EDGAR 10-K Filing

Company CIK: 1391933
Filing Year: 2024
Filename: 1391933_10-K_2024_0000927089-24-000048.json

---

ITEM 1. BUSINESS
Item 1. Business.
Genera
Quaint Oak Bancorp, Inc., a Pennsylvania corporation headquartered in Southampton, Pennsylvania, was organized in 2007 as the holding company for Quaint Oak Bank. Quaint Oak Bank, originally incorporated in 1926, converted from a Pennsylvania chartered building and loan association to a Pennsylvania chartered mutual savings bank named Quaint Oak Savings Bank in January 2000 and converted to a stock savings bank in July 2007. Quaint Oak Bank is headquartered in Southampton in Bucks County, Pennsylvania and operates through three banking locations: the main office location in Southampton, Pennsylvania and regional banking offices in Allentown, located in the Lehigh Valley area of Pennsylvania, and a Philadelphia, Pennsylvania location. The Bank also has a mortgage office in Philadelphia and an insurance agency and real estate sales office in New Britain Township, Pennsylvania. Quaint Oak Bank, through its subsidiary companies, conducts mortgage banking, multi-state specialty commercial real estate financing, multi-state equipment financing, real estate sales, title abstract and insurance businesses.
As of December 31, 2023, Quaint Oak Bank’s primary market area includes Bucks, Montgomery and Philadelphia Counties, Pennsylvania, and the Lehigh Valley area of Pennsylvania. As of December 31, 2023, Quaint Oak Bancorp had $754.1 million of total assets, $631.7 million of total deposits and $51.6 million of stockholders’ equity. Quaint Oak Bancorp’s stockholders’ equity constituted 6.4% of total assets as of December 31, 2023.
Quaint Oak Bank’s primary business consists of attracting deposits from the general public through a variety of deposit programs and investing such deposits principally in commercial real estate loans, commercial business loans, one-to-four family residential non-owner occupied loans, multi-family residential loans, construction loans, one-to-four family residential owner occupied loans, and home equity loans. In addition, Quaint Oak Bank offers mortgage banking, multi-state specialty commercial real estate financing and equipment financing, real estate sales, title abstract and insurance services through its subsidiary companies. Quaint Oak Bank serves its customers through its offices as well as through correspondence, telephone and on-line banking.
As of January 1, 2023, 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.
Deposits with Quaint Oak Bank are insured to the maximum extent provided by law through the Deposit Insurance Fund administered by the Federal Deposit Insurance Corporation (“FDIC”). Quaint Oak Bank is subject to examination and comprehensive regulation by the FDIC and the Pennsylvania Department of Banking and Securities. Quaint Oak Bancorp, which elected to be treated as a savings and loan holding company, is subject to examination and regulation by the Board of Governors of the Federal Reserve System (“Federal Reserve Board”). Quaint Oak Bank is also a member of the Federal Home Loan Bank of Pittsburgh (“FHLB of Pittsburgh” or “FHLB”), which is one of the 11 regional banks comprising the Federal Home Loan Bank System (“FHLB System”). Quaint Oak Bank is also subject to regulations of the Federal Reserve Board governing reserves required to be maintained against deposits and certain other matters.
Quaint Oak Bancorp’s principal executive offices are located at 501 Knowles Avenue, Southampton, Pennsylvania 18966, its telephone number is (215) 364-4059 and Internet address is www.quaintoak.com.
Quaint Oak Bank’s Lending Activities
General. At December 31, 2023, the net loan portfolio of Quaint Oak Bank amounted to $603.3 million, representing approximately 80.0% of its total assets at that date. The principal lending activity of Quaint Oak Bank is the origination of commercial real estate loans, commercial business loans, and one-to-four family residential non-owner occupied loans, multi-family residential loans, construction loans, one-to-four family residential owner occupied loans, and home equity loans. At December 31, 2023, commercial real estate loans amounted to $331.2 million, or 54.2% of its total loan portfolio. Commercial business loans totaled $127.9 million, or 20.9%, of the total loan portfolio at December 31, 2023. At December 31, 2023, one-to-four family residential loans amounted to $63.3 million or 10.4% of its total loan portfolio of which $40.5 million, or 6.7%, of the total loan portfolio consisted of non-owner occupied properties and $22.9 million, or 3.7%, of the total loan portfolio consisted of owner occupied properties. Multi-family residential loans totaled $46.7 million, or 7.7%, of the total loan portfolio at December 31, 2023. Construction loans totaled $35.6 million, or 5.8%, of the total loan portfolio at December 31, 2023. Home equity loans totaled $6.2 million, or 1.0%, of the total loan portfolio at December 31, 2023.
The types of loans that Quaint Oak Bank may originate are subject to federal and state laws and regulations. Interest rates charged on loans are affected principally by the demand for such loans, the supply of money available for lending purposes and the rates offered by our competitors. These factors are, in turn, affected by general and economic conditions, the monetary policy of the federal government, including the Federal Reserve Board, legislative and tax policies, and governmental budgetary matters.
Quaint Oak Bank is subject to a regulatory loans to one borrower limit of 15% of the Bank’s capital which amounts to $10.3 million at December 31, 2023. At December 31, 2023, Quaint Oak Bank’s five largest loans or groups of loans-to-one borrower, including related entities, were $7.6 million, $7.4 million, $6.6 million, $6.5 million, and $6.4 million. The loans consisted of three commercial real estate loans, and two construction loans. Each of Quaint Oak Bank’s five largest loans or groups of loans was performing in accordance with its terms at December 31, 2023.
Loan Portfolio Composition. The following table shows the composition of our loan portfolio by type of loan at the dates indicated.
December 31,
Amount
%
Amount
%
(Dollars in Thousands)
Real estate loans:
One-to-four family residential (1):
Owner occupied
$ 22,885
3.7 %
$ 18,070
2.9 %
Non-owner occupied
40,455
6.7
39,315
6.2
Total one-to-four family residential loans
63,340
10.4
57,385
9.1
Multi-family (five or more) residential
46,680
7.7
46,909
7.4
Commercial real estate
331,174
54.2
333,540
52.9
Construction
35,585
5.8
28,938
4.6
Home equity loans
6,162
1.0
4,918
0.8
Total real estate loans
482,941
79.1
471,690
65.7
Commercial business (2)
127,868
20.9
159,069
25.2
Other consumer
-
-
Total loans
610,878
100.0 %
630,761
100.0 %
Less:
Deferred loan fees and costs
(771 )
(1,219 )
Allowance for credit losses
(6,758 )
(7,678 )
Net loans
$ 603,349
$ 621,864
____________________
(1)
Does not include mortgage loans held for sale of $3.5 million and $2.9 million at December 31, 2023 and 2022, respectively.
(2)
Does not include equipment loans held for sale of $56.9 million and $130.3 million at December 31, 2023 and December 31, 2022, respectively.
Origination of Loans. The lending activities of Quaint Oak Bank are subject to the written underwriting standards and loan origination procedures established by the board of directors and management. New loans are generated primarily through the efforts of Quaint Oak Bank’s loan officers, referrals from brokers and existing customers. Loan applications are underwritten and processed by Quaint Oak Bank’s credit administration department.
All loans are presented to the loan committee for review. Quaint Oak Bank’s loan approval process is intended to assess the borrower’s ability to repay the loan, the viability of the loan and the value of the collateral that will secure the loan. Individual loan requests over $2.0 million, or loan requests that would increase the relationship over $2.0 million, must be approved by our President and Chief Executive Officer and Chief Operating Officer.
The following table shows our total loans and loans held for sale originated and repaid during the periods indicated. Included in the loan originations for commercial real estate loans was the purchase of a $55.5 million loan portfolio by the Bank’s wholly-owned subsidiary, Oakmont Commercial, LLC, in April, 2022. We did not purchase any loans in 2023.
Year Ended December 31,
(In Thousands)
Loan balance, beginning of period:
$ 755,086
$ 511,789
Loan originations:
One-to-four family residential owner occupied (1)
83,453
128,075
One-to-four family residential non-owner occupied
2,200
7,456
Multi-family residential
2,475
18,311
Commercial real estate (2)
82,551
178,251
Construction
17,994
17,651
Home equity
4,736
1,154
Commercial business (3)
386,553
611,831
Other consumer
-
Total loan originations
580,036
962,729
Loans sold
(414,002 )
(496,311 )
Loan principal repayments
(249,862 )
(214,224 )
Total loans sold and principal repayments
(663,864 )
(710,535 )
Decreases due to other items, net (4)
(7,529 )
(8,897 )
Net decrease in loan portfolio
$ (91,357 )
$ 243,297
Loan balance, end of period:
$ 663,729
$ 755,086
____________________
(1)
Includes $77.4 million and $118.4 million of loans originated for sale in 2023 and 2022, respectively.
(2)
Includes a $55.5 million loan portfolio purchased by the Bank’s wholly-owned subsidiary, Oakmont Commercial, in April 2022.
(3)
Includes $263.8 million and $403.2 million of equipment loans originated for sale in 2023 and 2022, respectively.
(4)
Other items consist of deferred fees and the allowance for credit losses.
Although Pennsylvania laws and regulations permit savings banks to originate loans secured by real estate located throughout the United States, Quaint Oak Bank concentrates its lending activity in its primary market area in Bucks, Montgomery and Philadelphia Counties, Pennsylvania, and the Lehigh Valley area of Pennsylvania.
Contractual Terms to Final Maturities. The following table shows the scheduled contractual maturities of our loans as of December 31, 2023, before giving effect to net items, and excluding loans held for sale. Demand loans, loans having no stated schedule of repayments and no stated maturity, and overdrafts are reported as due in one year or less. The amounts shown below do not take into account loan prepayments.
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
Total
(In Thousands)
Amounts due in:
One year or less
$
$ 3,865
$ 2,194
$ 24,470
$ 10,491
$
$ 7,523
$ 48,982
After one year through three years
10,785
6,900
66,394
7,342
34,124
125,655
After three years through five years
13,328
13,225
88,882
7,672
57,700
181,037
After five years through 15 years
1,433
8,769
20,407
104,761
7,172
5,208
28,570
176,320
After 15 years
20,978
3,708
3,954
46,667
2,908
78,884
Total
$ 22,885
$ 40,455
$ 46,680
$ 331,174
$ 35,585
$ 6,162
$ 127,937
$ 610,878
The following table shows the dollar amount of our loans at December 31, 2023 due after December 31, 2024 as shown in the preceding table, which have fixed interest rates, or which have floating or adjustable interest rates.
Fixed-Rate
Floating or
Adjustable-Rate
Total
(In Thousands)
One-to-four family residential owner occupied
$ 4,591
$ 17,911
$ 22,502
One-to-four family residential non-owner occupied
22,520
14,070
36,590
Multi-family residential
25,430
19,056
44,486
Commercial real estate
189,937
116,767
306,704
Construction
6,392
18,702
25,094
Home equity
1,300
4,806
6,106
Commercial business and other consumer
13,434
106,980
120,414
Total
$ 263,604
$ 298,292
$ 561,896
Scheduled contractual maturities of loans do not necessarily reflect the actual expected term of the loan portfolio. The average life of mortgage loans is substantially less than their average contractual terms because of prepayments. The average life of mortgage loans tends to increase when current mortgage loan rates are higher than rates on existing mortgage loans and, conversely, decrease when rates on current mortgage loans are lower than existing mortgage loan rates (due to refinancing of adjustable-rate and fixed-rate loans at lower rates). Under the latter circumstance, the weighted average yield on loans decreases as higher yielding loans are repaid or refinanced at lower rates.
One-to-Four Family Residential Owner Occupied Real Estate Loans. As part of our strategy of diversifying our loan portfolio with higher yielding and shorter-term loan products, Quaint Oak Bank does not actively market the origination of one-to-four family owner occupied residential loans to be held in our loan portfolio. At December 31, 2023, $22.9 million, or 3.7%, of our total loan portfolio, before net items, consisted of one-to-four family owner occupied residential loans.
One-to-Four Family Residential Non-Owner Occupied Real Estate Loans. As part of our strategy of diversifying our loan portfolio with higher yielding and shorter-term loan products, Quaint Oak Bank does not actively market the origination of one-to-four family residential non-owner occupied real estate loans to be held in our loan portfolio. At December 31, 2023, $40.5 million, or 6.7%, of our total loan portfolio, before net items, consisted of one-to-four family residential non-owner occupied loans.
It is our policy to lend in a first lien position on non-owner occupied residential property with fixed and variable rates and terms generally up to 15 years or longer amortizations. Generally, such loans are originated with a three-year or five-year maturity. Such loans are generally limited to 75%, or less, of the appraised value, or sales price plus improvement costs of the secured real estate property.
One-to-Four Family Residential Loans Originated for Sale. Quaint Oak Bank through its subsidiary, Quaint Oak Mortgage LLC, originates one-to-four family residential fixed and variable rate first mortgages with amortizing terms less than or equal to 30 years in accordance with secondary market standards. Loans originated by Quaint Oak Mortgage LLC are sold into the secondary market along with the loans’ servicing rights. For the year ended December 31, 2023, Quaint Oak Mortgage LLC originated $77.4 million of owner and non-owner occupied residential loans for sale and sold $76.8 million of these loans in the secondary market, realizing gains of $1.3 million. For the year ended December 31, 2022, Quaint Oak Mortgage LLC originated $118.4 million of owner and non-owner occupied residential loans for sale and sold $132.9 million of these loans in the secondary market.
Multi-Family Residential Loans. Quaint Oak Bank originates loans for multi-unit (five or more) residential properties. These loans are offered with fixed and adjustable interest rates and amortizations not to exceed 25 years. Generally, the loan-to-value ratio does not exceed 75%. These loans are underwritten with the same criteria and procedures as commercial real estate loans. At December 31, 2023, $46.7 million, or 7.7%, of our total loan portfolio, before net items, consisted of multi-family residential loans.
Commercial Real Estate Loans. A significant part of Quaint Oak Bank’s lending activity is the origination of loans secured by commercial real estate. At December 31, 2023, $331.2 million, or 54.2% of our total loan portfolio, before net items, consisted of commercial real estate loans. Although commercial real estate loans are generally considered to have greater credit risk than other certain types of loans, we intend to continue to originate such loans in our market area. At December 31, 2023, approximately 57% of total commercial real estate loans were owner occupied.
