10-K 1 tv489232-10k.htm FORM 10-K tv489232-10k - none - 8.431101s
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2017
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 Number: 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 Number)
8700 Perry Highway,
Pittsburgh, Pennsylvania

15237
(Address of principal executive offices)
(Zip code)
(412) 837-6955
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $0.01 per share
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ☐ No ☒
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 reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☒
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 ☐
Smaller reporting company ☒
Emerging growth company ☒
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. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of June 30, 2017, the aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant was $-0-.
As of April 13, 2018 there were 2,248,250 outstanding shares of the registrant’s common stock, of which 1,236,538 shares are owned by SSB Bancorp, MHC.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Proxy Statement for the 2018 Annual Meeting of Stockholders (Part III)

TABLE OF CONTENTS
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PART I
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20
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PART II
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45
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81
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PART III
82
82
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PART IV
83
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SIGNATURES
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EXPLANATORY NOTE
SSB Bancorp, Inc. (the “Company,” “we,” “us” or “our”) was incorporated on August 17, 2017 to serve as the subsidiary stock holding company for SSB Bank upon the reorganization of SSB Bank into the mutual holding company structure. As of December 31, 2017, the reorganization had not been completed. It was completed effective January 24, 2018. As of December 31, 2017, the Company had no assets or liabilities and had not conducted any business activities other than organizational activities. Accordingly, the audited financial statements, and other financial information, contained in this annual report on Form 10-K relate solely to SSB Bank.
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PART I
ITEM 1.
Business
Forward Looking Statements
This annual report contains forward-looking statements, which can be identified by the use of words such as “estimate,” “project,” “believe,” “intend,” “anticipate,” “assume,” “plan,” “seek,” “expect,” “will,” “may,” “should,” “indicate,” “would,” “contemplate,” “continue,” “potential,” “target” 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 our 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. Accordingly, you should not place undue reliance on such statements. We are under no duty to and do not take any obligation to update any forward-looking statements after the date of this annual report.
The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements:

general economic conditions, either nationally or in our market areas, that are worse than expected;

changes in the level and direction of loan delinquencies and write-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 implement and change our business strategies;

competition among depository and other financial institutions;

inflation and changes in the interest rate environment that reduce our margins and yields, our mortgage banking revenues, the fair value of financial instruments or our level of loan originations, or prepayments on loans we have made and make;

adverse changes in the securities or secondary mortgage markets;

changes in tax law, or laws or government regulations or policies affecting financial institutions, including changes in regulatory fees and capital requirements;

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;

our ability to manage market risk, credit risk and operational risk in the current economic environment;
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our ability to successfully introduce new products and services, enter new markets, and capitalize on growth opportunities;

our ability to successfully integrate into our operations any assets, liabilities, customers, systems and management personnel we may acquire 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; and

