EXHIBIT 13.0
PRESIDENT’S LETTER TO SHAREHOLDERS
To our Valued Shareholders:
On behalf of the Board of Directors, Senior Management and Employees of the Quaint Oak Family of Companies, I am pleased to present our 2018 Annual Report to Shareholders.
I am very pleased to note that Quaint Oak Bancorp, Inc. (the “Company”) successfully completed an $8.0 million subordinated debt offering in December 2018. We are excited about the prospect of future growth provided by this additional capital. This event contributed to the Company’s total assets surpassing the $270.0 million mark, a 13.3% increase in assets at December 31, 2018 compared to the prior year-end period.
Our mortgage company subsidiary is experiencing its own growth having exceeded $100.0 million in loans closed during the 2018 year. Lehigh Valley Business has identified our mortgage company as a “Fastest Growing Company” in the Greater Lehigh Valley for a third consecutive year. In light of our success in this business line, in February 2019 we opened a mortgage banking office in the Philadelphia market. This action is intended to further promote the growth of this subsidiary company.
The Bank’s growth in loans receivable, net, was 7.6% at December 31, 2018, compared to the prior year-end period. The increases in productivity at both the Bank and its mortgage company subsidiary have translated into improved net income for the Company. The Company’s 2018 net income surpassed the $2.0 million benchmark or $1.04 per share-basic. The incremental growth that we have experienced is the focus of our future. Our intention, with the added support of our improved capital position, is to accelerate implementation of our strategic growth plan. Key to this is investment in productive personnel along with improving and expanding our market presence. These anticipated expenditures are necessary for both the continued short and long-term growth of the Company. We look forward to the challenges that these growth prospects provide.
In closing, I am again, pleased that our stockholders have benefited from our strategy having received a 40% dividend increase over the previous year supported by the increase in stockholders’ equity of approximately $1.7 million in 2018. I am additionally pleased to report that the Company has repurchased over 60,700 additional shares during 2018. Our repurchase plans have now repurchased over 38% of the original shares issued in our initial public offering. As always, in conjunction with having maintained a strong repurchase plan, our current and continued business strategy includes long term profitability and payment of dividends reflecting our strong commitment to shareholder value.
Robert T. Strong
President and Chief Executive Officer
| Quaint Oak Family of Companies |
| Quaint Oak Bancorp, Inc. |
| Quaint Oak Bank |
Quaint Oak Abstract, LLC ׀ Quaint Oak Mortgage, LLC ׀ Quaint Oak Real Estate, LLC ׀ Quaint Oak Insurance Agency, LLC |
| Serving the Delaware Valley and the Lehigh Valley Markets |
| |
| | Page |
| Selected Consolidated Financial and Other Data | 1 | |
Management’s Discussion and Analysis of Financial Condition and Results of Operations | 2 | |
| Reports of Independent Registered Public Accounting Firm | 15 | |
| Consolidated Balance Sheets | 16 | |
| Consolidated Statements of Income | 17 | |
| Consolidated Statements of Comprehensive Income | 18 | |
Consolidated Statements of Stockholders’ Equity | 19 | |
| Consolidated Statements of Cash Flows | 20 | |
| Notes to Consolidated Financial Statements | 21 | |
Locations
| 61 | |
General Information
| 62 | |
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
Set forth below is selected financial and other data of Quaint Oak Bancorp, Inc. You should read the financial statements and related notes contained in this Annual Report which provide more detailed information.
| | | At or For the Years Ended December 31, | |
| | | | | | | |
| | | (Dollars in Thousands) | |
| Selected Financial and Other Data: | | | | | | |
| Total assets | | $ | 271,404 | | | $ | 239,596 | |
| Cash and cash equivalents | | | 26,012 | | | | 7,910 | |
| Investment in interest-earning time deposits | | | 4,927 | | | | 4,879 | |
| Investment securities available for sale at fair value (cost-2018 $6,682; 2017 $7,931) | | | 6,680 | | | | 7,912 | |
| Loans held for sale | | | 5,103 | | | | 7,006 | |
| Loans receivable, net | | | 216,898 | | | | 201,667 | |
| Federal Home Loan Bank stock, at cost | | | 1,086 | | | | 1,234 | |
| Premises and equipment, net | | | 2,058 | | | | 1,988 | |
| Deposits | | | 211,911 | | | | 186,221 | |
| Federal Home Loan Bank borrowings | | | 24,000 | | | | 28,000 | |
| Subordinated debt | | | 7,831 | | | | -- | |
| Stockholders’ Equity | | | 23,836 | | | | 22,185 | |
| | | | | | | | | |
| | | | | | | | | |
| Selected Operating Data: | | | | | | | | |
| Total interest income | | $ | 12,125 | | | $ | 10,588 | |
| Total interest expense. | | | 3,820 | | | | 3,002 | |
| Net interest income | | | 8,305 | | | | 7,586 | |
| Provision for loan losses | | | 415 | | | | 284 | |
| Net interest income after provision for loan losses | | | 7,890 | | | | 7,302 | |
| Total non-interest income | | | 3,947 | | | | 3,442 | |
| Total non-interest expense | | | 9,166 | | | | 8,072 | |
| Income before income taxes | | | 2,671 | | | | 2,672 | |
| Income taxes | | | 667 | | | | 1,205 | |
| Net income | | $ | 2,004 | | | $ | 1,467 | |
| | | | | | | | | |
Selected Operating Ratios(1): | | | | | | | | |
| Average yield on interest-earning assets | | | 4.98 | % | | | 4.88 | % |
| Average rate on interest-bearing liabilities | | | 1.77 | | | | 1.54 | |
| Average interest rate spread(2) | | | 3.21 | | | | 3.34 | |
| Net interest margin(2) | | | 3.41 | | | | 3.50 | |
| Average interest-earning assets to average interest-bearing liabilities | | | 112.68 | | | | 111.44 | |
| Net interest income after provision for loan losses to non-interest expense | | | 74.81 | | | | 90.46 | |
| Total non-interest expense to average assets | | | 3.62 | | | | 3.58 | |
| Efficiency ratio(3) | | | 74.81 | | | | 73.20 | |
| Return on average assets | | | 0.79 | | | | 0.65 | |
| Return on average equity | | | 8.70 | | | | 6.77 | |
| Average equity to average assets | | | 9.11 | | | | 9.60 | |
| | | | | | | | | |
Asset Quality Ratios(4): | | | | | | | | |
| Non-performing loans as a percent of loans receivable, net(5) | | | 0.54 | % | | | 1.52 | % |
| Non-performing assets as a percent of total assets(5) | | | 1.04 | | | | 1.28 | |
| Non-performing assets and troubled debt restructurings as a percent of total assets | | | 1.19 | | | | 1.58 | |
| Allowance for loan losses as a percent of non-performing loans | | | 166.81 | | | | 59.02 | |
| Allowance for loan losses as a percent of total loans receivable | | | 0.90 | | | | 0.89 | |
| Net charge-offs to average loans receivable | | | 0.13 | | | | 0.04 | |
| | | | | | | | | |
Capital Ratios(4): | | | | | | | | |
| Tier 1 leverage ratio | | | 10.92 | % | | | 8.54 | % |
| Common Tier 1 capital ratio | | | 14.45 | | | | 11.26 | |
| Tier 1 risk-based capital ratio | | | 14.45 | | | | 11.26 | |
| Total risk-based capital ratio | | | 15.49 | | | | 12.31 | |
___________________
| (1) | With the exception of end of period ratios, all ratios are based on average daily balances during the indicated periods. |
| (2) | Average interest rate spread represents the difference between the average yield on interest-earning assets and the average rate paid on interest-bearing liabilities, and net interest margin represents net interest income as a percentage of average interest-earning assets. |
| (3) | The efficiency ratio represents the ratio of non-interest expense divided by the sum of net interest income and non-interest income. |
| (4) | Asset quality ratios and capital ratios are end of period ratios, except for net charge-offs to average loans receivable. |
| (5) | Non-performing assets consist of non-performing loans and other real estate owned at December 31, 2018 and 2017. Non-performing loans consist of non-accruing loans plus accruing loans 90 days or more past due. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations
General
Quaint Oak Bancorp, Inc. (the “Company”) was formed in connection with Quaint Oak Bank’s (the “Bank”) conversion to a stock savings bank completed on July 3, 2007. The Company’s results of operations are dependent primarily on the results of Quaint Oak Bank, a wholly owned subsidiary of the Company, along with the Bank’s wholly owned subsidiaries. At December 31, 2018, 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 began operations in August 2016 and provides a broad range of personal and commercial insurance coverage solutions.
Quaint Oak Bank’s profitability depends, 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.
Quaint Oak Bank’s business consists primarily of originating residential, multi-family and commercial real estate loans secured by property and to a lesser extent commercial business loans, in its market area. At December 31, 2018, commercial real estate loans comprise the largest percentage of Quaint Oak Bank’s loan portfolio, before net items, at 47.2%. Quaint Oak Bank’s loans are primarily funded by certificates of deposit, which typically have a higher interest rate than passbook, savings and money market accounts. At December 31, 2018, certificates of deposit amounted to 61.2% of total assets compared to 60.5% of total assets at December 31, 2017. In conjunction with the expansion of our commercial lending activities, we began offering a business checking account, along with a consumer checking account product in December 2014. At December 31, 2018, non-interest bearing checking accounts amounted to 8.3% of total deposits compared to 4.3% of total deposits at December 31, 2017. Management anticipates that certificates of deposit will continue to be a primary source of funding for Quaint Oak Bank’s assets.
Our results of operations are significantly affected by general economic and competitive conditions, particularly with respect to changes in interest rates, government policies and actions of regulatory authorities as well as other factors beyond our control. Future changes in applicable law, regulations or government policies may materially affect our 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.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Critical Accounting Policies
In reviewing and understanding financial information for the Company, you are encouraged to read and understand the significant accounting policies used in preparing our financial statements. These policies are described in Note 2 of the notes to our financial statements. 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. 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 identified as impaired. For loans that are identified 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 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.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
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 considered 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.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Other-Than-Temporary Impairment of Securities. Securities are evaluated on at least a quarterly basis, and more frequently when market conditions warrant such an evaluation, to determine whether a decline in their value is other-than-temporary. To determine whether a loss in value is other-than-temporary, management utilizes criteria such as the reasons underlying the decline, the magnitude and duration of the decline and whether or not management intends to sell or expects that it is more likely than not that it will be required to sell the security prior to an anticipated recovery of the fair value. The term “other-than-temporary” is not intended to indicate that the decline is permanent, but indicates that the prospects for a near-term recovery of value are not necessarily favorable, or that there is a lack of evidence to support a realizable value equal to or greater than the carrying value of the investment. Once a decline in value for a debt security is determined to be other-than-temporary, the other-than-temporary impairment is separated into (a) the amount of the total other-than-temporary impairment related to a decrease in cash flows expected to be collected from the debt security (the credit loss) and (b) the amount of the total other-than-temporary impairment related to all other factors. The amount of the total other-than-temporary impairment related to the credit loss is recognized in earnings. The amount of the total other-than-temporary impairment related to all other factors is recognized in other comprehensive income, except for equity securities, where the full amount of the other-than-temporary impairment is recognized in earnings.
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 December 31, 2018 and December 31, 2017
General. The Company’s total assets at December 31, 2018 were $271.4 million, an increase of $31.8 million, or 13.3%, from $239.6 million at December 31, 2017. This growth in total assets was primarily due to an $18.1 million, or 228.8%, increase in cash and cash equivalents, a $15.2 million, or 7.6%, increase in loans receivable, net, and a $1.7 million increase in other real estate owned, partially offset by a $1.9 million, or 27.2%, decrease in loans held for sale and a $1.2 million, or 15.6%, decrease in investment securities available for sale. The largest increases within the loan portfolio occurred in the following categories: commercial real estate loans which increased $11.6 million, or 12.6%, commercial business loans which increased $11.7 million, or 97.6%, multi-family residential loans which increased $2.3 million, or 10.4%, and one-to-four family residential owner occupied loans which increased $922,000, or 16.2%. These increases were partially offset by a $4.5 million, or 8.6%, decrease in one-to-four family residential non-owner occupied loans and a $5.6 million, or 36.0%, decrease in construction loans. The increase in cash and cash equivalents was primarily due to the increase in deposits and the proceeds from the issuance of subordinated debt in December 2018.
Cash and Cash Equivalents. Cash and cash equivalents increased $18.1 million, or 228.8%, from $7.9 million at December 31, 2017 to $26.0 million at December 31, 2018 with the expectation that excess liquidity will be used to fund loans.
