See accompanying notes to unaudited consolidated financial statements.
See accompanying notes to unaudited consolidated financial statements.
| ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Forward-Looking Statements
We make certain statements in this document as to what we expect may happen in the future. These statements usually contain the words "believe," "estimate," "project," "expect," "anticipate," "intend" or similar expressions. Because these statements look to the future, they are based on our current expectations and beliefs. Actual results or events may differ materially from those reflected in the forward-looking statements. You should be aware that our current expectations and beliefs as to future events are subject to change at any time, and we can give you no assurances that the future events will actually occur.
General
The Company was formed in connection with the Bank’s conversion to a stock savings bank completed on July 3, 2007. The Company’s results of operations are dependent primarily on the results of the Bank, which is a wholly owned subsidiary of the Company. The Bank’s results of operations depend, to a large extent, on net interest income, which is the difference between the income earned on its loan and investment portfolios and the cost of funds, consisting of the interest paid on deposits and borrowings. Results of operations are also affected by provisions for loan losses, fee income and other non-interest income and non-interest expense. Non-interest expense principally consists of compensation, directors’ fees and expenses, office occupancy and equipment expense, profe ssional fees, 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 September 30, 2010 the Bank had four subsidiaries, Quaint Oak Mortgage, LLC, Quaint Oak Real Estate, LLC, Quaint Oak Abstract, 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. The insurance agency is currently inactive. The mortgage company also began operating at our main office in October 2010. In connection with the expansion into these activities, the Company acq uired an office building in Allentown, Pennsylvania from which the subsidiaries operate. The Bank also opened a new branch office at this location in February 2010.
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 resu lts. 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 is established through a provision for loan losses charged to expense. Loans are charged against the allowance for loan losses when management believes that the collectibility of the principal is unlikely. Subsequent recoveries are added to the allowance. The allowance is an amount that management believes will cover known and inherent losses in the loan portfolio, based on evaluations of the collectibility of loans. The evaluations take into consideration such factors as changes in the types and amount of loans in the loan portfolio, historical loss experience, adverse situation s that may affect the borrower's ability to repay, estimated value of any underlying collateral, estimated losses relating to specifically identified loans, and current economic conditions. This evaluation is inherently subjective as it requires material estimates including, among others, exposure to default, the amount and timing of expected future cash flows on impaired loans, value of collateral, estimated losses on our commercial and residential loan portfolios and general amounts for historical loss experience. All of these estimates may be susceptible to significant change.
While management uses the best information available to make loan loss allowance evaluations, adjustments to the allowance may be necessary based on changes in economic and other conditions or changes in accounting guidance. Historically, our estimates of the allowance for loan losses have not required significant adjustments from management's initial estimates. In addition, the Pennsylvania Department of Banking and the Federal Deposit Insurance Corporation, as an integral part of their examination processes, periodically review our allowance for loan losses. The Pennsylvania Department of Banking and the Federal Deposit Insurance Corporation may require the recognition of adjustments to the allowance for loan losses based on their judgment of information available to them at the time of their examinations. To the extent that actual outcomes differ from management's estimates, additional provisions to the allowance for loan losses may be required that would adversely impact earnings in future periods.
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 th at 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 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 def erred tax asset balances if our judgments change.
Comparison of Financial Condition at September 30, 2010 and December 31, 2009
Total Assets. The Company’s total assets at September 30, 2010 were $102.2 million, an increase of $8.3 million, or 8.8%, from $93.9 million at December 31, 2009. This increase was primarily due to growth in investment in interest-earning time deposits of $3.6 million, investment securities available for sale of $2.3 million, loans receivable, net of the allowance for loan losses, of $2.0 million, cash and cash equivalents of $1.6 million, and other real estate owned of $285,000. Offsetting these increases were principal payments from mortgage-backed securities held to maturity of $1.5 million. Asset growth for the nine months ended September 30, 2010 was funded by a $10.9 million increase in depos its.
Cash and Cash Equivalents. Cash and cash equivalents increased $1.6 million, or 30.3%, from $5.4 million at December 31, 2009 to $7.1 million at September 30, 2010 as excess liquidity was invested in liquid money market accounts.
