MSB FINANCIAL CORP. This discussion and analysis reflects the Company's consolidated financial statements and other relevant statistical data and is intended to enhance your understanding of our financial condition and results of operations. You should read the information in this section in conjunction with the Company's consolidated financial statements and accompanying notes thereto beginning on page F1 following Item 16 of this Form 10-K.
Critical Accounting Policies
Our accounting policies are integral to understanding the results reported and are described in Note 2 to our consolidated financial statements beginning on page F-1. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the dates of the consolidated statements of financial condition and revenues and expenses for the periods then ended. Actual results could differ significantly from those estimates. A material estimate that is particularly susceptible to significant change relates to the determination of the allowance for loan losses. The allowance for loan losses is established through provisions for loan losses charged against income. Loans deemed to be uncollectible are charged against the allowance for loan losses, and subsequent recoveries, if any, are credited to the allowance. The allowance for loan losses is maintained at a level by management which represents the evaluation of known and probable incurred losses in the loan portfolio at the consolidated balance sheet date that are reasonable to estimate. Management's periodic evaluation of the adequacy of 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, the 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 change, including the amounts and timing of future cash flows expected to be received on impaired loans.
In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company's allowance for loan losses. Such agencies may require the Company to recognize additions to the allowance for loan losses based on their judgments about information available to them at the time of their examinations.
The Company's loan portfolio is comprised of the following segments: residential
mortgage, commercial real estate, construction, commercial and industrial and
consumer. Some segments of the Company's loan receivable portfolio are further
disaggregated into classes which allow management to more accurately monitor
risk and performance. Accordingly, the methodology and allowance calculation
includes the segmentation of the total loan portfolio.
The residential mortgage loan segment is disaggregated into two classes:
one-to-four family loans, which are primarily first liens, and home equity
loans, which consist of first and second liens. The commercial real estate loan
segment includes owner and non-owner occupied loans which have medium risk based
on historical experience with these types of loans. The construction loan
segment is further disaggregated into two classes: one-to-four family
owner-occupied, which includes land loans, whereby the owner is known and there
is less risk, and other, whereby the property is generally under development and
tends to have more risk than the one-to-four family owner-occupied loans. The
commercial and industrial loan segment consists of loans made for the purpose of
financing the activities of commercial customers. The commercial and industrial
loans carry a mix of loans secured by real estate and unsecured lines of credit
some of which are for high net worth individuals. The consumer loan segment
consists primarily of installment loans and overdraft lines of credit connected
with customer deposit accounts.
The allowance consists of specific, general and unallocated components. The
specific component is related to loans that are classified as impaired. For
loans 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 and is based on historical loss experience adjusted
for qualitative factors. These qualitative risk factors include:
1. Lending policies and procedures, including underwriting
standards and collection, charge-off, and recovery practices.
2. National, regional, and local economic and business conditions
as well as the condition of various market segments, including
the value of underlying collateral for collateral dependent
loans.
3. Nature and volume of the portfolio and terms of loans.
4. Experience, ability, and depth of lending management and staff.
5. Volume and severity of past due, classified and nonaccrual loans
as well as and other loan modifications.
6. Quality of the Company's loan review system, and the degree of
oversight by the Company's Board of Directors.
7. Existence and effect of any concentrations of credit and changes
in the level of such concentrations.
8. Effect of external factors, such as competition and legal and
regulatory requirements.
Each factor is assigned a value to reflect improving, stable or declining conditions based on management's best judgment using relevant information available at the time of the evaluation.
The 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.
21-------------------------------------------------------------------------------- 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. Loans the terms of which are modified are classified as TDRs if, in connection with the modification, the Company grants such borrowers concessions and it is deemed that those borrowers are experiencing financial difficulty. Concessions granted under a TDR generally involve a reduction in interest rate below market rate given the associated credit risk, or an extension of a loan's stated maturity date. Nonaccrual TDRs are restored to accrual status if principal and interest payments, under the modified terms, are current for six consecutive months after modification. Loans classified as TDRs are designated as impaired until they are ultimately repaid in full or foreclosed and sold. Once the determination has been made that a loan is impaired, impairment is measured by comparing the recorded investment in the loan to one of the following:(a) the present value of expected cash flows (discounted at the loan's effective interest rate), (b) the loan's observable market price or (c) the fair value of collateral adjusted for expected selling costs. The method is selected on a loan by loan basis with management primarily utilizing the fair value of collateral method. The estimated fair values of the real estate collateral 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 estimated fair values of non-real estate collateral, such as accounts receivable, inventory and equipment, are determined based on the borrower's financial statements, inventory reports, accounts receivable agings or equipment appraisals or invoices. Indications of value from these sources are generally discounted based on the age of the financial information or the quality of the assets. The evaluation of the need and amount of the allowance for impaired loans and whether a loan can be removed from impairment status is made on a quarterly basis. The Company's policy for recognizing interest income on impaired loans does not differ from its overall policy for interest recognition.
Overview
Our primary business is attracting deposits from the general public and using those deposits, together with funds generated from operations, principal repayments on securities and loans and borrowed funds, for our lending and investing activities. Our loan portfolio consists of one-to-four-family residential real estate mortgages, commercial real estate mortgages, construction loans, commercial and industrial loans, home equity loans and lines of credit, and other consumer loans. We also invest inU.S. Government obligations and mortgage-backed securities and, to a lesser extent, corporate bonds. We reported net income of$4.1 million for the year endedDecember 31, 2019 as compared to a net income of$4.8 million for 2018. Net income for 2019 was affected by an increase in professional expenses associated with increased audit scope and identification of material weakness. Net interest income for 2019 was down approximately$382,000 , or 2.13%, as compared to 2018. For the year endedDecember 31, 2019 , interest income increased by$1.2 million , or 5.18%, while interest expense increased by$1.6 million , or 29.49%, as compared to 2018. Non-interest expense increased by$908,000 , or 7.66%, while non-interest income increased by$174,000 , or 21.75%, for the same comparative period. The net interest rate spread decreased in 2019 to 2.91%, compared to 3.08% for 2018, mainly as a result of increased competition for deposits caused an increase in deposit rates paid. Total assets were$593.1 million atDecember 31, 2019 , a 1.47% increase compared to$584.5 million atDecember 31, 2018 . The increase in assets occurred primarily as the result of a$6.7 million increase in cash and cash equivalents, and a$5.7 million increase in loans receivable, net, offset by a decrease of$3.6 million in securities held to maturity. Deposits were$472.8 million atDecember 31, 2019 , compared to$420.6 million atDecember 31, 2018 . FHLB advances were$51.6 million atDecember 31, 2019 compared to$94.3 million atDecember 31, 2018 . Stockholders' equity atDecember 31, 2019 was$65.4 million compared to our stockholders' equity atDecember 31, 2018 of$66.6 million . The Company had net income of$4.1 million for the year endedDecember 31, 2019 . The decline in shareholders' equity was primarily due to the repurchase of 199,202 shares of common stock at a total cost of$3.3 million and the declaration of a$2.6 million dividend. Our return on average equity for the year endedDecember 31, 2019 was 6.19% compared to 6.88% for the year endedDecember 31, 2018 .
Comparison of Financial Condition at
22
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General. Total assets at December 31, 2019 were $593.1 million versus $584.5
million at December 31, 2018 with the increase primarily attributable to an
increase in cash and cash equivalents and loan growth. During the year ended
December 31, 2019 , the Company experienced growth of $6.7 million , or 56.38%, in
cash and cash equivalents and of $5.7 million , or 1.14%, in loans receivable,
net. Securities held to maturity decreased $3.6 million primarily as a result of
the purchase of $10.0 million in securities offset by maturities and principal
repayments, while FHLB of New York stock decreased $1.9 million , or 40.12%.
Other assets increased $2.0 million primarily due to the recording of the new
lease accounting standard. Deposits decreased by $52.2 million while FHLB
advances decreased by $42.7 million .
The ratio of average interest-earning assets to average-interest bearing
liabilities was 120.42% for the year ended
Loans. Loans receivable, net, increased$5.7 million , or 1.14%, from$502.3 million atDecember 31, 2018 to$508.0 million atDecember 31, 2019 . The Bank's construction loan portfolio increased approximately$18.0 million due to new projects, while the commercial and multi-family real estate loan portfolio grew by$14.8 million , or 6.98%, sinceDecember 31, 2018 . The residential mortgage portfolio, consisting of one-to-four family residential loans and home equity loans, decreased$13.9 million to$153.8 million from$167.8 million , while commercial and industrial loans decreased$7.5 million as of year-end 2018.
All
remaining portfolios were consistent with prior year-end levels.
Securities. The securities held to maturity portfolio totaled$35.8 million atDecember 31, 2019 compared to$39.5 million atDecember 31, 2018 . Maturities, calls and principal repayments during 2019 totaled$13.6 million and$10.0 million in securities were purchased compared to$7.9 million of maturities, calls and principal repayments and$9.0 million in purchases during 2018. Deposits. Total deposits atDecember 31, 2019 increased to$472.8 million from$420.6 million atDecember 31, 2018 . Overall, deposits increased by$52.2 million with non-interest bearing balances increasing$1.2 million and interest-bearing deposits increasing$50.9 million sinceDecember 31, 2018 , as the Company focused on deposit pricing and the development of deeper commercial and small business relationships. Borrowings. Total borrowings were$51.6 million atDecember 31, 2019 compared to$94.3 million atDecember 31, 2018 . Overnight advances with the FHLB ofNew York atDecember 31, 2019 were$23.9 million compared to$66.6 million atDecember 31, 2018 . Equity. Stockholders' equity was$65.4 million atDecember 31, 2019 compared to$66.6 million atDecember 31, 2018 , a decrease of$1.3 million or 1.91%. The decrease in shareholders' equity was primarily due to the repurchase of 199,202 shares of common stock at a total cost of$3.3 million and the declaration of a$2.6 million dividend. This reduction was partially offset by a$4.1 million increase in retained earnings related to net income.
Comparison of Operating Results for the Years Ended
General. Our results of operations depend primarily on our net interest income. Net interest income is the difference between the interest income we earn on our interest-earning assets and the interest we pay on our interest-bearing liabilities. It is a function of the average balances of loans and investments versus deposits and borrowed funds outstanding in any one period and the yields earned on those loans and investments and the cost of those deposits and borrowed funds. Our results of operations are also affected by our provision for loan losses, non-interest income and non-interest expense. Non-interest income includes service fees and charges, and income on bank owned life insurance. Non-interest expense includes salaries and employee benefits, occupancy and equipment expense and other general and administrative expenses such as service bureau fees and advertising costs. The Company reported net income of$4.1 million forDecember 31, 2019 compared to net income of$4.8 million for the year endedDecember 31, 2018 , representing a decrease of$732,000 or 15.14%. This decrease was largely driven by an increase in non-interest expense of$908,000 and a decrease of$382,000 in net interest income. Offsetting this was a decrease in the provision for loan losses of$240,000 , and an increase of$174,000 in non-interest income. Income tax expense decreased$144,000 for the year endedDecember 31, 2019 versus 2018 as a result of lower earnings. Net Interest Income. Net interest income for the year endedDecember 31, 2019 totaled$17.6 million compared to$17.9 million for the year endedDecember 31, 2018 . Interest income for the year endedDecember 31, 2019 was$24.6 million compared to$23.3 million for the year endDecember 31, 2018 , while interest expense increased by$1.6 million to$7.0 million from$5.4 million the same period a year earlier. Average earning assets increased$7.8 million , or 1.44%, to$554.3 million year over year while the average yield on interest earning assets increased by 0.16% to 4.43% for the year endedDecember 31, 2019 . The result of those variances was an increase in interest income of$1.2 million for the year endedDecember 31, 2019 compared to the year endedDecember 31, 2018 . Interest income for the year endedDecember 31, 2019 was$24.6 million compared to$23.3 million for the year endDecember 31, 2018 . Interest income on loans receivable grew by$1.0 million to$23.0 million mainly due to an increase in loan rate. Average loans were$502.2 million and$495.7 million for the years endedDecember 31, 2019 and 2018, respectively. The average yield on loans increased by .15% which contributed to the increase in interest income from loans. Average securities held to maturity declined by$2.1 million to$37.8 million from$39.9 million . The average rate earned on the portfolio increased 0.15% to 2.82% from 2.67% for the prior year. Overall, the decreased volume combined with the increased rate resulted in a decrease of$1,000 in interest income from securities. Other interest-earning assets, consisting of ourFederal Reserve account, FHLB stock and other interest-bearing deposits with other financial institutions, increased by$3,5 million on average, to$14.4 million for the year endedDecember 31, 2019 compared with$10.9 million for the year endedDecember 31, 2018 . Partnered with this increase was an increase 23 --------------------------------------------------------------------------------
in the average yield from 2.94% to 3.37%. This increase in rate was largely
attributed to larger balances held at the
Total interest expense increased by$1.6 million to$7.0 million for the year endedDecember 31, 2019 as a result of higher rates. Overall, average interest-bearing liabilities increased$5.7 million , or 1.3%, to$460.3 million for the year endedDecember 31, 2019 as compared to$454.6 million for the year endedDecember 31, 2018 . Interest expense on certificates of deposit increased$848,000 as average balances were approximately$22.7 million higher for the year ended 2019 period totaling$147.3 million compared to$124.6 million for the year endedDecember 31, 2018 . The average cost of certificates of deposit increased by 0.32%. Savings accounts averaged$99.4 million for the year endedDecember 31, 2019 versus$105.6 million for the year endedDecember 31, 2018 . The 0.22% increase in the average rate was the primary reason for the$187,000 increase in interest expense for these accounts in 2019 as compared to the same period in 2018. Interest demand and money market accounts on average decreased$13.2 million to$140.2 million , while interest expense increased$413,000 for the year endedDecember 31, 2019 . The average interest rate paid on these accounts rose 0.37% to 1.19% from 0.82% as a result of larger balance accounts earning a higher rate of interest. Interest expense on FHLB advances rose by$144,000 to$1.7 million from$1.6 million a year earlier. The average cost of advances increased by 0.12% to 2.32% from 2.20% . Average FHLB advances were$73.5 million for the year endedDecember 31, 2019 versus$71.1 million for the year endedDecember 31, 2018 . The Company's net interest spread and margin declined over the periods and were 2.91% and 3.17%, respectively for the year endedDecember 31, 2019 compared to 3.08% and 3.28%, respectively for the year endedDecember 31, 2018 . Provision for Loan Losses. The loan loss provision for the year endedDecember 31, 2019 was$0 compared to$240,000 for the year endedDecember 31, 2018 . The Company's management reviews the level of the allowance for loan losses on a quarterly basis based on a variety of factors including, but not limited to, (1) the risk characteristics of the loan portfolio, (2) current economic conditions, (3) actual losses previously experienced, (4) the Company's level of loan growth and (5) the existing level of reserves for loan losses that are probable and estimable. This analysis resulted in a lower provision for loan loss being required for the period endedDecember 31, 2019 . The decrease in the level of provision for loan loss primarily reflects other credit metrics generally improving year over year. There was a stabilization of the quantitative and qualitative factors during the year endedDecember 31, 2019 andDecember 31, 2018 . The Company had$4,000 in charge-offs and$71,000 in recoveries for the year endedDecember 31, 2019 compared to$8,000 in charge-offs and$9,000 in recoveries for the year endedDecember 31, 2018 . The Company had$3.1 million in non-performing loans as ofDecember 31, 2019 , compared to$4.1 million atDecember 31, 2018 . The allowance for loan losses as a percentage of total loans was 1.08% forDecember 31, 2019 andDecember 31, 2018 , respectively, while the allowance for loan losses as a percentage of non-performing loans increased to 184.11% atDecember 31, 2019 from 136.83% atDecember 31, 2018 . Non-performing loans to total loans were 0.59% atDecember 31, 2019 compared to 0.81% atDecember 31, 2018 . Net charge-offs to average loans outstanding ratios were 0.00% for the year endedDecember 31, 2019 andDecember 31, 2018 . While management believes the allowance for loan losses is adequate for the risk in the loan portfolio, there can be no assurance that future increases may not be necessary. Non-Interest Income. This category includes fees derived from checking accounts, ATM transactions, debit card use and other fees. It also includes increases in the cash-surrender value of our bank owned life insurance. Overall, non-interest income was$974,000 for the year endedDecember 31, 2019 compared to$800,000 for the year endedDecember 31, 2018 , an increase of$174,000 or 21.75%. Income from fees and service charges totaled$346,000 for the year endedDecember 31, 2019 compared to$334,000 for the year endedDecember 31, 2018 , an increase of$12,000 or 3.59%. The increase was attributable to higher volume in services fees charged during the year. Income on bank owned life insurance was$554,000 and$388,000 for the years endedDecember 31, 2019 and 2018, while other non-interest income was$74,000 and$78,000 for the years endedDecember 31, 2019 and 2018, respectively. Bank owned life insurance increased as a result of a death benefit recorded during the year.
Non-Interest Expenses. Total non-interest expenses increased by
Salaries and employee benefits expense increased by$96,000 , or 1.44%, to$6.8 million for the year endedDecember 31, 2019 compared to$6.7 million for the year endedDecember 31, 2018 . Salary and benefits increased due to normal increases in salaries and benefits expenses. Directors' compensation expense totaled$524,000 for the year endedDecember 31, 2019 compared to$490,000 for the year endedDecember 31, 2018 , representing an increase of$34,000 or 6.94% as one director was added during the year.
Occupancy and equipment expense decreased by
Service bureau fees increased by$228,000 , or 65.71%, to$575,000 for the year endedDecember 31, 2019 compared to$347,000 for the year endedDecember 31, 2018 as a result of a reduction in the Company's relationship credit that had completed during the year.FDIC assessment expense decreased$111,000 , or 52.61%, to$100,000 for the year endedDecember 31, 2019 compared to$211,000 for the same period a year earlier. The reduction in expense was related to anFDIC credit received for the past two quarters. 24
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Professional services increased
Other non-interest expense totaled
Income Taxes. The income tax expense for the year endedDecember 31, 2019 was$1.7 million , or 28.9% of income before taxes as compared to income tax expense of$1.8 million , or 27.2%, of the reported income before income taxes, for the year endedDecember 31, 2018 . The increase in tax rate was primarily attributable to the tax true-up from 2018. Average Balance Sheet. The following tables set forth certain information for the year endedDecember 31, 2019 and 2018. The average yields and costs are derived by dividing interest income and expense by the average daily balance of assets and liabilities, respectively, for the periods presented. Year Ended December 31, 2019 2018 Interest Average Interest Average Average Earned/ Yield/ Average Earned/ Yield/ Balance Paid Cost Balance Paid Cost Interest-earning assets: Loans receivable (1)$ 502,186 $ 23,007 4.58 %$ 495,719 $ 21,960 4.43 % Securities 37,787 1,064 2.82 % 39,893 1,065 2.67 % Other interest-earning assets (2) 14,367 484 3.37 % 10,885 320 2.94 % Total interest-earning assets 554,340 24,555 4.43 % 546,497 23,345 4.27 % Non-interest-earning assets 22,698 22,435 Total assets$ 577,038 $ 568,932 Interest-bearing liabilities: Interest demand & money market demand$ 140,208 1,670 1.19 %$ 153,367 1,257 0.82 % Savings and club deposits 99,391 735 0.74 % 105,623 548 0.52 % Certificates of deposit 147,253 2,877 1.95 % 124,556 2,029 1.63 % Total interest-bearing deposits 386,852 5,282 1.37 % 383,546 3,834 1.00 % FHLB of New York advances 73,473 1,708 2.32 % 71,064 1,564 2.20 % Total interest-bearing liabilities 460,325 6,990 1.52 % 454,610 5,398 1.19 % Non-interest-bearing deposits 47,228 41,746 Other non-interest-bearing liabilities 3,194 2,345 Total liabilities 510,747 498,701 Stockholders' equity 66,291 70,231 Total liabilities and stockholders' equity$ 577,038 $ 568,932 Net interest income/net interest rate spread (3)$ 17,565 2.91 %$ 17,947 3.08 % Net interest margin (4) 3.17 % 3.28 % Ratio of interest-earning assets to interest-bearing liabilities 120.42 %
120.21 %
________________
(1) Non-accruing loans have been included, and the effect of such inclusion
was not material. The allowance for loan losses is excluded, while
construction loans in process and deferred fees are included.
(2) Includes FHLB of New York stock at cost and term deposits with other
financial institutions.
(3) Net interest rate spread represents the difference between the average
yield on interest-earning assets and the average cost of interest-bearing
liabilities.
(4) Net interest margin represents net interest income as a percentage of
average interest-earning assets.
Rate/Volume Analysis. The following table reflects the sensitivity of our
interest income and interest expense to changes in volume and in prevailing
interest rates during the periods indicated. Each category reflects the: (1)
changes in volume (changes in volume multiplied by past rate); (2) changes in
rate (changes in rate multiplied by past volume); and (3) net change. The net
change attributable to the combined impact of volume and rate has been allocated
proportionally to the absolute dollar amounts of change in each.
25
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Year Ended December 31,
2019 vs. 2018
Increase (Decrease)
Due to
Volume Rate Net
Interest and dividend income:
Loans receivable $ 292 755 1,047
Securities (29 ) 28 (1 )
Other interest-earning assets 113 51 164
Increase in total interest income 376 834 1,210
Interest expense: Interest demand and money market accounts (25 ) 438 413 Savings and club
(6 ) 193 187
Certificates of deposit 408 440 848
Total interest-bearing deposits 377 1,071 1,448
FHLB of New York advances 55 89 144
Increase in total interest expense 432 1,160 1,592
Change in net interest income $ (56 ) (326 ) (382 )
Liquidity, Commitments and Capital Resources
The Bank must be capable of meeting its customer obligations at all times. Potential liquidity demands include funding loan commitments, cash withdrawals from deposit accounts and other funding needs as they present themselves. Accordingly, liquidity is measured by our ability to have sufficient cash reserves on hand, at a reasonable cost and/or with minimum losses.
Senior management is responsible for managing our overall liquidity position and risk and is responsible for ensuring that our liquidity needs are being met on both a daily and long-term basis. The Financial Review Committee, comprised of senior management and chaired by the President and Chief Executive Officer is responsible for establishing and reviewing our liquidity procedures, guidelines, and strategy on a periodic basis. Our approach to managing day-to-day liquidity is measured through our daily calculation of investable funds and/or borrowing needs to ensure adequate liquidity. In addition, senior management constantly evaluates our short-term and long-term liquidity risk and strategy based on current market conditions, outside investment and/or borrowing opportunities, short and long-term economic trends, and anticipated short and long-term liquidity requirements. The Bank's loan and deposit rates may be adjusted as another means of managing short and long-term liquidity needs. We do not at present participate in derivatives or other types of hedging instruments to meet liquidity demands, as we take a conservative approach in managing liquidity. AtDecember 31, 2019 , the Bank had outstanding commitments to originate loans of$15.4 million , unused lines of credit of$86.4 million (including$13.3 million for home equity lines of credit and$73.1 million for commercial lines of credit), and standby letters of credit of$513,000 . Certificates of deposit scheduled to mature in one year or less atDecember 31, 2019 , totaled$96.1 million . The Bank had contractual obligations related to the long-term operating leases for the two branch and one operations center location that it leases (Loan Production Office, RiverWalk and Martinsville). For additional information regarding the Bank's lease commitments as ofDecember 31, 2019 , see Note 9 to our consolidated financial statements beginning on page F-1. The Bank has access to cash through borrowings from the FHLB, as needed, to meet its day-to-day funding obligations. AtDecember 31, 2019 , its total loans to deposits ratio was 107.46%. AtDecember 31, 2019 , the Bank's collateralized borrowing limit with the FHLB was$173.6 million , of which$51.6 million was outstanding. As ofDecember 31, 2019 , the Bank also had a$13.0 million line of credit with a financial institution for an unsecured line of credit (which is a form of borrowing) that it could access if necessary. Consistent with its goals to operate a sound and profitable financial organization, the Bank actively seeks to maintain its status as a well-capitalized institution in accordance with regulatory standards. As ofDecember 31, 2019 , the Company and the Bank exceeded all applicable regulatory capital requirements. See Note 8 to our consolidated financial statements beginning at page F-1 for more information about the Company and the Bank's regulatory capital compliance. Off-Balance Sheet Arrangements We are a party to financial instruments with off-balance-sheet risk in the normal course of our business of investing in loans and securities as well as in the normal course of maintaining and improving the Bank facilities. These financial instruments include significant purchase commitments such as commitments to purchase investment securities or mortgage-backed securities and commitments to extend credit 26 -------------------------------------------------------------------------------- to meet the financing needs of our customers. AtDecember 31, 2019 , our significant off-balance sheet commitments consisted of commitments to originate loans of$15.4 million , unused lines of credit of$86.4 million (including$13.3 million for home equity lines of credit and$73.1 million for commercial lines of credit) and standby letters of credit of$513,000 . Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Our exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit 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. Since a number of commitments typically expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. For additional information regarding our outstanding lending commitments atDecember 31, 2019 , see Note 13 to our consolidated financial statements beginning on page F-1. Impact of Inflation The Company's financial statements have been prepared in accordance with accounting principles generally accepted inthe United States of America . These principles require the measurement of financial position and operating results in terms of historical dollars, without considering changes in the relative purchasing power of money over time due to inflation. Our primary assets and liabilities are monetary in nature. As a result, interest rates have a more significant impact on our performance than the effects of general levels of inflation. Interest rates, however, do not necessarily move in the same direction or with the same magnitude as the price of goods and services, since such prices are affected by inflation. In a period of rapidly rising interest rates, the liquidity and maturities of our assets and liabilities are critical to the maintenance of acceptable performance levels. The principal effect of inflation on earnings, as distinct from levels of interest rates, is in the area of non-interest expense. Expense items such as employee compensation, employee benefits and occupancy and equipment costs may be subject to increases as a result of inflation. An additional effect of inflation is the possible increase in the dollar value of the collateral securing loans that we have made. We are unable to determine the extent, if any, to which properties securing our loans have appreciated in dollar value due to inflation. Recent Accounting Pronouncements Note 2 to the consolidated financial statements is incorporated herein by reference. Quarterly Results of Operations Three months ended 12/31/2019 9/30/2019 6/30/2019 3/31/2019 12/31/2018 9/30/2018 6/30/2018 3/31/2018 (In Thousands, Except Per Share Data) Interest income$ 6,101 $ 6,179 $ 6,167 $ 6,108 $ 6,003 $ 6,175 $ 5,738 $ 5,429 Interest expense 1,711 1,838 1,756 1,685 1,544 1,420 1,307 1,127 Net Interest Income 4,390 4,341 4,411 4,423 4,459 4,755 4,431 4,302 Provision for loan losses - - - - - 60 90 90 Net Interest Income after Provision for Loan Losses 4,390 4,341 4,411 4,423 4,459 4,695 4,341 4,212 Non-interest income 381 199 204 190 198 190 208 204 Non-interest expenses 3,077 2,919 2,906 3,867 2,911 3,064 2,899 2,987 Income before Income Taxes 1,694 1,621 1,709 746 1,746 1,821 1,650
1,429
Income tax expense (benefit) 443 505 487 232 491 506 407 407 Net Income$ 1,251 $ 1,116 $ 1,222 $ 514 $ 1,255 $ 1,315 $ 1,243 $ 1,022 Earnings per share: Basic$ 0.25 $ 0.22 $ 0.24 $ 0.10 $ 0.24 $ 0.25 $ 0.23 $ 0.19 Diluted$ 0.25 $ 0.22 $ 0.24 $ 0.10 $ 0.24 $ 0.24 $ 0.23 $ 0.19
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