owned, there are no significant judgements related to the amount and timing of revenue recognition.

 

Service Charges on Deposits

 

There are monthly service charges for both commercial and personal banking customers, depending on their account types, which are earned over the month per the related fee schedule based on the customers’ level of deposits. There are also transaction-based fees, which are earned based on specific transactions or customer activity within the customers’ deposit accounts. These are earned at the time the transaction or customer activity occurs. The fees are debited from the customer account.

 

Electronic Banking Fees

 

Interchange fees are earned based on customer transactions. Revenue is recognized when the transaction is settled. The Company does not charge ATM fees.

 

Mortgage Banking Income

 

Income is earned when SSB Bank-originated loans are sold to an investor on the secondary market. The investors offer pricing for loans at least daily. The Company makes commitments to deliver loans when pricing is acceptable. After a salable loan is originated and delivery is committed, the loan is sold, loan documents are delivered to the investor, revenue is recognized, and the loan is derecognized from the Consolidated Balance Sheets. Typically this happens within days of consummation. Mortgage servicing rights are retained in most cases, and the value of the mortgage servicing rights is recognized as revenue at the time of the sale.

 

Net Gain or Loss on Sale of Other Real Estate Owned

 

Net gain or loss is recorded when other real estate owned is sold to a third party and the Company collects substantially all of the consideration to which the Company is entitled in exchange for the transfer of the property.

 

The following table summarizes the point of revenue recognition and the income recognized for each of the revenue streams for the three and nine months ended September 30, 2020 and 2019:

 

    For the three months ended September 30, 
Revenue Streams Point of revenue recognition 2020  2019 
         
Service charges on deposits At a point in time & over time $1,085  $2,556 
Electronic banking fees At a point in time $18,699  $8,613 
Mortgage banking income At a point in time $629,200  $85,485 

 

    For the nine months ended September 30, 
Revenue Streams Point of revenue recognition 2020  2019 
         
Service charges on deposits At a point in time & over time $5,064  $5,985 
Electronic banking fees At a point in time $39,299  $22,143 
Mortgage banking income At a point in time $1,409,595  $234,124 

 

36
 

 

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

 

General

 

Management’s discussion and analysis of financial condition at September 30, 2020 and December 31, 2019 and results of operations for the three and nine months ended September 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 Center for Disease Control and the Commonwealth of Pennsylvania, pushing most 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 Commonwealth of Pennsylvania. During the “green” phase, all regular Board of Directors’ Meetings have returned to in-person 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 as normal while practicing all of the guidelines of the Center for Disease Control and the Commonwealth of Pennsylvania.
   
 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 September 30, 2020, we had 25 loans for $9.2 million that were still within their original 90-day period or had been granted an extension. As permitted by applicable banking agency guidance and accounting guidance issued in response to the COVID-19 pandemic, 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 September 30, 2020.

 

39
 

 

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

 

Coronavirus Update (Continued)

 

  Deferrals 
Month of Expiration Loans  Amount 
October 2020 (1)  9  $4,801,608 
November 2020 (1)  4  $444,848 
December 2020 (1)  4  $1,716,624 
January 2021  -  $- 
February 2021  -  $- 
March 2021  -  $- 
April 2021  8   2,266,484 
Total  25   9,229,564 

 

(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 September 30, 2020, we originated 342 PPP loans totaling $20.1 million. PPP loans are included within the category of commercial and industrial loans in the Company’s loan portfolio.
   
 We have started accepting applications for PPP loan forgiveness. As of September 30, 2020, none of our PPP loans have been forgiven by the SBA.
   
 The following table provides additional information with respect to the Company’s commercial and industrial and commercial mortgage loans, by loan type, at September 30, 2020:

 

September 30, 2020
Type of Loan (1) Number of Loans  Balance 
     (in thousands) 
Energy and construction  23  $8,511 
         
Retail  25   3,834 
         
Restaurants  18   3,611 
         
Hospitality and tourism  13   3,284 
         
Health and other professional services  32   3,159 
         
Paycheck Protection Program  342   20,135 
         
Residential 1-4 family and mixed use real estate  298   33,322 
         
Commercial real estate  46   10,742 
         
Multi-Family  28   5,813 
         
Commercial construction  9   1,870 
         
Total  492  $74,146 

 

40
 

 

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

 

Critical Accounting Policies

 

Critical accounting estimates are necessary in the application of certain accounting policies and procedures and are particularly susceptible to significant change. Critical accounting policies are defined as those involving significant judgments and assumptions by management that could have a material impact on the carrying value of certain assets or on income under different assumptions or conditions. Management believes the accounting policies discussed below to be the most critical accounting policies, which involve the most complex or subjective decisions or assessments.