Investment in Interest-Earning Time Deposits. Investment in interest-earning time deposits increased $3.6 million, or 114.5%, from $3.2 million at December 31, 2009 to $6.8 million at September 30, 2010 as the Company used this investment vehicle to complement its investment securities portfolio.
Investment Securities. Investment securities available for sale increased $2.3 million, or 230.0%, from $1.0 million at December 31, 2009 to $3.3 million at September 30, 2010. During this same period, mortgage-backed securities held to maturity decreased $1.5 million, or 20.0%, from $7.7 million to $6.2 million due to principal payments on these securities.
Loans Receivable, Net. Loans receivable, net, increased $2.0 million, or 2.8%, to $74.8 million at September 30, 2010 from $72.7 million at December 31, 2009. Increases within the portfolio occurred in construction loans which increased $1.3 million, or 37.8%, residential mortgage one-to-four family non-owner occupied loans which grew $1.3 million, or 5.2%, commercial lines of credit which increased $514,000, or 42.9%, multi-family residential loans which increased $152,000, or 4.9%, and home equity loans which grew $15,000, or 0.2%, as the Company continues its strategy of diversifying its loan portfolio with higher yielding and shorter-term loan products. These increases were partially offset by a decr ease of $1.2 million, or 7.5%, of residential mortgage one-to-four family owner occupied loans. The decrease in this loan category is attributable to normal amortization and pay-offs.
Deposits. Total interest-bearing deposits increased $10.9 million, or 16.0%, to $79.1 million at September 30, 2010 from $68.3 million at December 31, 2009. This increase was attributable to increases of $10.8 million in certificates of deposit and $257,000 in statement savings accounts, offset by decreases of $108,000 in eSavings accounts and $86,000 in passbook savings accounts. The increase in certificates of deposit was primarily due to the competitive interest rates offered by the Bank and investors seeking the safety of insured bank deposits.
Federal Home Loan Bank Advances. Federal Home Loan Bank advances decreased $1.3 million from $6.9 million at December 31, 2009 to $5.6 million at September 30, 2010 as the Company used excess liquidity to pay-down Federal Home Loan Bank advances.
Other Borrowings. In June 2009, the Company borrowed $450,000 from a commercial bank to finance the acquisition of a building in Allentown, Pennsylvania which serves as the offices for the Bank’s subsidiaries which began operation in July 2009 and branch banking office that opened in February 2010. The loan has an interest rate of 5.75%, matures on July 1, 2014 and is amortizing over 180 months. The balance on the loan at September 30, 2010 was $428,000.
Stockholders’ Equity. Total stockholders’ equity decreased $1.2 million to $16.2 million at September 30, 2010 from $17.4 million at December 31, 2009. Contributing to the decrease was the purchase of 187,376 shares of the Company’s stock in the open-market as part of the Company’s stock repurchase programs, as well as other private repurchases, for an aggregate purchase price of $1.7 million, and dividends paid of $103,000. These decreases were offset by $465,000 of net income for the nine months ended September 30, 2010, $88,000 amortization of stock awards and options under our stock compensation plans, $50,000 related to common stock earned by participants in the employee stock ownership plan, and $19,000 of accumulated other comprehensive income.
Comparison of Operating Results for the Three Months Ended September 30, 2010 and 2009
General. Net income amounted to $173,000 for the three months ended September 30, 2010, an increase of $34,000, or 24.5%, compared to net income of $139,000 for the same period in 2009. The increase in net income on a comparative quarterly basis was primarily the result of a $180,000 increase in net interest income, a $25,000 increase in non-interest income, and a $15,000 decrease in the provision for loan losses, offset by a $163,000 increase in non-interest expense and a $23,000 increase in the provision for income taxes. Our average interest rate spread increased 71basis points to 3.53% for the three months ended September 30, 2010 from 2.82% for the three months ended September 30, 2009. The improvement in our average interest rate spread occurred as a decrease in the average yield on our interest-earning assets was more than offset by a decrease in the average rate paid on our interest-bearing liabilities. Our net interest margin also increased quarter-over-quarter to 3.84% for the three months ended September 30, 2010 from 3.29% for the three months ended September 30, 2009.
Net Interest Income. Net interest income increased $180,000, or 24.1%, to $927,000 for the three months ended September 30, 2010 from $747,000 for the comparable period in 2009. The increase was driven by a $119,000, or 19.4% decrease in interest expense, offset by a $61,000, or 4.5% increase in interest income.