Investment Securities Available for Sale. Investment securities available for sale decreased $1.2 million, or 15.6%, from $7.9 million at December 31, 2017 to $6.7 million at December 31, 2018 due primarily to the principal repayments on these securities during the year ended December 31, 2018.
Loans Held for Sale. Loans held for sale decreased $1.9 million, or 27.2%, from $7.0 million at December 31, 2017 to $5.1 million at December 31, 2018 as the Bank’s mortgage banking subsidiary, Quaint Oak Mortgage, LLC, originated $97.4 million of one-to-four family residential loans during the year ended December 31, 2018 and sold $98.9 million of these loans in the secondary market during this same period. In addition, the Bank originated $2.8 million of commercial business loans held for sale during the year ended December 31, 2018 and sold $3.5 million of these loans during the same period.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Loans Receivable, Net. Loans receivable, net, increased $15.2 million, or 7.6%, to $216.9 million at December 31, 2018 from $201.7 million December 31, 2017. This increase was funded primarily from deposits. Increases within the portfolio occurred in commercial business loans which increased $11.7 million, or 97.6%, multi-family residential loans which increased $2.3 million, or 10.4%, and one-to-four family residential owner occupied loans which increased $922,000, or 16.2%. These increases were partially offset by a $4.5 million, or 8.6%, decrease in one-to-four family residential non-owner occupied loans, a $5.6 million, or 36.0%, decrease in construction loans, a $782,000, or 15.2%, decrease in home equity loans, and a $119,000 , or 86.2%, decrease 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.
Federal Home Loan Bank Stock. Federal Home Loan Bank stock decreased $148,000, or 12.0%, from $1.2 million at December 31, 2017 to $1.1 million at December 31, 2018 as the Bank decreased its level of FHLB borrowings.
Bank-Owned Life Insurance. The Company purchased $3.5 million in bank-owned life insurance (BOLI) as a mechanism for funding various employee benefit costs. The Company is the beneficiary of these policies that insure the lives of certain officers of its subsidiaries. The cash surrender value of the insurance policies amounted to $3.9 million and $3.8 million at December 31, 2018 and 2017, respectively.
Premises and Equipment, Net. Premises and equipment, net, increased $70,000, or 3.5%, to $2.1 million at December 31, 2018 from $2.0 million at December 31, 2017. The increase was due primarily to renovation of our 1710 Union Boulevard location and computer system upgrades.
Goodwill and Other Intangible, Net. Goodwill and other intangible assets, net of accumulated amortization, is related to the acquisition by Quaint Oak Insurance Agency of the renewal rights to a book of business on August 1, 2016 at a total cost of $1.0 million. Based on a valuation, $515,000 of the purchase price was determined to be goodwill and $485,000 was determined to be related to the renewal rights to the book of business and deemed to be an other intangible asset. This other intangible asset is being amortized over a ten year period based upon the annual retention rate of the book of business. The balance of other intangible asset at December 31, 2018 was $368,000, net of accumulated amortization of $117,000.
Other Real Estate Owned, Net. Other real estate owned (OREO) amounted to $1.7 million at December 31, 2018, consisting of one property that was collateral for a non-performing construction loan. There were no properties in other real estate owned at December 31, 2017. During the second quarter of 2018, collateral for a non-performing construction loan with an aggregate outstanding balance of $1.8 million at the time of foreclosure, was transferred into OREO. In conjunction with this transfer, $100,000 of the outstanding loan balance was charged-off through the allowance for loan losses in the second quarter of 2018, and following a further assessment of the value of the collateral by the Bank, an additional $115,000 was charged-off through the allowance for loan losses in the third quarter. During the quarter ended December 31, 2018, the Company made $50,000 of capital improvements to the property.
Deposits. Total deposits increased $25.7 million, or 13.8%, to $211.9 million at December 31, 2018 from $186.2 million at December 31, 2017. This increase in deposits was primarily attributable to increases of $21.2 million, or 14.6%, in certificates of deposit and $9.6 million, or 120.5% in non-interest bearing checking accounts, partially offset by a $3.6 million, 11.7%, decrease in money market accounts, a $1.2 million, or 52.4%, decrease in savings accounts, and a $271,000, or 58.5% decrease in passbook accounts.
Federal Home Loan Bank Borrowings. Total Federal Home Loan Bank borrowings decreased $4.0 million, or 14.3%, from $28.0 million at December 31, 2017 to $24.0 million at December 31, 2018. During the year ended December 31, 2018, the Company used excess liquidity to repay $1.0 million of short-term and $3.0 million of long-term fixed rate borrowings.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Subordinated Debt. On December 27, 2018, the Company issued $8.0 million in subordinated notes. These notes have a maturity date of December 31, 2028, and bear interest at a fixed rate of 6.50%. The Company may, at its option, at any time on an interest payment date on or after December 31, 2023, redeem the notes, in whole or in part, at par plus accrued interest to the date of redemption. The balance of subordinated debt, net of unamortized debt issuance costs, was $7.8 million at December 31, 2018.
Stockholders’ Equity. Total stockholders’ equity increased $1.7 million, or 7.4%, to $23.8 million at December 31, 2018 from $22.2 million at December 31, 2017. Contributing to the increase was net income for the year ended December 31, 2018 of $2.0 million, the reissuance of treasury stock for exercised stock options of $534,000, common stock earned by participants in the employee stock ownership plan of $192,000, amortization of stock awards and options under our stock compensation plans of $148,000, the reissuance of treasury stock under the Bank’s 401(k) Plan of $64,000, and other comprehensive income, net of $13,000. These increases were partially offset by the purchase of treasury stock of $793,000 and by dividends paid of $511,000.
Comparison of Operating Results for the Years Ended December 31, 2018 and 2017
General. Net income amounted to $2.0 million for the year ended December 31, 2018 compared to $1.5 million for the year ended December 31, 2017, an increase of $537,000, or 36.6%. During the fourth quarter of 2017, the Company wrote down its net deferred tax asset (“DTA”) by $297,000 as a result of the enactment of the Tax Cuts and Jobs Act (the “Tax Act”) on December 22, 2017. Excluding the $297,000 non-recurring re-measurement charge of the Company’s net DTA in 2017, the increase in net income was $240,000, or 13.6%. The $537,000, or 36.6%, increase was primarily the result of an increase in net interest income of $719,000, a decrease in the provision for income taxes of $538,000, and an increase in non-interest income of $505,000, partially offset by an increase in non-interest expense of $1.1 million and an increase in the provision for loan losses of $131,000. The decrease in the provision for income taxes was primarily due to the $297,000 re-measurement charge of the Company’s net DTA combined with a lower effective tax rate, also the result of the Tax Act.
Net Interest Income. Net interest income increased $719,000, or 9.5%, to $8.3 million for the year ended December 31, 2018 from $7.6 million for the year ended December 31, 2017. The increase in net interest income was driven by a $1.5 million, or 14.5% increase in interest income, partially offset by an $818,000, or 27.2%, increase in interest expense.
Interest Income. Interest income increased $1.5 million, or 14.5%, to $12.1 million for the year ended December 31, 2018 from $10.6 million for the year ended December 31, 2017. The increase in interest income was primarily due to a $21.6 million increase in average loans receivable, net, including loans held for sale, which increased from an average balance of $193.2 million for the year ended December 31, 2017 to an average balance of $214.7 million for the year ended December 31, 2018, and had the effect of increasing interest income $1.1 million. Also contributing to this increase was a seven basis point increase in the yield on loans receivable, net, including loans held for sale, which increased from 5.30% for the year ended December 31, 2017 to 5.37% for the year ended December 31, 2018, which had the effect of increasing interest income by $157,000. The increase in interest income was also due to a $6.7 million increase in average cash and cash equivalents due from banks, interest bearing, which increased from an average balance of $8.5 million for the year ended December 31, 2017 to an average balance of $15.2 million for the year ended December 31, 2018, and had the effect of increasing interest income $81,000. Also contributing to this increase was a 70 basis point increase in the yield on average cash and cash equivalents due from banks, interest bearing, which increased from 1.12% for the year ended December 31, 2017 to 1.82% for the year ended December 31, 2018, which had the effect of increasing interest income by $100,000.
Interest Expense. The increase in interest expense was primarily attributable to a $21.4 million increase in average interest-bearing liabilities, which increased from an average balance of $194.6 million for the year ended December 31, 2017 to an average balance of $216.0 million for the year ended December 31, 2018, and had the effect of increasing interest expense $388,000. This increase in average interest-bearing liabilities was primarily attributable to a $17.6 million increase in average certificate of deposit accounts which increased from an average balance of $139.1 million for the year ended December 31, 2017 to an average balance of $156.7 million for the year ended December 31, 2018, and had the effect of increasing interest expense $305,000, and a $6.0 million increase in average Federal Home Loan Bank borrowings which increased from an average balance of $20.9 million for the year ended December 31, 2017 to an average balance of $27.0 million for the year ended December 31, 2018, and had the effect of increasing interest expense $101,000. Also contributing to this increase was a 23 basis point increase in the average rate on interest-bearing liabilities, from 1.54% for the year ended December 31, 2017 to 1.77% for the year ended December 31, 2018, which had the effect of increasing interest expense by $430,000. This increase in rate was primarily attributable to a 19 basis point increase in rate on average certificate of deposit accounts, which increased from 1.74% for the year ended December 31, 2017 to 1.93% for the year ended December 31, 2018, and had the effect of increasing interest expense by $297,000, and a 50 basis point increase in rate on average Federal Home Loan Bank borrowings, which increased from 1.53% for the year ended December 31, 2017 to 2.03% for the year ended December 31, 2018, which had the effect of increasing interest expense by $127,000. The average interest rate spread decreased from 3.34% for the year ended December 31, 2017, to 3.21% for the year ended December 31, 2018 while the net interest margin decreased from 3.50% for the year ended December 31, 2017 to 3.41% for the year ended December 31, 2018.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
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.
| | | |
| | | | | | |
| | | Average | | | | | | Average Yield/ | | | Average | | | | | | Average Yield/ | |
| | | (Dollars in thousands) | |
| Interest-earning assets: | | | |
| Due from banks, interest-bearing | | $ | 15,166 | | | $ | 276 | | | | 1.82 | % | | $ | 8,461 | | | $ | 95 | | | | 1.12 | % |
| Investment in interest-earning time deposits | | | 4,914 | | | | 91 | | | | 1.85 | | | | 5,416 | | | | 90 | | | | 1.66 | |
| Investment securities available for sale | | | 7,351 | | | | 150 | | | | 2.04 | | | | 8,878 | | | | 134 | | | | 1.51 | |
| Loans receivable, net (1) (2) (3) | | | 214,729 | | | | 11,530 | | | | 5.37 | | | | 193,158 | | | | 10,231 | | | | 5.30 | |
| Investment in FHLB stock | | | 1,203 | | | | 78 | | | | 6.48 | | | | 948 | | | | 38 | | | | 4.01 | |
| Total interest-earning assets | | | 243,363 | | | | 12,125 | | | | 4.98 | % | | | 216,861 | | | | 10,588 | | | | 4.88 | % |
| Non-interest-earning assets | | | 9,787 | | | | | | | | | | | | 8,828 | | | | | | | | | |
| Total assets | | $ | 253,150 | | | | | | | | | | | $ | 225,689 | | | | | | | | | |
| Interest-bearing liabilities: | | | | | | | | | | | | | | | | | | | | | | | | |
| Passbook accounts | | $ | 310 | | | $ | -- | | | | -- | % | | $ | 694 | | | $ | 1 | | | | 0.14 | % |
| Savings accounts | | | 1,906 | | | | 4 | | | | 0.21 | | | | 1,584 | | | | 3 | | | | 0.19 | |
| Money market accounts | | | 29,982 | | | | 239 | | | | 0.80 | | | | 32,255 | | | | 258 | | | | 0.80 | |
| Certificate of deposit accounts | | | 156,696 | | | | 3,021 | | | | 1.93 | | | | 139,126 | | | | 2,419 | | | | 1.74 | |
| Total deposits | | | 188,894 | | | | 3,264 | | | | 1.73 | | | | 173,659 | | | | 2,681 | | | | 1.54 | |
| FHLB short-term borrowings | | | 9,745 | | | | 197 | | | | 2.02 | | | | 8,654 | | | | 101 | | | | 1.17 | |
| FHLB long-term borrowings | | | 17,236 | | | | 352 | | | | 2.04 | | | | 12,278 | | | | 220 | | | | 1.79 | |
| Subordinated debt | | | 107 | | | | 7 | | | | 6.54 | | | | - | | | | - | | | | - | |
| Total interest-bearing liabilities | | | 215,982 | | | | 3,820 | | | | 1.77 | % | | | 194,591 | | | | 3,002 | | | | 1.54 | % |
| Non-interest-bearing liabilities | | | 14,118 | | | | | | | | | | | | 9,422 | | | | | | | | | |
| Total liabilities | | | 230,100 | | | | | | | | | | | | 204,013 | | | | | | | | | |
| Stockholders’ Equity | | | 23,050 | | | | | | | | | | | | 21,676 | | | | | | | | | |
| Total liabilities and Stockholders’ Equity | | $ | 253,150 | | | | | | | | | | | $ | 225,689 | | | | | | | | | |
| Net interest-earning assets | | $ | 27,381 | | | | | | | | | | | $ | 22,270 | | | | | | | | | |
| Net interest income; average interest rate spread | | | | | | $ | 8,305 | | | | 3.21 | % | | | | | | $ | 7,586 | | | | 3.34 | % |
| Net interest margin (4) | | | | | | | | | | | 3.41 | % | | | | | | | | | | | 3.50 | % |
| Average interest-earning assets to average interest-bearing liabilities | | | | | | | | | | | 112.68 | % | | | | | | | | | | | 111.44 | % |
__________________
(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 $1,000 and an average yield of 4.22% for the year ended December 31, 2018 and an aggregate average balance of $68,000 and an average yield of 4.03% for the year ended December 31, 2017. The tax-exempt income from such loans has not been calculated on a tax equivalent basis. |
| (4) | Equals net interest income divided by average interest-earning assets. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Rate/Volume Analysis. The following table shows the extent to which changes in interest rates and changes in volume of interest-earning assets and interest-bearing liabilities affected our interest income and expense during the periods indicated. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (1) changes in rate, which is the change in rate multiplied by prior year volume, (2) changes in volume, which is the change in volume multiplied by prior year rate, and (3) changes in rate/volume, which is the change in rate multiplied by the change in volume.
