Notes to Unaudited Consolidated Financial Statements
Note 1 – Financial Statement Presentation and Significant Accounting Policies
Basis of Financial Presentation. The consolidated financial statements include the accounts of Quaint Oak Bancorp, Inc., a Pennsylvania chartered corporation (the “Company” or “Quaint Oak Bancorp”) and its wholly owned subsidiary, Quaint Oak Bank, a Pennsylvania chartered stock savings bank (the “Bank”), along with its wholly owned subsidiaries. At March 31, 2023, the Bank has 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 in the Lehigh Valley, Delaware Valley and Philadelphia County regions of Pennsylvania. The real estate and abstract companies offer real estate sales and title abstract services, respectively, primarily in the Lehigh Valley region of Pennsylvania. These companies began operation in July 2009. In February, 2019, Quaint Oak Mortgage opened a mortgage banking office in Philadelphia, Pennsylvania. QOB Properties, LLC began operations in July 2012 and holds Bank properties acquired through a foreclosure proceeding or acceptance of a deed in lieu of foreclosure. Quaint Oak Insurance Agency, LLC began operations in August 2016 and provides a broad range of personal and commercial insurance coverage solutions. Oakmont Commercial, LLC was formed in October 2021 and operates as a multi-state specialty commercial real estate financing company. As of January 4, 2021, the Bank holds a majority equity position in Oakmont Capital Holdings, LLC, a multi-state equipment finance company based in West Chester, Pennsylvania with a second significant facility located in Albany, Minnesota. All significant intercompany balances and transactions have been eliminated.
The Bank is subject to regulation by the Pennsylvania Department of Banking and Securities and the Federal Deposit Insurance Corporation. Pursuant to the Bank’s election under Section 10(l) of the Home Owners’ Loan Act, the Company is a savings and loan holding company regulated by the Board of Governors of the Federal Reserve System. The market area served by the Bank is principally Bucks, Montgomery and Philadelphia Counties in Pennsylvania and the Lehigh Valley area in Pennsylvania. The Bank has three regional offices located in the Delaware Valley, Lehigh Valley and Philadelphia markets. The principal deposit products offered by the Bank are money market accounts, certificates of deposit, non-interest bearing checking accounts for businesses and consumers, and savings accounts. The principal loan products offered by the Bank are fixed and adjustable rate residential and commercial mortgages, construction loans, commercial business loans, home equity loans, and lines of credit.
The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (US GAAP) for interim information and with the instructions to Form 10-Q, as applicable to a smaller reporting company. Accordingly, they do not include all the information and footnotes required by US GAAP for complete financial statements.
The foregoing consolidated financial statements are unaudited; but in the opinion of management include all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation thereof. The balances as of December 31, 2022 have been derived from the audited financial statements. These financial statements should be read in conjunction with the financial statements and notes thereto included in Quaint Oak Bancorp’s 2022 Annual Report on Form 10-K. The results of operations for the three months ended March 31, 2023 are not necessarily indicative of the results that may be expected for the year ending December 31, 2023.
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 credit losses and the valuation of deferred tax assets.
Critical Accounting Policies. During the quarter ended March 31, 2023, the Company implemented new CECL accounting policies, procedures, and controls as part of its adoption of ASU No. 2016-13 and subsequent ASUs issued to amend ASC Topic 326. There were no other changes made to the Company's internal control over financial reporting that occurred during the quarter ended March 31, 2023 that materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
Quaint Oak Bancorp, Inc.
Notes to Unaudited Consolidated Financial Statements
Note 1 – Financial Statement Presentation and Significant Accounting Policies (Continued)
Accounting Pronouncements Recently Adopted. In January 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, March 2020, to provide temporary optional expedients and exceptions to the U.S. GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens of the expected market transition from LIBOR and other interbank offered rates to alternative reference rates, such as the Secured Overnight Financing Rate. Entities can elect not to apply certain modification accounting requirements to contracts affected by what the guidance calls "reference rate reform", if certain criteria are met. An entity that makes this election would not have to re-measure the contracts at the modification date or reassess a previous accounting determination. Also, entities can elect various optional expedients that would allow them to continue applying hedge accounting for hedging relationships affected by reference rate reform, if certain criteria are met, and can make a one-time election to sell and/or reclassify held-to-maturity debt securities that reference an interest rate affected by reference rate reform. The amendments in this ASU are effective for all entities upon issuance through December 31, 2022. In December 2022, the FASB issued ASU 2022-06, Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848, which extends the sunset (or expiration) date of Accounting Standards Codification (ASC) Topic 848 to December 31, 2024. This gives reporting entities two additional years to apply the accounting relief provided under ASC Topic 848 for matters related to reference rate reform. ASU 2022-06 is effective for all reporting entities immediately upon issuance and must be applied on a prospective basis. This update did not have a significant impact on the Company’s financial statements.
In January 2021, the FASB issued ASU 2021-01, Reference Rate Reform (Topic 848), which provides optional temporary guidance for entities transitioning away from the London Interbank Offered Rate (LIBOR) and other interbank offered rates (IBORs) to new references rates so that derivatives affected by the discounting transition are explicitly eligible for certain optional expedients and exceptions within Topic 848. ASU 2021-01 clarifies that the derivatives affected by the discounting transition are explicitly eligible for certain optional expedients and exceptions in Topic 848. ASU 2021-01 is effective immediately for all entities. Entities may elect to apply the amendments on a full retrospective basis as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or on a prospective basis to new modifications from any date within an interim period that includes or is subsequent to the date of the issuance of a final update, up to the date that financial statements are available to be issued. The amendments in this update do not apply to contract modifications made, as well as new hedging relationships entered into, after December 31, 2022, and to existing hedging relationships evaluated for effectiveness for periods after December 31, 2022, except for certain hedging relationships existing as of December 31, 2022, that apply certain optional expedients in which the accounting effects are recorded through the end of the hedging relationship. This update did not have a significant impact on the Company’s financial statements.
In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment. To simplify the subsequent measurement of goodwill, the FASB eliminated Step 2 from the goodwill impairment test. In computing the implied fair value of goodwill under Step 2, an entity had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities (including unrecognized assets and liabilities) following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Instead, under the amendments in this Update, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. A public business entity that is a U.S. Securities and Exchange Commission (“SEC”) filer should adopt the amendments in this Update for its annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. In November 2019, the FASB issued ASU 2019-10, Financial Instruments – Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842), which deferred the effective date for ASC 350, Intangibles – Goodwill and Other, for smaller reporting companies to fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. This update did not have a significant impact on the Company’s financial statements.
In March 2022, the FASB issued ASU 2022-02, Financial Instruments - Credit Losses (ASC 326): Troubled Debt Restructurings (TDRs) and Vintage Disclosures. The guidance amends ASC 326 to eliminate the accounting guidance for TDRs by creditors, while enhancing disclosure requirements for certain loan refinancing and restructuring activities by creditors when a borrower is experiencing financial difficulty. Specifically, rather than applying TDR recognition and measurement guidance, creditors will determine whether a modification results in a new loan or continuation of existing loan. These amendments are intended to enhance existing disclosure requirements and introduce new requirements related to certain modifications of receivables made to borrowers experiencing financial difficulty. Additionally, the amendments to ASC 326 require that an entity disclose current-period gross write-offs by year of origination within the vintage disclosures, which requires that an entity disclose the amortized cost basis of financing receivables by credit quality indicator and class of financing receivable by year of origination. The guidance is only for entities that have adopted the amendments in Update 2016-13 for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022.
The Company adopted ASU 326 using the weighted average maturity method (WARM) for all financial assets measured at amortized cost, net of investments in leases and off balance sheet credit exposures. Results for reporting periods beginning after January 1, 2023 are presented under ASU 326, while prior period results are reported in accordance with the previously applicable incurred loss methodology. The Company recorded no change to retained earnings as of January 1, 2023 for the cumulative effect of adopting ASC 326.
Quaint Oak Bancorp, Inc.
