ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Forward-Looking Statements Are Subject to Change
We make certain statements in this document as to what we expect may happen in the future.
These statements usually contain the words
"
believe,
"
"
estimate,
"
"
project,
"
"
expect,
"
"
anticipate,
"
"
intend
"
or similar expressions. Because these statements look to the future, they are based on our current expectations and beliefs. Actual results or events may differ materially from those
reflected in the forward-looking statements. You should be aware that our current expectations and beliefs as to future events are subject to change at any time, and we can give you no assurances that the future events will actually occur.
General
The Company was formed in connection with the Bank’s conversion to a stock savings bank
completed on July 3, 2007. The Company’s results of operations are dependent primarily on the results of the Bank, which is a wholly owned subsidiary of the Company. The Bank’s results of operations depend, to a large extent, on net interest
income, which is the difference between the income earned on its loan and investment portfolios and the cost of funds, consisting of the interest paid on deposits and borrowings. Results of operations are also affected by provisions for loan
losses, fee income and other non-interest income and non-interest expense. Non-interest expense principally consists of compensation, directors’ fees and expenses, office occupancy and equipment expense, data processing expense, professional
fees, advertising expense, FDIC deposit insurance assessment, and other expenses. Our results of operations are also significantly affected by general economic and competitive conditions, particularly changes in interest rates, government
policies and actions of regulatory authorities. Future changes in applicable law, regulations or government policies may materially impact our financial condition and results of operations.
At March 31, 2019, the Bank has five wholly-owned subsidiaries, Quaint Oak Mortgage, LLC,
Quaint Oak Real Estate, LLC, Quaint Oak Abstract, LLC, QOB Properties, LLC, and Quaint Oak Insurance Agency, LLC, each a Pennsylvania limited liability company. The mortgage, real estate and abstract companies offer mortgage banking, real
estate sales and title abstract services, respectively, in the Lehigh Valley region of Pennsylvania, and began operation in July 2009. In February 2019, Quaint Oak Mortgage opened a mortgage banking office in Philadelphia, Pennsylvania. QOB
Properties, LLC began operations in July 2012 and holds Bank properties acquired through a foreclosure proceeding or acceptance of a deed in lieu of foreclosure. Quaint Oak Insurance Agency, LLC, located in Chalfont, Pennsylvania, began
operations in August 2016 and provides a broad range of personal and commercial insurance coverage solutions.
Critical Accounting Policies
The accounting and financial reporting policies of the Company conform to accounting
principles generally accepted in the United States of America and to general practices within the banking industry. Accordingly, the consolidated financial statements require certain estimates, judgments, and assumptions, which are believed to
be reasonable, based upon the information available. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the
periods presented. The following accounting policies comprise those that management believes are the most critical to aid in fully understanding and evaluating our reported financial results. These policies require numerous estimates or
economic assumptions that may prove inaccurate or may be subject to variations which may significantly affect our reported results and financial condition for the period or in future periods.
Allowance
for Loan Losses.
The allowance for loan losses represents management’s estimate of losses inherent in the loan portfolio as of the balance sheet date and is recorded as a reduction to loans receivable. The allowance for loan losses is
increased by the provision for loan losses, and decreased by charge-offs, net of recoveries. Loans deemed to be uncollectible are charged against the allowance for loan losses, and subsequent recoveries, if any, are credited to the allowance.
All, or part, of the principal balance of loans receivable are charged off to the allowance as soon as it is determined that the repayment of all, or part, of the principal balance is highly unlikely. Because all identified losses are
immediately charged off, no portion of the allowance for loan losses is restricted to any individual loan or groups of loans, and the entire allowance is available to absorb any and all loan losses.
The allowance for loan losses is maintained at a level considered adequate to provide for
losses that can be reasonably anticipated. Management performs a quarterly evaluation of the adequacy of the allowance. The allowance is based on the Company’s past loan loss experience, known and inherent risks in the portfolio, adverse
situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, composition of the loan portfolio, current economic conditions and other relevant factors. This evaluation is inherently subjective as
it requires material estimates that may be susceptible to significant revision as more information becomes available.