| | | | | | | |
| | | Increase (Decrease) Due to | | | Total Increase | | | Increase (Decrease) Due to | | | Total Increase | |
| | | | | | | | | Rate/ | | | | | | | | | Rate/ | |
| | | (In Thousands) | |
| Interest income: | | | | | | | | | | | | | | | | | | | | | | | | |
| Due from banks, interest-bearing | | $ | 54 | | | $ | 81 | | | $ | 46 | | | $ | 181 | | | $ | 102 | | | $ | (44 | ) | | $ | (51 | ) | | $ | 7 | |
| Investment in interest-earning time deposits | | | 10 | | | | (8 | ) | | | (1 | ) | | | 1 | | | | (6 | ) | | | (13 | ) | | | 1 | | | | (18 | ) |
| Investment securities available for sale | | | 47 | | | | (23 | ) | | | (8 | ) | | | 16 | | | | 6 | | | | 26 | | | | 1 | | | | 33 | |
| Loans receivable, net (1) (2) | | | 141 | | | | 1,142 | | | | 16 | | | | 1,299 | | | | (402 | ) | | | 1,860 | | | | (84 | ) | | | 1,374 | |
| Investment in FHLB stock | | | 24 | | | | 10 | | | | 6 | | | | 40 | | | | (4 | ) | | | 15 | | | | (2 | ) | | | 9 | |
| Total interest-earning assets | | | 276 | | | | 1,202 | | | | 59 | | | | 1,537 | | | | (304 | ) | | | 1,844 | | | | (135 | ) | | | 1,405 | |
| Interest expense: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Passbook accounts | | | -- | | | | -- | | | | -- | | | | -- | | | | -- | | | | -- | | | | -- | | | | -- | |
| Savings accounts | | | -- | | | | -- | | | | -- | | | | -- | | | | -- | | | | (2 | ) | | | -- | | | | (2 | ) |
| Money market accounts | | | (1 | ) | | | (18 | ) | | | -- | | | | (19 | ) | | | (1 | ) | | | 29 | | | | -- | | | | 28 | |
| Certificate of deposit accounts | | | 264 | | | | 305 | | | | 33 | | | | 602 | | | | 40 | | | | 179 | | | | 4 | | | | 223 | |
| Total deposits | | | 263 | | | | 287 | | | | 33 | | | | 583 | | | | 39 | | | | 206 | | | | 4 | | | | 249 | |
| FHLB short-term borrowings | | | 74 | | | | 13 | | | | 9 | | | | 96 | | | | 52 | | | | 7 | | | | 11 | | | | 70 | |
| FHLB long-term borrowings | | | 31 | | | | 89 | | | | 12 | | | | 132 | | | | 8 | | | | 102 | | | | 8 | | | | 118 | |
| Subordinated debt | | | -- | | | | -- | | | | 7 | | | | 7 | | | | 8 | | | | 102 | | | | 8 | | | | 118 | |
| Total interest-bearing liabilities | | | 368 | | | | 389 | | | | 61 | | | | 818 | | | | 99 | | | | 315 | | | | 23 | | | | 437 | |
| Increase (decrease) in net interest income | $ | (92 | ) | | $ | 813 | | | $ | (2 | ) | | $ | 719 | | | $ | (403 | ) | | $ | 1,529 | | | $ | (158 | ) | | $ | 968 | |
_______________________
| (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. |
Provision for Loan Losses. The Company increased its provision for loan losses by $131,000, or 46.1%, from $284,000 for the year ended December 31, 2017 to $415,000 for the year ended December 31, 2018, 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 December 31, 2018.
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 are on non-accrual status and three of which are 90 days or more past due and accruing interest. Non-performing loans amounted to $3.1 million, or 1.52% of net loans receivable at December 31, 2017, consisting of eleven loans, three of which were on non-accrual status and eight of which were 90 days or more past due and accruing interest. The non-performing loans at December 31, 2018 include two one-to-four family owner occupied residential loans, two commercial real estate loans, one one-to-four family non-owner occupied residential loan, and one commercial business loan, and all are generally well-collateralized or adequately reserved for. During the quarter ended December 31, 2018, one new loan was placed on non-accrual status resulting in the reversal of approximately $3,000 of previously accrued interest income, and one loan was paid-off. The allowance for loan losses as a percent of total loans receivable was 0.90% at December 31, 2018 and 0.89% at December 31, 2017.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Other real estate owned (OREO) amounted to $1.7 million at December 31, 2018, consisting of one property that was collateral for a non-performing construction loan. During the quarter ended December 31, 2018, the Company made $50,000 of capital improvements to the property. There were no properties in other real estate owned at December 31, 2017. Non-performing assets amounted to $2.8 million, or 1.04% of total assets at December 31, 2018 compared to $3.1 million, or 1.28% of total assets at December 31, 2017.
Non-Interest Income. Non-interest income increased $505,000, or 14.7%, from $3.4 million for the year ended December 31, 2017 to $3.9 million for the year ended December 31, 2018. The increase was primarily attributable to a $131,000 net increase in gain on sales and write-downs of other real estate owned, a $96,000, or 13.2%, increase in mortgage banking and title abstract fees, a $93,000, or 93.9% increase in real estate sales commissions, net, earned by Quaint Oak Real Estate, a wholly owned subsidiary of Quaint Oak Bank, a $67,000, or 104.7%, increase in other fees and services charges, a $57,000, or 118.8%, increase in gain on sale of SBA loans, a $41,000, or 10.5%, increase in insurance commissions earned by Quaint Oak Insurance Agency, a wholly owned insurance subsidiary of Quaint Oak Bank, and a $26,000, or 1.2%, increase in net gain on loans held for sale. These increases were partially offset by a $6,000, or 7.0%, decrease in come from bank-owned life insurance.
Non-Interest Expense. Non-interest expense increased $1.1 million, or 13.6%, from $8.1 million for the year ended December 31, 2017 to $9.2 million for the year ended December 31, 2018. Salaries and employee benefits expense accounted for $929,000 of the change as this expense increased 17.0%, from $5.5 million for the year ended December 31, 2017 to $6.4 million for the year ended December 31, 2018 due to expanding and improving the level of staff at the Bank and its subsidiary companies, primarily in the area of lending operations. Data processing costs accounted for $67,000 of the change as this expense increased 20.2%, from $331,000 for the year ended December 31, 2017 to $398,000 for the year ended December 31, 2018, due primarily to recurring costs associated with the Bank’s checking and other transaction account products. Other expense accounted for $29,000 of the change as this expense increased 4.2%, from $687,000 for the year ended December 31, 2017 to $716,000 for the year ended December 31, 2018 due primarily to an increase in recruiting fees. Occupancy and equipment expense accounted for $28,000 of the change as this expense increased 4.9%, from $573,000 for the year ended December 31, 2017 to $601,000 for the year ended December 31, 2018. The increase in occupancy and equipment expense was primarily attributable to charges related to the relocation of Quaint Oak Insurance Agency, LLC to a new location in Chalfont, Pennsylvania in June 2017. Advertising expense accounted for $22,000 of the change as this expense increased 11.3%, from $195,000 for the year ended December 31, 2017 to $217,000 for the year ended December 31, 2018, as the Company continued to focus on increasing brand awareness and market the products and services of the Bank and the Bank’s subsidiary companies. FDIC deposit insurance assessment accounted for $12,000 of the change as this expense increased 7.0%, from $174,000 for the year ended December 31, 2017 to $186,000 for the year ended December 31, 2018. The increase in FDIC deposit insurance assessment was primarily attributable to the year-over-year growth in the average assets of the Bank. The increase in other real estate owned expense accounted for $6,000 of the change as this expense increased 42.9%, from $14,000 for the year ended December 31, 2017 to $20,000 for the year ended December 31, 2018. Directors’ fees and expenses accounted for $4,000 of the change as this expense increased 2.0% from $204,000 for the year ended December 31, 2017 to $208,000 for the year ended December 31, 2018. Partially offsetting these increases were decreases in professional fees which declined $2,000, or 0.5%, from $367,000 for the year ended December 31, 2017 to $365,000 for the year ended December 31, 2018 and amortization of other intangible which declined $1,000, or 2.0%, from $49,000 for the year ended December 31, 2017 to $48,000 for the year ended December 31, 2018.
Provision for Income Tax. The provision for income taxes decreased $538,000, or 44.6%, from $1.2 million for the year ended December 31, 2017 to $667,000 for the year ended December 31, 2018 as our effective tax rate decreased from 45.1% for the year ended December 31, 2017 to 25.0% for the year ended December 31, 2018 primarily due to the $297,000 re-measurement charge of the Company’s net DTA in the fourth quarter of 2017 as a result of the Tax Act and the decrease in the Company’s federal income tax rate from 34% in 2017 to 21% in 2018 also as a result of the Tax Act.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Exposure to Changes in Interest Rates
The Company’s ability to maintain net interest income depends upon its ability to earn a higher yield on assets than the rates it pays on deposits and borrowings. The Company’s interest-earning assets consist primarily of loans collateralized by real estate which have longer maturities than our liabilities, consisting primarily of certificates of deposit, money market accounts and to a lesser extent borrowings. Consequently, the Company’s ability to maintain a positive spread between the interest earned on assets and the interest paid on deposits and borrowings can be adversely affected when market rates of interest rise. At December 31, 2018 and 2017, certificates of deposit amounted to $166.2 million and $145.0 million, respectively, or 61.2% and 60.5%, respectively, of total assets at such dates.
Gap Analysis. The matching of assets and liabilities may be analyzed by examining the extent to which such assets and liabilities are “interest rate sensitive” and by monitoring a bank’s interest rate sensitivity “gap.” An asset and liability is said to be interest rate sensitive within a specific time period if it will mature or reprice within that time period. The interest rate sensitivity gap is defined as the difference between the amount of interest-earning assets maturing or repricing within a specific time period and the amount of interest-bearing liabilities maturing or repricing within that same time period. A gap is considered positive when the amount of interest rate sensitive assets exceeds the amount of interest rate sensitive liabilities. A gap is considered negative when the amount of interest rate sensitive liabilities exceeds the amount of interest rate sensitive assets. During a period of rising interest rates, a negative gap would tend to adversely affect net interest income while a positive gap would tend to result in an increase in net interest income. Conversely, during a period of falling interest rates, a negative gap would tend to result in an increase in net interest income while a positive gap would tend to affect adversely net interest income. Our current interest rate risk management policy provides that our one-year interest rate gap as a percentage of total assets should not exceed positive or negative 20%. This policy was adopted by our management and Board of Directors based upon their judgment that it established an appropriate benchmark for the level of interest-rate risk, expressed in terms of the one-year gap, for the Company. If our one-year gap position approaches or exceeds the 20% policy limit, management will obtain simulation results in order to determine what steps might appropriately be taken, in order to maintain our one-year gap in accordance with the policy. Alternatively, depending on the then-current economic scenario, we could determine to make an exception to our policy or we could determine to revise our policy. Our one-year cumulative gap was a positive 24.7% at December 31, 2018, compared to 15.6% at December 31, 2017.
