ITEM 2.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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Forward-Looking Statements Are Subject to Change
We make certain statements in this document as to what we expect may happen in the future. These statements usually contain the words "believe," "estimate," "project," "expect," "anticipate," "intend" or similar expressions. Because these statements look to the future, they are based on our current expectations and beliefs. Actual results or events may differ materially from those reflected in the forward-looking statements. You should be aware that our current expectations and beliefs as to future events are subject to change at any time, and we can give you no assurances that the future events will actually occur.
General
The Company was formed in connection with the Bank’s conversion to a stock savings bank completed on July 3, 2007. The Company’s results of operations are dependent primarily on the results of the Bank, which is a wholly owned subsidiary of the Company. The Bank’s results of operations depend, to a large extent, on net interest income, which is the difference between the income earned on its loan and investment portfolios and the cost of funds, consisting of the interest paid on deposits and borrowings. Results of operations are also affected by provisions for loan losses, fee income and other non-interest income and non-interest expense. Non-interest expense principally consists of compensation, directors’ fees and expenses, office occupancy and equipment expense, professional 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, 2012 the Bank had five subsidiaries, Quaint Oak Mortgage, LLC, Quaint Oak Real Estate, LLC, Quaint Oak Abstract, LLC, Quaint Oak Insurance Agency, LLC, and QOB Properties, 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.
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 is currently inactive. The mortgage company also began operating at our main office in the Delaware Valley Region of Pennsylvania in October 2010. In connection with the expansion into these activities, the Company acquired 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 results. These policies require numerous estimates or economic assumptions that may prove inaccurate or may be subject to variations which may significantly affect our reported results and financial condition for the period or in future periods.
Allowance for Loan Losses
. The allowance for loan losses represents management’s estimate of losses inherent in the loan portfolio as of the balance sheet date and is recorded as a reduction to loans. The allowance for loan losses is increased by the provision for loan losses, and decreased by charge-offs, net of recoveries. Loans deemed to be uncollectible are charged against the allowance for loan losses, and subsequent recoveries, if any, are credited to the allowance. All, or part, of the principal balance of loans receivable are charged off to the allowance as soon as it is determined that the repayment of all, or part, of the principal balance is highly unlikely. Because all identified losses are immediately charged off, no portion of the allowance for loan losses is restricted to any individual loan or groups of loans, and the entire allowance is available to absorb any and all loan losses.
The allowance for loan losses is maintained at a level considered adequate to provide for losses that can be reasonably anticipated. Management performs a quarterly evaluation of the adequacy of the allowance. The allowance is based on the Company’s past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, composition of the loan portfolio, current economic conditions and other relevant factors. This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant revision as more information becomes available.
The allowance consists of specific, general and unallocated components. The specific component relates to loans that are classified as impaired. For loans that are classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers pools of loans by loan class. These pools of loans are evaluated for loss exposure based upon historical loss rates for each of these categories of loans, adjusted for qualitative factors. These significant factors may include changes in lending policies and procedures, changes in existing general economic and business conditions affecting our primary lending areas, credit quality trends, collateral value, loan volumes and concentrations, seasoning of the loan portfolio, recent loss experience in particular segments of the portfolio, duration of the current business cycle and bank regulatory examination results. The applied loss factors are reevaluated quarterly to ensure their relevance in the current economic environment. Residential mortgage lending generally entails a lower risk of default than other types of lending. Consumer loans and commercial real estate loans generally involve more risk of collectability because of the type and nature of the collateral and, in certain cases, the absence of collateral. It is the Company’s policy to establish a specific reserve for loss on any delinquent loan when it determines that a loss is probable. An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.
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 classified as 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 classified 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 classified 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.
Other-Than-Temporary Impairment of Securities.
Securities are evaluated on at least a quarterly basis, and more frequently when market conditions warrant such an evaluation, to determine whether a decline in their value is other-than-temporary. To determine whether a loss in value is other-than-temporary, management utilizes criteria such as the reasons underlying the decline, the magnitude and duration of the decline and whether or not management intends to sell or expects that it is more likely than not that it will be required to sell the security prior to an anticipated recovery of the fair value. The term “other-than-temporary” is not intended to indicate that the decline is permanent, but indicates that the prospects for a near-term recovery of value are not necessarily favorable, or that there is a lack of evidence to support a realizable value equal to or greater than the carrying value of the investment. Once a decline in value for a debt security is determined to be other-than-temporary, the other-than-temporary impairment is separated into (a) the amount of the total other-than-temporary impairment related to a decrease in cash flows expected to be collected from the debt security (the credit loss) and (b) the amount of the total other-than-temporary impairment related to all other factors. The amount of the total other-than-temporary impairment related to the credit loss is recognized in earnings. The amount of the total other-than-temporary impairment related to all other factors is recognized in other comprehensive income, except for equity securities, where the full amount of the other-than-temporary impairment is recognized in earnings.
