ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements Are Subject to Change
This Quarterly Report contains certain forward-looking statements (as defined in the Securities Exchange Act of 1934 and the regulations thereunder). Forward-looking statements are not historical facts but instead represent only the beliefs, expectations or opinions of the Company and its management regarding future events, many of which, by their nature, are inherently uncertain. Forward-looking statements may be identified by the use of such words as: “believe”, “expect”, “anticipate”, “intend”, “plan”, “estimate”, or words of similar meaning, or future or conditional terms such as “will”, “would”, “should”, “could”, “may”, “likely”, “probably”, or “possibly.” Forward-looking statements include, but are not limited to, financial projections and estimates and their underlying assumptions; statements regarding plans, objectives and expectations with respect to future operations, products and services; and statements regarding future performance. Such statements are subject to certain risks, uncertainties and assumptions, many of which are difficult to predict and generally are beyond the control of and its management, that could cause actual results to differ materially from those expressed in, or implied or projected by, forward-looking statements. The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements: (1) economic and competitive conditions which could affect the volume of loan originations, deposit flows and real estate values; (2) the levels of non-interest income and expense and the amount of loan losses; (3) competitive pressure among depository institutions increasing significantly; (4) changes in the interest rate environment causing reduced interest margins; (5) general economic conditions, either nationally or in the markets in which the Company is or will be doing business, being less favorable than expected;(6) political and social unrest, including acts of war or terrorism; (7) the impact of the current outbreak of the novel coronavirus (COVID-19) or (8) legislation or changes in regulatory requirements adversely affecting the business in which the Company is or will be engaged. The Company undertakes no obligation to update these forward-looking statements to reflect events or circumstances that occur after the date on which such statements were made.
General
The Company was formed in connection with the Bank’s conversion to a stock savings bank completed on July 3, 2007. The Company’s results of operations are dependent primarily on the results of the Bank, which is a wholly owned subsidiary of the Company. The Bank’s results of operations depend, to a large extent, on net interest income, which is the difference between the income earned on its loan and investment portfolios and the cost of funds, consisting of the interest paid on deposits and borrowings. Results of operations are also affected by provisions for loan losses, fee income and other non-interest income and non-interest expense. Non-interest expense principally consists of compensation, directors’ fees and expenses, office occupancy and equipment expense, data processing expense, professional fees, advertising expense, FDIC deposit insurance assessment, and other expenses. Our results of operations are also significantly affected by general economic and competitive conditions, particularly changes in interest rates, government policies and actions of regulatory authorities. Future changes in applicable law, regulations or government policies may materially impact our financial condition and results of operations.
At June 30, 2020, the Bank has five wholly-owned subsidiaries, Quaint Oak Mortgage, LLC, Quaint Oak Real Estate, LLC, Quaint Oak Abstract, LLC, QOB Properties, LLC, and Quaint Oak Insurance Agency, LLC, each a Pennsylvania limited liability company. The mortgage, real estate and abstract companies offer mortgage banking, real estate sales and title abstract services, respectively, in the Lehigh Valley region of Pennsylvania, and began operation in July 2009. In February 2019, Quaint Oak Mortgage opened a mortgage banking office in Philadelphia, Pennsylvania. QOB Properties, LLC began operations in July 2012 and holds Bank properties acquired through a foreclosure proceeding or acceptance of a deed in lieu of foreclosure. Quaint Oak Insurance Agency, LLC, located in Chalfont, Pennsylvania, began operations in August 2016 and provides a broad range of personal and commercial insurance coverage solutions. In February 2020, Quaint Oak Bank opened a full-service retail banking office in Philadelphia, Pennsylvania.
COVID-19
On March 11, 2020, the World Health Organization declared COVID-19 a pandemic. The effects of COVID-19 did not have a material impact on the financial results of the Company as of June 30, 2020. Due to orders issued by the governor of Pennsylvania and for the health of our customers and employees, the Bank closed lobbies to all three branch offices but remained fully operational. Other immediate responses to the pandemic included some of the following actions by the Company:
• Moved more than 92% of its employees to remote work-from-home status.
• Waived fees on deposit accounts and cash management services.
In response to the COVID-19 crisis, the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act was passed by Congress and signed into law on March 27, 2020. The CARES Act provides an estimated $2.2 trillion of economy-wide financial stimulus to combat the pandemic and stimulate the economy in the form of financial aid to individuals, businesses, nonprofits, states, and municipalities through loans, grants, tax changes, and other types of relief.
The following describes some of our responses to COVID-19 relative to the CARES Act, and other effects of the pandemic on our business.
Paycheck Protection Program. The CARES Act authorized the Small Business Administration (“SBA”) to temporarily guarantee loans under a new 7(a) loan program called the Paycheck Protection Program (“PPP”). As a qualified SBA lender, we were automatically authorized to originate PPP loans and chose to participate.
Through August 10, 2020, the Bank funded 848 PPP loans with total principal balances of $91.8 million and received SBA approval for another five PPP loans for $3.2 million.
Paycheck Protection Program Liquidity Facility. The CARES Act also allocated a limited amount of funds to the Federal Reserve Board (FRB) with a broad mandate to provide liquidity to eligible businesses, states or municipalities in light of COVID-19. On April 9, 2020, the U.S. Department of the Treasury announced several new or expanded lending programs to provide relief for businesses and governments. One of these programs was the Paycheck Protection Program Liquidity Facility (PPPLF). Under the PPPLF, all depository institutions that originate PPP loans are eligible to borrow on a non-recourse basis from their regional Federal Reserve Bank using SBA PPP loans as collateral. The principal amount of loans will be equal to the PPP loans pledged as collateral. There are no fees associated with these loans and the interest rate will be 35 basis points. The maturity date of PPPLF loans will be the same as the maturity date of the PPP loans pledged as collateral. The PPPLF loan maturity date will be accelerated if the underlying PPP loan goes into default and the lender sells the PPP loan to the SBA under the SBA guarantee. The PPPLF loan maturity date also will be accelerated for any loan forgiveness reimbursement received by the lender from the SBA.
In April 2020, the Bank received approval to borrow from the FRB under the PPPLF program to assist in funding PPP loans. Through August 10, 2020, the Bank used the FRB program to fund $48.9 million of PPP loans.
Loan Modifications/Troubled Debt Restructurings. Under the CARES Act, loans less than 30 days past due as of December 31, 2019 will be considered current for COVID-19 modifications. A financial institution can then suspend the requirements under GAAP for loan modifications related to COVID-19 that would otherwise be categorized as a troubled debt restructuring (“TDR”), and suspend any determination of a loan modified as a result of COVID-19 as being a TDR, including the requirement to determine impairment for accounting purposes. Financial institutions wishing to utilize this authority must make a policy election, which applies to any COVID-19 modification made between March 1, 2020 and the earlier of either December 31, 2020 or the 60th day after the end of the COVID-19 national emergency. Quaint Oak bank has made that election. Similarly, the Financial Accounting Standards Board has confirmed that short-term modifications made on a good-faith basis in response to COVID-19 to loan customers who were current prior to any relief will not be considered TDRs.