 

Allowance for Loan Losses. The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to income. Loan losses are charged against the allowance when management believes that specific loans, or portions of loans, are uncollectible. The allowance for loan losses is evaluated on a regular basis, and at least quarterly, by management. Management reviews the nature and volume of the loan portfolio, local and national conditions that may adversely affect the borrower’s ability to repay, loss experience, the estimated value of any underlying collateral, and other relevant factors. The evaluation of the allowance for loan losses is characteristically subjective as estimates are required that are subject to continual change as more information becomes available.

 

The allowance consists of general and specific reserve components. The specific reserves are related to loans that are considered impaired. Loans that are classified as impaired are measured in accordance with accounting guidance (ASC 310-10-35). The general reserve is allocated for non-impaired loans and includes evaluation of changes in the trend and volume of delinquency, our internal risk rating process and external conditions that may affect credit quality.

 

A loan is considered impaired when, based on current information and events, it is probable that we will be unable to collect the scheduled principal and interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status and the financial condition of the borrower. Loans that experience payment shortfalls and insignificant payment delays are typically not considered impaired. Management looks at each loan individually and considers all the circumstances around the shortfall or delay including the borrower’s prior payment history, borrower contact regarding the reason for the delay or shortfall and the amount of the shortfall. Collateral dependent loans are measured against the fair value of the collateral, while other loans are measured by the present value of expected future cash flows discounted at the loan’s effective interest rate. All loans are measured individually.

 

Loan segments are reviewed and evaluated for impairment based on the segment’s characteristic loss history and local economic conditions and trends within the segment that may affect the repayment of the loans.

 

From time to time, we may choose to restructure the contractual terms of certain loans either at the borrower or the Company’s request. We review all scenarios to determine the best payment structure with the borrower to improve the likelihood of repayment. Management reviews modified loans to determine if the loan should be classified as a trouble debt restructuring. A trouble debt restructuring is when a creditor, for economic or legal reasons related to a debtor’s financial difficulties, grants a concession to the borrower that it would not otherwise consider. Management considers the borrower’s ability to repay when a request to modify existing loan terms is presented. A transfer of assets to repay the loan balance, a modification of loan terms or a combination of these may occur. If an appropriate arrangement cannot be made, the loan is referred to legal counsel, at which time foreclosure will begin. If a loan is accruing at the time of restructuring, we review the loan to determine if it should be placed on non-accrual. It is our policy to keep a troubled debt restructured loan on non-accrual status for at least six months to ensure the borrower can repay, at that time management may consider its return to accrual status. Troubled debt restructured loans are classified as impaired loans.

 

41
 

 

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

 

Critical Accounting Policies (Continued)

 

Income Taxes. The Company accounts for income taxes in accordance with accounting guidance (ASC 740, Income Taxes). The income tax accounting guidance results in two components of income tax expense: current and deferred. Current income tax reflects taxes to be paid or refunded for the current period by applying the provisions of the enacted tax law to the taxable income or excess of deductions over revenues. U.S. GAAP requires that we use the Balance Sheet Method to determine the deferred income, which affects the differences between the book and tax bases of assets and liabilities, and any changes in tax rates and laws are recognized in the period in which they occur. Deferred taxes are based on a valuation model and the determination on a quarterly basis whether all or a portion of the deferred tax asset will be recognized.

 

Fair Value Measurements. The fair value of a financial instrument is defined as the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. The Company estimates the fair value of a financial instrument and any related asset impairment using a variety of valuation methods. Where financial instruments are actively traded and have quoted market prices, quoted market prices are used for fair value. When the financial instruments are not actively traded, other observable market inputs, such as quoted prices of securities with similar characteristics, may be used, if available, to determine fair value. When observable market prices do not exist, we estimate fair value. These estimates are subjective in nature and imprecision in estimating these factors can impact the amount of revenue or loss recorded. A more detailed description of the fair values measured at each level of the fair value hierarchy and the methodology utilized by the Company can be found in Note 12 to the Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.

 

Investment Securities. Available for sale and held to maturity securities are reviewed quarterly for possible other-than-temporary impairment. The review includes an analysis of the facts and circumstances of each individual investment such as the severity of loss, the length of time the fair value has been below cost, the expectation for that security’s performance, the creditworthiness of the issuer and our intent and ability to hold the security to recovery. A decline in value that is considered to be other-than-temporary is recorded as a loss within non-interest income in the statements of income. At September 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.