Notes to Unaudited Consolidated Financial Statements
Note 1 – Financial Statement Presentation and Significant Accounting Policies (Continued)
The following table presents the impact of adopting ASU 2016-13 on January 1, 2023 (in thousands):
| | As Reported
Under
ASC 326 | | Impact of ASC 326
Adoption | | Prior to Adopting
ASC 326 | |
| Allowance for credit losses - loans | | | | | | | | | |
| Real estate loans: | | | | | | | | | |
| One-to-four family residential: | | | | | | | | | |
| Owner occupied | $ | 123 | | $ | - | | $ | 123 | |
| Non-owner occupied | | 295 | | | - | | | 295 | |
| Total one-to-four family residential | | 418 | | | - | | | 418 | |
| Multi-family (five or more) residential | | 451 | | | - | | | 451 | |
| Commercial real estate | | 3,750 | | | - | | | 3,750 | |
| Construction | | 304 | | | - | | | 304 | |
| Home equity | | 33 | | | - | | | 33 | |
| Total real estate loans | | 4,956 | | | - | | | 4,956 | |
| | | | | | | | | | |
| Commercial business and other consumer | | 2,422 | | | - | | | 2,422 | |
| Unallocated | | 300 | | | - | | | 300 | |
| Total allowance for credit losses | | 7,678 | | | - | | | 7,678 | |
| | | | | | | | | | |
| Allowance for credit losses - unfunded commitments | | | | | | | | | |
| Reserve for unfunded commitments | | 27 | | | - | | | 27 | |
| | | | | | | | | | |
| Total | $ | 7,705 | | $ | - | | $ | 7,705 | |
Loans are stated at their principal amount outstanding, except for loans held for sale, which are carried at fair value. Interest income on loans is accrued as earned.
In general, loans are placed on non-accrual status once they become 90 days delinquent as to principal or interest. In certain cases a loan may be placed on nonaccrual status prior to being 90 days delinquent if there is an indication that the borrower is having difficulty making payments, or the Company believes it is probable that all amounts will not be collected according to the contractual terms of the loan agreement. When interest accruals are discontinued, unpaid interest previously credited to income is reversed. Non-accrual loans may be restored to accrual status when all delinquent principal and interest has been paid currently for six consecutive months or the loan is considered secured and in the process of collection. The Company generally applies payments received on non-accruing loans to principal until such time as the principal is paid off, after which time any payments received are recognized as interest income. If the Company believes that all amounts outstanding on a non-accrual loan will ultimately be collected, payments received subsequent to its classification as a non-accrual loan are allocated between interest income and principal.
A loan that is 90 days delinquent may continue to accrue interest if the loan is both adequately secured and is in the process of collection. Past due status is determined based on contractual due dates for loan payments. An adequately secured loan is one that has collateral with a supported fair value that is sufficient to discharge the debt, and/or has an enforceable guarantee from a financially responsible party. A loan is considered to be in the process of collection if collection is proceeding through legal action or through other activities that are reasonably expected to result in repayment of the debt or restoration to current status in the near future.
Loans deemed to be a loss are written off through a charge against the allowance for credit losses (ACL). All loans are evaluated for possible charge-off when it is probable that the balance will not be collected, based on the ability of the borrower to pay and the value of the underlying collateral, if any. Principal recoveries of loans previously charged off are recorded as increases to the ACL.
Loan Origination Fees and Costs. Loan origination fees and the related direct origination costs are deferred and amortized over the life of the loan as an adjustment to interest income.
Allowance for Credit Losses. The discussion that follows describes the methodology for determining the ACL under the ASU 326 model that was adopted effective January 1, 2023. The allowance methodology for prior periods is disclosed in the Company’s 2022 Annual Report on Form 10-K.
The Company has elected to exclude accrued interest receivable from the measurement of its ACL. When a loan is placed on non-accrual status, any outstanding accrued interest is reversed against interest income.
Quaint Oak Bancorp, Inc.
Notes to Unaudited Consolidated Financial Statements
Note 1 – Financial Statement Presentation and Significant Accounting Policies (Continued)
Loans. The ACL for loans is an estimate of the expected losses to be realized over the life of the loans in the portfolio. The ACL is determined for two distinct categories of loans: 1) loans evaluated collectively for expected credit losses and 2) loans evaluated individually for expected credit losses. The ACL also includes certain qualitative adjustments to the ASU 326 model.
Loans Evaluated Collectively. Homogeneous loans are evaluated collectively for expected credit losses.
Loans Evaluated Individually. Loans evaluated individually for expected credit losses could include loans on non-accrual status or loans whose terms are modified if the Company grants such borrowers concessions.
Loans evaluated individually may have specific allocations assigned if the measured value of the loan using one of the noted techniques is less than its current carrying value. For loans measured using the fair value of collateral, if the analysis determines that sufficient collateral value would be available for repayment of the debt, then no allocations would be assigned to those loans. Collateral could be in the form of real estate or business assets, such as accounts receivable or inventory, in the case of commercial and industrial loans. Commercial and industrial loans may also be secured by real estate.
Management regularly reviews loans in the portfolio to assess credit quality indicators and to determine appropriate loan classification. For all loans, an internal risk rating process is used. The Company believes that internal risk ratings are the most relevant credit quality indicator for these types of loans. The migration of loans through the various internal risk rating categories is a significant component of the ACL methodology for these loans, which bases the probability of default on this migration. Assigning risk ratings involves judgment. Risk ratings may be changed based on ongoing monitoring procedures, or if specific loan review assessments identify a deterioration or an improvement in the loan.
The following is a summary of the Company's internal risk rating categories:
| | ● | Pass: These loans do not currently pose undue credit risk and can range from the highest to average quality, depending on the degree of potential risk. |
| | ● | Special Mention: These loans have a heightened credit risk, but not to the point of justifying a classification of Substandard. Loans in this category are currently acceptable, but are nevertheless potentially weak. |
| | ● | Substandard or Lower: These loans are inadequately protected by current sound worth and paying capacity of the borrower. There exists a well-defined weakness or weaknesses that jeopardize the normal repayment of the debt. |
The allocation of the ACL is reviewed to evaluate its appropriateness in relation to the overall risk profile of the loan portfolio. The Company considers risk factors such as: local and national economic conditions; trends in delinquencies and non-accrual loans; the diversity of borrower industry types; and the composition of the portfolio by loan type.
Qualitative and Other Adjustments to Allowance for Credit Losses: In addition to the quantitative credit loss estimates for loans evaluated collectively, qualitative factors that may not be fully captured in the quantitative results are also evaluated. These include changes in lending policy, the nature and volume of the portfolio, overall business conditions in the economy, credit concentrations, competition, model imprecision, and legal and regulatory requirements. Qualitative adjustments are judgmental and are based on Management’s knowledge of the portfolio and the markets in which the Company operates. Qualitative adjustments are evaluated and approved on a quarterly basis. Additionally, the ACL includes other allowance categories that are not directly incorporated in the quantitative results. These include but are not limited to loans-in-process, trade acceptances and overdrafts.
Off Balance Sheet Credit Exposures: The ACL for off balance sheet credit exposures is recorded in other liabilities on the Consolidated Balance Sheet. This ACL represents management’s estimate of expected losses in its unfunded loan commitments and other off balance sheet credit exposures, such as letters of credit and credit recourse on sold residential mortgage loans. The allowance for credit losses specific to unfunded commitments is determined by estimating future draws and applying the expected loss rates on those draws. Future draws are based on historical averages of utilization rates (i.e., the likelihood of draws taken). The ACL for off balance sheet credit exposures is increased or decreased by charges or reductions to expense, through the provision for credit losses.
During the quarter ended March 31, 2023, the Company implemented new CECL accounting policies, procedures, and controls as part of its adoption of ASU No. 2016-13 and subsequent ASUs issued to amend ASC Topic 326. There were no other changes made to the Company's internal control over financial reporting that occurred during the quarter ended March 31, 2023 that materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
Reclassifications. Certain items in the 2022 consolidated financial statements have been reclassified to conform to the presentation in the 2023 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.