Prior to the enactment of the CARES Act, the banking regulatory agencies provided guidance as to how certain short-term modifications would not be considered TDRs, and have subsequently confirmed that such guidance could be applicable for loans that do not qualify for favorable accounting treatment under Section 4013 of the CARES Act.
The Bank addresses loan payment modification requests on a case-by-case basis considering the effects of the COVID-19 pandemic, related economic slow-down and stay-at-home orders on our customer and their current and projected cash flows through the term of the loan. Through August 10, 2020, we modified 223 loans with principal balances totaling $85.8 million representing approximately 24.7% of our June 30, 2020 loan balances. A majority of deferrals are two-month payment deferrals of principal and interest, with payments after deferral increased to collect amounts deferred. Of the total loans deferred to date, 71 loans totaling $37.3 million were granted a second deferral. It is too early to determine if these modified loans will perform in accordance with their modified terms.
Details with respect to actual loan modifications are as follows:
| | | | | | | |
| | | Number of Covid-19 Deferments | | | | | |
Percent of Total Loans at June 30, 2020 | |
| One-to-four family residential owner occupied | | | 5 | | | $ | 2,072 | | | | 33.0 | % |
| One-to-four family residential non-owner occupied | | | 47 | | | | 8,467 | | | | 21.2 | |
| Multi-family residential | | | 12 | | | | 9,065 | | | | 35.5 | |
| Commercial real estate | | | 99 | | | | 51,098 | | | | 40.2 | |
| Home equity | | | 4 | | | | 254 | | | | 5.7 | |
| Construction | | | - | | | | - | | | | - | |
| Commercial business | | | 56 | | | | 14,805 | | | | 10.9 | |
| Other consumer | | | - | | | | - | | | | - | |
| Total | | | 223 | | | $ | 85,761 | | | | 24.7 | % |
Critical Accounting Policies
The accounting and financial reporting policies of the Company conform to accounting principles generally accepted in the United States of America and to general practices within the banking industry. Accordingly, the consolidated financial statements require certain estimates, judgments, and assumptions, which are believed to be reasonable, based upon the information available. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the periods presented. The following accounting policies comprise those that management believes are the most critical to aid in fully understanding and evaluating our reported financial results. These policies require numerous estimates or economic assumptions that may prove inaccurate or may be subject to variations which may significantly affect our reported results and financial condition for the period or in future periods.
Allowance for Loan Losses. The allowance for loan losses represents management’s estimate of losses inherent in the loan portfolio as of the balance sheet date and is recorded as a reduction to loans receivable. The allowance for loan losses is increased by the provision for loan losses, and decreased by charge-offs, net of recoveries. Loans deemed to be uncollectible are charged against the allowance for loan losses, and subsequent recoveries, if any, are credited to the allowance. All, or part, of the principal balance of loans receivable are charged off to the allowance as soon as it is determined that the repayment of all, or part, of the principal balance is highly unlikely. Because all identified losses are immediately charged off, no portion of the allowance for loan losses is restricted to any individual loan or groups of loans, and the entire allowance is available to absorb any and all loan losses.
The allowance for loan losses is maintained at a level considered adequate to provide for losses that can be reasonably anticipated. Management performs a quarterly evaluation of the adequacy of the allowance. The allowance is based on the Company’s past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, composition of the loan portfolio, current economic conditions and other relevant factors. This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant revision as more information becomes available.
The allowance consists of specific, general and unallocated components. The specific component relates to loans that are designated as impaired. For loans that are designated as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers pools of loans by loan class. These pools of loans are evaluated for loss exposure based upon historical loss rates for each of these categories of loans, adjusted for qualitative factors. These significant factors may include changes in lending policies and procedures, changes in existing general economic and business conditions affecting our primary lending areas, credit quality trends, collateral value, loan volumes and concentrations, seasoning of the loan portfolio, recent loss experience in particular segments of the portfolio, duration of the current business cycle and bank regulatory examination results. The applied loss factors are reevaluated quarterly to ensure their relevance in the current economic environment. Residential owner occupied mortgage lending generally entails a lower risk of default than other types of lending. Consumer loans and commercial real estate loans generally involve more risk of collectability because of the type and nature of the collateral and, in certain cases, the absence of collateral. It is the Company’s policy to establish a specific reserve for loss on any delinquent loan when it determines that a loss is probable. An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.
A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not considered impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis by either the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral if the loan is collateral dependent. An allowance for loan losses is established for an impaired loan if its carrying value exceeds its estimated fair value. The estimated fair values of substantially all of the Company’s impaired loans are measured based on the estimated fair value of the loan’s collateral.
A loan is identified as a troubled debt restructuring (“TDR”) if the Company, for economic or legal reasons related to a debtor’s financial difficulties, grants a concession to the debtor that it would not otherwise consider. Concessions granted under a TDR typically involve a temporary or permanent reduction in payments or interest rate or an extension of a loan’s stated maturity date at less than a current market rate of interest. Loans identified as TDRs are designated as impaired.
For loans secured by real estate, estimated fair values are determined primarily through third-party appraisals. When a real estate secured loan becomes impaired, a decision is made regarding whether an updated certified appraisal of the real estate is necessary. This decision is based on various considerations, including the age of the most recent appraisal, the loan-to-value ratio based on the original appraisal and the condition of the property. Appraised values are discounted to arrive at the estimated selling price of the collateral, which is considered to be the estimated fair value. The discounts also include estimated costs to sell the property.
The allowance calculation methodology includes further segregation of loan classes into risk rating categories. The borrower’s overall financial condition, repayment sources, guarantors and value of collateral, if appropriate, are evaluated annually for all loans (except one-to-four family residential owner-occupied loans) where the total amount outstanding to any borrower or group of borrowers exceeds $500,000, or when credit deficiencies arise, such as delinquent loan payments. Credit quality risk ratings include regulatory classifications of special mention, substandard, doubtful and loss. Loans criticized special mention have potential weaknesses that deserve management’s close attention. If uncorrected, the potential weaknesses may result in deterioration of the repayment prospects. Loans classified substandard have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They include loans that are inadequately protected by the current sound net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans classified doubtful have all the weaknesses inherent in loans classified substandard with the added characteristic that collection or liquidation in full, on the basis of current conditions and facts, is highly improbable. Loans classified as a loss are considered uncollectible and are charged to the allowance for loan losses. Loans not classified are rated pass. In addition, Federal regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan losses and may require the Company to recognize additions to the allowance based on their judgments about information available to them at the time of their examination, which may not be currently available to management. Based on management’s comprehensive analysis of the loan portfolio, management believes the current level of the allowance for loan losses is adequate.