The allowance consists of specific, general and unallocated components. The specific
component relates to loans that are designated as impaired. For loans that are designated as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower
than the carrying value of that loan. The general component covers pools of loans by loan class. These pools of loans are evaluated for loss exposure based upon historical loss rates for each of these categories of loans, adjusted for
qualitative factors. These significant factors may include changes in lending policies and procedures, changes in existing general economic and business conditions affecting our primary lending areas, credit quality trends, collateral value,
loan volumes and concentrations, seasoning of the loan portfolio, recent loss experience in particular segments of the portfolio, duration of the current business cycle and bank regulatory examination results. The applied loss factors are
reevaluated quarterly to ensure their relevance in the current economic environment. Residential owner occupied mortgage lending generally entails a lower risk of default than other types of lending. Consumer loans and commercial real estate
loans generally involve more risk of collectability because of the type and nature of the collateral and, in certain cases, the absence of collateral. It is the Company’s policy to establish a specific reserve for loss on any delinquent loan
when it determines that a loss is probable. An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision
inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.
A loan is considered impaired when, based on current information and events, it is probable
that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status,
collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not considered impaired. Management determines the
significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the
borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis by either the present value of expected future cash flows discounted at the loan’s
effective interest rate or the fair value of the collateral if the loan is collateral dependent. An allowance for loan losses is established for an impaired loan if its carrying value exceeds its estimated fair value. The estimated fair values
of substantially all of the Company’s impaired loans are measured based on the estimated fair value of the loan’s collateral.
A loan is identified as a troubled debt restructuring (“TDR”) if the Company, for economic
or legal reasons related to a debtor’s financial difficulties, grants a concession to the debtor that it would not otherwise consider. Concessions granted under a TDR typically involve a temporary or permanent reduction in payments or interest
rate or an extension of a loan’s stated maturity date at less than a current market rate of interest. Loans identified as TDRs are designated as impaired.
For loans secured by real estate, estimated fair values are determined
primarily through third-party appraisals. When a real estate secured loan becomes impaired, a decision is made regarding whether an updated certified appraisal of the real estate is necessary. This decision is based on various considerations,
including the age of the most recent appraisal, the loan-to-value ratio based on the original appraisal and the condition of the property. Appraised values are discounted to arrive at the estimated selling price of the collateral, which is
considered to be the estimated fair value. The discounts also include estimated costs to sell the property.
The
allowance calculation methodology includes further segregation of loan classes into risk rating categories. The borrower’s overall financial condition, repayment sources, guarantors and value of collateral, if appropriate, are evaluated
annually for all loans (except one-to-four family residential owner-occupied loans) where the
total amount outstanding to any borrower or group of borrowers exceeds $500,000,
or when credit deficiencies arise, such as delinquent loan payments. Credit quality risk ratings include regulatory classifications of special mention, substandard, doubtful and loss. Loans
criticized special mention have potential weaknesses that deserve management’s close attention. If uncorrected, the potential weaknesses may result in deterioration of the repayment prospects. Loans classified substandard have a well-defined
weakness or weaknesses that jeopardize the liquidation of the debt. They include loans that are inadequately protected by the current sound net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans classified
doubtful have all the weaknesses inherent in loans classified substandard with the added characteristic that collection or liquidation in full, on the basis of current conditions and facts, is highly improbable. Loans classified as a loss are
considered uncollectible and are charged to the allowance for loan losses. Loans not classified are rated pass. In addition, Federal regulatory agencies, as an integral part of their examination process, periodically review the Company’s
allowance for loan losses and may require the Company to recognize additions to the allowance based on their judgments about information available to them at the time of their examination, which may not be currently available to management.
Based on management’s comprehensive analysis of the loan portfolio, management believes the current level of the allowance for loan losses is adequate.
