SOUTHAMPTON, PA — Quaint Oak Bancorp, Inc. (OTCQB: QNTO), the holding company for Quaint Oak Bank, this week announced that net income for the quarter ended June 30, 2023 was $570,000, or $0.25 per basic and diluted share, compared to $1.8 million, or $0.87 per basic and $0.82 per diluted share for the same period in 2022. Net income for the six months ended June 30, 2023 was $1.1 million, or $0.51 per basic and diluted share, compared to $4.0 million, or $1.99 per basic and $1.88 per diluted share for the same period in 2022.
Robert T. Strong, President and Chief Executive Officer stated, “The Federal Reserve Bank’s relentless pursuit of controlling inflation through an unprecedented number of rate increases has created extreme margin compression within the Bank. We believe the short period of time given to effect these rate increases has not provided sufficient time for loan rate adjustments to offset the compression. Over time, we expect loan portfolio rate adjustments will moderate the compression, currently felt.”
Mr. Strong added, “The Federal Reserve Bank rate increases have had an enormous impact on our real estate market area and related businesses of mortgage lending and title insurance. This has had a negative impact on our subsidiary businesses, accordingly. We have observed a scarceness of liquidity from the Federal Reserve Bank contracting its balance sheet. Our volume of loan sales in recent periods has been affected by this reduction of liquidity in the marketplace as well.”
Mr. Strong continued, “In an effort to offset these impacts, we have lowered our origination targets for new loan originations. We have instead focused on a reduction of loan assets through sales and the related reduction of high-cost leverage funding. Additionally, we have continued our focus on increased lower cost funding that has resulted in the runoff of higher cost deposits.”
Mr. Strong commented, “The goal of these actions is intended to reduce the Bank’s balance sheet with improved margins. Our loan portfolio performance continues to be positive. Both non-performing loans as a percent of total loans receivable, net along with non-performing assets as a percent of total assets were at 0.01% as of June 30, 2023. Our Texas Ratio was 0.13% as of the same date.”
Mr. Strong concluded, “As previously announced, the Board of Directors on July 12, 2023, declared a quarterly cash dividend of $0.13 per share on the common stock of the Company payable on August 7, 2023, to the shareholders of record at the close of business on July 24, 2023. As always, in conjunction with having maintained a strong repurchase plan, our current and continued business strategy includes long-term profitability and payment of dividends reflecting our strong commitment to shareholder value.”
On January 4, 2021, Quaint Oak Bank, the wholly-owned subsidiary of Quaint Oak Bancorp, Inc., invested $2.3 million for a 51% majority ownership interest in Oakmont Capital Holdings, LLC (“Oakmont”), a multi-state equipment finance company based in West Chester, Pennsylvania with a second significant facility located in Albany, Minnesota. The financial results that follow include Quaint Oak Bank’s investment in Oakmont. Quaint Oak Bank reflects the 49% interest it does not hold in Oakmont in its consolidated financial statements as noncontrolling interest.
Comparison of Quarter-over-Quarter Operating Results
Net income amounted to $570,000 for the three months ended June 30, 2023, a decrease of $1.2 million, or 67.8%, compared to net income of $1.8 million for the three months ended June 30, 2022. The decrease in net income on a comparative quarterly basis was primarily the result of an increase in non-interest expense of $1.8 million, a decrease in non-interest income of $923,000, and a decrease in net interest income of $508,000, partially offset by a decrease in net income attributable to noncontrolling interest of $830,000, a decrease in the provision for credit losses of $788,000, and a decrease in the provision for income taxes of $385,000.
The $508,000, or 8.7%, decrease in net interest income for the three months ended June 30, 2023 over the comparable period in 2022 was driven by a $5.3 million, or 355.0%, increase in interest expense, partially offset by a $4.8 million, or 65.8%, increase in interest income.