 

42
 

 

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

 

Comparison of Financial Condition at September 30, 2020 and December 31, 2019

 

Total Assets. Total assets increased by $24.7 million, or 12.2%, from $202.6 million at December 31, 2019 to $227.4 million at September 30, 2020. The increase was primarily attributable to an increase in cash and cash equivalents of $14.3 million, an increase in net loans of $9.7 million, and an increase in certificates of deposit of $1.5 million. Offsetting the increases was a decrease in securities available for sale of $2.4 million, or 24.1%. Funding the growth in assets was an increase in total deposits of $13.8 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 $14.3 million, or 65.3%, to $36.2 million at September 30, 2020 from $21.9 million at December 31, 2019. The increase in cash and cash equivalents was caused by a $17.2 million increase in interest-bearing deposits with other financial institutions, which was offset by a $2.9 million decrease in cash and due from banks. The increase in cash was primarily attributable to an increase in total deposits of $13.8 million as well as an increase in PPPLF advances of $17.3 million.

 

Net Loans. Net loans increased $9.7 million, or 6.2%, to $165.9 million at September 30, 2020, from $156.1 million at December 31, 2019. This was caused primarily by an increase in commercial and industrial loans of $20.4 million. The increase was primarily due to $20.1 million in PPP loans that were funded during the nine months ended September 30, 2020. These increases were offset by decreases in one-to-four family and commercial mortgages of $3.1 million and $7.2 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 reduce the concentration of commercial mortgage loans within the Company’s loan portfolio.

 

Available for Sale Securities. Securities available for sale decreased by $2.4 million or 24.1%, to $7.5 million at September 30, 2020, from $9.8 million at December 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, and $500,000 of mortgage-backed securities.

 

Deposits. Total deposits increased to $162.8 million at September 30, 2020 from $149.0 million at December 31, 2019. The increase of $13.8 million, or 9.2%, was primarily due to an increase in interest-bearing demand deposits of $12.5 million, or 68.8%. The increase was primarily due to expansion of existing key relationships and the depositing of PPP loan proceeds in the Bank. Offsetting the increase was a decrease in time deposits of $13.1 million, or 14.0%. As part of our strategic plan, we are focused on growing core deposits and decreasing brokered time deposits.

 

Federal Home Loan Bank Advances. Federal Home Loan Bank advances decreased by $7.1 million, or 22.7%, from $31.4 million at December 31, 2019, to $24.3 million at September 30, 2020. The decrease was due to two advances totaling $7.1 million that were repaid during the nine months ended September 30, 2020.

 

Paycheck Protection Program Liquidity Facility Advances. PPPLF advances increased by $17.3 million to $17.3 million at September 30, 2020. The PPPLF advances are secured by PPP loans and were utilized to directly fund the majority of the PPP loans originated during the period. The PPPLF advances have terms that match the term of the underlying PPP loans.

 

Stockholders’ Equity. Stockholders’ equity increased by $1.3 million, or 6.3%, to $22.2 million at September 30, 2020 from $20.9 million at December 31, 2019. The increase was primarily due to net income of $1.1 million for the nine-month period, as well as an increase in accumulated other comprehensive income of $171,000. The increase in accumulated other comprehensive income was due to the increases in the fair values of securities available for sale.

 

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 September 30, 2020 and 2019

 

Net Income. Net income increased by $386,000, or 431.6% to $476,000 for the three months ended September 30, 2020, from $90,000 for the three months ended September 30, 2019. The increase was primarily due to an increase in noninterest income of $586,000, or 369.7%, from $158,000 for the three months ended September 30, 2019, to $744,000 for the three months ended September 30, 2020. The increase in noninterest income was primarily due to an increase in gain on sale of loans of $544,000 and an increase in loan servicing fees of $27,000. The increase to noninterest income was offset by an increase in noninterest expense of $192,000. Additionally, net interest income after provision increased $132,000, or 12.1%. The increase was due to a decrease in interest expense of $175,000 and was offset by an increase in the provision for loan losses of $47,000.

 

Interest and Dividend Income. Interest and dividend income remained unchanged at $2.1 million for the three months ended September 30, 2020 and 2019. Interest income on loans increased 28,000, or 1.5%. This increase is attributable to an increase in the average balance of net loans of $9.6 million, and was offset by a decrease in the yield on net loans of 26 basis points. Additionally, interest-income on certificates of deposit held with other financial institutions increased by $6,000. Offsetting these increases were decreases in interest income from interest-bearing deposits with other financial institutions and investment securities of $23,000 and $8,000, respectively.