Interest Income. Interest income increased $61,000, or 4.5%, to $1.4 million for the three months ended September 30, 2010. The increase resulted primarily from $5.8 million increase in average interest-earnings assets, which accounted for $51,000 of the increase while a 53 basis point increase in the yield on short-term investments and investment securities was primarily responsible for the remaining $10,000 of the increase. The growth in average interest-earnings assets between the two periods can be attributed primarily to increases in average short-term investments and investment securities of $4.0 million and average net loans receivab le of $3.9 million, offset by a decrease in average mortgage-backed securities of $2.1 million. The increase in average short-term investments and investment securities and average net loans receivable was primarily funded by the $8.1 million increase in average interest-bearing deposits.
Interest Expense. Interest expense decreased $119,000, or 19.4%, to $494,000 for the three months ended September 30, 2010 compared to $613,000 for the three months ended September 30, 2009. The decrease was primarily attributable to an 82 basis point decrease in the overall cost of interest-bearing liabilities to 2.35% for the three months ended September 30, 2010 from 3.17% for the three months ended September 30, 2009, which had the effect of decreasing interest expense by $174,000. This decrease in rates was consistent with the decrease in market interest rates from September 2009 to September 2010. This decrease in interest expense due to rate was offset by a $6.8 million increase in average interest-bearing liabilities, which had the effect of increasing interest expense by $55,000. The increase in the average balance of interest-bearing liabilities was primarily driven by the growth in average certificates of deposit of $7.3 million, average statement savings accounts of $640,000, and average eSavings accounts of $299,000. The increase in average certificates of deposit was due to customer interest in higher yielding secure investments. These increases were offset by a decrease in average FHLB advances of $1.3 million, as these advances were paid down, as well as a decrease in average passbook accounts of $163,000.
Average Balances, Net Interest Income, and 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 September 30, | | | | | |
| | | | 2010 | | | | 2009 | |
| | | | | | | | | | | | Average | | | | | | | | | | | | Average | |
| | | | Average | | | | | | | | Yield/ | | | | Average | | | | | | | | Yield/ | |
| | | | Balance | | | | Interest | | | | Rate | | | | Balance | | | | Interest | | | | Rate | |
| Short-term investments and investment securities | | $ | 15,260 | | | $ | 54 | | | | 1.42 | % | | $ | 11,205 | | | $ | 25 | | | | 0.89 | % |
| Mortgage-backed securities | | | 6,444 | | | | 77 | | | | 4.78 | | | | 8,586 | | | | 103 | | | | 4.80 | |
| Loans receivable, net (1) | | | 74,977 | | | | 1,290 | | | | 6.88 | | | | 71,061 | | | | 1,232 | | | | 6.93 | |
| Total interest-earning assets | | | 96,681 | | | | 1,421 | | | | 5.88 | % | | | 90,852 | | | | 1,360 | | | | 5.99 | % |
| Non-interest-earning assets | | | 4,661 | | | | | | | | | | | | 4,308 | | | | | | | | | |
| Total assets | | $ | 101,342 | | | | | | | | | | | $ | 95,160 | | | | | | | | | |
| Interest-bearing liabilities: | | | | | | | | | | | | | | | | | | | | | | | | |
| Passbook accounts | | $ | 3,184 | | | | 4 | | | | 0.50 | % | | $ | 3,347 | | | | 7 | | | | 0.84 | % |
| Statement savings accounts | | | 6,766 | | | | 15 | | | | 0.89 | | | | 6,126 | | | | 13 | | | | 0.85 | |
| eSavings accounts | | | 1,831 | | | | 5 | | | | 1.09 | | | | 1,532 | | | | 6 | | | | 1.57 | |
| Certificate of deposit accounts | | | 65,771 | | | | 403 | | | | 2.45 | | | | 58,472 | | | | 512 | | | | 3.50 | |
| Total deposits | | | 77,552 | | | | 427 | | | | 2.20 | | | | 69,477 | | | | 538 | | | | 3.10 | |
| FHLB advances | | | 6,057 | | | | 61 | | | | 4.03 | | | | 7,314 | | | | 70 | | | | 3.83 | |
| Other borrowings | | | 429 | | | | 6 | | | | 5.59 | | | | 449 | | | | 5 | | | | 4.45 | |