Income
Taxes
. Deferred income tax assets and liabilities are determined using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is determined based on the tax effects of the temporary
differences between the book and tax bases of the various assets and liabilities and net operating loss carryforwards and gives current recognition to changes in tax rates and laws. The realization of our deferred tax assets principally
depends upon our achieving projected future taxable income. We may change our judgments regarding future profitability due to future market conditions and other factors. We may adjust our deferred tax asset balances if our judgments change.
Comparison of Financial Condition at March 31, 2019 and December 31, 2018
General
.
The Company’s total assets at March 31, 2019 were $281.9 million, an increase of $10.5 million, or 3.9%, from $271.4 million at
December 31, 2018. This growth in total assets was primarily due to a $5.2 million, or 106.1%, increase in investment in interest-earning time deposits, a $2.5 million, or 1.2%, increase in loans receivable, net, a $2.4 million, or 9.1%,
increase in cash and cash equivalents, and a $1.2 million, or 117.8%, increase in prepaid expenses and other assets. These increases were partially offset by an $890,000, or 17.4%, decrease in loans held for sale.
Cash and Cash Equivalents.
Cash and cash equivalents increased $2.4 million, or 9.1%, from $26.0 million at December 31, 2018 to $28.4 million at March 31, 2019 with the expectation that excess
liquidity will be used to fund loans.
Investment in Interest-Earning Time Deposits.
Investment in interest-earning time deposits increased $5.2 million, or 106.1%, from $4.9 million at December 31, 2019 to $10.2 million at March 31,
2019 as the Company invested excess liquidity into higher yielding interest-earning assets.
Investment Securities Available for Sale
.
Investment securities available for sale decreased $187,000, or 2.8%, from $6.7 million at December 31, 2018 to $6.5 million at March 31, 2019, due
primarily to the principal repayments on these securities during the three months ended March 31, 2019.
Loans Held for Sale.
Loans held for sale decreased $890,000 or 17.4%, from $5.1 million at December 31, 2018 to $4.2 million at March 31, 2019 as the Bank’s mortgage banking subsidiary, Quaint Oak
Mortgage, LLC, originated $17.8 million of one-to-four family residential loans during the three months ended March 31, 2019 and sold $18.5 million of loans in the secondary market during this same period. The Bank did not originate any
equipment loans held for sale during the three months ended March 31, 2019 but sold $258,000 of equipment loans during this same period.
Loans
Receivable, Net
.
Loans receivable, net, increased $2.5 million, or 1.2%, to $219.4 million at March 31, 2019 from $216.9 million December 31, 2018. This increase was funded primarily from
deposits and excess liquidity. Increases within the portfolio occurred in commercial business loans which increased $5.5 million, or 23.1%, multi-family residential loans which increased $691,000, or 2.9%, and home equity loans which increased
$408,000, or 9.4%. These increases were partially offset by decreases of $1.8 million, or 17.6%, in construction loans, $1.4 million, or 2.9%, in one-to-four family residential non-owner occupied loans, $531,000, or 0.5%, in commercial real
estate loans, $295,000, or 4.5%, in one-to-four family residential owner occupied loans, and $4,000, or 21.1%, in other consumer loans. The Company continues its strategy of diversifying its loan portfolio with higher yielding and shorter-term
loan products and selling substantially all of its newly originated one-to-four family owner-occupied loans into the secondary market.
Other
Real Estate Owned.
Other real estate owned (OREO) amounted to $1.74 million at March 31, 2019, consisting of one property that was collateral for a non-performing construction loan. During the quarter ended March 31, 2019, the
Company made $94,000 of capital improvements to the property. The balance of this OREO property amounted to $1.65 million at December 31, 2018. Non-performing assets amounted to $2.6 million, or 0.93% of total assets at March 31, 2019
compared to $2.8 million, or 1.04% of total assets at December 31, 2018.
Prepaid Expenses and Other Assets.