changes in the financial condition, results of operations or future prospects of issuers of securities that we own.
Because of these and a wide variety of other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements.
SSB Bancorp, Inc.
SSB Bancorp, Inc., a Maryland corporation organized on August 17, 2017, was incorporated as part of the mutual holding company reorganization of SSB Bank, which was completed on January 24, 2018. In the reorganization, SSB Bancorp, Inc. sold 1,011,712 shares of common stock to the public at $10.00 per share, representing 45% of its outstanding shares of common stock. SSB Bancorp, MHC owns 1,236,538, or 55%, of the outstanding common stock of SSB Bancorp, Inc.
SSB Bancorp, Inc. owns 100% of the common stock of SSB Bank. SSB Bancorp, Inc. was not an operating company at December 31, 2017 and became the holding company for SSB Bank upon completion of the reorganization.
SSB Bancorp, Inc. conducts its operations primarily through its wholly owned subsidiary, SSB Bank, a Pennsylvania-chartered savings bank. SSB Bancorp, Inc. manages its operations as one unit, and does not have separate operating segments.
The executive offices of SSB Bancorp, Inc. are located at 8700 Perry Highway, Pittsburgh, Pennsylvania 15237, and its telephone number is (412) 837-6955.
SSB Bancorp, MHC
SSB Bancorp, MHC, a Pennsylvania-chartered mutual holding company was formed as part of the reorganization. Upon completion of the reorganization, which was completed on January 24, 2018, SSB Bancorp, MHC does and will, for as long as it is in existence, own a majority of the outstanding shares of SSB Bancorp, Inc.’s common stock. SSB Bancorp, MHC’s principal assets are the common stock of SSB Bancorp, Inc. it received in the reorganization and offering and $40,000 of cash from its initial capitalization. Presently, it is expected that the only business activity of SSB Bancorp, MHC will be to own a majority of SSB Bancorp, Inc.’s common stock. SSB Bancorp, MHC is authorized, however, to engage in any other business activities that are permissible for mutual holding companies under Pennsylvania law, including investing in loans and securities.
SSB Bank
SSB Bank is a Pennsylvania-chartered stock savings bank headquartered in Pittsburgh, Pennsylvania. We conduct our business from our main office and one branch office. Both of our banking offices are located in Pittsburgh, Pennsylvania, which is located in Allegheny County in western Pennsylvania. At December 31, 2017, SSB Bank had total consolidated assets of  $171.9 million, net loans of  $140.6 million, deposits of  $132.4 million, and net worth of  $12.1 million.
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Historically, our business has consisted primarily of taking deposits from the general public and investing those funds, along with borrowings from the Federal Home Loan Bank of Pittsburgh, in one- to four-family residential real estate loans and, to a lesser extent, commercial real estate, commercial and industrial, and consumer loans. More recently, we have increased our focus on originating commercial real estate and commercial and industrial loans in an effort to diversify our overall loan portfolio, increase the overall yield earned on our loans, and assist in managing interest rate risk. To a limited extent, we also invest in securities for liquidity purposes. At December 31, 2017, our investment portfolio consisted municipal bonds, corporate bonds, mortgage-backed securities and U.S. treasury securities. We offer a variety of deposit products, including checking accounts, savings accounts and time deposits.
Our main office is located at 8700 Perry Highway, Pittsburgh, Pennsylvania 15237, and our telephone number at that address is (412) 837-6955. Our website address is www.ssbpgh.com. Information on our website is not and should not be considered a part of this annual report.
Market Area
SSB Bank provides financial services to individual consumers and businesses from its main branch office and headquarters located in the North Hills of Pittsburgh as well as its branch office located in the Northside of Pittsburgh. We view Allegheny County and the adjacent portions of surrounding counties as our primary market area for deposits and lending. We view the neighborhoods located in the North Side of Pittsburgh and in the North Hills Area of Pittsburgh as primary areas for growth.
Our primary focus in the marketplace is on small businesses, real estate investors, and homeowners. We believe that we have developed products and services that will meet the financial needs of our current and future customer base. Our marketing strategies focus on the strength of our knowledge of local consumer and small business markets, as well as expanding relationships with current business customers in particular.
Competition
We face intense competition within our market area both in making loans and attracting deposits. Our market area has a concentration of financial institutions that include large national and regional banks, community banks and credit unions. We also face competition from savings institutions, mortgage banking firms, consumer finance companies and, with respect to deposits, from money market funds, brokerage firms, mutual funds and insurance companies.
Lending Activities
General.   Our historical principal lending activity has been originating one- to four-family residential real estate loans and, to a lesser extent, commercial real estate loans, commercial and industrial loans, and consumer loans. More recently, we have increased our focus on originating commercial real estate and commercial and industrial loans in an effort to diversify our overall loan portfolio, increase the overall yield earned on our loans, and assist in managing interest rate risk. At December 31, 2017, our portfolio consisted predominantly of one- to four-family mortgages and commercial real estate loans. We primarily make loans to customers located in Allegheny County.
Historically, we have not originated significant amounts of loans for sale. In recent years, we have increased this activity in order to manage the duration and time to repricing of our loan portfolio, to manage interest rate risk, and to generate fee income. Currently, we generally attempt to sell all fixed-rate residential mortgages that we originate, with servicing rights retained. We also engage in a significant amount of loan participation sales of loans in our commercial portfolio in order to manage portfolio risk.
One- to Four-Family Residential Real Estate Lending.   At December 31, 2017, we had $75.9 million of loans secured by one- to four-family real estate, representing 53.6% of our total loan portfolio. Our one- to four-family residential real estate loans typically have terms of up to 30 years. Our adjustable-rate one- to four-family residential mortgage loans have an initial five year fixed-interest rate period followed by annual adjustments to the interest rate. Interest rates are generally based on LIBOR. Our one- to four-family residential real estate loans are generally underwritten to internal guidelines, although recently we have begun underwriting loans to agency guidelines. We generally limit the loan-to-value ratios of our one- to
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four-family residential mortgage loans to 80% of the purchase price or appraised value, whichever is lower. In addition, we occasionally make one- to four-family residential mortgage loans with loan-to-value ratios in excess of 80% of the purchase price or appraised value, whichever is less, with private mortgage insurance, but not to exceed 95%.
We also have a mortgage banking operation that generates mortgage loans through three mortgage loan originators and three correspondent mortgage companies. Loans are originated both for sale in the secondary market and for retention in portfolio.
Currently, we retain all adjustable-rate residential mortgage loans that we originate and generally seek to sell the majority of fixed-rate residential mortgage loans that we originate, with servicing rights retained, through the Mortgage Partnership Finance program administered by the Federal Home Loan Bank. During the years ended December 31, 2017 and 2016, we sold $14.5 million and $5.5 million, respectively, of one- to four-family mortgages. During the years ended December 31, 2017 and 2016, we earned servicing fee income of  $97,000 and $66,000, respectively. At December 31, 2017, we serviced $45.4 million of one- to four-family residential real estate loans held by others.
We do not offer “interest only” mortgage loans on permanent one- to four-family residential real estate loans, where the borrower pays interest for an initial period, after which the loan converts to a fully amortizing loan. Additionally, we do not offer loans that provide for negative amortization of principal, such as “Option ARM” loans, where the borrower can pay less than the interest owed on the loan, resulting in an increased principal balance during the life of the loan, or mortgage loans with balloon terms, pursuant to which a loan does not fully amortize over its relatively short term and the outstanding amount becomes payable in full at the end of the term.
Commercial Real Estate Loans.   In recent years, we have sought to increase our commercial real estate loans. Our commercial real estate loans are secured primarily by one- to four-family and multi-family non-owner occupied investment properties, hotels, and mixed-use properties, which may include both apartment and condominium units and retail or office space, all of which are located in our primary market area. At December 31, 2017, we had $50.1 million in commercial real estate loans, representing 35.4% of our total loan portfolio. This amount included $35.7 million of one- to four-family, non-owner-occupied investment properties, and $5.2 million of multi-family residential real estate loans, which are described below. At December 31, 2017, $9.2 million of our commercial real estate loans were for owner-occupied properties.
Our commercial real estate loans are generally balloon loans, with a five-year, fixed interest rate term based on a 20-year amortization schedule. We also offer fifteen-year, fixed-interest rate commercial real estate loans, without balloon terms. We also offer ten and twenty-year fixed-rate multi-family residential real estate loans, without balloon terms. The maximum loan-to-value ratio of our commercial real estate loans is generally 80%. At December 31, 2017, the average balance of our commercial real estate loans was $160,000, and our largest commercial real estate loan totaled $1.5 million and was secured by commercial real estate. At December 31, 2017, this loan was performing according to its original terms.
We consider a number of factors in originating commercial real estate loans. We evaluate the qualifications and financial condition of the borrower, including credit history, profitability and expertise, as well as the value and condition of the property securing the loan. When evaluating the qualifications of the borrower, we consider the financial resources of the borrower, the borrower’s experience in owning or managing similar property and the borrower’s payment history with us and other financial institutions. In evaluating the property securing the loan, the factors we consider include the ratio of the loan amount to the appraised value of the mortgaged property and the debt service coverage ratio (the ratio of net operating income to debt service). We require appraisals by state certified appraisers for all real estate related or business purpose loans for $250,000 or more. Personal guarantees are generally obtained by individuals who own 20% or more of the borrowing business. We engage a third party to perform a preliminary site evaluation to determine environmental risk for each commercial property and conduct additional testing, if necessary.
We generally limit our loans-to-one borrower to 10% of capital, or approximately $1.2 million at December 31, 2017. At December 31, 2017, our largest commercial real estate relationship was approximately $3.0 million, which amount consists of loans secured by one- to four-family non-owner occupied and multi-family properties.
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In recent years, we have begun to sell participation interests in individual commercial real estate loans that we originate to other financial institutions in order to reduce portfolio risk and manage our liquidity. Generally we retain 50% of the loan amount and continue to service such loans.
Multi-Family Residential Real Estate Loans.   At December 31, 2017, multi-family real estate loans totaled $5.2 million, or 3.7% of our total loan portfolio. Our multi-family real estate loans are typically secured by properties consisting of five or more rental units in our market area. At December 31, 2017, our largest multi-family residential real estate loan had an outstanding balance of  $540,000 and was secured by real estate containing retail space and apartments. At December 31, 2017, this loan was performing according to its original terms.
Our multi-family residential real estate loans are generally balloon loans, with five-year, seven-year or ten-year fixed-interest rate terms based on a 20-year amortization schedule. The maximum loan-to-value ratio of our multi-family residential real estate loans is generally 80% and we generally limit our loans-to-one borrower to 10% of capital, or approximately $1.2 million at December 31, 2017.
We consider a number of factors in originating multi-family residential real estate loans. We evaluate the qualifications and financial condition of the borrower, including credit history, profitability and expertise, as well as the value and condition of the property securing the loan. When evaluating the qualifications of the borrower, we consider the financial resources of the borrower, the borrower’s experience in owning or managing similar property and the borrower’s payment history with us and other financial institutions. In evaluating the property securing the loan, the factors we consider include the ratio of the loan amount to the appraised value of the mortgaged property and the debt service coverage ratio (the ratio of net operating income to debt service). We require appraisals by state certified appraisers for all real estate related or business purpose loans for $250,000 or more. Personal guarantees are generally obtained by individuals who own 20% or more of the borrowing business. We engage a third party to perform a preliminary site evaluation to determine environmental risk for each multi-family residential property and conduct additional testing, if necessary.
In recent years, we have begun to sell participation interest in individual multi-family real estate loans that we originate to other financial institutions in order to reduce portfolio risk and manage our liquidity. Generally we retain 50% of the loan amount and continue to service such loans. We are not an active purchaser of such loans.
Construction Loans.   We originate loans to individual homeowners and a limited group of established local builders to finance the construction of one- to four-family residential properties, and commercial and multi-family properties. At December 31, 2017, construction loans totaled $11.2 million, or 7.9% of our total loan portfolio, consisting of  $9.9 million of one- to four-family residential construction loans and $1.3 million of commercial and multi-family real estate construction loans. These loans generally are secured by properties located in our primary market area. We generally do not originate speculative construction loans, which are construction loans made to a builder who does not have a buyer under contract for the completed property when we originate the loan. At December 31, 2017, we did not have any speculative construction loans outstanding.
Our commercial and multi-family real estate construction loans typically involve purchase and renovation projects, and are primarily secured by non-owner-occupied properties located within the Pittsburgh city limits. Generally, the construction period of these loans may last up to 18 months, during which the borrower may make payments of interest only. Upon completion of construction, commercial construction loans generally become fixed-rate five-year balloon loans, based on a 20-year amortization schedule. The maximum loan-to-value ratio of such loans is generally 80%.
We also offer residential construction mortgages, which are made for the purpose of constructing a borrower’s primary residence. Generally, the construction period of these loans may last up to 12 months, during which a borrower may make payments of interest only. Construction periods of longer than 12 months require the approval of our senior lending officer or the president, chief executive officer and chief financial officer. Licensed contractors must be approved by us and an inspection of the construction process is performed before each scheduled disbursement to verify the stages of construction. Upon completion of construction, all residential construction mortgages become fixed-rate mortgages, which we attempt to sell, with servicing rights retained. The home must be fully completed and certified as such by the inspector before final disbursements and permanent financing.
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At December 31, 2017, our largest construction loan had an outstanding balance of  $700,000 and was secured by residential real estate. At December 31, 2017, this loan was performing according to its original terms.
Commercial and Industrial Loans.   We make commercial and industrial loans, primarily in our market area, to a variety of professionals, sole proprietorships, and small businesses. Our commercial lending efforts focus on experienced, growing small- to medium-sized, privately-held companies with solid historical and projected cash flow that operate in our market areas. These loans are generally secured by blanket liens on business assets, although we do from time to time offer unsecured lines of credit. At December 31, 2017, commercial and industrial loans were $11.5 million, or 8.1% of total loans, of which $651,000 were unsecured.
Our commercial lending products include term loans and revolving lines of credit. Commercial lines of credit are typically made with variable interest rates, which are adjusted annually and float over time. Term loans generally consist of fixed-rate loans for equipment, with terms of up to seven years and a maximum loan-to-value ratio of 100% of the purchase price.
When making commercial and industrial loans, we consider the financial statements of the borrower, our lending history with the borrower, the debt service capabilities and global cash flows of the borrower and other guarantors, the projected cash flows of the business and the value of the collateral, accounts receivable, inventory and equipment.
Our largest commercial and industrial loan at December 31, 2017 totaled $1.2 million and was a term loan secured by accounts receivable, inventory, equipment and other business assets. At December 31, 2017, this loan was performing in accordance with its original terms.
Consumer Loans and Home Equity Lines of Credit.   We offer a limited range of consumer loans, principally to customers residing in our primary market area with other relationships with us and with acceptable credit ratings. Our consumer loans consist primarily of loans on new and used automobiles, as well as second mortgage loans and home equity lines of credit. Adjustable-rate lines of credit are prime-based and reset each quarter. The maximum term for auto loans depends on the age of the vehicle, generally with a maximum term of seven years and maximum amount of  $75,000, for new vehicles. Unsecured lines of credit, home equity loans, and home equity lines of credit have terms of up to 5, 10, and 20 years, respectively. The maximum loan-to-value ratio for home equity loans and lines of credit is generally up to 90% (taking into account any outstanding first mortgage loan balance), while the maximum amount for home equity lines of credit is generally $250,000. At December 31, 2017, consumer loans and home equity lines of credit were $4.0 million, or 2.8% of total loans, of which $1.7 million were new and used auto loans.
The procedures for underwriting home equity lines of credit include an assessment of the applicant’s payment history on other debts and ability to meet existing obligations and payments on the proposed loan, including an assessment of the borrower’s debt-to-income ratio. Although the applicant’s creditworthiness is a primary consideration, the underwriting process also includes a comparison of the value of the collateral to the proposed loan amount. Borrowers are required to maintain insurance coverage whenever collateral is pledged in support of the loan.
Loan Underwriting Risks
Commercial Real Estate Loans.   Loans secured by commercial real estate generally have larger balances and involve a greater degree of risk than one- to four-family residential real estate loans. The primary concern in commercial real estate lending is the borrower’s creditworthiness and the feasibility and cash flow potential of the project. Payments on loans secured by income properties often depend on successful operation and management of the properties. As a result, repayment of such loans may be subject to adverse conditions in the real estate market or the economy to a greater extent than residential real estate loans. To monitor cash flows on income properties, we require borrowers and loan guarantors to provide annual financial statements on commercial real estate loans. In reaching a decision on whether to make a commercial real estate loan, we consider and review a global cash flow analysis of the borrower and consider the net operating income of the property, the borrower’s expertise, credit history and profitability and the value of the underlying property. We generally require that the properties securing these real estate
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loans have an aggregate debt service ratio, including the guarantor’s cash flow and the borrower’s other projects, of at least 1.20x. An environmental phase one report is obtained when the possibility exists that hazardous materials may have existed on the site, or the site may have been impacted by adjoining properties that handled hazardous materials. Additional environmental evaluations are performed, if required.
If we foreclose on a commercial real estate loan, the marketing and liquidation period to convert the real estate asset to cash can be lengthy with substantial holding costs. In addition, vacancies, deferred maintenance, repairs and market stigma can result in prospective buyers expecting sale price concessions to offset their real or perceived economic losses for the time it takes them to return the property to profitability. Depending on the individual circumstances, initial charge-offs and subsequent losses on commercial real estate loans can be unpredictable and substantial.
Additionally, commercial construction lending presents additional risks when compared with traditional permanent lending, because funds are advanced upon the security of the project, which is of uncertain value before its completion. Because of the uncertainties inherent in estimating construction costs, as well as the market value of the completed project and the effects of governmental regulation of real property, it is relatively difficult to evaluate accurately the total funds required to complete a project and the related loan-to-value ratio. These loans often involve the disbursement of substantial funds with repayment substantially dependent on the success of the ultimate project and the ability of the borrower to sell or lease the property or obtain permanent take-out financing, rather than the ability of the borrower or guarantor to repay principal and interest. If the appraised value of a completed project proves to be overstated, we may have inadequate security for the repayment of the loan upon completion of construction of the project and may incur a loss.
Commercial and Industrial Loans.   Unlike residential real estate loans, which generally are made on the basis of the borrower’s ability to make repayment from his or her employment or other income, and which are secured by real property whose value tends to be more easily ascertainable, commercial and industrial loans are of higher risk and typically are made on the basis of the borrower’s ability to make repayment from the cash flow of the borrower’s business and the collateral securing these loans may fluctuate in value. Our commercial and industrial loans are originated primarily based on the identified cash flow of the borrower and secondarily on the underlying collateral provided by the borrower. Most often, this collateral consists of real estate, accounts receivable, inventory or equipment. Credit support provided by the borrower for most of these loans is based on the liquidation of the pledged collateral and enforcement of a personal guarantee, if any. Further, any collateral securing such loans may depreciate over time, may be difficult to appraise and may fluctuate in value. As a result, the availability of funds for the repayment of commercial and industrial loans may depend substantially on the success of the business itself.
Adjustable-Rate Loans.   While we believe that adjustable-rate loans better offset the adverse effects of an increase in interest rates as compared to fixed-rate loans, an increased monthly payment required of adjustable-rate loan borrowers in a rising interest rate environment could cause an increase in delinquencies and defaults. The marketability of the underlying collateral also may be adversely affected in a high interest rate environment.
Balloon Loans.   Although balloon loans help to mitigate our vulnerability to interest rate risk because they reprice at the end of the short balloon term, the ability of the borrower to renew or repay the loan and the marketability of the underlying collateral may be adversely affected if real estate values decline or if interest rates rise before the expiration of the balloon term.