| Total interest-bearing liabilities | | | 84,038 | | | | 494 | | | | 2.35 | % | | | 77,240 | | | | 613 | | | | 3.17 | % |
| Non-interest-bearing liabilities | | | 879 | | | | | | | | | | | | 719 | | | | | | | | | |
| Total liabilities | | | 84,917 | | | | | | | | | | | | 77,959 | | | | | | | | | |
| Stockholders’ Equity | | | 16,425 | | | | | | | | | | | | 17,201 | | | | | | | | | |
| Total liabilities and Stockholders’ Equity | | $ | 101,342 | | | | | | | | | | | $ | 95,160 | | | | | | | | | |
| Net interest-earning assets | | $ | 12,643 | | | | | | | | | | | $ | 13,612 | | | | | | | | | |
Net interest income; average interest rate spread | | | | | | $ | 927 | | | | 3.53 | % | | | | | | $ | 747 | | | | 2.82 | % |
| Net interest margin (2) | | | | | | | | | | | 3.84 | % | | | | | | | | | | | 3.29 | % |
Average interest-earning assets to average interest-bearing liabilities | | | | | | | | | | | 115.04 | % | | | | | | | | | | | 117.62 | % |
______________________
| (1) | Includes non-accrual loans during the respective periods. Calculated net of deferred fees and discounts, loans in process and allowance for loan losses. |
| (2) | Equals net interest income divided by average interest-earning assets. |
Provision for Loan Losses. The Company decreased its provision for loan losses by $15,000 from $44,000 for the three months ended September 30, 2009 to $29,000 for the same period in 2010, 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 September 30, 2010.
Non-performing loans amounted to $2.5 million, or 3.35% of net loans receivable at September 30, 2010, consisting of nineteen loans, thirteen of which are on non-accrual status and six of which are 90 days or more past due and accruing interest. This compares to eleven non-performing loans totaling $925,000, or 1.27% of net loans receivable at December 31, 2009. The non-performing loans at September 30, 2010 include eleven one-to-four family non-owner occupied residential loans, four one-to-four family owner occupied residential loans, three home equity loans, and one commercial real estate loan, and all are generally well-collateralized or adequately reserved for. Management does not anticipate any significant losses on these loans. During the quarter ended September 30, 2010, three loans were placed on non-accrual status resulting in the reversal of $9,000 of previously accrued interest income. Also during the quarter, six loans were placed back on accrual status resulting in the receipt of approximately $9,000 of previously reversed and past due interest, and one one-to-four family non-owner occupied residential loan with an outstanding balance of $260,000, previously on non-accrual status, was transferred into other real estate owned. There was no charge-off associated with this transfer. Not included in non-performing loans are performing troubled debt restructurings which totaled $431,000 at September 30, 2010 compared to $1.5 million at December 31, 2009. The allowance for loan losses as a percent of total loans receivable was 1.22% at September 30, 2010 and 1.14% at December 31, 2009.
Other real estate owned amounted to $1.2 million at September 30, 2010, consisting of four properties, none of which had a carrying value of more than $373,000. This compares to three properties totaling $913,000 at December 31, 2009. In October, a one-to-four family non-owner occupied residential loan with an outstanding loan balance of $403,000 at September 30, 2010 previously classified as non-accrual, was transferred into other real estate owned at a fair value of approximately $325,000. In conjunction with this transfer, $78,000 of the outstanding loan balance was charged-off through the allowance for loan losses. Non-performing assets amounted to $3.7 million, or 3.62% of total assets at September 30, 2010, compared to $1.8 million, or 1.96% of total assets at December 31, 2009.
Non-Interest Income. Non-interest income increased $25,000, or 39.1%, for the three months ended September 30, 2010 over the comparable period in 2009 due primarily to the increase in fees generated by Quaint Oak Bank’s mortgage banking, title abstract and real estate sales subsidiaries which began operation in July of 2009.