 

Interest Expense. Total interest expense decreased $175,000, or 18.2%, to $789,000 for the three months ended September 30, 2020, compared to $964,000 for the three months ended September 30, 2019. The decrease was driven by a decrease in cost of interest-bearing deposits of 68 basis points from 2.22% for the three months ended September 30, 2019 to 1.54% for the three months ended September 30, 2020. Offsetting the decrease in cost was a $20.7 million increase in average balance of interest-bearing deposits. Money market accounts increased in average balance by $6.6 million, however, the cost decreased by 162 basis points when comparing the two periods, resulting in a decrease in interest expense on money market accounts of $105,000. Additionally, the average balance of certificates of deposits decreased by $7.0 million and the cost decreased by 8 basis points, resulting in a decrease in interest expense on certificates of deposit of $56,000. Offsetting the decreases was an increase in interest expense on interest-bearing demand accounts of $21,000 due to an increase in average balance of $20.9 million when comparing the two periods.

 

Net Interest Income. Net interest income increased $179,000, or 15.6%, when comparing the two periods. This was due to a decrease in interest expense of $175,000 when comparing the two periods. Average interest-bearing liabilities increase by $32.9 million, but the cost decreased by 75 basis points. Average interest-earning assets increased by $17.1 million, but the yield decreased by 43 basis points, resulting in virtually no change in interest and dividend income.

 

Provision for Loan Losses. The provision for loan losses increased $47,000, or 88.7%, to $100,000 for the three months ended September 30, 2020, from $53,000 for the three months ended September 30, 2019. The increase in provision for loan losses was due to qualitative adjustments to our allowance for loan losses methodology driven by the Coronavirus 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 $586,000, or 369.7% to $744,000 for the three months ended September 30, 2020, from $158,000 for the three months ended September 30, 2019. The increase was primarily due to an increase in gain on sale of loans of $544,000, from $85,000 for the three months ended September 30, 2019 to $629,000 for the three months ended September 30, 2020. The increase in gain on sale of loans was due to a high volume of one-to-four mortgage loan refinances and purchases that were subsequently sold into the secondary market. This is primarily due to the low interest rate environment during the period and the high volume of home purchases in the Company’s market area. There were also increases in loan servicing fees, earnings on bank-owned life insurance, and other noninterest income of $27,000 and $6,000, and $9,000, respectively.

 

44
 

 

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

 

Comparison of Operating Results for the Three Months Ended September 30, 2020 and 2019 (Continued)

 

Non-Interest Expense. Non-interest expense increased $192,000, or 17.0%, to $1.3 million for the three months ended September 30, 2020, compared to $1.1 million for the three months ended September 30, 2019. Salaries and employee benefits increased by $158,000 from $519,000 for the three months ended September 30, 2019, to $676,000 for the three months ended September 30, 2020. This increase was offset by decreases in professional fees, occupancy, and contributions and donations of $16,000, $7,000, and $2,000, respectively. There was also a $55,000 increase in other noninterest expenses.

 

Income Taxes. The Company recorded an income tax provision of $170,000 for the three months ended September 30, 2020, an increase of $139,000, or 454.3%, from the tax provision of $31,000 recorded for the three months ended September 30, 2019. This is a result of an increase in pre-tax income when comparing the two periods. The effective tax rate for the three months ended September 30, 2020 was 26.3% compared to 25.5% for the three months ended September 30, 2019.

 

Comparison of Operating Results for the Nine Months Ended September 30, 2020 and 2019

 

Net Income. Net income increased by $772,000, or 251.7%, to $1.1 million for the nine months ended September 30, 2020, from $307,000 for the nine months ended September 30, 2019. The increase was driven by an increase in noninterest income of $1.2 million, or 253.9%, from $489,000 for the nine months ended September 30, 2019, to $1.7 million for the nine months ended September 30, 2020. The increase in noninterest income was primarily due to an increase in gain on sale of loans of $1.2 million, from $222,000 for the nine months ended September 30, 2019, to $1.4 million for the nine months ended September 30, 2020. Additionally, net interest income after provision for loan losses increased by $283,000, from $3.2 million for the nine months ended September 30, 2019 to $3.5 million for the nine months ended September 30, 2020.

 

Interest and Dividend Income. Interest and dividend income increased $229,000, or 3.7%, to $6.4 million for the nine months ended September 30, 2020, from $6.2 million for the nine months ended September 30, 2019. This increase was driven by an increase in interest income on loans of $272,000, or 4.9%. This increase is attributable to an increase in the average balance of net loans of $6.3 million and an increase in yield on net loans of 4 basis points. Interest income on certificates of deposit increased by $41,000, or 135.7%, due to increases in volume. Offsetting these increases were decreases in interest income from investment securities and interest-bearing deposits with other financial institutions of $46,000 and $38,000, respectively. These offsetting decreases were primarily due to the decrease in market interest rates when comparing the two periods.