Consumer Loans.   Consumer loans may entail greater risk than residential real estate loans, particularly in the case of consumer loans that are unsecured or secured by assets that depreciate rapidly, such as motor vehicles. Repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment for the outstanding loan and a small remaining deficiency often does not warrant further substantial collection efforts against the borrower. Consumer loan collections depend on the borrower’s continuing financial stability, and therefore are likely to be adversely affected by various factors, including job loss, divorce, illness or personal bankruptcy. Furthermore, the application of various federal and state laws, including federal and state bankruptcy and insolvency laws, may limit the amount that can be recovered on such loans.
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Originations, Purchases and Sales of Loans
Lending activities are conducted by loan personnel operating at our main and branch office locations. All loans originated by us are underwritten pursuant to our policies and procedures. We primarily originate fixed-rate residential mortgage loans and adjustable-rate commercial real estate loans. Our ability to originate adjustable-rate loans is dependent upon customer demand for such loans, which is affected by current and expected future levels of market interest rates. We originate real estate and other loans through our loan officers, marketing efforts, our customer base, walk-in customers and referrals from existing customers, real estate agents, brokers, attorneys, builders and others.
We also purchase loans from correspondent banks to supplement our loan production. These loans generally consist of one- to four-family residential mortgage loans. For the year ended December 31, 2017, we purchased $12.2 million of whole loans. Substantially all of our purchased loans are to borrowers located in our primary market area. We underwrite our participation interest in the loan that we are purchasing according to our own underwriting criteria and procedures.
Generally, we seek to sell all of our fixed-rate residential real estate loans upon origination, with servicing rights retained, in order to manage the duration and time to repricing of our loan portfolio, and to generate fee income. We currently sell loans through Mortgage Partnership Finance program administered by the Federal Home Loan Bank of Pittsburgh. We sold $21.5 million of fixed-rate residential mortgages during the year ended December 31, 2017, all on a servicing-retained basis. At December 31, 2017, we serviced $45.4 million of one- to four-family residential real estate loans and $5.5 million of commercial real estate loans for others and we generated $97,000 in loan servicing fee income during the year ended December 31, 2017.
In addition, we have begun to sell participation interests in individual commercial loans that we originate in order to reduce portfolio risk and manage our liquidity. We generally retain 50% of the loan amount and continue to service such loans.
Loan Approval Procedures and Authority
Our lending activities follow written, non-discriminatory, underwriting standards and loan origination procedures established by our board of directors and management. Consistent with our lending policy, the board of directors has granted loan approval authority to certain senior officers up to prescribed limits, not exceeding $2.0 million in the case of the President and Chief Executive Officer, $1.0 million in the case of the Chief Lending Officer, and $500,000 in the case of the Commercial Loan Officer. Loans in excess of such amounts require the approval of the board of directors, as do any extensions of credit to borrowers who already have significant outstanding loan relationships. Loans that involve exceptions to policy, including loans in excess of our internal loans-to-one borrower limitation, must be authorized by the board of directors. Exceptions are reported to the board of directors monthly.
Loans-to-One Borrower
Under Pennsylvania banking laws, a Pennsylvania chartered savings bank, with certain limited exceptions, may lend to a single or related group of borrowers on an “unsecured” basis an amount equal to 15% of its capital accounts, which is the aggregate of capital, surplus, undivided profits, capital securities and reserve for loan losses. We have established an internal limit for an individual loan of 10% of our capital accounts, or approximately $1.2 million as of December 31, 2017.
Under certain circumstances, for instance well qualified customers or customers with multiple individually qualified projects, our internal loans-to-one borrower limit may be exceeded subject to the approval of the board of trustees. As of December 31, 2017 we had three loans that equaled or exceeded our individual loan limit with an aggregate balance of  $3.9 million. The three loans include a commercial and industrial loan of  $1.2 million secured by accounts receivable, inventory, equipment and other business assets; a commercial mortgage loan of  $1.2 million secured by commercial real estate, receivables, and an assignment of gross revenues; and a commercial mortgage of  $1.5 million secured by commercial real estate. At December 31, 2017, all three loans were performing in accordance with their original terms. At
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December 31, 2017, our largest lending relationship consisted of 19 loans aggregating $3.0 million, secured by 1-4 family real estate and multifamily real estate. At December 31, 2017, each loan in this relationship was performing according to its original repayment terms.
Investment Activities
We have legal authority to invest in various types of investment securities and liquid assets, including U.S. Treasury obligations, securities of various government-sponsored enterprises, residential mortgage-backed securities and municipal government securities, deposits at the Federal Home Loan Bank of Pittsburgh, certificates of deposit of federally insured institutions, and investment grade corporate bonds. We also are required to maintain an investment in Federal Home Loan Bank of Pittsburgh stock, which investment is based on the level of our Federal Home Loan Bank borrowings. Although we have the authority under applicable law to invest in derivative securities, we had no investments in derivative securities at December 31, 2017. At December 31, 2017, our investment portfolio had a fair value of $2.6 million and consisted of municipal bonds, corporate bonds, mortgage-backed securities and U.S. treasury securities. See Notes 2, 3 and 4 of the Notes to Financial Statements.
Our investment objectives are to maintain liquidity for use in our lending and deposit activities and to supplement interest income when demand for loans is weak. The Asset and Liability Committee of our board of trustees has the overall responsibility for the investment portfolio. Our President, Chief Executive Officer and Chief Financial Officer is responsible for implementation of the investment policy and monitoring our investment performance. The Asset and Liability Committee is responsible for monthly and quarterly reviews and reports on the status of our investment portfolio.
Sources of Funds
General.   Deposits have traditionally been our primary source of funds for our lending and investment activities. We also use Federal Home Loan Bank of Pittsburgh advances to supplement cash flow needs, as needed. In addition, funds are derived from scheduled loan payments, investment maturities, loan prepayments, retained earnings and income on interest-earning assets. While scheduled loan payments and income on interest-earning assets are relatively stable sources of funds, deposit inflows and outflows can vary widely and are influenced by prevailing interest rates, market conditions and levels of competition.
Deposit Accounts.   The majority of our deposits are from depositors who reside in our primary market area, however, we do accept some brokered and listing service deposits. Deposits are attracted through the offering of a broad selection of deposit instruments for both individuals and businesses. At December 31, 2017, our deposits totaled $132.4 million.
Deposit account terms vary according to the minimum balance required, the time period that funds must remain on deposit, and the interest rate paid on such deposits, among other factors. In determining the terms of our deposit accounts, we consider the rates offered by our competition, our liquidity needs, profitability, and customer preferences and concerns. We generally review our deposit mix and pricing on a weekly basis. Our deposit pricing strategy has generally been to offer competitive rates and services and to periodically offer special rates in order to attract deposits of a specific type or term.
Borrowings.   We use advances from the Federal Home Loan Bank of Pittsburgh to supplement our supply of investable funds. The Federal Home Loan Bank functions as a central reserve bank providing credit for its member financial institutions. As a member, we are required to own capital stock in the Federal Home Loan Bank and are authorized to apply for advances on the security of such stock and certain of our whole first mortgage loans and other assets (principally securities which are obligations of, or guaranteed by, the United States), provided certain standards related to creditworthiness have been met. Advances are made under several different programs, each having its own interest rate and range of maturities. Depending on the program, limitations on the amount of advances are based either on a fixed percentage of an institution’s net worth or on the Federal Home Loan Bank’s assessment of the institution’s creditworthiness. At December 31, 2017, we had $79.1 million of available borrowing capacity with the Federal Home Loan Bank of Pittsburgh and had $26.4 million in advances outstanding.
Personnel
As of December 31, 2017, we had 17 full-time employees and 3 part-time employees. Our employees are not represented by any collective bargaining group. Management believes that we have good working relations with our employees.
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Subsidiaries
SSB Bank is the wholly-owned subsidiary of SSB Bancorp, Inc. SSB Bancorp, Inc. and SSB Bank have no other subsidiaries.
Regulation and Supervision
General
As a bank holding company, SSB Bancorp, Inc. is required to comply with the rules and regulations of the Federal Reserve Board and Pennsylvania Department of Banking and Securities. It is required to file certain reports with the Federal Reserve Board and is subject to examination by and the enforcement authority of the Federal Reserve Board and the Pennsylvania Department of Banking and Securities. SSB Bancorp, Inc. is also subject to the rules and regulations of the Securities and Exchange Commission under the federal securities laws.
SSB Bank is a Pennsylvania chartered stock savings bank. Its deposits are insured up to applicable limits by the Federal Deposit Insurance Corporation. SSB Bank is subject to extensive regulation by the Pennsylvania Department of Banking and Securities, as its chartering agency, and by the Federal Deposit Insurance Corporation, as its deposit insurer. SSB Bank is required to file reports with, and is periodically examined by, the Federal Deposit Insurance Corporation and the Pennsylvania Department of Banking and Securities concerning its activities and financial condition and must obtain regulatory approvals before entering into certain transactions, including, but not limited to, mergers with or acquisitions of other financial institutions. SSB Bank is a member of the Federal Home Loan Bank of Pittsburgh, which is one of the 11 regional banks in the Federal Home Loan Bank System. SSB Bank’s relationship with its depositors and borrowers also is regulated to a great extent by federal law and, to a lesser extent, state law, including in matters concerning the ownership of deposit accounts and the form and content of SSB Bank’s loan documents.
The regulation and supervision of SSB Bank establish a comprehensive framework of activities in which an institution can engage and are intended primarily for the protection of depositors and borrowers and, for purposes of the Federal Deposit Insurance Corporation, the protection of the insurance fund. The regulatory structure also gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes.
Set forth below is a description of certain material regulatory requirements that are applicable to SSB Bank and SSB Bancorp, Inc. This description of statutes and regulations is not intended to be a complete description of such statutes and regulations and their effects on SSB Bank and SSB Bancorp, Inc. Any change in these laws or regulations, whether by federal legislators or the applicable regulatory agencies, could have a material adverse impact on the operations of SSB Bancorp, Inc. and SSB Bank.
Holding Company Regulation
SSB Bancorp, Inc. is a bank holding company within the meaning of Bank Holding Company of 1956, as amended. As such, SSB Bancorp, Inc. is registered with the Federal Reserve Board and is subject to regulations, examinations, supervision and reporting requirements applicable to bank holding companies. In addition, the Federal Reserve Board has enforcement authority over SSB Bancorp, Inc. and its non-savings bank subsidiaries. Among other things, this authority permits the Federal Reserve Board to restrict or prohibit activities that are determined to be a serious risk to the subsidiary savings bank.
A bank holding company is generally prohibited from engaging in non-banking activities, or acquiring direct or indirect control of more than 5% of the voting securities of any company engaged in non-banking activities. One of the principal exceptions to this prohibition is for activities found by the Federal Reserve Board to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. Some of the principal activities that the Federal Reserve Board has determined by regulation to be so closely related to banking are: (i) making or servicing loans; (ii) performing certain data processing services; (iii) providing discount brokerage services; (iv) acting as fiduciary, investment or financial advisor;
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(v) leasing personal or real property; (vi) making investments in corporations or projects designed primarily to promote community welfare; and (vii) acquiring a savings and loan association whose direct and indirect activities are limited to those permitted for bank holding companies.
The Gramm-Leach-Bliley Act of 1999 authorized a bank holding company that meets specified conditions, including being “well capitalized” and “well managed,” to opt to become a “financial holding company” and thereby engage in a broader array of financial activities than previously permitted. Such activities can include insurance underwriting and investment banking.
SSB Bancorp, Inc. is subject to the Federal Reserve Board’s capital adequacy guidelines for bank holding companies (on a consolidated basis), which have historically been similar to, though less stringent than, those of the Federal Deposit Insurance Corporation for SSB Bank. The Dodd-Frank Act, however, required the Federal Reserve Board to promulgate consolidated capital requirements for depository institution holding companies that are no less stringent, both quantitatively and in terms of components of capital, than those applicable to institutions themselves. Instruments such as cumulative preferred stock and trust preferred securities would no longer be includable as Tier 1 capital, as is currently the case with bank holding companies, subject to certain grandfathering rules. The previously discussed final rule regarding regulatory capital requirements implements the Dodd-Frank Act as to bank holding company capital standards. Consolidated regulatory capital requirements identical to those applicable to the subsidiary banks apply to bank holding companies (with greater than $1.0 billion of assets) at January 1, 2015. As is the case with institutions themselves, the capital conservation buffer will be phased-in between 2016 and 2019.
A bank holding company is generally required to give the Federal Reserve Board prior written notice of any purchase or redemption of then outstanding equity securities if the gross consideration for the purchase or redemption, when combined with the net consideration paid for all such purchases or redemptions during the preceding 12 months, is equal to 10% or more of the company’s consolidated net worth. The Federal Reserve Board may disapprove such a purchase or redemption if it determines that the proposal would constitute an unsafe and unsound practice, or would violate any law, regulation, Federal Reserve Board order or directive, or any condition imposed by, or written agreement with, the Federal Reserve Board. There is an exception to this approval requirement for well-capitalized bank holding companies that meet certain other conditions.
The Federal Reserve Board has issued a policy statement regarding capital distributions, including dividends, by bank holding companies. In general, the policies provide that dividends should be paid only out of current earnings and only if the prospective rate of earnings retention by the bank holding company appears consistent with the organization’s capital needs, asset quality and overall financial condition. The policies also require that a bank holding company serve as a source of financial strength to its subsidiary banks by standing ready to use available resources to provide adequate capital funds to those banks during periods of financial stress or adversity and by maintaining the financial flexibility and capital-raising capacity to obtain additional resources for assisting its subsidiary banks where necessary. The Dodd-Frank Act codified the source of strength doctrine. Under the prompt corrective action laws, the ability of a bank holding company to pay dividends may be restricted if a subsidiary bank becomes undercapitalized. These regulatory policies could affect the ability of SSB Bancorp, Inc. to pay dividends or otherwise engage in capital distributions.
Under the Federal Deposit Insurance Act, depository institutions are liable to the Federal Deposit Insurance Corporation for losses suffered or anticipated by the Federal Deposit Insurance Corporation in connection with the default of a commonly controlled depository institution or any assistance provided by the Federal Deposit Insurance Corporation to such an institution in danger of default.
The status of SSB Bancorp, Inc. as a registered bank holding company under the Bank Holding Company Act of 1956 does not exempt it from certain federal and state laws and regulations applicable to corporations generally, including, without limitation, certain provisions of the federal securities laws.
Federal Securities Laws
SSB Bancorp, Inc.’s common stock is registered with the Securities and Exchange Commission. SSB Bancorp, Inc. is subject to the information, proxy solicitation, insider trading restrictions and other requirements under the Securities Exchange Act of 1934.
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Emerging Growth Company Status
SSB Bancorp, Inc. is an emerging growth company under the Jumpstart Our Business Startups Act (the “JOBS Act”). We will cease to be an emerging growth company upon the earliest of: (i) the end of the fiscal year following the fifth anniversary of the completion of our initial stock offering, (ii) the first fiscal year after our annual gross revenues are $1.0 billion or more, (iii) the date on which we have, during the previous three-year period, issued more than $1.0 billion in non-convertible debt securities, or (iv) the end of any fiscal year in which the market value of our common stock held by non-affiliates exceeded $700 million as of the end of the second quarter of that fiscal year. We expect to lose our status as an emerging growth company in January 2023, five years after the completion of our initial stock offering.
An “emerging growth company” may choose not to hold stockholder votes to approve annual executive compensation (more frequently referred to as “say-on-pay” votes) or executive compensation payable in connection with a merger (more frequently referred to as “say-on-golden parachute” votes). An emerging growth company also is not subject to the requirement that its auditors attest to the effectiveness of the company’s internal control over financial reporting, and can provide scaled disclosure regarding executive compensation. Finally, an emerging growth company may elect to comply with new or amended accounting pronouncements in the same manner as a private company, but must make such election when the company is first required to file a registration statement. Such an election is irrevocable during the period a company is an emerging growth company. We have elected to use the extended transition period to delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies.
Sarbanes-Oxley Act of 2002
The Sarbanes-Oxley Act of 2002 is intended to improve corporate responsibility, to provide for enhanced penalties for accounting and auditing improprieties at publicly traded companies and to protect investors by improving the accuracy and reliability of corporate disclosures pursuant to the securities laws. SSB Bancorp, Inc. has in place policies, procedures and systems designed to comply with these regulations, and SSB Bancorp, Inc. periodically reviews such policies, procedures and systems to ensure continued compliance with these regulations.
Change in Control Regulations
Under the Change in Bank Control Act, no person, or group of persons acting in concert, may acquire control of a bank holding company, such as SSB Bancorp, Inc., unless the Federal Reserve Board has been given 60 days’ prior written notice and not disapproved the proposed acquisition. The Federal Reserve Board considers several factors in evaluating a notice, including the financial and managerial resources of the acquirer and competitive effects. Control, as defined under the applicable regulations, means the power, directly or indirectly, to direct the management or policies of the company or to vote 25% or more of any class of voting securities of the company. Acquisition of more than 10% of any class of a bank holding company’s voting securities constitutes a rebuttable presumption of control under certain circumstances, including where, as will be the case with SSB Bancorp, Inc., the issuer has registered securities under Section 12 of the Securities Exchange Act of 1934.
In addition, federal regulations provide that no company may acquire control (as defined in the Bank Holding Company Act) of a bank holding company without the prior approval of the Federal Reserve Board. Any company that acquires such control becomes a “bank holding company” subject to registration, examination and regulation by the Federal Reserve Board.
Dodd-Frank Act
The Dodd-Frank Act made extensive changes in the regulation of depository institutions and their holding companies. The Dodd-Frank Act created a new Consumer Financial Protection Bureau as an independent bureau of the Federal Reserve Board. The Consumer Financial Protection Bureau is responsible for the implementation of the federal financial consumer protection and fair lending laws and regulations, a function previously assigned to prudential regulators, and now has the authority to impose new requirements. However, institutions of less than $10 billion in assets, such as SSB Bank, continue to be
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examined for compliance with consumer protection and fair lending laws and regulations by, and be subject to the enforcement authority of, their federal prudential regulator, although the Consumer Financial Protection Bureau has back-up authority to examine and enforce consumer protection laws against all institutions, including institutions with less than $10 billion in assets.
In addition to creating the Consumer Financial Protection Bureau, the Dodd-Frank Act, among other things, directed changes in the way that institutions are assessed for deposit insurance, mandated the imposition of tougher consolidated capital requirements on holding companies, required the issuance of regulations requiring originators of securitized loans to retain a percentage of the risk for the transferred loans, imposed regulatory rate-setting for certain debit card interchange fees, repealed restrictions on the payment of interest on commercial demand deposits and contained a number of reforms related to mortgage originations. Many of the provisions of the Dodd-Frank Act are subject to delayed effective dates and/or still require the issuance of implementing regulations. Their impact on operations cannot yet be fully assessed. However, there is significant possibility that the Dodd-Frank Act will, at a minimum, result in increased regulatory burden, compliance costs and interest expense for SSB Bank and SSB Bancorp, Inc.
The Dodd-Frank Act contained the so-called “Volcker Rule,” which generally prohibits banking organizations from engaging in proprietary trading and from investing in, sponsoring or having certain relationships with hedge or private equity funds (“covered funds”). The federal agencies have issued a final rule implementing the Volcker Rule which, among other things, requires banking organizations to restructure and limit certain of their investments in and relationships with covered funds.
Pennsylvania Savings Bank Law
The Pennsylvania Banking Code of 1965, as amended (the “Banking Code”), contains detailed provisions governing the organization, operations, corporate powers, savings and investment authority, branching rights and responsibilities of directors, officers and employees of Pennsylvania savings banks. A Pennsylvania savings bank may locate or change the location of its principal place of business and establish an office anywhere in, or adjacent to, Pennsylvania, with the prior approval of the Pennsylvania Department of Banking and Securities. The Banking Code delegates extensive rulemaking power and administrative discretion to the Pennsylvania Department of Banking and Securities in its supervision and regulation of state-chartered savings banks.