Prepaid expenses and other assets increased $1.2 million, or 117.8%, due primarily to the adoption of Financial Accounting Standards Board accounting standard ASU
2016-02,
Leases (Topic 842)
by the Company on January 1, 2019. This standard requires a lessee to recognize the assets and liabilities that arise
from leases on the balance sheet by recognizing a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. The impact of adopting this accounting
standard on the Company’s balance sheet was $1.3 million at March 31, 2019.
Deposits
.
Total deposits increased $10.1 million, or 4.8%, to $222.0 million at March 31, 2019 from $211.9 million at December 31, 2018. This increase in deposits was
primarily attributable to increases of $12.9 million, or 7.8%, in certificates of deposit, $1.5 million, or 5.6%, in money market accounts, and $77,000, or 6.9%, in savings accounts. These increases were partially offset by a $4.3 million, or
24.5%, decrease in non-interest bearing checking accounts and a $103,000, or 53.6%, decrease in passbook accounts.
Stockholders’
Equity
.
Total stockholders’ equity increased $370,000, or 1.6%, to $24.2 million at March 31, 2019 from $23.8 million at December 31, 2018. Contributing to the increase was net income for the
three months ended March 31, 2019 of $413,000, the reissuance of treasury stock for exercised stock options of $109,000, common stock earned by participants in the employee stock ownership plan of $45,000, amortization of stock awards and
options under our stock compensation plans of $43,000, the reissuance of treasury stock under the Bank’s 401(k) Plan of $12,000, and other comprehensive income, net of $1,000. These increases were partially offset by dividends paid of $138,000
and by the purchase of treasury stock of $115,000.
Comparison of Operating Results for the Three Months Ended March 31, 2019
General.
Net income amounted to $413,000 for the three months ended March 31, 2019, an increase of $125,000, or 43.4%, compared to net income of $288,000 for the three months ended March 31, 2018.
The increase in net income on a comparative quarterly basis was primarily the result of an increase in net interest income of $158,000 and an increase non-interest income of $100,000, partially offset by an increase in the provision for income
taxes of $119,000 and an increase in the provision for loan losses of $14,000.
Net
Interest Income.
Net interest income increased $158,000, or 8.0%, to $2.1 million for the three months ended March 31, 2019 from $2.0 million for the three months ended March 31, 2018. The increase was driven by a $567,000 or 20.0%,
increase in interest income, partially offset by a $409,000 or 47.8%, increase in interest expense.
Interest
Income.
Interest income increased $567,000 or 20.0%, to $3.4 million for the three months ended March 31, 2019 from $2.8 million for the three months ended March 31, 2018. The increase in
interest income was primarily due to a $15.3 million increase in average loans receivable, net, including loans held for sale, which increased from an average balance of $207.8 million for the three months ended March 31, 2018 to an average
balance of $223.2 million for the three months ended March 31, 2019, and had the effect of increasing interest income $200,000. Also contributing to this increase was a 41 basis point increase in the yield on average loans receivable, net,
including loans held for sale, which increased from 5.21% for the three months ended March 31, 2018 to 5.62% for the three months ended March 31, 2019, which had the effect of increasing interest income $213,000. The increase in interest
income was also due to a $17.0 million increase in average cash and cash equivalents due from banks, interest bearing, which increased from an average balance of $12.4 million for the three months ended March 31, 2018 to an average balance of
$29.4 million for the three months ended March 31, 2019, and had the effect of increasing interest income $67,000. Also contributing to this increase was a 49 basis point increase in the yield on average cash and cash equivalents due from
banks, interest bearing, which increased from 1.61% for the three months ended March 31, 2018 to 2.10% for the three months ended March 31, 2019, which had the effect of increasing interest income $16,000.
Interest
Expense.