Income Taxes
. Deferred income tax assets and liabilities are determined using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is determined based on the tax effects of the temporary differences between the book and tax bases of the various assets and liabilities and net operating loss carryforwards and gives current recognition to changes in tax rates and laws. The realization of our deferred tax assets principally depends upon our achieving projected future taxable income. We may change our judgments regarding future profitability due to future market conditions and other factors. We may adjust our deferred tax asset balances if our judgments change.
Comparison of Financial Condition at September 30, 2012 and December 31, 2011
General
.
The Company’s total assets at September 30, 2012 were $109.1 million, a decrease of $128,000, or 0.12%, from $109.2 million at December 31, 2011. The decrease was primarily due to a decrease in cash and cash equivalents of $3.7 million and a decrease in investment securities and mortgage-backed securities of $6.2 million as a result of calls and sales. During the nine months ended September 30, 2012, $3.6 million of mortgage-backed securities previously designated as held to maturity were transferred into the investment securities available for sale category and sold. This liquidity, when combined with a $1.2 million increase in deposits, was used to fund an increase in loans held for sale of $3.9 million, loans receivable, net of $5.3 million, and the payoff of Federal Home Loan Bank term borrowings in the amount of $1.8 million.
Cash and Cash Equivalents.
Cash and cash equivalents decreased $3.7 million, or 31.7%, from $11.7 million at December 31, 2011 to $8.0 million at September 30, 2012 as excess liquidity was used to fund loans and scheduled repayments of Federal Home Loan Bank term borrowings.
Investment Securities Available for Sale and Mortgage-backed Securities Held-to-Maturity.
Investment and mortgage-backed securities decreased $6.2 million, or 58.7%, to $4.4 million at September 30, 2012 from $10.6 million at December 31, 2011. The decrease was primarily due to calls of U.S. Government agency securities in the amount of $3.0 million and the sale of $3.6 million of mortgage-backed securities previously designated as held to maturity that were transferred into the investment securities available for sale category. These decreases were offset by the purchase of a $500,000 U.S. Agency government security. The Company realized a gain of $331,000 on the sale of the mortgage-backed securities.
Loans Held for Sale.
Loans held for sale increased $3.9 million to $4.3 million at September 30, 2012 from $413,000 at December 31, 2011 as the Bank’s mortgage banking subsidiary, Quaint Oak Mortgage, LLC, originated $20.6 million of one-to-four family residential loans during the period ending September 30, 2012 and sold $16.7 million of these loans in the secondary market during this same period.
Loans Receivable, Net
. Loans receivable, net, increased $5.3 million, or 7.1%, to $80.7 million at September 30, 2012 from $75.3 million December 31, 2011. This increase was funded primarily from excess liquidity in cash and cash equivalents and the proceeds from calls and sales of investment securities available for sale. Increases within the portfolio occurred in the construction loan category which increased $3.9 million, or 73.5%, one-to-four family residential non-owner occupied loans which increased $3.2 million, or 10.7%, commercial real estate which increased $935,000, or 5.1%, commercial lines of credit which increased $180,000, or 10.9%, and home equity loans which increased $155,000, or 2.8%. These increases were partially offset by decreases of $2.3 million, or 19.1%, in residential mortgage one-to-four family owner occupied loans and $530,000, or 14.3%, in multi-family residential loans. The Company continues its strategy of diversifying its loan portfolio with higher yielding and shorter-term loan products and selling substantially all of its newly originated one-to-four family owner-occupied loans into the secondary market.
Premises and Equipment, Net
. Premises and equipment, net, increased $427,000, or 38.0%, to $1.55 million at September 30, 2012 from $1.12 million at December 31, 2011 primarily due to the capital expenditures made during the nine months ended September 30, 2012 in connection with the Company’s move to its new main office facility at 501 Knowles Avenue in Southampton, Pennsylvania in late March 2012.
Other Real Estate Owned, Net.