Non-Interest Expense. Non-interest expense increased $163,000, or 30.2%, from $539,000 for the three months ended September 30, 2009 to $702,000 for the three months ended September 30, 2010. Salaries and employee benefits expense accounted for $82,000 of the change as this expense increased 30.9%, from $265,000 for the three months ended September 30, 2009 to $347,000 for the three months ended September 30, 2010, due primarily to increased staff as the Company expanded its operations, including the new subsidiaries and branch banking office.&# 160; Other real estate owned expense accounted for $48,000 of the change as this expense increased 200.0%, from $24,000 for the three months ended September 30, 2009 to $72,000 for the same period in 2010, as costs were incurred on the Bank’s four foreclosed properties to maintain the properties and prepare them for resale. Professional fees accounted for $26,000 of the increase as this expense increased 44.8%, from $58,000 for the three months ended September 30, 2009 to $84,000 for the same period in 2010, due in part to increased legal fees associated with non-performing loans and fees paid to a third party to conduct compliance reviews. Advertising accounted for $12,000 of the change as this expense increased from $3,000 for the three months ended September 30, 2009 to $15,000 for the three months ended September 30, 2010, due primarily to increased marketing of the new subsidiaries and branch banking office. The other expense category increase d $9,000, or 24.3%, from $37,000 for the three months ended September 30, 2009 to $46,000 for the three months ended September 30, 2010, while occupancy and equipment expense increased $8,000, or 19.5%, from $41,000 for the three months ended September 30, 2009 to $49,000 for the three months ended September 30, 2010. Changes in both of these expense categories were due primarily to expenses incurred with respect to the new subsidiaries and branch banking office. Offsetting these increases in non-interest expenses was a decrease in directors’ fees and expenses of $12,000, or 19.0%, from $63,000 for the three months ended September 30, 2009 to $51,000 for the three months ended September 30, 2010, and a decrease of $10,000, or 20.8%, in FDIC deposit insurance assessment which decline from $48,000 for the three months ended September 30, 2009 to $38,000 for the same period in 2010.
Provision for Income Tax. The provision for income tax increased $23,000 from $89,000 for the three months ended September 30, 2009 to $112,000 for the three months ended September 30, 2010 due primarily to the increase in pre-tax income. The Company’s effective tax rate, including federal and state income taxes, was 39.3% and 39.0% for three months ended September 30, 2010 and 2009, respectively.
Comparison of Operating Results for the Nine Months Ended September 30, 2010 and 2009
General. Net income amounted to $465,000 for the nine months ended September 30, 2010, an increase of $127,000, or 37.6%, compared to net income of $338,000 for the same period in 2009. The increase in net income on a period over period basis was primarily the result of increases in net interest income of $392,000 and non-interest income of $128,000 and a decrease in the provision for loan losses of $43,000, offset by an increase in non-interest expense of $353,000 and the provision for income taxes of $83,000. Our average interest rate spread increased 61basis points to 3.36% for the nine months ended September 30, 2010 from 2.75% for the nine months ended September 30, 2009. As was the case for the thr ee month period ended September 30, 2010, the improvement in our average interest rate spread occurred as a decrease in the average yield on our interest-earning assets was more than offset by a decrease in the average rate paid on our interest-bearing liabilities. Our net interest margin also increased period-over-period to 3.70% for the nine months ended September 30, 2010 from 3.30% for the nine months ended September 30, 2009.
Net Interest Income. Net interest income increased $392,000 or 17.9%, to $2.6 million for the nine months ended September 30, 2010 from $2.2 million for the comparable period in 2009. The increase was driven by a $419,000, or 22.2% decrease in interest expense, offset by a $27,000, or 0.66% decrease in interest income.
Interest Income. Interest income decreased $27,000, or 0.7%, to $4.1 million for the nine months ended September 30, 2010. The decrease in interest income resulted primarily from a 34 basis point decrease in the yield on interest-earning assets to 5.79% for the nine months ended September 30, 2010 from 6.13% for the nine months ended September 30, 2009, which had the effect of decreasing interest income by $131,000. Contributing to the decrease in yield for the nine months ended September 30, 2010 was the reversal of $67,000 of accrued interest income on loans placed on non-accrual status during the period. This decrease in inter est income due to yield was offset by a $4.6 million increase in average interest-earning assets, which had the effect of increasing interest income by $104,000. The 47 basis point decrease in the overall yield on interest earning assets was consistent with the decrease in market interest rates from September 2009 to September 2010. The growth in average interest-earnings assets between the two periods can be attributed primarily to increases in average short-term investments and investment securities of $4.4 million and average net loans receivable of $2.3 million, offset by a decrease in average mortgage-backed securities of $2.2 million. The increase in average short-term investments and investment securities and average net loans receivable was primarily funded by the $7.5 million increase in average interest-bearing deposits.
