QUAINT OAK BANCORP INC
For the period ended Dec 31, 2023. Filed Mar 28, 2024.
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FY2023 · Filed Mar 28, 2024
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EX-13.0 · Critical Accounting Policies
Critical Accounting Policies
In reviewing and understanding financial information for the Company, you are encouraged to read and understand the significant accounting policies used in preparing our financial statements. These policies are described in Note 2 of the notes to our financial statements. The accounting and financial reporting policies of the Company conform to accounting principles generally accepted in the United States of America and to general practices within the banking industry. Accordingly, the consolidated financial statements require certain estimates, judgments, and assumptions, which are believed to be reasonable, based upon the information available. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the periods presented. The following accounting policies comprise those that management believes are the most critical to aid in fully understanding and evaluating our reported financial results. These policies require numerous estimates or economic assumptions that may prove inaccurate or may be subject to variations which may significantly affect our reported results and financial condition for the period or in future periods.
Allowance for Credit Losses. As of January 1, 2023, the Company adopted Accounting Standards Update (“ASU”) 2016-13,Financial Instruments–* Credit Losses (Topic* 326):“Measurement of Credit Losses on Financial Instruments,” which replaced the current loss impairment methodology under U.S. GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to form credit loss estimates in an effort to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit. ASU 2016-13, commonly referred to as Current Expected Credit Losses (“CECL”), requires a financial asset (or a group of financial assets) to be measured at an amortized cost basis and presented at the net amount expected to be collected. The amendments in this update affect financial assets and net investment in leases that are not accounted for at fair value through net income, including such financial assets as loans, debt securities, trade receivables, net investments in leases, off-balance-sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash. 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.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management evaluates the credit quality of the Company’s loan portfolio on an ongoing basis and performs a formal review of the adequacy of the ACL on a quarterly basis. The ACL is established through a provision for credit losses charged to earnings and is maintained at a level that management considers to be an estimate of the lifetime expected credit losses of the portfolio as of the evaluation date. Loans, or portions of loans, determined by management to be uncollectible are charged off against the ACL, while recoveries of amounts previously charged off are credited to the ACL.
Determining the amount of the ACL is considered a critical accounting estimate because it requires significant judgment and the use of estimates related to the amount and timing of expected future cash flows, estimated losses on pools of homogeneous loans based on historical loss experience and reasonable and supportable forecasts, as well as consideration of current economic trends and conditions, all of which may be susceptible to significant change. Banking regulators, as an integral part of their examination of the Company, also review the ACL, and may require, based on information available to them at the time of their examination, that management make the necessary adjustments to bring to the ACL balance to an appropriate level. Additionally, the ACL is determined, in part, by the composition and size of the loan portfolio.
The ACL consists of two components, a specific component and a general component. The specific component relates to loans that are individually analyzed for impairment. For such loans, an allowance is established when the discounted cash flows, collateral value or observable market price of the loan is lower than the carrying value of that loan. The general component covers all other loans and is based on historical loss experience adjusted. The general reserve component of the ACL is based on pools of performing loans segregated by loan segment. Historical loss factors are applied based on historical losses in each risk rating category to determine the appropriate reserve related to those loans.
Although the Company’s management uses the best information available, the level of the ACL remains an estimate which is subject to significant judgment and short-term change which could have a significant impact on the Company’s financial condition or results of operations. The Company’s ACL is highly sensitive to the methods, assumptions and estimates underlying its calculation. See Note 2, “Summary of Significant Accounting Policies” and Note 7 “Loans Receivable, Net and Allowance for Credit Losses” within the Company’s Notes to the Consolidated Financial Statements which are included in Part II of this Annual Report on Form 10-K for additional qualitative and quantitative information about the Company’s ACL.
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.
Quaint Oak Bancorp, Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
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 Annual Report on Form 10-K for the fiscal year ended December 31, 2022.
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.
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.
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.
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: 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. |
| • | Doubtful: These loans have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. |
Quaint Oak Bancorp, Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
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. For example, the Company considers the impact of current environmental factors at the reporting date that did not exist over the period from which historical experience was used. Relevant factors include, but are not limited to, concentrations of credit risk (geographic, large borrower, and industry), economic trends and conditions, changes in underwriting standards, experience and depth of lending staff, trends in delinquencies, and the level of criticized loans. 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. The ACL utilizes 36-month economic forecasts which include housing starts, real estate prices, loan delinquency trends, and US GDP changes.