The following table sets forth the amounts of our interest-earning assets and interest-bearing liabilities outstanding at December 31, 2018, which we expect, based upon certain assumptions, to reprice or mature in each of the future time periods shown. Except as stated below, the amount of assets and liabilities shown which reprice or mature during a particular period were determined in accordance with the earlier of term to repricing or the contractual maturity of the asset or liability. The table sets forth an approximation of the projected repricing of assets and liabilities at December 31, 2018, on the basis of contractual maturities, anticipated prepayments, and scheduled rate adjustments within a three-month period and subsequent selected time intervals. The loan amounts in the table reflect principal balances expected to be redeployed and/or repriced as a result of contractual amortization and anticipated prepayments of adjustable-rate loans and fixed-rate loans, and as a result of contractual rate adjustments on adjustable-rate loans. The Company’s annual historical prepayment rates are applied to loans. Money market, savings and passbook accounts are assumed to have annual rates of withdrawal, or “decay rates,” of 40%, 40%, and 20%, respectively.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
| | | 3 Months | | | More than 3 Months | | | More than 1 Year | | | More than 3 Years | | | More than | | | | |
| | | (Dollars In Thousands) | |
| Interest-earning assets (1): | | | | | | | | | | | | | | | | | | |
| Due from banks, interest-bearing | | $ | 25,643 | | | $ | -- | | | $ | -- | | | $ | -- | | | $ | -- | | | $ | 25,643 | |
| Investment in interest-earning time deposits | | | -- | | | | 1,603 | | | | 1,956 | | | | 1,368 | | | | -- | | | | 4,927 | |
| Investment securities available for sale | | | 4,458 | | | | 898 | | | | 1,032 | | | | 292 | | | | -- | | | | 6,680 | |
| Loans held for sale | | | 5,103 | | | | -- | | | | -- | | | | -- | | | | -- | | | | 5,103 | |
| Loans receivable (2) | | | 42,979 | | | | 56,640 | | | | 62,260 | | | | 29,011 | | | | 28,840 | | | | 219,730 | |
| Investment in Federal Home Loan Bank stock | | | -- | | | | -- | | | | -- | | | | -- | | | | 1,086 | | | | 1,086 | |
| Total interest-earning assets | | $ | 78,183 | | | $ | 59,141 | | | $ | 65,248 | | | $ | 30,671 | | | $ | 29,926 | | | $ | 263,169 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest-bearing liabilities: | | | | | | | | | | | | | | | | | | | | | | | | |
| Passbook accounts | | $ | 19 | | | $ | 19 | | | $ | 115 | | | $ | 20 | | | $ | 19 | | | $ | 192 | |
| Savings accounts | | | 224 | | | | 224 | | | | 448 | | | | 112 | | | | 112 | | | | 1,120 | |
| Money market accounts | | | 5,368 | | | | 5,368 | | | | 10,736 | | | | 2,684 | | | | 2,684 | | | | 26,841 | |
| Certificate accounts | | | 16,183 | | | | 31,007 | | | | 94,963 | | | | 24,063 | | | | -- | | | | 166,216 | |
| FHLB borrowings | | | 9,000 | | | | 3,000 | | | | 5,000 | | | | 6,000 | | | | 1,000 | | | | 24,000 | |
| Subordinated debt | | | -- | | | | -- | | | | -- | | | | -- | | | | 7,831 | | | | 7,831 | |
| Total interest-bearing liabilities | | $ | 30,794 | | | $ | 39,618 | | | $ | 111,263 | | | $ | 32,879 | | | $ | 11,646 | | | $ | 226,200 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest-earning assets less interest-bearing liabilities | | $ | 47,389 | | | $ | 19,523 | | | $ | (46,015 | ) | | $ | (2,208 | ) | | $ | 18,280 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Cumulative interest-rate sensitivity gap (3) | | $ | 47,389 | | | $ | 66,912 | | | $ | 20,897 | | | $ | 18,689 | | | $ | 36,969 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Cumulative interest-rate gap as a percentage of total assets at December 31, 2018 | | | 17.5 | % | | | 24.7 | % | | | 7.7 | % | | | 6.9 | % | | | 13.6 | % | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Cumulative interest-earning assets as a percentage of cumulative interest-bearing liabilities at December 31, 2018 | | | 253.9 | % | | | 195.0 | % | | | 111.5 | % | | | 108.7 | % | | | 116.3 | % | | | | |
_____________________
| (1) | Interest-earning assets are included in the period in which the balances are expected to be redeployed and/or repriced as a result of anticipated prepayments, scheduled rate adjustments and contractual maturities. |
| (2) | For purposes of the gap analysis, loans receivable includes non-performing loans gross of the allowance for loan losses and deferred loan fees. |
| (3) | Interest-rate sensitivity gap represents the difference between net interest-earning assets and interest-bearing liabilities. |
Qualitative Analysis. Our ability to maintain a positive “spread” between the interest earned on assets and the interest paid on deposits and borrowings is affected by changes in interest rates. The Company’s fixed-rate loans generally are profitable if interest rates are stable or declining since these loans have yields that exceed its cost of funds. If interest rates increase, however, the Company would have to pay more on its deposits and new borrowings, which would adversely affect its interest rate spread. In order to counter the potential effects of dramatic increases in market rates of interest, the Company intends to continue to originate more variable rate loans and increase core deposits. The Company also intends to place a greater emphasis on shorter-term home equity loans and commercial business loans.
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 December 31, 2018, the Company’s cash and cash equivalents amounted to $26.0 million. At such date, the Company also had $1.6 million invested in interest-earning time deposits maturing in one year or less.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
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 December 31, 2018, Quaint Oak Bank had outstanding commitments to originate loans of $17.6 million and commitments under unused lines of credit of $14.6 million, and $83,000 under standby letters of credit.
At December 31, 2018, certificates of deposit scheduled to mature in less than one year totaled $47.2 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 December 31, 2018, we had $24.0 million of borrowings from the FHLB and had $129.1 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 December 31, 2018 Quaint Oak Bank had $813,000 in borrowing capacity with the Federal Reserve Bank of Philadelphia. There were no borrowings under this facility at December 31, 2018.
Our stockholders’ equity amounted to $23.8 million at December 31, 2018, an increase of $1.7 million, or 7.4% from $22.2 million at December 31, 2017. Contributing to the increase was net income for the year ended December 31, 2018 of $2.0 million, the reissuance of treasury stock for exercised stock options of $534,000, common stock earned by participants in the employee stock ownership plan of $192,000, amortization of stock awards and options under our stock compensation plans of $148,000, the reissuance of treasury stock under the Bank’s 401(k) Plan of $64,000, and other comprehensive income, net of $13,000. These increases were partially offset by the purchase of treasury stock of $793,000 and by dividends paid of $511,000. For further discussion of the stock compensation plans, see Note 14 in the Notes to 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 December 31, 2018, Quaint Oak Bank exceeded each of its capital requirements with ratios of 10.92%, 14.45%, 14.45% and 15.49%, respectively. As a small savings and loan holding company, the Company is not currently subject to any regulatory capital requirements. For further discussion of the Bank’s regulatory capital requirements, see Note 17 in the Notes to Consolidated Financial Statements contained elsewhere herein.
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 December 31, 2018, we had unfunded commitments under lines of credit of $14.6 million, $17.6 million of commitments to originate loans, and $83,000 under standby letters of credit. We had no commitments to advance additional amounts pursuant to outstanding lines of credit or undisbursed construction loans.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Contractual Cash Obligations
The following table summarizes our contractual cash obligations at December 31, 2018. The balances in the table do not reflect interest due on these obligations.
| | | | | | | |
| | | | | | To | | | 1-3 | | | 4-5 | | | After 5 | |
| | | (In Thousands) | |
| Operating leases | | $ | 532 | | | $ | 102 | | | $ | 201 | | | $ | 91 | | | $ | 138 | |
| Certificates of deposit | | | 166,216 | | | | 47,190 | | | | 94,963 | | | | 24,063 | | | | -- | |
| FHLB borrowings | | | 24,000 | | | | 12,000 | | | | 5,000 | | | | 6,000 | | | | 1,000 | |
| Total contractual obligations | | $ | 190,748 | | | $ | 59,292 | | | $ | 100,164 | | | $ | 30,154 | | | $ | 1,138 | |
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.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of Quaint Oak Bancorp, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Quaint Oak Bancorp, Inc. and subsidiary (the “Company”) as of December 31, 2018 and 2017; the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for the years then ended; and the related notes to the consolidated financial statements (collectively, the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company, in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
We have served as the Company’s auditor since 2013.
Cranberry Township, Pennsylvania
March 29, 2019
Consolidated Balance Sheets
| | | | At December 31, | | | At December 31, | |
| | | | 2018 | | | 2017 | |
| | | | (In thousands, except share data) | |
| Assets | | | | |
| Due from banks, non-interest-bearing | | | $ | 369 | | | $ | 64 | |
| Due from banks, interest-bearing | | | | 25,643 | | | | 7,846 | |
| Cash and cash equivalents | | | | 26,012 | | | | 7,910 | |
| Investment in interest-earning time deposits | | | | 4,927 | | | | 4,879 | |
| Investment securities available for sale | | | | 6,680 | | | | 7,912 | |
| Loans held for sale | | | | 5,103 | | | | 7,006 | |
| Loans receivable, net of allowance for loan losses | | | | | | | | | |
| (2018 $1,965; 2017 $1,812) |
| | | 216,898 | | | | 201,667 | |
| Accrued interest receivable | | | | 1,153 | | | | 1,021 | |
| Investment in Federal Home Loan Bank stock, at cost | | | | 1,086 | | | | 1,234 | |
| Bank-owned life insurance | | | | 3,894 | | | | 3,814 | |
| Premises and equipment, net | | | | 2,058 | | | | 1,988 | |
| Goodwill | | | | 515 | | | | 515 | |
| Other intangible, net of accumulated amortization | | | | 368 | | | | 416 | |
| Other real estate owned, net | | | | 1,650 | | | | -- | |
| Prepaid expenses and other assets | | | | 1,060 | | | | 1,234 | |
| Total Assets | | | $ | 271,404 | | | $ | 239,596 | |
| | |
| Liabilities and Stockholders’ Equity | |
| Liabilities | | | | | | | | | |
| Deposits: | | | | | | | | | |
| Non-interest bearing | | | $ | 17,542 | | | $ | 7,956 | |
| Interest-bearing | | | | 194,369 | | | | 178,265 | |
| Total deposits | | | | 211,911 | | | | 186,221 | |
| Federal Home Loan Bank short-term borrowings | | | | 9,000 | | | | 10,000 | |
| Federal Home Loan Bank long-term borrowings | | | | 15,000 | | | | 18,000 | |
| Subordinated debt | | | | 7,831 | | | | -- | |
| Accrued interest payable | | | | 221 | | | | 167 | |
| Advances from borrowers for taxes and insurance | | | | 2,568 | | | | 2,423 | |
| Accrued expenses and other liabilities | | | | 1,037 | | | | 600 | |
| Total Liabilities | | | | 247,568 | | | | 217,411 | |
| | | | | | | | | | | |
| Stockholders’ Equity | | | | | | | | | |
Preferred stock – $0.01 par value, 1,000,000 shares authorized; none issued or outstanding | | | | -- | | | | -- | |
| Common stock – $0.01 par value; 9,000,000 shares | | | | | | | | | |
authorized; 2,777,250 issued; 1,975,947 and 1,920,024 outstanding at December 31, 2018 and 2017, respectively | | | | 28 | | | | 28 | |
| Additional paid-in capital | | | | 14,683 | | | | 14,481 | |
Treasury stock, at cost: 2018 801,303 shares; 2017 857,226 shares | | | | (4,824 | ) | | | (4,675 | ) |
| Unallocated common stock held by: | | | | | | | | | |
| Employee Stock Ownership Plan (ESOP) | | | | (185 | ) | | | (253 | ) |
| Recognition & Retention Plan Trust (RRP) | | | | -- | | | | (24 | ) |
| Accumulated other comprehensive loss | | | | (2 | ) | | | (15 | ) |
| Retained earnings | | | | 14,136 | | | | 12,643 | |
| Total Stockholders’ Equity | | | | 23,836 | | | | 22,185 | |
| Total Liabilities and Stockholders’ Equity | | | $ | 271,404 | | | $ | 239,596 | |
See accompanying notes to consolidated financial statements.