Quaint Oak Bancorp, Inc.
Notes to Unaudited Consolidated Financial Statements
Note 2 – Earnings Per Share
Earnings per share (“EPS”) consists of two separate components, basic EPS and diluted EPS. Basic EPS is computed based on the weighted average number of shares of common stock outstanding for each period presented. Diluted EPS is calculated based on the weighted average number of shares of common stock outstanding plus dilutive common stock equivalents (“CSEs”). CSEs consist of shares that are assumed to have been purchased with the proceeds from the exercise of stock options, as well as unvested restricted Earnings per share (“EPS”) consists of two separate components, basic EPS and diluted EPS. Basic EPS is computed based on the weighted average number of shares of common stock outstanding for each period presented. Diluted EPS is calculated based on the weighted average number of shares of common stock outstanding plus dilutive common stock equivalents (“CSEs”). CSEs consist of shares that are assumed to have been purchased with the proceeds from the exercise of stock options, as well as unvested restricted stock awards. Common stock equivalents which are considered antidilutive are not included for the purposes of this calculation. For the three months ended March 31, 2023 and 2022, all outstanding stock options granted under the 2008 Stock Option Plan, the 2013 Stock Incentive Plan and the 2018 Stock Incentive Plan representing shares were dilutive.
The following table sets forth the composition of the weighted average shares (denominator) used in the basic and dilutive earnings per share computations.
| | | For the Three Months Ended March 31, | |
| | | 2023 | | | 2022 | |
| Net Income Attributable to Quaint Oak Bancorp, Inc. | | $ | 563,000 | | | $ | 2,248,000 | |
| | | | | | | | | |
| Weighted average shares outstanding – basic | | | 2,182,597 | | | | 2,013,638 | |
| Effect of dilutive common stock equivalents | | | 89,932 | | | | 123,484 | |
| Adjusted weighted average shares outstanding – diluted | | | 2,272,530 | | | | 2,137,122 | |
| | | | | | | | | |
| Basic earnings per share | | $ | 0.26 | | | $ | 1.12 | |
| Diluted earnings per share | | $ | 0.25 | | | $ | 1.05 | |
Note 3 – Accumulated Other Comprehensive Income (Loss)
The following table presents the changes in accumulated other comprehensive income (loss) by component, net of tax, for the three months ended March 31, 2023 and 2022 (in thousands):
| | | Unrealized (Losses) Gains on Investment Securities Available for Sale (1) | |
| | | For the Three Months Ended March 31, | |
| | | 2023 | | | 2022 | |
| Balance at the beginning of the period | | $ | (24 | ) | | $ | 23 | |
| Total other comprehensive income (loss) | | | 10 | | | | (21 | ) |
| Balance at the end of the period | | $ | (14 | ) | | $ | 2 | |
_________________
(1) All amounts are net of tax. Amounts in parentheses indicate debits.
Quaint Oak Bancorp, Inc.
Notes to Unaudited Consolidated Financial Statements
Note 4 – Investment in Interest-Earning Time Deposits
The investment in interest-earning time deposits as of March 31, 2023 and December 31, 2022, by contractual maturity, are shown below (in thousands):
| | | March 31, 2023 | | | December 31, 2022 | |
| Due in one year or less | | $ | 750 | | | $ | 2,541 | |
| Due after one year through five years | | | 1,912 | | | | 1,292 | |
| Total | | $ | 2,662 | | | $ | 3,833 | |
Note 5 – Investment Securities Available for Sale
The amortized cost, gross unrealized gains and losses, and fair value of investment securities available for sale at March 31, 2023 and December 31, 2022 are summarized below (in thousands):
| | | March 31, 2023 | |
| | | Amortized Cost | | | Gross Unrealized Gains | | | Gross Unrealized (Losses) | | | Fair Value | |
| Available for Sale: | | | | | | | | | | | | | | | | |
| Mortgage-backed securities: | | | | | | | | | | | | | | | | |
| Government National Mortgage Association securities | | $ | 2,757 | | | $ | - | | | $ | (17 | ) | | $ | 2,740 | |
| Federal National Mortgage Association securities | | | 97 | | | | - | | | | (1 | ) | | | 96 | |
| Total available-for-sale-securities | | $ | 2,854 | | | $ | - | | | $ | (18 | ) | | $ | 2,836 | |
| | | December 31, 2022 | |
| | | Amortized Cost | | | Gross Unrealized Gains | | | Gross Unrealized (Losses) | | | Fair Value | |
| Available for Sale: | | | | | | | | | | | | | | | | |
| Mortgage-backed securities: | | | | | | | | | | | | | | | | |
| Government National Mortgage Association securities | | $ | 2,902 | | | $ | - | | | $ | (31 | ) | | $ | 2,871 | |
| Federal National Mortgage Association securities | | | 98 | | | | 1 | | | | - | | | | 99 | |
| Total available-for-sale-securities | | $ | 3,000 | | | $ | 1 | | | $ | (31 | ) | | $ | 2,970 | |
Quaint Oak Bancorp, Inc.
Notes to Unaudited Consolidated Financial Statements
Note 5 – Investment Securities Available for Sale (Continued)
The amortized cost and fair value of mortgage-backed securities at March 31, 2023, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties (in thousands):
| | | Available for Sale | |
| | | Amortized Cost | | | Fair Value | |
| Due after ten years | | $ | 2,854 | | | $ | 2,836 | |
| Total | | $ | 2,854 | | | $ | 2,836 | |
The following tables show the Company’s gross unrealized losses and fair value, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position at March 31, 2023 (in thousands):
| | | March 31, 2023 | |
| | | | | | | Less than Twelve Months | | | Twelve Months or Greater | | | Total | |
| | | Number of
Securities | | | Fair Value | | | Gross
Unrealized
Losses | | | Fair Value | | | Gross
Unrealized
Losses | | | Fair Value | | | Gross
Unrealized
Losses | |
| Government National Mortgage Association securities | | | 11 | | | $ | 2,740 | | | $ | (17 | ) | | $ | - | | | $ | - | | | $ | 2,740 | | | $ | (17 | ) |
| Federal National Mortgage Association securities | | | 1 | | | | 96 | | | | (1 | ) | | | - | | | | - | | | | 96 | | | | (1 | ) |
| Total | | | 12 | | | $ | 2,836 | | | $ | (18 | ) | | $ | - | | | $ | - | | | $ | 2,836 | | | $ | (18 | ) |
The following tables show the Company’s gross unrealized losses and fair value, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position at December 31, 2022 (in thousands):
| | | December 31, 2022 | |
| | | | | | | Less than Twelve Months | | | Twelve Months or Greater | | | Total | |
| | | Number of
Securities | | | Fair Value | | | Gross
Unrealized
Losses | | | Fair Value | | | Gross
Unrealized
Losses | | | Fair Value | | | Gross
Unrealized
Losses | |
| Government National Mortgage Association securities | | | 11 | | | $ | 2,871 | | | $ | (31 | ) | | $ | -- | | | $ | -- | | | $ | 2,871 | | | $ | (31 | ) |
The Company’s mortgage-backed securities have contractual terms that generally do not permit the issuer to settle the securities at a price less than the amortized cost of the investment. The change in fair value of these securities is attributable to changes in interest rates and not credit quality, and the Company does not have the intent to sell and does not believe it will more likely than not be required to sell any of these securities prior to a recovery of their fair value to amortized cost. Therefore, the Company does not have an allowance for credit losses for these investments as of March 31, 2023.
There were no impairment charges recognized during the three months ended March 31, 2023 or 2022.
Quaint Oak Bancorp, Inc.
Notes to Unaudited Consolidated Financial Statements
Note 6 - Loans Receivable, Net and Allowance for Credit Losses
The composition of net loans receivable is as follows (in thousands):
| | | March 31, 2023 | | | December 31, 2022 | |
| Real estate loans: | | | | | | | | |
| One-to-four family residential: | | | | | | | | |
| Owner occupied | | $ | 18,080 | | | $ | 18,070 | |
| Non-owner occupied | | | 38,181 | | | | 39,315 | |
| Total one-to-four family residential | | | 56,261 | | | | 57,385 | |
| Multi-family (five or more) residential | | | 47,632 | | | | 46,909 | |
| Commercial real estate | | | 339,226 | | | | 333,540 | |
| Construction | | | 39,204 | | | | 28,938 | |
| Home equity | | | 5,321 | | | | 4,918 | |
| Total real estate loans | | | 487,644 | | | | 471,690 | |
| | | | | | | | | |
| Commercial business(1) | | | 153,901 | | | | 159,069 | |
| Other consumer | | | 14 | | | | 2 | |
| Total Loans | | | 641,559 | | | | 630,761 | |
| | | | | | | | | |
| Deferred loan fees and costs | | | (1,075 | ) | | | (1,219 | ) |
| Allowance for credit losses | | | (7,658 | ) | | | (7,678 | ) |
| Net Loans | | $ | 632,826 | | | $ | 621,864 | |
(1) Includes $163,000 and $214,000 of PPP loans at March 31, 2023 and December 31, 2022, respectively.
The following table summarizes designated internal risk categories by portfolio segment and loan class, by origination year, as of March 31, 2023 (in thousands):
| | | Term Loans Amortized Cost by Origination Year | | | | | | | | | |
| As of March 31, 2023 | | 2023 | | | 2022 | | | 2021 | | | 2020 | | | 2019 | | | Prior | | | Revolving Loans Amortized Cost Basis | | | Total | |
| One-to-four family residential owner occupied | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Risk rating | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Pass | | $ | 524 | | | $ | 9,035 | | | $ | 3,553 | | | $ | 1,950 | | | $ | 575 | | | $ | 2,443 | | | $ | - | | | $ | 18,080 | |
| Special mention | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
| Substandard | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
| Doubtful | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
| Total one-to-four family residential owner occupied | | $ | 524 | | | $ | 9,035 | | | $ | 3,553 | | | $ | 1,950 | | | $ | 575 | | | $ | 2,443 | | | $ | - | | | $ | 18,080 | |
| One-to-four family residential non-owner occupied | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Current period gross charge-offs | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | |
| Risk rating | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Pass | | $ | - | | | $ | 6,972 | | | $ | 9,267 | | | $ | 3,333 | | | $ | 933 | | | $ | 17,676 | | | $ | - | | | $ | 38,181 | |
| Special mention | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
| Substandard | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
| Doubtful | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
| Total one-to-four family residential non-owner occupied | | $ | - | | | $ | 6,972 | | | $ | 9,267 | | | $ | 3,333 | | | $ | 933 | | | $ | 17,676 | | | $ | - | | | $ | 38,181 | |
| Current period gross charge-offs | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | |
Quaint Oak Bancorp, Inc.
Notes to Unaudited Consolidated Financial Statements
Note 6 - Loans Receivable, Net and Allowance for Credit Losses (Continued)
| | | Term Loans Amortized Cost by Origination Year | | | Revolving Loans Amortized Cost Basis | | | | | |
| As of March 31, 2023 | | 2023 | | | 2022 | | | 2021 | | | 2020 | | | 2019 | | | Prior | | | | | Total | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Multi-family residential Risk rating | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Pass | | $ | 972 | | | $ | 17,363 | | | $ | 13,155 | | | $ | 4,574 | | | $ | 603 | | | $ | 9,388 | | | $ | - | | | $ | 46,055 | |
| Special mention | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
| Substandard | | | - | | | | - | | | | - | | | | - | | | | - | | | | 1,577 | | | | - | | | | 1,577 | |
| Doubtful | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
| Total multi-family residential | | $ | 972 | | | $ | 17,363 | | | $ | 13,155 | | | $ | 4,574 | | | $ | 603 | | | $ | 10,965 | | | $ | - | | | $ | 47,632 | |
| Current period gross charge-offs | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | |
| Commercial real estate Risk rating | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Pass | | $ | 18,789 | | | $ | 158,332 | | | $ | 73,192 | | | $ | 22,984 | | | $ | 15,985 | | | $ | 49,009 | | | $ | 935 | | | $ | 339,226 | |
| Special mention | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
| Substandard | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
| Doubtful | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
| Total commercial real estate | | $ | 18,789 | | | $ | 158,332 | | | $ | 73,192 | | | $ | 22,984 | | | $ | 15,985 | | | $ | 49,009 | | | $ | 935 | | | $ | 339,226 | |
| Current period gross charge-offs | | $ | - | | | $ | - | | | $ | - | | | $ | 134 | | | $ | - | | | $ | - | | | $ | - | | | $ | 134 | |
| Construction Risk rating | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Pass | | $ | 3,874 | | | $ | 16,783 | | | $ | 12,653 | | | $ | 3,767 | | | $ | - | | | $ | - | | | $ | - | | | $ | 37,077 | |
| Special mention | | | - | | | | - | | | | - | | | | - | | | | - | | | | 2,127 | | | | - | | | | 2,127 | |
| Substandard | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
| Doubtful | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
| Total construction | | $ | 3,874 | | | $ | 16,783 | | | $ | 12,653 | | | $ | 3,767 | | | $ | - | | | $ | 2,127 | | | $ | - | | | $ | 39,204 | |
| Current period gross charge-offs | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | |
| Home equity Risk rating | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Pass | | $ | 500 | | | $ | 64 | | | $ | - | | | $ | - | | | $ | - | | | $ | 240 | | | $ | 4,517 | | | $ | 5,321 | |
| Special mention | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
| Substandard | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
| Doubtful | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
| Total home equity | | $ | 500 | | | $ | 64 | | | $ | - | | | $ | - | | | $ | - | | | $ | 240 | | | $ | 4,517 | | | $ | 5,321 | |
| Current period gross charge-offs | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | |
| Commercial business Risk rating | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Pass | | $ | 3,921 | | | $ | 85,027 | | | $ | 35,262 | | | $ | 5,748 | | | $ | 7,273 | | | $ | 743 | | | $ | 9,806 | | | $ | 147,780 | |
| Special mention | | | - | | | | 893 | | | | 925 | | | | - | | | | - | | | | - | | | | 1,999 | | | | 3,817 | |
| Substandard | | | - | | | | - | | | | 739 | | | | - | | | | 1,242 | | | | 323 | | | | - | | | | 2,304 | |
| Doubtful | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
| Total commercial business | | $ | 3,921 | | | $ | 85,920 | | | $ | 36,926 | | | $ | 5,748 | | | $ | 8,515 | | | $ | 1,066 | | | $ | 11,805 | | | $ | 153,901 | |
| Current period gross charge-offs | | $ | - | | | $ | - | | | $ | - | | | $ | 97 | | | $ | - | | | $ | - | | | $ | - | | | | 97 | |
| Other consumer Risk rating | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Pass | | $ | 14 | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | 14 | |
| Special mention | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
| Substandard | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
| Doubtful | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
| Total other consumer | | $ | 14 | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | 14 | |
| Current period gross charge-offs | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | |
| Total Risk rating | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Pass | | $ | 28,594 | | | $ | 293,576 | | | $ | 147,082 | | | $ | 42,356 | | | $ | 25,369 | | | $ | 79,499 | | | $ | 15,258 | | | $ | 631,734 | |
| Special mention | | | - | | | | 893 | | | | 925 | | | | - | | | | - | | | | 2,127 | | | | 1,999 | | | | 5,944 | |
| Substandard | | | - | | | | - | | | | 739 | | | | - | | | | 1,242 | | | | 1,900 | | | | - | | | | 3,881 | |
| Doubtful | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
| Total | | $ | 28,594 | | | $ | 294,469 | | | $ | 148,746 | | | $ | 42,356 | | | $ | 26,611 | | | $ | 83,526 | | | $ | 17,257 | | | $ | 641,559 | |
| Current period gross charge-offs | | $ | - | | | $ | - | | | $ | - | | | $ | 231 | | | $ | - | | | $ | - | | | $ | - | | | | 231 | |
Quaint Oak Bancorp, Inc.
Notes to Unaudited Consolidated Financial Statements
Note 6 - Loans Receivable, Net and Allowance for Credit Losses (Continued)
The information presented in the table above is not required for periods prior to the adoption of ASU 326. The following table presents the most comparable required information for the prior period, internal credit risk ratings for the indicated loan class segments as of December 31, 2022 (in thousands):
| | | December 31, 2022 | |
| | | Pass | | | Special Mention | | | Substandard | | | Doubtful | | | Total | |
| One-to-four family residential owner occupied | | $ | 17,663 | | | $ | 407 | | | $ | - | | | $ | - | | | $ | 18,070 | |
| One-to-four family residential non-owner occupied | | | 39,315 | | | | - | | | | - | | | | - | | | | 39,315 | |
| Multi-family residential | | | 45,201 | | | | - | | | | 1,708 | | | | - | | | | 46,909 | |
| Commercial real estate | | | 333,406 | | | | - | | | | 134 | | | | - | | | | 333,540 | |
| Construction | | | 28,938 | | | | - | | | | - | | | | - | | | | 28,938 | |
| Home equity | | | 4,918 | | | | - | | | | - | | | | - | | | | 4,918 | |
| Commercial business | | | 153,746 | | | | 2,908 | | | | 2,415 | | | | - | | | | 159,069 | |
| Other consumer | | | 2 | | | | - | | | | - | | | | - | | | | 2 | |
| Total | | $ | 623,189 | | | $ | 3,315 | | | $ | 4,257 | | | $ | - | | | $ | 630,761 | |
The following table presents non-accrual loans by classes of the loan portfolio as of March 31, 2023 and December 31, 2022 (in thousands):
| | | March 31, 2023 | | | December 31, | |
| | | Non-accrual loans | | | | | | | | | 2022 | |
| | | With a Related Allowance | | | Without a Related Allowance | | | Total | | | 90 Days or More Past Due and Accruing | | | Total Non- Performing | | | Total Non- Accrual Loans | |
| One-to-four family residential owner occupied | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | |
| One-to-four family residential non-owner occupied | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
| Multi-family residential | | | 1,577 | | | | - | | | | 1,577 | | | | - | | | $ | 1,577 | | | | 1,708 | |
| Commercial real estate | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
| Construction | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
| Home equity | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
| Commercial business | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
| Other consumer | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
| Total | | $ | 1,577 | | | $ | - | | | $ | 1,577 | | | | - | | | $ | 1,577 | | | $ | 1,708 | |
Quaint Oak Bancorp, Inc.
Notes to Unaudited Consolidated Financial Statements
Note 6 - Loans Receivable, Net and Allowance for Credit 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, 2022 as well as the average recorded investment and related interest income for the year then ended (in thousands):
| | | December 31, 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 | | | 7 | | | | 9 | | | | - | | | | 7 | | | | - | |
| Multi-family residential | | | 1,708 | | | | 1,722 | | | | - | | | | 1,708 | | | | - | |
| Commercial real estate | | | 129 | | | | 129 | | | | - | | | | 130 | | | | 12 | |
| 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 | | | 134 | | | | 134 | | | | 118 | | | | 136 | | | | 9 | |
| Construction | | | - | | | | - | | | | - | | | | - | | | | - | |
| Home equity | | | - | | | | - | | | | - | | | | - | | | | - | |
| Commercial business | | | 97 | | | | 97 | | | | 96 | | | | 102 | | | | 6 | |
| Other consumer | | | - | | | | - | | | | - | | | | - | | | | - | |
| | | | | | | | | | | | | | | | | | | | | |
| Total: | | | | | | | | | | | | | | | | | | | | |
| One-to-four family residential owner occupied | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | |
| One-to-four family residential non-owner occupied | | | 7 | | | | 9 | | | | - | | | | 7 | | | | - | |
| Multi-family residential | | | 1,708 | | | | 1,722 | | | | - | | | | 1,708 | | | | - | |
| Commercial real estate | | | 263 | | | | 263 | | | | 118 | | | | 266 | | | | 21 | |
| Construction | | | - | | | | - | | | | - | | | | - | | | | - | |
| Home equity | | | - | | | | - | | | | - | | | | - | | | | - | |
| Commercial business | | | 97 | | | | 97 | | | | 96 | | | | 102 | | | | 6 | |
| Other consumer | | | - | | | | - | | | | - | | | | - | | | | - | |
| Total | | $ | 2,075 | | | $ | 2,091 | | | $ | 215 | | | $ | 2,083 | | | $ | 27 | |
Prior to the adoption of ASU 2022-02, Financial Instruments—Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures, the Company had granted a variety of concessions to borrowers in the form of loan modifications that were considered TDRs. At December 31, 2022, the Company had two loans totaling $136,000 that were identified as troubled debt restructurings. Both of these loans were performing in accordance with their modified terms as of December 31, 2022.
As of March 31, 2023, there were no loans whose terms were modified for borrowers who may be experiencing financial difficulties.
Quaint Oak Bancorp, Inc.
Notes to Unaudited Consolidated Financial Statements
Note 6 - Loans Receivable, Net and Allowance for Credit Losses (Continued)
Following is a summary, by loan portfolio class, of changes in the allowance for credit losses for the three months ended March 31, 2023 and recorded investment in loans receivable as of March 31, 2023 (in thousands):
| | | | | | | March 31, 2023 | |
| | | 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 credit losses: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Beginning balance | | $ | 123 | | | $ | 295 | | | $ | 451 | | | $ | 3,750 | | | $ | 304 | | | $ | 33 | | | $ | 2,422 | | | $ | 300 | | | $ | 7,678 | |
| Impact of ASU | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
| Charge-offs | | | - | | | | - | | | | - | | | | (134 | ) | | | - | | | | - | | | | (97 | ) | | | - | | | | (231 | ) |
| Recoveries | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
| Provision(1) | | | 30 | | | | (39 | ) | | | (55 | ) | | | (249 | ) | | | 102 | | | | 21 | | | | 701 | | | | (300 | ) | | | 211 | |
| Ending balance | | $ | 153 | | | $ | 256 | | | $ | 396 | | | $ | 3,367 | | | $ | 406 | | | $ | 54 | | | $ | 3,026 | | | $ | - | | | $ | 7,658 | |
| | 1. | Provision included in the table only includes the portion related to loans receivable. The total provision for credit losses of $392,000 includes a provision of $181,000 for off balance sheet credit exposure, which is reflected in other liabilities on the balance sheet. |
The Bank allocated decreased allowance for credit loss provisions to the commercial real estate loan portfolio class for the three months ended March 31, 2023, due primarily to changes in quantitative factors in this portfolio class. The Bank allocated increased allowance for credit loss provisions to the commercial business loan portfolio class for the three months ended March 31, 2023, due primarily to changes in quantitative factors in this portfolio class. The Bank allocated decreased allowance for credit loss provisions to the multi-family residential loan portfolio class for the three months ended March 31, 2023, due primarily to changes in qualitative and quantitative factors in this portfolio class.
Following is a summary, by loan portfolio class, of changes in the allowance for credit losses for the year ended December 31, 2022 and recorded investment in loans receivable based on impairment evaluation as of December 31, 2022 (in thousands):
| | | December 31, 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 | |
| Allowance for credit losses: | |
| Beginning balance | | $ | 73 | | | $ | 292 | | | $ | 249 | | | $ | 2,475 | | | $ | 119 | | | $ | 29 | | | $ | 1,625 | | | $ | 400 | | | $ | 5,262 | |
| Charge-offs | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (59 | ) | | | - | | | | (59 | ) |
| Recoveries | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
| Provision | | | 50 | | | | 3 | | | | 202 | | | | 1,275 | | | | 185 | | | | 4 | | | | 856 | | | | (100 | ) | | | 2,475 | |
| Ending balance | | $ | 123 | | | $ | 295 | | | $ | 451 | | | $ | 3,750 | | | $ | 304 | | | $ | 33 | | | $ | 2,422 | | | $ | 300 | | | $ | 7,678 | |
| | |
| Ending balance evaluated for impairment: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Individually | | $ | - | | | $ | - | | | $ | - | | | $ | 118 | | | $ | - | | | $ | - | | | $ | 97 | | | $ | - | | | $ | 215 | |
| Collectively | | $ | 123 | | | $ | 295 | | | $ | 451 | | | $ | 3,632 | | | $ | 304 | | | $ | 33 | | | | 2,325 | | | $ | 300 | | | $ | 7,463 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Loans receivable: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Ending balance | | $ | 18,070 | | | $ | 39,315 | | | $ | 46,909 | | | $ | 333,540 | | | $ | 28,938 | | | $ | 4,918 | | | $ | 159,071 | | | | | | | $ | 630,761 | |
| Ending balance evaluated for impairment: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Individually | | $ | - | | | $ | 7 | | | $ | 1,708 | | | $ | 263 | | | $ | - | | | $ | - | | | $ | 97 | | | | | | | $ | 2,075 | |
| Collectively | | $ | 18,070 | | | $ | 39,308 | | | $ | 45,201 | | | $ | 333,277 | | | $ | 28,938 | | | $ | 4,918 | | | $ | 158,974 | | | | | | | $ | 628,686 | |
Quaint Oak Bancorp, Inc.
Notes to Unaudited Consolidated Financial Statements
Note 6 - Loans Receivable, Net and Allowance for Credit Losses (Continued)
The Bank allocated increased allowance for credit loss provisions to the commercial real estate loan portfolio class for the year ended December 31, 2022, due primarily to changes in qualitative and quantitative factors in this portfolio class. The Bank allocated increased allowance for credit loss provisions to the commercial business loan portfolio class for the year ended December 31, 2022, due primarily to changes in quantitative factors in this portfolio class. The Bank allocated increased allowance for credit loss provisions to the multi-family loan portfolio class for the year ended December 31, 2022, due primarily to changes in qualitative and quantitative factors in this portfolio class.
Following is a summary, by loan portfolio class, of changes in the allowance for credit losses for the three months ended March 31, 2022 and recorded investment in loans receivable as of March 31, 2022 (in thousands):
| | | March 31, 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 | |
| Allowance for credit losses: | |
| Beginning balance | | $ | 73 | | | $ | 292 | | | $ | 249 | | | $ | 2,475 | | | $ | 119 | | | $ | 29 | | | $ | 1,625 | | | $ | 400 | | | $ | 5,262 | |
| Charge-offs | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
| Recoveries | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
| Provision | | | 26 | | | | 13 | | | | 215 | | | | 162 | | | | 13 | | | | (1 | ) | | | 251 | | | | - | | | | 679 | |
| Ending balance | | $ | 99 | | | $ | 305 | | | $ | 464 | | | $ | 2,637 | | | $ | 132 | | | $ | 28 | | | $ | 1,876 | | | $ | 400 | | | $ | 5,941 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Ending balance evaluated for impairment: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Individually | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | |
| Collectively | | $ | 99 | | | $ | 305 | | | $ | 464 | | | $ | 2,637 | | | $ | 132 | | | $ | 28 | | | $ | 1,876 | | | $ | 400 | | | $ | 5,941 | |
The Bank allocated increased allowance for credit loss provisions to the commercial business loan portfolio class for the three months ended March 31, 2022, due primarily to changes in qualitative and quantitative factors in this portfolio class. The Bank allocated increased allowance for credit loss provisions to the multi-family residential loan portfolio class for the three months ended March 31, 2022 due primarily to qualitative and quantitative factors in this portfolio class. The Bank also allocated increased allowance for credit loss provisions to the commercial real estate loan portfolio class for the three months ended March 31, 2022, due primarily to changes in quantitative factors in this portfolio class.
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 March 31, 2023 and December 31, 2022 (in thousands):
| | | March 31, 2023 | |
| | | 30-89 Days Past Due | | | 90 Days or More Past Due and Accruing | | | 90 Days or More Past Due and on Non-Accrual | | | Current | | | Total Loans Receivable | |
| One-to-four family residential owner occupied | | $ | 406 | | | $ | - | | | $ | - | | | $ | 17,674 | | | $ | 18,080 | |
| One-to-four family residential non-owner occupied | | | 69 | | | | - | | | | - | | | | 38,112 | | | | 38,181 | |
| Multi-family residential | | | - | | | | - | | | | 1,577 | | | | 46,055 | | | | 47,632 | |
| Commercial real estate | | | 739 | | | | - | | | | - | | | | 338,487 | | | | 339,226 | |
| Construction | | | - | | | | - | | | | - | | | | 39,204 | | | | 39,204 | |
| Home equity | | | 38 | | | | - | | | | - | | | | 5,283 | | | | 5,321 | |
| Commercial business | | | - | | | | - | | | | - | | | | 153,901 | | | | 153,901 | |
| Other consumer | | | - | | | | - | | | | - | | | | 14 | | | | 14 | |
| Total | | $ | 1,252 | | | $ | ,- | | | $ | 1,577 | | | $ | 638,730 | | | $ | 641,559 | |
Quaint Oak Bancorp, Inc.
Notes to Unaudited Consolidated Financial Statements
Note 6 - Loans Receivable, Net and Allowance for Credit Losses (Continued)
The information presented in the table above is not required for periods prior to the adoption of ASU 326. The following table presents the most comparable required information for the classes of the loan portfolio summarized by the past due status prior to ASU 326 methodology as of December 31, 2022 (in thousands):
| | | December 31, 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 | | $ | 407 | | | $ | - | | | $ | 407 | | | $ | 17,663 | | | $ | 18,070 | | | $ | - | |
| One-to-four family residential non-owner occupied | | | 23 | | | | - | | | | 23 | | | | 39,292 | | | | 39,315 | | | | - | |
| Multi-family residential | | | - | | | | 1,708 | | | | 1,708 | | | | 45,201 | | | | 46,909 | | | | - | |
| Commercial real estate | | | 2,895 | | | | 134 | | | | 3,029 | | | | 330,511 | | | | 333,540 | | | | - | |
| Construction | | | 2,062 | | | | - | | | | 2,062 | | | | 26,876 | | | | 28,938 | | | | - | |
| Home equity | | | 39 | | | | - | | | | 39 | | | | 4,879 | | | | 4,918 | | | | - | |
| Commercial business | | | 10 | | | | 97 | | | | 107 | | | | 158,962 | | | | 159,069 | | | | 51 | |
| Other consumer | | | - | | | | - | | | | - | | | | 2 | | | | 2 | | | | - | |
| Total | | $ | 5,436 | | | $ | 1,939 | | | $ | 7,375 | | | $ | 623,386 | | | $ | 630,761 | | | $ | 51 | |
Non-performing loans, which consist of non-accruing loans plus accruing loans 90 days or more past due, amounted to $1.6 million at March 31, 2023 and $2.0 million at December 31, 2022. 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 March 31, 2023 and the year ended December 31, 2022 there was no interest income recognized on non-accrual loans on a cash basis. There was $59,000 of interest income foregone on non-accrual loans for the three months ended March 31, 2023. There was $167,000 of interest income foregone on non-accrual loans for the year ended December 31, 2022.
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 March 31, 2023 was $162,000, which is net of accumulated amortization of $253,000. Amortization expense for both the three months ended March 31, 2023 and 2022 amounted to approximately $12,000.
Note 8 – Deposits
Deposits consist of the following classifications (in thousands):
| | | March 31, 2023 | | | December 31, 2022 | |
| Non-interest bearing checking accounts | | $ | 95,214 | | | $ | 88,728 | |
| Savings accounts | | | 1,536 | | | | 1,597 | |
| Money market accounts | | | 243,003 | | | | 260,972 | |
| Certificates of deposit | | | 214,691 | | | | 197,951 | |
| Total deposits | | $ | 554,444 | | | $ | 549,248 | |
Quaint Oak Bancorp, Inc.
Notes to Unaudited Consolidated Financial Statements
Note 9 – Borrowings
Federal Home Loan Bank advances consist of the following at March 31, 2023 and December 31, 2022 (in thousands):
| | | March 31, 2023 | | | December 31, 2022 | |
| | | Amount | | | Weighted Interest
Rate | | | Amount | | | Weighted Interest
Rate | |
| Short-term borrowings | | $ | 113,200 | | | | 5.15 | % | | $ | 93,200 | | | | 4.45 | % |
| | | | | | | | | | | | | | | | | |
| Fixed rate borrowings maturing: | | | | | | | | | | | | | | | | |
| 2023 | | | 37,000 | | | | 2.34 | | | | 57,000 | | | | 2.22 | |
| 2024 | | | 6,167 | | | | 2.05 | | | | 6,167 | | | | 2.05 | |
| 2025 | | | 2,855 | | | | 1.25 | | | | 2,855 | | | | 1.25 | |
| Total FHLB long-term debt | | $ | 46,022 | | | | 2.23 | % | | $ | 66,022 | | | | 2.16 | % |
Federal Home Loan Bank (FHLB) borrowings totaled $159.2 million at March 31, 2023 and December 31, 2022. During the three months ended March 31, 2023, the Company borrowed $33.5 million of FHLB short-term borrowings and paid down $13.5 million of FHLB short-term borrowings and $20.0 million of FHLB long-term borrowings. Federal Reserve Bank (FRB) borrowings decreased $7.0 million, or 100.0%, to none at March 31, 2023 as the Company borrowed $42.7 million and paid down the $49.7 million of FRB borrowings.
On December 27, 2018, the Company issued $8.0 million in subordinated notes. These notes have a maturity date of December 31, 2028, and bear interest at a fixed rate of 6.50% for the first five years of their term and a floating rate for the remaining five years. The Company may, at its option, at any time on an interest payment date on or after December 31, 2023, redeem the notes, in whole or in part, at par plus accrued interest to the date of redemption.
On March 2, 2023, the Company announced the completion of a private offering of $12.0 million in aggregate principal amount of fixed rate subordinated notes due March 15, 2025 (the “Notes”) to certain qualified institutional buyers. On March 16, 2023, the Company completed an additional $2.0 million in aggregate private offering of subordinated debt to accredited investors under the same terms. The Company intends to use the net proceeds of the offerings for general corporate purposes.
The Notes bear interest at a fixed annual rate of 8.50%, payable semi-annually in arrears on March 15 and September 15 of each year, beginning September 15, 2023. The Notes’ maturity date is March 15, 2025. The Company is entitled to redeem the Notes, in whole or in part, on or after March 15, 2024, and to redeem the Notes at any time in whole upon certain other events, at a redemption price equal to 100% of the outstanding principal amount of the Notes to be redeemed plus any accrued and unpaid interest to, but excluding, the redemption date.
The balance of subordinated debt, net of unamortized debt issuance costs, was $21.7 million at March 31, 2023 and $8 million at December 31, 2022.
Other borrowings increased $5.6 million, or 102.5%, to $11.1 million at March 31, 2023 from $5.5 million at December 31, 2022. Other borrowings represent 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 March 31, 2023.
Quaint Oak Bancorp, Inc.
Notes to Unaudited Consolidated Financial Statements
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. The Bank may make cash contributions to the ESOP on a quarterly basis which are allocated to participant accounts on an annual basis.
During the quarter ended March 31, 2023, the Company did not make a discretionary contribution of shares to the ESOP and no expense was recognized.
During the quarter ended March 31, 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 months ended March 31, 2022, the Company recognized $91,000 of ESOP expense.
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 terminated on March 13, 2023, however the outstanding unvested shares awards as of such date remain outstanding for the remainder of their original five-year vesting term ending May 9, 2023.
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 March 31, 2023 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. The 2013 and 2018 Stock Incentive Plan share awards have vesting periods of five years.
A summary of share award activity under the Company’s 2013 and 2018 Stock Incentive Plans as of March 31, 2023 and 2022 and changes during the three months ended March 31, 2023 and 2022 is as follows:
| | | March 31, 2023 | |
| | | 2023 | | | 2022 | |
| | | 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 | | | 9,122 | | | $ | 13.30 | | | | 18,845 | | | $ | 13.30 | |
| Granted | | | - | | | | - | | | | - | | | | - | |
| Vested | | | - | | | | - | | | | - | | | | - | |
| Forfeited | | | - | | | | - | | | | - | | | | - | |
| 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 March 31, 2023 and 2022, the Company recognized approximately $31,000 of compensation expense. During both the three months ended March 31, 2023 and 2022, the Company recognized a tax benefit of approximately $7,000. As of March 31, 2023, approximately $12,000 in additional compensation expense will be recognized over the remaining service period of approximately 0.1 years.
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, expiring May 8, 2023. 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 2013 Stock Incentive Plan terminated on March 13, 2023, however the outstanding unexercised stock options as of such date remain outstanding for the remainder of their original ten-year terms. 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.
Quaint Oak Bancorp, Inc.
Notes to Unaudited Consolidated Financial Statements
Note 10 – Stock Compensation Plans (Continued)
Stock Incentive Plans – Share Awards (Continued)
As of March 31, 2023, a total of 195,936 grants of stock options were outstanding under the Option Plan and 2013 and 2018 Stock Incentive Plans and 37,250 stock options were available for future grant under the 2018 Stock Incentive 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.
Stock Option and Stock Incentive Plans – Stock Options
A summary of option activity under the Company’s Option Plan and 2013 and 2018 Stock Incentive Plans for the three months ended March 31, 2023 and 2022 and changes during the three months ended March 31, 2023 and 2022 is as follows:
| | | March 31, | |
| | | 2023 | | | 2022 | |
| | | 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 | | | 195,936 | | | $ | 11.24 | | | | 3.5 | | | | 233,136 | | | $ | 10.96 | | | | 4.2 | |
| Granted | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
| Exercised | | | (23,000 | ) | | | 8.10 | | | | - | | | | (1,000 | ) | | | 13.30 | | | | - | |
| Forfeited | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
| Outstanding at end of period | | | 172,936 | | | $ | 11.66 | | | | 3.7 | | | | 232,136 | | | $ | 10.95 | | | | 4.1 | |
| Exercisable at end of period | | | 147,009 | | | $ | 10.62 | | | | 6.5 | | | | 179,081 | | | $ | 10.26 | | | | 5.6 | |
During both the three months ended March 31, 2023 and 2022, 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. As of March 31, 2023, approximately $6,000 in additional compensation expense will be recognized over the remaining service period of approximately 0.1 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.
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 2022 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.
Quaint Oak Bancorp, Inc.
Notes to Unaudited Consolidated Financial Statements
Note 11 – Fair Value Measurements and Fair Values of Financial Instruments (Continued)
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.
Non-performing loans: Non-performing 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.