Income Taxes. Deferred income tax assets and liabilities are determined using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is determined based on the tax effects of the temporary differences between the book and tax bases of the various assets and liabilities and net operating loss carryforwards and gives current recognition to changes in tax rates and laws. The realization of our deferred tax assets principally depends upon our achieving projected future taxable income. We may change our judgments regarding future profitability due to future market conditions and other factors. We may adjust our deferred tax asset balances if our judgments change.
Comparison of Financial Condition at June 30, 2020 and December 31, 2019
General. The Company’s total assets at June 30, 2020 were $408.0 million, an increase of $105.4 million, or 34.9%, from $302.5 million at December 31, 2019. This growth in total assets was primarily due to a $95.3 million, or 38.6%, increase, in loans receivable, net, and a $4.1 million, or 45.5%, increase in loans held for sale. The largest increases within the loan portfolio occurred in commercial business loans which increased $90.6 million, or 198.1%, commercial real estate loans which increased $7.8 million, or 6.5%, and multi-family residential loans which increased $3.3 million, or 14.8%. The increase in commercial business loans was due primarily to the $89.1 million of the SBA PPP loans generated during the second quarter of 2020. These increases were partially offset by a $4.3 million, or 34.6%, decrease in construction loans.
Cash and Cash Equivalents. Cash and cash equivalents increased $2.1 million, or 14.2%, from $14.6 million at December 31, 2019 to $16.6 million at June 30, 2020 with the expectation that excess liquidity will be used to fund loans.
Investment in Interest-Earning Time Deposits. Investment in interest-earning time deposits decreased $250,000, or 2.5%, from $10.2 million at December 31, 2019 to $9.9 million at June 30, 2020 as one interest-earning time deposit matured during the six months ended June 30, 2020.
Investment Securities Available for Sale. Investment securities available for sale increased $3.0 million, or 39.0%, from $7.6 million at December 31, 2019 to $10.6 million at June 30, 2020, as the Company invested excess liquidity into higher yielding interest-earning assets.
Loans Held for Sale. Loans held for sale increased $4.1 million, or 45.5%, from $8.9 million at December 31, 2019 to $13.0 million at June 30, 2020 as the Bank’s mortgage banking subsidiary, Quaint Oak Mortgage, LLC, originated $79.3 million of one-to-four family residential loans during the six months ended June 30, 2020 and sold $75.2 million of loans in the secondary market during this same period. The Bank did not originate or sell any equipment loans held for sale during the six months ended June 30, 2020.
Loans Receivable, Net. Loans receivable, net, increased $95.3 million, or 38.6%, to $342.0 million at June 30, 2020 from $246.7 million December 31, 2019. This increase was funded primarily from deposits, borrowings under the Federal Reserve’s Paycheck Protection Program Liquidity Facility, and excess liquidity. Increases within the portfolio occurred in commercial business loans which increased $90.6 million, or 198.1%, commercial real estate loans which increased $7.8 million, or 6.5%, multi-family residential loans which increased $3.3 million, or 14.8%, home equity loans which increased $746,000, or 20.0%, and non-owner occupied loans which increased $28,000, or 0.1%. These increases were partially offset by decreases of $4.3 million, or 34.6%, in construction loans, $18,000, or 0.3%, in one-to-four family residential owner occupied loans, and $9,000, or 40.9%, in other consumer loans. The increase in commercial business loans was due primarily to the $89.1 million of the SBA PPP loans generated during the second quarter of 2020. The Company continues its strategy of diversifying its loan portfolio with higher yielding and shorter-term loan products and selling substantially all of its newly originated one-to-four family owner-occupied loans into the secondary market.
Other Real Estate Owned. Other real estate owned (OREO) amounted to $1.8 million at December 31, 2019 consisting of four properties that were collateral for a non-performing construction loan. At June 30, 2020, OREO amounted to $921,000 consisting of two properties that were collateral for a non-performing construction loan. During the six month ended June 30, 2020, the Company made $121,000 of capital improvements to the properties and sold two properties totaling $1.0 million and realized a net gain of $18,000. Non-performing assets amounted to $2.4 million, or 0.58% of total assets at June 30, 2020 compared to $2.2 million, or 0.72% of total assets at December 31, 2019.
Prepaid Expenses and Other Assets. Prepaid expenses and other assets increased $1.2 million, or 42.9%, to $4.0 million at June 30, 2020 from $2.8 million at December 31, 2019, due primarily to the adoption of Financial Accounting Standards Board accounting standard ASU 2016-02, Leases (Topic 842) by the Company on January 1, 2019. This standard requires a lessee to recognize the assets and liabilities that arise from leases on the balance sheet by recognizing a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. The impact of adopting this accounting standard on the Company’s balance sheet accounted for $616,000 of the increase.
Deposits. Total deposits increased $61.6 million, or 27.1%, to $289.1 million at June 30, 2020 from $227.5 million at December 31, 2019. This increase in deposits was primarily attributable to increases of $34.6 million, or 219.5%, in non-interest bearing checking accounts, $16.4 million, or 64.5%, in money market accounts, and $9.4 million, or 5.1%, in certificates of deposit. The increase in non-interest bearing checking accounts was primarily due to the checking accounts opened by PPP loan customers.
Borrowings. Total Federal Home Loan Bank (FHLB) borrowings decreased $7.1 million, or 19.5%, to $29.2 million at June 30, 2020 from $36.3 million at December 31, 2019. Short-term FHLB advances declined from $10.0 million at December 31, 2019 to none at June 30, 2020 as the Company used excess liquidity to pay-off $6.0 million of advances and termed-out $4.0 million of advances at varying maturities. Long-term FHLB borrowings increased $2.9 million, or 11.1%, from $26.3 million at December 31, 2019 to $29.2 million at June 30, 2020, primarily as a result of the $4.0 million term-out of short-term borrowings and the pay-off of a $1.0 million term loan that matured in June 2020. Federal Reserve Bank long-term borrowings increased to $48.9 million at June 30, 2020, from none at December 31, 2019 as the Company borrowed this amount to fund PPP loans under the Federal Reserve’s Paycheck Protection Program Liquidity Facility (PPPLF). Under the PPPLF the Company pledged certain PPP loans as collateral and borrowed from the Federal Reserve at a rate of 0.35% that is fixed for two years.