It is generally our policy to lend in a first lien position on real property occupied as a commercial business property or mixed-use properties. However, in rare instances, we may take a second lien position if approved by the loan committee. Quaint Oak Bank offers fixed and variable rate mortgage loans with amortization not to exceed 25 years. Commercial real estate loans are limited to 70%, or less, of non-owner occupied residential loans, and 80%, or less, of owner occupied residential loans, of the appraised value, or sales price plus improvement costs of the secured real estate property. Commercial real estate loans are presented to the loan committee for review and approval, including analysis of the creditworthiness of the borrower. The loan committee reviews the cash flows from the property to determine if the proceeds will adequately cover debt service. Quaint Oak Bank uses a Debt Service Coverage Ratio (DSCR) of 1.20. We require the collection of various documents to verify income, including personal tax returns, business tax returns, and copies of current leases. Assignments of rents and leases as well as the requirement to provide annual updates of financial information and rent rolls are included in the loan documentation. Commercial real estate loans may be more adversely affected by conditions in the real estate markets or the overall economy and accordingly, conservative loan to value ratios are required at origination.
Construction Loans. Our construction loans are generally originated for the purpose of building or providing funds for leasehold improvements to a business’s primary place of operation. On occasion the Bank may provide funds for building or renovating a single-family residential home. Generally, we do not make construction loans for speculative development. Funds are advanced incrementally as work is completed. The borrower is required to make monthly interest payments. When the construction is finished, the amount of the outstanding loan is generally less than 70% of the completed value of the property. Quaint Oak Bank is paid in full when the borrower seeks permanent financing or the property is sold. At December 31, 2023, $35.6 million, or 5.8% of Quaint Oak Bank’s total loan portfolio, before net items, consisted of construction loans.
Home Equity Loans. Quaint Oak Bank is authorized to make loans for a wide variety of personal or consumer purposes. Quaint Oak Bank originates home equity lines of credit in order to accommodate its customers and because such loans generally have shorter terms than residential mortgage loans. At December 31, 2023, $6.2 million, or 1.0% of Quaint Oak Bank’s total loan portfolio, before net items, consisted of home equity loans.
Commercial Business Loans. Quaint Oak Bank originates loans to businesses for working capital, purchase of a business, tenant improvements, receivables, purchase of inventory, and for the purchase of business essential equipment. Business essential equipment is equipment necessary for a business to support or assist with the day-to-day operation or profitability of the business. At December 31, 2023, $127.9 million, or 20.9% of Quaint Oak Bank’s total loan portfolio, before net items, consisted of commercial business loans. At December 31, 2023, commercial business loans include $156,000 of SBA PPP loans. During the year ended December 31, 2023 the Bank originated $263.8 million in equipment loans held for sale and sold $287.1 million of equipment loans. Also contributing to the decrease in equipment loans held for sale at December 31, 2023 is $50.1 million of loan amortization and prepayments.
Other Consumer Loans. Quaint Oak Bank originates loans secured by savings accounts in order to accommodate its existing customers. At December 31, 2023, $69,000 of Quaint Oak Bank’s total loan portfolio, before net items, consisted of other consumer loans.
Loan Origination and Other Fees. In addition to interest earned on loans, Quaint Oak Bank generally receives loan origination fees or “points” for originating loans. Loan points are a percentage of the principal amount of the mortgage loan and are charged to the borrower in connection with the origination of the loan. Such origination fees, net of certain direct loan origination costs, are deferred and recognized as an adjustment to the yield (interest income) of the related loans over the contractual life of the loans.
Asset Quality
General. Quaint Oak Bank’s collection procedures provide that when a loan is 17 days past due, a telephone call is made to the borrower by our collections specialist to determine the reason for the delinquency and to work out a possible solution. Late charges will be assessed based on the number of days specified in the note beyond the due date. The Board of Directors is notified of all delinquencies 30 days past due. In most cases, deficiencies are cured promptly. While we generally prefer to work with borrowers to resolve such problems, we will institute foreclosure or other collection proceedings when necessary to minimize any potential loss.
Loans are placed on non-accrual status when management believes the probability of collection of interest is doubtful. When a loan is placed on non-accrual status, previously accrued but unpaid interest is deducted from interest income. Quaint Oak Bank generally discontinues the accrual of interest income when the loan becomes 90 days past due as to principal or interest unless the credit is well secured and we believe we will fully collect. There were $51,000 and $1.9 million of non-accrual loans at December 31, 2023 and 2022, respectively.
Real estate and other assets acquired by Quaint Oak Bank as a result of foreclosure or by deed-in-lieu of foreclosure are classified as real estate owned until sold. There was no other real estate owned as of December 31, 2023 or December 31, 2022.
Delinquent Loans. The following table shows the delinquencies in our loan portfolio as of December 31, 2023.
December 31, 2023
30-89
Days Overdue
90 or More Days
Overdue
Number
of Loans
Principal
Balance
Number
of Loans
Principal
Balance
(Dollars in Thousands)
One-to-four family residential-owner occupied
$
$
One-to-four family residential-non-owner occupied
-
-
Multi-family residential
-
-
Commercial real estate
3,944
-
-
Home equity
-
-
Total delinquent loans
$ 4,914
$
Delinquent loans to total net loans
0.81 %
0.07 %
Delinquent loans to total loans
0.80 %
0.07 %
Non-Performing Assets. The following table shows the amounts of our non-performing assets (defined as non-accruing loans, accruing loans 90 days or more past due and other real estate owned) and troubled debt restructurings at the dates indicated.
December 31,
(Dollars in Thousands)
Total non-accruing loans
$
$ 1,939
Total accruing loans 90 days or more past due
Total non-performing loans (1)
1,990
Other real estate owned, net
-
-
Total non-performing assets
1,990
Troubled debt restructurings (2)
-
Total non-performing assets and troubled debt restructurings
$
$ 2,126
Total non-performing loans as a percentage of loans, net
0.06 %
0.32 %
Total non-performing loans as a percentage of total assets
0.06 %
0.25 %
Total non-performing assets as a percentage of total assets
0.08 %
0.27 %
Total non-performing assets and troubled debt restructurings as a percentage of total assets
0.08 %
0.27 %
__________________
(1)
Non-performing loans consist of non-accruing loans plus accruing loans 90 days or more past due.
(2)
Troubled debt restructurings not included in non-accruing loans and accruing loans 90 days or more past due as of December 31, 2022. 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.
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.
Classified Assets. Federal regulations require that each insured savings institution classify its assets on a regular basis. In addition, in connection with examinations of insured institutions, federal examiners have authority to identify problem assets and, if appropriate, classify them. There are three classifications for problem assets: “substandard,” “doubtful” and “loss.” Substandard assets have one or more defined weaknesses and are characterized by the distinct possibility that the insured institution will sustain some loss if the deficiencies are not corrected. Doubtful assets have the weaknesses of substandard assets with the additional characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions and values questionable, and there is a higher possibility of loss. An asset classified loss is considered uncollectible and of such little value that continuance as an asset of the institution is not warranted. Another category designated “special mention” also must be established and maintained for assets which do not currently expose an insured institution to a sufficient degree of risk to warrant classification as substandard, doubtful or loss. Assets classified as substandard or doubtful require the institution to establish general allowances for credit losses. If an asset or portion thereof is classified as a loss, the insured institution must either establish specific allowances for credit losses in the amount of 100% of the portion of the asset classified loss, or charge-off such amount. General loss allowances established to cover possible losses related to assets classified substandard or doubtful may be included in determining an institution’s regulatory capital, while specific valuation allowances for credit losses do not qualify as regulatory capital. Federal examiners may disagree with an insured institution’s classifications and amounts reserved.
Allowance for Credit Losses. At December 31, 2023, Quaint Oak Bank’s allowance for credit losses amounted to $6.8 million. The Company adopted ASU 2016-13 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 ASC 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 implementing ASC 326.
The following table shows changes in our allowance for credit losses during the periods presented.
December 31,
(Dollars in Thousands)
Total loans outstanding at end of period, net
$ 603,349
$ 621,864
Average loans outstanding (1)
$ 638,376
$ 531,912
Allowance for credit losses, beginning of period
$ 7,678
$ 5,262
(Recovery of) Provision for credit losses
(45 )
2,475
Charge-offs:
Multi-family residential
(2 )
-
Commercial real estate
(134 )
-
Commercial business
(739 )
(59 )
Total charge-offs
(875 )
(59 )
Recoveries on loans previously charged-off
-
-
Allowance for credit losses, end of period
$ 6,758
$ 7,678
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, net
1.11 %
1.22 %
Non-performing loans as a percent of total loans receivable, net
0.07 %
0.32 %
Ratio of net charge-offs during the period to average loans outstanding during the period:
Multi-family residential
n/m
-
Commercial real estate
0.02 %
-
Commercial business
0.12 %
0.01 %
Total charge-offs
0.14 %
0.01 %
Non-accrual loans to total loans outstanding, net
0.01 %
0.31 %
Allowance for credit losses to non-accrual loans
13,232.1 %
396.1 %
____________________
(1)
Excludes loans held for sale.
*n/m
Not meaningful
The following table shows how our allowance for credit losses is allocated by loan class at each of the dates indicated.
December 31,
Amount of Allowance
Loan
Category
as a % of
Total Loans
Amount of Allowance
Loan
Category
as a % of
Total Loans
(Dollars in Thousands)
One-to-four family residential owner occupied
$
2.3 %
$
2.9 %
One-to-four family residential non-owner occupied
3.2
6.2
Multi-family residential
6.2
7.4
Commercial real estate
2,784
41.2
3,750
52.9
Construction
8.6
4.6
Home equity
0.9
0.8
Commercial business and other consumer
2,538
37.6
2,422
25.2
Unallocated
-
-
-
Total
$ 6,758
100.0 %
$ 7,678
100.0 %
Investment Activities
General. We invest in securities pursuant to our investment policy, which has been approved by our Board of Directors. Our investment policy is reviewed annually by our Asset-Liability Committee (ALCO). All policy changes recommended by ALCO must be approved by the Board of Directors. ALCO is authorized by the Board to make investments consistent with the investment policy. While general investment strategies are developed and authorized by ALCO, the execution of specific actions rests with the Chief Financial Officer, Chief Operating Officer and the President and Chief Executive Officer.
Our investment policy is designed primarily to manage the interest rate sensitivity of our assets and liabilities, to generate a favorable return without incurring undue interest rate and credit risk, to complement our lending activities and to provide and maintain liquidity.
Our securities are classified as available for sale, held to maturity, or trading, at the time of acquisition. Securities classified as held to maturity must be purchased with the intent and ability to hold that security until its final maturity and can be sold prior to maturity only under rare circumstances. Held to maturity securities are accounted for based upon the amortized cost of the security. Available for sale securities can be sold at any time based upon our needs or market conditions. Available for sale securities are accounted for at fair value, with unrealized gains and losses on these securities, net of income tax provisions, reflected in stockholders’ equity as accumulated other comprehensive income. At December 31, 2023, we had $2.3 million of securities classified as available for sale and no securities classified as held to maturity or trading.
The Company also invests excess liquidity in interest-earning time deposits with other banks, laddering the maturities. As of December 31, 2023, the Company held $1.9 million in interest-earning time deposits.
Federal Home Loan Bank (FHLB) stock is a restricted investment security, carried at cost. The purchase of FHLB stock provides banks with the right to be a member of the FHLB and to receive the products and services that the FHLB provides to member banking institutions. Unlike other types of stock, FHLB stock is acquired primarily for the right to receive advances from the FHLB, rather than for the purpose of maximizing dividends or stock growth. FHLB stock is an activity-based stock that is directly proportional to the volume of advances taken by a member institution. The FHLB will repurchase capital stock at $1.00 per share from Quaint Oak Bank. The FHLB has paid dividends on the capital stock in each quarter of 2023 and 2022.
The following table sets forth our investment portfolio at carrying value as of the dates indicated.
December 31,
(In Thousands)
Interest-earning time deposits with other financial institutions
$ 1,912
$ 3,833
Mortgage-backed securities:
Government National Mortgage Association
2,268
2,871
Federal National Mortgage Association
Investment in FHLB stock
1,474
6,601
Total
$ 5,727
$ 13,404
The following table sets forth the amount of investment securities which mature during each of the periods indicated and the weighted average yields for each range of maturities at December 31, 2023. The weighted average yield is calculated by dividing income within each contractual maturity range by the outstanding amount of the related investment.
Amounts at December 31, 2023 Which Mature In
One Year or Less
Weighted Average Yield
Over One Year Through Five Years
Weighted Average Yield
Over Five Years Through Ten Years
Weighted Average Yield
Over Ten Years
Weighted Average Yield
(Dollars in Thousands)
Interest-earning time deposits with other financial institutions
$ 1,000
3.46 %
$
4.00 %
$ -
- %
$ -
- %
Mortgage-backed securities:
Government National Mortgage Association
-
-
-
-
-
-
2,268
5.97
Federal National Mortgage Association
-
-
-
-
-
-
5.69
$ 1,000
3.46 %
$
4.00 %
$ -
- %
$ 2,341
5.96 %
Sources of Funds