The Pennsylvania Department of Banking and Securities generally examines each savings bank not less frequently than once every two years. Although the Pennsylvania Department of Banking and Securities may accept the examinations and reports of the Federal Deposit Insurance Corporation in lieu of its own examination, the current practice is for the Department of Banking to conduct individual examinations. The Pennsylvania Department of Banking and Securities may order any savings bank to discontinue any violation of law or unsafe or unsound business practice and may direct any director, officer, or employee of a savings bank engaged in a violation of law, unsafe or unsound practice or breach of fiduciary duty to show cause at a hearing before the Pennsylvania Department of Banking and Securities why such person should not be removed. The Pennsylvania Department of Banking and Securities may also appoint a receiver or conservator for an institution in appropriate cases.
The “Banking Law Modernization Package” was Pennsylvania legislation effective on December 24, 2012. The legislation was intended to update, simplify and modernize the banking laws of Pennsylvania and reduce regulatory burden where possible. The legislation, among other things, increased the threshold for investments in bank premises without the approval of the Pennsylvania Department of Banking and Securities from 25% of capital, surplus, undivided profits and capital securities to 100%, eliminated archaic lending requirements and pricing restrictions, and changed the procedure for Pennsylvania chartered institutions closing a branch from an application for approval to a notice. The legislation also clarified the examination and enforcement authority of the Pennsylvania Department of Banking and Securities over subsidiaries of Pennsylvania institutions, and authorized the assessment of civil money penalties of up to $25,000 under certain circumstances for violations of laws or orders related to the institution or unsafe or unsound practices or breaches of fiduciary duties.
In the case of a Pennsylvania-chartered savings bank, the Banking Code states that no dividend may be paid out of surplus without the approval of the Pennsylvania Department of Banking and Securities. Dividends may be paid out of accumulated net earnings. No dividend may generally be paid that would result in SSB Bank failing to comply with its regulatory capital requirements.
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Federal Bank Regulation
Capital Requirements.   Under Federal Deposit Insurance Corporation regulations, federally insured state-chartered banks that are not members of the Federal Reserve System (“state non-member banks”), such as SSB Bank, are required to comply with minimum leverage capital requirements. The minimum capital leverage requirement is a ratio of Tier 1 capital to total assets that is not less than 4.0%. Tier 1 capital consists of common equity Tier 1 (“CET1”) and “Additional Tier 1 capital” instruments meeting specified requirements. CET1 is defined as common stock, plus related surplus, and retained earnings plus limited amounts of minority interest in the form of common stock, less the majority of the regulatory deductions.
The Federal Deposit Insurance Corporation regulations require state non-member banks to maintain certain levels of regulatory capital in relation to regulatory risk-weighted assets. The ratio of regulatory capital to regulatory risk-weighted assets is referred to as a bank’s “risk-based capital ratio.” Risk-based capital ratios are determined by allocating assets and specified off-balance sheet items (including recourse obligations, direct credit substitutes and residual interests) to risk-weighted categories ranging from 0.0% to 200.0%, with higher levels of capital being required for the categories perceived as representing greater risk.
State non-member banks must maintain a minimum ratio of total capital to risk-weighted assets of at least 8.0%, of which at least one-half must be Tier 1 capital. Total capital consists of Tier 1 capital and Tier 2 capital. Tier 1 capital consists of common stock, plus related surplus and retained earnings. Under the new capital rules, for most banking organizations, the most common form of Additional Tier 1 capital is noncumulative perpetual preferred stock and the most common form of Tier 2 capital is subordinated notes and a portion of the allowance for loan and lease losses, in each case, subject to the new capital rules’ specific requirements. Banks that engage in specified levels of trading activities are subject to adjustments in their risk based capital calculation to ensure the maintenance of sufficient capital to support market risk.
In July 2013, the Federal Deposit Insurance Corporation and the other federal bank regulatory agencies issued a final rule that has revised their leverage and risk-based capital requirements and the method for calculating risk-weighted assets to make them consistent with agreements that were reached by the Basel Committee on Banking Supervision and certain provisions of the Dodd-Frank Act. Among other things, the rule establishes a new common equity Tier 1 minimum capital requirement (4.5% of risk-weighted assets), increases the minimum Tier 1 capital to risk-based assets requirement (from 4% to 6% of risk-weighted assets), sets the leverage ratio at a uniform 4% of total assets and assigns a higher risk weight (150%) to exposures that are more than 90 days past due or are on non-accrual status and to certain commercial real estate facilities that finance the acquisition, development or construction of real property. The final rule also requires unrealized gains and losses on certain “available for sale” securities holdings to be included for purposes of calculating regulatory capital requirements unless a one-time opt-out is exercised. SSB Bank has elected to exercise its one-time option to opt-out of the requirement under the final rule to include certain “available for sale” securities holdings for purposes of calculating its regulatory capital requirements. The rule limits a banking organization’s capital distributions and certain discretionary bonus payments to executive officers if the banking organization does not hold a “capital conservation buffer” which, when fully phased in, will consist of 2.5% of common equity Tier 1 capital to risk-weighted assets in addition to the amount necessary to meet its minimum risk-based capital requirements. The final rule became effective on January 1, 2015. The “capital conservation buffer” will be phased in from January 1, 2016 to January 1, 2019, when the full capital conservation buffer will be effective.
The Federal Deposit Insurance Corporation Improvement Act required each federal banking agency to revise its risk-based capital standards for insured institutions to ensure that those standards take adequate account of interest-rate risk, concentration of credit risk, and the risk of nontraditional activities, as well as to reflect the actual performance and expected risk of loss on multi-family residential loans. The Federal Deposit Insurance Corporation, along with the other federal banking agencies, adopted a regulation providing that the agencies will take into account the exposure of a bank’s capital and economic value to changes in interest rate risk in assessing a bank’s capital adequacy. The Federal Deposit Insurance Corporation also has authority to establish individual minimum capital requirements in appropriate cases upon determination that an institution’s capital level is, or is likely to become, inadequate in light of the particular circumstances.
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Standards for Safety and Soundness.   As required by statute, the federal banking agencies adopted final regulations and Interagency Guidelines Establishing Standards for Safety and Soundness to implement safety and soundness standards. The guidelines set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at insured depository institutions before capital becomes impaired. The guidelines address internal controls and information systems, internal audit system, credit underwriting, loan documentation, interest rate exposure, asset growth, asset quality, earnings and compensation, fees and benefits. The agencies have also established standards for safeguarding customer information. If the appropriate federal banking agency determines that an institution fails to meet any standard prescribed by the guidelines, the agency may require the institution to submit to the agency an acceptable plan to achieve compliance with the standard.
Investment Activities.   All state-chartered Federal Deposit Insurance Corporation-insured banks, including savings banks, are generally limited in their investment activities to principal and equity investments of the type and in the amount authorized for national banks, notwithstanding state law, subject to certain exceptions. For example, state chartered banks may, with Federal Deposit Insurance Corporation approval, continue to exercise state authority to invest in common or preferred stocks listed on a national securities exchange and in the shares of an investment company registered under the Investment Company Act of 1940. The maximum permissible investment is 100% of Tier 1 Capital, as specified by the Federal Deposit Insurance Corporation’s regulations, or the maximum amount permitted by Pennsylvania law, whichever is less.
In addition, the Federal Deposit Insurance Corporation is authorized to permit such a state bank to engage in state-authorized activities or investments not permissible for national banks (other than non-subsidiary equity investments) if it meets all applicable capital requirements and it is determined that such activities or investments do not pose a significant risk to the Deposit Insurance Fund. The Federal Deposit Insurance Corporation has adopted procedures for institutions seeking approval to engage in such activities or investments. In addition, a non-member bank may control a subsidiary that engages in activities as principal that would only be permitted for a national bank to conduct in a “financial subsidiary” if a bank meets specified conditions and deducts its investment in the subsidiary for regulatory capital purposes.
Interstate Banking and Branching.   Federal law permits well capitalized and well managed bank holding companies to acquire banks in any state, subject to Federal Reserve Board approval, certain concentration limits and other specified conditions. Interstate mergers of banks are also authorized, subject to regulatory approval and other specified conditions. In addition, among other things, recent amendments made by the Dodd-Frank Act permit banks to establish de novo branches on an interstate basis provided that branching is authorized by the law of the host state for the banks chartered by that state.
Prompt Corrective Regulatory Action.   Federal law requires, among other things, that federal bank regulatory authorities take “prompt corrective action” with respect to banks that do not meet minimum capital requirements. For these purposes, the law establishes five capital categories: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized.
The Federal Deposit Insurance Corporation has adopted regulations to implement the prompt corrective action legislation. An institution is deemed to be “well capitalized” if it has a total risk-based capital ratio of 10.0% or greater, a Tier 1 risk-based capital ratio of 8.0% or greater, a Tier 1 leverage ratio of 5.0% or greater and a common equity Tier 1 ratio of 6.5% or greater. An institution is “adequately capitalized” if it has a total risk-based capital ratio of 8.0% or greater, a Tier 1 risk-based capital ratio of 6.0% or greater, a Tier 1 leverage ratio of 4.0% or greater and a common equity Tier 1 ratio of 4.5% or greater. An institution is “undercapitalized” if it has a total risk-based capital ratio of less than 8.0%, a Tier 1 risk-based capital ratio of less than 6.0%, a Tier 1 leverage ratio of less than 4.0% or a common equity Tier 1 ratio of less than 4.5%. An institution is deemed to be “significantly undercapitalized” if it has a total risk-based capital ratio of less than 6.0%, a Tier 1 risk-based capital ratio of less than 4.0%, a Tier 1 leverage ratio of less than 3.0% or a common equity Tier 1 ratio of less than 3.0%. An institution is considered to be “critically undercapitalized” if it has a ratio of tangible equity (as defined in the regulations) to total assets that is equal to or less than 2.0%. At December 31, 2017, SSB Bank was classified as a “well capitalized” institution.
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At each successive lower capital category, an insured depository institution is subject to more restrictions and prohibitions, including restrictions on growth, restrictions on interest rates paid on deposits, restrictions or prohibitions on payment of dividends, and restrictions on the acceptance of brokered deposits. Furthermore, if an insured depository institution is classified in one of the undercapitalized categories, it is required to submit a capital restoration plan to the appropriate federal banking agency, and the holding company must guarantee the performance of that plan. Based upon its capital levels, a bank that is classified as well-capitalized, adequately capitalized, or undercapitalized may be treated as though it were in the next lower capital category if the appropriate federal banking agency, after notice and opportunity for hearing, determines that an unsafe or unsound condition, or an unsafe or unsound practice, warrants such treatment. An undercapitalized bank’s compliance with a capital restoration plan is required to be guaranteed by any company that controls the undercapitalized institution in an amount equal to the lesser of 5.0% of the institution’s total assets when deemed undercapitalized or the amount necessary to achieve the status of adequately capitalized. If an “undercapitalized” bank fails to submit an acceptable plan, it is treated as if it is “significantly undercapitalized.” “Significantly undercapitalized” banks must comply with one or more of a number of additional restrictions, including but not limited to an order by the Federal Deposit Insurance Corporation to sell sufficient voting stock to become adequately capitalized, requirements to reduce total assets, cease receipt of deposits from correspondent banks or dismiss directors or officers, and restrictions on interest rates paid on deposits, compensation of executive officers and capital distributions by the parent holding company. “Critically undercapitalized” institutions are subject to additional measures including, subject to a narrow exception, the appointment of a receiver or conservator within 270 days after it obtains such status.
Transaction with Affiliates and Regulation W of the Federal Reserve Regulations.   Transactions between banks and their affiliates are governed by federal law. An affiliate of a bank is any company or entity that controls, is controlled by or is under common control with the bank. In a holding company context, the parent bank holding company and any companies which are controlled by such parent holding company are affiliates of the bank (although subsidiaries of the bank itself, except financial subsidiaries, are generally not considered affiliates). Generally, Section 23A of the Federal Reserve Act and the Federal Reserve Board’s Regulation W limit the extent to which the bank or its subsidiaries may engage in “covered transactions” with any one affiliate to an amount equal to 10.0% of such institution’s capital stock and surplus, and with all such transactions with all affiliates to an amount equal to 20.0% of such institution’s capital stock and surplus. Section 23B applies to “covered transactions” as well as to certain other transactions and requires that all such transactions be on terms substantially the same, or at least as favorable, to the institution or subsidiary as those provided to a non-affiliate. The term “covered transaction” includes the making of loans to, purchase of assets from, and issuance of a guarantee to an affiliate, and other similar transactions. Section 23B transactions also include the provision of services and the sale of assets by a bank to an affiliate. In addition, loans or other extensions of credit by the financial institution to the affiliate are required to be collateralized according to the requirements set forth in Section 23A of the Federal Reserve Act.
Sections 22(h) and (g) of the Federal Reserve Act place restrictions on loans to a bank’s insiders, i.e., executive officers, directors and principal stockholders. Under Section 22(h) of the Federal Reserve Act, loans to a director, an executive officer and to a greater than 10.0% stockholder of a financial institution, and certain affiliated interests of these, together with all other outstanding loans to such person and affiliated interests, may not exceed specified limits. Section 22(h) of the Federal Reserve Act also requires that loans to directors, executive officers and principal stockholders be made on terms substantially the same as offered in comparable transactions to other persons and also requires prior board approval for certain loans. In addition, the aggregate amount of extensions of credit by a financial institution to insiders cannot exceed the institution’s unimpaired capital and surplus. Section 22(g) of the Federal Reserve Act places additional restrictions on loans to executive officers.
Enforcement.   The Federal Deposit Insurance Corporation has extensive enforcement authority over insured state savings banks, including SSB Bank. The enforcement authority includes, among other things, the ability to assess civil money penalties, issue cease and desist orders and remove directors and officers. In general, these enforcement actions may be initiated in response to violations of laws and regulations, breaches of fiduciary duty and unsafe or unsound practices. The Federal Deposit Insurance Corporation is required, with certain exceptions, to appoint a receiver or conservator for an insured state non-member
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bank if that bank was “critically undercapitalized” on average during the calendar quarter beginning 270 days after the date on which the institution became “critically undercapitalized.” It may also appoint itself as conservator or receiver for an insured state non-member bank under specified circumstances, including: (1) insolvency; (2) substantial dissipation of assets or earnings through violations of law or unsafe or unsound practices; (3) existence of an unsafe or unsound condition to transact business; (4) insufficient capital; or (5) the incurrence of losses that will deplete substantially all of the institution’s capital with no reasonable prospect of replenishment without federal assistance.
Federal Insurance of Deposit Accounts.   SSB Bank is a member of the Deposit Insurance Fund, which is administered by the Federal Deposit Insurance Corporation. Deposit accounts in SSB Bank are insured up to a maximum of  $250,000 for each separately insured depositor.
The Federal Deposit Insurance Corporation imposes an assessment for deposit insurance on all depository institutions. Under its risk-based assessment system, insured institutions are assigned to risk categories based on supervisory evaluations, regulatory capital levels and certain other factors. An institution’s assessment rate depends upon the category to which it is assigned and certain adjustments specified by regulation, with less risky institutions paying lower rates. Assessment rates (inclusive of possible adjustments) currently range from 212 to 45 basis points of each institution’s total assets less tangible capital. The Federal Deposit Insurance Corporation may increase or decrease the scale uniformly, except that no adjustment can deviate by more than two basis points from the base scale without notice and comment rulemaking. The Federal Deposit Insurance Corporation’s current system represents a change, required by the Dodd-Frank Act, from its prior practice of basing the assessment on an institution’s volume of deposits.
The Dodd-Frank Act increased the minimum target Deposit Insurance Fund ratio from 1.15% of estimated insured deposits to 1.35% of estimated insured deposits. The Federal Deposit Insurance Corporation must seek to achieve the 1.35% ratio by September 30, 2020. Insured institutions with assets of $10 billion or more are supposed to fund the increase. The Dodd-Frank Act eliminated the 1.5% maximum fund ratio, instead leaving it to the discretion of the Federal Deposit Insurance Corporation. It has recently exercised that discretion by establishing a long range fund ratio of 2%.
The Federal Deposit Insurance Corporation has authority to increase insurance assessments. A significant increase in insurance premiums would likely have an adverse effect on the operating expenses and results of operations of SSB Bank. Future insurance assessment rates cannot be predicted.
Insurance of deposits may be terminated by the Federal Deposit Insurance Corporation upon a finding that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule order or regulatory condition imposed in writing. We do not know of any practice, condition or violation that might lead to termination of SSB Bank’s deposit insurance.
In addition to the Federal Deposit Insurance Corporation assessments, the Financing Corporation (“FICO”) is authorized to impose and collect, with the approval of the Federal Deposit Insurance Corporation, assessments for anticipated payments, issuance costs and custodial fees on bonds issued by the FICO in the 1980s to recapitalize the former Federal Savings and Loan Insurance Corporation. The bonds issued by the FICO are due to mature in 2017 through 2019.
Privacy Regulations.   Federal Deposit Insurance Corporation regulations generally require that SSB Bank disclose its privacy policy, including identifying with whom it shares a customer’s “non-public personal information,” to customers at the time of establishing the customer relationship and annually thereafter. In addition, SSB Bank is required to provide its customers with the ability to “opt-out” of having their personal information shared with unaffiliated third parties and not to disclose account numbers or access codes to non-affiliated third parties for marketing purposes. SSB Bank currently has a privacy protection policy in place and believes that such policy is in compliance with the regulations.
Community Reinvestment Act.   Under the Community Reinvestment Act (“CRA”), as implemented by Federal Deposit Insurance Corporation, a state non-member bank has a continuing and affirmative obligation, consistent with its safe and sound operation, to help meet the credit needs of its entire community, including low and moderate income neighborhoods. The CRA does not establish specific
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lending requirements or programs for financial institutions nor does it limit an institution’s discretion to develop the types of products and services that it believes are best suited to its particular community, consistent with the CRA. The CRA requires the Federal Deposit Insurance Corporation, in connection with its examination of a state non-member bank, to assess the institution’s record of meeting the credit needs of its community and to take such record into account in its evaluation of certain applications by such institution, including applications to acquire branches and other financial institutions. The CRA requires the Federal Deposit Insurance Corporation to provide a written evaluation of an institution’s CRA performance utilizing a four-tiered descriptive rating system. SSB Bank’s latest Federal Deposit Insurance Corporation CRA rating was “Satisfactory.”
Consumer Protection and Fair Lending Regulations.   The Equal Credit Opportunity Act and the Fair Housing Act prohibit lenders from discriminating in their lending practices on the basis of characteristics specified in those statutes. The failure to comply with the Equal Credit Opportunity Act and the Fair Housing Act could result in enforcement actions by federal regulatory agencies or the Department of Justice. Additionally, Section 5 of the Federal Trade Commission Act, which prohibits unfair and deceptive acts and practices against consumers, authorizes private individual and class action lawsuits and the award of actual, statutory and punitive damages and attorneys’ fees for certain types of violations. The Dodd Frank Act also added a new statute that prohibits unfair, deceptive or abusive acts or practices against consumers, which can be enforced by the Consumer Financial Protection Bureau, the Federal Deposit Insurance Corporation and state Attorneys General.
USA Patriot Act.   SSB Bank is subject to the USA PATRIOT Act, which gives federal agencies additional powers to address terrorist threats through enhanced domestic security measures, expanded surveillance powers, increased information sharing, and broadened anti-money laundering requirements. By way of amendments to the Bank Secrecy Act, Title III of the USA PATRIOT Act provided measures intended to encourage information sharing among bank regulatory agencies and law enforcement bodies. Further, certain provisions of Title III impose affirmative obligations on a broad range of financial institutions, including banks, thrifts, brokers, dealers, credit unions, money transfer agents, and parties registered under the Commodity Exchange Act.
Other Regulations
Interest and other charges collected or contracted for by SSB Bank are subject to state usury laws and federal laws concerning interest rates. Loan operations are also subject to state and federal laws applicable to credit transactions, such as the:

Truth in Lending Act, which requires lenders to disclose the terms and conditions of consumer credit;

Real Estate Settlement Procedures Act, which requires lenders to disclose the nature and costs of the real estate settlement process and prohibits specific practices, such as kickbacks, and places limitations upon the use of escrow accounts;

Home Mortgage Disclosure Act of 1975, which requires financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves; and

Rules and regulations of the various federal and state agencies charged with the responsibility of implementing such federal and state laws.
The deposit operations of SSB Bank also are subject to, among others, the:

Truth in Savings Act, which requires financial institutions to disclose the terms and conditions of their deposit accounts;

Expedited Funds Availability Act, which requires banks to make funds deposited in transaction accounts available to their customers within specified time frames;

Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records;
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Check Clearing for the 21st Century Act (also known as “Check 21”), which gives “substitute checks,” such as digital check images and copies made from that image, the same legal standing as the original paper check;

Electronic Funds Transfer Act and Regulation E promulgated thereunder, which govern automatic deposits to and withdrawals from deposit accounts and customers’ rights and liabilities arising from the use of automated teller machines and other electronic banking services; and

Pennsylvania banking laws and regulations, which governs deposit powers.
Federal Reserve System
Federal Reserve Board regulations require depository institutions to maintain non-interest-earning reserves against their transaction accounts (primarily NOW and regular checking accounts). The regulations generally require that reserves be maintained against aggregate transaction accounts as follows: for that portion of transaction accounts aggregating $115.1 million or less (which may be adjusted by the Federal Reserve Board) the reserve requirement is 3.0%, and the amounts greater than $115.1 million require a 10.0% reserve (which may be adjusted annually by the Federal Reserve Board between 8.0% and 14.0%). The first $15.5 million of otherwise reservable balances (which may be adjusted by the Federal Reserve Board) are exempted from the reserve requirements. SSB Bank is in compliance with these requirements.
Federal Home Loan Bank System
SSB Bank is a member of the Federal Home Loan Bank System, which consists of 11 regional Federal Home Loan Banks. The Federal Home Loan Bank provides a central credit facility primarily for member institutions. Members of the Federal Home Loan Bank are required to acquire and hold shares of capital stock in the Federal Home Loan Bank. SSB Bank complied with this requirement at December 31, 2017. Based on redemption provisions of the Federal Home Loan Bank of Pittsburgh, the stock has no quoted market value and is carried at cost. SSB Bank reviews for impairment based on the ultimate recoverability of the cost basis of the Federal Home Loan Bank of Pittsburgh stock. At December 31, 2017, no impairment has been recognized.
At its discretion, the Federal Home Loan Bank of Pittsburgh may declare dividends on the stock. The Federal Home Loan Banks are required to provide funds for certain purposes including the resolution of insolvent thrifts in the late 1980s and to contributing funds for affordable housing programs. These requirements could reduce the amount of dividends that the Federal Home Loan Banks pay to their members and result in the Federal Home Loan Banks imposing a higher rate of interest on advances to their members. There can be no assurance that such dividends will continue in the future. Further, there can be no assurance that the impact of recent or future legislation on the Federal Home Loan Banks also will not cause a decrease in the value of the Federal Home Loan Bank of Pittsburgh stock held by SSB Bank.
Taxation
SSB Bank, SSB Bancorp, MHC and SSB Bancorp, Inc. are subject to federal and state income taxation in the same general manner as other corporations, with some exceptions discussed below. The following discussion of federal and state taxation is intended only to summarize material income tax matters and is not a comprehensive description of the tax rules applicable to SSB Bancorp, MHC, SSB Bancorp, Inc. and SSB Bank.
Our federal and state tax returns have not been audited for the past three years.
Federal Taxation
Method of Accounting.   For federal income tax purposes, SSB Bank reports its income and expenses on the accrual method of accounting and uses a tax year ending December 31 for filing its federal income tax returns. SSB Bancorp, Inc. and SSB Bank will file a consolidated federal income tax return. The Small Business Protection Act of 1996 eliminated the use of the reserve method of accounting for income taxes
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on bad debt reserves by savings institutions with more than $500 million in assets. For taxable years beginning after 1995, SSB Bank has been subject to the same bad debt reserve rules as commercial banks. It currently utilizes the specific charge-off method under Section 166 of the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”).
Net Operating Loss Carryovers.   Generally, a financial institution may not carry back net operating losses to the preceding two taxable years but may carry forward net operating losses indefinitely. At December 31, 2017, SSB Bank had no federal net operating loss carryforwards.
Capital Loss Carryovers.   A corporation cannot recognize capital losses in excess of capital gains generated. Generally, a financial institution may carry back capital losses to the preceding three taxable years and forward to the succeeding five taxable years. Any capital loss carryback or carryover is treated as a short-term capital loss for the year to which it is carried. As such, it is grouped with any other capital losses for the year to which it is carried and is used to offset any capital gains. Any undeducted loss remaining after the five-year carryover period is not deductible. At December 31, 2017, SSB Bank had no capital loss carryovers.
Corporate Dividends.   SSB Bancorp, Inc. may generally exclude from its income 100% of dividends received from SSB Bank as a member of the same affiliated group of corporations.
State Taxation
As a Maryland business corporation, SSB Bancorp, Inc. is required to file annual tax returns with the State of Maryland. In addition, SSB Bancorp, Inc. is subject to Pennsylvania’s corporate net income tax. Dividends received by SSB Bancorp, Inc. from SSB Bank will qualify for a 100% dividends received deduction and are not subject to corporate net income tax.
SSB Bank is subject to Pennsylvania’s mutual thrift institutions tax based on SSB Bank’s net income determined in accordance with U.S. GAAP, with certain adjustments. The tax rate under the mutual thrift institutions tax is 11.5%. Interest on Pennsylvania and federal obligations is excluded from net income. An allocable portion of interest expense incurred to carry the obligations is disallowed as a deduction.
ITEM 1A.
Risk Factors
Not applicable, as SSB Bancorp, Inc. is a “smaller reporting company.”
ITEM 1B.
Unresolved Staff Comments
None.
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ITEM 2.
Properties
As of December 31, 2017, the net book value of our office properties was $4.2 million, and the net book value of our furniture, fixtures and equipment was $181,000. The following table sets forth information regarding our offices.
Location
Leased/Owned
Year Acquired
Main Office:
8700 Perry Highway
Pittsburgh, Pensylvania 15237
Owned 2017
Branch Office:
2470 California Avenue
Pittsburgh, Pennsylvania 15212
Owned 1930
We believe that current facilities are adequate to meet our present and foreseeable needs, subject to possible future expansion.
ITEM 3.
Legal Proceedings
Periodically, we are involved in claims and lawsuits, such as claims to enforce liens, condemnation proceedings on properties in which we hold security interests, claims involving the making and servicing of real property loans and other issues incident to our business. At December 31, 2017, we were not a party to any pending legal proceedings that we believe would have a material adverse effect on our financial condition, results of operations or cash flows.
ITEM 4.
Mine Safety Disclosures
Not applicable.
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PART II
ITEM 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our common stock is quoted on the OTC Pink Marketplace operated by OTC Markets Group under the symbol “SSBP.” As of April 16, 2018, we had 124 stockholders of record (excluding the number of persons or entities holding stock in street name through various brokerage firms), and 2,248,250 shares of common stock outstanding, of which 1,236,538 shares, or 55%, are owned by SSB Bancorp, MHC. SSB Bancorp, Inc. completed its initial public offering on January 24, 2018, and its stock commenced trading on January 26, 2018. Accordingly, there is no market information to report for the year ended December 31, 2017.
The payment and amount of any dividend payments will be subject to statutory and regulatory limitations, and will depend upon a number of factors, including the following: regulatory capital requirements; our financial condition and results of operations; our other uses of funds for the long-term value of stockholders; tax considerations; the Federal Reserve Board’s current regulations restricting the waiver of dividends by mutual holding companies; and general economic conditions.
The Federal Reserve Board has issued a policy statement providing that dividends should be paid only out of current earnings and only if our prospective rate of earnings retention is consistent with our capital needs, asset quality and overall financial condition. Regulatory guidance also provides for prior regulatory consultation with respect to capital distributions in certain circumstances such as where the holding company’s net income for the past four quarters, net of dividends previously paid over that period, is insufficient to fully fund the dividend or the holding company’s overall rate or earnings retention is inconsistent with its capital needs and overall financial condition. In addition, SSB Bank’s ability to pay dividends will be limited if it does not have the capital conservation buffer required by the new capital rules, which may limit our ability to pay dividends to stockholders. No assurances can be given that any dividends will be paid or that, if paid, will not be reduced or eliminated in the future. Special cash dividends, stock dividends or returns of capital, to the extent permitted by regulations and policies of the Federal Reserve Board and the Federal Deposit Insurance Corporation, may be paid in addition to, or in lieu of, regular cash dividends.
If SSB Bancorp, Inc. pays dividends to its stockholders, it will likely pay dividends to SSB Bancorp, MHC. The Federal Reserve Board’s current regulations significantly restrict the ability of mutual holding companies organized after December 1, 2009 to waive dividends declared by their subsidiaries. Accordingly, we do not currently anticipate that SSB Bancorp, MHC will waive dividends paid by SSB Bancorp, Inc.
There were no sales of unregistered securities or repurchases of shares of common stock during the quarter ended December 31, 2017.
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ITEM 6.
Selected Financial and Other Data
The summary information presented below at each date or for each of the periods presented is derived in part from the financial statements of SSB Bank. The financial condition data at December 31, 2017 and 2016, and the operating data for the years ended December 31, 2017 and 2016 were derived from the audited financial statements of SSB Bank included elsewhere in this annual report. The information at and for the year ended December 31, 2015 was derived in part from audited financial statements that are not included in this annual report. The following information is only a summary, and should be read in conjunction with our financial statements and notes included in this annual report.
At December 31,
2017
2016(4)
2015(4)
(Dollars in thousands)
Selected Financial Condition Data:
Total assets
$ 171,905 $ 141,251 $ 127,907
Cash and cash equivalents
16,478 6,831 14,122
Certificates of deposit
943 1,390 1,734
Securities available for sale
2,616 3,226 3,043
Securities held to maturity
10 14 18
Gross loans
141,450 104,162 104,606
Net loans
140,575 103,747 104,080
Loans held for sale
19,942
Total liabilities
159,794 129,756 116,946
Total deposits
132,430 109,371 96,577
Federal Home Loan Bank advances
26,416 19,125 19,125
Total equity
$ 12,112 $ 11,495 $ 10,960
For Years Ended December 31,
2017
2016(4)
2015(4)
(Dollars in thousands)
Selected Operating Data:
Interest income
$ 6,223 $ 5,293 $ 5,004
Interest expense
2,316 1,998 1,719
Net interest income
3,907 3,295 3,285
Provision (credit) for loan losses
247 30 (42)
Net interest income after provision (credit) for loan losses
3,660 3,265 3,327
Non-interest income (loss)(1)(2)
527 (43) 324
Non-interest expense
3,014 2,343 2,192
Income before income taxes
1,173 879 1,459
Provision for income taxes(3)
584 291 545
Net income
$ 589 $ 588 $ 914
(1)
Non-interest income included a provision for losses on loans held for sale of  $372,000 for the year ended December 31, 2016. There was no provision for losses on loans held for sale for the years ended December 31, 2017 or 2015.
(2)
Non-interest income included a gain on sale of loans of  $348,000 for the year ended December 31, 2017, $176,000 for the year ended December 31, 2016, and $269,000 for the year ended December 31, 2015.
(3)
Provision for income taxes for the year ended December 31, 2017 includes a $203,000 write-down of the net deferred tax asset due to changes in federal tax laws enacted in December 2017.
(4)
For the years 2016 and 2015, the above schedule reflects prior year adjustments related to interest on investor sold loans and loan participations.
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For the Years Ended December 31,
2017
2016(6)
2015(6)
Performance Ratios:
Return on average assets(1)
0.38% 0.43% 0.73%
Return on average equity(2)
4.89% 5.19% 8.86%
Interest rate spread(3)
2.56% 2.40% 2.54%
Net interest margin(4)
2.61% 2.49% 2.65%
Efficiency ratio(5)
67.97% 72.05% 60.74%
Average interest-earning assets to average interest-bearing liabilities 
103.58% 105.44% 107.11%
Capital Ratios:
Average equity to assets
7.79% 8.37% 8.25%
Tier 1 capital (to adjusted total assets)
7.85% 8.53% 8.76%
Tier 1 capital (to risk-weighted assets)
9.47% 11.32% 14.35%
Total capital (to risk-weighted assets)
10.29% 12.12% 15.45%
Common equity Tier 1 capital (to risk-weighted assets)
9.47% 11.32% 14.35%
Asset Quality Ratios:
Allowance for loan losses as a percent of total gross loans
0.74% 0.79% 0.80%
Allowance for loan losses as a percent of non-performing loans
31.85% 47.79% 43.68%
Net charge-offs to average outstanding loans during the period
(0.02)% (0.04)% 0.00%
Non-performing loans as a percent of total gross loans
2.31% 1.65% 1.84%
Non-performing assets as a percent of total assets
1.94% 1.26% 1.55%
Other Data:
Number of offices
2 1 1
Number of full-time equivalent employees
18 15 11
(1)
Represents net income divided by average total assets.
(2)
Represents net income divided by average equity (net worth).
(3)
Represents the difference between the weighted average yield on average interest-earning assets and the weighted average cost of average interest-bearing liabilities.
(4)
Represents net interest income as a percent of average interest-earning assets.
(5)
Represents non-interest expense divided by the sum of net interest income and non-interest income. Non-interest income for the year ended December 31, 2016 included a provision for loss on loans held for sale of  $372,000. Excluding the provision for loss on loans held for sale, the efficiency ratio for the year ended December 31, 2016 would be 64.65%.
(6)
For the years 2016 and 2015, the above schedule reflects prior year adjustments related to interest on investor sold loans and loans participations.
ITEM 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
This discussion and analysis reflects our financial statements and other relevant statistical data and is intended to enhance your understanding of our financial condition and results of operations. The information in this section has been derived from the financial statements, which appear elsewhere in this annual report. You should read the information in this section in conjunction with the other business and financial information provided in this annual report.
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Overview
SSB Bank’s business consists primarily of making loans to real estate investors, businesses and consumers. We also invest in securities, which consist of Federal Home Loan Bank of Pittsburgh stock, mortgage-backed securities issued by U.S. government-sponsored entities, corporate bonds, tax-exempt municipal bonds, and U.S. Treasury notes. SSB Bank also has a mortgage banking operation that generates one- to four-family residential mortgage loans through three mortgage loan originators and three correspondent mortgage banks. Such residential mortgage loans are originated both for sale in the secondary market and for retention in our portfolio. However, the origination of loans for sale became a larger focus for SSB Bank at the beginning of 2017. We are seeking to rely less on correspondent banks for loan originations, focusing instead on self-generated originations.
SSB Bank offers a variety of deposit accounts, including checking accounts, savings and money market accounts, and time deposits. We also utilize advances from the Federal Home Loan Bank of Pittsburgh for liquidity and for asset/liability management purposes.
SSB Bank also offers various merchant services to businesses, consisting of multiple credit card processing solutions and other ancillary services such as Internet banking. These services are offered through a third-party partner.
Our results of operations rely heavily on net interest income, which is the difference between interest earned on interest-earning assets and interest expense on interest-bearing liabilities. The results of operations are also affected by non-interest income, non-interest expenses, and the provision for loan losses. Primary sources of non-interest income are gains on the sale of loans, earnings on bank-owned life insurance, and loan servicing fees. Primary non-interest expenses are personnel costs, occupancy, professional fees, federal deposit insurance premiums, and data processing.
Our financial condition and results of operations may also be affected by general and local economic and competitive conditions, changes in market interest rates, governmental policies, and actions of financial regulatory authorities.
Business Strategy
Our business strategy is to use our capital to both serve our community and maintain a profitable community savings bank. Our goals have been to grow our core deposit base, effectively manage our cost of funds, and develop strong business relationships with our customers. We have traditionally not had any significant sources of non-interest income; however, more recently, our mortgage banking operations have generated gains on loan sales and servicing fee income.
Our current business strategy consists of the following:

Grow our loan portfolio, with a focus on expanding multi-family and commercial and industrial lending with limited growth in commercial real estate lending.   We believe that commercial lending and multi-family lending offer opportunities to invest in our community, to increase the overall yield earned on our loans, and to assist in managing interest rate risk. We intend to continue to expand our originations of these loans in our primary market area. At the same time, we intend to continue our traditional residential mortgage lending activities, including our mortgage banking operations where we sell into the secondary market fixed-rate residential mortgage loans we originate, and retain the servicing rights. The mortgage banking operations serve as a source of non-interest income through serving fee income and gains on sales of loans.

Increase our core deposit base.   Deposits are our primary source of funds for lending. While historically we relied on time deposits as a source of funds, we are now focused on increasing core deposits. We consider savings, checking, money market, and commercial deposits to be core deposits. Core deposits are the funding source that is least costly and least sensitive to interest rate fluctuations. Core deposits also help us maintain loan-to-deposit ratios at levels consistent with regulatory expectations. Going forward, we will seek to increase such deposits, particularly by expanding upon our relationships with new and existing commercial customers. Furthermore, we have invested in technologies, such as remote check capture and mobile and on-line banking that should help to attract core deposits.
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Manage credit risk to maintain a low level of non-performing assets.   Strong asset quality is a key to the long-term financial success of any bank. Our credit risk management strategy focuses on well-defined credit and investment policies and procedures that we believe promote conservative lending and investment practices, conservative loan underwriting criteria and active credit monitoring.

Manage interest rate risk.   Interest rate risk management is central to our budgeting, liquidity and asset management. Our continued focus on originating shorter-term commercial real estate loans, multi-family loans and commercial and industrial loans, together with the continued sale of fixed-rate residential mortgage loans into the secondary market and the additional capital raised in the offering, will help to mitigate and manage interest rate risk.
Summary of Critical Accounting Policies and Estimates
A summary of our accounting policies is described in Note 1 to the financial statements. 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.
The JOBS Act contains provisions that, among other things, reduce certain reporting requirements for qualifying public companies. As an emerging growth company, we may elect to delay adoption of new or revised financial accounting standards until such date that the standards are required to be adopted by non-issuer (private) companies. If such standards would not apply to non-issuer companies, no deferral would be applicable. Such an election is irrevocable during the period that a company is an emerging growth company. We intend to take advantage of the benefits of extended transition periods. Accordingly, our financial statements may not be comparable to those of public companies that adopt new or revised financial accounting standards as of an earlier date.
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 applicable accounting guidance. 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.
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From time to time, we may choose to restructure the contractual terms of certain loans either at the borrower or Bank’s request. We review all scenarios to determine the best payment structure with the borrower to improve the likelihood of repayment. Management reviews modified loans to determine if the loan should be classified as a trouble debt restructuring. A trouble debt restructuring is when a creditor, for economic or legal reasons related to a debtor’s financial difficulties, grants a concession to the borrower that it would not otherwise consider. Management considers the borrower’s ability to repay when a request to modify existing loan terms is presented. A transfer of assets to repay the loan balance, a modification of loan terms or a combination of these may occur. If an appropriate arrangement cannot be made, the loan is referred to legal counsel, at which time foreclosure will begin. If a loan is accruing at the time of restructuring, we review the loan to determine if it should be placed on non-accrual. It is our policy to keep a troubled debt restructured loan on non-accrual status for at least six months to ensure the borrower can repay, at that time management may consider its return to accrual status.
Troubled debt restructured loans are considered to be impaired.
Income Taxes.   SSB Bank accounts for income taxes in accordance with accounting guidance (ASC 740, Income Taxes). The income tax accounting guidance results in two components of income tax expense: current and deferred. Current income tax reflects taxes to be paid or refunded for the current period by applying the provisions of the enacted tax law to the taxable income or excess of deductions over revenues. U.S. GAAP requires that we use the Balance Sheet Method to determine the deferred income, which affects the differences between the book and tax bases of assets and liabilities, and any changes in tax rates and laws are recognized in the period of enactment. Accordingly, changes resulting from the Tax Cuts and Jobs Act enacted on December 22, 2017 have been recognized in the financial statements as of and for the year ended December 31, 2017. Deferred taxes are based on a valuation model and the determination on a quarterly basis whether all or a portion of the deferred tax asset will be recognized.
Fair Value Measurements.   The fair value of a financial instrument is defined as the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. SSB Bank estimates the fair value of a financial instrument and any related asset impairment using a variety of valuation methods. Where financial instruments are actively traded and have quoted market prices, quoted market prices are used for fair value. When the financial instruments are not actively traded, other observable market inputs, such as quoted prices of securities with similar characteristics, may be used, if available, to determine fair value. When observable market prices do not exist, we estimate fair value. These estimates are subjective in nature and imprecision in estimating these factors can impact the amount of revenue or loss recorded. A more detailed description of the fair values measured at each level of the fair value hierarchy and the methodology utilized by SSB Bank can be found in Note 14 to the financial statements.
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 net income. At December 31, 2017, we believe the unrealized losses are primarily a result of increases in market yields from the time of purchase. In general, as market yields rise, the fair value of securities will decrease; as market yields fall, the fair value of securities will increase. Management generally views changes in fair value caused by changes in interest rates as temporary; therefore, these securities have not been classified as other-than-temporarily impaired. Management has also concluded that based on current information we expect to continue to receive scheduled interest payments as well as the entire principal balance. Furthermore, management does not intend to sell these securities and does not believe it will be required to sell these securities before they recover in value.
27

Loan Portfolio
General.   Loans are our primary interest-earning asset. At December 31, 2017, net loans represented 81.8% of our total assets.
Loan Portfolio Analysis.   The following table sets forth the composition of our loan portfolio by type of loan at the dates indicated.
At December 31,
2017
2016
Amount
Percent
Amount
Percent
(Dollars in thousands)
Mortgage Loans:
One-to-four family
$ 75,858 53.63% $ 68,472 65.74%
Commercial
50,122 35.43 25,207 24.20
125,980 89.06 93,679 89.94
Commercial and industrial
11,456 8.10 8,327 7.99
Consumer
4,014 2.84 2,156 2.07
141,450 100.00% 104,162 100.00%
Third-party loan acquisition and other net origination costs
386 406
Discount on loans previously held for sale
(220)
Allowance for loan losses
(1,041) (821)
Total
$ 140,575 $ 103,747
Loan Maturity.   The following tables set forth certain information at December 31, 2017 and December 31, 2016 regarding the dollar amount of loan principal repayments becoming due during the periods indicated. The tables do not include any estimate of prepayments that may significantly shorten the average loan life and may cause actual repayment experience to differ from that shown below. Demand loans, which are loans having no stated repayment schedule or no stated maturity, are reported as due in one year or less.
December 31, 2017
One-to-Four
Family
Mortgage
Loans
Commercial
Mortgage
Loans
Commercial
and Industrial
Loans
Consumer
Loans
Total
Loans
(Dollars in thousands)
Amounts due in:
1 year or less
$ 6,746 $ 4,023 $ 4,341 $ 75 $ 15,185
More than 1 year through 2 years
7 1,040 323 112 1,482
More than 2 years through 3 years
19 3,338 704 156 4,217
More than 3 years through 5 years
1,276 18,200 2,660 1,026 23,162
More than 5 years through 10 years
5,456 16,106 3,356 1,461 26,379
More than 10 years through 15 years
7,365 5,308 72 1,102 13,847
More than 15 years
54,989 2,107 82 57,178
Total
$ 75,858 $ 50,122 $ 11,456 $ 4,014 $ 141,450
28

December 31, 2016
One-to-Four
Family
Mortgage
Loans
Commercial
Mortgage
Loans
Commercial
and Industrial
Loans
Consumer
Loans
Total
Loans
(Dollars in thousands)
Amounts due in:
1 year or less
$ 1,370 $ 3,033 $ 3,112 $ 23 $ 7,538
More than 1 year through 2 years
38 644 89 55 826
More than 2 years through 3 years
2,534 1,416 421 189 4,560
More than 3 years through 5 years
7,210 6,260 1,419 612 15,501
More than 5 years through 10 years
4,934 7,946 3,286 1,277 17,443
More than 10 years through 15 years
6,173 3,724 9,897
More than 15 years
46,213 2,184 48,397
Total
$ 68,472 $ 25,207 $ 8,327 $ 2,156 $ 104,162
The following tables sets forth the dollar amount of all loans at December 31, 2017 that are due after one year and have either fixed interest rates or floating or adjustable interest rates. The amounts shown below exclude third-party loan and other net origination costs and the discount on loans previously held for sale.
December 31, 2017
Fixed Rates
Floating or
Adjustable Rates
Total
(Dollars in thousands)
One-to-four family mortgage loans
$ 62,938 $ 6,174 $ 69,112
Commercial mortgage loans
45,947 152 46,099
Commercial and industrial loans
7,115 7,115
Consumer loans and HELOC
1,825 2,114 3,939
Total
$
117,825
$
8,440
$
126,265
December 31, 2016
Fixed
Rates
Floating or
Adjustable Rates
Total
(Dollars in thousands)
One-to-four family mortgage loans
$ 58,223 $ 8,879 $ 67,102
Commercial mortgage loans
21,873 301 22,174
Commercial and industrial loans
5,165 50 5,215
Consumer loans
1,140 993 2,133
Total
$
86,401
$
10,223
$
96,624
29

Loan Originations, Purchases and Sales.   The following table sets forth our loan origination, purchase and sale activity for the periods indicated.
Year Ended December 31
2017
2016
(In thousands)
Total loans at beginning of period
$ 104,162 $ 104,606
Loans originated:
One-to-four family mortgage loans
17,309 3,798
Commercial mortgage loans
23,214 14,868
Construction loans
6,400 4,345
Multi-family loans
1,633 2,853
Commercial and industrial loans
4,320 5,236
Consumer loans
1,403 1,962
Total loans originated
54,279 33,062
Loans purchased:
One-to-four family mortgage loans
6,728 12,117
Commercial mortgage loans
206
Construction loans
5,485 6,018
Consumer loans
1,036
Total loans purchased
12,213 19,377
Additions:
Loans held for sale transferred to loans held for investment
12,556
Less:
Loan principal repayments
20,253 27,106
Loan sales
21,507 5,463
Loans transferred to held for sale
20,314
Net loan activity
37,288 (444)
Total loans at end of period
$ 141,450 $ 104,162
Asset Quality
Credit Risk Management.   Management of asset quality is accomplished by internal controls, monitoring and reporting of key risk indicators, and both internal and independent third-party loan reviews. The primary objective of our loan review process is to measure borrower performance and assess risk for the purpose of identifying loan weakness in order to minimize loan loss exposure. From the time of loan origination through final repayment, commercial real estate and commercial business loans are assigned a risk rating based on pre-determined criteria and levels of risk. The risk rating is monitored annually for most loans; however, it may change during the life of the loan as appropriate.
Delinquency Procedures.   When a borrower fails to make a required loan payment, we take a number of steps to have the borrower cure the delinquency and restore the loan to current status, including contacting the borrower by letter and phone at regular intervals. When the borrower is in default, we may commence collection proceedings. If a foreclosure action is instituted and the loan is not brought current, paid in full, or refinanced before the foreclosure sale, the real property securing the loan may be sold at foreclosure.
30