Stockholders’ Equity. Total stockholders’ equity increased $1.0 million, or 3.9%, to $26.9 million at June 30, 2020 from $25.9 million at December 31, 2019. Contributing to the increase was net income for the six months ended June 30, 2020 of $1.2 million, the reissuance of treasury stock for exercised stock options of $101,000, common stock earned by participants in the employee stock ownership plan of $89,000, amortization of stock awards and options under our stock compensation plans of $87,000, and the reissuance of treasury stock under the Bank’s 401(k) Plan of $49,000. These increases were partially offset by dividends paid of $357,000, the purchase of treasury stock of $112,000, and other comprehensive income, net of $14,000.
Comparison of Operating Results for the Three Months Ended June 30, 2020 and 2019
General. Net income amounted to $731,000 for the three months ended June 30, 2020, an increase of $66,000, or 9.9%, compared to net income of $665,000 for the three months ended June 30, 2019. The increase in net income on a comparative quarterly basis was primarily the result of an increase in net interest income of $559,000, partially offset by a decrease in non-interest income of $78,000, and increases in non-interest expense of $168,000, the provision for loan losses of $229,000, and the provision for income taxes of $18,000.
Net Interest Income. Net interest income increased $559,000, or 26.6%, to $2.7 million for the three months ended June 30, 2020 from $2.1 million for the three months ended June 30, 2019. The increase was driven by a $556,000, or 16.0%, increase in interest income and a $3,000, or 0.2%, decrease in interest expense.
Interest Income. Interest income increased $556,000, or 16.0%, to $4.0 million for the three months ended June 30, 2020 from $3.5 million for the three months ended June 30, 2019. The increase in interest income was primarily due to a $86.7 million increase in average loans receivable, net, including loans held for sale, which increased from an average balance of $229.8 million for the three months ended June 30, 2019 to an average balance of $316.5 million for the three months ended June 30, 2020, and had the effect of increasing interest income $1.2 million. This increase in interest income was partially offset by a 65 basis point decrease in the yield on average loans receivable, net, including loans held for sale, which decreased from 5.57% for the three months ended June 30, 2019 to 4.92% for the three months ended June 30, 2020, and had the effect of decreasing interest income $516,000. Also partially offsetting this increase was a 215 basis point decrease in the yield on average cash and cash equivalents due from banks, interest bearing, which decreased from 2.24% for the three months ended June 30, 2019 to 0.09% for the three months ended June 30, 2020, and had the effect of reducing interest income $151,000.
Interest Expense. Interest expense decreased modestly by $3,000, or 0.2%, to $1.4 million for both the three months ended June 30, 2020 and 2019. The decrease in interest expense was primarily attributable to 22 basis point decrease in rate on average certificate of deposit accounts, which decreased from 2.31% for the three months ended June 30, 2019 to 2.09% for the three months ended June 30, 2020, and had the effect of decreasing interest expense by $107,000. This decrease was partially offset by a $12.3 million increase in average certificate of deposit accounts which increased from an average balance of $179.3 million for the three months ended June 30, 2019 to an average balance of $191.6 million for the three months ended June 30, 2020, and had the effect of increasing interest expense $71,000. The decrease in interest expense was also partially offset by an increase in average Federal Reserve Bank borrowings of $24.2 million which had the effect of increasing interest expense by $23,000. The average interest rate spread decreased from 2.82% for the three months ended June 30, 2019 to 2.53% for the three months ended June 30, 2020 while the net interest margin decreased from 3.09% for the three months ended June 30, 2019 to 2.92% for the three months ended June 30, 2020.
Average Balances, Net Interest Income, Yields Earned and Rates Paid. The following table shows for the periods indicated the total dollar amount of interest from average interest-earning assets and the resulting yields, as well as the interest expense on average interest-bearing liabilities, expressed both in dollars and rates, and the net interest margin. All average balances are based on daily balances.
| | Three Months Ended June 30, | |
| | | | | | |
| | | Average | | | | | | Average Yield/ | | | Average | | | | | | Average Yield/ | |
| | | (Dollars in thousands) | |
| Interest-earning assets: | | | |
| Due from banks, interest-bearing | | $ | 27,997 | | | $ | 6 | | | | 0.09 | % | | $ | 22,682 | | | | 127 | | | | 2.24 | % |
| Investment in interest-earning time deposits | | | 9,922 | | | | 61 | | | | 2.46 | | | | 10,154 | | | | 74 | | | | 2.92 | |
| Investment securities available for sale | | | 8,245 | | | | 54 | | | | 2.62 | | | | 8,240 | | | | 56 | | | | 2.72 | |
| Loans receivable, net (1) (2) | | | 316,506 | | | | 3,891 | | | | 4.92 | | | | 229,786 | | | | 3,200 | | | | 5.57 | |
| Investment in FHLB stock | | | 1,344 | | | | 21 | | | | 6.25 | | | | 1,088 | | | | 20 | | | | 7.35 | |
| Total interest-earning assets | | | 364,014 | | | | 4,033 | | | | 4.43 | % | | | 271,950 | | | | 3,477 | | | | 5.11 | % |
| Non-interest-earning assets | | | 15,743 | | | | | | | | | | | | 12,433 | | | | | | | | | |
| Total assets | | $ | 379,757 | | | | | | | | | | | $ | 284,383 | | | | | | | | | |
| Interest-bearing liabilities: | | | | | | | | | | | | | | | | | | | | | | | | |
| Passbook accounts | | $ | 6 | | | $ | * | | | | * | % | | $ | 77 | | | $ | * | | | | * | % |
| Savings accounts | | | 1,921 | | | | 1 | | | | 0.21 | | | | 1,754 | | | | 1 | | | | 0.23 | |
| Money market accounts | | | 33,986 | | | | 68 | | | | 0.80 | | | | 27,714 | | | | 55 | | | | 0.79 | |
| Certificate of deposit accounts | | | 191,609 | | | | 1,000 | | | | 2.09 | | | | 179,265 | | | | 1,037 | | | | 2.31 | |
| Total deposits | | | 227,522 | | | | 1,069 | | | | 1.88 | | | | 208,810 | | | | 1,093 | | | | 2.09 | |
| FHLB short-term borrowings | | | - | | | | 1 | | | | 0.00 | | | | 2,868 | | | | 36 | | | | 5.02 | |
| FHLB long-term borrowings | | | 29,908 | | | | 153 | | | | 2.05 | | | | 21,099 | | | | 120 | | | | 2.27 | |
| FRB long-term borrowings | | | 24,211 | | | | 23 | | | | 0.38 | | | | - | | | | - | | | | - | |
| Subordinated debt | | | 7,876 | | | | 130 | | | | 6.60 | | | | 7,843 | | | | 130 | | | | 6.63 | |
| Total interest-bearing liabilities | | | 289,517 | | | | 1,376 | | | | 1.90 | % | | | 240,620 | | | | 1,379 | | | | 2.29 | % |
| Non-interest-bearing liabilities | | | 63,933 | | | | | | | | | | | | 19,367 | | | | | | | | | |
| Total liabilities | | | 353,450 | | | | | | | | | | | | 259,987 | | | | | | | | | |
| Stockholders’ Equity | | | 26,307 | | | | | | | | | | | | 24,396 | | | | | | | | | |
| Total liabilities and Stockholders’ Equity | | $ | 379,757 | | | | | | | | | | | $ | 284,383 | | | | | | | | | |
| Net interest-earning assets | | $ | 74,496 | | | | | | | | | | | $ | 31,330 | | | | | | | | | |
| Net interest income; average interest rate spread | | | | | | $ | 2,657 | | | | 2.53 | % | | | | | | $ | 2,098 | | | | 2.82 | % |
| Net interest margin (3) | | | | | | | | | | | 2.92 | % | | | | | | | | | | | 3.09 | % |
| Average interest-earning assets to average interest-bearing liabilities | | | | | | | | | | | 125.73 | % | | | | | | | | | | | 113.02 | % |
________________________
(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) Equals net interest income divided by average interest-earning assets.