Quaint Oak Bancorp, Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Selected Consolidated Financial and Other Data. Set forth below is selected financial and other data of Quaint Oak Bancorp, Inc. You should read the financial statements and related notes contained in this Annual Report which provide more detailed information.
| At or For the Years Ended December 31, | ||
|---|---|---|
| 2023 | 2022 | |
| (Dollars in Thousands) | ||
| Selected Financial and Other Data: | ||
| Total assets | $754,118 | $792,350 |
| Cash and cash equivalents | 62,127 | 3,893 |
| Investment in interest-earning time deposits | 1,912 | 3,833 |
| Investment securities available for sale at fair value | 2,341 | 2,970 |
| Loans held for sale | 60,380 | 133,222 |
| Loans receivable, net | 603,349 | 621,864 |
| Federal Home Loan Bank stock, at cost | 1,474 | 6,601 |
| Premises and equipment, net | 2,933 | 2,775 |
| Deposits | 631,699 | 549,248 |
| Federal Home Loan Bank borrowings | 29,022 | 159,222 |
| Subordinated debt | 21,957 | 7,966 |
| Total Quaint Oak Bancorp, Inc. Stockholders’ Equity | 48,491 | 44,793 |
| Noncontrolling Interest | 3,074 | 4,289 |
| Total Stockholders’ Equity | 51,565 | 49,082 |
| Selected Operating Data: | ||
| Total interest income | $44,470 | $32,466 |
| Total interest expense | 26,307 | 8,777 |
| Net interest income | 18,163 | 23,689 |
| Provision for credit losses | 157 | 2,475 |
| Net interest income after provision for credit losses | 18,006 | 21,214 |
| Total non-interest income | 15,332 | 19,411 |
| Total non-interest expense | 30,440 | 27,260 |
| Income before income taxes | 2,898 | 13,365 |
| Income taxes | 1,228 | 3,054 |
| Net income | $1,670 | $10,311 |
| Net income attributable to noncontrolling interest | $(350) | $2,448 |
| Net income attributable to Quaint Oak Bancorp, Inc. | $2,020 | $7,863 |
| Selected Operating Ratios (1): | ||
| Average yield on interest-earning assets | 5.80% | 4.88% |
| Average rate on interest-bearing liabilities | 4.09 | 1.58 |
| Average interest rate spread(2) | 1.71 | 3.30 |
| Net interest margin(2) | 2.37 | 3.56 |
| Average interest-earning assets to average interest-bearing liabilities | 119.09 | 119.85 |
| Net interest income after provision for credit losses to non-interest expense | 59.15 | 77.82 |
| Total non-interest expense to average assets | 3.83 | 3.98 |
| Efficiency ratio(3) | 90.88 | 63.25 |
| Return on average assets | 0.34 | 1.53 |
| Return on average equity | 5.81 | 26.92 |
| Asset Quality Ratios(4): | ||
| Non-performing loans as a percent of loans receivable, net(5) | 0.06% | 0.32% |
| Non-performing assets as a percent of total assets(5) | 0.06 | 0.25 |
| Non-performing assets and troubled debt restructurings as a percent of total assets | 0.08 | 0.27 |
| Allowance for credit losses as a percent of non-performing loans | 1,494.57 | 386.01 |
| Allowance for credit losses as a percent of total loans receivable | 1.11 | 1.22 |
| Net charge-offs to average loans receivable | 0.12 | 0.01 |
Quaint Oak Bancorp, Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
| At or For the Years Ended | ||
|---|---|---|
| December 31, | ||
| 2023 | 2022 | |
| Capital Ratios(4): | ||
| Tier 1 leverage ratio | 9.11% | 7.07% |
| Common Tier 1 capital ratio | 11.17 | 7.41 |
| Tier 1 risk-based capital ratio | 11.17 | 7.41 |
| Total risk-based capital ratio | 12.30 | 8.49 |
| (1) | With the exception of end of period ratios, all ratios are based on average daily balances during the indicated periods. |
| (2) | Average interest rate spread represents the difference between the average yield on interest-earning assets and the average rate paid on |
interest-bearing liabilities, and net interest margin represents net interest income as a percentage of average interest-earning assets.
| (3) | The efficiency ratio represents the ratio of non-interest expense divided by the sum of net interest income and non-interest income. |
| (4) | Asset quality ratios and capital ratios are end of period ratios, except for net charge-offs to average loans receivable. |
| (5) | Non-performing assets consist of non-performing loans at December 31, 2023 and 2022. Non-performing loans consist of non-accruing loans plus accruing loans 90 days or more past due. |
The text of this filing, as the company filed it with the SEC, without its images or exhibits. This is not investment advice.