Other real estate owned, net, increased $70,000, or 37.8%, to $255,000 at September 30, 2012 from $185,000 at December 31, 2011. This increase was due to the transfer of two properties totaling $255,000 into other real estate owned, offset by the sale of three properties totaling $185,000 during the nine months ended September 30, 2012.
Deposits
. Total interest-bearing deposits increased $1.2 million, or 1.4%, to $89.7 million at September 30, 2012 from $88.5 million at December 31, 2011. This increase in deposits was attributable to an increase in eSavings accounts of $4.4 million, offset by decreases of $1.9 million in certificates of deposit, $1.2 million in statement savings accounts, and $98,000 in passbook savings accounts.
Stockholders’ Equity
. Total stockholders’ equity increased $890,000 to $16.6 million at September 30, 2012 from $15.7 million at December 31, 2011. Contributing to the increase was net income for the nine months ended September 30, 2012 of $791,000, amortization of stock awards and options under our stock compensation plans of $89,000, common stock earned by participants in the employee stock ownership plan of $71,000, and accumulated other comprehensive income of $85,000. These increases were offset by dividends paid of $113,000 and the purchase of 3,305 shares of the Company’s stock as part of the Company’s stock repurchase program, for an aggregate purchase price of $33,000.
Comparison of Operating Results for the Three Months Ended September 30, 2012 and 2011
General.
Net income amounted to $242,000 for the three months ended September 30, 2012, an increase of $131,000, or 118.0%, compared to net income of $111,000 for three months ended September 30, 2011. The increase in net income on a comparative quarterly basis was primarily the result of the increases in net interest income of $123,000 and non-interest income of $321,000, which were offset by increases in the provision for loan losses of $3,000, non-interest expense of $255,000, and the provision for income taxes of $55,000.
Net Interest Income.
Net interest income increased $123,000, or 13.6%, to $1.0 million for the three months ended September 30, 2012 from $903,000 for the three months ended September 30, 2011. The increase was driven by a $56,000, or 4.0%, increase in interest income and a $67,000, or 13.8%, decrease in interest expense.
Interest Income.
Interest income increased $56,000, or 4.0%, to $1.45 million for the three months ended September 30, 2012 from $1.39 million for the three months ended September 30, 2011. The increase in interest income was primarily due to a $7.6 million increase in average loans receivable, net, including loans held for sale, which had the effect of increasing interest income $106,000. Contributing an additional $4,000 to interest income was a 34 basis point increase in the yield on average short-term investments and investment securities available for sale, from 1.25% for the three months ended September 30, 2011 to 1.59% for the three months ended September 30, 2012. Offsetting these increases was a $4.5 million decrease in average mortgage-backed securities held to maturity which had the effect of decreasing interest income $54,000. The increase in average loans receivable, net, including loans held for sale on a comparative quarterly basis was primarily funded by the decrease in average mortgage-backed securities held to maturity and average short-term investments and investment securities available for sale and
the increase in average interest-bearing deposits. The decrease in average mortgage-backed securities held to maturity was due primarily to the sale of mortgage-backed securities in the second quarter of 2012 after their transfer to the available for sale category at the end of the first quarter of 2012. The decrease in average short-term investments and investment securities available for sale was primarily due to the calls of U.S. government securities during the three months ended September 30, 2012.
Interest Expense.
Interest expense decreased $67,000, or 13.8%, to $419,000 for the three months ended September 30, 2012 compared to $486,000 for the three months ended September 30, 2011. The decrease was primarily attributable to a 27 basis point decline in the overall cost of average interest-bearing liabilities from 2.12% for the three months ended September 30, 2011 to 1.85% for the three months ended September 30, 2012 which had the effect of decreasing interest expense by $40,000. This decrease due to rate combined with a decrease of $2.6 million in average certificates of deposit accounts which had the effect of decreasing interest expense by $15,000, a decrease of $1.7 million in average FHLB advances which had the effect of decreasing interest expense by $18,000, and a decrease of $409,000 in other borrowings which had the effect of decreasing interest expense by $6,000. These decreases were offset by an increase of $5.0 million in average eSavings accounts which had the effect of increasing interest expense by $12,000. The overall decrease in rates was consistent with the decrease in market interest rates from September 2011 to September 2012. The decrease in average certificates of deposits accounts and increase in eSavings accounts on a comparative quarterly basis were due to rates offered by the Company in these two deposit categories, while the decrease in the average FHLB advances and average other borrowings was attributable to the scheduled repayments and the payoff, in November 2011, of a loan used to finance the purchase of our Lehigh Valley office building, respectively.
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.