Interest expense increased $409,000 or 47.8%, to $1.3 million for the three months ended March 31, 2019 from $856,000 for the three months ended March 31, 2018. The increase in interest expense was primarily attributable to
a $23.8 million increase in average certificate of deposit accounts which increased from an average balance of $148.6 million for the three months ended March 31, 2018 to an average balance of $172.4 million for the three months ended March 31,
2019, and had the effect of increasing interest expense $107,000. Also contributing to this increase was a 39 basis point increase in rate on average certificate of deposit accounts, which increased from 1.80% for the three months ended March
31, 2018 to 2.19% for the three months ended March 31, 2019, and had the effect of increasing interest expense by $147,000. The increase in interest expense was also due to average subordinated debt of $7.8 million for the three months ended
March 31, 2019, at the applicable interest rate of 6.5%, which had the effect of increasing interest expense by $129,000 compared to no effect for the three months ended March 31, 2018.
Average Balances,
Net Interest Income, Yields Earned and Rates Paid.
The following table shows for the periods indicated the total dollar amount of interest
from average interest-earning assets and the resulting yields, as well as the interest expense on average interest-bearing liabilities, expressed both in dollars and rates, and the net interest margin. All average balances are based on daily
balances
.
|
|
Three Months Ended March 31,
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
Yield/
|
|
|
Average
|
|
|
|
|
|
Average
Yield/
|
|
|
|
(Dollars in thousands)
|
|
Interest-earning assets:
|
|
|
|
Due from banks, interest-bearing
|
|
$
|
29,384
|
|
|
$
|
154
|
|
|
|
2.10
|
%
|
|
$
|
12,413
|
|
|
$
|
50
|
|
|
|
1.61
|
%
|
Investment in interest-earning time deposits
|
|
|
8,015
|
|
|
|
49
|
|
|
|
2.45
|
|
|
|
4,884
|
|
|
|
22
|
|
|
|
1.80
|
|
Investment securities available for sale
|
|
|
6,630
|
|
|
|
42
|
|
|
|
2.53
|
|
|
|
7,810
|
|
|
|
35
|
|
|
|
1.79
|
|
Loans receivable, net (1) (2) (3)
|
|
|
223,167
|
|
|
|
3,137
|
|
|
|
5.62
|
|
|
|
207,829
|
|
|
|
2,709
|
|
|
|
5.21
|
|
Investment in FHLB stock
|
|
|
1,086
|
|
|
|
20
|
|
|
|
7.37
|
|
|
|
1,235
|
|
|
|
19
|
|
|
|
6.15
|
|
Total interest-earning assets
|
|
|
268,282
|
|
|
|
3,402
|
|
|
|
5.07
|
%
|
|
|
234,171
|
|
|
|
2,835
|
|
|
|
4.84
|
%
|
Non-interest-earning assets
|
|
|
11,385
|
|
|
|
|
|
|
|
|
|
|
|
8,670
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
279,667
|
|
|
|
|
|
|
|
|
|
|
$
|
242,841
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Passbook accounts
|
|
$
|
97
|
|
|
$
|
-
|
|
|
|
-
|
%
|
|
$
|
394
|
|
|
$
|
-
|
|
|
|
-
|
%
|
Savings accounts
|
|
|
1,215
|
|
|
|
1
|
|
|
|
0.33
|
|
|
|
2,004
|
|
|
|
1
|
|
|
|
0.20
|
|
Money market accounts
|
|
|
27,636
|
|
|
|
54
|
|
|
|
0.78
|
|
|
|
31,067
|
|
|
|
61
|
|
|
|
0.79
|
|
Certificate of deposit accounts
|
|
|
172,448
|
|
|
|
944
|
|
|
|
2.19
|
|
|
|
148,611
|
|
|
|
667
|
|
|
|
1.80
|
|
Total deposits
|
|
|
201,396
|
|
|
|
999
|
|
|
|
1.98
|
|
|
|
182,076
|
|
|
|
729
|
|
|
|
1.60
|
|
FHLB short-term borrowings
|
|
|
9,000
|
|
|
|
58
|
|
|
|
2.58
|
|
|
|
10,000
|
|
|
|
36
|