 

Interest Expense. Total interest expense decreased $246,000, or 8.8%, to $2.6 million for the nine months ended September 30, 2020, compared to $2.8 million for the nine months ended September 30, 2019. The decrease was driven by a drop in cost of interest-bearing deposits of 43 basis points from 2.14% for the nine months ended September 30, 2019 to 1.71% for the nine months ended September 30, 2020. There was also a decrease in interest expense of $43,000 from borrowings that include FHLB advances and PPPLF advances. This decrease was due to the maturity of $7.1 million in FHLB advances during the period. Money market accounts increased in average balance by $4.1 million, however, the cost decreased by 86 basis points when comparing the two periods, resulting in a decrease in interest expense on money market accounts of $156,000. Additionally, the average balance of certificates of deposit decreased by $3.5 million and the cost decreased by 8 basis points, resulting in a decrease in interest expense on certificates of deposit of $115,000. Offsetting the decreases was an increase in interest expense on interest-bearing demand accounts of $69,000 due to an increase in average balance of $17.3 million when comparing the two periods.

 

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

 

Comparison of Operating Results for the Nine Months Ended September 30, 2020 and 2019 (Continued)

 

Net Interest Income. Net interest income increased $475,000, or 14.1%, when comparing the two periods. This was due to an increase in interest income of $229,000 when comparing the two periods, while interest expense decreased by $246,000 when comparing the two periods. Average interest-earning assets increased by $22.0 million, and the yield decreased by 33 basis points when comparing the two periods. Average interest-bearing liabilities increased by $24.7 million, and the cost decreased by 46 basis points.

 

Provision for Loan Losses. The provision for loan losses increased $192,000, or 129.2%, to $340,000 for the nine months ended September 30, 2020, from $149,000 for the nine months ended September 30, 2019. The increase in the provision for loan losses was due to qualitative adjustments to our allowance for loan losses methodology driven by 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 $1.2 million, or 253.9% to $1.7 million for the nine months ended September 30, 2020, from $489,000 for the nine months ended September 30, 2019. The increase was primarily due to an increase in gain on sale of loans of $1.2 million, from $222,000 for the nine months ended September 30, 2019 to $1.4 million for the nine months ended September 30, 2020. The increase in gain on sale of loans was due to a high volume of one-to-four mortgage loan 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 $42,000 and $19,000, respectively. The increases were offset by a decrease in securities gains of $15,000.

 

Non-Interest Expense. Non-interest expense increased $438,000, or 13.1%, to $3.8 million for the nine months ended September 30, 2020, compared to $3.3 million for the nine months ended September 30, 2019. Salaries and employee benefits increased $279,000, or 17.7%, to $1.9 million for the nine months ended September 30, 2020 from $1.6 million for the nine months ended September 30, 2019. The increase was due to the addition of staff and yearly pay raises. Professional fees increased by $23,000, from $431,000 for the nine months ended September 30, 2019, to $454,000 for the nine months ended September 30, 2020. Occupancy expenses increased by $23,000 and other noninterest expense increased by $148,000. Offsetting the increases were decreases in federal deposit insurance, contributions and donations, and data processing of $21,000, $11,000, and $5,000, respectively.

 

Income Taxes. The Company recorded an income tax provision of $375,000 for the nine months ended September 30, 2020, an increase of $315,000, or 530.3%, from the tax provision of $59,000 recorded for the nine months ended September 30, 2019 as a result of an increase in pre-tax income for the nine months ended September 30, 2020. The effective tax rate for the nine months ended September 30, 2020 was 25.8% compared to 16.2% for the nine months ended September 30, 2019. The increase in the effective tax rate was due to a decrease in the amount of tax-free income when comparing the two periods. This is primarily attributable to a decrease in interest in US Treasury Securities.

 

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

 

Management of Market Risk

 

General. Our most significant form of market risk is interest rate risk because, as a financial institution, the majority of our assets and liabilities are sensitive to changes in interest rates. Therefore, a principal part of our operations is to manage interest rate risk and limit the exposure of our financial condition and results of operations to changes in market interest rates. Our Asset/Liability Management Committee is responsible for evaluating the interest rate risk inherent in our assets and liabilities, for determining the level of risk that is appropriate, given our business strategy, operating environment, capital, liquidity and performance objectives, and for managing this risk consistent with the policy and guidelines approved by our board of directors. We currently utilize a third-party modeling program, prepared on a quarterly basis, to evaluate our sensitivity to changing interest rates, given our business strategy, operating environment, capital, liquidity and performance objectives, and for managing this risk consistent with the guidelines approved by the board of directors.