Provision for Loan Losses. The Company’s provision for loan losses increased $229,000, or 301.3%, to $305,000 for the three months ended June 30, 2020 from $76,000 for the three months ended June 30, 2019. The increase in the provision for loan losses for the three months ended June 30, 2020 over the three months ended June 30, 2019 was based on an evaluation of the allowance relative to such factors as volume of the loan portfolio, concentrations of credit risk, prevailing economic conditions, which includes the impact of the COVID-19 pandemic, prior loan loss experience and amount of non-performing loans at June 30, 2020.
Non-performing loans amounted to $1.4 million or 0.42% of net loans receivable at June 30, 2020, consisting of eight loans, one loan is on non-accrual status and seven loans are 90 days or more past due and accruing interest. Comparably, non-performing loans amounted to $362,000 or 0.15% of net loans receivable at December 31, 2019, consisting of two loans, one loan was on non-accrual status and one loan was 90 days or more past due and accruing interest. The non-performing loans at June 30, 2020 include three one-to-four family non-owner occupied residential loans, three commercial real estate loans, one one-to-four family owner occupied residential loan, and one equipment loan, and all are generally well-collateralized or adequately reserved for. The allowance for loan losses as a percent of total loans receivable was 0.77% at June 30, 2020 and 0.90% at December 31, 2019. Excluding PPP loans, which are 100% guaranteed by the SBA, the allowance for loan losses to total loans was 1.04% at June 30, 2020.
Non-Interest Income. Non-interest income decreased $78,000 or 5.4%, from $1.45 million for the three months ended June 30, 2019 to $1.37 million for the three months ended June 30, 2020. The decrease was attributable to a $111,000, or 179.0%, decrease in other fees and service charges, a $41,000, or 4.7%, decrease in net gain on loans held for sale, and a $3,000, or 9.0%, decrease in real estate sales commissions, net. The decrease in other fees and service charges was primarily due to the increase in loan documentation expense, which was netted against fee income, and the fact that the Company waived all fees during the entire second quarter for all its customers in response to the COVID-19 pandemic. These decreases were partially offset by a $26,000, or 8.0%, increase in mortgage banking and title abstract fees, an $18,000, or 52.9%, increase in the gain on the sale of SBA loans, an $18,000 increase in gain on sales from other real estate owned, a $14,000, or 13.2%, increase in insurance commissions, and a $1,000, or 5.3% increase in income from bank-owned life insurance.
Non-Interest Expense. Total non-interest expense increased $168,000, or 6.7%, from $2.5 million for the three months ended June 30, 2019 to $2.7 million for the three June 30, 2020, primarily due to a $44,000, or 25.3%, increase in occupancy and equipment expense, a $42,000, or 35.6%, increase in data processing expense, a $29,000, or 13.4%, increase in other expense, a $21,000, or 22.8%, increase in professional fees, a $15,000, or 125.0%, increase in FDIC deposit insurance assessment, a $13,000, or 0.7%, increase in salaries and employee benefits expense, a $4,000, or 5.6% increase in advertising, and a $4,000, or 100.0%, increase in other real estate owned expense. The increase in occupancy and equipment expense was primarily attributable to the opening of our new retail banking office in Philadelphia, Pennsylvania in February 2020. The increase in data processing expense was due to an increase in transaction deposit accounts. The increase in non-interest expense was partially offset by a $4,000, or 7.1%, decrease in director’s fees and expenses.
Provision for Income Tax. The provision for income tax increased $18,000, or 6.5%, from $276,000 for the three months ended June 30, 2019 to $294,000 for the three months ended June 30, 2020 due primarily to an increase in pre-tax income.
Comparison of Operating Results for the Six Months Ended June 30, 2020 and 2019
General. Net income amounted to $1.2 million for the six months ended June 30, 2020, an increase of $85,000, or 7.9%, compared to net income of $1.1 million for the six months ended June 30, 2019. The increase in net income was primarily the result of an increase in net interest income of $665,000, and an increase in non-interest income of $387,000, partially offset by an increase in non-interest expense of $688,000, an increase in the provision for loan losses of $259,000, and an increase in the provision for income taxes of $20,000.
Net Interest Income. The $665,000, or 15.7%, increase in net interest income for the six months ended June 30, 2020 over the comparable period in 2019 was driven by an $825,000, or 12.0%, increase in interest income, partially offset by a $160,000, or 6.1%, increase in interest expense.
Interest Income. Interest income increased $825,000, or 12.0%, to $7.7 million for the six months ended June 30, 2020 from $6.9 million for the six months ended June 30, 2019. The increase in interest income was primarily due to a $59.6 million increase in average loans receivable, net, including loans held for sale, which increased from an average balance of $226.5 million for the six months ended June 30, 2019 to an average balance of $286.1 million for the six months ended June 30, 2020, and had the effect of increasing interest income $1.7 million. Offsetting this increase was a 45 basis point decrease in the yield on average loans receivable, net, including loans held for sale, which decreased from 5.60% for the six months ended June 30, 2019 to 5.15% for the six months ended June 30, 2020, which had the effect of decreasing interest income $643,000. The increase in interest income was partially offset by a $4.0 million decrease in average cash and cash equivalents due from banks, interest bearing, which decreased from an average balance of $23.6 million for the six months ended June 30, 2019 to an average balance of $19.6 million for the six months ended June 30, 2020, and had the effect of decreasing interest income $48,000. Also partially offsetting this increase was a 171 basis point decrease in the yield on average cash and cash equivalents due from banks, interest bearing, which decreased from 2.38% for the six months ended June 30, 2019 to 0.67% for the six months ended June 30, 2020, which had the effect of decreasing interest income $167,000.