The $5.3 million, or 355.0%, increase in interest expense for the three months ended June 30, 2023 over the comparable period in 2022 was primarily attributable to a 335 basis point increase in the rate on average money market accounts which increased from 0.75% for the three months ended June 30, 2022 to 4.10% for the three months ended June 30, 2023 and had the effect of increasing interest expense by $2.0 million. Also contributing to the increase in interest expense is a 439 basis point increase in the rate on average FHLB short-term borrowings which increased from 1.07% for the three months ended June 30, 2022 to 5.46% for the three months ended June 30, 2023 and had the effect of increasing interest expense by $1.2 million. Also contributing to the increase in interest expense was a 196 basis point increase in average rate of certificates of deposit, which increased from 0.93% for the three months ended June 30, 2022 to 2.89% for the three months ended June 30, 2023, and had the effect of increasing interest expense by $1.1 million. The average interest rate spread decreased from 3.37% for the three months ended June 30, 2022 to 1.83% for the three months ended June 30, 2023 while the net interest margin decreased from 3.54% for the three months ended June 30, 2022 to 2.66% for the three months ended June 30, 2023.
The $4.8 million, or 65.8%, increase in interest income was primarily due to a $190.3 million increase in average loans receivable, net, including loans held for sale, which increased from an average balance of $590.4 million for the three months ended June 30, 2022 to an average balance of $780.7 million for the three months ended June 30, 2023, and had the effect of increasing interest income $2.3 million. Also contributing to the increase in interest income was a 119 basis point increase in the yield on average loans receivable, net, including loans held for sale, which increased from 4.88% for the three months ended June 30, 2022 to 6.07% for the three months ended June 30, 2023, and had the effect of increasing interest income $2.3 million.
The $788,000, or 131.6%, decrease in the provision for credit losses for the three months ended June 30, 2023 over the three months ended June 30, 2022 was primarily due to the implementation of ASU 2016-13, Financial Instruments – Credit Losses, which became effective for the Company as of January 1, 2023. More specifically, under the Company’s current Allowance for Credit Losses accounting model, certain qualitative factors used prior to the adoption of ASU 2016-13 were evaluated and adjusted in accordance with the model criteria and the general reserve which was used in the past to cover uncertainties that could affect management’s estimate of probable losses primarily associated with the COVID-19 pandemic was eliminated.
The $923,000, or 21.3%, decrease in non-interest income for the three months ended June 30, 2023 over the comparable period in 2022 was primarily attributable to a $1.8 million, or 62.5%, decrease in net gain on loans held for sale, as the general lack of liquidity in the marketplace affected the Company’s ability to sell equipment loans during the quarter ended June 30, 2023. Also contributing to the decrease in non-interest income was a $258,000, or 31.3%, decrease in mortgage banking, equipment lending, and title abstract fees, and a $16,000, or 25.0%, decrease in real estate sales commissions, net. These decreases were partially offset by an $815,000, or 264.6%, increase in loan servicing income, a $167,000, or 491.2%, increase in gain on sale of SBA loans, a $130,000, or 158.5%, increase in other fees and service charges, and a $21,000, or 15.1%, increase in insurance commissions. The increase in loan servicing fee income was primarily due to the increase in the balance of loans serviced by Oakmont.
The $1.8 million, or 26.9%, increase in non-interest expense for the three months ended June 30, 2023 over the comparable period in 2022 was primarily due to an $858,000, or 175.1%, increase in other expense, a $637,000, or 13.0%, increase in salaries and employee benefits expense, a $127,000, or 112.4%, increase in FDIC deposit insurance assessment, a $95,000, or 20.4%, increase in occupancy and equipment expense, a $45,000, or 27.6%, increase in data processing expense, and a $30,000, or 41.7% increase in director’s fees and expenses. The increase in other expense is primarily due to ongoing costs incurred as a result of the Bank’s correspondent banking initiatives. The increase in salaries and employee benefits expense is primarily due to expanding and improving the level of staff at the Bank and Oakmont. Oakmont also contributed to the increases in occupancy and equipment expense, and other expense for the three months ended June 30, 2023. The increase in non-interest expense was partially offset by a $17,000, or 11.0%, decrease in advertising expense, and a $3,000, or 1.3% decrease in professional fees.
The provision for income tax decreased $385,000, or 58.5%, from $658,000 for the three months ended June 30, 2022 to $273,000 for the three months ended June 30, 2023 due primarily to the decrease in pre-tax income.
Comparison of Six-Month Operating Results
Net income amounted to $1.1 million for the six months ended June 30, 2023, a decrease of $2.9 million, or 71.8%, compared to net income of $4.0 million for the six months ended June 30, 2022. The decrease in net income on a comparative six-month basis was primarily the result of an increase in non-interest expense of $3.2 million, a decrease in non-interest income of $3.1 million, and a decrease in net interest income of $676,000, partially offset by a decrease in net income attributable to noncontrolling interest of $2.0 million, a decrease in the provision for credit losses of $1.1 million, and a decrease in the provision for income taxes of $1.0 million.
The $676,000, or 6.0%, decrease in net interest income for the six months ended June 30, 2023 over the comparable period in 2022 was driven by a $9.9 million, or 414.8%, increase in interest expense, partially offset by a $9.3 million, or 67.6%, increase in interest income.
The $9.9 million, or 414.8%, increase in interest expense for the six months ended June 30, 2023 over the comparable period in 2022 was primarily attributable to a 325 basis point increase in the rate on average money market accounts which increased from 0.60% for the six months ended June 30, 2022 to 3.85% for the six months ended June 30, 2023 and had the effect of increasing interest expense by $3.9 million. Also contributing to the increase in interest expense is a 462 basis point increase in the rate on average FHLB short-term borrowings which increased from 0.54% for the six months ended June 30, 2022 to 5.16% for the six months ended June 30, 2023 and had the effect of increasing interest expense by $2.5 million. Also contributing to the increase in interest expense was a 172 basis point increase in average rate of certificates of deposit, which increased from 0.92% for the six months ended June 30, 2022 to 2.64% for the six months ended June 30, 2023, and had the effect of increasing interest expense by $1.8 million. The average interest rate spread decreased from 3.57% for the six months ended June 30, 2022 to 1.98% for the six months ended June 30, 2023 while the net interest margin decreased from 3.73% for the six months ended June 30, 2022 to 2.72% for the six months ended June 30, 2023.
The $9.3 million, or 67.6%, increase in interest income was primarily due to a $204.2 million increase in average loans receivable, net, including loans held for sale, which increased from an average balance of $559.3 million for the six months ended June 30, 2022 to an average balance of $763.5 million for the six months ended June 30, 2023, and had the effect of increasing interest income $4.9 million. Also contributing to the increase in interest income was a 105 basis point increase in the yield on average loans receivable, net, including loans held for sale, which increased from 4.83% for the six months ended June 30, 2022 to 5.88% for the six months ended June 30, 2023, and had the effect of increasing interest income $4.0 million.
As was the case for the quarter, the $1.1 million, or 84.1%, decrease in the provision for credit losses for the six months ended June 30, 2023 over the six months ended June 30, 2022 was primarily due to the implementation of ASU 2016-13, Financial Instruments – Credit Losses, which became effective for the Company as of January 1, 2023. More specifically, under the Company’s current Allowance for Credit Losses accounting model, certain qualitative factors used prior to the adoption of ASU 2016-13 were evaluated and adjusted in accordance with the model criteria and the general reserve which was used in the past to cover uncertainties that could affect management’s estimate of probable losses primarily associated with the COVID-19 pandemic was eliminated.
The $3.1 million, or 31.0%, decrease in non-interest income for the six months ended June 30, 2023 over the comparable period in 2022 was primarily attributable to a $5.1 million, or 72.4%, decrease in net gain on loans held for sale, as the general lack of liquidity in the marketplace affected the Company’s ability to sell equipment loans during the six months ended June 30, 2023. Also contributing to the decrease in non-interest income was an $89,000, or 6.1%, decrease in mortgage banking, equipment lending, and title abstract fees, and a $53,000, or 42.4%, decrease in real estate sales commissions, net. The increase in loan servicing fee income was primarily due to the increase in the balance of loans serviced by Oakmont. These decreases were partially offset by a $1.9 million, or 396.2%, increase in loan servicing income, a $195,000, or 78.6%, increase in other fees and service charges, an $84,000, or 50.3%, increase in gain on sale of SBA loans, and a $41,000, or 16.1%, increase in insurance commissions.