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 March 31, 2023 (in thousands):
| | | March 31, 2023 | |
| | | 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 | | $ | 2,740 | | | $ | - | | | $ | 2,740 | | | $ | - | |
| Federal National Mortgage Association mortgage- backed securities | | | 96 | | | | - | | | | 96 | | | | - | |
| Total investment securities available for sale | | $ | 2,836 | | | $ | - | | | $ | 2,836 | | | $ | - | |
| Total recurring fair value measurements | | $ | 2,836 | | | $ | - | | | $ | 2,836 | | | $ | - | |
| | | | | | | | | | | | | | | | | |
| Nonrecurring fair value measurements | | | | | | | | | | | | | | | | |
| Collateral-dependent loans | | $ | 1,577 | | | $ | - | | | $ | - | | | $ | 1,577 | |
| Total nonrecurring fair value measurements | | $ | 1,577 | | | $ | - | | | $ | - | | | $ | 1,577 | |
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, 2022 (in thousands):
| | | December 31, 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 | | $ | 2,871 | | | $ | - | | | $ | 2,871 | | | $ | - | |
| Federal National Mortgage Association mortgage- backed securities | | | 99 | | | | - | | | | 99 | | | | - | |
| Total investment securities available for sale | | $ | 2,970 | | | $ | - | | | $ | 2,970 | | | $ | - | |
| Total recurring fair value measurements | | $ | 2,970 | | | $ | - | | | $ | 2,970 | | | $ | - | |
| | | | | | | | | | | | | | | | | |
| Nonrecurring fair value measurements | | | | | | | | | | | | | | | | |
| Impaired loans | | $ | 1,860 | | | $ | - | | | $ | - | | | $ | 1,860 | |
| Total nonrecurring fair value measurements | | $ | 1,860 | | | $ | - | | | $ | - | | | $ | 1,860 | |
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 March 31, 2023 and December 31, 2022 (in thousands):
| | | March 31, 2023 | |
| | | Quantitative Information About Level 3 Fair Value Measurements | |
| | | Total Fair Value | | Valuation Techniques | | Unobservable Input | | | Range (Weighted Average) | |
| Collateral-dependent loans | | $ | 1,577 | | Appraisal of collateral (1) | | Appraisal adjustments (2) | | | | 8% (8%) | |
| | | December 31, 2022 |
| | | Quantitative Information About Level 3 Fair Value Measurements | |
| | | Total Fair Value | | Valuation Techniques | | Unobservable Input | | | Range (Weighted Average) | |
| Impaired loans | | $ | 1,860 | | Appraisal of collateral (1) | | Appraisal adjustments (2) | | | | 10% (10%) | |
______________________
| (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 March 31, 2023 and December 31, 2022 (in thousands):
| | | | | | | | | | | Fair Value Measurements at | |
| | | | | | | | | | | March 31, 2023 | |
| | | 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 | | $ | 2,662 | | | $ | 2,742 | | | $ | - | | | $ | - | | | $ | 2,742 | |
| Loans held for sale | | | 141,206 | | | | 145,046 | | | | - | | | | 145,046 | | | | - | |
| Loans receivable, net | | | 632,826 | | | | 610,989 | | | | - | | | | - | | | | 610,989 | |
| | | | | | | | | | | | | | | | | | | | | |
| Financial Liabilities | | | | | | | | | | | | | | | | | | | | |
| Deposits | | | 554,444 | | | | 558,001 | | | | 339,753 | | | | - | | | | 218,248 | |
| FHLB long-term borrowings | | | 46,022 | | | | 45,881 | | | | - | | | | - | | | | 45,881 | |
| Subordinated debt | | | 21,739 | | | | 21,165 | | | | - | | | | - | | | | 21,165 | |
| | | | | | | | | | | Fair Value Measurements at | |
| | | | | | | | | | | December 31, 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 | | $ | 3,833 | | | $ | 3,907 | | | $ | - | | | $ | - | | | $ | 3,907 | |
| Loans held for sale | | | 133,222 | | | | 137,253 | | | | - | | | | 137,253 | | | | - | |
| Loans receivable, net | | | 621,864 | | | | 600,186 | | | | - | | | | - | | | | 600,186 | |
| | | | | | | | | | | | | | | | | | | | | |
| Financial Liabilities | | | | | | | | | | | | | | | | | | | | |
| Deposits | | | 549,248 | | | | 551,157 | | | | 351,297 | | | | - | | | | 199,860 | |
| FHLB long-term borrowings | | | 66,022 | | | | 65,846 | | | | - | | | | - | | | | 65,846 | |
| FRB long-term borrowings | | | 7,000 | | | | 6,981 | | | | - | | | | - | | | | 6,981 | |
| Subordinated debt | | | 7,966 | | | | 7,886 | | | | - | | | | - | | | | 7,886 | |
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.
Quaint Oak Bancorp, Inc.
Notes to Unaudited Consolidated Financial Statements
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 and investment portfolio and management’s assessment of the collectability of the loan and investment 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.
The following table presents summary financial information for the reportable segments (in thousands):
| | | As of or for the Three Months Ended March 31, | |
| | | 2023 | | | 2022 | |
| | | Quaint Oak Bank(1) | | | Oakmont Capital Holdings, LLC | | | Consolidated | | | Quaint Oak Bank(1) | | | Oakmont Capital Holdings, LLC | | | Consolidated | |
| Net Interest Income (Loss) | | $ | 5,596 | | | $ | (287 | ) | | $ | 5,309 | | | $ | 5,501 | | | $ | (23 | ) | | $ | 5,478 | |
| Provision for Credit Losses | | | 392 | | | | - | | | | 392 | | | | 679 | | | | - | | | | 679 | |
| Net Interest Income (Loss) after Provision for Credit Losses | | | 5,204 | | | | (287 | ) | | | 4,917 | | | | 4,822 | | | | (23 | ) | | | 4,799 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Non-Interest Income | | | | | | | | | | | | | | | | | | | | | | | | |
| Mortgage banking, equipment lending and title abstract fees | | | 137 | | | | 669 | | | | 806 | | | | 204 | | | | 433 | | | | 637 | |
| Real estate sales commissions, net | | | 24 | | | | - | | | | 24 | | | | 61 | | | | - | | | | 61 | |
| Insurance commissions | | | 136 | | | | - | | | | 136 | | | | 116 | | | | - | | | | 116 | |
| Other fees and services charges | | | 98 | | | | 133 | | | | 231 | | | | 149 | | | | 17 | | | | 166 | |
| Net loan servicing income | | | 143 | | | | 1,086 | | | | 1,229 | | | | 5 | | | | 160 | | | | 165 | |
| Income from bank-owned life insurance | | | 24 | | | | - | | | | 24 | | | | 21 | | | | - | | | | 21 | |
| Net gain on loans held for sale | | | 391 | | | | 489 | | | | 880 | | | | 1,038 | | | | 3,172 | | | | 4,210 | |
| Gain on the sale of SBA loans | | | 50 | | | | - | | | | 50 | | | | 133 | | | | - | | | | 133 | |
| Total Non-Interest Income | | | 1,003 | | | | 2,377 | | | | 3,380 | | | | 1,727 | | | | 3,782 | | | | 5,509 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Non-Interest Expense | | | | | | | | | | | | | | | | | | | | | | | | |
| Salaries and employee benefits | | | 3,576 | | | | 1,766 | | | | 5,342 | | | | 3,238 | | | | 1,353 | | | | 4,591 | |
| Directors’ fees and expenses | | | 105 | | | | - | | | | 105 | | | | 71 | | | | - | | | | 71 | |
| Occupancy and equipment | | | 342 | | | | 185 | | | | 527 | | | | 308 | | | | 112 | | | | 420 | |
| Data processing | | | 217 | | | | - | | | | 217 | | | | 197 | | | | - | | | | 197 | |
| Professional fees | | | 148 | | | | 27 | | | | 175 | | | | 171 | | | | 13 | | | | 184 | |
| FDIC deposit insurance assessment | | | 232 | | | | - | | | | 232 | | | | 116 | | | | - | | | | 116 | |
| Advertising | | | 83 | | | | 216 | | | | 299 | | | | 85 | | | | 123 | | | | 208 | |
| Amortization of other intangible | | | 12 | | | | - | | | | 12 | | | | 12 | | | | - | | | | 12 | |
| Other | | | 593 | | | | 128 | | | | 721 | | | | 299 | | | | 85 | | | | 384 | |
| Total Non-Interest Expense | | | 5,308 | | | | 2,322 | | | | 7,630 | | | | 4,497 | | | | 1,686 | | | | 6,183 | |
| Pretax Segment Profit (Loss) | | $ | 899 | | | $ | (232 | ) | | $ | 667 | | | $ | 2,052 | | | $ | 2,073 | | | $ | 4,125 | |
| Net (Loss) Income Attributable to Noncontrolling Interest | | $ | (114 | ) | | $ | - | | | $ | (114 | ) | | $ | 1,016 | | | $ | - | | | $ | 1,016 | |
| Segment Assets | | $ | 767,307 | | | $ | 44,293 | | | $ | 811,600 | | | $ | 514,970 | | | $ | 20,896 | | | $ | 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. |