| UNITED STATES |
| SECURITIES AND EXCHANGE COMMISSION |
| Washington, D.C. 20549 |
| FORM |
| (Mark One) | |
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| For the quarterly period ended | |
| OR | |
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| For the transition period from | to |
| Commission file number: | |
| QUAINT OAK BANCORP, INC. |
| (Exact Name of Registrant as Specified in Its Charter) |
| | | |
| (State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) | |
| | | |
| (Address of Principal Executive Offices) | (Zip Code) |
| ( |
| (Registrant’s Telephone Number, Including Area Code) |
| Not applicable |
| (Former name, former address and former fiscal year, if changed since last report) |
| Securities registered pursuant to Section 12(b) of the Act: None |
| Title of each Class | Trading Symbol(s) | Name of each exchange on which registered |
| Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ |
| Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ |
| Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. |
| Large accelerated filer ☐ Accelerated filer ☐ |
| If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ |
| Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). |
| Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: As of May 8, 2023, |
INDEX
| PART I - FINANCIAL INFORMATION |
Page |
|
| Item 1 - |
Financial Statements |
|
| Consolidated Balance Sheets as of March 31, 2023 and December 31, 2022 (Unaudited) |
1 |
|
| Consolidated Statements of Income for the Three Months Ended March 31, 2023 and 2022 (Unaudited) |
2 |
|
| Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2023 and 2022 (Unaudited) |
4 |
|
| Consolidated Statements of Stockholders’ Equity for the Three Months Ended March 31, 2023 and 2022 (Unaudited) |
5 |
|
| Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2023 and 2022 (Unaudited) |
6 |
|
| Notes to the Unaudited Consolidated Financial Statements |
8 |
|
| Item 2 - |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
28 |
| Item 3 - |
Quantitative and Qualitative Disclosures About Market Risk |
34 |
| Item 4 - |
Controls and Procedures |
34 |
| PART II - OTHER INFORMATION |
||
| Item 1 - |
Legal Proceedings |
34 |
| Item 1A - |
Risk Factors |
34 |
| Item 2 - |
Unregistered Sales of Equity Securities and Use of Proceeds |
34 |
| Item 3 - |
Defaults Upon Senior Securities |
35 |
| Item 4 - |
Mine Safety Disclosures |
35 |
| Item 5 - |
Other Information |
35 |
| Item 6 - |
Exhibits |
35 |
| SIGNATURES |
||
ITEM 1. FINANCIAL STATEMENTS
Quaint Oak Bancorp, Inc.
Consolidated Balance Sheets (Unaudited)
| At March 31, | At December 31, | |||||||
| 2023 | 2022 | |||||||
|
| (In thousands, except share and per share data) | |||||||
| Assets | ||||||||
| Due from banks, non-interest-bearing | $ | $ | ||||||
| Due from banks, interest-bearing | ||||||||
| Cash and cash equivalents | ||||||||
| Investment in interest-earning time deposits | ||||||||
| Investment securities available for sale | ||||||||
| Loans held for sale | ||||||||
| Loans receivable, net of allowance for credit losses (2023 $; 2022 $) | ||||||||
| Accrued interest receivable | ||||||||
| Investment in Federal Home Loan Bank stock, at cost | ||||||||
| Bank-owned life insurance | ||||||||
| Premises and equipment, net | ||||||||
| Goodwill | ||||||||
| Other intangible, net of accumulated amortization | ||||||||
| Prepaid expenses and other assets | ||||||||
| Total Assets | $ | $ | ||||||
| Liabilities and Stockholders’ Equity | ||||||||
| Liabilities | ||||||||
| Deposits: | ||||||||
| Non-interest bearing | $ | $ | ||||||
| Interest-bearing | ||||||||
| Total deposits | ||||||||
| Federal Home Loan Bank short-term borrowings | ||||||||
| Federal Home Loan Bank long-term borrowings | ||||||||
| Federal Reserve Bank short-term borrowings | ||||||||
| Other short-term borrowings | ||||||||
| Subordinated debt | ||||||||
| Accrued interest payable | ||||||||
| Advances from borrowers for taxes and insurance | ||||||||
| Accrued expenses and other liabilities | ||||||||
| Total Liabilities | ||||||||
| Stockholders’ Equity | ||||||||
| Preferred stock – $ par value, shares authorized; issued or outstanding | ||||||||
| Common stock – $ par value; shares authorized; issued; and outstanding at March 31, 2023 and December 31, 2022, respectively | ||||||||
| Additional paid-in capital | ||||||||
| Treasury stock, at cost: and shares at March 31, 2023 and December 31, 2022, respectively | ( | ) | ( | ) | ||||
| Accumulated other comprehensive loss | ( | ) | ( | ) | ||||
| Retained earnings | ||||||||
| Total Quaint Oak Bancorp, Inc. Stockholders' Equity | ||||||||
| Noncontrolling Interest | ||||||||
| Total Stockholders' Equity | $ | $ | ||||||
| Total Liabilities and Stockholders’ Equity | $ | $ | ||||||
See accompanying notes to the unaudited consolidated financial statements.
Quaint Oak Bancorp, Inc.
Consolidated Statements of Income (Unaudited)
| For the Three Months Ended |
||||||||
| March 31, |
||||||||
| 2023 |
2022 |
|||||||
| (In thousands) |
||||||||
| Interest Income |
||||||||
| Interest on loans, including fees |
$ | $ | ||||||
| Interest and dividends on time deposits, investment securities, interest-bearing deposits with others, and Federal Home Loan Bank stock |
||||||||
| Total Interest Income |
||||||||
| Interest Expense |
||||||||
| Interest on deposits |
||||||||
| Interest on Federal Home Loan Bank short-term borrowings |
||||||||
| Interest on Federal Home Loan Bank long-term borrowings |
||||||||
| Interest on Federal Reserve Bank short-term borrowings |
||||||||
| Interest on subordinated debt |
||||||||
| Interest on other short-term borrowings |
||||||||
| Total Interest Expense |
||||||||
| Net Interest Income |
||||||||
| Provision for Credit Losses |
||||||||
| Net Interest Income after Provision for Credit Losses |
||||||||
| Non-Interest Income |
||||||||
| Mortgage banking, equipment lending and title abstract fees |
||||||||
| Real estate sales commissions, net |
||||||||
| Insurance commissions |
||||||||
| Other fees and services charges |
||||||||
| Net loan servicing income |
||||||||
| Income from bank-owned life insurance |
||||||||
| Net gain on loans held for sale |
||||||||
| Gain on the sale of SBA loans |
||||||||
| Total Non-Interest Income |
||||||||
| Non-Interest Expense |
||||||||
| Salaries and employee benefits |
||||||||
| Directors' fees and expenses |
||||||||
| Occupancy and equipment |
||||||||
| Data processing |
||||||||
| Professional fees |
||||||||
| FDIC deposit insurance assessment |
||||||||
| Advertising |
||||||||
| Amortization of other intangible |
||||||||
| Other |
||||||||
| Total Non-Interest Expense |
||||||||
See accompanying notes to the unaudited consolidated financial statements.
Quaint Oak Bancorp, Inc.
Consolidated Statements of Income (Unaudited)
| For the Three Months Ended |
||||||||
| March 31, |
||||||||
| 2023 |
2022 |
|||||||
| (In thousands, except for share and per share data) |
||||||||
| Income before Income Taxes |
$ | $ | ||||||
| Income Taxes |
||||||||
| Net Income |
$ | $ | ||||||
| Net (Loss) Income Attributable to Noncontrolling Interest |
$ | ( |
) | $ | ||||
| Net Income Attributable to Quaint Oak Bancorp, Inc. |
$ | $ | ||||||
| Earnings per share - basic |
$ | $ | ||||||
| Average shares outstanding - basic |
||||||||
| Earnings per share - diluted |
$ | $ | ||||||
| Average shares outstanding - diluted |
||||||||
See accompanying notes to the unaudited consolidated financial statements.
Quaint Oak Bancorp, Inc.
Consolidated Statements of Comprehensive Income (Unaudited)
| For the Three Months Ended |
||||||||
| March 31, |
||||||||
| 2023 |
2022 |
|||||||
| (In thousands) |
||||||||
| Net Income |
$ | $ | ||||||
| Other Comprehensive Income (Loss): |
||||||||
| Unrealized gains (losses) on investment securities available-for-sale |
( |
) | ||||||
| Income tax effect |
( |
) | ||||||
| Other comprehensive income (loss) |
( |
) | ||||||
| Total Comprehensive Income |
$ | $ | ||||||
| Comprehensive (Loss) Income Attributable to Noncontrolling Interest |
$ | ( |
) | $ | ||||
| Comprehensive Income Attributable to Quaint Oak Bancorp, Inc. |
$ | $ | ||||||
See accompanying notes to the unaudited consolidated financial statements.
Quaint Oak Bancorp, Inc.
Consolidated Statements of Stockholders’ Equity (Unaudited)
| For the Three Months Ended March 31, 2023
|
|
|
|
| ||||||||||||||||||||||||||||
| Common Stock | ||||||||||||||||||||||||||||||||
| Number of Shares Outstanding | Amount | Additional Paid-in Capital | Treasury Stock | Accumulated Other Comprehensive Loss | Retained Earnings | Noncontrolling Interest | Total Stockholders’ Equity | |||||||||||||||||||||||||
| (In thousands, except share and per share data) | ||||||||||||||||||||||||||||||||
| BALANCE – | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | $ | |||||||||||||||||||||
| DECEMBER 31, 2022 | ||||||||||||||||||||||||||||||||
| Reissuance of treasury stock under 401(k) Plan | ||||||||||||||||||||||||||||||||
| Reissuance of treasury stock for exercised stock options | ||||||||||||||||||||||||||||||||
| Stock based compensation expense | ||||||||||||||||||||||||||||||||
| Cash dividends declared ($ per share) | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Noncontrolling interest distribution | (40 | ) | ( | ) | ||||||||||||||||||||||||||||
| Net income (loss) | ( | ) | ||||||||||||||||||||||||||||||
| Other comprehensive income, net | 10 | |||||||||||||||||||||||||||||||
| BALANCE – MARCH 31, 2023 | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | $ | |||||||||||||||||||||
| For the Three Months Ended March 31, 2022
|
|
|
|
| ||||||||||||||||||||||||||||
| Common Stock | ||||||||||||||||||||||||||||||||
| Number of Shares Outstanding | Amount | Additional Paid-in Capital | Treasury Stock | Accumulated Other Comprehensive Income | Retained Earnings | Noncontrolling Interest | Total Stockholders’ Equity | |||||||||||||||||||||||||
| (In thousands, except share data) | ||||||||||||||||||||||||||||||||
| BALANCE – | ||||||||||||||||||||||||||||||||
| DECEMBER 31, 2021 | $ | $ | $ | ( | ) | $ | $ | $ | $ | |||||||||||||||||||||||
| Contribution of shares to ESOP from Treasury | ||||||||||||||||||||||||||||||||
| Treasury stock purchased | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Reissuance of treasury stock under 401(k) Plan | 18 | |||||||||||||||||||||||||||||||
| Reissuance of treasury stock for exercised stock options | ||||||||||||||||||||||||||||||||
| Stock based compensation expense | ||||||||||||||||||||||||||||||||
| Cash dividends declared ($ per share) | ( | ) | (221 | ) | ||||||||||||||||||||||||||||
| Noncontrolling interest member distribution | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Net income | ||||||||||||||||||||||||||||||||
| Other comprehensive loss, net | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| BALANCE – MARCH 31, 2022 | $ | $ | $ | ( | ) | $ | $ | $ | $ | |||||||||||||||||||||||
See accompanying notes to the unaudited consolidated financial statements.
Quaint Oak Bancorp, Inc.
Consolidated Statements of Cash Flows (Unaudited)
| For the Three Months |
||||||
| Ended March 31, |
||||||
| 2023 |
2022 |
|||||
| (In Thousands) |
||||||
| Cash Flows from Operating Activities |
||||||
| Net income |
$ | $ | ||||
| Adjustments to reconcile net income to net cash (used in) provided by operating activities: |
||||||
| Provision for credit losses |
||||||
| Depreciation of premises and equipment |
||||||
| Amortization (accretion), net of operating right-of-use assets |
||||||
| Amortization (accretion), net of subordinated debt issuance costs |
||||||
| Amortization (accretion), net of other intangible |
||||||
| Amortization (accretion), net of securities premiums |
( |
) | ||||
| Amortization (accretion), net of deferred loan fees and costs, net |
( |
) | ( |
) | ||
| Stock-based compensation expense |
||||||
| Net gain on loans held for sale |
( |
) | ( |
) | ||
| Loans held for sale-originations |
( |
) | ( |
) | ||
| Loans held for sale-proceeds |
||||||
| Gain on the sale of SBA loans |
( |
) | ( |
) | ||
| Increase in the cash surrender value of bank-owned life insurance |
( |
) | ( |
) | ||
| Changes in assets and liabilities which provided (used) cash: |
||||||
| Accrued interest receivable |
( |
) | ||||
| Prepaid expenses and other assets |
( |
) | ||||
| Accrued interest payable |
||||||
| Accrued expenses and other liabilities |
||||||
| Net Cash (Used in) Provided by Operating Activities |
( |
) | ||||
| Cash Flows from Investing Activities |
||||||
| Purchase of interest-earning time deposits |
( |
) | ( |
) | ||
| Redemption of interest-earning time deposits |
||||||
| Principal repayments of investment securities available for sale |
||||||
| Net increase in loans receivable |
( |
) | ( |
) | ||
| Purchase of Federal Home Loan Bank stock |
( |
) | ( |
) | ||
| Redemption of Federal Home Loan Bank stock |
||||||
| Purchase of premises and equipment |
( |
) | ( |
) | ||
| Net Cash Used in Investing Activities |
( |
) | ( |
) | ||
| Cash Flows from Financing Activities |
||||||
| Net (decrease) increase in demand deposits, money markets, and savings accounts |
( |
) | ||||
| Net increase in certificate accounts |
||||||
| Decrease in advances from borrowers for taxes and insurance |
( |
) | ( |
) | ||
| Repayments of Federal Home Loan Bank short-term borrowings |
( |
) | ( |
) | ||
| Proceeds from Federal Home Loan Bank short-term borrowings |
||||||
| Repayments of Federal Home Loan Bank long-term borrowings |
( |
) | ||||
| Repayments of Federal Reserve Bank short-term borrowings |
( |
) | ( |
) | ||
| Proceeds from Federal Reserve Bank short-term borrowings |
||||||
| Proceeds from other borrowings |
||||||
| Net proceeds from subordinated debt |
||||||
| Dividends paid |
( |
) | ( |
) | ||
| Noncontrolling interest capital distribution |
( |
) | ( |
) | ||
| Purchase of treasury stock |
( |
) | ||||
| Proceeds from the reissuance of treasury stock |
||||||
| Proceeds from the exercise of stock options |
||||||
| Net Cash Provided by Financing Activities |
||||||
| Net (Decrease) Increase in Cash and Cash Equivalents |
( |
) | ||||
| Cash and Cash Equivalents – Beginning of Year |
||||||
| Cash and Cash Equivalents – End of Year |
$ | $ | ||||
See accompanying notes to the unaudited consolidated financial statements.
Quaint Oak Bancorp, Inc.
Consolidated Statements of Cash Flows (Unaudited)
| For the Three Months |
||||||||
| Ended March 31, |
||||||||
| 2023 |
2022 |
|||||||
| (In Thousands) |
||||||||
| Supplementary Disclosure of Cash Flow and Non-Cash Information: |
||||||||
| Cash payments for interest |
$ | $ | ||||||
| Cash payments for income taxes |
$ | $ | ||||||
| Initial recognition of operating lease right-of use assets |
$ | $ | ||||||
| Initial recognition of operating lease obligations |
$ | $ | ||||||
See accompanying notes to the unaudited consolidated financial statements.
Quaint Oak Bancorp, Inc.
Notes to Unaudited Consolidated Financial Statements
Note 1 – Financial Statement Presentation and Significant Accounting Policies
Basis of Financial Presentation. The consolidated financial statements include the accounts of Quaint Oak Bancorp, Inc., a Pennsylvania chartered corporation (the “Company” or “Quaint Oak Bancorp”) and its wholly owned subsidiary, Quaint Oak Bank, a Pennsylvania chartered stock savings bank (the “Bank”), along with its wholly owned subsidiaries. At March 31, 2023, the Bank has wholly-owned subsidiaries, Quaint Oak Mortgage, LLC, Quaint Oak Real Estate, LLC, Quaint Oak Abstract, LLC, QOB Properties, LLC, Quaint Oak Insurance Agency, LLC, and Oakmont Commercial, LLC, each a Pennsylvania limited liability company. The mortgage company offers mortgage banking in the Lehigh Valley, Delaware Valley and Philadelphia County regions of Pennsylvania. The real estate and abstract companies offer real estate sales and title abstract services, respectively, primarily in the Lehigh Valley region of Pennsylvania. These companies began operation in July 2009. In February, 2019, Quaint Oak Mortgage opened a mortgage banking office in Philadelphia, Pennsylvania. QOB Properties, LLC began operations in July 2012 and holds Bank properties acquired through a foreclosure proceeding or acceptance of a deed in lieu of foreclosure. Quaint Oak Insurance Agency, LLC began operations in August 2016 and provides a broad range of personal and commercial insurance coverage solutions. Oakmont Commercial, LLC was formed in October 2021 and operates as a multi-state specialty commercial real estate financing company. As of January 4, 2021, the Bank holds a majority equity position in Oakmont Capital Holdings, LLC, a multi-state equipment finance company based in West Chester, Pennsylvania with a second significant facility located in Albany, Minnesota. All significant intercompany balances and transactions have been eliminated.
The Bank is subject to regulation by the Pennsylvania Department of Banking and Securities and the Federal Deposit Insurance Corporation. Pursuant to the Bank’s election under Section 10(l) of the Home Owners’ Loan Act, the Company is a savings and loan holding company regulated by the Board of Governors of the Federal Reserve System. The market area served by the Bank is principally Bucks, Montgomery and Philadelphia Counties in Pennsylvania and the Lehigh Valley area in Pennsylvania. The Bank has three regional offices located in the Delaware Valley, Lehigh Valley and Philadelphia markets. The principal deposit products offered by the Bank are money market accounts, certificates of deposit, non-interest bearing checking accounts for businesses and consumers, and savings accounts. The principal loan products offered by the Bank are fixed and adjustable rate residential and commercial mortgages, construction loans, commercial business loans, home equity loans, and lines of credit.
The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (US GAAP) for interim information and with the instructions to Form 10-Q, as applicable to a smaller reporting company. Accordingly, they do not include all the information and footnotes required by US GAAP for complete financial statements.
The foregoing consolidated financial statements are unaudited; but in the opinion of management include all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation thereof. The balances as of December 31, 2022 have been derived from the audited financial statements. These financial statements should be read in conjunction with the financial statements and notes thereto included in Quaint Oak Bancorp’s 2022 Annual Report on Form 10-K. The results of operations for the three months ended March 31, 2023 are not necessarily indicative of the results that may be expected for the year ending December 31, 2023.
Critical Accounting Policies. During the quarter ended March 31, 2023, the Company implemented new CECL accounting policies, procedures, and controls as part of its adoption of ASU No. 2016-13 and subsequent ASUs issued to amend ASC Topic 326. There were no other changes made to the Company's internal control over financial reporting that occurred during the quarter ended March 31, 2023 that materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
Quaint Oak Bancorp, Inc.
Notes to Unaudited Consolidated Financial Statements
Note 1 – Financial Statement Presentation and Significant Accounting Policies (Continued)
Accounting Pronouncements Recently Adopted. In January 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, March 2020, to provide temporary optional expedients and exceptions to the U.S. GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens of the expected market transition from LIBOR and other interbank offered rates to alternative reference rates, such as the Secured Overnight Financing Rate. Entities can elect not to apply certain modification accounting requirements to contracts affected by what the guidance calls "reference rate reform", if certain criteria are met. An entity that makes this election would not have to re-measure the contracts at the modification date or reassess a previous accounting determination. Also, entities can elect various optional expedients that would allow them to continue applying hedge accounting for hedging relationships affected by reference rate reform, if certain criteria are met, and can make a one-time election to sell and/or reclassify held-to-maturity debt securities that reference an interest rate affected by reference rate reform. The amendments in this ASU are effective for all entities upon issuance through December 31, 2022. In December 2022, the FASB issued ASU 2022-06, Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848, which extends the sunset (or expiration) date of Accounting Standards Codification (ASC) Topic 848 to December 31, 2024. This gives reporting entities two additional years to apply the accounting relief provided under ASC Topic 848 for matters related to reference rate reform. ASU 2022-06 is effective for all reporting entities immediately upon issuance and must be applied on a prospective basis. This update did not have a significant impact on the Company’s financial statements.
In January 2021, the FASB issued ASU 2021-01, Reference Rate Reform (Topic 848), which provides optional temporary guidance for entities transitioning away from the London Interbank Offered Rate (LIBOR) and other interbank offered rates (IBORs) to new references rates so that derivatives affected by the discounting transition are explicitly eligible for certain optional expedients and exceptions within Topic 848. ASU 2021-01 clarifies that the derivatives affected by the discounting transition are explicitly eligible for certain optional expedients and exceptions in Topic 848. ASU 2021-01 is effective immediately for all entities. Entities may elect to apply the amendments on a full retrospective basis as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or on a prospective basis to new modifications from any date within an interim period that includes or is subsequent to the date of the issuance of a final update, up to the date that financial statements are available to be issued. The amendments in this update do not apply to contract modifications made, as well as new hedging relationships entered into, after December 31, 2022, and to existing hedging relationships evaluated for effectiveness for periods after December 31, 2022, except for certain hedging relationships existing as of December 31, 2022, that apply certain optional expedients in which the accounting effects are recorded through the end of the hedging relationship. This update did not have a significant impact on the Company’s financial statements.
In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment. To simplify the subsequent measurement of goodwill, the FASB eliminated Step 2 from the goodwill impairment test. In computing the implied fair value of goodwill under Step 2, an entity had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities (including unrecognized assets and liabilities) following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Instead, under the amendments in this Update, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. A public business entity that is a U.S. Securities and Exchange Commission (“SEC”) filer should adopt the amendments in this Update for its annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. In November 2019, the FASB issued ASU 2019-10, Financial Instruments – Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842), which deferred the effective date for ASC 350, Intangibles – Goodwill and Other, for smaller reporting companies to fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. This update did not have a significant impact on the Company’s financial statements.
In March 2022, the FASB issued ASU 2022-02, Financial Instruments - Credit Losses (ASC 326): Troubled Debt Restructurings (TDRs) and Vintage Disclosures. The guidance amends ASC 326 to eliminate the accounting guidance for TDRs by creditors, while enhancing disclosure requirements for certain loan refinancing and restructuring activities by creditors when a borrower is experiencing financial difficulty. Specifically, rather than applying TDR recognition and measurement guidance, creditors will determine whether a modification results in a new loan or continuation of existing loan. These amendments are intended to enhance existing disclosure requirements and introduce new requirements related to certain modifications of receivables made to borrowers experiencing financial difficulty. Additionally, the amendments to ASC 326 require that an entity disclose current-period gross write-offs by year of origination within the vintage disclosures, which requires that an entity disclose the amortized cost basis of financing receivables by credit quality indicator and class of financing receivable by year of origination. The guidance is only for entities that have adopted the amendments in Update 2016-13 for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022.
The Company adopted ASU 326 using the weighted average maturity method (WARM) for all financial assets measured at amortized cost, net of investments in leases and off balance sheet credit exposures. Results for reporting periods beginning after January 1, 2023 are presented under ASU 326, while prior period results are reported in accordance with the previously applicable incurred loss methodology. The Company recorded
Quaint Oak Bancorp, Inc.
Notes to Unaudited Consolidated Financial Statements
Note 1 – Financial Statement Presentation and Significant Accounting Policies (Continued)
The following table presents the impact of adopting ASU 2016-13 on January 1, 2023 (in thousands):
| As Reported | Impact of ASC 326 | Prior to Adopting ASC 326 | |||||||
| Allowance for credit losses - loans | |||||||||
| Real estate loans: | |||||||||
| One-to-four family residential: | |||||||||
| Owner occupied | $ | $ | $ | ||||||
| Non-owner occupied | |||||||||
| Total one-to-four family residential | |||||||||
| Multi-family (five or more) residential | |||||||||
| Commercial real estate | |||||||||
| Construction | |||||||||
| Home equity | |||||||||
| Total real estate loans | |||||||||
| Commercial business and other consumer | |||||||||
| Unallocated | |||||||||
| Total allowance for credit losses | |||||||||
| Allowance for credit losses - unfunded commitments | |||||||||
| Reserve for unfunded commitments | |||||||||
| Total | $ | $ | $ | ||||||
Loans are stated at their principal amount outstanding, except for loans held for sale, which are carried at fair value. Interest income on loans is accrued as earned.
In general, loans are placed on non-accrual status once they become 90 days delinquent as to principal or interest. In certain cases a loan may be placed on nonaccrual status prior to being 90 days delinquent if there is an indication that the borrower is having difficulty making payments, or the Company believes it is probable that all amounts will not be collected according to the contractual terms of the loan agreement. When interest accruals are discontinued, unpaid interest previously credited to income is reversed. Non-accrual loans may be restored to accrual status when all delinquent principal and interest has been paid currently for six consecutive months or the loan is considered secured and in the process of collection. The Company generally applies payments received on non-accruing loans to principal until such time as the principal is paid off, after which time any payments received are recognized as interest income. If the Company believes that all amounts outstanding on a non-accrual loan will ultimately be collected, payments received subsequent to its classification as a non-accrual loan are allocated between interest income and principal.
A loan that is 90 days delinquent may continue to accrue interest if the loan is both adequately secured and is in the process of collection. Past due status is determined based on contractual due dates for loan payments. An adequately secured loan is one that has collateral with a supported fair value that is sufficient to discharge the debt, and/or has an enforceable guarantee from a financially responsible party. A loan is considered to be in the process of collection if collection is proceeding through legal action or through other activities that are reasonably expected to result in repayment of the debt or restoration to current status in the near future.
Loans deemed to be a loss are written off through a charge against the allowance for credit losses (ACL). All loans are evaluated for possible charge-off when it is probable that the balance will not be collected, based on the ability of the borrower to pay and the value of the underlying collateral, if any. Principal recoveries of loans previously charged off are recorded as increases to the ACL.
Loan Origination Fees and Costs. Loan origination fees and the related direct origination costs are deferred and amortized over the life of the loan as an adjustment to interest income.
Allowance for Credit Losses. The discussion that follows describes the methodology for determining the ACL under the ASU 326 model that was adopted effective January 1, 2023. The allowance methodology for prior periods is disclosed in the Company’s 2022 Annual Report on Form 10-K.
The Company has elected to exclude accrued interest receivable from the measurement of its ACL. When a loan is placed on non-accrual status, any outstanding accrued interest is reversed against interest income.
Quaint Oak Bancorp, Inc.
Notes to Unaudited Consolidated Financial Statements
Note 1 – Financial Statement Presentation and Significant Accounting Policies (Continued)
Loans. The ACL for loans is an estimate of the expected losses to be realized over the life of the loans in the portfolio. The ACL is determined for two distinct categories of loans: 1) loans evaluated collectively for expected credit losses and 2) loans evaluated individually for expected credit losses. The ACL also includes certain qualitative adjustments to the ASU 326 model.
Loans Evaluated Collectively. Homogeneous loans are evaluated collectively for expected credit losses.
Loans Evaluated Individually. Loans evaluated individually for expected credit losses could include loans on non-accrual status or loans whose terms are modified if the Company grants such borrowers concessions.
Loans evaluated individually may have specific allocations assigned if the measured value of the loan using one of the noted techniques is less than its current carrying value. For loans measured using the fair value of collateral, if the analysis determines that sufficient collateral value would be available for repayment of the debt, then no allocations would be assigned to those loans. Collateral could be in the form of real estate or business assets, such as accounts receivable or inventory, in the case of commercial and industrial loans. Commercial and industrial loans may also be secured by real estate.
Management regularly reviews loans in the portfolio to assess credit quality indicators and to determine appropriate loan classification. For all loans, an internal risk rating process is used. The Company believes that internal risk ratings are the most relevant credit quality indicator for these types of loans. The migration of loans through the various internal risk rating categories is a significant component of the ACL methodology for these loans, which bases the probability of default on this migration. Assigning risk ratings involves judgment. Risk ratings may be changed based on ongoing monitoring procedures, or if specific loan review assessments identify a deterioration or an improvement in the loan.
The following is a summary of the Company's internal risk rating categories:
| ● | Pass: These loans do not currently pose undue credit risk and can range from the highest to average quality, depending on the degree of potential risk. |
| ● | Special Mention: These loans have a heightened credit risk, but not to the point of justifying a classification of Substandard. Loans in this category are currently acceptable, but are nevertheless potentially weak. |
| ● | Substandard or Lower: These loans are inadequately protected by current sound worth and paying capacity of the borrower. There exists a well-defined weakness or weaknesses that jeopardize the normal repayment of the debt. |
The allocation of the ACL is reviewed to evaluate its appropriateness in relation to the overall risk profile of the loan portfolio. The Company considers risk factors such as: local and national economic conditions; trends in delinquencies and non-accrual loans; the diversity of borrower industry types; and the composition of the portfolio by loan type.
Qualitative and Other Adjustments to Allowance for Credit Losses: In addition to the quantitative credit loss estimates for loans evaluated collectively, qualitative factors that may not be fully captured in the quantitative results are also evaluated. These include changes in lending policy, the nature and volume of the portfolio, overall business conditions in the economy, credit concentrations, competition, model imprecision, and legal and regulatory requirements. Qualitative adjustments are judgmental and are based on Management’s knowledge of the portfolio and the markets in which the Company operates. Qualitative adjustments are evaluated and approved on a quarterly basis. Additionally, the ACL includes other allowance categories that are not directly incorporated in the quantitative results. These include but are not limited to loans-in-process, trade acceptances and overdrafts.
Off Balance Sheet Credit Exposures: The ACL for off balance sheet credit exposures is recorded in other liabilities on the Consolidated Balance Sheet. This ACL represents management’s estimate of expected losses in its unfunded loan commitments and other off balance sheet credit exposures, such as letters of credit and credit recourse on sold residential mortgage loans. The allowance for credit losses specific to unfunded commitments is determined by estimating future draws and applying the expected loss rates on those draws. Future draws are based on historical averages of utilization rates (i.e., the likelihood of draws taken). The ACL for off balance sheet credit exposures is increased or decreased by charges or reductions to expense, through the provision for credit losses.
During the quarter ended March 31, 2023, the Company implemented new CECL accounting policies, procedures, and controls as part of its adoption of ASU No. 2016-13 and subsequent ASUs issued to amend ASC Topic 326. There were no other changes made to the Company's internal control over financial reporting that occurred during the quarter ended March 31, 2023 that materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
Quaint Oak Bancorp, Inc.
Notes to Unaudited Consolidated Financial Statements
Note 2 – Earnings Per Share
Earnings per share (“EPS”) consists of two separate components, basic EPS and diluted EPS. Basic EPS is computed based on the weighted average number of shares of common stock outstanding for each period presented. Diluted EPS is calculated based on the weighted average number of shares of common stock outstanding plus dilutive common stock equivalents (“CSEs”). CSEs consist of shares that are assumed to have been purchased with the proceeds from the exercise of stock options, as well as unvested restricted Earnings per share (“EPS”) consists of two separate components, basic EPS and diluted EPS. Basic EPS is computed based on the weighted average number of shares of common stock outstanding for each period presented. Diluted EPS is calculated based on the weighted average number of shares of common stock outstanding plus dilutive common stock equivalents (“CSEs”). CSEs consist of shares that are assumed to have been purchased with the proceeds from the exercise of stock options, as well as unvested restricted stock awards. Common stock equivalents which are considered antidilutive are not included for the purposes of this calculation. For the three months ended March 31, 2023 and 2022, all outstanding stock options granted under the 2008 Stock Option Plan, the 2013 Stock Incentive Plan and the 2018 Stock Incentive Plan representing shares were dilutive.
The following table sets forth the composition of the weighted average shares (denominator) used in the basic and dilutive earnings per share computations.
| For the Three Months Ended March 31, | ||||||||
| 2023 | 2022 | |||||||
| Net Income Attributable to Quaint Oak Bancorp, Inc. | $ | $ | ||||||
| Weighted average shares outstanding – basic | ||||||||
| Effect of dilutive common stock equivalents | ||||||||
| Adjusted weighted average shares outstanding – diluted | ||||||||
| Basic earnings per share | $ | $ | ||||||
| Diluted earnings per share | $ | $ | ||||||
Note 3 – Accumulated Other Comprehensive Income (Loss)
The following table presents the changes in accumulated other comprehensive income (loss) by component, net of tax, for the three months ended March 31, 2023 and 2022 (in thousands):
| Unrealized (Losses) Gains on Investment Securities Available for Sale (1) | ||||||||
| For the Three Months Ended March 31, | ||||||||
| 2023 | 2022 | |||||||
| Balance at the beginning of the period | $ | ( | ) | $ | ||||
| Total other comprehensive income (loss) | ( | ) | ||||||
| Balance at the end of the period | $ | ( | ) | $ | ||||
_________________
(1) All amounts are net of tax. Amounts in parentheses indicate debits.
Quaint Oak Bancorp, Inc.
Notes to Unaudited Consolidated Financial Statements
Note 4 – Investment in Interest-Earning Time Deposits
The investment in interest-earning time deposits as of March 31, 2023 and December 31, 2022, by contractual maturity, are shown below (in thousands):
| March 31, 2023 | December 31, 2022 | |||||||
| Due in one year or less | $ | $ | ||||||
| Due after one year through five years | ||||||||
| Total | $ | $ | ||||||
Note 5 – Investment Securities Available for Sale
The amortized cost, gross unrealized gains and losses, and fair value of investment securities available for sale at March 31, 2023 and December 31, 2022 are summarized below (in thousands):
| March 31, 2023 | ||||||||||||||||
| Amortized Cost | Gross Unrealized Gains | Gross Unrealized (Losses) | Fair Value | |||||||||||||
| Available for Sale: | ||||||||||||||||
| Mortgage-backed securities: | ||||||||||||||||
| Government National Mortgage Association securities | $ | $ | $ | ( | ) | $ | ||||||||||
| Federal National Mortgage Association securities | ( | ) | ||||||||||||||
| Total available-for-sale-securities | $ | $ | $ | ( | ) | $ | ||||||||||
| December 31, 2022 | ||||||||||||||||
| Amortized Cost | Gross Unrealized Gains | Gross Unrealized (Losses) | Fair Value | |||||||||||||
| Available for Sale: | ||||||||||||||||
| Mortgage-backed securities: | ||||||||||||||||
| Government National Mortgage Association securities | $ | $ | $ | ( | ) | $ | ||||||||||
| Federal National Mortgage Association securities | ||||||||||||||||
| Total available-for-sale-securities | $ | $ | $ | ( | ) | $ | ||||||||||
Quaint Oak Bancorp, Inc.
Notes to Unaudited Consolidated Financial Statements
Note 5 – Investment Securities Available for Sale (Continued)
The amortized cost and fair value of mortgage-backed securities at March 31, 2023, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties (in thousands):
| Available for Sale | ||||||||
| Amortized Cost | Fair Value | |||||||
| Due after ten years | $ | $ | ||||||
| Total | $ | $ | ||||||
The following tables show the Company’s gross unrealized losses and fair value, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position at March 31, 2023 (in thousands):
| March 31, 2023 | ||||||||||||||||||||||||||||
| Less than Twelve Months | Twelve Months or Greater | Total | ||||||||||||||||||||||||||
| Number of Securities | Fair Value | Gross | Fair Value | Gross | Fair Value | Gross | ||||||||||||||||||||||
| Government National Mortgage Association securities | $ | $ | ( | ) | $ | $ | $ | $ | ( | ) | ||||||||||||||||||
| Federal National Mortgage Association securities | ( | ) | ( | ) | ||||||||||||||||||||||||
| Total | $ | $ | ( | ) | $ | $ | $ | $ | ( | ) | ||||||||||||||||||
The following tables show the Company’s gross unrealized losses and fair value, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position at December 31, 2022 (in thousands):
| December 31, 2022 | ||||||||||||||||||||||||||||
| Less than Twelve Months | Twelve Months or Greater | Total | ||||||||||||||||||||||||||
| Number of | Fair Value | Gross | Fair Value | Gross | Fair Value | Gross | ||||||||||||||||||||||
| Government National Mortgage Association securities | $ | $ | ( | ) | $ | -- | $ | -- | $ | $ | ( | ) | ||||||||||||||||