Interest Expense. Interest expense increased $160,000, or 6.1%, to $2.8 million for the six months ended June 30, 2020 from $2.6 million for the six months ended June 30, 2019. The increase in interest expense was primarily attributable to a $14.2 million increase in average certificate of deposit accounts which increased from an average balance of $175.9 million for the six months ended June 30, 2019 to an average balance of $190.1 million for the six months ended June 30, 2020, and had the effect of increasing interest expense $160,000. Partially offsetting this increase was an eight basis point decrease in rate on average certificate of deposit accounts, which decreased from 2.25% for the six months ended June 30, 2019 to 2.17% for the six months ended June 30, 2020, and had the effect of decreasing interest expense by $73,000. The increase in interest expense was also due to a $6.8 million increase in average FHLB borrowings which increased from an average balance of $24.0 million for the six months ended June 30, 2019 to an average balance of $30.8 million for the six months ended June 30, 2020, and had the effect of increasing interest expense $55,000. Partially offsetting this increase was a 29 basis point decrease in rate on average FHLB borrowings, which decreased from 2.45% for the six months ended June 30, 2019 to 2.16% for the six months ended June 30, 2020, and had the effect of decreasing interest expense by $17,000. Also contributing to the increase in interest expense was an increase in average Federal Reserve Bank borrowings of $12.1 million for the six months ended June 30, 2020 which had the effect of increasing interest expense by $23,000. The average interest rate spread decreased from 2.91% for the six months ended June 30, 2019 to 2.68% for the six months ended June 30, 2020 while the net interest margin decreased from 3.16% for the six months ended June 30, 2019 to 3.02% for the six months ended June 30, 2020.
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.
| | Six Months Ended June 30, | |
| | | | | | |
| | | Average | | | | | | Average Yield/ | | | Average | | | | | | Average Yield/ | |
| | | (Dollars in thousands) | |
| Interest-earning assets: | | | |
| Due from banks, interest-bearing | | $ | 19,600 | | | $ | 66 | | | | 0.67 | % | | $ | 23,621 | | | $ | 281 | | | | 2.38 | % |
| Investment in interest-earning time deposits | | | 9,990 | | | | 124 | | | | 2.48 | | | | 9,090 | | | | 123 | | | | 2.71 | |
| Investment securities available for sale | | | 7,892 | | | | 101 | | | | 2.56 | | | | 7,439 | | | | 98 | | | | 2.63 | |
| Loans receivable, net (1) (2) | | | 286,138 | | | | 7,363 | | | | 5.15 | | | | 226,495 | | | | 6,337 | | | | 5.60 | |
| Investment in FHLB stock | | | 1,381 | | | | 50 | | | | 7.24 | | | | 1,087 | | | | 40 | | | | 7.36 | |
| Total interest-earning assets | | | 325,001 | | | | 7,704 | | | | 4.74 | % | | | 267,732 | | | | 6,879 | | | | 5.14 | % |
| Non-interest-earning assets | | | 14,274 | | | | | | | | | | | | 11,913 | | | | | | | | | |
| Total assets | | $ | 339,275 | | | | | | | | | | | $ | 279,645 | | | | | | | | | |
| Interest-bearing liabilities: | | | | | | | | | | | | | | | | | | | | | | | | |
| Passbook accounts | | $ | 6 | | | $ | * | | | | * | % | | $ | 87 | | | $ | * | | | | * | % |
| Savings accounts | | | 1,863 | | | | 2 | | | | 0.21 | | | | 1,486 | | | | 1 | | | | 0.13 | |
| Money market accounts | | | 30,138 | | | | 121 | | | | 0.80 | | | | 27,676 | | | | 110 | | | | 0.79 | |
| Certificate of deposit accounts | | | 190,081 | | | | 2,067 | | | | 2.17 | | | | 175,875 | | | | 1,981 | | | | 2.25 | |
| Total deposits | | | 222,088 | | | | 2,190 | | | | 1.97 | | | | 205,124 | | | | 2,092 | | | | 2.04 | |
| FHLB short-term borrowings | | | 1,978 | | | | 31 | | | | 3.13 | | | | 5,917 | | | | 94 | | | | 3.18 | |
| FHLB long-term borrowings | | | 28,779 | | | | 300 | | | | 2.08 | | | | 18,066 | | | | 199 | | | | 2.20 | |
| FRB long-term borrowings | | | 12,106 | | | | 23 | | | | 0.38 | | | | - | | | | - | | | | - | |
| Subordinated debt | | | 7,872 | | | | 260 | | | | 6.61 | | | | 7,835 | | | | 259 | | | | 6.60 | |
| Total interest-bearing liabilities | | | 272,823 | | | | 2,804 | | | | 2.06 | % | | | 236,942 | | | | 2,644 | | | | 2.23 | % |
| Non-interest-bearing liabilities | | | 40,266 | | | | | | | | | | | | 18,527 | | | | | | | | | |
| Total liabilities | | | 313,089 | | | | | | | | | | | | 255,469 | | | | | | | | | |
| Stockholders’ Equity | | | 26,186 | | | | | | | | | | | | 24,176 | | | | | | | | | |
| Total liabilities and Stockholders’ Equity | | $ | 339,275 | | | | | | | | | | | $ | 279,645 | | | | | | | | | |
| Net interest-earning assets | | $ | 52,178 | | | | | | | | | | | $ | 30,790 | | | | | | | | | |
| Net interest income; average interest rate spread | | | | | | $ | 4,900 | | | | 2.68 | % | | | | | | $ | 4,235 | | | | 2.91 | % |
| Net interest margin (3) | | | | | | | | | | | 3.02 | % | | | | | | | | | | | 3.16 | % |
| Average interest-earning assets to average interest-bearing liabilities | | | | | | | | | | | 119.13 | % | | | | | | | | | | | 112.99 | % |
_______________________
(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) Equals net interest income divided by average interest-earning assets.
Provision for Loan Losses. The Company increased its provision for loan losses by $259,000, or 160.9%, from $161,000 for the six months ended June 30, 2019 to $420,000 for the six months ended June 30, 2020. The increase in the provision for loan losses was based on an evaluation of the allowance relative to such factors as volume of the loan portfolio, concentrations of credit risk, prevailing economic conditions, which includes the impact of the COVID-19 pandemic, prior loan loss experience and amount of non-performing loans at June 30, 2020.
Non-Interest Income. Non-interest income increased $387,000, or 16.9%, for the six months ended June 30, 2020 over the comparable period in 2019. The increase in non-interest income for the six months ended June 30, 2020 was primarily attributable to a $307,000, or 23.6%, increase in net gain on loans held for sale, a $175,000, or 37.2%, increase in mortgage banking and title abstract fees, a $19,000, or 9.6%, increase in insurance commissions, an $18,000 increase in the gain on the sales of other real estate owned, and a $12,000, or 23.5%, increase in real estate sales commission, net. These increases were partially offset by an $88,000, or 62.9%, decrease in gain on the sales of SBA loans, and a $56,000, or 62.2%, decrease in other fees and service charges.