Interest Expense. Interest expense decreased $419,000, or 22.2%, to $1.5 million for the nine months ended September 30, 2010 compared to $1.9 million for the nine months ended September 30, 2009. The decrease in interest expense was primarily attributable to a 95 basis point decrease in the overall cost of interest-bearing liabilities to 2.43% for the nine months ended September 30, 2010 from 3.38% for the nine months ended September 30, 2009 which had the effect of decreasing interest expense by $563,000. The decrease in rates was consistent with the decrease in market interest rates from September 2009 to September 2010. This decrease in interest expense due to rate was offset by a $6.1 million increase in average interest-bearing liabilities, which had the effect of increasing interest expense by $144,000. The increase in the average balance of interest-bearing liabilities was primarily driven by the growth in average certificates of deposit of $5.7 million, average statement savings accounts of $1.2 million, average eSavings accounts of $713,000, and average other borrowings of $281,000. The increase in average certificates of deposit was due to customer interest in higher yielding secure investments. These increases were offset by the decrease in average FHLB advances of $1.7 million as these advances were paid down.
Average Balances, Net Interest Income, and 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.
| | | Nine Months Ended September 30, | |
| | | | | | | |
| | | Average | | | | | | Average Yield/ | | | Average | | | | | | Average Yield/ | |
| Interest-earning assets: | | (Dollars in thousands) | |
Short-term investments and investment securities | | $ | 12,548 | | | $ | 127 | | | | 1.35 | % | | $ | 8,129 | | | $ | 116 | | | | 1.90 | % |
| Mortgage-backed securities | | | 6,943 | | | | 249 | | | | 4.78 | | | | 9,102 | | | | 328 | | | | 4.80 | |
| Loans receivable, net (1) | | | 73,883 | | | | 3,678 | | | | 6.64 | | | | 71,542 | | | | 3,637 | | | | 6.78 | |
| Total interest-earning assets | | | 93,374 | | | | 4,054 | | | | 5.79 | % | | | 88,773 | | | | 4,081 | | | | 6.13 | % |
| Non-interest-earning assets | | | 4,612 | | | | | | | | | | | | 3,633 | | | | | | | | | |
| Total assets | | $ | 97,986 | | | | | | | | | | | $ | 92,406 | | | | | | | | | |
| Interest-bearing liabilities: | | | | | | | | | | | | | | | | | | | | | | | | |
| Passbook accounts | | $ | 3,247 | | | | 15 | | | | 0.62 | % | | $ | 3,334 | | | | 23 | | | | 0.92 | % |
| Statement savings accounts | | | 6,654 | | | | 53 | | | | 1.06 | | | | 5,478 | | | | 67 | | | | 1.63 | |
| eSavings accounts | | | 1,871 | | | | 17 | | | | 1.21 | | | | 1,158 | | | | 16 | | | | 1.84 | |
| Certificate of deposit accounts | | | 61,718 | | | | 1,174 | | | | 2.54 | | | | 56,024 | | | | 1,552 | | | | 3.69 | |
| Total deposits | | | 73,490 | | | | 1,259 | | | | 2.28 | | | | 65,994 | | | | 1,658 | | | | 3.35 | |
| FHLB advances | | | 6,462 | | | | 188 | | | | 3.88 | | | | 8,168 | | | | 222 | | | | 3.62 | |
| Other borrowings | | | 434 | | | | 19 | | | | 5.84 | | | | 153 | | | | 5 | | | | 4.36 | |
| Total interest-bearing liabilities | | | 80,386 | | | | 1,466 | | | | 2.43 | % | | | 74,315 | | | | 1,885 | | | | 3.38 | % |
| Non-interest-bearing liabilities | | | 863 | | | | | | | | | | | | 775 | | | | | | | | | |
| Total liabilities | | | 81,249 | | | | | | | | | | | | 75,090 | | | | | | | | | |
| Stockholders’ Equity | | | 16,737 | | | | | | | | | | | | 17,316 | | | | | | | | | |
Total liabilities and Stockholders’ Equity | | $ | 97,986 | | | | | | | | | | | $ | 94,406 | | | | | | | | | |
| Net interest-earning assets | | $ | 12,988 | | | | | | | | | | | $ | 14,458 | | | | | | | | | |
Net interest income; average interest rate spread | | | | | | $ | 2,588 | | | | 3.36 | % | | | | | | $ | 2,196 | | | | 2.75 | % |
| Net interest margin (2) | | | | | | | | | | | 3.70 | % | | | | | | | | | | | 3.30 | % |
| Average interest-earning assets to average interest-bearing liabilities | | | | | | | | | | | 116.16 | % | | | | | | | | | | | 119.46 | % |
______________________
| (1) | Includes non-accrual loans during the respective periods. Calculated net of deferred fees and discounts, loans in process and allowance for loan losses. |