General. Deposits are the primary source of Quaint Oak Bank’s funds for lending and other investment purposes. In addition to deposits, principal and interest payments on loans are a source of funds. Loan payments are a relatively stable source of funds, while deposit inflows and outflows are significantly influenced by general interest rates and money market conditions. Borrowings may also be used on a short-term basis to compensate for reductions in the availability of funds from other sources and on a longer-term basis for general business purposes.
Deposits. Deposits are attracted by Quaint Oak Bank principally from Bucks, Montgomery and Philadelphia Counties, Pennsylvania, and the Lehigh Valley area of Pennsylvania, although we also attract deposits from outside our market area and the Commonwealth of Pennsylvania. Deposit account terms vary, with the principal differences being the minimum balance required, the time periods the funds must remain on deposit, and the interest rate. Quaint Oak Bank offers a variety of deposit accounts with a range of rates and terms. Our deposit accounts consist of certificates of deposit, money market and other savings products, including interest-bearing business checking accounts, and non-interest bearing business and consumer checking accounts. Quaint Oak Bank generally does not solicit deposits from outside Pennsylvania or pay fees to brokers to solicit funds for deposit, however the Bank does use a listing service for certificates of deposit, has a deposit placement agreement with a third party bank for money market accounts and has a correspondent relationship with a third party bank for non-interest and interest bearing checking accounts. At December 31, 2023, approximately 41.8% of Quaint Oak Bank’s total deposits were held by customers outside the Commonwealth of Pennsylvania.
Interest rates paid, maturity terms, service fees and withdrawal penalties are established on a periodic basis. Management determines the rates and terms based on rates paid by competitors, the need for funds or liquidity, growth goals and federal regulations. Management attempts to control the flow of deposits by pricing the accounts to remain generally competitive with other financial institutions in our market area.
The following table shows the distribution of, and certain other information relating to, our deposits by type of deposit, as of the dates indicated.
December 31,
Amount
%
Amount
%
(Dollars in Thousands)
Certificate accounts:
0.00% - 0.99%
$ 20,533
3.3 %
$ 74,703
13.6 %
1.00% - 1.99%
10,078
1.6
16,698
3.0
2.00% - 2.99%
14,539
2.3
37,606
6.8
3.00% - 3.99%
41,124
6.5
50,376
9.2
4.00% - 4.99%
93,044
14.7
18,568
3.4
5.00% - 5.99%
36,525
5.8
-
-
Total certificate accounts
215,843
34.2
197,951
36.0
Transaction accounts:
Interest bearing checking accounts
104,274
16.5
-
-
Non-interest bearing checking accounts
92,216
14.6
88,728
16.2
Savings accounts
0.1
1,597
0.3
Money market accounts
218,525
34.6
260,972
47.5
Total transaction accounts
415,856
65.8
351,297
64.0
Total deposits
$ 631,699
100.0 %
$ 549,248
100.0 %
The following table shows the average balance of each type of deposit and the average rate paid on each type of deposit for the periods indicated.
Average Balance
Interest Expense
Average Rate Paid
Average Balance
Interest Expense
Average Rate Paid
(Dollars in Thousands)
Savings accounts
$ 1,298
$
0.23 %
$ 1,673
$
0.18 %
Money market accounts
232,666
9,670
4.16
259,886
3,924
1.51
Business checking accounts
49,709
2,496
5.02
-
-
-
Certificates of deposit
215,264
6,642
3.09
185,202
2,116
1.14
Total interest-bearing deposits
$ 498,937
$ 18,811
3.77 %
$ 446,761
$ 6,043
1.35 %
Non-interest bearing deposits
$ 84,841
$ -
- %
$ 73,137
$ -
- %
Total deposits
$ 583,778
$ 18,811
3.77 %
$ 519,898
$ 6,043
1.35 %
Uninsured deposits as of December 31, 2023 and 2022 are estimated based on regulatory reporting requirements to be $294.5 million and $255.3 million, respectively.
The following table presents, by various interest rate categories and maturities, the amount of certificates of deposit at December 31, 2023.
Balance at December 31, 2023
Maturing in the Twelve Months Ending December 31,
Certificates of Deposit
Thereafter
Total
(In Thousands)
0.00% - 0.99%
$ 13,379
$ 3,971
$ 2,909
$
$ 20,533
1.00% - 1.99%
3,531
5,176
1,065
10,078
2.00% - 2.99%
8,980
3,621
1,196
14,539
3.00% - 3.99%
16,722
13,028
2,691
8,683
41,124
4.00% - 4.99%
34,595
10,597
5,054
42,798
93,044
5.00% - 5.99%
36,525
-
-
-
36,525
Total certificate accounts
$ 113,732
$ 36,393
$ 12,156
$ 53,562
$ 215,843
The following table shows the maturities of our certificates of deposit of more than $250,000 at December 31, 2023 by time remaining to maturity.
Quarter Ending:
Amount
Weighted
Average Rate
(Dollars in Thousands)
3 months or less
$ 5,086
4.67 %
3 to 6 months
5,679
4.34
6 to 9 months
4,348
4.58
9 to 12 months
4,162
4.85
After 12 months
9,496
4.01
Total certificates of deposit with balances of more than $250,000
$ 28,771
4.40 %
Borrowings. Quaint Oak Bank may obtain advances from the Federal Home Loan Bank of Pittsburgh upon the security of the common stock it owns in that bank and certain of its residential mortgage loans and mortgage-backed and other investment securities, provided certain standards related to creditworthiness have been met. These advances are made pursuant to several credit programs, each of which has its own interest rate and range of maturities. Federal Home Loan Bank advances are generally available to meet seasonal and other withdrawals of deposit accounts and to permit increased lending.
As of December 31, 2023, Quaint Oak Bank has a maximum borrowing capacity with the Federal Home Loan Bank of approximately $316.8 million. Quaint Oak Bank’s Federal Home Loan Bank advances outstanding were $29.0 million and $159.2 million at December 31, 2023 and 2022, respectively. As of December 31, 2023, Quaint Oak Bank has $12.0 million in borrowing capacity with the Federal Reserve Bank (FRB) of Philadelphia under the discount window program. There were no borrowings with the FRB as of December 31, 2023. Quaint Oak Bank borrowed $7.0 million from the FRB discount window as of December 31, 2022.
As of December 31, 2023, there was $5.5 million of other short-term borrowings representing balances on two lines of credit that Oakmont Capital Holdings, LLC has with a credit union. Borrowing capacity on the two lines of credit totaled $15.0 million at December 31, 2023.
The following table shows certain information regarding our short-term borrowings at or for the dates indicated:
FHLB Short-Term Borrowings
At or For the Year
Ended December 31,
FRB Short-Term Borrowings
At or For the Year
Ended December 31,
Average balance outstanding
$ 72,566
$ 31,505
$
$ 1,556
Maximum amount outstanding at any month-end during the period
116,200
93,200
7,000
7,000
Balance outstanding at end of period
-
93,200
-
7,000
Average interest rate during the period
5.38 %
2.34 %
4.78 %
0.97 %
Weighted average interest rate at end of period
- %
4.45 %
- %
4.50 %
Other Short-Term Borrowings
At or For the Year
Ended December 31,
Average balance outstanding
$ 9,291
$ 1,601
Maximum amount outstanding at any month-end during the period
14,508
5,489
Balance outstanding at end of period
5,549
5,489
Average interest rate during the period
8.40 %
6.68 %
Weighted average interest rate at end of period
8.46 %
7.11 %
Federal Home Loan Bank long-term borrowings and the weighted interest rate consist of the following at December 31, 2023 and 2022 (in thousands):
December 31, 2023
December 31, 2022
Fixed rate borrowings maturing:
Amount
Weighted Interest
Rate
Amount
Weighted Interest
Rate
-
-
$ 57,000
2.22 %
21,167
4.25
6,167
2.05
7,855
3.40
2,855
1.25
Total FHLB long-term debt
$ 29,022
4.02 %
$ 66,022
2.16 %
Federal Reserve Bank (FRB) borrowings decreased $7.0 million to none at December 31, 2023 as the Company paid off the $7.0 million of FRB borrowings outstanding at December 31, 2022.
Total Employees
There were 124 full-time employees and one part-time employee at the Bank and its subsidiary companies, excluding Oakmont, at December 31, 2023. None of these employees are represented by a collective bargaining agreement, and we believe that the Company enjoys good relations with its personnel.
Market Area
As of December 31, 2023, our primary market area for loans and deposits is in Bucks, Montgomery and Philadelphia Counties, Pennsylvania, and the Lehigh Valley area of Pennsylvania, although we also attract loans and deposits from outside our market area and the Commonwealth of Pennsylvania. Our operating strategy is based on strong personal service and operating efficiency.
Quaint Oak Bank is headquartered in Southampton in Bucks County, Pennsylvania and operates through its main office and two regional offices located in the Lehigh Valley and Philadelphia markets. Bucks County lies north of Philadelphia, bordering Montgomery County on the west and New Jersey to the east. In recent years, population growth has been above Pennsylvania averages in both Bucks and Montgomery Counties. We expect population growth and new housing growth will likely remain above the state average in the near term. Income and wealth demographics are also above both national and Pennsylvania averages. The Lehigh Valley area is one of the fastest growing regions in Pennsylvania due in part to its reasonable business climate and lower cost of living in comparison to its surrounding areas and states. The Lehigh Valley is particularly noteworthy for its unusually balanced and multi-faceted economy. Far from depending on a single industry, the top four sub-sectors of the regional GDP are all extremely close to one another, which ultimately means a healthier and more vibrant regional economy. Philadelphia is the largest city in the Commonwealth of Pennsylvania and the sixth most populous city in the United States. Philadelphia's diverse economic sectors include higher education, manufacturing, oil refining, food processing, health care and biotechnology, telecommunications, tourism and financial services.
Competition
Quaint Oak Bank faces significant competition both in attracting deposits and in making loans. Its most direct competition for deposits has come historically from commercial banks, credit unions and other savings institutions located in its primary market area, including many large financial institutions which have greater financial and marketing resources available to them. In addition, Quaint Oak Bank faces significant competition for investors’ funds from short-term money market securities, mutual funds and other corporate and government securities. Also, given Quaint Oak Bank’s operating strategies and reliance on savings accounts and certificates of deposit, Quaint Oak Bank also faces intense competition from money market mutual funds and national savings products. Quaint Oak Bank does not rely upon any individual group or entity for a material portion of its deposits, with the exception of using a listing agent for certificates of deposit. The ability of Quaint Oak Bank to attract and retain deposits depends on its ability to generally provide a rate of return, liquidity and risk comparable to that offered by competing investment opportunities.
Quaint Oak Bank’s competition for loans comes principally from commercial banks, mortgage banking companies, other savings institutions and credit unions. Quaint Oak Bank competes for loan originations primarily through the interest rates and loan fees it charges, and the efficiency and quality of services it provides borrowers. Factors that affect competition include general and local economic conditions, current interest rate levels and volatility in the mortgage markets.
REGULATION
Regulation of Quaint Oak Bancorp
General. Quaint Oak Bancorp is subject to regulation as a savings and loan holding company under the Home Owners’ Loan Act, as amended, because we made an election under Section 10(l) of the Home Owners’ Loan Act to be treated as a “savings association” for purposes of Section 10 of the Home Owners’ Loan Act. Quaint Oak Bancorp is regulated by the Federal Reserve Board and is subject to the regulations, examinations, supervision and reporting requirements relating to savings and loan holding companies. Quaint Oak Bancorp is also required to file certain reports with, and otherwise comply with the rules and regulations of, the Pennsylvania Department of Banking and Securities and the Securities and Exchange Commission. As a subsidiary of a savings and loan holding company, Quaint Oak Bank is subject to certain restrictions in its dealings with Quaint Oak Bancorp and affiliates thereof, including the Federal Reserve Board’s Qualified Thrift Lender test, dividend restrictions and transactions with affiliates regulations.
In the last several years, Quaint Oak Bancorp has experienced heightened regulatory requirements and scrutiny following the global financial crisis and as a result of the enactment in 2010 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). Resulting reforms have caused Quaint Oak Bancorp’s compliance and risk management processes, and the costs thereof, to increase.
2018 Regulatory Reform. In May 2018 the Economic Growth, Regulatory Relief and Consumer Protection Act (the “Act”), was enacted to modify or remove certain financial reform rules and regulations, including some of those implemented under the Dodd-Frank Act. While the Act maintains most of the regulatory structure established by the Dodd-Frank Act, it amends certain aspects of the regulatory framework for small depository institutions with assets of less than $10 billion and for large banks with assets of more than $50 billion.
The Act, among other matters, expands the definition of qualified mortgages which may be held by a financial institution and simplifies the regulatory capital rules for financial institutions and their holding companies with total consolidated assets of less than $10 billion by instructing the federal banking regulators to establish a single “Community Bank Leverage Ratio” of between 8 and 10 percent to replace the leverage and risk-based regulatory capital ratios. The Act also expands the category of holding companies that may rely on the “Small Bank Holding Company and Savings and Loan Holding Company Policy Statement” by raising the maximum amount of assets a qualifying holding company may have from $1.0 billion to $3.0 billion. This expansion also excludes such holding companies from the minimum capital requirements of the Dodd-Frank Act. In addition, the Act includes regulatory relief for community banks regarding regulatory examination cycles, call reports, the Volcker Rule (proprietary trading prohibitions), mortgage disclosures and risk weights for certain high-risk commercial real estate loans.
Restrictions Applicable to Quaint Oak Bancorp. As a non-grandfathered savings and loan holding company, Quaint Oak Bancorp is permitted to engage only in the following activities:
●
furnishing or performing management services for a subsidiary savings institution;
●
conducting an insurance agency or escrow business;
●
holding, managing, or liquidating assets owned or acquired from a subsidiary savings institution;
●
holding or managing properties used or occupied by a subsidiary savings institution;
●
acting as trustee under a deed of trust;
●
any other activity (i) that the Federal Reserve Board, by regulation, has determined to be permissible for bank holding companies under Section 4(c) of the Bank Holding Company Act of 1956, unless the Federal Reserve Board, by regulation, prohibits or limits any such activity for savings and loan holding companies, or (ii) in which multiple savings and loan holding companies were authorized by regulation to directly engage in on March 5, 1987;