Non-Interest Expense. Non-interest expense increased $688,000, or 14.2%, from $4.8 million for the six months ended June 30, 2019 to $5.5 million for the six months ended June 30, 2020 attributable to a $366,000, or 10.8%, increase in salaries and employee benefits expense, an $89,000, or 26.7%, increase in occupancy and equipment expense, a $77,000, or 35.0%, increase in data processing expense, a $76,000, or 20.1%, increase in other expenses, a $53,000, or 30.5%, increase in professional fees, an $11,000, or 100.0% increase in other real estate owned expenses, an $8,000, or 5.6%, increase in advertising, a $7,000, or 17.5% increase in the FDIC deposit insurance assessment, and a $1,000, or 0.9% increase in directors’ fees and expenses. The increase in salaries and benefits expense is primarily due to expanding and improving the level of staff at the Bank and its subsidiary companies. The increase in occupancy and equipment expense was primarily attributable to the opening of our new retail banking office in Philadelphia, Pennsylvania in February 2020. The increase in data processing expense was due to an increase in transaction deposit accounts.
Provision for Income Tax. The provision for income tax increased $20,000, or 4.4%, from $450,000 for the six months ended June 30, 2019 to $470,000 for the six months ended June 30, 2020 due primarily to an increase in pre-tax income.
Operating Segments
The Company’s operations consist of two reportable operating segments: Banking and Mortgage Banking. Our Banking Segment generates revenues primarily from its lending, deposit gathering and fee business activities. Our Mortgage Banking Segment originates residential mortgage loans which are sold into the secondary market along with the loans’ servicing rights. Detailed segment information appears in Note 12 in the Notes to Consolidated Financial Statements.
Our Banking Segment reported a pre-tax segment profit (“PTSP”) for the three months ended June 30, 2019 of $571,000, a $186,000, or 48.3%, increase from the same period in 2019. This increase in PTSP was due to a $574,000, or 27.0%, increase in net interest income which was partially offset by decreases in non-interest income, an increase in non-interest expense and an increase in the provision for loan losses. The increase in non-interest expense was due primarily to increases in occupancy and equipment, data processing, professional fees and other expenses.
Our Mortgage Banking Segment reported a PTSP for the three months ended June 30, 2020 of $454,000, a $102,000, or 18.3%, decrease from the same period in 2019. The decrease in PTSP was primarily due to a decrease in non-interest income which was driven by a decrease in net gain on the sale of loans and processing fees, and an increase in non-interest expense.
Our Banking Segment reported a pre-tax segment profit (“PTSP”) for the six months ended June 30, 2020 of $750,000, a $160,000, or 17.6%, decrease from the same period in 2019. This decrease in PTSP was primarily due to a $605,000, or 15.2%, increase in non-interest expense. The increase in non-interest expense was primarily driven by increases in salaries and employee benefits expense, occupancy and equipment, data processing, professional fees, and other expenses. This increase in non-interest expense was partially offset by a $275,000, or 6.7%, increase in net interest income.
Our Mortgage Banking Segment reported a PTSP for the six months ended June 30, 2020 of $883,000, a $265,000, or 42.9%, increase from the same period in 2019. The increase in PTSP was primarily due to a $391,000, or 25.9%, increase in non-interest income which was driven by an increase in net gain on the sale of loans and processing fees. This increase was partially offset by an $83,000, or 9.8%, increase in non-interest expense.
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 June 30, 2020, the Company’s cash and cash equivalents amounted to $16.6 million. At such date, the Company also had $3.1 million invested in interest-earning time deposits maturing in one year or less.
The Company uses its liquidity to fund existing and future loan commitments, to fund deposit outflows, to invest in other interest-earning assets and to meet operating expenses. At June 30, 2020, Quaint Oak Bank had outstanding commitments to originate loans of $14.0 million, commitments under unused lines of credit of $12.5 million, and $2.1 million under standby letters of credit.
At June 30, 2020, certificates of deposit scheduled to mature in less than one year totaled $116.6 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 June 30, 2020, we had $29.2 million of borrowings from the FHLB and had $160.6 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 June 30, 2020 Quaint Oak Bank had $825,812 in borrowing capacity with the Federal Reserve Bank (FRB) of Philadelphia. There were no borrowings under this facility at June 30, 2020. The Bank also has borrowing capacity with the FRB under the PPPLF program in the amount of outstanding pledged PPP loans.
Total stockholders’ equity increased $1.0 million, or 3.9%, to $26.9 million at June 30, 2020 from $25.9 million at December 31, 2019. Contributing to the increase was net income for the six months ended June 30, 2020 of $1.2 million, the reissuance of treasury stock for exercised stock options of $101,000, common stock earned by participants in the employee stock ownership plan of $89,000, amortization of stock awards and options under our stock compensation plans of $87,000, and the reissuance of treasury stock under the Bank’s 401(k) Plan of $49,000. These increases were partially offset by dividends paid of $357,000, the purchase of treasury stock of $112,000, and other comprehensive income, net of $14,000. For further discussion of the stock compensation plans, see Note 10 in the Notes to Unaudited Consolidated Financial Statements contained elsewhere herein.
Quaint Oak Bank is required to maintain regulatory capital sufficient to meet tier 1 leverage, common equity tier 1 capital, tier 1 risk-based and total risk-based capital ratios of at least 4.00%, 4.50%, 6.00%, and 8.00%, respectively. At June 30, 2020, Quaint Oak Bank exceeded each of its capital requirements with ratios of 8.69%, 13.45%, 13.45% and 14.56%, respectively. As a small savings and loan holding company eligible for exemption, the Company is not currently subject to any regulatory capital requirements.
Off-Balance Sheet Arrangements
In the normal course of operations, we engage in a variety of financial transactions that, in accordance with generally accepted accounting principles are not recorded in our financial statements. These transactions involve, to varying degrees, elements of credit, interest rate, and liquidity risk. Such transactions are used primarily to manage customers’ requests for funding and take the form of loan commitments and lines of credit. Our exposure to credit loss from non-performance by the other party to the above-mentioned financial instruments is represented by the contractual amount of those instruments. We use the same credit policies in making commitments and conditional obligations as we do for on-balance sheet instruments. In general, we do not require collateral or other security to support financial instruments with off–balance sheet credit risk.