| (2) | Equals net interest income divided by average interest-earning assets. |
Provision for Loan Losses. The Company decreased its provision for loan losses by $43,000 from $129,000 for the nine months ended September 30, 2009 to $86,000 for the same period in 2010, 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 September 30, 2010. See additional discussion under “Comparison of Operating Results for the Three Months Ended September 30, 2010.”
Non-Interest Income. Non-interest income increased $128,000, or 118.5% for the nine months ended September 30, 2010 over the comparable period in 2009. As was the case for the three month period ending September 30, 2010, the increase was primarily attributable to the fees generated by Quaint Oak Bank’s mortgage banking, title abstract and real estate sales subsidiaries which began operation in July of 2009.
Non-Interest Expense. Non-interest expense increased $353,000, or 21.8%, from $1.6 million for the nine months ended September 30, 2009 to $2.0 million for the nine months ended September 30, 2010. Salaries and employee benefits expense accounted for $268,000 of the change as this expense increased 36.4%, from $737,000 for the nine months ended September 30, 2009 to $1.0 million for the nine months ended September 30, 2010, due primarily to increased staff as the Company expanded its operations, including the new subsidiaries and branch banking office. Occupancy and equipment expense accounted for $52,000 of the change as this expense increased 59.8%, from $87,000 for the nine months ended September 30, 2009 to $139,000 for the nine months ended September 30, 2010. This period over period increase was primarily attributable to the costs associated with the building on Union Boulevard in Allentown, Pennsylvania, which was acquired late in the second quarter of 2009 to serve as the offices for Quaint Oak Bank’s mortgage banking, abstract title and real estate sales subsidiaries and branch banking office. Other expense accounted for $51,000, or 51.5% of the change as this expense category increased from $99,000 for the nine months ended September 30, 2009 to $150,000 for the nine months ended September 30, 2010, due primarily to expenses incurred with respect to the new subsidiaries and branch banking office. Advertising accounted for $35,000 of the change as this expense increased 388.9%, from $9,000 for the nine months ended September 30, 2009 to $44,000 for the nine months ended September 30, 2010, due primarily to increased marketing of the new subsidiaries and branch banking office. Also contributing to the increase in non-interest expense period over period was a $4,000, or 1.5% increase in professional fees and a $1,000, or 1.0% increase on other real estate owned expense. Offsetting these increases was a decrease in directors’ fees and expenses which declined $41,000, or 20.9%, from $196,000 for the nine months ended September 30, 2009 to $155,000 for the nine months ended September 30, 2010 as a director and consultant became a full time employee of the Company on October 4, 2009 and as of this date no longer received director or consulting fees from the Company. Also offsetting the increases in non-interest expense was a $17,000, or 13.0% decrease in FDIC deposit insurance assessment.
Provision for Income Tax. The provision for income tax increased $83,000 from $220,000 for the nine months ended September 30, 2009 to $303,000 for the nine months ended September 30, 2010 due primarily to the increase in pre-tax income. The Company’s effective tax rate, including federal and state income taxes, was 39.5% and 39.4% for nine months ended September 30, 2010 and 2009, respectively.
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 September 30, 2010, the Company's cash and cash equivalents amounted to $7.1 million. At such date, the Company also had $3.8 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 September 30, 2010, Quaint Oak Bank had outstanding commitments to originate loans of $371,000 and commitments under unused lines of credit of $3.4 million.