Delinquent Loans.   The following tables set forth our loan delinquencies, including non-accrual loans, by type and amount at the dates indicated.
At December 31, 2017
30 – 59 Days
Past Due
60 – 89 Days
Past Due
90 Days or
Greater
Past Due
Total
Past Due
Current
Total Loans
Receivable
90 Days or
Greater Still
Accruing
(In thousands)
Mortgage loans:
One-to-four family
$ 982 $ 400 $ 1,900 $ 3,282 $ 72,576 $ 75,858 $
Commercial
656 1,123 1,779 48,343 50,122
Commercial and Industrial
302 8 310 11,146 11,456
Consumer
1 14 29 44 3,970 4,014
Total
$ 1,941 $ 414 $ 3,060 $ 5,415 $ 136,035 $ 141,450 $    —
At December 31, 2016
30 – 59 Days
Past Due
60 – 89 Days
Past Due
90 Days or
Greater
Past Due
Total
Past Due
Current
Total Loans
Receivable
90 Days or
Greater Still
Accruing
(In thousands)
Mortgage loans:
One-to-four family
$ 1,033 $ 440 $ 1,356 $ 2,829 $ 65,643 $ 68,472 $ 138
Commercial
303 203 506 24,701 25,207
Commercial and Industrial
263 27 9 299 8,028 8,327 9
Consumer
18 5 53 76 2,080 2,156 53
Total
$ 1,617 $ 472 $ 1,621 $ 3,710 $ 100,452 $ 104,162 $ 200
Non-performing Assets.   Non-performing assets include loans that are 90 or more days past due or on non-accrual status, including troubled debt restructurings on non-accrual status, and real estate and other loan collateral acquired through foreclosure and repossession. Troubled debt restructurings include loans where management has granted a concession from the original terms to a borrower that is experiencing financial difficulties. Loans 90 days or greater past due may remain on an accrual basis if adequately collateralized and in the process of collection. For non-accrual loans, interest previously accrued but not collected is reversed and charged against income at the time a loan is placed on non-accrual status. Loans generally are returned to accrual status when the borrower has become current and has demonstrated continued ability to service the loan.
Real estate that we acquire as a result of foreclosure or by deed-in-lieu of foreclosure is classified as foreclosed real estate until it is sold. When property is acquired, it is initially recorded at the fair value less costs to sell at the date of foreclosure, establishing a new cost basis. Holding costs and declines in fair value after acquisition of the property result in charges against income.
31

The following table sets forth information regarding our non-performing assets at the dates indicated.
At December 31,
2017
2016
(Dollars in thousands)
Non-accrual loans:
One-to-four family mortgage loans
$ 2,108 $ 1,315
Commercial mortgage loans
1,123 203
Commercial and industrial loans
8
Consumer loans
29
Total
3,268 1,518
Accruing loans past due 90 days or more:
One-to-four family mortgage loans
138
Commercial and industrial loans
9
Consumer loans
53
Total
200
Total non-performing loans
3,268 1,718
Other real estate owned
60 60
Total non-performing assets
$ 3,328 $ 1,778
Troubled debt restructurings (accruing):
One-to-four family mortgage loans
$ 310 $ 286
Commercial mortgage loans
310
Total troubled debt restructurings (accruing)
$ 310 $ 596
Total troubled debt restructurings (accruing) and total non-performing assets
$ 3,638 $ 2,374
Total non-performing loans to gross loans
2.31% 1.65%
Total non-performing loans to total assets
1.90% 1.22%
Total non-performing assets to total assets
1.94% 1.26%
Total non-performing assets and troubled debt restructurings (accruing) to total assets
2.12% 1.68%
The cumulative amount of accrued interest not recognized on non-accrual loans at December 31, 2017 and December 31, 2016 was $289,000 and $223,000 respectively. Accordingly, for the years ended December 31, 2017 and 2016, interest income was negatively impacted by $66,000 and $16,000, respectively, as a result of nonaccrual loans not performing in accordance with their original terms. Interest income was minimally impacted by accruing troubled debt restructurings for the years ended December 31, 2017 and 2016 with the exception of the recognition of  $95,000 and $101,000, respectively, related to recoveries of interest from prior periods.
Potential Problem Loans.   Certain loans are identified during our loan review process that are currently performing according to their contractual terms and we expect to receive payment in full of principal and interest, but it is deemed probable that we will be unable to collect all the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. This may result from deteriorating conditions such as cash flows, collateral values or creditworthiness of the borrower. These loans are classified as impaired but are not accounted for on a non-accrual basis.
Other potential problem loans are those loans that are currently performing, but where known information about possible credit problems of the borrowers causes us to have concerns as to the ability of such borrowers to comply with contractual loan repayment terms. At December 31, 2017, there were no other potential problem loans.
32

Classified Assets.   The following table sets forth information regarding our classified assets, as defined under applicable regulatory standards, and our special mention assets at the dates indicated.
At December 31,
2017
2016
(In thousands)
Special mention
$ 255 $ 327
Substandard(1) 3,260 1,518
Ending Balance
$ 3,515 $ 1,845
(1)
Includes one- to four-family residential real estate loans on nonaccrual status of $2.1 million and $1.3 million at December 31, 2017 and 2016, respectively, as well as consumer loans on nonaccrual status of $29,000 at December 31, 2017.
Allowance for Loan Losses.   The allowance for loan losses is maintained at levels considered adequate by management to provide for probable incurred loan losses inherent in the loan portfolio at the balance sheet reporting dates. The allowance for loan losses is based on management’s assessment of various factors affecting the loan portfolio, including portfolio composition, delinquent and non-accrual loans, national and local business conditions and loss experience and an overall evaluation of the quality of the underlying collateral.
The following table sets forth activity in our allowance for loan losses for the years indicated.
Year Ended December 31,
2017
2016
(Dollars in thousands)
Allowance for loan losses at beginning of period
$ 821 $ 839
Provision for loan losses
247 30
Charge-offs:
One-to-four family mortgage loans
(50)
Commercial mortgage loans
Commercial and industrial loans
Consumer loans
(27)
Total charge-offs
(27) (50)
Recoveries:
One-to-four family mortgage loans
2
Commercial mortgage loans
Commercial and industrial loans
Consumer loans
Total recoveries
2
Net (charge-offs) recoveries
(27) (48)
Allowance for loan losses at end of period
$ 1,041 $ 821
Allowance for loan losses to non-performing loans at end of period
31.85% 47.79%
Allowance for loan losses to total gross loans outstanding at end of period
0.74% 0.79%
Net charge-offs to average loans outstanding during the period
(0.02)% (0.04)%
33

Allocation of Allowance for Loan Losses.   The following tables set forth the allowance for loan losses allocated by loan category. The allowance for loan losses allocated to each category is not necessarily indicative of future losses in any particular category and does not restrict the use of the allowance to absorb losses in other categories.
December 31,
2017
2016
Amount
Percent of
Allowance to
Total
Allowance
Percent of
Loans in
Category to
Total Loans
Amount
Percent of
Allowance
to Total
Allowance
Percent of
Loans in
Category to
Total Loans
(Dollars in thousands)
One-to-four family mortgage loans
$ 514 49.38% 53.63% $ 498 60.66% 65.74%
Commercial mortgage loans
383 36.79 35.43 229 27.89 24.20
Commercial and industrial loans
81 7.78 8.10 60 7.31 7.99
Consumer loans
63 6.05 2.84 34 4.14 2.07
Total
$ 1,041 100% 100% $ 821 100% 100%
See Notes 1 and 6 to the financial statements for a complete discussion of the allowance for loan losses. Although we believe that we use the best information available to establish the allowance for loan losses, future adjustments to the allowance for loan losses may be necessary and our results of operations could be adversely affected if circumstances differ substantially from the assumptions used in making the determinations. Furthermore, while we believe we have established our allowance for loan losses in conformity with U.S. GAAP, there can be no assurance that regulators, in reviewing our loan portfolio, will not require us to increase our allowance for loan losses. In addition, because future events affecting borrowers and collateral cannot be predicted with certainty, there can be no assurance that the existing allowance for loan losses is adequate or that increases will not be necessary should the quality of any loans deteriorate as a result of the factors discussed above. Any material increase in the allowance for loan losses may adversely affect our financial condition and results of operations.
Securities Portfolio
The following table sets forth the amortized cost and estimated fair value of our securities portfolio at the dates indicated.
December 31,
2017
2016
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
(In thousands)
Securities held-to-maturity:
Mortgage-backed securities in government-sponsored entities
$ 10 $ 9 $ 14 $ 14
Total
$ 10 $ 9 $ 14 $ 14
Securities available-for-sale:
U.S. treasury securities
$ 194 $ 195 $ 195 $ 200
Mortgage-backed securities in government-sponsored entities
525 519 648 644
Obligations of state and political subdivisions
1,626 1,600 1,953 1,879
Corporate bonds
301 302 502 503
Total
$ 2,646 $ 2,616 $ 3,298 $ 3,226
At December 31, 2017 and 2016, we had no investments in a single issuer (other than securities issued by the U.S. government and government agency), which had an aggregate book value in excess of 10% of our total equity.
34

Securities Portfolio Maturities and Yields.   The following table sets forth the stated maturities and weighted average yields of investment securities at December 31, 2017. Weighted-average yields on tax-exempt securities are not presented on a tax equivalent basis. Certain mortgage-backed securities have adjustable interest rates and will reprice annually within the various maturity ranges. These repricing schedules are not reflected in the table below. Weighted average yield calculations on investment securities available for sale do not give effect to changes in fair value that are reflected as a component of equity.
December 31, 2017
One Year or Less
More than One Year to
Five Years
More than Five Years to
Ten Years
More than Ten Years
Total
Amortized
Cost
Weighted
Average
Yield
Amortized
Cost
Weighted
Average
Yield
Amortized
Cost
Weighted
Average
Yield
Amortized
Cost
Weighted
Average
Yield
Amortized
Cost
Fair
Value
Weighted
Average
Yield
(Dollars in thousands)
Securities held-to-maturity:
Mortgage-backed securities in government-sponsored entities
$ $ 8 5.40% $ 2 4.13% $ $ 10 $ 9 5.17%
Total
$ $ 8 5.40% $ 2 4.13% $ $ 10 $ 9 5.17%
Securities available-for-sale:
Mortgage-backed securities in government-sponsored entities
91 4.50% 434 3.25% 525 519 3.48%
Obligations of state and political subdivisions
$ 85 3.69% $ 606 2.03% 291 2.00% 644 2.57% 1,626 1,600 2.33%
Corporate bonds
301 2.34% 301 302 2.33%
U.S. treasury securities
$ $ 194 3.13% $ $ $ 194 $ 195 3.13%
Total
$ 85 3.69% $ 1,101 2.31% $ 382 2.59% $ 1,078 2.84% $ 2,646 $ 2,616 2.61%
December 31, 2016
One Year or Less
More than One Year to
Five Years
More than Five Years to
Ten Years
More than Ten Years
Total
Amortized
Cost
Weighted
Average
Yield
Amortized
Cost
Weighted
Average
Yield
Amortized
Cost
Weighted
Average
Yield
Amortized
Cost
Weighted
Average
Yield
Amortized
Cost
Fair
Value
Weighted
Average
Yield
(Dollars in thousands)
Securities held-to-maturity:
Mortgage-backed securities in government-sponsored entities
$ $ 9 5.23% $ 3 5.83% $ 2 4.13% $ 14 $ 14 5.22%
Total
$ $ 9 5.23% $ 3 5.83% $ 2 4.13% $ 14 $ 14 5.22%
Securities available-for-sale:
U.S. treasury securities
$ $ 195 3.13% $ $ $ 195 $ 200 3.13%
Mortgage-backed securities in government-sponsored entities
124 4.50% 524 3.25% 648 644 3.49%
Obligations of state and political subdivisions
504 2.34% 806 2.02% 643 2.60% 1,953 1,879 2.29%
Corporate bonds
100 1.750% 402 2.33% 502 503 2.22%
Total
$ 100 1.750% $ 1,101 2.48% $ 930 2.36% $ 1,167 2.89% $ 3,298 $ 3,226 2.51%
35

Each reporting period, we evaluate all securities with a decline in fair value below the amortized cost of the investment to determine whether or not the impairment is deemed to be other-than-temporary. Other-than-temporary impairment (“OTTI”) is required to be recognized if  (1) we intend to sell the security; (2) it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis; or (3) for debt securities, the present value of expected cash flows is not sufficient to recover the entire amortized cost basis. For impaired debt securities that we intend to sell, or more likely than not will be required to sell, the full amount of the depreciation is recognized as OTTI, resulting in a realized loss that is a charged to earnings through a reduction in our non-interest income. For all other impaired debt securities, credit-related OTTI is recognized through earnings and non-credit related OTTI is recognized in other comprehensive income/loss, net of applicable taxes. We did not recognize any OTTI during the years ended December 31, 2017 and 2016.
Deposits
Deposits have traditionally been our primary source of funds for our lending and investment activities. The substantial majority of our deposits are from depositors who reside in our primary market area. Deposits are attracted through the offering of a broad selection of deposit instruments for both individuals and businesses. The following table sets forth the distribution of total deposits by account type at the dates indicated.
December 31,
2017
2016
Amount
Percent
Amount
Percent
(Dollars in thousands)
Non-interest bearing demand accounts
$ 441 0.33% $ 459 0.42%
Interest-bearing demand accounts
23,168 17.49 13,118 11.99
Money market accounts
14,598 11.02 13,686 12.51
Savings accounts
12,524 9.46 12,068 11.03
Time deposit accounts
81,699 61.69 70,040 64.04
Total $ 132,430 100.00% $ 109,371 100.00%
The following tables indicate the amount of jumbo certificates of deposit by time remaining until maturity at December 31, 2017 and 2016. Jumbo certificates of deposit require minimum deposits of $100,000.
Maturity Period
Dollar Amount
(In thousands)
December 31, 2017:
Three months or less
$ 2,249
Over three through six months
2,137
Over six through twelve months
7,662
Over twelve months
56,364
Total
$ 68,412
December 31, 2016:
Three months or less
$ 1,580
Over three through six months
986
Over six through twelve months
9,698
Over twelve months
45,067
Total
$ 57,331
36