Consolidated Statements of Income
| | | | |
| | | 2018 | | | 2017 | |
| | | (In thousands, except share | |
| | | and per share data) | |
| Interest Income | | | | | | |
| Interest on loans, including fees | | $ | 11,530 | | | $ | 10,231 | |
Interest and dividends on investment securities, interest-bearing deposits with others, and Federal Home Loan Bank stock | | | 595 | | | | 357 | |
| Total Interest Income | | | 12,125 | | | | 10,588 | |
| | | | | | | | | |
| Interest Expense | | | | | | | | |
| Interest on deposits | | | 3,264 | | | | 2,681 | |
| Interest on Federal Home Loan Bank short-term borrowings | | | 197 | | | | 101 | |
| Interest on Federal Home Loan Bank long-term borrowings | | | 352 | | | | 220 | |
| Interest on subordinated debt | | | 7 | | | | -- | |
| Total Interest Expense | | | 3,820 | | | | 3,002 | |
| | | | | | | | | |
| Net Interest Income | | | 8,305 | | | | 7,586 | |
| | | | | | | | | |
| Provision for Loan Losses | | | 415 | | | | 284 | |
| | | | | | | | | |
| Net Interest Income after Provision for Loan Losses | | | 7,890 | | | | 7,302 | |
| | | | | | | | | |
| Non-Interest Income | | | | | | | | |
| Mortgage banking and title abstract fees | | | 826 | | | | 730 | |
| Real estate sales commissions, net | | | 192 | | | | 99 | |
| Insurance commissions | | | 430 | | | | 389 | |
| Other fees and services charges | | | 131 | | | | 64 | |
| Income from bank-owned life insurance | | | 80 | | | | 86 | |
| Net gain on the sale of residential mortgage loans | | | 2,120 | | | | 2,094 | |
| Gain on the sale of SBA loans | | | 105 | | | | 48 | |
| Gain (loss) on sales and write-downs of other real estate owned | | | 63 | | | | (68 | ) |
| Total Non-Interest Income, net | | | 3,947 | | | | 3,442 | |
| | | | | | | | | |
| Non-Interest Expense | | | | | | | | |
| Salaries and employee benefits | | | 6,407 | | | | 5,478 | |
| Directors’ fees and expenses | | | 208 | | | | 204 | |
| Occupancy and equipment | | | 601 | | | | 573 | |
| Data processing | | | 398 | | | | 331 | |
| Professional fees | | | 365 | | | | 367 | |
| FDIC deposit insurance assessment | | | 186 | | | | 174 | |
| Other real estate owned expenses | | | 20 | | | | 14 | |
| Advertising | | | 217 | | | | 195 | |
| Amortization of other intangible | | | 48 | | | | 49 | |
| Other | | | 716 | | | | 687 | |
| Total Non-Interest Expense | | | 9,166 | | | | 8,072 | |
| | | | | | | | | |
| Income before Income Taxes | | | 2,671 | | | | 2,672 | |
| Income Taxes | | | 667 | | | | 1,205 | |
| Net Income | | $ | 2,004 | | | $ | 1,467 | |
| | | | | | | | | |
| Earnings per share – basic | | $ | 1.04 | | | $ | 0.79 | |
| Average shares outstanding - basic | | | 1,923,491 | | | | 1,857,457 | |
| Earnings per share - diluted | | $ | 1.01 | | | $ | 0.74 | |
| Average shares outstanding - diluted | | | 1,982,998 | | | | 1,994,832 | |
See accompanying notes to consolidated financial statements.
Consolidated Statements of Comprehensive Income
| | | Years Ended December 31, | |
| | | | | | | |
| | | (In Thousands) | |
| | | | | | | |
| Net Income | | $ | 2,004 | | | $ | 1,467 | |
| | | | | | | | | |
| Other Comprehensive Income: | | | | | | | | |
| Unrealized gains on investment securities available for sale | | | 16 | | | | 38 | |
| Income tax effect | | | (3 | ) | | | (13 | ) |
| Net other comprehensive income | | | 13 | | | | 25 | |
| | | | | | | | | |
| Total Comprehensive Income | | $ | 2,017 | | | $ | 1,492 | |
| | | | | | | | | |
See accompanying notes to consolidated financial statements.
Consolidated Statements of Stockholders’ Equity
(In thousands, except share and per share data) | | | | |
| | | | | | | | | | | | | | |
| |
| | Number of Shares Outstanding | | | | | | Additional Paid-in | | | | | | Unallocated Common Stock Held by Benefit Plans | | | Accumulated Other Comprehensive Loss | | | Retained | | | Total Stockholders’ | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
BALANCE – DECEMBER 31, 2016
| 1,891,150 | | | $ | 28 | | | $ | 14,240 | | | $ | (4,611 | ) | | $ | (367 | ) | | $ | (38 | ) | | $ | 11,538 | | | $ | 20,790 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Common stock allocated by ESOP (14,428 shares) | | | | | | | | | | | 118 | | | | | | | | 67 | | | | | | | | | | | | 185 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Treasury stock purchased | | | (29,393 | ) | | | | | | | | | | | (347 | ) | | | | | | | | | | | | | | | (347 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Reissuance of treasury stock under 401(k) Plan | | | 7,336 | | | | | | | | 56 | | | | 38 | | | | | | | | | | | | | | | | 94 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Reissuance of treasury stock under Stock Incentive Plan | | | 5,397 | | | | | | | | (28 | ) | | | 28 | | | | | | | | | | | | | | | | -- | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Reissuance of treasury stock for exercised stock options | | | 45,534 | | | | | | | | (11 | ) | | | 217 | | | | | | | | | | | | | | | | 206 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Stock based compensation expense | | | | | | | | | | | 129 | | | | | | | | | | | | | | | | | | | | 129 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Release of 4,864 vested RRP shares | | | | | | | | | | | (23 | ) | | | | | | | 23 | | | | | | | | | | | | -- | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Cash dividends declared ($0.19 per share) | | | | | | | | | | | | | | | | | | | | | | | | | | | (364 | ) | | | (364 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net income | | | | | | | | | | | | | | | | | | | | | | | | | | | 1,467 | | | | 1,467 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Reclassification of certain income tax
effects from accumulated other comprehensive income | | | | | | | | | | | | | | | | | | | | | | | (2 | ) | | | 2 | | | | -- | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Other comprehensive income, net | | | | | | | | | | | | | | | | | | | | | | | 25 | | | | | | | | 25 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| BALANCE – DECEMBER 31, 2017 | 1,920,024 | | | $ | 28 | | | $ | 14,481 | | | $ | (4,675 | ) | | $ | (277 | ) | | $ | (15 | ) | | $ | 12,643 | | | $ | 22,185 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Common stock allocated by ESOP (14,428 shares) | | | | | | | | | 124 | | | | | | | | 68 | | | | | | | | | | | | 192 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Treasury stock purchased | | | (60,711 | ) | | | | | | | | | | | (795 | ) | | | 2 | | | | | | | | | | | | (793 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Reissuance of treasury stock under 401(k) Plan | | | 4,793 | | | | | | | | 37 | | | | 27 | | | | | | | | | | | | | | | | 64 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Reissuance of treasury stock under stock incentive plan | | | 4,997 | | | | | | | | (28 | ) | | | 28 | | | | | | | | | | | | | | | | -- | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Reissuance of treasury stock for exercised stock options | | | 106,844 | | | | | | | | (57 | ) | | | 591 | | | | | | | | | | | | | | | | 534 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Stock based compensation expense | | | | | | | | | | | 148 | | | | | | | | | | | | | | | | | | | | 148 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Release of 4,664 vested RRP shares | | | | | | | | | | | (22 | ) | | | | | | | 22 | | | | | | | | | | | | -- | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Cash dividends declared ($0.26 per share) | | | | | | | | | | | | | | | | | | | | | | | | | | | (511 | ) | | | (511 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net income | | | | | | | | | | | | | | | | | | | | | | | | | | | 2,004 | | | | 2,004 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Other comprehensive income, net | | | | | | | | | | | | | | | | | | | | | | | 13 | | | | | | | | 13 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| BALANCE –DECEMBER 31, 2018 | | | 1,975,947 | | | $ | 28 | | | $ | 14,683 | | | $ | (4,824 | ) | | $ | (185 | ) | | $ | (2 | ) | | $ | 14,136 | | | $ | 23,836 | |
See accompanying notes to consolidated financial statements.
| Consolidated Statements of Cash Flows | | | |
| | | Years Ended | |
| | | December 31, | |
| | | 2018 | | | 2017 | |
| | | (In Thousands) | |
| Cash Flows from Operating Activities | | | |
| Net income | | $ | 2,004 | | | $ | 1,467 | |
| Adjustments to reconcile net income to net cash provided by (used in) operating activities: | | | | | | | | |
| Provision for loan losses | | | 415 | | | | 284 | |
| Depreciation expense | | | 202 | | | | 192 | |
| Amortization of other intangible | | | 48 | | | | 49 | |
| Net amortization of securities premiums | | | 19 | | | | 19 | |
| Accretion of deferred loan fees and costs, net | | | (348 | ) | | | (333 | ) |
| Deferred income taxes | | | (26 | ) | | | 232 | |
| Stock-based compensation expense | | | 340 | | | | 314 | |
| Net gain on loans held for sale | | | (2,120 | ) | | | (2,094 | ) |
| Loans held for sale-originations | | | (100,138 | ) | | | (87,963 | ) |
| Loans held for sale-proceeds | | | 104,160 | | | | 87,763 | |
| Gain on the sale of SBA loans | | | (105 | ) | | | (48 | ) |
| Net (gain) loss on sale and write-downs of other real estate owned | | | (63 | ) | | | 68 | |
| Increase in the cash surrender value of bank-owned life insurance | | | (80 | ) | | | (86 | ) |
| Changes in assets and liabilities which provided (used) cash: | | | | | | | | |
| Accrued interest receivable | | | (132 | ) | | | (159 | ) |
| Prepaid expenses and other assets | | | 197 | | | | (236 | ) |
| Accrued interest payable | | | 54 | | | | 25 | |
| Accrued expenses and other liabilities | | | 437 | | | | 86 | |
| Net Cash Provided by (Used in) Operating Activities | | | 4,864 | | | | (420 | ) |
| Cash Flows from Investing Activities | | | | | | | | |
| Purchase of interest-earning time deposits | | | (809 | ) | | | (1,630 | ) |
| Redemption of interest-earning time deposits | | | 761 | | | | 2,849 | |
| Principal repayments on investment securities available for sale | | | 1,230 | | | | 1,662 | |
| Net increase in loans receivable | | | (16,734 | ) | | | (24,763 | ) |
| Purchase of Federal Home Loan Bank stock | | | (12 | ) | | | (561 | ) |
| Redemption of Federal Home Loan Bank stock | | | 160 | | | | 40 | |
| Proceeds from the sale of other real estate owned | | | 63 | | | | 389 | |
| Capitalized expenditures on other real estate owned | | | (109 | ) | | | (22 | ) |
| Purchase of premises and equipment | | | (272 | ) | | | (450 | ) |
| Net Cash Used in Investing Activities | | | (15,722 | ) | | | (22,486 | ) |
| Cash Flows from Financing Activities | | | | | | | | |
| Net increase in demand deposits, money markets, and savings accounts | | | 4,512 | | | | 1,244 | |
| Net increase in certificate accounts | | | 21,178 | | | | 7,970 | |
| Increase in advances from borrowers for taxes and insurance | | | 145 | | | | 213 | |
| Net (repayments) proceeds from Federal Home Loan Bank short-term borrowings | | | (1,000 | ) | | | 3,000 | |
| Proceeds from Federal Home Loan Bank long-term borrowings | | | -- | | | | 12,000 | |
| Repayment of Federal Home Loan Bank long-term borrowings | | | (3,000 | ) | | | (2,500 | ) |
| Net proceeds from the issuance of subordinated debt | | | 7,831 | | | | -- | |
| Dividends paid | | | (511 | ) | | | (364 | ) |
| Purchase of treasury stock | | | (793 | ) | | | (347 | ) |
| Proceeds from the reissuance of treasury stock | | | 64 | | | | 94 | |
| Proceeds from the exercise of stock options | | | 534 | | | | 206 | |
| Net Cash Provided by Financing Activities | | | 28,960 | | | | 21,516 | |
| Net Increase (Decrease) in Cash and Cash Equivalents | | | 18,102 | | | | (1,390 | ) |
| Cash and Cash Equivalents – Beginning of Year | | | 7,910 | | | | 9,300 | |
| Cash and Cash Equivalents – End of Year | | $ | 26,012 | | | $ | 7,910 | |
| Supplementary Disclosure of Cash Flow and Non-Cash Information: | | | | | | | | |
| Cash payments for interest | | $ | 3,766 | | | $ | 2,977 | |
| Cash payments for income taxes | | $ | 561 | | | $ | 1,139 | |
| Transfer of loans to other real estate owned | | $ | 1,541 | | | $ | -- | |
| | | | | | | | | |
See accompanying notes to consolidated financial statements.