At September 30, 2010, certificates of deposit scheduled to mature in less than one year totaled $36.6 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, which provide an additional source of funds. As of September 30, 2010, we had $5.6 million of advances from the Federal Home Loan Bank of Pittsburgh and had $40.5 million in borrowing capacity. We are reviewing our continued utilization of advances from the Federal Home Loan Bank as a source of funding based on the decision in December 2008 by the Federal Home Loan Bank of Pittsburgh to suspend the dividend on , and restrict the repurchase of, Federal Home Loan Bank stock. The amount of Federal Home Loan Bank stock that a member institution is required to hold is directly proportional to the volume of advances taken by that institution. Should we decide to utilize sources of funding other than advances from the Federal Home Loan Bank, we believe that additional funding is available in the form of advances or repurchase agreements through various other sources. The Bank currently has a line of credit commitment from another bank for borrowings up to $1.5 million. There were no borrowings under this line of credit at September 30, 2010.
Our stockholders’ equity amounted to $16.2 million at September 30, 2010, a decrease of $1.2 million from December 31, 2009. Contributing to the decrease was the purchase of 187,376 shares of the Company’s stock in the open-market as part of the Company’s stock repurchase programs, as well as other private repurchases, for an aggregate purchase price of $1.7 million, and dividends paid of $103,000. These decreases were offset by $465,000 of net income for the nine months ended September 30, 2010, $88,000 amortization of stock awards and options under our stock compensation plans, $50,000 related to common stock earned by participants in the employee stock ownership plan, and $19,000 of accumulated other comprehensive income. For further discussion of the stock compensation plans, see Note 7 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, tier 1 risk-based and total risk-based capital ratios of at least 4.00%, 4.00% and 8.00%, respectively. At September 30, 2010, Quaint Oak Bank exceeded each of its capital requirements with ratios of 13.76%, 21.32% and 22.61%, respectively. As a savings and loan holding company, the Company is not 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 o n-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 September 30, 2010, we had unfunded commitments under lines of credit of $3.4 million and $371,000 of commitments to originate loans. 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 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 good s 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 September 30, 2010. 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 a n 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 2010 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II
ITEM 1. LEGAL PROCEEDINGS
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.
ITEM 1A. RISK FACTORS
Not applicable.
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 September 30, 2010 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 (2) | |
| July 1, 2010 – July 31, 2010 | | | 2,500 | | | $ | 9.01 | | | | 2,500 | | | | 53,104 | |
| August 1, 2010 – August 31, 2010 | | | 21,000 | | | | 8.76 | | | | 1,000 | | | | 52,104 | |
| September 1, 2010 – September 30, 2010 | | | 33,100 | | | | 9.06 | | | | 33,100 | | | | 19,004 | |
Total | | | 56,600 | | | $ | 8.94 | | | | 36,600 | | | | 19,004 | |
Notes to this table:
| (1) | Certain shares were acquired during the quarter as a result of privately negotiated transactions. |
| (2) | On March 11, 2010, the Company announced by press release its second repurchase program to repurchase up to an additional 69,431 shares, or approximately 5.5% of the Company's current outstanding shares of common stock as of March 11, 2010. On September 10, 2010, the Company announced by press release its third repurchase program to repurchase up to an additional 69,431 shares, or approximately 6.2% of the Company's current outstanding shares of common stock as of September 30, 2010. The Company will commence this third stock repurchase program upon the completion of its prior repurchase program which has 19,004 shares remaining to be purchased as of September 30, 2010. |
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. (REMOVED AND RESERVED)
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS
31.1 Rule 13a-14(a) Certification of Chief Executive Officer
31.1 Rule 13a-14(a) Certification of Chief Financial Officer
32.0 Certification pursuant to 18 U.S.C. Section 1350
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.
| | | | |
| Date: | November 15, 2010 | By: | /s/ Robert T. Strong |
| | | | Robert T. Strong |
| | | | President and Chief Executive Officer |
| | | | |
| | | | |
| | | By: | /s/ John J. Augustine |
| Date: | November 15, 2010 | | John J. Augustine |
| | | | Chief Financial Officer |