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Three Months Ended September 30,
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2012
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2011
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Average
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Average
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Average
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Yield/
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Average
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Yield/
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Balance
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Interest
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Rate
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Balance
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Interest
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Rate
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Interest-earning assets:
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(Dollars in thousands)
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Short-term investments and investment
securities available for sale
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$
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19,866
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$
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79
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1.59
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%
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$
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23,951
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$
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75
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1.25
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%
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Mortgage-backed securities held to
maturity
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-
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-
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-
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4,475
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|
54
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4.83
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Loans receivable, net (1) (2)
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82,898
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1,366
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6.59
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75,323
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1,260
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|
|
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6.69
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Total interest-earning assets
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102,764
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1,445
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5.62
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%
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103,749
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1,389
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5.36
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%
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Non-interest-earning assets
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5,293
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4,258
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Total assets
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$
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108,057
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$
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108,007
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Interest-bearing liabilities:
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Passbook accounts
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$
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2,810
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2
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0.28
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%
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$
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2,911
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2
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0.27
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%
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Statement savings accounts
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5,922
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|
6
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0.41
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6,859
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10
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|
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0.58
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eSavings accounts
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7,793
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|
19
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0.98
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2,827
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7
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|
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0.99
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Certificate of deposit accounts
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71,685
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|
366
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2.04
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74,325
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|
|
416
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|
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2.24
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Total deposits
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88,210
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|
|
393
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|
|
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1.78
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86,922
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|
|
|
435
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|
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2.00
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FHLB advances
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2,548
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|
|
|
26
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|
|
|
4.08
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|
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4,252
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|
|
45
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|
|
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4.23
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Other borrowings
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|
|
-
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|
|
|
-
|
|
|
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-
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|
|
|
409
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|
6
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|
|
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5.87
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Total interest-bearing liabilities
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90,758
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|
|
419
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|
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|
1.85
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%
|
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91,583
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|
|
|
486
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2.12
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%
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Non-interest-bearing liabilities
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942
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|
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859
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Total liabilities
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91,700
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92,442
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Stockholders’ Equity
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16,357
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15,565
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|
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|
|
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Total liabilities and Stockholders’
Equity
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$
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108,057
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|
|
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|
|
|
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$
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1
08,007
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|
|
|
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Net interest-earning assets
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$
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12,006
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|
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|
|
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$
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12,165
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Net interest income; average interest rate
spread
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1,026
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|
|
|
3.77
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%
|
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$
|
903
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|
|
3.24
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%
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Net interest margin (3)
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3.99
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%
|
|
|
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|
|
|
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3.48
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%
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Average interest-earning assets to average
interest-bearing liabilities
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|
|
|
|
|
|
|
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113.23
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%
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|
|
|
|
|
|
|
|
|
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113.28
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%
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_________________
(1)
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Includes loans held for sale.
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(2)
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Includes non-accrual loans during the respective periods. Calculated net of deferred fees and discounts, loans in process and allowance for loan losses.
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(3)
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Equals net interest income divided by average interest-earning assets.
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Provision for Loan Losses.
The Company’s provision for loan losses increased by $3,000, or 10.3% from $29,000 for the three months ended September 30, 2011 to $32,000 for the three months ended September 30, 2012, 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, 2012.
Non-performing loans amounted to $2.2 million, or 2.68% of net loans receivable at September 30, 2012, consisting of twenty-five loans, seventeen of which are on non-accrual status and eight of which are 90 days or more past due and accruing interest. Comparably, non-performing loans amounted to $3.3 million, or 4.42% of net loans receivable at December 31, 2011, consisting of thirty-six loans, twenty of which were on non-accrual status and sixteen of which were 90 days or more past due and accruing interest. The non-performing loans at September 30, 2012 include twelve one-to-four family non-owner occupied residential loans, six commercial real estate loans, four home equity loans, and three one-to-four family owner-occupied residential loans, and all are generally well-collateralized or adequately reserved for. During the quarter ended September 30, 2012, two loans were placed on non-accrual status resulting in the reversal of approximately $5,000 of previously accrued interest income, two properties securing loans that were on non-accrual were transferred to other real estate owned, and one loan that was on non-accrual was paid off with no loss to principal. Included in non-performing loans are seven loans identified as troubled debt restructurings which totaled $439,000 at September 30, 2012. The Company had one additional troubled debt restructuring not included in non-performing loans at September 30, 2012 in the amount of $181,000 that was 60-89 days past due. The allowance for loan losses as a percent of total loans receivable was 1.19% at September 30, 2012 and 1.06% at December 31, 2011.