|
|
|
1.44
|
|
FHLB long-term borrowings
|
|
|
15,000
|
|
|
|
79
|
|
|
|
2.11
|
|
|
|
18,000
|
|
|
|
91
|
|
|
|
2.02
|
|
Subordinated debt
|
|
|
7,827
|
|
|
|
129
|
|
|
|
6.59
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total interest-bearing liabilities
|
|
|
233,223
|
|
|
|
1,265
|
|
|
|
2.17
|
%
|
|
|
210,076
|
|
|
|
856
|
|
|
|
1.63
|
%
|
Non-interest-bearing liabilities
|
|
|
22,491
|
|
|
|
|
|
|
|
|
|
|
|
10,401
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
255,714
|
|
|
|
|
|
|
|
|
|
|
|
220,477
|
|
|
|
|
|
|
|
|
|
Stockholders’ Equity
|
|
|
23,953
|
|
|
|
|
|
|
|
|
|
|
|
22,364
|
|
|
|
|
|
|
|
|
|
Total liabilities and Stockholders’ Equity
|
|
$
|
279,667
|
|
|
|
|
|
|
|
|
|
|
$
|
242,841
|
|
|
|
|
|
|
|
|
|
Net interest-earning assets
|
|
$
|
35,059
|
|
|
|
|
|
|
|
|
|
|
$
|
24,095
|
|
|
|
|
|
|
|
|
|
Net interest income; average interest rate spread
|
|
|
|
|
|
$
|
2,137
|
|
|
|
2.90
|
%
|
|
|
|
|
|
$
|
1,979
|
|
|
|
3.21
|
%
|
Net interest margin (4)
|
|
|
|
|
|
|
|
|
|
|
3.19
|
%
|
|
|
|
|
|
|
|
|
|
|
3.38
|
%
|
Average interest-earning assets to average
interest-bearing liabilities
|
|
|
|
|
|
|
|
|
|
|
115.03
|
%
|
|
|
|
|
|
|
|
|
|
|
111.47
|
%
|
________________________
(1)
|
Includes loans held for sale.
|
(2)
|
Includes non-accrual loans during the respective periods. Calculated net of deferred fees and discounts, loans in process and allowance for loan losses.
|
(3)
|
Includes tax free municipal leases with an aggregate average balance of $34,000 and an average yield of 4.57% for the three months ended March 31, 2018.
The tax-exempt income from such loans has not been calculated on a tax equivalent basis. There were no tax free municipal leases in 2019.
|
(4)
|
Equals net interest income divided by average interest-earning assets.
|
Provision
for Loan Losses.
The Company’s provision for loan losses increased $14,000, or 19.7%, from $71,000 for the three months ended March 31, 2018 to $85,000 for the three months ended March 31, 2019,
based on an evaluation of the allowance relative to such factors as volume of the loan portfolio, concentrations of credit risk, prevailing economic conditions, prior loan loss experience and amount of non-performing loans at March 31, 2019.
Non-performing loans amounted to $880,000 or 0.40% of net loans
receivable at March 31, 2019, consisting of five loans, two of which are on non-accrual status and three of which are 90 days or more past due and accruing interest. Comparably, non-performing loans amounted to $1.2 million, or 0.54% of net
loans receivable at December 31, 2018, consisting of six loans, three of which were on non-accrual status and three of which were 90 days or more past due and accruing interest. The non-performing loans at March 31, 2019 include two
one-to-four family non-owner occupied residential loans, one one-to-four family owner occupied residential loan, one commercial real estate loan, and one construction loan, and all are generally well-collateralized or adequately reserved for.
During the quarter ended March 31, 2019, one loan that was previously on non-accrual status was paid-off. The allowance for loan losses as a percent of total loans receivable was 0.93% at March 31, 2019 and 0.90% at December 31, 2018.
Non-Interest
Income.