●
purchasing, holding, or disposing of stock acquired in connection with a qualified stock issuance if the purchase of such stock by such holding company is approved by the Federal Reserve Board; and
●
any activity permissible for financial holding companies under section 4(k) of the Bank Holding Company Act.
Permissible activities which are deemed to be financial in nature or incidental thereto under section 4(k) of the Bank Holding Company Act include:
●
lending, exchanging, transferring, investing for others, or safeguarding money or securities;
●
insurance activities or providing and issuing annuities, and acting as principal, agent, or broker;
●
financial, investment, or economic advisory services;
●
issuing or selling instruments representing interests in pools of assets that a bank is permitted to hold directly;
●
underwriting, dealing in, or making a market in securities;
●
activities previously determined by the Federal Reserve Board to be closely related to banking;
●
activities that bank holding companies are permitted to engage in outside of the U.S.; and
●
portfolio investments made by an insurance company.
In addition, Quaint Oak Bancorp cannot be acquired unless the acquirer is engaged solely in financial activities or acquire a company unless the company is engaged solely in financial activities.
If a savings and loan holding company acquires or merges with another holding company, the holding company acquired or the holding company resulting from such merger or acquisition may only invest in assets and engage in the activities listed above, and it has a period of two years to cease any non-conforming activities and divest any non-conforming investments. As of December 31, 2023 Quaint Oak Bancorp was not engaged in any non-conforming activities and it did not have any non-conforming investments.
If the subsidiary savings association fails to meet the Qualified Thrift Lender test set forth in Section 10(m) of the Home Owners’ Loan Act, as discussed below, then the savings and loan holding company must register with the Federal Reserve Board as a bank holding company, unless the savings institution requalifies as a Qualified Thrift Lender within one year thereafter.
Qualified Thrift Lender Test. A savings association can comply with the Qualified Thrift Lender test by either meeting the Qualified Thrift Lender test set forth in the Home Owners’ Loan Act and implementing regulations or qualifying as a domestic building and loan association as defined in Section 7701(a)(19) of the Internal Revenue Code of 1986, as amended. Currently the Qualified Thrift Lender test in the Home Owners’ Loan Act requires that 65% of an institution’s portfolio assets (as defined) consist of certain housing and consumer-related assets on a monthly average basis in nine out of every twelve months. To be a Qualified Thrift Lender under the IRS test, the savings institution must meet the “business operations test” and a “60 percent assets test”, each defined in the Internal Revenue Code. A savings association subsidiary of a savings and loan holding company that does not comply with the Qualified Thrift Lender test is immediately subject to the following restrictions on its operations:
●
the institution may not engage in any new activity or make any new investment, directly or indirectly, unless such activity or investment is permissible for both a national bank and a savings association;
●
the branching powers of the institution are restricted to those of a national bank; and
●
payment of dividends by the institution are subject to the rules regarding payment of dividends by a national bank and must be necessary to meet the obligations of its holding company.
Upon the expiration of three years from the date the institution ceases to meet the Qualified Thrift Lender test, it must cease any activity and not retain any investment not permissible for both a national bank and a savings association (subject to safety and soundness considerations). A savings institution not in compliance with the Qualified Thrift Lender test is also subject to an enforcement action for violation of the Home Owners’ Loan Act, as amended.
Quaint Oak Bank believes that it meets the provisions of the Qualified Thrift Lender test and for the year ended December 31, 2023, 70% of its portfolio assets meet the requirements.
Regulatory Capital Requirements. The Federal Reserve Board has adopted capital adequacy guidelines pursuant to which it assesses the adequacy of capital in examining and supervising a savings and loan holding company and in analyzing applications to it under the Savings and Loan Holding Company Act. The Federal Reserve Board’s capital adequacy guidelines for Quaint Oak Bancorp, on a consolidated basis, are similar to those imposed on Quaint Oak Bank by the Federal Deposit Insurance Corporation. See “-Regulation of Quaint Oak Bank - Capital Requirements.” However, as of December 31, 2023, Quaint Oak Bancorp was not required to comply with the requirements until such time that its consolidated total assets exceed $3.0 billion or the Federal Reserve Board determines that Quaint Oak Bancorp is no longer deemed to be a small savings and loan holding company. However, if Quaint Oak Bancorp had been subject to the requirements, it would have been in compliance with such requirements.
Limitations on Transactions with Affiliates. Transactions between savings associations and any affiliate are governed by Sections 23A and 23B of the Federal Reserve Act as made applicable to savings associations by Section 11 of the Home Owners’ Loan Act. An affiliate of a savings association includes any company or entity which controls the savings association or that is controlled by a company that controls the savings association. In a holding company context, the holding company of a savings association (such as Quaint Oak Bancorp) and any companies which are controlled by such holding company are affiliates of the savings association. Generally, Section 23A limits the extent to which the savings association or its subsidiaries may engage in “covered transactions” with any one affiliate to an amount equal to 10% of such association’s capital stock and surplus, and contains an aggregate limit on all such transactions with all affiliates to an amount equal to 20% of such capital stock and surplus. Section 23B applies to “covered transactions” as well as certain other transactions and requires that all transactions be on terms substantially the same, or at least as favorable, to the savings association as those provided to a non-affiliate. The term “covered transaction” includes the making of loans to, purchase of assets from and issuance of a guarantee to an affiliate and similar transactions. Section 23B transactions also include the provision of services and the sale of assets by a savings association to an affiliate. In addition to the restrictions imposed by Sections 23A and 23B, Section 11 of the Home Owners’ Loan Act prohibits a savings association from (i) making a loan or other extension of credit to an affiliate, except for any affiliate which engages only in certain activities which are permissible for bank holding companies, or (ii) purchasing or investing in any stocks, bonds, debentures, notes or similar obligations of any affiliate, except for affiliates which are subsidiaries of the savings association.
In addition, Sections 22(g) and (h) of the Federal Reserve Act as made applicable to savings associations by Section 11 of the Home Owners’ Loan Act, place restrictions on loans to executive officers, directors and principal stockholders of the savings association and its affiliates. Under Section 22(h), loans to a director, an executive officer and to a greater than 10% stockholder of a savings association, and certain affiliated interests of either, may not exceed, together with all other outstanding loans to such person and affiliated interests, the savings association’s loans to one borrower limit (generally equal to 15% of the association’s unimpaired capital and surplus). Section 22(h) also requires that loans to directors, executive officers and principal stockholders be made on terms substantially the same as offered in comparable transactions to other persons unless the loans are made pursuant to a benefit or compensation program that (i) is widely available to employees of the association and (ii) does not give preference to any director, executive officer or principal stockholder, or certain affiliated interests of either, over other employees of the savings association. Section 22(h) also requires prior board approval for certain loans. In addition, the aggregate amount of extensions of credit by a savings association to all insiders cannot exceed the association’s unimpaired capital and surplus. Furthermore, Section 22(g) places additional restrictions on loans to executive officers. As an insured state-chartered savings bank, Quaint Oak Bank currently is subject to Sections 22(g) and (h) of the Federal Reserve Act and at December 31, 2023, was in compliance with the above restrictions.
Restrictions on Acquisitions. Except under limited circumstances, savings and loan holding companies are prohibited from acquiring, without prior approval of the Federal Reserve Board, (i) control of any other savings association or savings and loan holding company or substantially all the assets thereof or (ii) more than 5% of the voting shares of a savings association or holding company thereof which is not a subsidiary. Except with the prior approval of the Federal Reserve Board, no director or officer of a savings and loan holding company or person owning or controlling by proxy or otherwise more than 25% of such company’s stock, may acquire control of any savings association, other than a subsidiary savings association, or of any other savings and loan holding company.
The Federal Reserve Board may only approve acquisitions resulting in the formation of a multiple savings and loan holding company which controls savings associations in more than one state if (i) the multiple savings and loan holding company involved controls a savings association which operated a home or branch office located in the state of the association to be acquired as of March 5, 1987; (ii) the acquirer is authorized to acquire control of the savings association pursuant to the emergency acquisition provisions of the Federal Deposit Insurance Act; or (iii) the statutes of the state in which the association to be acquired is located specifically permit associations to be acquired by the state-chartered associations or savings and loan holding companies located in the state where the acquiring entity is located (or by a holding company that controls such state-chartered savings associations).
Federal Securities Laws. Quaint Oak Bancorp’s common stock is registered with the Securities and Exchange Commission under Section 12(g) of the Securities Exchange Act of 1934, as amended. Quaint Oak Bancorp is subject to information, proxy solicitation, insider trading restrictions, and other requirements under the Securities Exchange Act of 1934.
The Sarbanes-Oxley Act. As a public company, Quaint Oak Bancorp is subject to the Sarbanes-Oxley Act of 2002 which addresses, among other issues, corporate governance, auditing and accounting, executive compensation, and enhanced and timely disclosure of corporate information. As directed by the Sarbanes-Oxley Act, our principal executive officer and principal financial officer are required to certify that our quarterly and annual reports do not contain any untrue statement of a material fact. The rules adopted by the Securities and Exchange Commission under the Sarbanes-Oxley Act have several requirements, including having these officers certify that: they are responsible for establishing, maintaining and regularly evaluating the effectiveness of our internal control over financial reporting; they have made certain disclosures to our auditors and the audit committee of the Board of Directors about our internal control over financial reporting; and they have included information in our quarterly and annual reports about their evaluation and whether there have been changes in our internal control over financial reporting or in other factors that could materially affect internal control over financial reporting.
Volcker Rule Regulations. Regulations have been adopted by the federal banking agencies to implement the provisions of the Dodd Frank Act commonly referred to as the Volcker Rule. The regulations contain prohibitions and restrictions on the ability of financial institutions holding companies and their affiliates to engage in proprietary trading and to hold certain interests in, or to have certain relationships with, various types of investment funds, including hedge funds and private equity funds. Federal regulations exclude from the Volcker Rule restrictions community banks with $10 billion or less in total consolidated and total trading assets and liabilities of five percent or less of total consolidated assets. Quaint Oak qualifies for the exclusion from Volcker Rule restrictions.
Regulation of Quaint Oak Bank
Pennsylvania Banking Law. The Pennsylvania Banking Code contains detailed provisions governing the organization, location of offices, rights and responsibilities of directors, officers and employees, as well as corporate powers, savings and investment operations and other aspects of Quaint Oak Bank and its affairs. The Pennsylvania Banking Code delegates extensive rulemaking power and administrative discretion to the Pennsylvania Department of Banking and Securities so that the supervision and regulation of state-chartered savings banks may be flexible and readily responsive to changes in economic conditions and in savings and lending practices.
One of the purposes of the Pennsylvania Banking Code is to provide savings banks with the opportunity to be competitive with each other and with other financial institutions existing under other Pennsylvania laws and other state, federal and foreign laws. A Pennsylvania savings bank may locate or change the location of its principal place of business and establish an office anywhere in the Commonwealth, with the prior approval of the Pennsylvania Department of Banking and Securities.
The Pennsylvania Department of Banking and Securities generally examines each savings bank not less frequently than once every two years. Although the Pennsylvania Department of Banking and Securities may accept the examinations and reports of the Federal Deposit Insurance Corporation in lieu of its own examination, the present practice is for the Pennsylvania Department of Banking and Securities to conduct individual examinations. The Pennsylvania Department of Banking and Securities may order any savings bank to discontinue any violation of law or unsafe or unsound business practice and may direct any director, trustee, officer, attorney or employee of a savings bank engaged in an objectionable activity, after the Pennsylvania Department of Banking and Securities has ordered the activity to be terminated, to show cause at a hearing before the Pennsylvania Department of Banking and Securities why such person should not be removed.
Insurance of Accounts. The deposits of Quaint Oak Bank are insured to the maximum extent permitted by the Deposit Insurance Fund, administered by the Federal Deposit Insurance Corporation, and are backed by the full faith and credit of the U.S. Government. The 2010 financial institution reform legislation permanently increased deposit insurance on most accounts to $250,000 per separately insured deposit ownership right or category. As insurer, the Federal Deposit Insurance Corporation is authorized to conduct examinations of, and to require reporting by, insured institutions. It also may prohibit any insured institution from engaging in any activity determined by regulation or order to pose a serious threat to the Federal Deposit Insurance Corporation.
The FDIC assesses deposit insurance premiums on the assessment base of a depository institution, which is its average total assets reduced by the amount of its average tangible equity. For a small institution (one with assets of less than $10 billion) that has been federally insured for at least five years, the initial base assessment rate ranges from 5to 32 basis points, based on the institution’s CAMELS composite and component ratings and certain financial ratios; its leverage ratio; its ratio of net income before taxes to total assets; its ratio of nonperforming loans and leases to gross assets; its ratio of other real estate owned to gross assets; its brokered deposits ratio (excluding reciprocal deposits if the institution is well capitalized and has a CAMELS composite rating of 1 or 2); its one year asset growth ratio (which penalizes growth adjusted for mergers in excess of 10%); and its loan mix index (which penalizes higher risk loans based on historical industry charge off rates). The initial base assessment rate is subject to downward adjustment (not below 2.5%) based on the ratio of unsecured debt the institution has issued to its assessment base, and to upward adjustment (which can cause the rate to exceed 30 basis points) based on its holdings of unsecured debt issued by other insured institutions.
The Federal Deposit Insurance Corporation may terminate the deposit insurance of any insured depository institution, including Quaint Oak Bank, if it determines after a hearing that the institution has engaged or is engaging in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, order or any condition imposed by an agreement with the Federal Deposit Insurance Corporation. It also may suspend deposit insurance temporarily during the hearing process for the permanent termination of insurance, if the institution has no tangible capital. If insurance of accounts is terminated, the accounts at the institution at the time of the termination, less subsequent withdrawals, shall continue to be insured for a period of six months to two years, as determined by the Federal Deposit Insurance Corporation. Management is aware of no existing circumstances which would result in termination of Quaint Oak Bank’s deposit insurance.
The Federal Deposit Insurance Corporation adopted a final rule in October 2022 to increase initial base deposit insurance assessment rates by two basis points beginning in the first quarterly assessment period of 2023. The FDIC may increase or decrease the range of assessments uniformly, except that no adjustment can deviate more than two basis points from the base assessment rate without notice and comment rulemaking.
Capital Requirements. Federal regulations require federally insured depository institutions to meet several minimum capital standards: a common equity Tier 1 capital to risk-based assets ratio of 4.5%, a Tier 1 capital to risk-based assets ratio of 6.0%, a total capital to risk-based assets ratio of 8.0%, and a 4.0% Tier 1 capital to total assets leverage ratio.
At December 31, 2023, Quaint Oak Bank’s capital exceeded all applicable capital requirements. See Note 18 to the notes to our financial statements included in Exhibit 13.0 hereto.
In determining the amount of risk-weighted assets for calculating risk-based capital ratios, all assets, including certain off-balance sheet assets (e.g., recourse obligations, direct credit substitutes, residual interests) are multiplied by a risk-weight factor assigned by the regulations based on the risks believed inherent in the type of asset. Higher levels of capital are required for asset categories believed to present greater risk. Common equity Tier 1 capital is generally defined as common stockholders’ equity and retained earnings. Tier 1 capital is generally defined as common equity Tier 1 and additional Tier 1 capital. Additional Tier 1 capital includes certain non-cumulative perpetual preferred stock and related surplus and minority interests in equity accounts of consolidated subsidiaries. Total capital includes Tier 1 capital (common equity Tier 1 capital plus additional Tier 1 capital) and Tier 2 capital. Tier 2 capital is comprised of capital instruments and related surplus, meeting specified requirements, and may include cumulative preferred stock and long-term perpetual preferred stock, mandatory convertible securities, intermediate preferred stock and subordinated debt. Also included in Tier 2 capital is the allowance for loan and lease losses limited to a maximum of 1.25% of risk-weighted assets. Calculation of all types of regulatory capital is subject to deductions and adjustments specified in the regulations. In assessing an institution’s capital adequacy, the Federal Deposit Insurance Corporation takes into consideration not only these numeric factors, but qualitative factors as well, and has the authority to establish higher capital requirements for individual institutions where deemed necessary.
In addition to establishing the minimum regulatory capital requirements, the regulations limit capital distributions and certain discretionary bonus payments to management if the institution does not hold a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted assets above the amount necessary to meet its minimum risk-based capital requirements.
In September 2019, the regulatory agencies, including the Federal Deposit Insurance Corporation and the Federal Reserve Board adopted a final rule, effective January 1, 2020, creating a community bank leverage ratio (“CBLR”) of between 8% and 10% for institutions with total consolidated assets of less than $10 billion, and that meet other qualifying criteria related to off-balance sheet exposures and trading assets and liabilities. The CBLR provides for a simple measure of capital adequacy for qualifying institutions with capital complying with the ratio and otherwise meeting the specified requirements and electing the alternative framework are considered to comply with the applicable regulatory capital requirements, including the risk-based requirements. A qualifying institution may opt in and out of the community bank leverage ratio framework on its quarterly call report. Quaint Oak Bank has not utilized the community bank leverage ratio.
Any savings bank that fails any of the capital requirements is subject to possible enforcement action by the Federal Deposit Insurance Corporation. Such action could include a capital directive, a cease and desist order, civil money penalties, the establishment of restrictions on the institution’s operations, termination of federal deposit insurance and the appointment of a conservator or receiver. The Federal Deposit Insurance Corporation’s capital regulations provide that such actions, through enforcement proceedings or otherwise, could require one or more of a variety of corrective actions.
Pennsylvania Department of Banking and Securities Capital Requirements. Quaint Oak Bank is also subject to more stringent Pennsylvania Department of Banking and Securities capital guidelines. Although not adopted in regulation form, the Pennsylvania Department of Banking and Securities utilizes capital standards requiring a minimum of 6% leverage capital and 10% risk-based capital. The components of leverage and risk-based capital are substantially the same as those defined by the Federal Deposit Insurance Corporation. At December 31, 2023, Quaint Oak Bank’s tier 1 leverage ratio and total risk-based capital were well-capitalized.
Prompt Corrective Action. The following table shows the amount of capital associated with the different capital categories set forth in the prompt corrective action regulations.
Capital Category
Total Risk-Based Capital
Tier 1 Risk-Based Capital
Tier 1 Common Equity Capital
Tier 1 Leverage Capital
Well capitalized
10% or more
8% or more
6.5% or more
5% or more
Adequately capitalized
8% or more
6% or more
4.5% or more
4% or more
Undercapitalized
Less than 8%
Less than 6%
Less than 4.5%
Less than 4%
Significantly undercapitalized
Less than 6%
Less than 4%
Less than 3%
Less than 3%
In addition, an institution is “critically undercapitalized” if it has a ratio of tangible equity to total assets that is equal to or less than 2.0%. Under specified circumstances, a federal banking agency may reclassify a well-capitalized institution as adequately capitalized and may require an adequately capitalized institution or an undercapitalized institution to comply with supervisory actions as if it were in the next lower category (except that the Federal Deposit Insurance Corporation may not reclassify a significantly undercapitalized institution as critically undercapitalized).
An institution generally must file a written capital restoration plan which meets specified requirements within 45 days of the date that the institution receives notice or is deemed to have notice that it is undercapitalized, significantly undercapitalized or critically undercapitalized. A federal banking agency must provide the institution with written notice of approval or disapproval within 60 days after receiving a capital restoration plan, subject to extensions by the agency. An institution which is required to submit a capital restoration plan must concurrently submit a performance guaranty by each company that controls the institution. In addition, undercapitalized institutions are subject to various regulatory restrictions, and the appropriate federal banking agency also may take any number of discretionary supervisory actions.
At December 31, 2023, Quaint Oak Bank was deemed a well-capitalized institution for purposes of the prompt corrective regulations and as such is not subject to the above mentioned restrictions.
Activities and Investments of Insured State-Chartered Savings Banks. The activities and equity investments of Federal Deposit Insurance Corporation-insured, state-chartered savings banks are generally limited to those that are permissible for national banks. Under regulations dealing with equity investments, an insured state bank generally may not directly or indirectly acquire or retain any equity investment of a type, or in an amount, that is not permissible for a national bank. An insured state bank is not prohibited from, among other things:
●
acquiring or retaining a majority interest in a subsidiary;
●
investing as a limited partner in a partnership the sole purpose of which is direct or indirect investment in the acquisition, rehabilitation or new construction of a qualified housing project, provided that such limited partnership investments may not exceed 2% of the bank’s total assets;
●
acquiring up to 10% of the voting stock of a company that solely provides or reinsures directors’, trustees’ and officers’ liability insurance coverage or bankers’ blanket bond group insurance coverage for insured depository institutions; and
●
acquiring or retaining the voting shares of a depository institution if certain requirements are met.
The Federal Deposit Insurance Corporation has adopted regulations pertaining to the other activity restrictions imposed upon insured state banks and their subsidiaries. Pursuant to such regulations, insured state banks engaging in impermissible activities may seek approval from the Federal Deposit Insurance Corporation to continue such activities. State banks not engaging in such activities but that desire to engage in otherwise impermissible activities either directly or through a subsidiary may apply for approval from the Federal Deposit Insurance Corporation to do so; however, if such bank fails to meet the minimum capital requirements or the activities present a significant risk to the Deposit Insurance Fund, such application will not be approved by the Federal Deposit Insurance Corporation. Pursuant to this authority, the Federal Deposit Insurance Corporation has determined that investments in certain majority-owned subsidiaries of insured state banks do not represent a significant risk to the deposit insurance funds. Investments permitted under that authority include real estate activities and securities activities.
Brokered Deposits. A "brokered deposit" is any deposit that is obtained from or through the mediation or assistance of a deposit broker. Deposit brokers may attract deposits from individuals and companies throughout the United States and internationally whose deposit decisions are based primarily on obtaining the highest interest rates. Federal Deposit Insurance Corporation regulations limit the ability of an insured depository institution, such as Quaint Oak Bank, to accept, renew or roll over brokered deposits unless the institution is well-capitalized under the prompt corrective action framework described above, or unless it is adequately capitalized and obtains a waiver from the Federal Deposit Insurance Corporation. In addition, less than well-capitalized banks are subject to restrictions on the interest rates they may pay on deposits. The characterization of deposits as "brokered" may result in the imposition of higher deposit assessments on such deposits. As mandated by the Economic Growth Act, the Federal Deposit Insurance Corporation adopted a final rule in February 2019 to include a limited exception for reciprocal deposits for Federal Deposit Insurance Corporation insured depository institutions that are well-rated and well-capitalized (or adequately capitalized and for which the insured depository institution has obtained a waiver from the Federal Deposit Insurance Corporation.). Certain reciprocal deposits of up to the lesser of $5 billion or 20% of an insured depository institution’s deposits are excluded from the definition of brokered deposits, where the insured depository institution is "well-capitalized" and has a composite rating of 1 or 2.
In December 2020, the Federal Deposit Insurance Corporation issued a final rule amending its brokered deposits regulation. The rule sought to clarify and modernize the Federal Deposit Insurance Corporation’s regulatory framework for brokered deposits. Notable aspects of the rule included (i) the establishment of bright-line standards for determining whether an entity meets the statutory definition of "deposit broker;" (ii) the identification of a number of business relationships in which the agent or nominee is automatically not deemed to be a "deposit broker" because their primary purpose is not the placement of funds with depository institutions (the "primary purpose exception"); (iii) the establishment of a "more transparent" application process for entities that seek to rely upon the "primary purpose exception", but do not qualify for one of the identified business relationships to which the exception is automatically applicable; and (iv) the clarification that third parties that have an exclusive deposit-placement arrangement with one insured depository institution are not considered a "deposit broker." The final rule took effect on April 1, 2021, and full compliance was required by January 1, 2022.
Restrictions on Capital Distributions. Federal Reserve Board and Federal Deposit Insurance Corporation regulations govern capital distributions by savings institutions, which include cash dividends, stock repurchases and other transactions charged to the capital account of a savings institution to make capital distributions. These regulations apply to Quaint Oak Bancorp because Quaint Oak Bank is considered a savings association for certain purposes under Home Owners’ Loan Act, as amended. Under applicable regulations, a savings association must file an application for Federal Deposit Insurance Corporation approval of the capital distribution if:
●
the total capital distributions for the applicable calendar year exceed the sum of the institution’s net income for that year to date plus the institution’s retained net income for the preceding two years;
●
the institution would not be at least adequately capitalized following the distribution;
●
the distribution would violate any applicable statute, regulation, agreement or Federal Deposit Insurance Corporation-imposed condition; or
●
the institution is not eligible for expedited treatment of its filings with the Federal Deposit Insurance Corporation.
If an application is not required to be filed, state savings banks that elect to be treated as savings associations such as Quaint Oak Bank must still file a notice with the Federal Deposit Insurance Corporation at least 30 days before the board of directors declares a dividend or approves a capital distribution if either (1) the institution would not be well-capitalized following the distribution; or (2) the proposed distribution would reduce the amount or retire any part of its common or preferred stock or retire any part of a debt instrument included in its regulatory capital. In addition, a savings institution, such as Quaint Oak Bank, that is the subsidiary of a stock saving and loan holding company, must also file a notice with the appropriate Federal Reserve Bank at least 30 days before the proposed declaration of a dividend by its board of directors.
A savings association that either before or after a proposed capital distribution fails to meet its then applicable minimum capital requirement or that has been notified that it needs more than normal supervision may not make any capital distributions without the prior written approval of the Federal Deposit Insurance Corporation. In addition, the Federal Deposit Insurance Corporation may prohibit a proposed capital distribution, which would otherwise be permitted by Federal Deposit Insurance Corporation regulations, if the Federal Deposit Insurance Corporation determines that such distribution would constitute an unsafe or unsound practice.
The Federal Deposit Insurance Corporation prohibits an insured depository institution from paying dividends on its capital stock or interest on its capital notes or debentures (if such interest is required to be paid only out of net profits) or distributing any of its capital assets while it remains in default in the payment of any assessment due the Federal Deposit Insurance Corporation. Quaint Oak Bank is currently not in default in any assessment payment to the Federal Deposit Insurance Corporation.
Commercial Real Estate Lending Concentration Guidance. Under guidance issued by the federal banking agencies, the agencies have expressed concerns with institutions that ease commercial real estate underwriting standards and have directed financial institutions to maintain underwriting discipline and exercise risk management practices to identify, measure and monitor lending risks. The agencies have also issued guidance that requires a financial institution to employ enhanced risk management practices if the institution is exposed to significant concentration risk in its commercial real estate portfolio. Under that guidance, an institution is potentially exposed to significant concentration risk if: (i) total reported loans for construction, land development, and other land represent 100% or more of total capital or (ii) total reported loans secured by multi-family and non-farm residential properties, loans for construction, land development, and other land loans otherwise sensitive to the general commercial real estate market, including loans to commercial real estate related entities, represent 300% or more of total capital, and the outstanding balance of the institution's commercial real estate loan portfolio has increased by 50% or more during the prior 36 months. At December 31, 2023, the balance of these real estate loans represented 642.3% of Quaint Oak Bank’s total capital and our commercial real estate loan portfolio increased by 251.2% during the preceding 36 months. Institutions, which are deemed to have concentrations in commercial real estate lending are expected to employ heightened levels of risk management with respect to their commercial real estate portfolios, and may be required to hold higher levels of capital.
Privacy Requirements of the Gramm-Leach-Bliley Act and Cyber Security. Federal law places limitations on financial institutions like Quaint Oak Bank regarding the sharing of consumer financial information with unaffiliated third parties. Specifically, these provisions require all financial institutions offering financial products or services to retail customers to provide such customers with the financial institution’s privacy policy and provide such customers the opportunity to “opt out” of the sharing of personal financial information with unaffiliated third parties. Quaint Oak Bank currently has a privacy protection policy in place and believes such policy is in compliance with the regulations. In addition, on November 18, 2021, the federal banking agencies announced the adoption of a final rule providing for new notification requirements for banking organizations and their service providers for significant cybersecurity incidents. Specifically, the new rule requires a banking organization to notify its primary federal regulator as soon as possible, and no later than 36 hours after, the banking organization determines that a “computer-security incident” rising to the level of a “notification incident” has occurred. Notification is required for incidents that have materially affected or are reasonably likely to materially affect the viability of a banking organization’s operations, its ability to deliver banking products and services, or the stability of the financial sector. Service providers are required under the rule to notify affected banking organization customers as soon as possible when the provider determines that it has experienced a computer-security incident that has materially affected or is reasonably likely to materially affect the banking organization’s customers for four or more hours. Compliance with the new rule was required by May 1, 2022. Non-compliance with federal or similar state privacy and cybersecurity laws and regulations could lead to substantial regulatory imposed fines and penalties, damages from private causes of action and/or reputational harm.
In July 2023, the Securities and Exchange Commission adopted rules requiring registrants to disclose material cybersecurity incidents they experience and to disclose on an annual basis material information regarding their cybersecurity risk management, strategy, and governance. The new rules require registrants to disclose on the new Item 1.05 of Form 8-K any cybersecurity incident they determine to be material and to describe the material aspects of the incident's nature, scope, and timing, as well as its material impact or reasonably likely material impact on the registrant. An Item 1.05 Form 8-K will generally be due four business days after a registrant determines that a cybersecurity incident is material. See Item 1C. Cybersecurity for annual disclosures.
Consumer Financial Services. The historical structure of federal consumer protection regulation applicable to all providers of consumer financial products and services changed significantly with the establishment of the Consumer Financial Protection Bureau (“CFPB”) as part of the Dodd-Frank Act reforms. The CFPB has broad rulemaking authority for a wide range of consumer protection laws that apply to all providers of consumer products and services, including Quaint Oak Bank, as well as the authority to prohibit “unfair, deceptive or abusive” acts and practices. The CFPB has examination and enforcement authority over providers with more than $10 billion in assets. FDIC-insured institutions with $10 billion or less in assets, like Quaint Oak Bank, continue to be examined by their applicable bank regulators.
Anti-Money Laundering. Federal anti-money laundering rules impose various requirements on financial institutions intended to prevent the use of the U.S. financial system to fund terrorist activities. These provisions include a requirement that financial institutions operating in the United States have anti-money laundering compliance programs, due diligence policies and controls to ensure the detection and reporting of money laundering. Such compliance programs supplement existing compliance requirements, also applicable to financial institutions, under the Bank Secrecy Act and the Office of Foreign Assets Control Regulations. Quaint Oak Bank has established policies and procedures to ensure compliance with the federal anti-laundering provisions.
Regulatory Enforcement Authority. The federal banking laws provide substantial enforcement powers available to federal banking regulators. This enforcement authority includes, among other things, the ability to assess civil money penalties, to issue cease-and-desist or removal orders and to initiate injunctive actions against banking organizations and institution-affiliated parties, as defined. In general, these enforcement actions may be initiated for violations of laws and regulations and unsafe or unsound practices. Other actions or inactions may provide the basis for enforcement action, including misleading or untimely reports filed with regulatory authorities.
Community Reinvestment Act. All insured depository institutions have a responsibility under the Community Reinvestment Act and related regulations to help meet the credit needs of their communities, including low- and moderate-income neighborhoods. An institution’s failure to comply with the provisions of the Community Reinvestment Act could result in restrictions on its activities. Quaint Oak Bank received an “Outstanding” Community Reinvestment Act rating in its most recently completed examination.
On October 24, 2023, the federal banking agencies, including the FDIC issued a final rule designed to strengthen and modernize regulations implementing the CRA. The changes are designed to encourage banks to expand access to credit, investment and banking services in low- and moderate-income communities, adapt to changes in the banking industry including mobile and internet banking, provide greater clarity and consistency in the application of the CRA regulations and tailor CRA evaluations and data collection to bank size and type. Quaint Oak Bank cannot predict the impact the changes to the CRA will have on its operations at this time.
Federal Home Loan Bank System. Quaint Oak Bank is a member of the Federal Home Loan Bank of Pittsburgh, which is one of 11 regional Federal Home Loan Banks. Each Federal Home Loan Bank serves as a reserve or central bank for its members within its assigned region. It is funded primarily from proceeds from the sale of consolidated obligations of the Federal Home Loan Bank System. It makes loans to members (i.e., advances) in accordance with policies and procedures established by the board of directors of the Federal Home Loan Bank.
As a member, Quaint Oak Bank is required to purchase and maintain stock in the Federal Home Loan Bank of Pittsburgh in an amount in accordance with the Federal Home Loan Bank’s capital plan and sufficient to ensure that the Federal Home Loan Bank remains in compliance with its minimum capital requirements. At December 31, 2023, Quaint Oak Bank was in compliance with this requirement.
Federal Reserve Board System. The Federal Reserve Board requires all depository institutions to maintain non-interest bearing reserves at specified levels against their transaction accounts, which are primarily checking and NOW accounts, and non-personal time deposits. The balances maintained to meet the reserve requirements imposed by the Federal Reserve Board may be used to satisfy the liquidity requirements that are imposed by the Pennsylvania Department of Banking and Securities. At December 31, 2023, Quaint Oak Bank was in compliance with these reserve requirements.
TAXATION
Federal Taxation
General. Quaint Oak Bancorp and Quaint Oak Bank are subject to federal income tax provisions of the Internal Revenue Code of 1986, as amended, in the same general manner as other corporations with some exceptions listed below. For federal income tax purposes, Quaint Oak Bancorp files a consolidated federal income tax return with its wholly owned subsidiaries on a fiscal year basis. The applicable federal income tax expense or benefit will be properly allocated to each entity based upon taxable income or loss calculated on a separate company basis.
Method of Accounting. For federal income tax purposes, income and expenses are reported on the accrual method of accounting and Quaint Oak Bancorp files its federal income tax return using a December 31 fiscal year end.
Taxable Distributions and Recapture. Prior to the Small Business Job Protection Act, bad debt reserves created prior to January 1, 1988 were subject to recapture into taxable income if a savings bank failed to meet certain thrift asset and definitional tests. New federal legislation eliminated these thrift related recapture rules. However, under current law, pre-1988 reserves remain subject to recapture should a savings bank make certain non-dividend distributions or cease to maintain a savings bank charter. At December 31, 2023, Quaint Oak Bank did not have federal pre-1988 reserves subject to recapture.
Corporate Dividends Received Deduction. Quaint Oak Bancorp may exclude from income 100% of dividends received from a member of the same affiliated group of corporations. The corporate dividends received deduction is 80% in the case of dividends received from corporations, which a corporate recipient owns less than 80%, but at least 20% of the distribution corporation. Corporations that own less than 20% of the stock of a corporation distributing a dividend may deduct only 70% of dividends received.
Other Matters. The Company is no longer subject to examination by taxing authorities for the years before January 1, 2020.
State and Local Taxation
Pennsylvania Taxation. Quaint Oak Bancorp is subject to the Pennsylvania Corporate Net Income Tax. The Corporation Net Income Tax rate for 2023 is 9.99% and is imposed on unconsolidated taxable income for federal purposes with certain adjustments.
Quaint Oak Bank is subject to tax under the Pennsylvania Mutual Thrift Institutions Tax Act (the “MTIT”), as amended to include thrift institutions having capital stock. Pursuant to the MTIT, the tax rate is 11.5%. The MTIT exempts Quaint Oak Bank from other taxes imposed by the Commonwealth of Pennsylvania for state income tax purposes and from all local taxation imposed by political subdivisions, except taxes on real estate and real estate transfers. The MTIT is a tax upon net earnings, determined in accordance with U.S. generally accepted accounting principles with certain adjustments. The MTIT, in computing income under U.S. generally accepted accounting principles, allows for the deduction of interest earned on state and federal obligations, while disallowing a percentage of thrift’s interest expense deduction in the proportion of interest income on those securities to the overall interest income of Quaint Oak Bank. Net operating losses, if any, thereafter can be carried forward three years for MTIT purposes.