Other real estate owned (OREO) amounted to $255,000 at September 30, 2012, consisting of two properties. This compares to three properties totaling $185,000 at December 31, 2011. Non-performing assets amounted to $2.4 million, or 2.22% of total assets at September 30, 2012 compared to $3.5 million, or 3.22% of total assets at December 31, 2011. The OREO properties at September 30, 2012 consisted of two properties in our market area which had been collateral for two loans previously classified as non-accrual and which were transferred to OREO during the quarter. At September 30, 2012, the two OREO properties had an aggregate carrying value of $255,000, which is their estimated fair value at such date. The properties consisted of a multi-family residential building which had served as collateral for a non-performing loan with an outstanding balance of $200,000 at the time of foreclosure, and a single family non-owner occupied residence which previously had secured a non-performing loan with an outstanding balance of $65,000 at the time of foreclosure. In conjunction with these transfers, $10,000 of the outstanding loan balances was charged-off through the allowance for loan losses. Also during the quarter, the Company sold one OREO property and realized a gain of approximately $18,000 on the transaction.
Non-Interest Income.
Non-interest income increased $321,000 or 782.9%, for the three months ended September 30, 2012 over the comparable period in 2011 primarily due to a $238,000 increase in fee income generated by Quaint Oak Bank’s mortgage banking and title abstract subsidiaries, a $71,000 increase in net gains realized from the sales of other real estate owned properties, and a $15,000 increase in other income. These increases were partially offset by a $3,000 decrease in other banking fees and service charges.
Non-Interest Expense.
Non-interest expense increased $255,000, or 35.1%, from $727,000 for the three months ended September 30, 2011 to $982,000 for the three months ended September 30, 2012. Salaries and employee benefits expense accounted for $145,000 of the change as this expense increased 33.3%, from $435,000 for the three months ended September 30, 2011 to $580,000 for the three months ended September 30, 2012 due primarily to increased staff as the Company expanded its mortgage banking and lending operations. Also contributing to the period over period increase was a $50,000, or 277.8%, increase in FDIC deposit insurance assessment, a $39,000, or 65.0%, increase in occupancy and equipment expense, a $29,000, or 55.8%, increase in other expense, a $23,000, or 30.3%, increase in professional fees, and a $2,000, or 16.7%, increase in advertising expense. The increase in FDIC deposit insurance assessment was primarily due to a modification of the accrual estimate during the third quarter of 2011 that resulted in a reduction of this expense during that quarter. Offsetting these increases was a $28,000, or 52.8%, decrease in other real estate owned expense and a $5,000, or 8.8%, decrease in directors’ fees and expenses.
Provision for Income Tax.
The provision for income tax increased $55,000, or 71.4%, from $77,000 for the three months ended September 30, 2011 to $132,000 for the three months ended September 30, 2012 due primarily to the increase in pre-tax income. Our effective tax rate declined to 35.3% during the three months ended September 30, 2012 from 41.0% for the comparable period in 2011 primarily due to the utilization of a state tax credit during the 2012 period.
Comparison of Operating Results for the Nine Months Ended September 30, 2012 and 2011
General.
Net income amounted to $791,000 for the nine months ended September 30, 2012, an increase of $406,000, or 105.5%, compared to net income of $385,000 for the same period in 2011. The increase in net income on a period over period basis was primarily the result of the increases in net interest income of $364,000 and non-interest income of $861,000, which were offset by increases in the provision for loan losses of $97,000, non-interest expense of $506,000, and the provision for income taxes of $216,000.
Net Interest Income.
Net interest income increased $364,000, or 13.5%, to $3.1 million for the nine months ended September 30, 2012 from $2.7 million for the comparable period in 2011. The increase was driven by a $224,000, or 5.4% increase in interest income and a $140,000, or 9.8% decrease in interest expense.
Interest Income.
Interest income increased $224,000, or 5.4%, to $4.3 million for the nine months ended September 30, 2012 from $4.1 million for the nine months ended September 30, 2011. The increase in interest income was primarily due to a $6.4 million increase in average loans receivable, net, including loans held for sale, which had the effect of increasing interest income by $321,000. Contributing an additional $60,000 to interest income was a 39 basis point increase in the yield on average short-term investments and investment securities available for sale, from 1.24% for the nine months ended September 30, 2011 to 1.63% for the nine months ended September 30, 2012. Offsetting these increases was a $3.3 million decrease in average mortgage-backed securities held to maturity which had the effect of decreasing interest income $120,000, a decrease in the yield on average loans receivable, net from 6.69% for the nine months ended September 30, 2011 to 6.65% for the nine months ended September 30, 2012, which had the effect of decreasing interest income $28,000, and a decrease in average short-term investments and investment securities of $986,000 which had the effect of decreasing interest income $9,000. The increase in average loans receivable, net, including loans held for sale on a period over period basis was primarily funded by the $3.3 million increase in average interest-bearing deposits and the $3.3 million decrease in average mortgage-backed securities held to maturity. The decrease in average mortgage-backed securities held to maturity was due primarily to the sale of mortgage-backed securities in the beginning of the second quarter of 2012 after their transfer to the available for sale category at the end of the first quarter of 2012, as well as principal payments on these securities.
Interest Expense.
Interest expense decreased $140,000, or 9.8%, to $1.3 million for the nine months ended September 30, 2012 compared to $1.4 million for the nine months ended September 30, 2011. The decrease was primarily attributable to a 23 basis point decline in the overall cost of average interest-bearing liabilities from 2.14% for the nine months ended September 30, 2011 to 1.91% for the nine months ended September 30, 2012 which had the effect of decreasing interest expense by $102,000. This decrease due to rate combined with a decrease of $1.8 million in average FHLB advances and a $414,000 decrease in average other borrowings which had the effect of decreasing interest expense an additional $54,000 and $18,000, respectively. The decrease in rates was consistent with the decrease in market interest rates from September 2011 to September 2012. The decrease in the average FHLB advances on a period over period basis was attributable to scheduled repayments while the decrease in average other borrowings was due to the payoff, in November 2011, of a loan used to finance the purchase of our Lehigh Valley office building. These decreases were offset by an increase of $3.3 million increase average total deposits which had the effect of increasing interest expense by $34,000. The increase in the average balance of total deposits was primarily driven by the growth in average eSavings accounts of $3.2 million and average certificates of deposit of $880,000 due to customer interest in higher yielding and secure investments. These increases were offset by the decreases in the average balance of statement savings accounts of $661,000 and passbook accounts of $136,000.
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.
|
|
Nine Months Ended September 30,
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
Yield/
|
|
|
Average
|
|
|
|
|
|
Average
Yield/
|
|
Interest-earning assets:
|
|
(Dollars in thousands)
|
|
Short-term investments and investment
securities available for sale
|
|
$
|
20,439
|
|
|
$
|
250
|
|
|
|
1.63
|
%
|
|
$
|
21,425
|
|
|
$
|
199
|
|
|
|
1.24
|
%
|
Mortgage-backed securities
|
|
|
1,489
|
|
|
|
53
|
|
|
|
4.75
|
|
|
|
4,826
|
|
|
|
174
|
|
|
|
4.81
|
|
Loans receivable, net (1) (2)
|
|
|
81,139
|
|
|
|
4,045
|
|
|
|
6.65
|
|
|
|
74,732
|
|
|
|
3,751
|
|
|
|
6.69
|
|
Total interest-earning assets
|
|
|
103,067
|
|
|
|
4,348
|
|
|
|
5.62
|
%
|
|
|
100,983
|
|
|
|
4,124
|
|
|
|
5.45
|
%
|
Non-interest-earning assets
|
|
|
4,584
|
|
|
|
|
|
|
|
|
|
|
|
4,818
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
107,651
|
|
|
|
|
|
|
|
|
|
|
|
115,801
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Passbook accounts
|
|
$
|
2,888
|
|
|
|
5
|
|
|
|
0.23
|
%
|
|
$
|
3,024
|
|
|
|
8
|
|
|
|