The following tables set forth time deposit accounts classified by rate and maturity at December 31, 2017 and 2016.
December 31, 2017
Amount Due
Total
Percent of Total
Time Deposit
Accounts
Less Than
One Year
More Than
One Year to
Two Years
More than
Two Years to
Three Years
More Than
Three Years
(Dollars in thousands)
0.00 – 1.00% $ 1,392 $ 177 $ $ $ 1,569 1.92%
1.01 – 2.00% 14,011 17,674 9,051 9,955 50,691 62.05
2.01 – 3.00% 8 2,141 6,265 21,025 29,439 36.03
Total $ 15,411 $ 19,992 $ 15,316 $ 30,980 $ 81,699 100.00%
December 31, 2016
Amount Due
Total
Percent of Total
Time Deposit
Accounts
Less Than
One Year
More Than
One Year to
Two Years
More than
Two Years to
Three Years
More Than
Three Years
(Dollars in thousands)
0.00 – 1.00% $ 1,770 $ 507 $ 22 $ $ 2,299 3.28%
1.01 – 2.00% 13,807 8,078 12,601 13,959 48,445 69.17
2.01 – 3.00% 1,284 8 2,141 15,863 19,296 27.55
Total $ 16,861 $ 8,593 $ 14,764 $ 29,822 $ 70,040 100.00%
Borrowings
We use advances from the Federal Home Loan Bank of Pittsburgh to supplement our investable funds. At December 31, 2017, we had $79.1 million of available borrowing capacity with the Federal Home Loan Bank of Pittsburgh and $26.4 million in advances outstanding. The following table sets forth information concerning our borrowings at the dates and for the periods indicated.
Year Ended December 31,
2017
2016
(In thousands)
Maximum balance outstanding at any month-end during period:
Federal Home Loan Bank advances
26,416 19,125
Average balance outstanding during period:
Federal Home Loan Bank advances
25,531 19,125
Weighted average interest rate during period:
Federal Home Loan Bank advances
2.26% 2.49%
Balance outstanding at end of period:
Federal Home Loan Bank advances
26,416 19,125
Weighted average interest rate at end of period:
Federal Home Loan Bank advances
2.17% 2.45%
Comparison of Financial Condition at December 31, 2017 and December 31, 2016
Total Assets.   Total assets were $171.9 million as of December 31, 2017, an increase of  $30.7 million, or 21.7% when compared to total assets of  $141.3 million at December 31, 2016. The increase was due primarily to increases in the time deposits and interest-bearing deposit portfolio, including $10.1 million of subscription funds to purchase shares of common stock of SSB Bancorp in the initial public offering that was completed January 24, 2018. The Bank borrowed an additional $7.3 million to fund loans. The increases in deposits and borrowings funded an increase of  $37.0 million in loans, primarily in one to four family and commercial real estate loans. SSB’s new headquarters was completed in September 2017, increasing premises and equipment by $2.7 million and the Bank purchased bank-owned life insurance.
37

Cash and Cash Equivalents.   Cash and cash equivalents increased $9.6 million, or 141.2%, to $16.5 million at December 31, 2017 from $6.8 million at December 31, 2016. This increase is primarily due to the receipt of  $10.7 million in escrow deposits for the aforementioned SSB Bancorp stock offering.
Net Loans.   Net loans increased $36.8 million, or 35.5%, to $140.6 million at December 31, 2017 from $103.7 million at December 31, 2016. The greatest impact is due to the increase in commercial mortgages of $24.9 million, or 98.8%, to $50.1 million at December 31, 2017 from $25.2 million at December 31, 2016. One-to-four family mortgages increased $7.4 million, or 10.8%, to $75.9 million at December 31, 2017 from $68.5 million at December 31, 2016. The volume of commercial and industrial loans increased by $3.1 million, or 37.6%, to $11.5 million at December 31, 2017 from $8.3 million at December 31, 2016. Consumer loans increased $1.9 million, or 86.2%, to $4.0 million at December 31, 2017 from $2.2 million at December 31, 2016.
During the year, the volumes in originations were as follows: $17.3 million in one- to four-family mortgages, an increase of  $13.5 million over the $3.8 million originated in 2016; $23.2 million in commercial mortgages, an increase of  $8.3 million over the $14.9 originated in 2016; and $6.4 million in construction loans, an increase of  $2.1 million over the $4.3 million originated in 2016. Originations of multi-family, commercial and industrial, and consumer loans decreased $2.7 million as compared to the prior year.
Loans purchased during 2017 were $6.7 million in one-to-four family, a decrease of  $5.4 million or 44.5% as compared to 2016; there were no commercial mortgages purchased in 2017 as compared to $206,000 in 2016. Construction loans purchased were $5.4 million, a decrease of  $533,000 or 8.9% as compared to 2016. This decrease is due to the Bank’s strategy to originate more loans as opposed to purchasing loans.
$12.6 million in loans that were reported as held for sale at December 31, 2016 were transferred to loans held for investment in 2017. The Bank sold loans in the amount of  $21.5 million, an increase of $16.0 million or 290.2% as compared to $5.5 million in 2016, as a result of hiring a full time Mortgage Loan Originator in January of 2017.
The largest increase in our loan portfolio was in the commercial mortgage loan and commercial and industrial loan portfolios. This growth reflects our strategy to invest in higher yielding adjustable rate loans to improve net margins and manage interest rate risk. We currently sell selected, conforming 15-year and 30-year fixed rate mortgage loans to the Federal Home Loan Bank of Pittsburgh on a servicing retained basis through its mortgage purchase program.
Loans Held for Sale.   There were no loans held for sale at December 31, 2017. The loans that were held-for-sale at year end 2016 totaled $19.9 million. In June 2017, $6.9 million of one-to-four family mortgages were sold and the remaining held for sale portfolio was reclassified to held for investment. The decision to reclassify the loans as being held for investment was made as there was less demand for one-to-four family and commercial mortgage loans on the secondary market.
Available for Sale Securities.   Available for sale securities decreased by approximately $610,000, or 18.9%, to $2.6 million at December 31, 2017 from $3.2 million at December 31, 2016. The decrease results from sales of two municipal bonds totaling $314,000, calls and maturities of two corporate bonds and one municipal bond totaling $210,000, principal payments received on mortgage back securities of  $117,000, and the amortization of purchase premiums and improved bond prices.
Deposits.   Deposits increased $23.1 million, or 21.1%, to $132.4 million at December 31, 2017 from $109.4 million at December 31, 2016. Core deposits increased $11.4 million, or 29.0%, to $50.7 million at December 31, 2017 from $39.3 million at December 31, 2016. The primary reason for the increase was an increase of  $10.1 million in Business Demand Deposits primarily due to the subscription funds to purchase the common stock of SSB Bancorp in the offering completed in January 2018. We began offering these account types in 2010; therefore, increases are expected and were generated primarily, and continue to be, through electronic delivery systems and existing customers. Time deposits increased $11.7 million, or 16.6%, to $81.7 million at December 31, 2017 from $70.0 million at December 31, 2016. The increase in time deposits was primarily due to an increase in deposits obtained through brokers and listing services. During the year ended December 31, 2017, the Bank implemented a strategy to pursue less costly core deposits, which took affect February 2018.
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Borrowings.   Borrowings increased $7.3 million, or 38.1%, to $26.4 million at December 31, 2017 from $19.1 million at December 31, 2016. The Bank’s increase in borrowings, which consists of Federal Home Loan Bank advances, was due to the need of funding for loan growth.
Total Net Worth.   Net worth increased $617,000 or 5.4% to $12.1 million at December 31, 2017 from $11.5 million at December 31, 2016. Net Income was $589,000 for the year 2017. This was partially offset by other comprehensive income of  $28,000 related to net changes in unrealized gains/losses in the available-for-sale securities portfolio.
Comparison of Results of Operations for the Years Ended December 31, 2017 and 2016
Net Income.   Net income increased $1,000, or 0.2%, to $589,000 for the year ended December 31, 2017 from $588,000 for the year ended December 31, 2016. This increase was due to a $395,000 increase in net interest income after the provision for loan losses and a $570,000 increase in noninterest income, which was partially offset by a $671,000 increase in noninterest expenses and a $293,000 increase in the provision for income taxes. The increase in net interest income is due to the growth in net loans of  $36.8 million from December 31, 2016 to December 31, 2017. The growth in noninterest expenses is due to increases in personnel, professional fees, FDIC insurance, data processing, and other noninterest expenses.
Interest and Dividend Income.   Interest and dividend income increased $930,000, or 17.6%, to $6.2 million for the year ended December 31, 2017 from $5.3 million for the year ended December 31, 2016. This increase was due to an increase of  $894,000, or 17.5%, in interest on loans to $6.0 million for the year ended December 31, 2017, from $5.1 million for the year ended December 31, 2016. The increased interest is due to a $20.1 million increase in average total loans for the year ended December 31, 2017. Also, the weighted average yield on the loan portfolio was 4.39% for the year ended December 31, 2017 compared to 4.37% for the year ended December 31, 2016. Aside from loan growth, there was a $27,000 increase in income from interest-bearing deposits to $46,000 for the year ended December 31, 2017 from $19,000 for the year ended December 31, 2016. There was also a $14,000 increase in income from investment securities to $144,000 for the year ended December 31, 2017 from $130,000 for the year ended December 31, 2016. These increases were slightly offset by a decrease in income from certificates of deposit of  $5,000 to $23,000 for the year ended December 31, 2017 from $28,000 for the year ended December 31, 2016.
Average interest-earning assets increased $17.5 million, from $128.5 million for the year ended December 31, 2016 to $146.0 million for the year ended December 31, 2017, while the yield on the interest earning-assets increased 16 basis points, from 4.04% to 4.20% when comparing the two periods.
Interest Expense.   Total interest expense increased $318,000, or 15.9%, to $2.3 million for the year ended December 31, 2017 from $2.0 million for the year ended December 31, 2016. Interest expense on deposit accounts increased $250,000, or 16.4%, to $1.8 million for the year ended December 31, 2017 from $1.5 million for the year ended December 31, 2016. The increase was primarily due to an increase in the average balance of interest-bearing deposits from $102.8 million for the year ended December 31, 2016 to $115.4 million for the year ended December 31, 2017; an increase of  $12.6 million or 12.3%. This was accompanied by a 6 basis point increase in the weighted average cost from 1.48% to 1.54%.
Interest expense on Federal Home Loan Bank advances increased $68,000, or 14.3%, to $544,000 for the year ended December 31, 2017 from $476,000 for the year ended December 31, 2016. The average balance increased from $19.1 million to $25.5 million when comparing the two periods. The increase in the average balance of advances is due to management utilizing advances as a funding source for loan originations. The increase in advances of shorter term led to a decrease in the cost of the advances from 2.49% to 2.13%, a decrease of 36 basis points when comparing the two periods.
Net Interest Income.   Net interest income increased $612,000, or 18.6%, to $3.9 million for the year ended December 31, 2017 from $3.3 million for the year ended December 31, 2016. This increase was due to an increase in our interest rate spread to 2.56% for the year ended December 31, 2017 from 2.40% for the year ended December 31, 2016, and an increase in our net interest margin to 2.61% for the year ended December 31, 2017 from 2.49% for the year ended December 31, 2016. The increase in our interest rate spread and net interest margin was primarily due to the increase in the yield of total earning assets from 4.04% to 4.20% across the two periods. While there was a significant increase in yield on total earning
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assets, there was no change to the average cost of interest bearing liabilities across the two periods as the cost remained at 1.64%. Also, while FHLB advances increased, the average rate decreased from 2.49% to 2.13% across the two periods to offset the average cost of deposits increasing from 1.48% to 1.54% across the two periods.
Provision for Loan Losses.   Based on management’s analysis of the allowance for loan losses, we recorded a provision for loan losses of  $247,000 for the year ended December 31, 2017 compared to a provision of  $30,000 for the year ended December 31, 2016. The increase in the provision for the year ended December 31, 2017 was primarily due to increases in the commercial mortgage and commercial and industrial portfolios when comparing the two periods.
Non-Interest Income.   Non-interest income increased $570,000 to $527,000 for the year ended December 31, 2017 compared to a loss of  $43,000 for the year ended December 31, 2016. The loss in 2016 included a provision for loss of  $372,000 on loans held for sale. Gains on the sale of loans increased by $172,000 to $348,000 for the year ended December 31, 2017 from $176,000 for the year ended December 31, 2016. There was also an increase in loan servicing fees of  $31,000, or 46.9%, to $97,000 for the year ended December 31, 2017 from $66,000 for the year ended December 31, 2016, reflecting sales of loans with servicing rights retained.
Non-Interest Expense.   Non-interest expense increased $671,000, or 28.6%, to $3.0 million for the year ended December 31, 2017 from $2.3 for the year ended December 31, 2016. The increase was due primarily to a $340,000 or 30.5% increase in salaries and employee benefit costs due to increased staffing, a $26,000 or 11.0% increase in occupancy, a $99,000 or 38.1% increase in professional fees due to the formation of the mutual holding company, a $37,000 or 40.6% increase in Federal deposit insurance, a $72,000 or 34.2% increase in data processing, and a $116,000 or 42.5% increase in other noninterest expenses. These were partially offset by a decrease of  $18,000 or 24.1% in contributions and donations.
Income Taxes.   The income tax provision increased by $293,000, or 100.8%, to $584,000 for the year ended December 31, 2017 from $320,000 for the year ended December 31, 2016. The effective tax rate was 49.8% for the year ended December 31, 2017 and 33.1% for the year ended December 31, 2016. The increase in tax expense was primarily due to the Tax Cuts and Jobs Act which caused the Bank to write down its net deferred tax asset by $203,000 as of the enactment date of December 22, 2017.
Average Balance Sheet
The following tables present information regarding average balances of assets and liabilities, the total dollar amounts of interest income from average interest-earning assets, the total dollar amounts of interest expense on average interest-bearing liabilities, and the resulting annualized average yields and costs. The yields and costs for the periods indicated are derived by dividing income or expense by the average balances of assets or liabilities, respectively, for the periods presented. Average balances have been calculated using daily balances. Nonaccrual loans are included in average balances only. Loan fees are included in interest income on loans and are not material. Yields on tax exempt investment securities are not presented on a tax equivalent basis. Any adjustments necessary to present such yields on a tax equivalent basis are insignificant.
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Year Ended December 31,
2017
2016(7)
Average
Balance
Interest and
Dividends
Yield/Cost
Average
Balance
Interest and
Dividends
Yield/Cost
(Dollars in thousands)
Assets:
Interest-bearing deposits
$ 5,176 $ 46 0.90% $ 7,413 $ 19 0.26%
Net loans and loans held for sale(1)(5)(6)
134,799 5,915 4.39 114,740 5,015 4.37
Investment securities
2,992 64 2.14 3,467 72 2.08
Other interest-earning assets(2)
2,999 103 3.43 2,906 86 2.96
Total interest-earning assets
145,966 6,128 4.20 128,526 5,192 4.04
Non-interest-earning assets
8,688 6,756
Total assets
$ 154,654 $ 135,282
Liabilities and equity: