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QUAINT OAK BANCORP INC - Quarter Report: 2022 September (Form 10-Q)

qnto20220930_10q.htm
 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

For the quarterly period ended

September 30, 2022

 

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:

000-52694

 

 

QUAINT OAK BANCORP, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

 

Pennsylvania

 

35-2293957

(State or Other Jurisdiction of Incorporation or Organization)

 

(I.R.S. Employer Identification No.)

   

501 Knowles Avenue, Southampton, Pennsylvania

 

18966

(Address of Principal Executive Offices)

 

(Zip Code)

 

(215) 364-4059

(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.                                                                                                                                                                                                                                                  ☒   Yes   ☐  No

 

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).                                                           ☒  Yes  ☐   No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non- accelerated filer, 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

 

Non-accelerated filer

Smaller reporting company

   

Emerging growth company

 

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).        ☐   Yes  ☒   No

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:  As of November 9, 2022, 2,053,527

shares of the Registrant’s common stock were issued and outstanding.

 

 

 

 

 

 

INDEX

 

PART I - FINANCIAL INFORMATION

Page

     

Item 1 -

Financial Statements

 
     
 

Consolidated Balance Sheets as of  September 30, 2022 and December 31, 2021 (Unaudited)         

1

     
 

Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2022 and 2021 (Unaudited)         

2

     
 

Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2022 and 2021 (Unaudited)         

4

     
 

Consolidated Statements of Stockholders’ Equity for the Three and Nine Months Ended September 30, 2022 and 2021 (Unaudited)         

5

     
 

Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2022 and 2021 (Unaudited)         

8

     
 

Notes to the Unaudited Consolidated Financial Statements         

10

     

Item 2 -

Management’s Discussion and Analysis of Financial Condition and Results of Operations         

34

   

Item 3 -

Quantitative and Qualitative Disclosures About Market Risk         

47

   

Item 4 -

Controls and Procedures         

47

   

PART II - OTHER INFORMATION

   

Item 1 -

Legal Proceedings         

47

     

Item 1A -

Risk Factors

48

   

Item 2 -

Unregistered Sales of Equity Securities and Use of Proceeds         

48

   

Item 3 -

Defaults Upon Senior Securities         

48

   

Item 4 -

Mine Safety Disclosures         

48

   

Item 5 -

Other Information         

48

   

Item 6 -

Exhibits         

49

   

SIGNATURES

 

 

 

 

 

 

ITEM 1. FINANCIAL STATEMENTS

 

Quaint Oak Bancorp, Inc.

Consolidated Balance Sheets (Unaudited)

 

  

At September 30,

  

At December 31,

 
  

    2022

  

2021

 
  (In thousands, except share data) 

Assets

 

 

 

Due from banks, non-interest-bearing

 $830  $854 

Due from banks, interest-bearing

  7,509   9,851 

Cash and cash equivalents

  8,339   10,705 

Investment in interest-earning time deposits

  5,569   7,924 

Investment securities available for sale

  3,193   4,033 

Loans held for sale

  88,400   107,823 

Loans receivable, net of allowance for loan losses (2022 $7,141; 2021 $5,262)

  579,154   403,966 

Accrued interest receivable

  3,658   3,139 

Investment in Federal Home Loan Bank stock, at cost

  3,953   2,178 

Bank-owned life insurance

  4,203   4,137 

Premises and equipment, net

  2,916   2,653 

Goodwill

  2,573   2,573 

Other intangible, net of accumulated amortization

  186   222 

Prepaid expenses and other assets

  5,116   4,762 

Total Assets

 $707,260  $554,115 

Liabilities and Stockholders Equity

 

Liabilities

        

Deposits:

        

Non-interest bearing

 $79,825  $64,731 

Interest-bearing

  467,289   382,435 

Total deposits

  547,114   447,166 

Federal Home Loan Bank short-term borrowings

  10,000   26,000 

Federal Home Loan Bank long-term borrowings

  83,022   23,193 

Federal Reserve Bank long-term borrowings

  -   3,895 

Subordinated debt

  7,958   7,933 

Accrued interest payable

  412   174 

Advances from borrowers for taxes and insurance

  3,612   2,856 

Accrued expenses and other liabilities

  9,532   5,989 

Total Liabilities

  661,650   517,206 

Stockholders Equity

        

Preferred stock – $0.01 par value, 1,000,000 shares authorized; none issued or outstanding

  -   - 

Common stock – $0.01 par value; 9,000,000 shares authorized; 2,777,250 issued; 2,053,554 and 2,011,313 outstanding at

        

September 30, 2022 and December 31, 2021, respectively

  28   28 

Additional paid-in capital

  16,024   15,685 

Treasury stock, at cost: 723,696 and 765,937 shares at September 30, 2022 and December 31, 2021, respectively

  (4,748)  (4,977)

Accumulated other comprehensive (loss) income

  (19)  23 

Retained earnings

  29,933   24,030 

Total Quaint Oak Bancorp, Inc. Stockholders' Equity

  41,218   34,789 

Noncontrolling Interest

  4,392   2,120 

Total Stockholders' Equity

 $45,610  $36,909 

Total Liabilities and Stockholders Equity

 $707,260  $554,115 

 

 

 

See accompanying notes to the unaudited consolidated financial statements.

 

 

 
 
1

 

 

 

Quaint Oak Bancorp, Inc.

Consolidated Statements of Income (Unaudited)

 

   

For the Three

Months Ended

   

For the Nine

Months Ended

 
   

September 30,

   

September 30,

 
   

2022

   

2021

   

2022

   

2021

 
   

(In thousands, except for share data)

 

Interest Income

                               

Interest on loans, including fees

  $ 8,671     $ 5,944     $ 22,171     $ 16,422  

Interest and dividends on time deposits, investment securities, interest-bearing deposits with others, and Federal Home Loan Bank stock

    325       73       506       327  

Total Interest Income

    8,996       6,017       22,677       16,749  
                                 

Interest Expense

                               

Interest on deposits

    1,672       702       3,199       2,370  

Interest on Federal Home Loan Bank short-term borrowings

    58       8       133       14  

Interest on Federal Home Loan Bank long-term borrowings

    457       124       958       392  

Interest on Federal Reserve Bank long-term borrowings

    -       8       4       77  

Interest on subordinated debt

    130       130       390       390  

Interest on other short-term borrowings

    22       31       49       127  

Total Interest Expense

    2,339       1,003       4,733       3,370  

Net Interest Income

    6,657       5,014       17,944       13,379  

Provision for Loan Losses

    655       557       1,933       1,259  

Net Interest Income after Provision for Loan Losses

    6,002       4,457       16,011       12,120  
                                 

Non-Interest Income

                               

Mortgage banking, equipment lending and title abstract fees

    760       604       2,221       1,657  

Real estate sales commissions, net

    88       79       213       143  

Insurance commissions

    152       133       407       373  

Other fees and services charges

    131       38       379       211  

Net loan servicing income

    480       475       954       1,026  

Income from bank-owned life insurance

    23       21       66       61  

Net gain on loans held for sale

    4,281       1,866       11,349       4,416  

Gain on the sale of SBA loans

    58       369       225       636  

Gain on the sale of investment securities available for sale

    -       -       -       362  

Total Non-Interest Income

    5,973       3,585       15,814       8,885  
                                 

Non-Interest Expense

                               

Salaries and employee benefits

    5,335       4,100       14,817       10,939  

Directors' fees and expenses

    67       58       210       186  

Occupancy and equipment

    477       379       1,363       1,143  

Data processing

    140       234       500       641  

Professional fees

    257       107       669       488  

FDIC deposit insurance assessment

    225       97       454       221  

Other real estate owned expenses

    -       2       -       14  

Advertising

    169       110       531       337  

Amortization of other intangible

    12       12       36       36  

Other

    636       326       1,509       974  

Total Non-Interest Expense

    7,318       5,425       20,089       14,979  

 

 

 

 

See accompanying notes to the unaudited consolidated financial statements.

2

Quaint Oak Bancorp, Inc.

Consolidated Statements of Income (Unaudited)

 

   

For the Three

Months Ended

   

For the Nine

Months Ended

 
   

September 30,

   

September 30,

 
   

2022

   

2021

   

2022

   

2021

 
   

(In thousands, except for share data)

 

Income before Income Taxes

  $ 4,657     $ 2,617     $ 11,736     $ 6,026  

Income Taxes

    1,012       702       2,531       1,693  

Net Income

  $ 3,645     $ 1,915     $ 9,205     $ 4,333  

Net Income Attributable to Noncontrolling Interest

  $ 1,010     $ 133     $ 2,551     $ 12  

Net Income Attributable to Quaint Oak Bancorp, Inc.

  $ 2,635     $ 1,782     $ 6,654     $ 4,321  
                                 

Earnings per share - basic

  $ 1.29     $ 0.89     $ 3.27     $ 2.17  

Average shares outstanding - basic

    2,050,650       2,002,816       2,034,153       1,991,336  

Earnings per share - diluted

  $ 1.22     $ 0.85     $ 3.09     $ 2.07  

Average shares outstanding - diluted

    2,168,732       2,100,026       2,150,944       2,085,286  

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to the unaudited consolidated financial statements.

3

 

Quaint Oak Bancorp, Inc.

Consolidated Statements of Comprehensive Income (Unaudited)

 

   

For the Three

Months Ended

   

For the Nine

Months Ended

 
   

September 30,

   

September 30,

 
   

2022

   

2021

   

2022

   

2021

 
   

(In thousands)

 

Net Income

  $ 3,645     $ 1,915     $ 9,205     $ 4,333  
                                 

Other Comprehensive Income (Loss):

                               

Unrealized gains (losses) on investment securities available-for-sale

    (1 )     -       (54 )     257  

Income tax effect

    -       -       12       (55 )

Reclassification adjustment for gain on sale of investment securities included in

net income

    -       -       -       (362 )

Income tax effect

    -       -       -       76  

Other comprehensive loss

    (1 )     -       (42 )     (84 )
                                 

Total Comprehensive Income

  $ 3,644     $ 1,915     $ 9,163     $ 4,249  

Comprehensive Income Attributable to Noncontrolling Interest

  $ 1,010     $ 133     $ 2,551     $ 12  

Comprehensive Income Attributable to Quaint Oak Bancorp, Inc.

  $ 2,634     $ 1,782     $ 6,612     $ 4,237  

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to the unaudited consolidated financial statements.

4

 

 

Quaint Oak Bancorp, Inc.

Consolidated Statements of Stockholders' Equity (Unaudited)

 

For the Three Months Ended September 30, 2022

 

 

 

 

 

 

 

 

       
 Common Stock        Accumulated          
 Number of     Additional     Other        Total 
 Shares     Paid-in  Treasury  Comprehensive  Retained  Noncontrolling  Stockholders' 
 Outstanding  Amount  Capital  Stock  Income (Loss)  Earnings  Interest  Equity 
       (In thousands, except share and per share data)          

BALANCE - JUNE 30, 2022

2,045,721 $28 $15,904 $(4,784)$(18)$27,564 $3,485 $42,179 
                        

Common stock allocated by ESOP (4,000

shares)

4,000     59  25           84 

Treasury stock purchase

(760)       (18)          (18)

Reissuance of treasury stock under stock

incentive plan

                     - 

Reissuance of treasury stock under 401(k)

Plan

593     11  4           15 
                        

Reissuance of treasury stock for exercised

stock options

4,000     8  25           33 
                        

Stock based compensation expense

      42              42 
                        

Cash dividends declared ($0.13 per share)

               (266)    (266)
                        

Noncontrolling interest member distribution

                  (103) (103)
                        

Net income

               2,635  1,010  3,645 
                        

Other comprehensive loss, net

            (1)       (1)
                        

BALANCE SEPTEMBER 30, 2022

2,053,554 $28 $16,024 $(4,748)$(19)$29,933 $4,392 $45,610 

 

 

For the Three Months Ended September 30, 2021                         
                   Unallocated                 
                   Common   Accumulated             
   Number of       Additional       Stock Held   Other           Total 
   Shares       Paid-in   Treasury   by Benefit   Comprehensive   Retained   Noncontrolling   Stockholders' 
   Outstanding   Amount   Capital   Stock   Plans   Income   Earnings   Interest   Equity 
               (In thousands, except share and per share data)             

BALANCE – JUNE 30, 2021

  2,004,015  $28  $15,457  $(5,022) $(17) $34  $20,606  $2,115  $33,201 
                                     

Common stock allocated by

ESOP (3,607 shares)

          48      17               65 

Reissuance of treasury

stock under 401(k)

Plan

  1,080       14   6                   20 
                                     

Stock based compensation

expense

          42                       42 
                                     

Cash dividends declared

($0.11 per share)

                          (220)      (220)
                                     

Net income 

                          1,782   133   1,915 
                                     

Other comprehensive

income, net

                      -           - 
                                     

BALANCE

SEPTEMBER 30, 2021

2,005,095  $28  $15,561  $(5,016) $-  $34  $22,168  $2,248  $35,023 

 

 

 

See accompanying notes to the unaudited consolidated financial statements.

5

 

Quaint Oak Bancorp, Inc.

Consolidated Statements of Stockholders' Equity (Unaudited)

 

For the Nine Months Ended September 30, 2022                         
   Common Stock           Accumulated             
   Number of       Additional       Other           Total 
   Shares       Paid-in   Treasury   Comprehensive   Retained   Noncontrolling   Stockholders' 
   Outstanding   Amount   Capital   Stock   Income (Loss)   Earnings   Interest   Equity 
           (In thousands, except share and per share data)         

BALANCE –  DECEMBER 31, 2021

2,011,313  $28  $15,685  $(4,977) $23  $24,030  $2,120  $36,909 
                                 

Common stock allocated by ESOP

(12,000 shares)

  12,000       184   75               259 

Treasury stock purchase

  (1,969)          (46)              (46)

Reissuance of treasury stock under

stock incentive plan

  9,123       (57)  57               - 

Reissuance of treasury stock under

401(k) Plan

  2,087       35   13               48 
                                 

Reissuance of treasury stock for

exercised stock options

  21,000       51   130               181 
                                 

Stock based compensation expense

          126                   126 
                                 

Cash dividends declared ($0.37 per

share)

                      (751)      (751)
                                 

Noncontrolling interest member 

distribution

                          (279)  (279)
                                 

Net income

                      6,654   2,551   9,205 
                                 

Other comprehensive loss, net

                  (42)          (42)
                                 

BALANCE –  SEPTEMBER 30, 2022

  2,053,554  $28  $16,024  $(4,748) $(19) $29,933  $4,392  $45,610 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to the unaudited consolidated financial statements.

6

Quaint Oak Bancorp, Inc.

Consolidated Statements of Stockholders' Equity (Unaudited)

 

For the Nine Months Ended September , 2021       Unallocated                 
                   Common   Accumulated             
   Number of       Additional       Stock Held   Other           Total 
   Shares       Paid-in   Treasury   by Benefit   Comprehensive   Retained   Noncontrolling   Stockholders' 
   Outstanding   Amount   Capital   Stock   Plans   Income   Earnings   Interest   Equity 
               (In thousands, except share and per share data)             

BALANCE – 

DECEMBER 31, 2020

  1,986,528  $28  $15,282  $(5,114) $(51) $118  $18,465  $-  $28,728 
                                     

Common stock allocated

by ESOP (10,821 shares)

          136       51               187 
                                     

Treasury stock purchase

  (1,398)          (25)                  (25)
                                     

Reissuance of treasury

stock under 401(k) Plan

  3,044       35   18                   53 
                                     

Reissuance of treasury

stock under stock

incentive plan

  9,421       (58)  58                   - 
                                     

Reissuance of treasury

stock for exercised

stock options

  7,500       40   47                   87 
                                     

Stock based compensation

expense

          126                       126 
                                     

Noncontrolling interest

initial contribution

                              2,236   2,236 
                                     

Cash dividends declared

($0.31 per share)

                          (618)      (618)
                                     

Net income

                          4,321   12   4,333 
                                     

Other comprehensive

loss, net

                      (84)          (84)

BALANCE –  

SEPTEMBER 30, 2021

2,005,095  $28  $15,561  $(5,016) $-  $34  $22,168  $2,248  $35,023 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to the unaudited consolidated financial statements.

7

 

Quaint Oak Bancorp, Inc.

Consolidated Statements of Cash Flows (Unaudited)

 

  

For the Nine Months

 
  

Ended September 30,

 
  

2022

  

2021

 
  

(In Thousands)

 

Cash Flows from Operating Activities

        

Net income

 $9,205  $4,333 

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

        

Provision for loan losses

  1,933   1,259 

Depreciation of premises and equipment

  244   228 

Amortization of operating right-of-use assets

  151   122 

Amortization of subordinated debt issuance costs

  25   25 

Amortization of other intangible

  36   36 

Net amortization of securities premiums

  -   6 

Accretion of deferred loan fees and costs, net

  (1,629)  (3,482)

Stock-based compensation expense

  385   313 

Gain on the sale of investment securities available for sale

  -   (362)

Net gain on loans held for sale

  (11,349)  (4,416)

Loans held for sale-originations

  (377,608)  (276,705)

Loans held for sale-proceeds

  408,381   238,398 

Gain on the sale of SBA loans

  (225)  (636)

Increase in the cash surrender value of bank-owned life insurance

  (66)  (61)

Changes in assets and liabilities which provided (used) cash:

        

Accrued interest receivable

  (519)  (284)

Prepaid expenses and other assets

  (493)  1,093 

Accrued interest payable

  238   (52)

Accrued expenses and other liabilities

  3,540   (224)

Net Cash Provided by (Used in) Operating Activities

  32,249   (40,409)

Cash Flows from Investing Activities

        

Purchase of interest-earning time deposits

  (2,132)  (2,141)

Redemption of interest-earning time deposits

  4,487   3,712 

Principal repayments on investment securities available for sale

  787   801 

Proceeds from the sale of investment securities available for sale

  -   5,862 

Net increase in loans receivable

  (175,266)  (21,335)

Purchase of Federal Home Loan Bank stock

  (8,331)  (913)

Redemption of Federal Home Loan Bank stock

  6,556   560 

Acquisition of Oakmont Capital Holdings, net of cash acquired

  -   1,259 

Capitalized expenditures on other real estate owned

  -   (203)

Purchase of premises and equipment

  (507)  (400)

Net Cash Used in Investing Activities

  (174,406)  (12,798)

Cash Flows from Financing Activities

        

Net increase in demand deposits, money markets, and savings accounts

  103,630   111,258 

Net decrease in certificate accounts

  (3,682)  (30,596)

Increase (decrease) in advances from borrowers for taxes and insurance

  756   (423)

Repayments of Federal Home Loan Bank short-term borrowings

  (131,300)  (10,000)

Proceeds from Federal Home Loan Bank short-term borrowings

  115,300   21,000 

Repayments of Federal Home Loan Bank long-term borrowings

  (20,171)  (4,000)

Proceeds from Federal Home Loan Bank long-term borrowings

  80,000   - 

Repayments of Federal Reserve Bank long-term borrowings

  (3,895)  (43,170)

Repayments of other borrowings

  -   (9,956)

Dividends paid

  (751)  (618)

Noncontrolling interest capital distribution

  (279)  - 

Purchase of treasury stock

  (46)  (25)

Proceeds from the reissuance of treasury stock

  48   53 

Proceeds from the exercise of stock options

  181   87 

Net Cash Provided by Financing Activities

  139,791   33,610 

Net Decrease in Cash and Cash Equivalents

  (2,366)  (19,597)

Cash and Cash Equivalents Beginning of Year

  10,705   33,913 

Cash and Cash Equivalents End of Year

 $8,339  $14,316 

 

 

See accompanying notes to the unaudited consolidated financial statements.

8

Quaint Oak Bancorp, Inc.

Consolidated Statements of Cash Flows (Unaudited)

 

   

For the Nine Months

 
   

Ended September 30,

 
   

2022

   

2021

 
   

(In Thousands)

 

Supplementary Disclosure of Cash Flow and Non-Cash Information:

               

Cash payments for interest

  $ 4,496     $ 3,348  

Cash payments for income taxes

  $ 2,892     $ 2,405  

Initial recognition of operating lease right-of use assets

  $ 560     $ 670  

Initial recognition of operating lease obligations

  $ 502     $ 670  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to the unaudited consolidated financial statements.

9

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 September 30, 2022, the Bank has six 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, real estate and abstract companies offer mortgage banking, real estate sales and title abstract services, respectively, primarily in the Lehigh Valley, Delaware Valley and Philadelphia County regions 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. On April 29, 2022, Oakmont Commercial, LLC, a wholly owned subsidiary of Quaint Oak Bank, purchased all the stock of KCMI Capital, Inc., a Pennsylvania corporation and subsidiary of Wilmington Savings Fund Society, FSB. The purchase price for the shares totaled approximately $55.5 million, which represented the unpaid principal balance of the loan portfolio, the primary asset of KCMI Capital, Inc. 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 and the Lehigh Valley area in Pennsylvania. The Bank has three banking locations: the main office location in Southampton, Pennsylvania and regional banking offices in the Lehigh Valley and Philadelphia. The Bank also has a mortgage office in Philadelphia and an insurance agency office in New Britain Township, Pennsylvania. The principal deposit products offered by the Bank are certificates of deposit, money market accounts, 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, 2021 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 2021 Annual Report on Form 10-K. The results of operations for the nine months ended September 30, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022.

 

 

 

10

Quaint Oak Bancorp, Inc.

Notes to Unaudited Consolidated Financial Statements

 

Note 1 Financial Statement Presentation and Significant Accounting Policies (Continued)

 

Use of Estimates in the Preparation of Financial Statements. The preparation of the financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates. The Company’s most significant estimates are the determination of the allowance for loan losses and the valuation of deferred tax assets.

 

Critical Accounting Policies. The Company’s critical accounting policies involving significant judgments and assumptions used in the preparation of the consolidated financial statements as of September 30, 2022 have remained unchanged from the disclosures presented in our Annual Report on Form 10-K.

 

Recent Accounting Pronouncements Not Yet Adopted. In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments, which changes the impairment model for most financial assets. This Update is intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. The underlying premise of the Update is that financial assets measured at amortized cost should be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis. The allowance for credit losses should reflect management’s current estimate of credit losses that are expected to occur over the remaining life of a financial asset. The income statement will be effected for the measurement of credit losses for newly recognized financial assets, as well as the expected increases or decreases of expected credit losses that have taken place during the period. ASU 2016-13 is effective for annual and interim periods beginning after December 15, 2022, and early adoption is permitted for annual and interim periods beginning after December 15, 2018. With certain exceptions, transition to the new requirements will be through a cumulative effect adjustment to opening retained earnings as of the beginning of the first reporting period in which the guidance is adopted. We expect to recognize a one-time cumulative-effect adjustment to the allowance for loan losses as of the beginning of the first reporting period in which the new standard is effective.

 

The Company has contracted with a third-party software vendor to assist with the implementation of CECL. The Company is actively working on preliminary test calculations, data validation, as well as process and procedural documentation. The Company is currently conducting runs of the CECL model and the incurred-loss model in parallel. The new model will include additional assumptions used to calculate credit losses over the estimated life of financial assets and will include the impact of forecasted economic conditions. While the total impact of CECL to the Company’s financial statements is unknown at this time, the Company recognizes it may be material.

 

In November 2019, the FASB issued ASU 2019-10, Financial Instruments Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842). This Update defers the effective date of ASU 2016-13 for SEC filers that are eligible to be smaller reporting companies, non-SEC filers, and all other companies to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. We expect to recognize a one-time cumulative effect adjustment to the allowance for loan losses as of the beginning of the first reporting period in which the new standard is effective, but cannot yet determine the magnitude of any such one-time adjustment or the overall impact of the new guidance on the consolidated financial statements.

 

 

 

11

 

Quaint Oak Bancorp, Inc.

Notes to Unaudited Consolidated Financial Statements 

 

Note 1 Financial Statement Presentation and Significant Accounting Policies (Continued)

 

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 is not expected to have a significant impact on the Company’s financial statements.

 

In May 2019, the FASB issued ASU 2019-05, Financial Instruments Credit Losses, Topic 326, which allows entities to irrevocably elect the fair value option for certain financial assets previously measured at amortized cost upon adoption of the new credit losses standard. To be eligible for the transition election, the existing financial asset must otherwise be both within the scope of the new credit losses standard and eligible for the applying the fair value option in ASC 825-10.3. The election must be applied on an instrument-by-instrument basis and is not available for either available-for-sale or held-to-maturity debt securities. For entities that elect the fair value option, the difference between the carrying amount and the fair value of the financial asset would be recognized through a cumulative-effect adjustment to opening retained earnings as of the date an entity adopted ASU 2016-13. Changes in fair value of that financial asset would subsequently be reported in current earnings. For entities that have not yet adopted ASU 2016-13, the effective dates and transition requirements are the same as those in ASU 2016-13. For entities that have adopted ASU 2016-13, ASU 2019-05 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted once ASU 2016-13 has been adopted. 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 944, Financial Services Insurance, for public business entities that are SEC filers, except for smaller reporting companies, to fiscal years beginning after December 15, 2021, and interim periods within those fiscal years and for all other entities, including smaller reporting companies, to fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. This Update is not expected to have a significant impact on the Company’s financial statements.

 

In March 2020, the FASB issued ASU 2020-03, Codification Improvements to Financial Instruments. This ASU was issued to improve and clarify various financial instruments topics, including the current expected credit losses (CECL) standard issued in 2016. The ASU includes seven issues that describe the areas of improvement and the related amendments to GAAP; they are intended to make the standards easier to understand and apply and to eliminate inconsistencies, and they are narrow in scope and are not expected to significantly change practice for most entities. Among its provisions, the ASU clarifies that all entities, other than public business entities that elected the fair value option, are required to provide certain fair value disclosures under ASC 825, Financial Instruments, in both interim and annual financial statements. It also clarifies that the contractual term of a net investment in a lease under Topic 842 should be the contractual term used to measure expected credit losses under Topic 326. Amendments related to ASU 2019-04 are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is not permitted before an entity’s adoption of ASU 2016-01. Amendments related to ASU 2016-13 for entities that have not yet adopted that guidance are effective upon adoption of the amendments in ASU 2016-13. Early adoption is not permitted before an entity’s adoption of ASU 2016-13. Amendments related to ASU 2016-13 for entities that have adopted that guidance are effective for fiscal years beginning after December 15, 2019, including interim periods within those years. Other amendments are effective upon issuance of this ASU. This Update is not expected to have a significant impact on the Company’s financial statements.

 

 

12

Quaint Oak Bancorp, Inc.

Notes to Unaudited Consolidated Financial Statements 

 

Note 1 Financial Statement Presentation and Significant Accounting Policies (Continued)

 

In March 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 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. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations.

 

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. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations.

 

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. Early adoption using prospective application, including adoption in an interim period where the guidance should be applied as of the beginning of the fiscal year. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations.

 

13

Quaint Oak Bancorp, Inc.

Notes to Unaudited Consolidated Financial Statements 

 

Note 1 Financial Statement Presentation and Significant Accounting Policies (Continued)

 

Reclassifications. Certain items in the 2021 consolidated financial statements have been reclassified to conform to the presentation in the 2022 consolidated financial statements. Such reclassifications did not have a material impact on the presentation of the overall financial statements. The reclassifications had no effect on net income or stockholders’ equity.

 

 

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 and nine months ended September 30, 2022 and 2021, 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

September 30,

  

For the Nine Months Ended

September 30,

 
  

2022

  

2021

  

2022

  

2021

 

Net Income Attributable to Quaint Oak Bancorp, Inc.

 $2,635,000  $1,782,000  $6,654,000  $4,321,000 
                 

Weighted average shares outstanding – basic

  2,050,650   2,002,816   2,034,153   1,991,336 

Effect of dilutive common stock equivalents

  118,082   97,211   116,791   93,950 

Adjusted weighted average shares outstanding – diluted

  2,168,732   2,100,026   2,150,944   2,085,286 
                 

Basic earnings per share

 $1.29  $0.89  $3.27  $2.17 

Diluted earnings per share

 $1.22  $0.85  $3.09  $2.07 

 

 

 

 

 

 

 

14

 

Quaint Oak Bancorp, Inc.

Notes to Unaudited Consolidated Financial Statements 

 

 

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 and nine months ended September 30, 2022 and 2021 (in thousands):

 

  

Unrealized Gains (Losses) on Investment Securities Available

for Sale (1)

 
  

For the Three Months Ended

September 30,

  

For the Nine Months Ended

September 30,

 
  

2022

  

2021

  

2022

  

2021

 

Balance at the beginning of the period

 $(18) $34  $23  $118 

Other comprehensive income (loss) before classifications

  (1)  -   (42)  202 

Amount reclassified from accumulated other comprehensive loss

  -   -   -   (286)

Total other comprehensive loss

  (1)  -   (42)  (84)

Balance at the end of the period

 $(19) $34  $(19) $34 

_________________

(1)    All amounts are net of tax. Amounts in parentheses indicate debits.

 

The following table presents significant amounts reclassified out of each component of accumulated other comprehensive (loss) income for the three and nine months ended September 30, 2022 and 2021 (in thousands):

 

Details About Other Comprehensive Loss

 

Amount Reclassified from Accumulated

Other Comprehensive (Loss) Income (1)

 

Affected Line Item in the

Statement of Income

  

For the Three Months

Ended September 30,

  

For the Nine Months

Ended September 30,

 
  

2022

  

2021

  

2022

  

2021

 

Unrealized losses on investment securities

available for sale

 $-  $-  $-  $362 

Gain on sales of investment securities available for sale

   -   -   -   (76)

Income taxes

  $-  $-  $-  $286  
 

(1)

Amounts in parentheses indicate debits to net income.

 

 

Note 4 Investment in Interest-Earning Time Deposits

 

The investment in interest-earning time deposits as of September 30, 2022 and December 31, 2021, by contractual maturity, are shown below (in thousands):

 

  

September 30,

2022

  

December 31,

2021

 

Due in one year or less

 $3,111  $4,487 

Due after one year through five years

  2,458   3,437 

Total

 $5,569  $7,924 

 

 

 

 

 

15

 

Quaint Oak Bancorp, Inc.

Notes to Unaudited Consolidated Financial Statements 

 

 

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 September 30, 2022 and December 31, 2021 are summarized below (in thousands): 

 

  

September 30, 2022

 
  

Amortized

Cost

  

Gross

Unrealized

Gains

  

Gross

Unrealized

(Losses)

  

Fair Value

 

Available for Sale:

                

Mortgage-backed securities:

                

Government National Mortgage Association securities

 $3,100  $-  $(26) $3,074 

Federal National Mortgage Association securities

  117   2   -   119 

Total available-for-sale-securities

 $3,217  $2  $(26) $3,193 

 

  

December 31, 2021

 
  

Amortized

Cost

  

Gross

Unrealized

Gains

  

Gross

Unrealized

(Losses)

  

Fair Value

 

Available for Sale:

                

Mortgage-backed securities:

                

Government National Mortgage Association securities

 $3,860  $22  $-  $3,882 

Federal National Mortgage Association securities

  144   7   -   151 

Total available-for-sale-securities

 $4,004  $29  $-  $4,033 

 

 

The amortized cost and fair value of mortgage-backed securities at September 30, 2022, 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 five years through ten years

 $-  $- 

Due after ten years

 $3,217  $3,193 

Total

 $3,217  $3,193 

 

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 September 30, 2022 (in thousands):

 

     September 30, 2022 
      

Less than Twelve Months

  

Twelve Months or Greater

  

Total

 
           Gross       Gross       Gross 
   Number of       Unrealized       Unrealized       Unrealized 
   Securities   Fair Value   Loss   Fair Value   Losses   Fair Value   Losses 

Government National Mortgage Association securities

  11  $3,074  $(26) $-  $-  $3,074  $(26)

 

At December 31, 2021, there were no securities in an unrealized loss position. There were no impairment charges recognized during the three or nine months ended September 30, 2022 or 2021.

 

 

 

16

 

Quaint Oak Bancorp, Inc.

Notes to Unaudited Consolidated Financial Statements 

 

 

Note 6 - Loans Receivable, Net and Allowance for Loan Losses

 

The composition of net loans receivable is as follows (in thousands):

  

September 30,

2022

  

December 31,

2021

 

Real estate loans:

        

One-to-four family residential:

        

Owner occupied

 $17,424  $9,779 

Non-owner occupied

  39,410   38,752 

Total one-to-four family residential

  56,834   48,531 

Multi-family (five or more) residential

  48,468   29,344 

Commercial real estate

  313,160   183,822 

Construction

  25,838   15,843 

Home equity

  5,265   4,706 

Total real estate loans

  449,565   282,246 
         

Commercial business(1)

  138,133   129,608 

Other consumer

  3   12 

Total Loans

  587,701   411,866 
         

Deferred loan fees and costs

  (1,406)  (2,638)

Allowance for loan losses

  (7,141)  (5,262)

Net Loans

 $579,154  $403,966 

__________________

(1)Includes $3.0 million and $42.6 million of PPP loans at September 30, 2022 and December 31, 2021, respectively.

 

The following tables present the classes of the loan portfolio summarized by the aggregate pass rating and the classified ratings of special mention, substandard and doubtful within the Company’s internal risk rating system as of September 30, 2022 and December 31, 2021 (in thousands): 

 

  

September 30, 2022

 
  

Pass

  

Special

Mention

  

Substandard

  

Doubtful

  

Total

 

One-to-four family residential owner occupied

 $17,014  $410  $-  $-  $17,424 

One-to-four family residential non-owner occupied

  39,402   -   8   -   39,410 

Multi-family residential

  46,760   -   1,708   -   48,468 

Commercial real estate

  312,163   -   997   -   313,160 

Construction

  25,838   -   -   -   25,838 

Home equity

  5,265   -   -   -   5,265 

Commercial business

  136,310   103   1,720   -   138,133 

Other consumer

  3   -   -   -   3 

Total

 $582,755  $513  $4,433  $-  $587,701 

 

  

December 31, 2021

 
  

Pass

  

Special

Mention

  

Substandard

  

Doubtful

  

Total

 

One-to-four family residential owner occupied

 $9,365  $414  $-  $-  $9,779 

One-to-four family residential non-owner occupied

  38,743   -   9   -   38,752 

Multi-family residential

  27,621   1,723   -   -   29,344 

Commercial real estate

  181,914   -   1,908   -   183,822 

Construction

  15,843   -   -   -   15,843 

Home equity

  4,706   -   -   -   4,706 

Commercial business

  125,725   -   3,883   -   129,608 

Other consumer

  12   -   -   -   12 

Total

 $403,929  $2,137  $5,800  $-  $411,866 

 

 

17

 

Quaint Oak Bancorp, Inc.

Notes to Unaudited Consolidated Financial Statements 

 

Note 6 - Loans Receivable, Net and Allowance for Loan Losses (Continued)

 

The following table presents impaired loans by class, segregated by those for which a specific allowance was required and those for which a specific allowance was not necessary as of September 30, 2022 as well as the average recorded investment and related interest income for the period then ended (in thousands):

 

  

September 30, 2022

 
  

Recorded

Investment

  

Unpaid

Principal

Balance

  

Related

Allowance

  

Average

Recorded

Investment

  

Interest

Income

Recognized

 

With no related allowance recorded:

                    

One-to-four family residential owner occupied

 $-  $-  $-  $-  $- 

One-to-four family residential non-owner occupied

  8   9   -   9   - 

Multi-family residential

  1,708   1,723   -   1,723   - 

Commercial real estate

  130   130   -   130   9 

Construction

  -   -   -   -   - 

Home equity

  -   -   -   -   - 

Commercial business

  -   -   -   -   - 

Other consumer

  -   -   -   -   - 
               -     

With an allowance recorded:

                    

One-to-four family residential owner occupied

 $-  $-  $-  $-  $- 

One-to-four family residential non-owner occupied

  -   -   -   -   - 

Multi-family residential

  -   -   -   -   - 

Commercial real estate

  -   -   -   -   - 

Construction

  -   -   -   -   - 

Home equity

  -   -   -   -   - 

Commercial business

  -   -   -   -   - 

Other consumer

  -   -   -   -   - 
                     

Total:

                    

One-to-four family residential owner occupied

 $-  $-  $-  $-  $- 

One-to-four family residential non-owner occupied

  8   9   -   9   - 

Multi-family residential

  1,708   1,723   -   1,723   - 

Commercial real estate

  130   130   -   130   9 

Construction

  -   -   -   -   - 

Home equity

  -   -   -   -   - 

Commercial business

  -   -   -   -   - 

Other consumer

  -   -   -   -   - 

Total

 $1,846  $1,862  $-  $1,862  $9 

 

 

 

 

 

 

 

18

 

Quaint Oak Bancorp, Inc.

Notes to Unaudited Consolidated Financial Statements 

 

Note 6 - Loans Receivable, Net and Allowance for Loan Losses (Continued)

 

The following table presents impaired loans by class, segregated by those for which a specific allowance was required and those for which a specific allowance was not necessary as of December 31, 2021 as well as the average recorded investment and related interest income for the year then ended (in thousands):

 

  

December 31, 2021

 
  

Recorded

Investment

  

Unpaid

Principal

Balance

  

Related

Allowance

  

Average

Recorded

Investment

  

Interest

Income

Recognized

 

With no related allowance recorded:

                    

One-to-four family residential owner occupied

 $-  $-  $-  $66  $- 

One-to-four family residential non-owner occupied

  9   9   -   9   - 

Multi-family residential

  -   -   -   -   - 

Commercial real estate

  131   131   -   131   12 

Construction

  -   -   -   -   - 

Home equity

  -   -   -   -   - 

Commercial business

  -   -   -   18   - 

Other consumer

  -   -   -   -   - 
                     

With an allowance recorded:

                    

One-to-four family residential owner occupied

 $-  $-  $-  $-  $- 

One-to-four family residential non-owner occupied

  -   -   -   -   - 

Multi-family residential

  -   -   -   -   - 

Commercial real estate

  -   -   -   -   - 

Construction

  -   -   -   -   - 

Home equity

  -   -   -   -   - 

Commercial business

  -   -   -   -   - 

Other consumer

  -   -   -   -   - 
                     

Total:

                    

One-to-four family residential owner occupied

 $-  $-  $-  $66  $- 

One-to-four family residential non-owner occupied

  9   9   -   9   - 

Multi-family residential

  -   -   -   -   - 

Commercial real estate

  131   131   -   131   12 

Construction

  -   -   -   -   - 

Home equity

  -   -   -   -   - 

Commercial business

  -   -   -   18   - 

Other consumer

  -   -   -   -   - 

Total

 $140  $140  $-  $224  $12 

 

The loan portfolio also includes certain loans that have been modified in a troubled debt restructuring, where economic concessions have been granted to borrowers who have experienced or are expected to experience financial difficulties. These concessions typically result from loss mitigation activities and could include reductions in the interest rate, payment extensions, forbearance, or other actions. At September30, 2022, the Company had two loans totaling $138,000 that were identified as troubled debt restructurings. One of these loans was performing in accordance with its modified terms and one was on non-accrual as of September 30, 2022. During the nine month period ended September 30, 2022, no new loans were identified as TDRs. At December 31, 2021, the Company had two loans totaling $140,000 that were identified as troubled debt restructurings. One of these loans was performing in accordance with its modified terms and one was on non-accrual as of December 31, 2021. If a TDR is placed on non-accrual it is not reverted back to accruing status until the borrower makes timely payments as contracted for at least six months and future collection under the revised terms is probable.

 

 

19

 

Quaint Oak Bancorp, Inc.

Notes to Unaudited Consolidated Financial Statements 

 

Note 6 - Loans Receivable, Net and Allowance for Loan Losses (Continued)

 

Any reserve for an impaired TDR loan is based upon the present value of the future expected cash flows discounted at the loan’s original effective rate or upon the fair value of the collateral less costs to sell, if the loan is deemed collateral dependent. At September 30, 2022 there were no commitments to lend additional funds to debtors whose loan terms have been modified as TDRs.

 

The general practice of the Bank is to work with borrowers so that they are able to pay back their loan in full. If a borrower continues to be delinquent or cannot meet the terms of a TDR modification and the loan is determined to be uncollectible, the loan will be charged off.

 

Following is a summary, by loan portfolio class, of changes in the allowance for loan losses for the three and nine months ended September 30, 2022 and recorded investment in loans receivable as of September 30, 2022 (in thousands):

 

  

September 30, 2022

 
  

1-4 Family

Residential

Owner

Occupied

  

1-4 Family

Residential

Non-Owner

Occupied

  

Multi-Family

Residential

  

Commercial

Real Estate

  

Construction

  

Home

Equity

  

Commercial

Business

and Other

Consumer

  

Unallocated

  

Total

 
For the Three Months Ended September 30, 2022 

Allowance for loan losses:

 

Beginning balance

 $104  $276  $377  $3,383  $283  $32  $1,735  $350  $6,540 

Charge-offs

  -   -   -   -   -   -   (54)  -   (54)

Recoveries

  -   -   -   -   -   -   -   -   - 

Provision

  15   7   90   187   (76)  3   379   50   655 

Ending balance

 $119  $283  $467  $3,570  $207  $35  $2,060  $400  $7,141 
                                     
For the Nine Months Ended September 30, 2022 

Allowance for loan losses:

 

Beginning balance

 $73  $292  $249  $2,475  $119  $29  $1,625  $400  $5,262 

Charge-offs

  -   -   -   -   -   -   (54)  -   (54)

Recoveries

  -   -   -   -   -   -   -   -   - 

Provision

  46   (9)  218   1,095   88   6   489   -   1,933 

Ending balance

 $119  $283  $467  $3,570  $207  $35  $2,060  $400  $7,141 
                                     

Ending balance evaluated

 

for impairment:

                                    

Individually

 $-  $-  $-  $-  $-  $-  $-  $-  $- 

Collectively

 $119  $283  $467  $3,570  $207  $35  $2,060  $400  $7,141 
                                     

Loans receivable:

                                 

Ending balance:

 $17,424  $39,410  $48,468  $313,160  $25,838  $5,265  $138,136     $587,701 
                                     

Ending balance evaluated

                                 

for impairment:

                                    

Individually

 $-  $8  $1,708  $130  $-  $-  $-      $1,846 

Collectively

 $17,424  $39,402  $46,760  $313,030  $25,838  $5,265  $138,136      $585,855 

 

The Bank allocated increased allowance for loan loss provisions to the commercial real estate loan portfolio class for the three and nine months ended September 30, 2022, due primarily to changes in quantitative factors in this portfolio class. The Bank allocated increased allowance for loan loss provisions to the commercial business loan portfolio class for the nine months ended September 30, 2022, due primarily to changes in quantitative factors in this portfolio class. The Bank allocated increased allowance for loan loss provisions to the multi-family residential loan portfolio class for the nine months ended September 30, 2022, due primarily to changes in qualitative and quantitative factors in this portfolio class.

 

 

20

Quaint Oak Bancorp, Inc.

Notes to Unaudited Consolidated Financial Statements 

 

Note 6 - Loans Receivable, Net and Allowance for Loan Losses (Continued)

 

Following is a summary, by loan portfolio class, of changes in the allowance for loan losses for the three and nine months ended September 30, 2021 and recorded investment in loans receivable as of September 30, 2021 (in thousands):

 

  

September 30, 2021

 
  

1-4 Family

Residential

Owner

Occupied

  

1-4 Family

Residential

Non-Owner

Occupied

  

Multi-Family

Residential

  

Commercial

Real Estate

  

Construction

  

Home

Equity

  

Commercial

Business

and Other

Consumer

  

Unallocated

  

Total

 

For the Three Months Ended September 30, 2021

 

Allowance for loan losses:

 

Beginning balance

 $72  $356  $242  $1,617  $163  $26  $970  $300  $3,746 

Charge-offs

  -   -   -   -   -   -   -   -   - 

Recoveries

  -   -   -   -   -   -   -   -   - 

Provision

  -   22   5   407   (28)  (4)  205   (50)  557 

Ending balance

 $72  $378  $247  $2,024  $135  $22  $1,175  $250  $4,303 
                                     

For the Nine Months Ended September 30, 2021

 

Allowance for loan losses:

 

Beginning balance

 $88  $362  $229  $1,287  $62  $20  $763  $250  $3,061 

Charge-offs

  -   -   -   -   -   -   (17)  -   (17)

Recoveries

  -   -   -   -   -   -   -   -   - 

Provision

  (16)  16   18   737   73   2   429   -   1,259 

Ending balance

 $72  $378  $247  $2,024  $135  $22  $1,175  $250  $4,303 

Ending balance evaluated

 

for impairment:

                                    

Individually

 $-  $-  $-  $-  $-  $-  $-  $-  $- 

Collectively

 $72  $378  $247  $2,024  $135  $22  $1,175  $250  $4,303 

 

The Bank allocated increased allowance for loan loss provisions to the commercial real estate loan portfolio class for the three months ended September 30, 2021, due primarily to changes in quantitative and qualitative factors in this portfolio class. The Bank allocated increased allowance for loan loss provisions to the commercial real estate loan portfolio class for the nine months ended September 30, 2021, due primarily to changes in quantitative factors in this portfolio class The Bank allocated increased allowance for loan loss provisions to the commercial business loan portfolio class for the three and nine months ended September 30, 2021, due primarily to changes in qualitative and quantitative factors in this portfolio class. In general, the primary driver of the increase in qualitative factors was the economic trends factor associated with the COVID-19 pandemic.

 

 

 

 

 

 

 

 

 

21

 

Quaint Oak Bancorp, Inc.

Notes to Unaudited Consolidated Financial Statements 

 

Note 6 - Loans Receivable, Net and Allowance for Loan Losses (Continued)

 

Following is a summary, by loan portfolio class, of changes in the allowance for loan losses for the year ended December 31, 2021 and recorded investment in loans receivable based on impairment evaluation as of December 31, 2021 (in thousands):

 

  

December 31, 2021

 
  

1-4 Family

Residential

Owner

Occupied

  

1-4 Family

Residential

Non-Owner

Occupied

  

Multi-

Family

Residential

  

Commercial

Real Estate

  

Construction

  

Home

Equity

  

Commercial

Business

and Other

Consumer

  

Unallocated

  

Total

 

Allowance for loan losses:

 

Beginning balance

 $88  $362  $229  $1,287  $62  $20  $763  $250  $3,061 

Charge-offs

  -   -   -   -   -   -   (17)  -   (17)

Recoveries

  -   -   -   -   -   -   17   -   17 

Provision

  (15)  (70)  20   1,188   57   9   862   150   2,201 

Ending balance

 $73  $292  $249  $2,475  $119  $29  $1,625  $400  $5,262 
Ending balance evaluated                                    

for impairment:

                                    

Individually

 $-  $-  $-  $-  $-  $-  $-  $-  $- 

Collectively

 $73  $292  $249  $2,475  $119  $29  $1,625  $400  $5,262 
                                     
Loans receivable:                                    
Ending balance $9,779  $38,752  $29,344  $183,822  $15,843  $4,706  $129,620     $411,866 
Ending balance evaluated                                    
for impairment:                                    
Individually $  $9  $-  $131  $-  $-  $-     $140 
Collectively $9,779  $38,743  $29,344  $183,691  $15,843  $4,706  $129,620     $411,726 

 

The Bank allocated increased allowance for loan loss provisions to the commercial real estate loan portfolio class for the year ended December 31, 2021, due primarily to changes in volume and qualitative factors in this portfolio class. The Bank allocated increased allowance for loan loss provisions to the commercial business loan portfolio class for the year ended December 31, 2021, due primarily to changes in qualitative factors in this portfolio class. The Bank allocated increased allowance for loan loss provisions to the multi-family loan portfolio class for the year ended December 31, 2021, due primarily to changes in qualitative factors in this portfolio class. The Bank allocated increased allowance for loan loss provisions to the construction loan portfolio class for the year ended December 31, 2021, due primarily to changes in quantitative and qualitative factors in this portfolio class. In general, the primary driver of the increase in qualitative factors was the economic trends factor associated with the COVID-19 pandemic. In this regard, the Bank increased the unallocated component of the allowance for the year ended December 31, 2021 to cover uncertainties that could affect management’s estimate of probable losses primarily associated with the COVID-19 pandemic.

 

The following table presents non-accrual loans by classes of the loan portfolio as of September 30, 2022 and December 31, 2021 (in thousands):

 

  

September 30,

2022

  

December 31,

2021

 

One-to-four family residential owner occupied

 $-  $- 

One-to-four family residential non-owner occupied

  8   9 

Multi-family residential

  1,708   - 

Commercial real estate

  -   - 

Construction

  -   - 

Home equity

  -   - 

Commercial business

  -   - 

Other consumer

  -   - 

Total

 $1,716  $9 

 

 

22

 

Quaint Oak Bancorp, Inc.

Notes to Unaudited Consolidated Financial Statements 

 

Note 6 - Loans Receivable, Net and Allowance for Loan Losses (Continued)

 

The performance and credit quality of the loan portfolio is also monitored by analyzing the age of the loans receivable as determined by the length of time a recorded payment is past due. The following tables present the classes of the loan portfolio summarized by the past due status as of September 30, 2022 and December 31, 2021 (in thousands):

  

September 30, 2022

 
  

30-89

Days Past

Due

  

90 Days

or More

Past Due

  

Total

Past Due

  

Current

  

Total Loans

Receivable

  

Loans

Receivable

90 Days or

More Past

Due and

Accruing

 

One-to-four family residential owner occupied

 $556  $-  $556  $16,868  $17,424  $- 

One-to-four family residential non-owner occupied

  57   8   65   39,345   39,410   - 

Multi-family residential

  873   1,708   2,581   45,887   48,468   - 

Commercial real estate

  2,133   -   2,133   311,027   313,160   - 

Construction

  -   -   -   25,838   25,838   - 

Home equity

  40   -   40   5,225   5,265   - 

Commercial business

  2,129   -   2,129   136,004   138,133   - 

Other consumer

  -   -   -   3   3   - 

Total

 $5,788  $1,716  $7,504  $580,197  $587,701  $- 
    
  

December 31, 2021

 
  

30-89

Days Past

Due

  

90 Days

or More

Past Due

  

Total

Past Due

  

Current

  

Total Loans

Receivable

  

Loans

Receivable

90 Days or

More Past

Due and

Accruing

 

One-to-four family residential owner occupied

 $809  $-  $809  $8,970  $9,779  $- 

One-to-four family residential non-owner occupied

  285   9   294   38,458   38,752   - 

Multi-family residential

  -   -   -   29,344   29,344   - 

Commercial real estate

  -   -   -   183,822   183,822   - 

Construction

  -   -   -   15,843   15,843   - 

Home equity

  -   -   -   4,706   4,706   - 

Commercial business

  367   -   367   129,241   129,608   - 

Other consumer

  -   -   -   12   12   - 

Total

 $1,461  $9  $1,470  $410,396  $411,866  $- 

 

Non-performing loans, which consist of non-accruing loans plus accruing loans 90 days or more past due, amounted to $1.7 million at September 30, 2022 and $9,000 at December 31, 2021. For the delinquent loans in our portfolio, we have considered our ability to collect the past due interest, as well as the principal balance of the loan, in order to determine whether specific loans should be placed on non-accrual status. In cases where our evaluations have determined that the principal and interest balances are collectible, we have continued to accrue interest.

 

For the three months ended September 30, 2022 and 2021 there was no interest income recognized on non-accrual loans on a cash basis. There was $43,000 and $122,000 of interest income foregone on non-accrual loans for the three and nine months ended September 30, 2022, respectively. There was $1,000 of interest income foregone on non-accrual loans for both the three and nine months ended September 30, 2021.

 

 

23

 

Quaint Oak Bancorp, Inc.

Notes to Unaudited Consolidated Financial Statements 

 

 

Note 7 – Goodwill and Other Intangible, Net 

 

On January 4, 2021, the Bank acquired a majority ownership interest 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. The Bank recognized $2.1 million of goodwill as part of the acquisition of Oakmont Capital Holdings, LLC. On August 1, 2016, Quaint Oak Insurance Agency, LLC began operations by acquiring the renewal rights to a book of business produced and serviced by an independent insurance agency located in New Britain, Pennsylvania, that provides a broad range of personal and commercial insurance coverage solutions. The Company paid $1.0 million for these rights. Based on a valuation, $515,000 of the purchase price was determined to be goodwill and $485,000 was determined to be related to the renewal rights to the book of business and deemed to be an other intangible asset. This other intangible asset is being amortized over a ten year period based upon the annual retention rate of the book of business. The balance of other intangible asset at September 30, 2022 was $186,000, which is net of accumulated amortization of $299,000. Amortization expense for the three and nine months ended September 30, 2022 and 2021 amounted to approximately $12,000 and $36,000, respectively.

 

 

Note 8 Deposits

 

Deposits consist of the following classifications (in thousands):

  

September 30,

2022

  

December 31,

2021

 

Non-interest bearing checking accounts

 $79,825  $64,731 

Passbook accounts

  4   10 

Savings accounts

  1,662   1,828 

Money market accounts

  289,395   200,687 

Certificates of deposit

  176,228   179,910 

Total deposits

 $547,114  $447,166 

 

 

Note 9 Borrowings

 

Federal Home Loan Bank advances consist of the following at September 30, 2022 and December 31, 2021 (in thousands):

 

  

September 30, 2022

  

December 31, 2021

 
  

Amount

  

Weighted

Interest
Rate

  

Amount

  

Weighted

Interest
Rate

 

Short-term borrowings

 $10,000   3.11% $26,000   0.28%
                 

Fixed rate borrowings maturing:

                

2022

  17,000   1.72   7,171   2.10 

2023

  57,000   2.22   7,000   2.16 

2024

  6,167   2.05   6,167   2.05 

2025

  2,855   1.25   2,855   1.25 

Total FHLB long-term debt

 $83,022   2.07% $23,193   2.00%

 

 

 

 

24

Quaint Oak Bancorp, Inc.

Notes to Unaudited Consolidated Financial Statements

 

Note 9 – Borrowings (Continued)

 

Federal Reserve Bank long-term borrowings decreased $3.9 million, or 100.0%, to none at September 30, 2022 from $3.9 million at December 31, 2021 as the Company paid off first round PPP loans pledged as collateral under the FRB’s Paycheck Protection Program Liquidity Facility (PPPLF). The Company did not utilize the FRB’s PPPLF to fund second round PPP loans. Under the PPPLF the Company pledged certain PPP loans as collateral and borrowed from the Federal Reserve at a rate of 0.35% that was fixed for two years.

 

There were no other short-term borrowings representing outstanding balances on two lines of credit that Oakmont Capital Holdings, LLC has with a credit union which are used to fund equipment loans. Borrowing capacity on the two lines of credit total $15.0 million at September 30, 2022.

 

 

Note 10 Stock Compensation Plans

 

Employee Stock Ownership Plan

 

The Company maintains an Employee Stock Ownership Plan (ESOP) for the benefit of employees who meet the eligibility requirements of the plan. Using proceeds from a loan from the Company, the ESOP purchased 8%, or 222,180 shares of the Company’s then outstanding common stock in the open market during 2007. The Bank made cash contributions to the ESOP on a quarterly basis sufficient to enable the ESOP to make the required loan payments to the Company until the loan was repaid in full as of September 30, 2021. The loan bore an interest rate of 7.75% per annum, with principal and interest paid quarterly in equal installments over 15 years pursuant to the terms of the original note. The loan was secured by the unallocated shares of common stock held by the ESOP. The Bank made cash contributions to the ESOP on a quarterly basis sufficient to enable the ESOP to make the required loan payments to the Company until the loan was repaid in full as of September 30, 2021.

 

During the third quarter of 2022, the Company made a discretionary contribution of 4,000 shares to the ESOP. These shares were released from Treasury Stock at a cost of approximately $84,000. During the three and nine months ended September 30, 2022, the Company recognized $84,000 and $259,000 of ESOP expense, respectively. During the three and nine months ended September 30, 2021, the Company recognized $65,000 and $187,000 of ESOP expense, respectively.

 

Stock Incentive Plans Share Awards

 

In May 2013, the shareholders of Quaint Oak Bancorp approved the adoption of the 2013 Stock Incentive Plan (the “2013 Stock Incentive Plan”). The 2013 Stock Incentive Plan approved by shareholders in May 2013 covered a total of 195,000 shares, of which 48,750, or 25%, may be restricted stock awards, for a balance of 146,250 stock options assuming all the restricted shares are awarded. In May 2018, the shareholders of Quaint Oak Bancorp approved the adoption of the 2018 Stock Incentive Plan (the “2018 Stock Incentive Plan”). The 2018 Stock Incentive Plan approved by shareholders in May 2018 covered a total of 155,000 shares, of which 38,750, or 25%, may be restricted stock awards, for a balance of 116,250 stock options assuming all the restricted shares are awarded.

 

As of September 30, 2022 a total of 9,122 share awards were unvested under the 2013 and 2018 Stock Incentive Plans and up to 11,750 share awards were available for future grant under the 2018 Stock Incentive Plan and 1,800 share awards under the 2013 Stock Incentive Plan. The 2013 and 2018 Stock Incentive Plan share awards have vesting periods of five years.

 

 

 

25

Quaint Oak Bancorp, Inc.

Notes to Unaudited Consolidated Financial Statements 

 

Note 10 Stock Compensation Plans (Continued)

 

Stock Incentive Plans Share Awards (Continued)

 

A summary of the status of the share awards under the 2013 and 2018 Stock Incentive Plans as of September 30, 2022 and 2021 and changes during the nine months ended September 30, 2022 and 2021 is as follows:

 

  

September 30, 2022

  

September 30, 2021

 
  

Number of

Shares

  

Weighted

Average Grant

Date Fair Value

  

Number of

Shares

  

Weighted

Average Grant

Date Fair Value

 

Unvested at the beginning of the period

  18,845  $13.30   28,266  $13.30 

Granted

  -   -   -   - 

Vested

  (9,123)  13.30   (9,421)  13.30 

Forfeited

  (600)  13.30   -   - 

Unvested at the end of the period

  9,122  $13.30   18,845  $13.30 

 

Compensation expense on the restricted stock awards is recognized ratably over the five year vesting period in an amount which is equal to the fair value of the common stock at the date of grant. During both the three months ended September 30, 2022 and 2021, the Company recognized approximately $31,000 of compensation expense. A tax benefit of approximately $7,000 was recognized during each of these periods. During both the nine months ended September 30, 2022 and 2021, the Company recognized approximately $93,000 of compensation expense. A tax benefit of approximately $20,000 was recognized during each of these periods. As of September 30, 2022, approximately $74,000 in additional compensation expense will be recognized over the remaining service period of approximately 0.6 years.

 

Stock Option and Stock Incentive Plans Stock Options

 

In May 2008, the shareholders of Quaint Oak Bancorp approved the adoption of the 2008 Stock Option Plan (the “Option Plan”). The Option Plan authorized the grant of stock options to officers, employees and directors of the Company to acquire 277,726 shares of common stock with an exercise price no less than the fair market value on the date of the grant. The Option Plan expired February 13, 2018, however, outstanding options granted in 2013 remain valid and existing for the remainder of their 10 year terms. As described above under “Stock Incentive Plans – Share Awards”, the 2013 Stock Incentive Plan approved by shareholders in May 2013 covered a total of 195,000 shares, of which 146,250 may be stock options assuming all the restricted shares are awarded. The 2018 Stock Incentive Plan approved by shareholders in May 2018 covered a total of 155,000 shares, of which 116,250 may be stock options assuming all the restricted shares are awarded.

 

All incentive stock options issued under the Option Plan and the 2013 and 2018 Stock Incentive Plans are intended to comply with the requirements of Section 422 of the Internal Revenue Code. Options will become vested and exercisable over a five year period and are generally exercisable for a period of ten years after the grant date.

 

As of September 30, 2022, a total of 205,936 grants of stock options were outstanding under the Option Plan and 2013 and 2018 Stock Incentive Plans and 40,250 stock options were available for future grant under the 2018 Stock Incentive Plan, 7,400 stock options under the 2013 Stock Incentive Plan and none under the Option Plan. Options will become vested and exercisable over a five year period and are generally exercisable for a period of ten years after the grant date.

 

 

26

Quaint Oak Bancorp, Inc.

Notes to Unaudited Consolidated Financial Statements 

 

Note 10 Stock Compensation Plans (Continued)

 

Stock Option and Stock Incentive Plans Stock Options (Continued)

 

A summary of option activity under the Company’s Option Plan and 2013 and 2018 Stock Incentive Plans as of September 30, 2022 and 2021 and changes during the three months ended September 30, 2022 and 2021 is as follows:

 

  

2022

  

2021

 
  

Number

of

Shares

  

Weighted

Average

Exercise

Price

  

Weighted

Average

Remaining

Contractual

Life (in

years)

  

Number

of

Shares

  

Weighted

Average

Exercise

Price

  

Weighted

Average

Remaining

Contractual

Life (in

years)

 

Outstanding at the beginning of the period

  233,136  $10.96   4.2   240,636  $10.98   5.2 

Granted

  -   -   -   -   -   - 

Exercised

  (21,000)  8.60   -   (7,500)  11.57   - 

Forfeited

  (6,200)  10.62   -   -   -   - 

Outstanding at end of period

  205,936  $11.21   3.7   233,136  $10.96   4.5 

Exercisable at end of period

  175,009  $10.96   6.3   180,081  $10.28   5.6 

 

During both the three months ended September 30, 2022 and 2021, approximately $11,000 in compensation expense on stock options was recognized. A tax benefit of approximately $1,000, was recognized during each of these periods. During both the nine months ended September 30, 2022 and 2021, approximately $33,000 in compensation expense on stock options was recognized. A tax benefit of approximately $2,000, was recognized during each of these periods. As of September 30, 2022, approximately $28,000 in additional compensation expense will be recognized over the remaining service period of approximately 0.6 years.

 

 

Note 11 Fair Value Measurements and Fair Values of Financial Instruments

 

Fair value estimates are based on quoted market prices, if available, quoted market prices of similar assets or liabilities, or the present value of expected future cash flows and other valuation techniques. These valuations are significantly affected by discount rates, cash flow assumptions, and risk assumptions used. Therefore, fair values estimates may not be substantiated by comparison to independent markets and are not intended to reflect the proceeds that may be realizable in an immediate settlement of the instruments.

 

Fair value is determined at one point in time and is not representative of future value. These amounts do not reflect the total value of a going concern organization. Management does not have the intention to dispose of a significant portion of its assets and liabilities and therefore, the unrealized gains or losses should not be interpreted as a forecast of future earnings and cash flows.

 

The following disclosures show the hierarchal disclosure framework associated with the level of pricing observations utilized in measuring assets and liabilities at fair value. The three broad levels of pricing are as follows:

 

Level I:         Quoted prices are available in active markets for identical assets or liabilities as of the reported date.

 

 

 

27

Quaint Oak Bancorp, Inc.

Notes to Unaudited Consolidated Financial Statements 

 

Note 11 Fair Value Measurements and Fair Values of Financial Instruments (Continued)

 

Level II:         Pricing inputs are other than the quoted prices in active markets, which are either directly or indirectly observable as of the reported date. The nature of these assets and liabilities includes items for which quoted prices are available but traded less frequently and items that are fair-valued using other financial instruments, the parameters of which can be directly observed.

 

Level III:       Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.

 

This hierarchy requires the use of observable market data when available.

 

The methods of determining the fair value of assets and liabilities presented in this note are consistent with our methodologies disclosed in Note 19 of the Company’s 2021 Form 10-K, as the fair value of loans, excluding previously presented impaired loans measured at fair value on a non-recurring basis, is estimated using discounted cash flow analyses. The discount rates used to determine fair value use interest rate spreads that reflect factors such as liquidity, credit and non-performance risk. Loans are considered a Level 3 classification.

 

The following is a discussion of assets and liabilities measured at fair value on a recurring and non-recurring basis and valuation techniques applied:

 

Investment Securities Available For Sale: The fair value of securities available for sale are determined by using matrix pricing (Level 2), which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted market prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted prices.

 

We may be required from time to time to measure certain assets at fair value on a nonrecurring basis in accordance with U.S. GAAP. These adjustments to fair value usually result from application of lower-of-cost-or-market accounting or write-downs of individual assets.

 

Impaired Loans: Impaired loans are carried at the lower of cost or the fair value of the collateral for collateral-dependent loans less estimated costs to sell. Collateral is primarily in the form of real estate. The use of independent appraisals, discounted cash flow models and management’s best judgment are significant inputs in arriving at the fair value measure of the underlying collateral and impaired loans are therefore classified within Level 3 of the fair value hierarchy.

 

Other Real Estate Owned: Other real estate owned is carried at the lower of the investment in the real estate or the fair value of the real estate less estimated selling costs. The use of independent appraisals and management’s best judgment are significant inputs in arriving at the fair value measure of the underlying collateral and therefore other real estate owned is classified within Level 3 of the fair value hierarchy.

 

 

 

 

 

28

 

Quaint Oak Bancorp, Inc.

Notes to Unaudited Consolidated Financial Statements 

 

Note 11 Fair Value Measurements and Fair Values of Financial Instruments (Continued)

 

The table below sets forth the financial assets and liabilities that were accounted for on a recurring and nonrecurring basis by level within the fair value hierarchy as of September 30, 2022 (in thousands):

 

  September 30, 2022 
     Fair Value Measurements Using:   
  

Total Fair

Value

  

Quoted

Prices in

Active

Markets for

Identical

Assets

(Level 1)

  

Significant Other

Observable

Inputs

(Level 2)

  

Unobservable

Inputs

(Level 3)

 

Recurring fair value measurements:

                

Investment securities available for sale

                

Government National Mortgage Association mortgage-backed securities

 $3,074  $-  $3,074  $- 

Federal National Mortgage Association mortgage- backed securities

  119   -   119   - 

Total investment securities available for sale

 $3,193  $-  $3,193  $- 

Total recurring fair value measurements

 $3,193  $-  $3,193  $- 
                 

Nonrecurring fair value measurements

                

Impaired loans

 $1,846  $-  $-  $1,846 

Total nonrecurring fair value measurements

 $1,846  $-  $-  $1,846 

 

 

The table below sets forth the financial assets and liabilities that were accounted for on a recurring and nonrecurring basis by level within the fair value hierarchy as of December 31, 2021 (in thousands):

 

     December 31, 2021  
     Fair Value Measurements Using:  
  

Total Fair

Value

  

Quoted

Prices in

Active

Markets for

Identical

Assets

(Level 1)

  

Significant Other

Observable

Inputs

(Level 2)

  

Unobservable

Inputs

(Level 3)

 

Recurring fair value measurements:

                

Investment securities available for sale

                

Government National Mortgage Association mortgage-backed securities

 $3,882  $-  $3,882  $- 

Federal National Mortgage Association mortgage- backed securities

  151   -   151   - 

Total investment securities available for sale

 $4,033  $-  $4,033  $- 

Total recurring fair value measurements

 $4,033  $-  $4,033  $- 
                 

Nonrecurring fair value measurements

                

Impaired loans

 $140  $-  $-  $140 

Total nonrecurring fair value measurements

 $140  $-  $-  $140 

 

 

29

Quaint Oak Bancorp, Inc.

Notes to Unaudited Consolidated Financial Statements 

 

Note 11 Fair Value Measurements and Fair Values of Financial Instruments (Continued)

 

The following table presents additional quantitative information about assets measured at fair value on a nonrecurring basis and for which the Company has used Level 3 inputs to determine fair value as of September 30, 2022 and December 31, 2021 (in thousands):

 

   September 30, 2022    

 

  Quantitative Information About Level 3 Fair Value Measurements    
  

Total Fair

Value

 

Valuation

Techniques

 

Unobservable

Input

 

Range (Weighted

Average)

    

Impaired loans

 $1,846 

Appraisal of collateral (1)

 

Appraisal adjustments (2)  8%(8%)    

 

  December 31, 2021   

 

  Quantitative Information About Level 3 Fair Value Measurements    
  

Total Fair

Value

 

Valuation

Techniques

 

Unobservable

Input

 

Range (Weighted

Average)

    

Impaired loans

 $140 

Appraisal of collateral (1)

 

Appraisal adjustments (2)  8%(8%)    

________________

 

(1)

Fair value is generally determined through independent appraisals of the underlying collateral, which generally include various Level 3 inputs which are identifiable.

 

(2)

Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses. The range and weighted average of liquidation expenses and other appraisal adjustments are presented as a percentage of the appraisal.

 

The estimated fair values of the Company’s financial instruments that are not required to be measured or reported at fair value were as follows at September 30, 2022 and December 31, 2021 (in thousands):

 

          

Fair Value Measurements at

 
          

September 30, 2022

 
  

Carrying

Amount

  

Fair Value

Estimate

  

Quoted Prices in

Active Markets

for Identical

Assets

(Level 1)

  

Significant

Other

Observable

Inputs

(Level 2)

  

Unobservable

Inputs

(Level 3)

 

Financial Assets

                    

Investment in interest-earning time deposits

 $5,569  $5,635  $-  $-  $5,635 

Loans held for sale

  88,400   95,437   -   95,437   - 

Loans receivable, net

  579,154   553,379   -   -   553,379 
                     

Financial Liabilities

                    

Deposits

  547,114   547,151   370,886   -   176,265 

FHLB long-term borrowings

  83,022   82,791   -   -   82,791 

Subordinated debt

  7,958   7,911   -   -   7,911 

 

 

 

 

30

 

Quaint Oak Bancorp, Inc.

Notes to Unaudited Consolidated Financial Statements 

 

Note 11 Fair Value Measurements and Fair Values of Financial Instruments (Continued)

          

Fair Value Measurements at

 
          

December 31, 2021

 
  

Carrying

Amount

  

Fair Value

Estimate

  

Quoted Prices in

Active Markets

for Identical

Assets

(Level 1)

  

Significant

Other

Observable

Inputs

(Level 2)

  

Unobservable

Inputs

(Level 3)

 

Financial Assets

                    

Investment in interest-earning time deposits

 $7,924  $8,091  $-  $-  $8,091 

Loans held for sale

  107,823   112,843   -   112,843   - 

Loans receivable, net

  403,966   409,203   -   -   409,203 
                     

Financial Liabilities

                    

Deposits

  447,166   446,576   267,255   -   179,321 

FHLB long-term borrowings

  23,193   23,231   -   -   23,231 

FRB long-term borrowings

  3,895   3,895   -   -   3,895 

Subordinated debt

  7,933   8,312   -   -   8,312 

 

For cash and cash equivalents, accrued interest receivable, investment in FHLB stock, bank-owned life insurance, FHLB short-term borrowings, accrued interest payable, and advances from borrowers for taxes and insurance, the carrying value is a reasonable estimate of the fair value and are considered Level 1 measurements.

 

 

Note 12 Operating Segments

 

The Company's operations currently consist of two reportable operating segments: Banking and Oakmont Capital Holdings, LLC. The Company offers different products and services through its two segments. The accounting policies of the segments are generally the same as those of the consolidated company.

 

The Banking Segment generates its revenues primarily from its lending, deposit gathering and fee business activities. The profitability of this segment's operations depends primarily on its net interest income after provision for credit losses, which is the difference between interest earned on interest earning assets and interest paid on interest bearing liabilities less provision for credit losses. The provision for credit losses is almost entirely dependent on changes in the Banking Segment's loan portfolio and management’s assessment of the collectability of the loan portfolio as well as prevailing economic and market conditions. The profitability of this segment’s operations also depends on the generation of non-interest income which includes fees and commissions generated by Quaint Oak Bank and its wholly-owned subsidiaries, Quaint Oak Mortgage, LLC, Quaint Oak Real Estate, LLC, Quaint Oak Abstract, LLC, Quaint Oak Insurance Agency, LLC, and Oakmont Commercial, LLC, which are included in the Banking Segment for segment reporting purposes. The Banking Segment is also subject to an extensive system of laws and regulations that are intended primarily for the protection of depositors and other customers, federal deposit insurance funds and the banking system as a whole. These laws and regulations govern such areas as capital, permissible activities, allowance for loan and lease losses, loans and investments, and rates of interest that can be charged on loans. For segment reporting purposes, Quaint Oak Bancorp, Inc. is included as part of the Company’s Banking segment.

 

The Oakmont Capital Holdings, LLC Segment originates equipment loans which are generally sold to third party institutions with the loans’ servicing rights retained. The profitability of this segment’s operations depends primarily on the gains realized from the sale of loans, processing fees, and service fees. The Oakmont Capital Holdings, LLC Segment is also subject to an extensive system of laws and regulations that are intended primarily for the protection of commercial customers.

 

31

 

Quaint Oak Bancorp, Inc.

Notes to Unaudited Consolidated Financial Statements 

 

Note 12 – Operating Segments (Continued)

 

The following table presents summary financial information for the reportable segments (in thousands):

 

  

As of or for the Three Months Ended September 30,

 
  

2022

  

2021

 
  

Quaint

Oak

Bank(1)

  

Oakmont

Capital

Holdings,

LLC

  

Consolidated

  

Quaint

Oak

Bank(1)

  

Oakmont

Capital

Holdings,

LLC

  

Consolidated

 

Net Interest Income (Loss)

 $6,766  $(109) $6,657  $5,022  $(8) $5,014 

Provision for Loan Losses

  655   -   655   557   -   557 

Net Interest Income (Loss) after Provision for

    Loan Losses

  6,111   (109)  6,002   4,465   (8)  4,457 
                         

Non-Interest Income

                        

Mortgage banking, equipment lending and title abstract fees

  173   587   760   332   272   604 

Real estate sales commissions, net

  88   -   88   79   -   79 

Insurance commissions

  152   -   152   133   -   133 

Other fees and services charges

  57   74   131   36   2   38 

Net loan servicing income

  6   474   480   62   413   475 

Income from bank-owned life insurance

  23   -   23   21   -   21 

Net gain on loans held for sale

  891   3,390   4,281   843   1,023   1,866 

Gain on the sale of SBA loans

  58   -   58   369   -   369 

Total Non-Interest Income

  1,448   4,525   5,973   1,875   1,710   3,585 
                         

Non-Interest Expense

                        

Salaries and employee benefits

  3,547   1,788   5,335   2,867   1,233   4,100 

Directors’ fees and expenses

  67   -   67   58   -   58 

Occupancy and equipment

  323   154   477   295   84   379 

Data processing

  140   -   140   234   -   234 

Professional fees

  240   17   257   67   40   107 

FDIC deposit insurance assessment

  225   -   225   97   -   97 

Other real estate owned expenses

  -   -   -   2   -   2 

Advertising

  95   74   169   75   35   110 

Amortization of other intangible

  12   -   12   12   -   12 

Other

  314   322   636   288   38   326 

Total Non-Interest Expense

  4,963   2,355   7,318   3,995   1,430   5,425 

Pretax Segment Profit

 $2,596  $2,061  $4,657  $2,345  $272  $2,617 

Segment Assets

 $683,882  $23,378  $707,260  $520,005  $15,861  $535,866 

_______________________

 

(1)

Includes Quaint Oak Bancorp, Inc. and the Bank’s subsidiaries, Quaint Oak Mortgage, Quaint Oak Real Estate, Quaint Oak Abstract, Quaint Oak Insurance Agency, QOB Properties, and Oakmont Commercial.

 

 

 

 

 

 

32

Quaint Oak Bancorp, Inc.

Notes to Unaudited Consolidated Financial Statements 

 

Note 12 Operating Segments (Continued)

 

  

As of or for the Nine Months Ended September 30,

 
  

2022

  

2021

 
  

Quaint Oak Bank(1)

  

Oakmont Capital Holdings, LLC

  

Consolidated

  

Quaint Oak Bank(1)

  

Oakmont Capital Holdings, LLC

  

Consolidated

 

Net Interest Income (Loss)

 $18,160  $(216) $17,944  $13,476  $(97) $13,379 

Provision for Loan Losses

  1,933   -   1,933   1,259   -   1,259 

Net Interest Income (Loss) after Provision for

    Loan Losses

  16,227   (216)  16,011   12,217   (97)  12,120 
                         

Non-Interest Income

                        

Mortgage banking, equipment lending and title abstract fees

  600   1,621   2,221   990   667   1,657 

Real estate sales commissions, net

  213   -   213   143   -   143 

Insurance commissions

  407   -   407   373   -   373 

Other fees and services charges

  221   158   379   182   29   211 

Net loan servicing income

  11   943   954   128   898   1,026 

Income from bank-owned life insurance

  66   -   66   61   -   61 

Net gain on loans held for sale

  2,828   8,521   11,349   2,283   2,133   4,416 

Gain on sale of investment securities available for sale

  -   -   -   362   -   362 

Gain on the sale of SBA loans

  225   -   225   636   -   636 

Total Non-Interest Income

  4,571   11,243   15,814   5,158   3,727   8,885 
                         

Non-Interest Expense

                        

Salaries and employee benefits

  10,213   4,604   14,817   7,942   2,997   10,939 

Directors’ fees and expenses

  210   -   210   186   -   186 

Occupancy and equipment

  975   388   1,363   895   248   1,143 

Data processing

  500   -   500   641   -   641 

Professional fees

  625   44   669   356   132   488 

FDIC deposit insurance assessment

  454   -   454   221   -   221 

Other real estate owned expenses

  -   -   -   14   -   14 

Advertising

  265   266   531   224   113   337 

Amortization of other intangible

  36   -   36   36   -   36 

Other

  990   519   1,509   858   116   974 

Total Non-Interest Expense

  14,268   5,821   20,089   11,373   3,606   14,979 

Pretax Segment Profit

 $6,530  $5,206  $11,736  $6,002  $24  $6,026 

Segment Assets

 $683,882  $23,378  $707,260  $520,005  $15,861  $535,866 

____________________

 

(2)

Includes Quaint Oak Bancorp, Inc. and the Bank’s subsidiaries, Quaint Oak Mortgage, Quaint Oak Real Estate, Quaint Oak Abstract, Quaint Oak Insurance Agency, QOB Properties, and Oakmont Commercial.

 

 

 

33

 
 

ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Forward-Looking Statements Are Subject to Change

 

         This Quarterly Report contains certain forward-looking statements (as defined in the Securities Exchange Act of 1934 and the regulations thereunder). Forward-looking statements are not historical facts but instead represent only the beliefs, expectations or opinions of the Company and its management regarding future events, many of which, by their nature, are inherently uncertain. Forward-looking statements may be identified by the use of such words as: “believe”, “expect”, “anticipate”, “intend”, “plan”, “estimate”, or words of similar meaning, or future or conditional terms such as “will”, “would”, “should”, “could”, “may”, “likely”, “probably”, or “possibly.” Forward-looking statements include, but are not limited to, financial projections and estimates and their underlying assumptions; statements regarding plans, objectives and expectations with respect to future operations, products and services; and statements regarding future performance. Such statements are subject to certain risks, uncertainties and assumptions, many of which are difficult to predict and generally are beyond the control of and its management, that could cause actual results to differ materially from those expressed in, or implied or projected by, forward-looking statements. The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements: (1) economic and competitive conditions which could affect the volume of loan originations, deposit flows and real estate values; (2) the levels of non-interest income and expense and the amount of loan losses; (3) competitive pressure among depository institutions increasing significantly; (4) changes in the interest rate environment causing reduced interest margins; (5) general economic conditions, either nationally or in the markets in which the Company is or will be doing business, being less favorable than expected;(6) political and social unrest, including acts of war or terrorism; (7) the impact of the current outbreak of the novel coronavirus (COVID-19) or (8) legislation or changes in regulatory requirements adversely affecting the business in which the Company is or will be engaged. The Company undertakes no obligation to update these forward-looking statements to reflect events or circumstances that occur after the date on which such statements were made.

 

General

 

The Company was formed in connection with the Bank’s conversion to a stock savings bank completed on July 3, 2007. The Company’s results of operations are dependent primarily on the results of the Bank, which is a wholly owned subsidiary of the Company, along with the Bank’s wholly owned subsidiaries. The Bank’s results of operations depend, to a large extent, on net interest income, which is the difference between the income earned on its loan and investment portfolios and the cost of funds, consisting of the interest paid on deposits and borrowings. Results of operations are also affected by provisions for loan losses, fee income and other non-interest income and non-interest expense. Non-interest expense principally consists of compensation, directors’ fees and expenses, office occupancy and equipment expense, data processing expense, professional fees, advertising expense, FDIC deposit insurance assessment, and other expenses. Our results of operations are also significantly affected by general economic and competitive conditions, particularly changes in interest rates, government policies and actions of regulatory authorities. Future changes in applicable law, regulations or government policies may materially impact our financial condition and results of operations.

 

         At September 30, 2022, the Bank has six 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 primarily 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.

 

 

 

34

 

COVID-19

 

On March 11, 2020, the World Health Organization declared COVID-19 a pandemic. The effects of COVID-19 did not have a material impact on the financial results of the Company as of September 30, 2022. Due to orders issued by the governor of Pennsylvania and for the health of our customers and employees, the Bank closed lobbies to all three branch offices but remained fully operational. Other immediate responses to the pandemic included some of the following actions by the Company:

 

•         Moved more than 92% of its employees to remote work-from-home status.

•         Waived fees on deposit accounts and cash management services.

 

In response to the COVID-19 crisis, the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act was passed by Congress and signed into law on March 27, 2020. The CARES Act provides an estimated $2.2 trillion of economy-wide financial stimulus to combat the pandemic and stimulate the economy in the form of financial aid to individuals, businesses, nonprofits, states, and municipalities through loans, grants, tax changes, and other types of relief.

 

The following describes some of our responses to COVID-19 relative to the CARES Act, and other effects of the pandemic on our business.

 

Paycheck Protection Program. The CARES Act authorized the Small Business Administration (“SBA”) to temporarily guarantee loans under a new 7(a) loan program called the Paycheck Protection Program (“PPP”). As a qualified SBA lender, we were automatically authorized to originate PPP loans and chose to participate. Since March 2020, the Company has continued to work diligently to help support its existing and new customers through the SBA Paycheck Protection Program (“PPP”), loan modifications, loan deferrals and fee waivers. On December 27, 2020, the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (the “Economic Aid Act”) became law. The Economic Aid Act opened a new PPP loan period for first loans and implemented a second loan draw for certain PPP borrowers, each through May 31, 2021. Under the first round, the Company funded 854 PPP loans totaling $95.1 million. As of September 30, 2022, 853 of these first round PPP loans totaling $95.1 million were forgiven under the SBA forgiveness program. Under the second round of PPP the Company funded 985 PPP loans totaling $88.4 million. As of September 30, 2022, 922 of the second round PPP loans totaling $85.4 million have been forgiven under the SBA forgiveness program. The Company recognized approximately $1.1 million and $4.4 million of deferred loan fees amortization related to PPP loans for the nine months ended September 30, 2022 and the year ended December 31, 2021, respectively.

 

Paycheck Protection Program Liquidity Facility. The CARES Act also allocated a limited amount of funds to the Federal Reserve Board (FRB) with a broad mandate to provide liquidity to eligible businesses, states or municipalities in light of COVID-19. On April 9, 2020, the U.S. Department of the Treasury announced several new or expanded lending programs to provide relief for businesses and governments. One of these programs was the Paycheck Protection Program Liquidity Facility (PPPLF). Under the PPPLF, all depository institutions that originate PPP loans are eligible to borrow on a non-recourse basis from their regional Federal Reserve Bank using SBA PPP loans as collateral. The principal amount of loans will be equal to the PPP loans pledged as collateral. There are no fees associated with these loans and the interest rate is 35 basis points. The maturity date of PPPLF loans will be the same as the maturity date of the PPP loans pledged as collateral. The PPPLF loan maturity date will be accelerated if the underlying PPP loan goes into default and the lender sells the PPP loan to the SBA under the SBA guarantee. The PPPLF loan maturity date also will be accelerated for any loan forgiveness reimbursement received by the lender from the SBA.

 

 

 

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In April 2020, the Bank received approval to borrow from the FRB under the PPPLF program to assist in funding PPP loans. Through September 30, 2022, the Bank used the FRB program to fund $52.1 million of PPP loans. The Bank paid all PPP loans pledged as collateral under the PPPLF program and had no outstanding advances with the FRB at September 30, 2022. Through September 30, 2022 the Bank has not used the PPPLF program to fund any round two PPP loans.

 

Loan Modifications/Troubled Debt Restructurings. Under the CARES Act, loans less than 30 days past due as of December 31, 2019 will be considered current for COVID-19 modifications. A financial institution can then suspend the requirements under GAAP for loan modifications related to COVID-19 that would otherwise be categorized as a troubled debt restructuring (“TDR”), and suspend any determination of a loan modified as a result of COVID-19 as being a TDR, including the requirement to determine impairment for accounting purposes. Financial institutions wishing to utilize this authority must make a policy election, which applies to any COVID-19 modification made between March 1, 2020 and the earlier of either January 1, 2022 or the 60th day after the end of the COVID-19 national emergency. Quaint Oak Bank has made that election. Similarly, the Financial Accounting Standards Board has confirmed that short-term modifications made on a good-faith basis in response to COVID-19 to loan customers who were current prior to any relief will not be considered TDRs.

 

Prior to the enactment of the CARES Act, the banking regulatory agencies provided guidance as to how certain short-term modifications would not be considered TDRs, and have subsequently confirmed that such guidance could be applicable for loans that do not qualify for favorable accounting treatment under Section 4013 of the CARES Act.

 

The Bank addresses loan payment modification requests on a case-by-case basis considering the effects of the COVID-19 pandemic, related economic slow-down and stay-at-home orders on our customer and their current and projected cash flows through the term of the loan. Through September 30, 2022, the Bank modified 231 loans with principal balances totaling $90.6 million representing approximately 15.6% of our September 30, 2022 loan balances. A majority of deferrals are two-month payment deferrals of principal and interest, with payments after deferral increased to collect amounts deferred. In some cases, certain loans were granted additional deferrals. As of September 30, 2022 there are no loans that are still on deferral.

 

 

 

 

 

 

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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. Critical 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.

 

Our critical accounting policies involving significant judgments and assumptions used in the preparation of the unaudited consolidated financial statements as of September 30, 2022 have remained unchanged from the disclosures presented in our Annual Report on Form 10-K.

 

Comparison of Financial Condition at September 30, 2022 and December 31, 2021

 

General. The Company’s total assets at September 30, 2022 were $707.3 million, an increase of $153.1 million, or 27.6%, from $554.1 million at December 31, 2021. This growth in total assets was primarily due to a $175.2 million, or 43.4%, increase in loans receivable, net. This increase was partially offset by a $19.4 million, or 18.0%, decrease in loans held for sale. The largest increases within the loan portfolio occurred in commercial real estate loans which increased $129.3 million, or 70.4%, multi-family residential loans which increased $19.1 million, or 65.2%, construction loans which increased $10.0 million, or 63.1%, commercial business loans which increased $8.5 million, or 6.6%, and one-to-four family owner occupied loans which increased $7.6 million, or 78.2%, The increase in commercial real estate loans was primarily due to the purchase of a $55.5 million loan portfolio by the Bank’s wholly-owned subsidiary, Oakmont Commercial, LLC in April, 2022.

 

Cash and Cash Equivalents. Cash and cash equivalents decreased $2.4 million, or 22.1%, from $10.7 million at December 31, 2021 to $8.3 million at September 30, 2022, as excess liquidity was used primarily to fund loans.

 

Investment in Interest-Earning Time Deposits. Investment in interest-earning time deposits decreased $2.4 million, or 29.7%, from $7.9 million at December 31, 2021 to $5.6 million at September 30, 2022 as 14 interest-earning time deposits matured and were not renewed and six interest-earning time deposits were purchased during the nine months ended September 30, 2022.

 

Investment Securities Available for Sale. Investment securities available for sale decreased $840,000, or 20.8%, from $4.0 million at December 31, 2021 to $3.2 million at September 30, 2022, due primarily to the principal repayments on these securities during the nine months ended September 30, 2022.

 

Loans Held for Sale. Loans held for sale decreased $19.4 million, or 18.0%, from $107.8 million at December 31, 2021 to $88.4 million at September 30, 2022 as the Bank originated $277.6 million in equipment loans held for sale and sold $274.4 million of equipment loans during the nine months ended September 30, 2022. Also contributing to the decrease in loans held for sale is $11.2 million of loan amortization and prepayments. Additionally, the Bank’s mortgage banking subsidiary, Quaint Oak Mortgage, LLC, originated $100.0 million of one-to-four family residential loans during the nine months ended September 30, 2022 and sold $111.4 million of loans in the secondary market during this same period.

 

 

 

 

37

 

Loans Receivable, Net. Loans receivable, net, increased $175.2 million, or 43.4%, to $579.2 million at September 30, 2022 from $404.0 million December 31, 2021. This increase was funded primarily from deposits. Increases within the portfolio occurred in commercial real estate which increased $129.3 million, or 70.4%, multi-family residential loans which increased $19.1 million, or 65.2%, construction loans which increased $10.0 million, or 63.1%, commercial business loans which increased $8.5 million, or 6.6%, and one -to-four family owner occupied loans which increased $7.6 million, or 78.2%. However, by excluding PPP loans from commercial business loans, the balance of commercial business loans increased $46.3 million, or 52.1%. The increase in commercial real estate loans was primarily due to the purchase of a $55.5 million loan portfolio by the Bank's wholly-owned subsidiary, Oakmont Commercial, LLC in April, 2022. 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.

 

Deposits. Total deposits increased $99.9 million, or 22.4%, to $547.1 million at September 30, 2022 from $447.2 million at December 31, 2021. This increase in deposits was primarily attributable to increases of $88.7 million, or 44.2%, in money market accounts, and $15.1 million, or 23.3%, in non-interest bearing checking accounts. The increase in deposits was partially offset by a $3.7 million, or 2.0%, decrease in certificates of deposit, a $166,000, or 9.0%, decrease in savings accounts and a $6,000, or 60.0%, decrease in passbook accounts. The increase in money market accounts was primarily due to a $150.0 million deposit in May, 2022 through a deposit placement agreement with a third party bank.

 

Borrowings. Total Federal Home Loan Bank (FHLB) borrowings increased $43.8 million, or 89.1%, to $93.0 million at September 30, 2022 from $49.2 million at December 31, 2021. During the nine months ended September 30, 2022, the Company borrowed $115.3 million of FHLB short-term borrowings and $80.0 million of FHLB long-term borrowings and paid down $131.3 million of FHLB short-term borrowings and $20.2 million of FHLB long-term borrowings. Federal Reserve Bank (FRB) long-term borrowings decreased $3.9 million, or 100.0%, to none at September 30, 2022 from $3.9 million at December 31, 2021 as the Company paid off first round PPP loans pledged as collateral under the FRB’s Paycheck Protection Program Liquidity Facility (PPPLF). The Company did not utilize the FRB’s PPPLF to fund second round PPP loans.

 

Accrued Expenses and Other Liabilities. Accrued expenses and other liabilities increased $3.5 million, or 59.2%, to $9.5 million at September 30, 2022 from $6.0 million at December 31, 2021, due primarily to an increase in tax and other expense accruals.

 

Stockholders Equity. Total stockholders’ equity increased $8.7 million, or 23.6%, to $45.6 million at September 30, 2022 from $36.9 million at December 31, 2021. Contributing to the increase was net income for the nine months ended September 30, 2022 of $6.7 million, net income attributable to noncontrolling interest of $2.6 million, common stock earned by participants in the employee stock ownership plan of $259,000, amortization of stock awards and options under our stock compensation plans of $126,000, the reissuance of treasury stock under the Bank’s 401(k) Plan of $48,000 and the reissuance of treasury stock for exercised stock options of $181,000. These increases were partially offset by dividends paid of $751,000, noncontrolling interest distribution of $279,000, the purchase of treasury stock of $46,000, and other comprehensive loss, net of $42,000.

 

 

 

38

 

Comparison of Operating Results for the Three Months Ended September 30, 2022 and 2021

 

General. Net income amounted to $2.6 million for the three months ended September 30, 2022, an increase of $853,000, or 47.9%, compared to net income of $1.8 million for the three months ended September 30, 2021. The increase in net income on a comparative quarterly basis was primarily the result of an increase in non-interest income of $2.4 million, and an increase in net interest income of $1.6 million, partially offset by an increase in non-interest expense of $1.9 million, an increase in the provision for loan losses of $98,000, and an increase in the provision for income taxes of $310,000.

 

Net Interest Income. Net interest income increased $1.6 million, or 32.8% to $6.7 million for the three months ended September 30, 2022 from $5.0 million for the three months ended September 30, 2021. The increase was driven by a $3.0 million, or 49.5%, increase in interest income. This increase in net interest income was partially offset by a $1.3 million, or 133.2%, increase in interest expense.

 

Interest Income. The $3.0 million, or 49.5%, increase in interest income was primarily due to a $178.0 million increase in average loans receivable, net, including loans held for sale, which increased from an average balance of $488.5 million for the three months ended September 30, 2021 to an average balance of $666.5 million for the three months ended September 30, 2022, and had the effect of increasing interest income $2.2 million. Also contributing to the increase in interest income was a 33 basis point increase in the yield on average loans receivable, net, including loans held for sale, which increased from 4.87% for the three months ended September 30, 2021 to 5.20% for the three months ended September 30, 2022, and had the effect of increasing interest income $561,000.

 

Interest Expense. The $1.3 million, or 133.2%, increase in interest expense for the three months ended September 30, 2022 over the comparable period in 2021 was primarily attributable to a 95 basis point increase in the rate on average money market accounts, which increased from 0.55% for the three months ended September 30, 2021 to 1.50% for the three months ended September 30, 2022, and had the effect of increasing interest expense by $736,000. Also contributing to the increase in money market interest expense was a $117.2 million increase in average money market accounts which increased from $192.5 million for the three months ended September 30, 2021 to an average balance of $309.7 million for the three months ended September 30, 2022, and had the effect of increasing interest expense by $160,000. Both the increase in money market average balance and rate was impacted by a $150.0 million deposit in May, 2022 through a deposit placement agreement with a third party bank. Also contributing to the increase in interest expense was a $64.1 million increase in average FHLB long-term borrowings which increased from an average balance of $24.2 million for the three months ended September 30, 2021 to an average balance of $88.3 million for the three months ended September 30, 2022, and had the effect of increasing interest expense by $329,000. The average interest rate spread decreased from 3.62% for the three months ended September 30, 2021 to 3.50% for the three months ended September 30, 2022 while the net interest margin decreased from 3.82% for the three months ended September 30, 2021 to 3.75% for the three months ended September 30, 2022.

 

 

 

 

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Average Balances, Net Interest Income, Yields Earned and Rates Paid. The following table shows for the periods indicated the total dollar amount of interest from average interest-earning assets and the resulting yields, as well as the interest expense on average interest-bearing liabilities, expressed both in dollars and rates, and the net interest margin. All average balances are based on daily balances.

 

   

Three Months Ended September 30,

 
   

2022

   

2021

 
   

Average

Balance

   

Interest

   

Average

Yield/

Rate

   

Average

Balance

   

Interest

   

Average

Yield/

Rate

 
   

(Dollars in thousands)

 

Interest-earning assets:

                                               

Due from banks, interest-bearing

  $ 29,437     $ 196       2.66 %   $ 23,162     $ 5       0.09 %

Investment in interest-earning time deposits

    7,202       46       2.55       7,917       46       2.32  

Investment securities available for sale

    3,357       19       2.26       4,487       7       0.62  

Loans receivable, net (1) (2)

    666,501       8,671       5.20       488,518       5,944       4.87  

Investment in FHLB stock

    4,348       64       5.89       1,648       15       3.64  

Total interest-earning assets

    710,845       8,996       5.06 %     525,732       6,017       4.58 %

Non-interest-earning assets

    21,988                       15,013                  

Total assets

  $ 732,833                     $ 540,745                  

 

Interest-bearing liabilities:                                          
Passbook accounts   $ 3     $ -       * %   $ 14     $ -       * %

Savings accounts

    1,611       1       0.25       1,766       1       0.23  

Money market accounts

    309,742       1,159       1.50       192,515       263       0.55  

Certificate of deposit accounts

    183,740       512       1.11       168,204       438       1.04  

Total deposits

    495,096       1,672       1.35       362,499       702       0.77  

FHLB short-term borrowings

    9,065       58       2.56       13,163       8       0.24  

FHLB long-term borrowings

    88,269       457       2.07       24,193       124       2.05  

FRB long-term borrowings

    130       -       0.00       8,976       8       0.36  

Subordinated debt

    7,953       130       6.54       7,919       130       6.57  

Other short-term borrowings

    458       22       19.21       1,071       31       11.58  

Total interest-bearing liabilities

    600,971       2,339       1.56 %     417,821       1,003       0.96 %

Non-interest-bearing liabilities

    92,048                       94,725                  

Total liabilities

    693,019                       512,546                  

Stockholders’ Equity

    39,814                       28,199                  

Total liabilities and Stockholders’ Equity

  $ 732,833                     $ 540,745                  

Net interest-earning assets

  $ 109,874                     $ 107,911                  

Net interest income; average interest rate spread

          $ 6,657       3.50 %           $ 5,014       3.62 %

Net interest margin (3)

                    3.75 %                     3.82 %

Average interest-earning assets to average

       interest-bearing liabilities

                    118.28 %                     125.83 %

________________________

*            Not meaningful.

(1)         Includes loans held for sale.

(2)         Includes non-accrual loans during the respective periods. Calculated net of deferred fees and discounts, loans in process and allowance for loan losses.

(3)         Equals net interest income divided by average interest-earning assets.

 

Provision for Loan Losses. The Company’s provision for loan losses increased $98,000, or 17.6%, to $655,000 for the three months ended September 30, 2022 from $557,000 for the three months ended September 30, 2021. The increase in the provision for loan losses for the three months ended September 30, 2022 over the three months ended September 30, 2021 was based on an evaluation of the allowance relative to such factors as volume of the loan portfolio, concentrations of credit risk, prevailing economic conditions, prior loan loss experience and amount of non-performing loans at September 30, 2022.

 

 

 

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Non-performing loans at September 30, 2022 consisted of two loans on non-accrual status in the aggregate amount of $1.7 million. The non-performing loans at September 30, 2022 are generally well-collateralized or adequately reserved for. The allowance for loan losses as a percent of total loans receivable, net was 1.22% at September 30, 2022 and 1.30% at December 31, 2021. Non-performing assets amounted to $1.7 million, or 0.24% of assets at September 30, 2022 compared to $9,000 at December 31, 2021.

 

          Non-Interest Income. Non-interest income increased $2.4 million, or 66.6%, from $3.6 million for the three months ended September 30, 2021 to $6.0 million for the three months ended September 30, 2022. The increase was primarily attributable to a $2.4 million, or 129.4%, increase in net gain on loans held for sale, a $156,000, or 25.8%, increase in mortgage banking, equipment lending, and title abstract fees, a $93,000, or 244.7%, increase in other fees and service charges, a $19,000, or 14.3%, increase in insurance commissions, and a $9,000, or 11.4%, increase in real estate sales commissions, net. The increase in net gain on loans held for sale was primarily due to the sale of $97.5 million of equipment loans during the three months ended September 30, 2022. These increases were partially offset by a $311,000, or 84.3%, decrease in gain on sale of SBA loans.

 

Non-Interest Expense. Total non-interest expense increased $1.9 million, or 34.9%, from $5.4 million for the three months ended September 30, 2021 to $7.3 million for the three months ended September 30, 2022, primarily due to a $1.2 million, or 30.1%, increase in salaries and employee benefits expense, a $310,000, or 95.1%, increase in other expense, a $150,000, or 140.2%, increase in professional fees, a $128,000, or 132.0%, increase in FDIC deposit insurance assessment, a $98,000, or 25.9%, increase in occupancy and equipment expense, a $59,000, or 53.6%, increase in advertising expense, and a $9,000, or 15.5%, increase in Directors’ fees and expenses. The increase in salaries and employee benefits expense is primarily due to expanding and improving the level of staff at the Bank and its subsidiary companies, including Oakmont Capital Holdings, LLC. Oakmont Capital Holdings, LLC’s results for the three months ended September 30, 2022 also contributed to the increases in occupancy and equipment expense, professional fees, advertising expense, and other expense. The increase in non-interest expense was partially offset by a $94,000, or 40.2%, decrease in data processing expense, and a $2,000, or 100.0%, decrease in other real estate owned expenses.

 

Provision for Income Tax. The provision for income tax increased $310,000, or 44.2%, from $702,000 for the three months ended September 30, 2021 to $1.0 million for the three months ended September 30, 2022 due primarily to the increase in pre-tax income.

 

Comparison of Operating Results for the Nine Months Ended September 30, 2022 and 2021

 

General. Net income amounted to $6.7 million for the nine months ended September 30, 2022, an increase of $2.3 million, or 54.0%, compared to net income of $4.3 million for the nine months ended September 30, 2021. The increase in net income on a comparative nine-month basis was primarily the result of an increase in non-interest income of $6.9 million, and an increase in net interest income of $4.6 million, partially offset by an increase in non-interest expense of $5.1 million, an increase in the provision for income taxes of $838,000, and an increase in the provision for loan losses of $674,000.

 

Net Interest Income. Net interest income increased $4.6 million, or 34.1% to $17.9 million for the nine months ended September 30, 2022 from $13.4 million for the nine months ended September 30, 2021. The increase was driven by a $5.9 million, or 35.4%, increase in interest income, partially offset by a $1.4 million, or 40.4%, increase in interest expense.

 

 

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Interest Income. The $5.9 million, or 35.4%, increase in interest income was primarily due to a $116.5 million increase in average loans receivable, net, including loans held for sale, which increased from an average balance of $478.9 million for the nine months ended September 30, 2021 to an average balance of $595.4 million for the nine months ended September 30, 2022, and had the effect of increasing interest income $4.0 million. Also contributing to the increase in interest income was a 40 basis point increase in the yield on average loans receivable, net, including loans held for sale, which increased from 4.57% for the nine months ended September 30, 2021 to 4.97% for the nine months ended September 30, 2022, and had the effect of increasing interest income $1.8 million. Contributing to both the increase in average balance of loans receivable, net and yield was the purchase of a $55.5 million commercial real estate loan portfolio by the Bank’s wholly-owned subsidiary, Oakmont Commercial, LLC in April, 2022.

 

Interest Expense. The $1.4 million, or 40.4%, increase in interest expense was primarily attributable to a 33 basis point increase in the rate on average money market accounts, which increased from 0.63% for the nine months ended September 30, 2021 to 0.96% for the nine months ended September 30, 2022, and had the effect of increasing interest expense by $633,000. Also contributing to the increase in interest expense was an $87.9 million increase in average money market accounts which increased from an average balance of $166.8 million for the nine months ended September 30, 2021 to an average balance of $254.7 million for the nine months ended September 30, 2022, and had the effect of increasing interest expense by $417,000. The increase in money market average balance was impacted by a $150.0 million deposit in May, 2022 through a deposit placement agreement with a third party bank. Also contributing to the increase in interest expense was a $37.5 million increase in average FHLB long-term borrowings which increased from $26.3 million for the nine months ended September 30, 2021 to $63.7 million for the nine months ended September 30, 2022, and had the effect of increasing interest expense by $560,000. This increase in interest expense was partially offset by a 19 basis point decrease in the rate on average certificate of deposit accounts, which decreased from 1.17% for the nine months ended September 30, 2021 to 0.98% for the nine months ended September 30, 2022, and had the effect of decreasing interest expense by $259,000. The average interest rate spread increased from 3.20% for the nine months ended September 30, 2021 to 3.54% for the nine months ended September 30, 2022, while the net interest margin increased from 3.41% for the nine months ended September 30, 2021 to 3.73% for the nine months ended September 30, 2022.

 

 

 

 

 

 

 

 

 

 

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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,

 
   

2022

   

2021

 
   

Average

Balance

   

Interest

   

Average

Yield/

Rate

   

Average

Balance

   

Interest

   

Average

Yield/

Rate

 
   

(Dollars in thousands)

 

Interest-earning assets:

                                               

Due from banks, interest-bearing

  $ 30,668     $ 241       1.05 %   $ 27,624     $ 23       0.11 %

Investment in interest-earning time deposits

    7,237       107       1.97       8,154       155       2.53  

Investment securities available for sale

    3,656       35       1.28       6,553       92       1.87  

Loans receivable, net (1) (2)

    595,354       22,171       4.97       478,864       16,422       4.57  

Investment in FHLB stock

    3,751       123       4.37       1,483       57       5.12  

Total interest-earning assets

    640,666       22,677       4.72 %     522,678       16,749       4.27 %

Non-interest-earning assets

    19,225                       15,232                  

Total assets

  $ 659,891                       537,910                  

 

Interest-bearing liabilities:                                                
Passbook accounts   $ 6     $ -       * %   $ 11     $ -       * %

Savings accounts

    1,672       3       0.24       1,605       2       0.17  

Money market accounts

    254,701       1,840       0.96       166,791       791       0.63  

Certificate of deposit accounts

    183,987       1,356       0.98       179,589       1,577       1.17  

Total deposits

    440,366       3,199       0.97       347,996       2,370       0.91  

FHLB short-term borrowings

    21,391       133       0.83       5,462       14       0.34  

FHLB long-term borrowings

    63,746       958       2.00       26,255       392       1.99  

FRB long-term borrowings

    1,776       4       0.30       29,733       77       0.35  

Subordinated debt

    7,944       390       6.55       7,910       390       6.57  

Other short-term borrowings

    229       49       28.53       4,022       127       4.21  

Total interest-bearing liabilities

    535,452       4,733       1.18 %     421,378       3,370       1.07 %

Non-interest-bearing liabilities

    86,585                       89,534                  

Total liabilities

    622,037                       510,912                  

Stockholders’ Equity

    37,854                       26,998                  

Total liabilities and Stockholders’ Equity

  $ 659,891                     $ 537,910                  

Net interest-earning assets

  $ 105,214                     $ 101,300                  

Net interest income; average interest rate spread

          $ 17,944       3.54 %           $ 13,379       3.20 %

Net interest margin (3)

                    3.73 %                     3.41 %

Average interest-earning assets to average

       interest-bearing liabilities

                    119.65 %                     124.04 %

________________________

*            Not meaningful.

(1)         Includes loans held for sale.

(2)         Includes non-accrual loans during the respective periods. Calculated net of deferred fees and discounts, loans in process and allowance for loan losses.

(3)         Equals net interest income divided by average interest-earning assets.

 

Provision for Loan Losses. The Company’s provision for loan losses increased $674,000, or 53.5%, to $1.9 million for the nine months ended September 30, 2022 from $1.3 million for the nine months ended September 30, 2021. The increase in the provision for loan losses for the nine months ended September 30, 2022 over the nine months ended September 30, 2021 was based on an evaluation of the allowance relative to such factors as volume of the loan portfolio, concentrations of credit risk, prevailing economic conditions, prior loan loss experience and amount of non-performing loans at September 30, 2022.

 

Non-performing loans at September 30, 2022 consisted of two loans on non-accrual status in the aggregate amount of $1.7 million. The non-performing loans at September 30, 2022 are generally well-collateralized or adequately reserved for. The allowance for loan losses as a percent of total loans receivable, net was 1.22% at September 30, 2022 and 1.30% at December 31, 2021. Non-performing assets amounted to $1.7 million, or 0.24% of assets at September 30, 2022 compared to $9,000 at December 31, 2021.

 

 

43

 

         Non-Interest Income. Non-interest income increased $6.9 million, or 78.0%, from $8.9 million for the nine months ended September 30, 2021 to $15.8 million for the nine months ended September 30, 2022. The increase was primarily attributable to a $6.9 million, or 157.0%, increase in net gain on loans held for sale, a $564,000, or 34.0%, increase in mortgage banking, equipment lending, and title abstract fees, a $168,000, or 79.6%, increase in other fees and service charges, a $70,000, or 49.0%, increase in real estate commissions, net, and a $34,000, or 9.1%, increase in insurance commissions. The increase in net gain on loans held for sale was primarily due to the sale of $274.4 million of equipment loans during the nine months ended September 30, 2022. These increases were partially offset by a $411,000, or 64.6%, decrease in gain on sale of SBA loans, a $362,000, or 100.0%, decrease in gain on sale of investment securities available for sale, and a $72,000, or 7.0%, decrease in net loan servicing income.

 

Non-Interest Expense. Total non-interest expense increased $5.1 million, or 34.1%, from $15.0 million for the nine months ended September 30, 2021 to $20.1 million for the nine months ended September 30, 2022, primarily due to a $3.9 million, or 35.5%, increase in salaries and employee benefits expense, a $535,000, or 54.9%, increase in other expense, a $233,000, or 105.4%, increase in FDIC deposit insurance assessment, a $220,000, or 19.2%, increase in occupancy and equipment expense, a $194,000, or 57.6%, increase in advertising expense, a $181,000, or 37.1%, increase in professional fees, and a $24,000, or 12.9%, increase in Directors’ fees and expenses. The increase in salaries and employee benefits is primarily due to expanding and improving the level of staff at the Bank and its subsidiary companies, including Oakmont Capital Holdings, LLC. Oakmont Capital Holdings, LLC’s results for the nine months ended September 30, 2022 also contributed to the increases in occupancy and equipment expense, professional fees, advertising expense, and other expense. The increase in non-interest expense was partially offset by a $141,000, or 22.0%, decrease in data processing expense, and a $14,000, or 100.0%, decrease in other real estate owned expenses.

 

Provision for Income Tax. The provision for income tax increased $838,000, or 49.5%, from $1.7 million for the nine months ended September 30, 2021 to $2.5 million for the nine months ended September 30, 2022 due primarily to the increase in pre-tax income.

 

Operating Segments

 

The Company's operations consist of two reportable operating segments: Banking and Oakmont Capital Holdings, LLC. Our Banking Segment generates revenues primarily from its lending, deposit gathering and fee business activities. Our Oakmont Capital Holdings, LLC Segment originates equipment loans which are generally sold to third party institutions with the loans’ servicing rights retained. Detailed segment information appears in Note 12 in the Notes to Unaudited Consolidated Financial Statements.

 

Our Banking Segment reported a pre-tax segment profit (“PTSP”) for the three months ended September 30, 2022 of $2.6 million, a $251,000, or 10.7%, increase from the same period in 2021. This increase in PTSP was primarily due to a $1.7 million or 34.7%, increase in net interest income. This increase was partially offset by a $968,000, or 24.2%, increase in non-interest expense, a $427,000, or 22.8%, decrease in non-interest income and $98,000, or 17.6%, increase in the provision for loan losses. The decrease in non-interest income was primarily due to a $311,000, or 84.3%, decrease in the gain on sale of SBA loans, and a $159,000, or 47.9%, decrease in mortgage banking and title abstract fees, partially offset by a $48,000, or 5.7%, increase in gain on loans held for sale. The increase in non-interest expense was primarily due to a $680,000, or 23.7%, increase in salaries and employee benefits expense, a $173,000, or 258.2%, increase in professional fees, a $128,000, or 132.0%, increase in FDIC deposit insurance assessment expense, and a $28,000, or 9.5%, increase in occupancy and equipment expense.

 

44

 

Our Oakmont Capital Holdings, LLC Segment reported a pre-tax segment profit (“PTSP”) for the three months ended September 30, 2022 of $2.1 million, a $1.8 million, or 657.7%, increase from the same period in 2021. The increase in PTSP was primarily due to a $2.8 million, or 164.6%, increase in non-interest income partially offset by a $925,000, or 64.7%, increase in non-interest expense, and a $101,000, or 1,262.5%, decrease in net interest income. The increase in non-interest income was primarily due to a $2.4 million, or 231.4%, increase net gain on loans held for sale, and a $315,000, or 115.8%, increase in equipment lending fees. The increase in non-interest expense was primarily due to a $555,000, 45.0%, increase in salaries and employee benefits expense, a $284,000, or 747.4%, increase in other non-interest expenses, and a $70,000, or 83.3%, increase in occupancy and equipment expense.

 

Our Banking Segment reported a pre-tax segment profit (“PTSP”) for the nine months ended September 30, 2022 of $6.5 million, a $528,000, or 8.9%, increase from the same period in 2021. This increase in PTSP was primarily due to a $4.7 million, or 34.8%, increase in net interest income. This increase was partially offset by a $2.9 million, or 25.5%, increase in non-interest expense, a $674,000, or 53.5% increase in the provision for loan losses, and a $587,000, or 11.4%, decrease in non-interest income. The increase in non-interest expense was primarily due to a $2.3 million, or 28.6%, increase in salaries and employee benefits expense, a $269,000, or 75.6%, increase in professional fees, a $233,000, or 105.4%, increase in FDIC deposit insurance assessment, a $132,000, or 15.4%, increase in other non-interest expenses, and an $80,000, or 8.9%, increase in occupancy and equipment expense. The decrease in non-interest income was primarily due to a $411,000, or 64.6%, decrease in gain on the sale of SBA loans, a $390,000, or 39.4%, decrease in mortgage banking and title abstract fees, and a $362,000, or 100.0%, decrease in gain on sale of investment securities available for sale, partially offset by a $545,000, or 23.9%, increase in gain on loans held for sale.

 

Our Oakmont Capital Holdings, LLC Segment reported a pre-tax segment profit (“PTSP”) for the nine months ended September 30, 2022 of $5.2 million, a $5.2 million, increase from the same period in 2021. The increase in PTSP was primarily due to a $7.5 million, or 201.7%, increase in non-interest income, partially offset by a $2.2 million, or 61.4%, increase in non-interest expense, and a $119,000, or 122.7%, decrease in net interest income. The increase in non-interest income was primarily due to a $6.4 million, or 299.5%, increase in net gain on loans held for sale, and a $954,000, or 143.0%, increase in equipment lending fees. The increase in non-interest expense was primarily due to a $1.6 million, or 53.6%, increase in salaries and employee benefits expense, a $403,000, or 347.4%, increase in other non-interest expense, a $153,000, or 135.4%, increase in advertising expense, and a $140,000, or 56.5%, increase in occupancy and equipment expense, partially offset by an $88,000, or 66.7%, decrease in professional fees.

 

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, 2022, the Company's cash and cash equivalents amounted to $8.3 million. At such date, the Company also had $3.1 million invested in interest-earning time deposits maturing in one year or less.

 

 

 

45

 

              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, 2022, Quaint Oak Bank had outstanding commitments to originate loans of $20.3 million, commitments under unused lines of credit of $49.0 million, and $3.3 million under standby letters of credit.

 

At September 30, 2022, certificates of deposit scheduled to mature in one year or less totaled $85.8 million. Based on prior experience, management believes that a significant portion of such deposits will remain with us, although there can be no assurance that this will be the case.

 

          In addition to cash flow from loan payments and prepayments and deposits, the Company has significant borrowing capacity available to fund liquidity needs. If the Company requires funds beyond its ability to generate them internally, borrowing agreements exist with the Federal Home Loan Bank of Pittsburgh (FHLB), which provide an additional source of funds. As of September 30, 2022, we had $93.0 million of borrowings from the FHLB and had $344.2 million in borrowing capacity. Under terms of the collateral agreement with the FHLB of Pittsburgh, we pledge residential mortgage loans as well as Quaint Oak Bank’s FHLB stock as collateral for such advances. In addition, as of September 30, 2022 Quaint Oak Bank had $5.3 million in borrowing capacity with the Federal Reserve Bank of Philadelphia. There were no borrowings under this facility at September 30, 2022. Oakmont Capital Holdings, LLC has two lines of credit with a credit union which are used to fund equipment loans totaling $15.0 million at September 30, 2022. As of September 30, 2022, there were no outstanding balances on these two lines of credit.

 

Total stockholders’ equity increased $8.7 million, or 23.6%, to $45.6 million at September 30, 2022 from $36.9 million at December 31, 2021. Contributing to the increase was net income for the nine months ended September 30, 2022 of $6.7 million, net income attributable to noncontrolling interest of $2.6 million, common stock earned by participants in the employee stock ownership plan of $259,000, amortization of stock awards and options under our stock compensation plans of $126,000, the reissuance of treasury stock under the Bank’s 401(k) Plan of $48,000 and the reissuance of treasury stock for exercised stock options of $181,000. These increases were partially offset by dividends paid of $751,000, noncontrolling interest distribution of $279,000, the purchase of treasury stock of $46,000, and other comprehensive loss, net of $42,000. For further discussion of the stock compensation plans, see Note 10 in the Notes to Unaudited Consolidated Financial Statements contained elsewhere herein.

 

Quaint Oak Bank is required to maintain regulatory capital sufficient to meet tier 1 leverage, common equity tier 1 capital, tier 1 risk-based and total risk-based capital ratios of at least 4.00%, 4.50%, 6.00%, and 8.00%, respectively. At September 30, 2022, Quaint Oak Bank exceeded each of its capital requirements with ratios of 6.82%, 8.45%, 8.45% and 9.67%, respectively. As a small savings and loan holding company eligible for exemption, the Company is not currently subject to any regulatory capital requirements.

 

Off-Balance Sheet Arrangements

 

          In the normal course of operations, we engage in a variety of financial transactions that, in accordance with generally accepted accounting principles are not recorded in our financial statements. These transactions involve, to varying degrees, elements of credit, interest rate, and liquidity risk. Such transactions are used primarily to manage customers' requests for funding and take the form of loan commitments and lines of credit. Our exposure to credit loss from non-performance by the other party to the above-mentioned financial instruments is represented by the contractual amount of those instruments. We use the same credit policies in making commitments and conditional obligations as we do for on-balance sheet instruments. In general, we do not require collateral or other security to support financial instruments with off–balance sheet credit risk.

 

 

46

 

          Commitments. At September 30, 2022, we had unfunded commitments under lines of credit of $49.0 million, $20.3 million of commitments to originate loans, and $3.3 million under standby letters of credit. We had no commitments to advance additional amounts pursuant to outstanding lines of credit or undisbursed construction loans.

 

Impact of Inflation and Changing Prices

 

The consolidated financial statements and related financial data presented herein have been prepared in accordance with accounting principles generally accepted in the United States of America which generally require the measurement of financial position and operating results in terms of historical dollars, without considering changes in relative purchasing power over time due to inflation. Unlike most industrial companies, virtually all of the Company’s assets and liabilities are monetary in nature. As a result, interest rates generally have a more significant impact on the Company’s performance than does the effect of inflation. Interest rates do not necessarily move in the same direction or in the same magnitude as the prices of goods and services, since such prices are affected by inflation to a larger extent than interest rates.

 

ITEM 3.            QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not Applicable.

 

ITEM 4.            CONTROLS AND PROCEDURES

 

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)) as of September 30, 2022. Based on their evaluation of the Company’s disclosure controls and procedures, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and regulations are operating in an effective manner.

 

         No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15(d)-15(f) under the Securities Exchange Act of 1934) occurred during the third fiscal quarter of fiscal 2022 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.

 

 

 

 

 

47

 

ITEM 1A.

RISK FACTORS

 

Not applicable.

 

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

(a)         Not applicable.

 

(b)         Not applicable.

 

(c)         Purchases of Equity Securities

 

 

The Company’s repurchases of its common stock made during the quarter ended September 30, 2022 including stock-for-stock option exercises of outstanding stock options, are set forth in the table below:

 

Period

 

Total Number

of Shares

Purchased

   

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, 2022 – July 31, 2022

    -     $ -       -       24,375  
                                 

August 1, 2022 – August 31, 2022

    -       -       -       24,375  
                                 

September 1, 2022 – September 30, 2022

    760       23.00       -       24,375  
                                 

Total

    760     $ 23.00       -       24,375  

 

Notes to this table:

 

(1)

On December 12, 2018, the Board of Directors of Quaint Oak Bancorp approved its fifth share repurchase program which provides for the repurchase of up to 50,000 shares, or approximately 2.5% of the Company’s then issued and outstanding shares of common stock, and announced the fifth repurchase program on Form 8-K filed on December 13, 2018. The repurchase program does not have an expiration date.

 

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

 

Not applicable.

 

ITEM 4.

MINE SAFETY DISCLOSURES

 

Not applicable.

 

ITEM 5.

OTHER INFORMATION

 

Not applicable.

 

 

48

 

 

ITEM 6.

EXHIBITS

 

No.

 

Description

31.1

 

Rule 13a-14(d) and 15d-14(d) Certification of the Chief Executive Officer.

31.2

 

Rule 13a-14(d) and 15d-14(d) Certification of the Chief Financial Officer.

32.0

 

Section 1350 Certification.

101.INS

 

Inline XBRL Instance Document.

101.SCH

 

Inline XBRL Taxonomy Extension Schema Document.

101.CAL

 

Inline XBRL Taxonomy Extension Calculation Linkbase Document.

101.DEF

 

Inline XBRL Taxonomy Extension Definitions Linkbase Document.

101.LAB

 

Inline XBRL Taxonomy Extension Label Linkbase Document.

101.PRE

 

Inline XBRL Taxonomy Extension Presentation Linkbase Document.

104

 

Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101).

 

 

 

 

 

 

 

 

 

 

49

 

SIGNATURES

 

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

    /s/Robert T. Strong

Date: November 14, 2022

By:

Robert T. Strong

President and Chief Executive Officer

     
    /s/John J. Augustine

Date: November 14, 2022

By:

John J. Augustine

Executive Vice President and Chief Financial Officer

 

 

50