Notes to Consolidated Financial Statements
Note 1 - Nature of Operations
The consolidated financial statements include the accounts of Quaint Oak Bancorp, Inc., a Pennsylvania chartered corporation (the “Company” or “Quaint Oak Bancorp”) and its wholly owned subsidiary, Quaint Oak Bank, a Pennsylvania chartered stock savings bank, along with its wholly owned subsidiaries. At December 31, 2018, 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 began operations in August 2016 by acquiring the renewal rights to a book of business produced and serviced by an independent insurance agency located in New Britain, Pennsylvania, that provides a broad range of personal and commercial insurance coverage solutions. All significant intercompany balances and transactions have been eliminated.
The Bank is subject to regulation by the Pennsylvania Department of Banking and Securities and the Federal Deposit Insurance Corporation. Pursuant to the Bank’s election under Section 10(l) of the Home Owners’ Loan Act, the Company is a savings and loan holding company regulated by the Board of Governors of the Federal Reserve System. The market area served by the Bank is principally Bucks, Montgomery and Philadelphia Counties, Pennsylvania and the Lehigh Valley area of Pennsylvania. The Bank has two locations: the main office location in Southampton, Pennsylvania and a regional banking office in the Lehigh Valley area of Pennsylvania. The principal deposit products offered by the Bank are certificates of deposit, money market accounts, non-interest bearing checking accounts for businesses and consumers, and savings accounts. The principal loan products offered by the Bank are fixed and adjustable rate residential and commercial mortgages, construction loans, home equity loans, lines of credit, and commercial business loans.
Note 2 - Summary of Significant Accounting Policies
Use of Estimates
The preparation of the financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates. The Company’s most significant estimates are the determination of the allowance for loan losses and valuation of deferred tax assets.
Significant Group Concentrations of Credit Risk
The Bank has a significant concentration of loans in Philadelphia County, Pennsylvania. The concentration of credit by type of loan is set forth in Note 7. Although the Bank has a diversified loan portfolio, its debtors’ ability to honor their contracts is influenced by the region’s economy. During the year ended December 31, 2018, one investor purchased a total of 53% of all loans sold by the Bank from its mortgage loans held for sale, and the sales to this investor accounted for approximately 53% of the gain on loans sold during the year.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include non-interest earning and interest-earning demand deposits and money market accounts with various financial institutions, all of which mature within ninety days of acquisition.
Notes to Consolidated Financial Statements (Continued)
Note 2 - Summary of Significant Accounting Policies (Continued)
Investment Securities
Management determines the appropriate classification of debt securities at the time of purchase and reevaluates such designation as of each balance sheet date.
Securities classified as available for sale are those securities that the Company intends to hold for an indefinite period of time but not necessarily to maturity. Any decision to sell a security classified as available for sale would be based on various factors, including significant movement in interest rates, changes in maturity mix of the Company’s assets and liabilities, liquidity needs, regulatory capital requirements, and other similar factors. Securities available for sale are carried at fair value. Unrealized gains and losses are reported in other comprehensive income, net of related deferred tax effects. Realized gains and losses, determined on the basis of the cost of the specific securities sold, are included in earnings. Premiums and discounts are recognized in interest income using the interest method over the terms of the securities.
Securities classified as held to maturity are those debt securities the Company has both the intent and ability to hold to maturity regardless of the changes in market conditions, liquidity needs, or changes in general economic conditions. These securities are carried at cost adjusted for amortization of premium and accretion of discount, which are recognized in interest income using the interest method over the terms of the securities.
The Company follows the accounting guidance related to recognition and presentation of other-than-temporary impairment. This accounting guidance specifies that (a) if a company does not have the intent to sell a debt security prior to recovery and (b) it is more likely than not that it will not have to sell the debt security prior to recovery, the security would not be considered other-than-temporarily impaired unless there is a credit loss. When an entity does not intend to sell the security, and it is more likely than not the entity will not have to sell the security before recovery of its cost basis, it will recognize the credit component of an other-than-temporary impairment of a debt security in earnings and the remaining portion in other comprehensive income. For held-to-maturity debt securities, the amount of an other-than-temporary impairment recorded in other comprehensive income for the noncredit portion of a previous other-than-temporary impairment should be amortized prospectively over the remaining life of the security on the basis of the timing of future estimated cash flows of the security. The Company recognized no other-than-temporary impairment charges during the years ended December 31, 2018 and 2017.
Federal Home Loan Bank Stock
Federal law requires a member institution of the Federal Home Loan Bank (FHLB) system to hold restricted stock of its district Federal Home Loan Bank according to a predetermined formula. FHLB stock is carried at cost and evaluated for impairment. When evaluating FHLB stock for impairment, its value is determined based on the ultimate recoverability of the par value of the stock. We evaluate our holdings of FHLB stock for impairment each reporting period. No impairment charges were recognized on FHLB stock during the years ended December 31, 2018 and 2017.
Loans Receivable
Loans receivable that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are stated at their outstanding unpaid principal balances, net of an allowance for loan losses and any deferred fees. Interest income is accrued on the unpaid principal balance. Loan origination fees and costs are deferred and recognized as an adjustment of the yield (interest income) of the related loans. The Bank is generally amortizing these amounts over the contractual life of the loan.
Notes to Consolidated Financial Statements (Continued)
Note 2 - Summary of Significant Accounting Policies (Continued)
Loans Receivable (Continued)
The loans receivable portfolio is segmented into residential loans, commercial real estate loans, construction loans, commercial business, and consumer loans. The residential loan segment has two classes: one-to-four family residential owner occupied loans and one-to-four family residential non-owner occupied loans. The commercial real estate loan segment consists of the following classes: multi-family (five or more) residential, commercial real estate and commercial lines of credit. Construction loans are generally granted for the purpose of building a single residential home. Commercial business loans are loans to businesses primarily for purchase of business essential equipment. Business essential equipment is equipment necessary for a business to support or assist with the day-to-day operation or profitability of the business. The consumer loan segment consists of the following classes: home equity loans and other consumer loans. Included in the home equity class are home equity loans and home equity lines of credit. Included in the other consumer are loans secured by saving accounts.
The accrual of interest is generally discontinued when principal or interest has become 90 days past due unless the loan is in the process of collection and is either guaranteed or well secured. When a loan is placed on nonaccrual status, unpaid interest credited to income in the current year is reversed and unpaid interest accrued in prior years is charged against the allowance for loan losses. Interest received on nonaccrual loans generally is either applied against principal or reported as interest income, according to management’s judgment as to the collectability of principal. Generally, loans are restored to accrual status when the obligation is brought current, has performed in accordance with the contractual terms for a reasonable period of time and the ultimate collectability of the total contractual principal and interest is no longer in doubt.
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. 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 identified as impaired. For loans that are identified 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 re-evaluated quarterly to ensure their relevance in the current economic environment. Residential 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.
Notes to Consolidated Financial Statements (Continued)
Note 2 - Summary of Significant Accounting Policies (Continued)
Allowance for Loan Losses (Continued)
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 considered 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 as 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.
Notes to Consolidated Financial Statements (Continued)
Note 2 - Summary of Significant Accounting Policies (Continued)
Allowance for Loan Losses (Continued)
Loans Held for Sale
Loans originated by the Bank’s mortgage banking subsidiary, Quaint Oak Mortgage, LLC, are intended for sale in the secondary market and are carried at the lower of cost or fair value. Gains and losses on loan sales (sales proceeds minus carrying value) are recorded in noninterest income, and direct loan origination costs and fees are deferred at origination of the loan and are recognized in noninterest income upon sale of the loan.
Bank Owned Life Insurance (“BOLl”)
The Company purchases bank owned life insurance as a mechanism for funding various employee benefit costs. The Company is the beneficiary of these policies that insure the lives of certain officers of its subsidiaries. The Company has recognized the cash surrender value under the insurance policies as an asset in the Consolidated Balance Sheets. Changes in the cash surrender value are recorded in non-interest income in the Consolidated Statements of Income.
Premises and Equipment
Land is carried at cost. Premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed on the straight-line method over the expected useful lives of the related assets that range from three to thirty-nine years. The costs of maintenance and repairs are expensed as incurred. Costs of major additions and improvements are capitalized.
Intangible Assets
Intangible assets on the consolidated balance sheets represent the acquisition by Quaint Oak Insurance Agency of the renewal rights to a book of business on August 1, 2016 at a total cost of $1.0 million. Based on a valuation, $515,000 of the purchase price was determined to be goodwill and $485,000 was determined to be related to the renewal rights to the book of business and deemed an other intangible asset. The renewal rights are being amortized over a ten year period based upon the annual retention rate of the book of business.
The Company will complete a goodwill and other intangible asset analysis at least on an annual basis or more often if events and circumstances indicate that there may be impairment.
Notes to Consolidated Financial Statements (Continued)
Note 2 - Summary of Significant Accounting Policies (Continued)
Other Real Estate Owned
Other real estate owned or foreclosed assets are comprised of property acquired through a foreclosure proceeding or acceptance of a deed in lieu of foreclosure and loans classified as in-substance foreclosures. A loan is classified as in-substance foreclosure when the Bank has taken possession of the collateral regardless of whether formal foreclosure proceedings take place. Other real estate properties are initially recorded at fair value, net of estimated selling costs at the date of foreclosure, establishing a new cost basis. After foreclosure, valuations are periodically performed by management and the real estate is carried at the lower of cost or fair value less estimated costs to sell. Net revenue and expenses from operations and additions to the valuation allowance are included in other expenses.
At December 31, 2018 the Company had one property in other real estate owned totaling $1.7 million. The Company had no other real estate owned as of December 31, 2017.
Advertising Costs
The Company expenses all advertising costs as incurred. Advertising costs are included in non-interest expense on the Consolidated Statements of Income.
Transfers of Financial Assets
Transfers of financial assets are accounted for as sales, when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity or the ability to unilaterally cause the holder to return specific assets.
Income Taxes
Deferred income taxes are provided on the liability method whereby deferred tax assets are recognized for deductible temporary differences and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax basis. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. On December 22, 2017, the Tax Cuts and Jobs Act (“TCJA”) was signed into law. The TCJA makes broad and complex changes to the U.S. tax code that affected our income tax rate in 2017. The TCJA reduces the U.S. federal corporate income tax rate from 34% to 21%. As a result, the Company was required to re-measure, through income tax expense, the deferred tax assets and liabilities using the enacted rate at which they are expected to be recovered or settled.
The Company follows guidance related to accounting for uncertainty in income taxes, which sets out a consistent framework to determine the appropriate level of tax reserves to maintain for uncertain tax positions. A tax position is recognized as a benefit only if it is more likely than not that the tax position would be sustained in a tax examination, with a tax examination presumed to occur. The amount recognized is the largest amount of tax benefit that has more than 50 percent likelihood of being realized upon examination. For tax positions not meeting the more likely than not test, no tax benefit is recorded. The Company had no material uncertain tax positions or accrued interest and penalties as of December 31, 2018 and 2017. The Company’s policy is to account for interest as a component of interest expense and penalties as components of other expense. The Company is no longer subject to examination by taxing authorities for the years before January 1, 2015.
Notes to Consolidated Financial Statements (Continued)
Note 2 - Summary of Significant Accounting Policies (Continued)
Comprehensive Income (Loss)
Accounting principles generally accepted in the United States of America require that recognized revenue, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available for sale securities, are reported as a separate component of the stockholders’ equity section of the balance sheet, such items, along with net income, are components of comprehensive income (loss).
Treasury Stock and Unallocated Common Stock
The acquisition of treasury stock by the Company, including unallocated stock held by certain benefit plans, is recorded under the cost method. At the date of subsequent reissue, treasury stock is reduced by the cost of such stock on a first-in, first-out basis with any excess proceeds credited to additional paid-in capital.
Share-Based Compensation
Stock compensation accounting guidance requires that the compensation cost relating to share-based payment transactions be recognized in financial statements. That cost is measured based on the grant date fair value of the equity or liability instruments issued. The stock compensation accounting guidance covers a wide range of share-based compensation arrangements including stock option and restricted share plans.