0.35
|
%
|
Statement savings accounts
|
|
|
6,241
|
|
|
|
20
|
|
|
|
0.43
|
|
|
|
6,902
|
|
|
|
37
|
|
|
|
0.71
|
|
eSavings accounts
|
|
|
5,922
|
|
|
|
43
|
|
|
|
0.97
|
|
|
|
2,743
|
|
|
|
20
|
|
|
|
0.97
|
|
Certificate of deposit accounts
|
|
|
72,371
|
|
|
|
1,128
|
|
|
|
2.08
|
|
|
|
71,491
|
|
|
|
1,202
|
|
|
|
2.24
|
|
Total deposits
|
|
|
87,422
|
|
|
|
1,196
|
|
|
|
1.82
|
|
|
|
84,160
|
|
|
|
1,267
|
|
|
|
2.01
|
|
FHLB advances
|
|
|
3,134
|
|
|
|
98
|
|
|
|
4.17
|
|
|
|
4,908
|
|
|
|
149
|
|
|
|
4.05
|
|
Other borrowings
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
414
|
|
|
|
18
|
|
|
|
5.80
|
|
Total interest-bearing liabilities
|
|
|
90,556
|
|
|
|
1,294
|
|
|
|
1.91
|
%
|
|
|
89,482
|
|
|
|
1,434
|
|
|
|
2.14
|
%
|
Non-interest-bearing liabilities
|
|
|
970
|
|
|
|
|
|
|
|
|
|
|
|
862
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
91,526
|
|
|
|
|
|
|
|
|
|
|
|
90,344
|
|
|
|
|
|
|
|
|
|
Stockholders’ Equity
|
|
|
16,125
|
|
|
|
|
|
|
|
|
|
|
|
15,457
|
|
|
|
|
|
|
|
|
|
Total liabilities and Stockholders’
Equity
|
|
$
|
107,651
|
|
|
|
|
|
|
|
|
|
|
$
|
105,801
|
|
|
|
|
|
|
|
|
|
Net interest-earning assets
|
|
$
|
12,511
|
|
|
|
|
|
|
|
|
|
|
$
|
11,501
|
|
|
|
|
|
|
|
|
|
Net interest income; average interest rate
spread
|
|
|
|
|
|
|
3,054
|
|
|
|
3.71
|
%
|
|
|
|
|
|
|
2,690
|
|
|
|
3.31
|
%
|
Net interest margin (3)
|
|
|
|
|
|
|
|
|
|
|
3.95
|
%
|
|
|
|
|
|
|
|
|
|
|
3.55
|
%
|
Average interest-earning assets to average interest-bearing liabilities
|
|
|
|
|
|
|
|
|
|
|
113.82
|
%
|
|
|
|
|
|
|
|
|
|
|
112.85
|
%
|
______________________
(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 $97,000, or 114.1% from $85,000 for the nine months ended September 30, 2011 to $182,000 for the nine months ended September 30, 2012, 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 during the period. See additional discussion under “Comparison of Operating Results for the Three Months Ended September 30, 2012 and 2011.”
Non-Interest Income.
The $861,000, or 387.8% increase in non-interest income for the nine months ended September 30, 2012 over the comparable period in 2011 was primarily attributable to a $430,000 increase in fee income generated by Quaint Oak Bank’s mortgage banking and title abstract subsidiaries, a $331,000 gain on sale of investment securities available for sale during the quarter ended September 30, 2012, a $65,000 increase in net gains realized from the sales of other real estate owned properties, a $32,000 gain on the sale of an SBA loan, and a $5,000 increase in other banking fees and service charges. These increases were partially offset by a $2,000 decrease in other income.
Non-Interest Expense.
Non-interest expense increased $506,000, or 23.2%, from $2.2 million for the nine months ended September 30, 2011 to $2.7 million for the nine months ended September 30, 2012. Salaries and employee benefits expense accounted for $339,000 of the change as this expense increased 27.0%, from $1.3 million for the nine months ended September 30, 2011 to $1.6 million for the nine months ended September 30, 2012 due primarily to increased staff as the Company expanded its mortgage banking and lending operations. Also contributing to the period over period increase was a $91,000, or 54.5%, increase in occupancy and equipment expense, a $68,000, or 43.6%, increase in other expense, a $39,000, or 17.0%, increase in professional fees, a $38,000, or 64.4%, increase in FDIC deposit insurance assessment, and an $8,000, or 22.9%, increase in advertising expense. The increase in occupancy and equipment expense was primarily related to the move of our Delaware Valley office from 607 Lakeside Office Park, Southampton, PA to a larger facility at 501 Knowles Avenue, Southampton, PA and computer system upgrades. Offsetting these increases was a $69,000, or 66.3%, decrease in other real estate owned expense and an $8,000, or 4.7%, decrease in directors’ fees and expenses. The period over period decrease in other real estate owned expense was directly related to the decline in other real estate owned from $1.2 million at September 30, 2011 to $255,000 as of September 30, 2012.
Provision for Income Tax.
The provision for income tax increased $216,000, or 81.5%, from $265,000 for the nine months ended September 30, 2011 to $481,000 for the nine months ended September 30, 2012 due primarily to the increase in pre-tax income as our effective tax rate remained relatively consistent at 37.8% for the 2012 period compared to 40.8% for the comparable period in 2011.