 

Our interest rate risk profile is considered liability-sensitive, which means that if interest rates rise our deposits and other interest-bearing liabilities would be expected to reprice to higher interest rates faster than would our loans and other interest-earning assets. We have sought to manage our interest rate risk in order to minimize the exposure of our earnings and capital to changes in interest rates. In recent years, we have implemented the following strategies to manage our interest rate risk:

 

 increasing lower cost core deposits and limiting our reliance on higher cost funding sources, such as time deposits; and
   
 diversifying our loan portfolio by adding more commercial and industrial loans, which typically have shorter maturities and/or balloon payments, and selling one- to four-family residential mortgage loans, which have fixed interest rates and longer terms.

 

By following these strategies, we believe that we are well positioned to react to increases in market interest rates.

 

We do not engage in hedging activities, such as engaging in futures, options or swap transactions, or investing in high-risk mortgage derivatives, such as collateralized mortgage obligation residual interests, real estate mortgage investment conduit residual interests or stripped mortgage backed securities.

 

Economic Value of Equity. We analyze our sensitivity to changes in interest rates through an economic value of equity (“EVE”) model. EVE represents the difference between the present value of assets and the present value of liabilities. The EVE ratio represents the dollar amount of our EVE divided by the present value of our total assets for a given interest rate scenario. EVE attempts to quantify our economic value using a discounted cash flow methodology while the EVE ratio reflects that value as a form of capital ratio. We estimate what our EVE would be at a specific date. We then calculate what the EVE would be at the same date throughout a series of interest rate scenarios representing immediate and permanent, parallel shifts in the yield curve. We currently calculate EVE under the assumptions that interest rates increase 100, 200, 300 and 400 basis points from current market rates and that interest rates decrease 100 basis points from current market rates.

 

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

 

Management of Market Risk (Continued)

 

The following table presents the estimated changes in our EVE that would result from changes in market interest rates at September 30, 2020. All estimated changes presented in the table are within the policy limits approved by our board of directors.

 

     Estimated Increase  EVE as Percent of Economic 
Basis Point (“bp”)    (Decrease) in EVE  Value of Assets 
Change in Interest
Rates (1)
  Estimated EVE   Dollar
Change
   Percent
Change
   EVE Ratio (2)   Change 
                     
+400bp $16,560  $(4,382)  (20.92)%  7.69%  (1.24)%
+300bp  17,925   (3,017)  (14.41)%  8.14%  (0.79)%
+200bp  19,205   (1,737)  (8.29)%  8.53%  (0.40)%
+100bp  20,267   (675)  (3.22)%  8.82%  (0.11)%
0  20,942   -   0.00%  8.93%  0.00%
-100bp  21,683   741   3.54%  9.06%  0.13%

 

(1) Assumes instantaneous parallel changes in interest rates.

(2) EVE ratio represents the EVE divided by the economic value of assets.

 

Certain shortcomings are inherent in the methodologies used in the above interest rate risk measurements. Modeling requires making certain assumptions that may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. The above table assumes that the composition of our interest-sensitive assets and liabilities existing at the date indicated remains constant uniformly across the yield curve regardless of the duration or repricing of specific assets and liabilities. Accordingly, although the table provides an indication of our interest rate risk exposure at a particular point in time, such measurements are not intended to and do not provide a precise forecast of the effect of changes in market interest rates on our EVE and will differ from actual results.

 

Liquidity and Capital Resources

 

Liquidity. Liquidity is the ability to meet current and future financial obligations of a short-term nature that arise in the ordinary course of business. Liquidity is primarily needed to meet the borrowing and deposit withdrawal requirements of our customers and to fund investing activities and current and planned expenditures. Our primary sources of funds are deposits, principal and interest payments on loans and securities, proceeds from the sale of loans, and advances from the FHLB 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 September 30, 2020, the Company had cash and cash equivalents of $36.2 million. As of September 30, 2020, SSB Bank had $24.3 million in outstanding borrowings from the FHLB of Pittsburgh and had $89.4 million of total borrowing capacity.

 

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

 

Liquidity and Capital Resources (Continued)

 

At September 30, 2020, the Company had $29.3 million of loan commitments outstanding which includes $10.3 million of unused lines of credit, $5.2 million of unadvanced construction funds, $9.0 million of commitments to extend credit, and $4.8 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 FHLB of Pittsburgh.

 

Time deposits due within one year of September 30, 2020 totaled $32.3 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 September 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 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 September 30, 2020, SSB Bancorp, Inc. (on an unconsolidated basis) had liquid assets of $3.6 million.

 

Capital Resources. At September 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 Obligations Total  Less Than One Year  One to Three Years  Three to Five Years  More Than Five Years 
  (In thousands) 
At September 30, 2020:               
Long-term debt obligations $41,543  $8,000  $21,293  $2,250  $10,000 
                     
At December 31, 2019:                    
Long-term debt obligations $31,375  $7,125  $8,000  $6,250  $10,000 

 

Off-Balance Sheet Arrangements. We are a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of our customers. These financial instruments include commitments to extend credit and unused lines of credit, which involve elements of credit and interest rate risk in excess of the amount recognized in the balance sheets. Our exposure to credit loss is represented by the contractual amount of the instruments. We use the same credit policies in making commitments as we do for on-balance sheet instruments.