The stock compensation accounting guidance requires that compensation cost for all stock awards be calculated and recognized over the employees’ service period, generally defined as the vesting period. For awards with graded-vesting, compensation cost is recognized on a straight-line basis over the requisite service period for the entire award. A Black-Scholes model is used to estimate the fair value of stock options, while the closing price of the Company’s common stock on the grant date is used for restricted stock awards.
At December 31, 2018, the Company has outstanding equity awards under two share-based plans: the 2013 Stock Incentive Plan and the 2018 Stock Incentive Plan. Awards under these plans were made in May 2013 and 2018. These plans are more fully described in Note 14.
The Company also has an employee stock ownership plan (“ESOP”). This plan is more fully described in Note 14. As ESOP shares are committed to be released and allocated among participants, the Company recognizes compensation expense equal to the average market price of the shares over the period earned.
Earnings Per Share
Amounts reported in earnings per share reflect earnings available to common stockholders for the period divided by the weighted average number of shares of common stock outstanding during the period, exclusive of unearned ESOP shares, unvested restricted stock (RRP) shares and treasury shares. Stock options and unvested restricted stock are regarded as potential common stock and are considered in the diluted earnings per share calculations to the extent they would have a dilutive effect if converted to common stock, computed using the “treasury stock” method.
Revenue from Contracts with Customers
The Company records revenue from contracts with customers in accordance with Accounting Standards Codification Topic 606, “Revenue from Contracts with Customers” (“Topic 606”). Under Topic 606, the Company must identify the contract with a customer, identify the performance obligations in the contract, determine the transaction price, allocate the transaction price to the performance obligations in the contract, and recognize revenue when (or as) the Company satisfies a performance obligation. Significant revenue has not been recognized in the current reporting period that results from performance obligations satisfied in previous periods. The Company’s primary sources of revenue are derived from interest and dividends earned on loans and investment securities, gains on the sale of loans, income from bank-owned life insurance, and other financial instruments that are not within the scope of Topic 606. The main types of non-interest income within the scope of the standard are as follows:
Notes to Consolidated Financial Statements (Continued)
Note 2 - Summary of Significant Accounting Policies (Continued)
Revenue from Contracts with Customers (Continued)
Service Charges on Deposits: The Bank has contracts with its commercial checking deposit customers where fees are charged if the account balance falls below predetermined levels defined as compensating balances. These agreements can be cancelled at any time by either the Bank or the deposit customer. Revenue from these transactions is recognized on a monthly basis as the Bank has an unconditional right to the fee consideration. The Bank also has transaction fees related to specific transactions or activities resulting from customer request or activity that include overdraft fees, wire fees, and other transaction fees. All of these fees are attributable to specific performance obligations of the Bank where the revenue is recognized at a defined point in time, completion of the requested service/transaction.
Insurance Commissions: Insurance income generally consist of commissions from the sale of insurance policies and performance-based commissions from insurance companies. The Bank recognizes commission income from the sale of insurance policies when it acts as an agent between the insurance carrier and policyholder, arranging for the insurance carrier to provide policies to policyholders, and acts on behalf of the insurance carrier by providing customer service to the policyholder during the policy period. Commission income is recognized over time, using the output method of time elapsed, which corresponds with the underlying insurance policy period, for which the Bank is obligated to perform under contract with the insurance carrier. Commission income is variable, as it is comprised of a certain percentage of the underlying policy premium. The Bank estimates the variable consideration based upon the “most likely amount” method, and does not expect or anticipate a significant reversal of revenue in future periods, based upon historical experience. Payment is due from the insurance carrier for commission income once the insurance policy has been sold. The Bank has elected to apply a practical expedient related to capitalizable costs, which are the commissions paid to insurance producers, and will expense these commissions paid to insurance producers as incurred, as these costs are related to the commission income and would have been amortized within one year or less if they had been capitalized, the same period over which the commission income was earned. Performance-based commissions from insurance companies are recognized at a point in time, when received, and no contingencies remain.
Off-Balance Sheet Financial Instruments
In the ordinary course of business, the Bank has entered into off-balance sheet financial instruments consisting of commitments to extend credit. Such financial instruments are recorded in the consolidated balance sheet when they are funded.
Reclassifications
Certain items in the 2017 consolidated financial statements have been reclassified to conform to the presentation in the 2018 consolidated financial statements. Such reclassifications did not have a material impact on the overall consolidated financial statements.
Notes to Consolidated Financial Statements (Continued)
Note 2 - Summary of Significant Accounting Policies (Continued)
Recently Adopted Accounting Pronouncements
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (a new revenue recognition standard). The Update’s core principle is that a company will recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, this Update specifies the accounting for certain costs to obtain or fulfill a contract with a customer and expands disclosure requirements for revenue recognition. This Update is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. The Bank has adopted this standard effective January 1, 2018. Because the guidance does not apply to revenue associated with financial instruments, including loans and securities, there was no material change from our current accounting for revenue because the majority of the Company’s financial instruments are not within the scope of Topic 606. The standard did result in new disclosure requirements.
In January 2016, the FASB issued ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. This Update applies to all entities that hold financial assets or owe financial liabilities and is intended to provide more useful information on the recognition, measurement, presentation, and disclosure of financial instruments. Among other things, this Update (a) requires equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income; (b) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment; (c) eliminates the requirement to disclose the fair value of financial instruments measured at amortized cost for entities that are not public business entities; (d) eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; (e) requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; (f) requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements; and (g) clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets.
The Bank has adopted this standard effective January 1, 2018. On a prospective basis, the Bank implemented changes to the measurement of the fair value of financial instruments using an exit price notion for disclosure purposes included in Note 18 to the financial statements. The Bank estimated the fair value based on guidance from ASC 820-10, Fair Value Measurements, which defines fair value as the price which would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. There is no active observable market for sale information on community bank loans and, thus, Level III fair value procedures were utilized, primarily in the use of present value techniques incorporating assumptions that market participants would use in estimating fair values. In the absence of reliable market information, the Bank used its own assumptions in an effort to determine a reasonable estimate of fair value.
On February 14, 2018, the Financial Accounting Standards Board finalized ASU 2018-02 – Income Statement-Reporting Comprehensive Income (Topic 220). This accounting standard allows companies to reclassify the “stranded” tax effect in accumulated other comprehensive income that resulted from the U.S. federal government enacted tax bill, H.R.1, an act to provide reconciliation pursuant to Titles II and V of the concurrent resolution on the Budget for Fiscal Year 2018 (Tax Cuts and Jobs Act), which requires deferred tax liabilities and assets to be adjusted for the effect of a change in tax laws.
The Company elected to early adopt this accounting standard, which provides a benefit to the financial statements by more accurately aligning the impacts of the items carried in accumulated other comprehensive income with the associated tax effect. The adoption was applied on a modified retrospective basis and resulted in a one-time cumulative effect adjustment of $2,000 between retained earnings and accumulated other comprehensive income on the Consolidated Balance Sheets as of the beginning of the year ended December 31, 2017. The adjustment had no impact on net income or any prior periods presented.
Notes to Consolidated Financial Statements (Continued)
Note 2 - Summary of Significant Accounting Policies (Continued)
Recently Adopted Accounting Pronouncements (Continued)
Recent Accounting Pronouncements Not Yet Adopted
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The standard requires lessees to recognize the assets and liabilities that arise from leases on the balance sheet. A lessee should recognize in the statement of financial position 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. A short-term lease is defined as one in which (a) the lease term is 12 months or less and (b) there is not an option to purchase the underlying asset that the lessee is reasonably certain to exercise. For short-term leases, lessees may elect to recognize lease payments over the lease term on a straight-line basis. For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2018, and interim periods within those years. The amendments should be applied at the beginning of the earliest period presented using a modified retrospective approach with earlier application permitted as of the beginning of an interim or annual reporting period. The Company is currently assessing the practical expedients it may elect at adoption, but does not anticipate the amendments will have a significant impact to the financial statements. Based on the Company’s preliminary analysis of its current portfolio, the impact to the Company’s balance sheet is estimated to result in less than a 1% increase in assets and liabilities. The Company also anticipates additional disclosures to be provided at adoption.
In September 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments, which changes the impairment model for most financial assets. This Update is intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. The underlying premise of the Update is that financial assets measured at amortized cost should be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis. The allowance for credit losses should reflect management’s current estimate of credit losses that are expected to occur over the remaining life of a financial asset. The income statement will be effected for the measurement of credit losses for newly recognized financial assets, as well as the expected increases or decreases of expected credit losses that have taken place during the period. ASU 2016-13 is effective for annual and interim periods beginning after December 15, 2019, and early adoption is permitted for annual and interim periods beginning after December 15, 2018. With certain exceptions, transition to the new requirements will be through a cumulative effect adjustment to opening retained earnings as of the beginning of the first reporting period in which the guidance is adopted. We expect to recognize a one-time cumulative effect adjustment to the allowance for loan losses as of the beginning of the first reporting period in which the new standard is effective, but cannot yet determine the magnitude of any such one-time adjustment or the overall impact of the new guidance on the consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment. To simplify the subsequent measurement of goodwill, the FASB eliminated Step 2 from the goodwill impairment test. In computing the implied fair value of goodwill under Step 2, an entity had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities (including unrecognized assets and liabilities) following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Instead, under the amendments in this Update, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting units fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. A public business entity that is a U.S. Securities and Exchange Commission (“SEC”) filer should adopt the amendments in this Update for its annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. This Update is not expected to have a significant impact on the Company’s financial statements.
Notes to Consolidated Financial Statements (Continued)
Note 2 - Summary of Significant Accounting Policies (Continued)
Recent Accounting Pronouncements Not Yet Adopted (Continued)
In March 2017, the FASB issued ASU 2017-08, Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20). The amendments in this Update shorten the amortization period for certain callable debt securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. For public business entities, the amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. An entity should apply the amendments in this Update on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. Additionally, in the period of adoption, an entity should provide disclosures about a change in accounting principle. This Update is not expected to have a significant impact on the Company’s financial statements.
In January 2018, the FASB issued ASU 2018-01, Leases (Topic 842), which provides an optional transition practical expedient to not evaluate under Topic 842 existing or expired land easements that were not previously accounted for as leases under the current lease guidance in Topic 840. An entity that elects this practical expedient should evaluate new or modified land easements under Topic 842 beginning at the date the entity adopts Topic 842; otherwise, an entity should evaluate all existing or expired land easements in connection with the adoption of the new lease requirements in Topic 842 to assess whether they meet the definition of a lease. The effective date and transition requirements for the amendments are the same as the effective date and transition requirements in ASU 2016-02. This Update is not expected to have a significant impact on the Company’s financial statements.
In July 2018, the FASB issued ASU 2018-09, Codification Improvements, represents changes to clarify, correct errors in, or make minor improvements to the Codification. The amendments make the Codification easier to understand and easier to apply by eliminating inconsistencies and providing clarifications. The transition and effective date guidance is based on the facts and circumstances of each amendment. Some of the amendments do not require transition guidance and will be effective upon issuance of this ASU. However, many of the amendments in this ASU do have transition guidance with effective dates for annual periods beginning after December 15, 2018, for public business entities. This Update is not expected to have a significant impact on the Company’s financial statements.
In July 2018, the FASB issued ASU 2018-10, Codification Improvements to Topic 842, Leases, represents changes to clarify, correct errors in, or make minor improvements to the Codification. The amendments in this ASU affect the amendments in ASU 2016-02, which are not yet effective, but for which early adoption upon issuance is permitted. For entities that early adopted Topic 842, the amendments are effective upon issuance of this ASU, and the transition requirements are the same as those in Topic 842. For entities that have not adopted Topic 842, the effective date and transition requirements will be the same as the effective date and transition requirements in Topic 842. This Update is not expected to have a significant impact on the Company’s financial statements.