Commitments. At June 30, 2020, we had unfunded commitments under lines of credit of $12.5 million, $14.0 million of commitments to originate loans, and $2.1 million under standby letters of credit. We had no commitments to advance additional amounts pursuant to outstanding lines of credit or undisbursed construction loans.
Impact of Inflation and Changing Prices
The consolidated financial statements and related financial data presented herein have been prepared in accordance with accounting principles generally accepted in the United States of America which generally require the measurement of financial position and operating results in terms of historical dollars, without considering changes in relative purchasing power over time due to inflation. Unlike most industrial companies, virtually all of the Company’s assets and liabilities are monetary in nature. As a result, interest rates generally have a more significant impact on the Company’s performance than does the effect of inflation. Interest rates do not necessarily move in the same direction or in the same magnitude as the prices of goods and services, since such prices are affected by inflation to a larger extent than interest rates.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
ITEM 4. CONTROLS AND PROCEDURES
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)) as of June 30, 2020. Based on their evaluation of the Company’s disclosure controls and procedures, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and regulations are operating in an effective manner.
No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15(d)-15(f) under the Securities Exchange Act of 1934) occurred during the second fiscal quarter of fiscal 2020 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II
The Company is not involved in any pending legal proceedings other than routine legal proceedings occurring in the ordinary course of business, which involve amounts in the aggregate believed by management to be immaterial to the financial condition and operating results of the Company.
The COVID-19 pandemic has adversely impacted our ability to conduct business and is expected to adversely impact our financial results and those of our customers. The ultimate impact will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic and actions taken by governmental authorities in response to the pandemic.
The COVID-19 pandemic has significantly adversely affected our operations and the way we provide banking services to businesses and individuals, most of whom are currently under government issued stay-at-home orders. As an essential business, we continue to provide banking and financial services to our customers in an environment compliant with federal and state COVID-19 guidelines. In addition, we continue to provide access to banking and financial services through online banking, ATMs and by telephone. If the COVID-19 pandemic worsens it could limit or disrupt our ability to provide banking and financial services to our customers.
In response to the stay-at-home orders, the majority of our employees currently are working remotely to enable us to continue to provide banking services to our customers. Heightened cybersecurity, information security and operational risks may result from these remote work-from-home arrangements. We also could be adversely affected if key personnel or a significant number of employees were to become unavailable due to the effects and restrictions of the COVID-19 pandemic. We also rely upon our third-party vendors to conduct business and to process, record and monitor transactions. If any of these vendors are unable to continue to provide us with these services, it could negatively impact our ability to serve our customers. Although we have business continuity plans and other safeguards in place, there is no assurance that such plans and safeguards will be effective.
There is pervasive uncertainty surrounding the future economic conditions that will emerge in the months and years following the start of the pandemic. As a result, management is confronted with a significant and unfamiliar degree of uncertainty in estimating the impact of the pandemic on credit quality, revenues and asset values. To date, the COVID-19 pandemic has resulted in declines in loan demand and loan originations, other than through government sponsored programs such as the Payroll Protection Program, deposit availability, market interest rates and negatively impacted many of our business and consumer borrower’s ability to make their loan payments. Because the length of the pandemic and the efficacy of the extraordinary measures being put in place to address its economic consequences are unknown, including recent reductions in the targeted federal funds rate, until the pandemic subsides, we expect our net interest income and net interest margin will be adversely affected. Many of our borrowers have become unemployed or may face unemployment, and certain businesses are at risk of insolvency as their revenues decline precipitously, especially in businesses related to travel, hospitality, leisure and physical personal services. Businesses may ultimately not reopen as there is a significant level of uncertainty regarding the level of economic activity that will return to our markets over time, the impact of governmental assistance, the speed of economic recovery, the resurgence of COVID-19 in subsequent seasons and changes to demographic and social norms that will take place.
The impact of the pandemic is expected to continue to adversely affect us during 2020 and possibly longer as the ability of many of our customers to make loan payments has been significantly affected. Although the Company makes estimates of loan losses related to the pandemic as part of its evaluation of the allowance for loan losses, such estimates involve significant judgment and are made in the context of significant uncertainty as to the impact the pandemic will have on the credit quality of our loan portfolio. It is likely that increased loan delinquencies, adversely classified loans and loan charge-offs will increase in the future as a result of the pandemic. Consistent with guidance provided by banking regulators, we have modified loans by providing various loan payment deferral options to our borrowers affected by the COVID-19 pandemic. Notwithstanding these modifications, these borrowers may not be able to resume making full payments on their loans once the COVID-19 pandemic is resolved. Any increases in the allowance for credit losses will result in a decrease in net income and, most likely, capital, and may have a material negative effect on our financial condition and results of operations.
Even after the COVID-19 pandemic subsides, the U.S. economy will likely require some time to recover from its effects, the length of which is unknown. and during which we may experience a recession. As a result, we anticipate our business may be materially and adversely affected during this recovery.
| ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
(a) Not applicable.
(b) Not applicable.
(c) Purchases of Equity Securities
The Company’s repurchases of its common stock made during the quarter ended June 30, 2020 including stock-for-stock option exercises of outstanding stock options, are set forth in the table below:
| | Total Number of Shares | | | Average Price Paid per Share | | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | | Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs (1) | |
| April 1, 2020 – April 30, 2020 | | | - | | | $ | - | | | | - | | | | 34,675 | |
| May 1, 2020 – May 31, 2020 | | | 756 | | | | 10.33 | | | | - | | | | 34,675 | |
| June 1, 2020 – June 30, 2020 | | | 3,402 | | | | 11.00 | | | | - | | | | 34,675 | |
| Total | | | 4,158 | | | $ | 10.88 | | | | - | | | | 34,675 | |
Notes to this table:
| (1) | On December 12, 2018, the Board of Directors of Quaint Oak Bancorp approved its fifth share repurchase program which provides for the repurchase of up to 50,000 shares, or approximately 2.5% of the Company’s then issued and outstanding shares of common stock, and announced the fifth repurchase program on Form 8-K filed on December 13, 2018. The repurchase program does not have an expiration date. |
| ITEM 3. | DEFAULTS UPON SENIOR SECURITIES |
Not applicable.
| ITEM 4. | MINE SAFETY DISCLOSURES |
Not applicable.
Not applicable.
| |
| 31.1 | |
| 31.2 | |
| 32.0 | |
| 101.INS | XBRL Instance Document. |
| 101.SCH | XBRL Taxonomy Extension Schema Document. |
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document. |
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document. |
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document. |
| 101.DEF | XBRL Taxonomy Extension Definitions Linkbase Document. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | | /s/Robert T. Strong
|
| Date: August 14, 2020 | By: | President and Chief Executive Officer |
| | | |
| | | |
| | | /s/John J. Augustine
|
| Date: August 14, 2020 | By: | Executive Vice President and Chief Financial Officer |