Non-interest income increased $100,000, or 13.5%, for the three months ended March 31, 2019 over the comparable period in 2018 primarily due to a $112,000, or 34.9%, increase in net gain on
the sales of loans held for sale, an $83,000, or 360.9%, increase in gain on the sale of SBA loans, a $32,000, or 28.3%, increase in mortgage banking and abstract fees, and a $13,000, or 16.5%, increase in insuran
c
e commissions. These increases were offset by a $63,000, decrease in the gain on the sales of other real estate owned, a $46,000, or 62.2% decrease on other fees and service
charges, and a $31,000, or 63.3%, decrease in real estate sales commissions, net.
Non-Interest Expense.
Total non-interest expense of $2.3 million for the three months ended March 31, 2019 was unchanged from the three months ended March 31, 2018. Professional fees increased $22,000, or 36.7%, advertising expense
increased $17,000, or 31.5%, data processing expense increased $16,000, or 18.6%, occupancy and equipment expense increased $10,000, or 6.7%, other real estate owned expenses increased $7,000, and directors’ fees increased $3,000, or 5.6%.
These increases were offset by a $42,000, or 2.5% decrease in salaries and employee benefits expense, a $19,000, or 40.4%, decrease in FDIC deposit insurance assessment, and a $14,000, or 8.0%, decrease in other expense.
Provision for Income Tax.
The provision for income tax increased $119,000, or 216.4%, from $55,000 for the three months ended March 31, 2018 to $174,000 for the three months ended March 31, 2019 due primarily to the increase in
pre-tax income and an increase in our effective tax rate from 16.0% for the three months ended March 31, 2018 to 29.6% for the three months ended March 31, 2019. The increase in our effective tax rate was primarily due a tax deduction taken
in the first quarter of 2018 related to the exercise of non-qualified stock options during the three months ended March 31, 2018.
Operating Segments
The Company's operations consist of two reportable operating segments: Banking and Mortgage
Banking. Our Banking Segment generates revenues primarily from its lending, deposit gathering and fee business activities. Our Mortgage Banking Segment originates residential mortgage loans which are sold into the secondary market along with
the loans’ servicing rights. Detailed segment information appears in Note 12 in the Notes to Consolidated Financial Statements.
Our Banking Segment reported a pre-tax segment profit (“PTSP”) for the three months ended
March 31, 2019 of $493,000, an 86,000, or 21.1%, increase from the same period in 2018. This increase in PTSP was due to an increase in net interest income, driven by higher average loan balances and yields partially offset by a higher cost of
funds and a decrease in non-interest expense due primarily to a decrease in salaries and benefits expense. These increases were partially offset by a decrease in non-interest income, primarily due to a decrease in gain on the sale of other
real estate owned, a decrease in other fees and service charges, and an increase in the provision for loan losses.
Our Mortgage Banking Segment reported a PTSP for the three months ended March 31, 2019 of
$94,000, a $158,000 increase from the same period in 2018. The increase in PTSP was primarily due to the increase in non-interest income which was driven by an increases in net gain on the sale of loans and processing fees. This increase was
partially offset by increases in non-interest expense and a decrease in net interest income.
Liquidity and Capital Resources
The Company’s primary sources of funds are deposits, amortization and prepayment of loans
and to a lesser extent, loan sales and other funds provided from operations. While scheduled principal and interest payments on loans are a relatively predictable source of funds, deposit flows and loan prepayments are greatly influenced by
general interest rates, economic conditions and competition. The Company sets the interest rates on its deposits to maintain a desired level of total deposits. In addition, the Company invests excess funds in short-term interest-earning
assets that provide additional liquidity. At March 31, 2019, the Company's cash and cash equivalents amounted to $28.4 million. At such date, the Company also had $1.3 million invested in interest-earning time deposits maturing in one year or
less.
The Company uses its liquidity to fund existing and future loan commitments, to fund deposit
outflows, to invest in other interest-earning assets and to meet operating expenses. At March 31, 2019, Quaint Oak Bank had outstanding commitments to originate loans of $21.8 million, commitments under unused lines of credit of $15.5 million,
and $1.9 million under standby letters of credit.