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, 2012 the Company's cash and cash equivalents amounted to $8.0 million. At such date, the Company also had $3.6 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, 2012, Quaint Oak Bank had outstanding commitments to originate loans of $4.0 million and commitments under unused lines of credit of $9.1 million.
At September 30, 2012, certificates of deposit scheduled to mature in less than one year totaled $30.0 million. Based on prior experience, management believes that a significant portion of such deposits will remain with us, although it is dependent on our deposit pricing strategy at the time of maturity and 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, 2012, we had $2.0 million of advances from the Federal Home Loan Bank of Pittsburgh and had $44.0 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 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. As of September 30, 2012 Quaint Oak Bank has $2.1 million in borrowing capacity with the Federal Reserve Bank of Philadelphia. There were no borrowings under this facility at September 30, 2012. Quaint Oak Bank currently has two additional line of credit commitments with two different banks totaling $1.5 million. There were no borrowings under these lines of credit at September 30, 2012.
Our stockholders’ equity amounted to $16.6 million at September 30, 2012, an increase of $890,000 from $15.7 million at December 31, 2011.
Contributing to the increase was net income for the nine months ended September 30, 2012 of $791,000, amortization of stock awards and options under our stock compensation plans of $89,000, common stock earned by participants in the employee stock ownership plan of $71,000, and accumulated other comprehensive income of $85,000. These increases were offset by dividends paid of $113,000 and the purchase of 3,305 shares of the Company’s stock as part of the Company’s stock repurchase programs, for an aggregate purchase price of $33,000.
For further discussion of the stock compensation plans, see Note 9 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, 2012, Quaint Oak Bank exceeded each of its capital requirements with ratios of 14.05%, 21.69% and 22.95% , respectively. As a savings and loan holding company, 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 September 30, 2012, we had unfunded commitments under lines of credit of $9.1 million and $4.0 million 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 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 September 30, 2012. Based on their evaluation of the Company’s disclosure controls and procedures, the Company’s 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 third fiscal quarter of fiscal 2012 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.
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, 2012 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)
|
|
July 1, 2012 – July 31, 2012
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
|
59,920
|
|
August 1, 2012 – August 31, 2012
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
59,920
|
|
September 1, 2012 – September 30, 2012
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
59,920
|
|
Total
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
|
59.920
|
|
Notes to this table:
(1)
|
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 then current outstanding shares of common stock. The Company commenced this third stock repurchase program upon the completion of its prior repurchase program on December 3, 2010.
|
ITEM 3.
|
DEFAULTS UPON SENIOR SECURITIES
|
Not applicable.
ITEM 4.
|
MINE SAFETY PROCEDURES
|
Not applicable.
ITEM 5.
|
OTHER INFORMATION
|
Not applicable.
|
|
|
|
10.1
|
|
Employment Agreement between Quaint Oak Bank and John J. Augustine dated as of September 14, 2012 (1)
|
|
31.1
|
|
Rule 13a-14(d) and 15d-14(d) Certification of the Chief Executive Officer.
|
|
31.2
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Rule 13a-14(d) and 15d-14(d) Certification of the Chief Financial Officer.
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32.0
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Section 1350 Certification.
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_______________________
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(1) Incorporated by reference from the Company’s Current Report on Form 8-K dated September 14, 2012, filed with the Securities and Exchange Commission on September 18, 2012 (File No. 000-52694).
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The following Exhibits are being furnished as part of this report:
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101.INS
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XBRL Instance Document.*
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101.SCH
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XBRL Taxonomy Extension Schema Document.*
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101.CAL
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XBRL Taxonomy Extension Calculation Linkbase Document.*
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101.LAB
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XBRL Taxonomy Extension Label Linkbase Document.*
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101.PRE
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XBRL Taxonomy Extension Presentation Linkbase Document.*
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101.DEF
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XBRL Taxonomy Extension Definitions Linkbase Document.*
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*
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The interactive data files are being furnished on Exhibit 101 hereto and, in accordance with Rule 402 of Regulation S-T, shall not be deemed filed for purposes of Section 11 or 12 of the Securities Act of 1933, as amended, or Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability under those sections.
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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 13, 2012
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/s/ Robert T. Strong
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By:
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President and Chief Executive Officer
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Date:
November 13, 2012
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/s/ John J. Augustine
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By:
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Chief Financial Officer
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