Notes to Consolidated Financial Statements (Continued)
Note 2 - Summary of Significant Accounting Policies (Continued)
Recent Accounting Pronouncements Not Yet Adopted (Continued)
In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842): Targeted Improvements. This Update provides another transition method which allows entities to initially apply ASC 842 at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. Entities that elect this approach should report comparative periods in accordance with ASC 840, Leases. In addition, this Update provides a practical expedient under which lessors may elect, by class of underlying assets, to not separate nonlease components from the associated lease component, similar to the expedient provided for lessees. However, the lessor practical expedient is limited to circumstances in which the nonlease component or components otherwise would be accounted for under the new revenue guidance and both (a) the timing and pattern of transfer are the same for the nonlease component(s) and associated lease component and (b) the lease component, if accounted for separately, would be classified as an operating lease. If the nonlease component or components associated with the lease component are the predominant component of the combined component, an entity should account for the combined component in accordance with ASC 606, Revenue from Contracts with Customers. Otherwise, the entity should account for the combined component as an operating lease in accordance with ASC 842. If a lessor elects the practical expedient, certain disclosures are required. This Update is effective for public business entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years, with early adoption permitted. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. This Update is not expected to have a significant impact on the Company’s financial statements.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes the Disclosure Requirements for Fair Value Measurements. The Update removes the requirement to disclose the amount of and reasons for transfers between Level I and Level II of the fair value hierarchy; the policy for timing of transfers between levels; and the valuation processes for Level III fair value measurements. The Update requires disclosure of changes in unrealized gains and losses for the period included in other comprehensive income (loss) for recurring Level III fair value measurements held at the end of the reporting period and the range and weighted average of significant unobservable inputs used to develop Level III fair value measurements. This Update is effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. This Update is not expected to have a significant impact on the Company’s financial statements.
In November, 2018, the FASB issued ASU 2018-19, Codification Improvements to Topic 326, Financial Instruments - Credit Losses, which amended the effective date of ASU 2016-13 for entities other than public business entities (PBEs), by requiring non-PBEs to adopt the standard for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Therefore, the revised effective dates of ASU 2016-13 for PBEs that are SEC filers will be fiscal years beginning after December 15, 2019, including interim periods within those years, PBEs other than SEC filers will be for fiscal years beginning after December 15, 2020, including interim periods within those years, and all other entities (non-PBEs) will be for fiscal years beginning after December 15, 2021, including interim periods within those years. The ASU also clarifies that receivables arising from operating leases are not within the scope of Subtopic 326-20. Rather, impairment of receivables arising from operating leases should be accounted for in accordance with Topic 842, Leases. The effective date and transition requirements for ASU 2018-19 are the same as those in ASU 2016-13, as amended by ASU 2018-19. This Update is not expected to have a significant impact on the Company’s financial statements, OR the Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations.
In December 2018, the FASB issued ASU 2018-20, Leases (Topic 842), which addressed implementation questions arising from stakeholders in regard to ASU 2016-02, Leases. Specifically addressed in this Update were issues related to 1) sales taxes and other similar taxes collected from lessees, 2) certain lessor costs, and 3) recognition of variable payments for contracts with lease and nonlease components. The amendments in this Update affect the amendments in Update 2016-02, which are not yet effective but can be early adopted. The effective date and transition requirements for the amendments in this Update are the same as the effective date and transition requirements in Update 2016-02 (for example, January 1, 2019, for calendar-year-end public business entities). This Update is not expected to have a significant impact on the Company’s financial statements, OR the Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations.
Notes to Consolidated Financial Statements (Continued)
Note 3 – Earnings Per Share
Earnings per share (“EPS”) consists of two separate components, basic EPS and diluted EPS. Basic EPS is computed based on the weighted average number of shares of common stock outstanding for each period presented. Diluted EPS is calculated based on the weighted average number of shares of common stock outstanding plus dilutive common stock equivalents (“CSEs”). CSEs consist of shares that are assumed to have been purchased with the proceeds from the exercise of stock options, as well as unvested restricted stock (RRP) shares. Common stock equivalents which are considered antidilutive are not included for the purposes of this calculation. For the years ended December 31, 2018 and 2017, all unvested restricted stock program awards and outstanding stock options representing shares were dilutive.
The following table sets forth the composition of the weighted average shares (denominator) used in the basic and dilutive earnings per share computations.
| | | For the Year Ended December 31, | |
| | | | | | | |
| Net Income | | $ | 2,004,000 | | | $ | 1,467,000 | |
| | | | | | | | | |
| Weighted average shares outstanding – basic | | | 1,923,491 | | | | 1,857,457 | |
| Effect of dilutive common stock equivalents | | | 59,507 | | | | 137,375 | |
| Adjusted weighted average shares outstanding – diluted | | | 1,982,998 | | | | 1,994,832 | |
| | | | | | | | | |
| Basic earnings per share | | $ | 1.04 | | | $ | 0.79 | |
| Diluted earnings per share | | $ | 1.01 | | | $ | 0.74 | |
Note 4 – Accumulated Other Comprehensive Loss
The following table presents the changes in accumulated other comprehensive loss by component, net of tax, for the years ended December 31, 2018 and 2017 (in thousands):
| | | Unrealized Losses on Investment Securities Available for Sale (1) | |
| | | | | | | |
| Balance beginning of the year | | $ | (15 | ) | | $ | (38 | ) |
| | |
| Other comprehensive income before reclassifications | | | 13 | | | | 25 | |
| Amount reclassified from accumulated other comprehensive loss | | | -- | | | | -- | |
| Total other comprehensive income | | | 13 |
| | | 25 | |
| | | | | | | | | |
| Reclassification of certain income tax effects from accumulated other comprehensive income | | | -- | | | | (2 | ) |
| Balance end of the year | | $ | (2 | ) | | $ | (15 | ) |
_______________________
(1) All amounts are net of tax. Amounts in parentheses indicate debits.
Notes to Consolidated Financial Statements (Continued)
Note 5 – Investment in Interest-Earning Time Deposits
The investment in interest-earning time deposits as of December 31, 2018 and 2017, by contractual maturity, is shown below (in thousands):
| | | | | | | |
| Due in one year or less | | $ | 1,604 | | | $ | 761 | |
| Due after one year through five years | | | 3,323 | | | | 4,118 | |
| Total | | $ | 4,927 | | | $ | 4,879 | |
Note 6 – Investment Securities Available for Sale
The amortized cost, gross unrealized gains and losses, and fair value of investment securities available for sale at December 31, 2018 and 2017 are summarized below (in thousands):
| | | December 31, 2018 | |
| | | | | | | | | | | | | |
| Available for Sale: | | | | | | | | | | | | |
| Mortgage-backed securities: | | | | | | | | | | | | |
| Governmental National Mortgage Association securities | | $ | 4,844 | | | $ | 29 | | | $ | -- | | | $ | 4,873 | |
| Federal Home Loan Mortgage Corporation securities | | | 1,111 | | | | -- | | | | (29 | ) | | | 1,082 | |
| Federal National Mortgage Association securities | | | 367 | | | | -- | | | | -- | | | | 367 | |
| Total mortgage-backed securities | | | 6,322 | | | | 29 | | | | (29 | ) | | | 6,322 | |
| Debt securities: | | | | | | | | | | | | | | | | |
| U.S. government agency | | | 360 | | | | -- | | | | (2 | ) | | | 358 | |
| Total available-for-sale-securities | | $ | 6,682 | | | $ | 29 | | | $ | (31 | ) | | $ | 6,680 | |
| | | December 31, 2017 | |
| | | | | | | | | | | | | |
| Available for Sale: | | | | | | | | | | | | |
| Mortgage-backed securities: | | | | | | | | | | | | |
| Governmental National Mortgage Association securities | | $ | 5,624 | | | $ | 19 | | | $ | -- | | | $ | 5,643 | |
| Federal Home Loan Mortgage Corporation securities | | | 1,377 | | | | -- | | | | (35 | ) | | | 1,342 | |
| Federal National Mortgage Association securities | | | 570 | | | | -- | | | | -- | | | | 570 | |
| Total mortgage-backed securities | | | 7,571 | | | | 19 | | | | (35 | ) | | | 7,555 | |
| Debt securities: | | | | | | | | | | | | | | | | |
| U.S. government agency | | | 360 | | | | -- | | | | (3 | ) | | | 357 | |
| Total available-for-sale-securities | | $ | 7,931 | | | $ | 19 | | | $ | (38 | ) | | $ | 7,912 | |
The amortized cost and fair value of mortgage-backed and debt securities at December 31, 2018, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties (in thousands):
| | | | |
| | | | | | | |
| Due after one year through five years | | $ | 360 | | | $ | 358 | |
| Due after ten years | | | 6,322 | | | | 6,322 | |
| Total | | $ | 6,682 | | | $ | 6,680 | |
Notes to Consolidated Financial Statements (Continued)
Note 6 – Investment Securities Available for Sale (Continued)
The following tables show the Company’s gross unrealized losses and fair value, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position at December 31, 2018 and 2017 (in thousands):
| | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
| Federal Home Loan Mortgage Corporation mortgage-backed securities | | | 2 | | | $
| -- | | | $
| -- | | | $ | 1,082 | | | $ | (29 | ) | | $ | 1,082 | | | $ | (29 | ) |
| Debt securities, U.S. government agency | | | 1 | | | | -- | | | | -- | | | | 358 | | | | (2 | ) | | | 358 | | | | (2 | ) |
| Total | | | 3 | | | $ | -- | | | $ | -- | | | $ | 1,440 | | | $ | (31 | ) | | $ | 1,440 | | | $ | (31 | ) |
| | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
| Federal Home Loan Mortgage Corporation mortgage-backed securities | | | 2 | | | $ | -- | | | $ | -- | | | $ | 1,342 | | | $ | (35 | ) | | $ | 1,342 | | | $ | (35 | ) |
| Debt securities, U.S. government agency | | | 1 | | | | -- | | | | -- | | | | 357 | | | | (3 | ) | | | 357 | | | | (3 | ) |
| Total | | | 3 | | | $ | -- | | | $ | -- | | | $ | 1,699 | | | $ | (38 | ) | | $ | 1,699 | | | $ | (38 | ) |
At December 31, 2018, there were three securities in an unrealized loss position that at such date had an aggregate depreciation of 2.12% from the Company’s amortized cost basis. Management believes that the estimated fair value of the securities disclosed above is primarily dependent on the movement of market interest rates. Management evaluated the length of time and the extent to which the fair value has been less than cost and the financial condition and near term prospects of the issuer, including any specific events which may influence the operations of the issuer. The Company has the ability and intent to hold the securities until the anticipated recovery of fair value occurs. Management does not believe any individual unrealized loss as of December 31, 2018 represents an other-than-temporary impairment. There were no impairment charges recognized during the year ended December 31, 2018 or 2017.
Notes to Consolidated Financial Statements (Continued)
Note 7 - Loans Receivable, Net and Allowance for Loan Losses
The composition of net loans receivable is as follows (in thousands):
| | | | | | | |
| Real estate loans: | | | | | | |
| One-to-four family residential: | | | | | | |
| Owner occupied | | $ | 6,603 | | | $ | 5,681 | |
| Non-owner occupied | | | 47,361 | | | | 51,833 | |
| Total one-to-four family residential | | | 53,964 | | | | 57,514 | |
| Multi-family (five or more) residential | | | 23,967 | | | | 21,715 | |
| Commercial real estate | | | 103,819 | | | | 92,234 | |
| Construction | | | 9,998 | | | | 15,632 | |
| Home equity | | | 4,347 | | | | 5,129 | |
| Total real estate loans | | | 196,095 | | | | 192,224 | |
| | | | | | | | | |
| Commercial business | | | 23,616 | | | | 11,954 | |
| Other consumer | | | 19 | | | | 138 | |
| Total Loans | | | 219,730 | | | | 204,316 | |
| | | | | | | | | |
| Deferred loan fees and costs | | | (867 | ) | | | (837 | ) |
| Allowance for loan losses | | | (1,965 | ) | | | (1,812 | ) |
| Net Loans | | $ | 216,898 | | | $ | 201,667 | |
The following tables present the classes of the loan portfolio summarized by the aggregate pass rating and the classified ratings of special mention, substandard and doubtful within the Company’s internal risk rating system as of December 31, 2018 and 2017 (in thousands):
| | December 31, 2018 | |
| | | | | | | | | | | | | | | | |
| One-to-four family residential owner occupied | | $ | 6,421 | | | $ | -- | | | $ | 182 | | | $ | -- | | | $ | 6,603 | |
| One-to-four family residential non-owner occupied | | | 46,534 | | | | -- | | | | 827 | | | | -- | | | | 47,361 | |
| Multi-family residential | | | 23,967 | | | | -- | | | | -- | | | | -- | | | | 23,967 | |
| Commercial real estate | | | 101,821 | | | | -- | | | | 1,998 | | | | -- | | | | 103,819 | |
| Construction | | | 9,998 | | | | -- | | | | -- | | | | -- | | | | 9,998 | |
| Home equity | | | 4,347 | | | | -- | | | | -- | | | | -- | | | | 4,347 | |
| Commercial business | | | 23,149 | | | | -- | | | | 467 | | | | -- | | | | 23,616 | |
| Other consumer | | | 19 | | | | -- | | | | -- | | | | -- | | | | 19 | |
| Total | | $ | 216,256 | | | $ | -- | | | $ | 3,374 | | | $ | -- | | | $ | 219,730 | |