At March 31, 2019, certificates of deposit scheduled to mature in less than one year totaled
$51.5 million. Based on prior experience, management believes that a significant portion of such deposits will remain with us, although there can be no assurance that this will be the case.
In addition to cash flow from loan payments and prepayments and deposits, the Company has
significant borrowing capacity available to fund liquidity needs. If the Company requires funds beyond its ability to generate them internally, borrowing agreements exist with the Federal Home Loan Bank of Pittsburgh (FHLB), which provide an
additional source of funds. As of March 31, 2019, we had $24.0 million of borrowings from the FHLB and had $133.4 million in borrowing capacity. Under terms of the collateral agreement with the FHLB of Pittsburgh, we pledge residential
mortgage loans as well as Quaint Oak Bank’s FHLB stock as collateral for such advances. In addition, as of March 31, 2019 Quaint Oak Bank had $844,000 in borrowing capacity with the Federal Reserve Bank of Philadelphia. There were no
borrowings under this facility at March 31, 2019.
Our stockholders’ equity amounted to $24.2 million at March 31, 2019, an increase of
$370,000, or 1.6%, from $23.8 million at December 31, 2018. Contributing to the increase was net income for the three months ended March 31, 2019 of $413,000, the reissuance of treasury stock for exercised stock options of $109,000, common
stock earned by participants in the employee stock ownership plan of $45,000, amortization of stock awards and options under our stock compensation plans of $43,000, the reissuance of treasury stock under the Bank’s 401(k) Plan of $12,000, and
other comprehensive income, net of $1,000. These increases were partially offset by dividends paid of $138,000 and by the purchase of treasury stock of $115,000. For further discussion of the stock compensation plans, see Note 10 in the Notes
to Unaudited Consolidated Financial Statements contained elsewhere herein.
Quaint Oak Bank is required to maintain regulatory capital sufficient to meet tier 1
leverage, common equity tier 1 capital, tier 1 risk-based and total risk-based capital ratios of at least 4.00%, 4.50%, 6.00%, and 8.00%, respectively. At March 31, 2019, Quaint Oak Bank exceeded each of its capital requirements with ratios of
10.43%, 14.51%, 14.51% and 15.58%, respectively. As a small savings and loan holding company eligible for exemption, the Company is not currently subject to any regulatory capital requirements.
Off-Balance Sheet Arrangements
In the normal course of operations, we engage in a variety of financial transactions that,
in accordance with generally accepted accounting principles are not recorded in our financial statements. These transactions involve, to varying degrees, elements of credit, interest rate, and liquidity risk. Such transactions are used
primarily to manage customers' requests for funding and take the form of loan commitments and lines of credit. Our exposure to credit loss from non-performance by the other party to the above-mentioned financial instruments is represented by
the contractual amount of those instruments. We use the same credit policies in making commitments and conditional obligations as we do for on-balance sheet instruments. In general, we do not require collateral or other security to support
financial instruments with off–balance sheet credit risk.
Commitments.
At March 31, 2019, we had unfunded commitments under lines of credit of $15.5 million, $21.8 million of commitments to originate loans, and $1.9 million under standby letters of credit. We had no commitments to
advance additional amounts pursuant to outstanding lines of credit or undisbursed construction loans.
Impact of Inflation and Changing Prices
The consolidated financial statements and related financial data presented herein have been
prepared in accordance with accounting principles generally accepted in the United States of America which generally require the measurement of financial position and operating results in terms of historical dollars, without considering changes
in relative purchasing power over time due to inflation. Unlike most industrial companies, virtually all of the Company’s assets and liabilities are monetary in nature. As a result, interest rates generally have a more significant impact on
the Company’s performance than does the effect of inflation. Interest rates do not necessarily move in the same direction or in the same magnitude as the prices of goods and services, since such prices are affected by inflation to a larger
extent than interest rates.