 

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

The information required by this item is included in Item 2 of this quarterly report under “Management of Market Risk.”

 

Item 4. Controls and Procedures

 

Disclosure Controls and Procedures

 

Under the supervision and with the participation of our senior management, including our principal executive officer and principal financial officer, SSB Bancorp, Inc. evaluated the effectiveness of the design and operation of its disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based upon that evaluation, the principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective.

 

Changes in Internal Control Over Financial Reporting

 

There were no changes made in our internal control over financial reporting during the quarter ended September 30, 2020 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

 

PART II – OTHER INFORMATION

 

Item 1. Legal Proceedings

 

We are not involved in any pending legal proceedings as a plaintiff or a defendant other than routine legal proceedings occurring in the ordinary course of business. At September 30, 2020, we were not involved in any legal proceedings the outcome of which we believe would be material to our financial condition or results of operations.

 

Item 1A. Risk Factors

 

In addition to the other information disclosed in this quarterly report, particularly the disclosures under “Part I – Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Coronavirus Update”:

 

The COVID-19 pandemic has adversely impacted our business and financial results and that of many of our customers, and the ultimate impact will depend on future developments, which are highly uncertain, cannot be predicted and outside of our control, including the scope and duration of the pandemic and actions taken by governmental authorities in response to the pandemic.

 

The COVID-19 pandemic has created extensive disruptions to the global economy and to the lives of individuals throughout the world. Governments, businesses, and the public are taking unprecedented actions to contain the spread of COVID-19 and to mitigate its effects, including quarantines, travel bans, shelter-in-place orders, closures of businesses and schools, fiscal and monetary stimulus, and legislation designed to deliver financial aid and other relief. While the scope, duration, and full effects of COVID-19 are rapidly evolving and not fully known, the pandemic and the efforts to contain it have disrupted global economic activity, adversely affected the functioning of financial markets, impacted market interest rates, increased economic and market uncertainty, and disrupted trade and supply chains. If these effects continue for a prolonged period or result in sustained economic stress or recession, the effects of COVID-19 could have a material adverse impact on us in a number of ways as described in more detail below.

 

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Item 1A. Risk Factors (Continued)

 

Credit Risk – Our risks of timely loan repayment and the value of collateral supporting the loans are affected by the strength of our borrowers’ businesses. Concern about the spread of COVID-19 has caused and is likely to continue to cause business shutdowns, limitations on commercial activity and financial transactions, labor shortages, supply chain interruptions, increased unemployment and commercial property vacancy rates, reduced profitability and ability for property owners to make mortgage payments, and overall economic and financial market instability, all of which may cause our customers to be unable to make scheduled loan payments. Hotel and restaurant operators and others in the leisure, hospitality and travel industries and the agricultural industry, among other industries, have been particularly hurt by COVID-19. If the effects of COVID-19 result in widespread and sustained repayment shortfalls on loans in our portfolio, we could incur significant delinquencies, foreclosures and credit losses, particularly if the available collateral is insufficient to cover our credit exposure. The future effects of COVID-19 on economic activity could negatively affect the collateral values associated with our existing loans, the ability to liquidate the real estate collateral securing our residential and commercial real estate loans, our ability to maintain loan origination volume and to obtain additional financing, the future demand for or profitability of our lending and services, and the financial condition and credit risk of our customers. Further, in the event of delinquencies, regulatory changes and policies designed to protect borrowers may slow or prevent us from making our business decisions or may result in a delay in our taking certain remediation actions, such as foreclosure. In addition, we have unfunded commitments to extend credit to customers. During a challenging economic environment like now, our customers depend more on our credit commitments and increased borrowings under these commitments could adversely impact our liquidity. Furthermore, in an effort to support our communities during the pandemic, we are participating in the Paycheck Protection Program under the CARES Act whereby loans to small businesses are made and those loans are subject to the regulatory requirements that would require forbearance of loan payments for a specified time or that would limit our ability to pursue all available remedies in the event of a loan default. If the borrower under the PPP loan fails to qualify for loan forgiveness, we are at the heightened risk of holding these loans at unfavorable interest rates as compared to the loans to customers that we would have otherwise extended credit.