---

ITEM 1A. RISK FACTORS
Item 1A. Risk Factors.
We are marketing for sale of our 51% stake in Oakmont Capital Holdings, LLC, primarily to reduce our asset size and increase our capital ratios.
The Bank maintains a 51% ownership interest in Oakmont Capital Holdings, LLC (“Oakmont Capital”), a multi-state equipment finance company based in West Chester, Pennsylvania with a second significant facility located in Albany, Minnesota. We are currently marketing the Bank’s interest in Oakmont Capital for sale in order to reduce our asset size and increase the Bank’s capital ratios. In recent periods, Oakmont Capital has materially contributed to our growth in assets and our non-interest income. While we are currently marketing Oakmont Capital for sale, we may not complete the transaction if we are unable to receive favorable terms for the acquisition. If we complete a sale, we anticipate that our non-interest income will decrease. If we do not complete a sale, we may be required to raise additional capital to support the growth attributable to continued ownership interest in Oakmont Capital. Our ability to raise additional capital, when and if needed, will depend on conditions in the capital markets, economic conditions and a number of other factors, including investor preferences regarding the banking industry, market conditions and governmental activities, many of which are outside of our control, and on our financial condition and performance.

---

ITEM 1B. UNRESOLVED STAFF COMMENTS
Item 1B. Unresolved Staff Comments.
Not applicable.

---

ITEM 2. PROPERTIES
Item 2. Properties.
The following table provides certain information as of December 31, 2023 with respect to our main office located in Southampton, Pennsylvania, our regional offices located in Allentown and Philadelphia, Pennsylvania, mortgage banking, real estate sales and title abstract property in Allentown, Pennsylvania, our insurance agency office in Chalfont, Pennsylvania, and a mortgage loan production office in Philadelphia.
Description/Address
Leased/Owned
Date of Lease Expiration
Net Book Value of Property
Amount of Deposits
(In Thousands)
501-503 Knowles Avenue
Southampton, Pennsylvania 18966
Leased
03/31/2027
$ 41
$390,620
1710 Union Boulevard
Allentown, Pennsylvania 18019
Owned
NA
1,388
90,457
117-21 Spring Garden Street (Suite A)
Philadelphia, Pennsylvania 19123
Leased
2/28/2040
28,339
4275 County Line Road (Suite #14)
Chalfont, Pennsylvania 18914
Leased
5/31/2027(1)
Not applicable
100 Spring Garden Street
Philadelphia, Pennsylvania 19123
Leased
8/31/2038(2)
-
Not applicable
_________________
(1)
Such lease has a five year renewal option which would commence on June 1, 2027 and end on May 31, 2032.
(2)
Such lease has a five year renewal options which would commence on September 1, 2039 and end on August 31, 2044.

---

ITEM 3. LEGAL PROCEEDINGS
Item 3. Legal Proceedings.
Quaint Oak Bancorp is not involved in any legal proceedings except nonmaterial litigation incidental to the ordinary course of business.

---

ITEM 4. MINE SAFETY DISCLOSURE
Item 4. Mine Safety Disclosures.
Not applicable.
PART II

---

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
(a) Quaint Oak Bancorp’s common shares trade on the OTCQB, the OTC market tier for companies that report to the SEC or a U.S. banking or insurance regulator, under the symbol “QNTO.” As of March 19, 2024 Quaint Oak Bancorp had 2,493,154 common shares outstanding held of record by 147 shareholders. The number of shareholders does not reflect the number of persons or entities who may hold stock in nominee or “street” name through brokerage firms or others.
(b) Not applicable.
(c) Purchases of Equity Securities
Quaint Oak Bancorp’s repurchases of its common stock during the quarter ended December 31, 2023, including stock for stock option exercises of outstanding stock options, are set forth in the table below:
Period
Total Number of
Shares
Purchased
Average Price
Paid per Share
Total Number of Shares
Purchased as Part of
Publicly Announced
Plans or Programs
Maximum Number of Shares
that May Yet Be Purchased
Under the Plans or Programs (1)
October 1, 2023 - October 31, 2023
-
$ -
-
24,375
November 1, 2023 - November 30, 2023
-
-
-
24,375
December 1, 2023 - December 31, 2023
-
-
-
24,375
Total
-
$ -
-
24,375
Notes to this table:
(1)
On December 12, 2018, the Board of Directors of Quaint Oak Bancorp approved its fifth share repurchase program which provides for the repurchase of up to 50,000 shares, or approximately 2.5% of the Company’s then issued and outstanding shares of common stock and announced the fifth repurchase program on Form 8-K filed on December 13, 2018. The repurchase program does not have an expiration date.

---

ITEM 6. SELECTED FINANCIAL DATA
Item 6. [Reserved]

---

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The information required herein is incorporated by reference from pages 1 to 16 of the Annual Report attached hereto as Exhibit 13.0 (“Annual Report”).

---

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
As a smaller reporting company (as defined) we are not required to provide this information.

---

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Item 8. Financial Statements and Supplementary Data.
The information required herein is incorporated by reference from pages 19 to 62 of the Annual Report.

---

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
Not Applicable.

---

ITEM 9A. CONTROLS AND PROCEDURES
Item 9A. Controls and Procedures.
(a) Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)) as of December 31, 2023. Based on their evaluation of Quaint Oak Bancorp’s disclosure controls and procedures, Quaint Oak Bancorp’s Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are designed to ensure that information required to be disclosed by Quaint Oak Bancorp in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and regulations are operating in an effective manner.
(b) Management’s Annual Report on Internal Control over Financial Reporting
Management of Quaint Oak Bancorp is responsible for establishing and maintaining an adequate system of internal control over financial reporting. An adequate system of internal control encompasses the processes and procedures that have been established by management to:
●
Maintain records that accurately reflect Quaint Oak Bancorp’s transactions;
●
Prepare financial statements and footnote disclosures in accordance with GAAP that can be relied upon by external users;
●
Prevent and detect unauthorized acquisition, use or disposition of Quaint Oak Bancorp’s assets that could have a material effect of the financial statements.
Management, including the Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of Quaint Oak Bancorp’s controls over financial reporting based on the framework in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in 2013. Based on our evaluation under the framework in Internal Control - Integrated Framework, management concluded that Quaint Oak Bancorp’s internal control over financial reporting was effective as of December 31, 2023. Furthermore, during the conduct of its assessment, management identified no material weakness in its financial reporting control system.
(c) No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15(d)-15(f) under the Securities Exchange Act of 1934) occurred during the fourth fiscal quarter of fiscal 2023 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Previously Disclosed Material Weakness in Internal Control Over Financial Reporting
The Company previously disclosed in Part I, Item 4 - Controls and Procedures in its Quarterly Report on Form 10-Q/A for the quarters ended June 30, 2023 and September 30, 2023 (together, the “Restated Periods”), that it had identified a reclassification related to expenses on deposit accounts obtained from a correspondent banking relationship that resulted in material misstatements of interest expense and other non-interest expense for the Restated Periods. The audit committee of our board of directors determined that the Company accounted for the expense related to checking account deposits received from the correspondent banking relationship as other non-interest expense rather than interest expense on deposits. The deposits which were reported as non-interest bearing deposits on our consolidated balance sheets were reclassified, in part, as interest-bearing deposits for the Restated Periods. A portion of the deposits related to the correspondent banking relationship remained classified as non-interest bearing deposits. As a result of the reclassification, interest expense for the Restated Periods increased resulting in a decrease in net interest income for the Restated Periods. Other non-interest expense and total non-interest expense decreased for the Restated Period as a result of the reclassification. In addition, as a result of the restatement, the Company’s interest rate spread and net interest margin decreased for the Restated Periods. The Company determined that this error constituted a "material weakness" in its internal control over financial reporting.
In response to the identified material weakness, our management, with the oversight of the audit committee of our board of directors, commenced the redesign of specific processes and controls associated with the review of contracts for correspondent banking relationships to ensure that the relevant accounting implications are identified and considered. We believe that with the implementation of these redesigned and enhanced controls, the identified material weakness has been remediated as of December 31, 2023, thereby strengthening our internal control over financial reporting.

---

ITEM 9B. OTHER INFORMATION
Item 9B. Other Information.
Not applicable.

---

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Item 10. Directors and Executive Officers and Corporate Governance.
The information required herein is incorporated by reference from the information contained in the sections captioned “Information with Respect to Nominees for Director, Continuing Directors and Executive Officers” and “Beneficial Ownership of Common Stock by Certain Owners and Management - Delinquent Section 16(a) Reports” in Quaint Oak Bancorp’s definitive Proxy Statement for the Annual Meeting of Shareholders to be held May 8, 2024 (the “Proxy Statement”), a copy of which will be filed with the Securities and Exchange Commission.
Quaint Oak Bancorp has adopted a Code of Conduct and Ethics that applies to its principal executive officer and principal financial officer, as well as other officers and employees of Quaint Oak Bancorp and Quaint Oak Bank. A copy of the Code of Ethics is available on the Company’s website at www.quaintoak.com.

---

ITEM 11. EXECUTIVE COMPENSATION
Item 11. Executive Compensation.
The information required herein is incorporated by reference from the information contained in the sections captioned “Information with Respect to Nominees for Director, Continuing Directors and Executive Officers - Director Compensation” and “Executive Compensation” in the Proxy Statement.

---

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information required herein is incorporated by reference from the information contained in the section captioned “Beneficial Ownership of Common Stock by Certain Beneficial Owners and Management” in the Proxy Statement.
Equity Compensation Plan Information. The following table provides information as of December 31, 2023 with respect to shares of common stock that may be issued under our existing equity compensation plans, which consist of the 2018 and 2023 Stock Incentive Plans. Both of these plans were approved by our shareholders.
Plan Category
Number of securities to be issued upon exercise of outstanding options, warrants
and rights
(a)
Weighted-average exercise price of outstanding options,
warrants and rights
(b)
Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
(c)
Equity compensation plans approved by security holders
224,033 (1)
$ 15.98 (1)
46,500
Equity compensation plans not approved by security holders
-
-
-
Total
224,033
$ 15.98
46,500
___________________
(1) Includes 45,000 shares subject to restricted stock grants which were not vested as of December 31, 2023. The weighted-average exercise price excludes such restricted stock grants.

---

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The information required herein is incorporated by reference from the information contained in the section captioned “Information with Respect to Nominees for Director, Continuing Directors and Executive Officers - Transactions with Certain Related Persons” in the Proxy Statement.

---

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Item 14. Principal Accountant Fees and Services.
The information required herein is incorporated by reference from the information contained in the section captioned “Ratification of Appointment of Independent Registered Public Accounting Firm - Audit Fees” in the Proxy Statement.
PART IV

---

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
Item 15. Exhibit and Financial Statement Schedules.
(a)
(1)
The following financial statements are incorporated by reference from Item 8 hereof (see Exhibit 13.0):
Report of Independent Registered Public Accounting Firm (S.R. Snodgrass, P.C., Cranberry Township, Pennsylvania, PCAOB Firm ID 74)
Consolidated Balance Sheets as of December 31, 2023 and 2022
Consolidated Statements of Income for the Years Ended December 31, 2023 and 2022
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2023 and 2022
Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2023 and 2022
Consolidated Statements of Cash Flows for the Years Ended December 31, 2023 and 2022
Notes to Consolidated Financial Statements
(2) All schedules are omitted because they are not required or applicable, or the required information is shown in the consolidated financial statements or the notes thereto.
(3) Exhibits
The following exhibits are filed as part of this Form 10-K and this list includes the Exhibit Index.
No.
Exhibits
Location
3.1
Articles of Incorporation of Quaint Oak Bancorp, Inc.
(1)
3.2
Bylaws of Quaint Oak Bancorp, Inc.
(1)
4.1
Form of Stock Certificate of Quaint Oak Bancorp, Inc.
(1)
4.2
Form of Subordinated Note due December 31, 2028
(2)
4.3
Form of Global Subordinated Note due March 15, 2025
(3)
4.4
Form of Subordinated Note due March 15, 2025
(4)
4.5
Description of Securities Registered under Section 12 of the Securities Exchange Act of 1934
(5)
10.1
Amended and Restated Employment Agreement by and between Robert T. Strong and Quaint Oak Bank*
(6)
10.2
Quaint Oak Bancorp, Inc. 2008 Stock Option Plan*
(7)
10.3
Employment Agreement between Quaint Oak Bank and John J. Augustine*
(8)
10.4
Quaint Oak Bancorp, Inc. 2013 Stock Incentive Plan*
(9)
10.5
Employment Agreement between Quaint Oak Mortgage, LLC, Quaint Oak Real Estate, LLC, and Quaint Oak Abstract, LLC, and William R. Gonzalez, as amended*
(10)
10.6
Quaint Oak Bancorp, Inc. 2018 Stock Incentive Plan*
(11)
10.7
Form of Subordinated Note Purchase Agreement dated December 27, 2018
(2)
10.8
Form of Subordinated Note Purchase Agreement dated March 2, 2023
(3)
10.9
Form of Subscription Agreement dated March 15, 2023
(4)
10.10
Quaint Oak Bancorp, Inc. 2023 Stock Incentive Plan
(12)
10.11
Stock Purchase Agreement between Quaint Oak Bancorp, Inc. and ItalBank International Inc., dated November 2, 2023
(13)
10.12
Stock Purchase Agreement between Quaint Oak Bancorp, Inc. and Fintech Holdings LLC, dated February 14, 2024
(14)
13.0
Annual Report to Shareholders
Filed herewith
21.0
Subsidiaries of the Registrant
Filed herewith
23.1
Consent of S.R. Snodgrass, P.C.
Filed herewith
31.1
Certification of Chief Executive Officer
Filed herewith
31.2
Certification of Chief Financial Officer
Filed herewith
32.0
Section 1350 Certification of the Chief Executive Officer and Chief Financial Officer
Filed herewith
101.INS
Inline XBRL Instance Document
Filed herewith
101.SCH
Inline XBRL Taxonomy Extension Schema Document
Filed herewith
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document
Filed herewith
101.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document
Filed herewith
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase Document
Filed herewith
101.DEF
Inline XBRL Taxonomy Extension Definitions Linkbase Document
Filed herewith
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 10)
Filed herewith
(Footnotes on following page)
___________________
* Denotes management compensation plan or arrangement.
(1)
Incorporated by reference from the Company’s Registration Statement on Form SB-2, filed on March 21, 2007, as amended, and declared effective on May 14, 2007 (File No. 333-141474).
(2)
Incorporated by reference from the Company’s Current Report on Form 8-K, filed on December 28, 2018 (File No. 000-52694).
(3)
Incorporated by reference from the Company’s Current Report on Form 8-K, filed on March 2, 2023 (File No. 000-52694).
(4)
Incorporated by reference from the Company’s Current Report on Form 8-K, filed on March 21, 2023 (File No. 000-52694).
(5)
Incorporated by reference from the Company’s Annual Report on Form 10-K, filed with the Commission on March 27, 2020 (File No. 000-52694).
(6)
Incorporated by reference from the Company’s Current Report on Form 8-K, filed on December 16, 2008 (File No. 000-52694).
(7)
Incorporated by reference from the Company’s definitive proxy statement for the Annual Meeting of Shareholders held on May 14, 2008 (Commission File No. 000-52694) filed with the Commission on April 11, 2008.
(8)
Incorporated by reference from the Company’s Current Report on Form 8-K, filed on September 18, 2012 (File No. 000-52694).
(9)
Incorporated by reference from the Company’s definitive proxy statement for the Annual Meeting of Shareholders held on May 8, 2013 (Commission File No. 000-526341) filed with the Commission on April 8, 2013.
(10)
Incorporated by reference from the Company’s Annual Report on Form 10-K, filed with the Commission on March 26, 2015 (File No. 000-52694).
(11)
Incorporated by reference from the Company’s definitive proxy statement for the Annual Meeting of Shareholders held on May 9, 2018 (Commission File No. 000-526341) filed with the Commission on April 6, 2018.
(12)
Incorporated by reference from the Company’s definitive proxy statement for the Annual Meeting of Shareholders held on May 10, 2023 (Commission File No. 000-526341) filed with the Commission on April 5, 2023.
(13)
Incorporated by reference from the Company’s Current Report on Form 8-K, filed on November 3, 2023 (File No. 000-52694).
(14)
Incorporated by reference from the Company’s Current Report on Form 8-K, filed on February 15, 2024 (File No. 000-52694).
(b)
Exhibits
The exhibits listed under (a)(3) of this Item 15 are filed herewith.
(c)
Reference is made to (a)(2) of this Item 15.