 

Strategic Risk – Our success may be affected by a variety of external factors that may affect the price or marketability of our products and services, changes in interest rates that may increase our funding costs, reduced demand for our financial products due to economic conditions and the various response of governmental and nongovernmental authorities. The COVID-19 pandemic has significantly increased economic and demand uncertainty and has led to disruption and volatility in the global capital markets. Furthermore, many of the governmental actions have been directed toward curtailing household and business activity to contain COVID-19. These actions have been rapidly expanding in scope and intensity. For example, in many of our markets, local governments have acted to temporarily close or restrict the operations of most businesses. The future effects of COVID-19 on economic activity could negatively affect the future banking products we provide, including a decline in originating loans.

 

Operational Risk – Current and future restrictions on our workforce’s access to our facilities could limit our ability to meet customer servicing expectations and have a material adverse effect on our operations. We rely on business processes and branch activity that largely depend on people and technology, including access to information technology systems as well as information, applications, payment systems and other services provided by third parties. In response to COVID-19, we have modified our business practices with a portion of our employees working remotely from their homes to have our operations uninterrupted as much as possible. Further, technology in employees’ homes may not be as robust as in our offices and could cause the networks, information systems, applications, and other tools available to employees to be more limited or less reliable than in our offices. The continuation of these work-from-home measures also introduces additional operational risk, including increased cybersecurity risk from phishing, malware, and other cybersecurity attacks, all of which could expose us to risks of data or financial loss and could seriously disrupt our operations and the operations of any impacted customers.

 

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Item 1A. Risk Factors (Continued)

 

Moreover, we rely on many third parties in our business operations, including the appraiser of the real property collateral, vendors that supply essential services such as loan servicers, providers of financial information, systems and analytical tools and providers of electronic payment and settlement systems, and local and federal government agencies, offices, and courthouses. In light of the developing measures responding to the pandemic, many of these entities may limit the availability and access of their services. If the third-party service providers continue to have limited capacities for a prolonged period or if additional limitations or potential disruptions in these services materialize, it may negatively affect our operations.

 

Interest Rate Risk/Market Value Risk – Our net interest income, lending and investment activities, deposits and profitability could be negatively affected by volatility in interest rates caused by uncertainties stemming from COVID-19. In March 2020, the Federal Reserve lowered the target range for the federal funds rate to a range from 0% to 0.25%, citing concerns about the impact of COVID-19 on financial markets and market stress in the energy sector. A prolonged period of extremely volatile and unstable market conditions would likely increase our funding costs and negatively affect market risk mitigation strategies. Higher income volatility from changes in interest rates and spreads to benchmark indices could cause a loss of future net interest income and a decrease in prevailing fair market values of our investment securities and other assets, including our mortgage servicing rights. Fluctuations in interest rates will impact both the level of income and expense recorded on most of our assets and liabilities and the market value of all interest-earning assets and interest-bearing liabilities, which in turn could have a material adverse effect on our net income, operating results, or financial condition.

 

Because there have been no comparable recent global pandemics that resulted in similar global impact, we do not yet know the full extent of COVID-19’s effects on our business, operations, or the global economy as a whole. Any future development will be highly uncertain and cannot be predicted, including the scope and duration of the pandemic, the effectiveness of our work-from-home arrangements, third party providers’ ability to support our operations, and any actions taken by governmental authorities and other third parties in response to the pandemic. The uncertain future development of this crisis could materially and adversely affect our business, operations, operating results, financial condition, liquidity or capital levels.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

(a)Not applicable.
  
(b)Not applicable.
  
(c)The Company did not repurchase any shares of its common stock during the quarter ended September 30, 2020.

 

Item 3. Defaults Upon Senior Securities

 

None.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other Information

 

None.

 

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Item 6. Exhibits

 

Exhibit  
Number Description
   
3.1 Articles of Incorporation of SSB Bancorp, Inc. (1)
   
3.2 Bylaws of SSB Bancorp, Inc. (2)
   
31.1 

Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

31.2 Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
   
32.1 Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
   
32.2 Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
   
101.0 The following materials for the quarter ended September 30, 2020, formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Statements of Financial Condition, (ii) the Consolidated Statements of Income, (iii) Consolidated Statements of Comprehensive Income (Loss), (iv) Consolidated Statements of Changes in Equity, (v) Consolidated Statements of Cash Flows, and (vi) Notes to Consolidated Financial Statements

 

 

(1)Incorporated by reference to Exhibit 3.1 to the Company’s Registration Statement on Form S-1, as amended (Commission File No. 333-220403).
(2)Incorporated by reference to Exhibit 3.2 to the Company’s Registration Statement on Form S-1, as amended (Commission File No. 333-220403).

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 SSB BANCORP, INC.
  
  
Date: November 13, 2020/s/ J. Daniel Moon, IV
 J. Daniel Moon, IV
 

President and Chief Executive Officer

 

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

 

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