The $3.2 million, or 25.2%, increase in non-interest expense for the six months ended June 30, 2023 over the comparable period in 2022 was primarily due to a $1.4 million, or 14.6%, increase in salaries and employee benefits expense, a $1.2 million, or 137.0%, increase in other expense, a $243,000, or 106.1%, increase in FDIC deposit insurance assessment, a $202,000, or 22.8%, increase in occupancy and equipment expense, a $74,000, or 20.4%, increase in advertising expense, a $65,000, or 18.1%, increase in data processing expense, and a $64,000, or 44.8%, increase in director’s fees and expenses. As was the case for the quarter, the increase in other expense is primarily due to ongoing costs incurred as a result of the Bank’s correspondent banking initiatives. The increase in salaries and employee benefits expense is primarily due to expanding and improving the level of staff at the Bank and Oakmont. Oakmont also contributed to the increases in occupancy and equipment expense, advertising expense, and other expense for the six months ended June 30, 2023. The increase in non-interest expense was partially offset by a $12,000, or 2.9% decrease in professional fees.
The provision for income tax decreased $1.0 million, or 67.7%, from $1.5 million for the six months ended June 30, 2022 to $491,000 for the six months ended June 30, 2023 due primarily to the decrease in pre-tax income.
Comparison of Financial Condition
The Company’s total assets at June 30, 2023 were $783.8 million, a decrease of $8.6 million, or 1.1%, from $792.4 million at December 31, 2022. This decrease in total assets was primarily due to a $17.5 million, or 13.2%, decrease in loans held for sale, and a $5.7 million, or 146.3%, increase in cash and cash equivalents. Partially offsetting this decrease was an $4.9 million, or 0.8%, increase in loans receivable, net. The largest increases within the loan portfolio occurred in commercial real estate loans which increased $9.1 million, or 2.7%, construction loans which increased $6.7 million, or 23.1%, multi-family residential loans which increased $1.7 million, or 3.7%, home equity loans which increased $323,000, or 6.6%, and other consumer loans which increased $11,000, or 550.0%. Partially offsetting these increases was a $10.5 million, or 6.6% decrease in commercial business loans, and a $3.0 million, or 5.2%, decrease in one-to-four family non-owner occupied loans.
Loans held for sale decreased $17.5 million, or 13.2%, from $133.2 million at December 31, 2022 to $115.7 million at June 30, 2023 as the Bank originated $168.9 million in equipment loans held for sale and sold $168.5 million of equipment loans during the six months ended June 30, 2023. Contributing to the decrease in loans held for sale is $18.5 million of loan amortization and prepayments. Additionally, the Bank’s mortgage banking subsidiary, Quaint Oak Mortgage, LLC, originated $37.1 million of one-to-four family residential loans during the six months ended June 30, 2023 and sold $36.5 million of loans in the secondary market during this same period.
Total deposits increased $24.2 million, or 4.4%, to $573.4 million at June 30, 2023 from $549.2 million at December 31, 2022. This increase in deposits was primarily attributable to an increase of $34.7 million, or 39.1%, in non-interest bearing checking accounts, and an increase of $21.2 million, or 10.7%, in certificates of deposit. The increase in total deposits was partially offset by a $31.5 million, or 12.1%, decrease in money market accounts, and a $220,000, or 13.8%, decrease in savings accounts.
Federal Home Loan Bank (FHLB) borrowings decreased $45.2 million, or 28.4%, to $114.0 million at June 30, 2023 from $159.2 million at December 31, 2022. During the six months ended June 30, 2023, the Company borrowed $45.5 million of FHLB short-term borrowings and $20.0 million of FHLB long-term borrowings. During the six months ended June 30, 2023, the Company paid down $66.7 million of FHLB short-term borrowings and $44.0 million of FHLB long-term borrowings. Federal Reserve Bank (FRB) borrowings decreased $7.0 million, or 100.0%, to none at June 30, 2023 as the Company paid off the $7.0 million of FRB borrowings at December 31, 2022. Other borrowings increased $4.2 million, or 76.0%, to $9.7 million at June 30, 2023 from $5.5 million at December 31, 2022.
Subordinated debt, net of unamortized debt issuance costs, increased $13.8 million, or 173.8%, to $21.8 million at June 30, 2023 from $8.0 million at December 31, 2022 as the Company completed a private offering of $12.0 million in aggregate principal amount of fixed rate subordinated notes to certain qualified institutional buyers on March 2, 2023. On March 16, 2023, the Company completed an additional private offering of $2.0 million in aggregate principal amount of fixed rate subordinated notes to certain accredited investors. The subordinated notes from both offerings are due March 15, 2025. The Company intends to use the net proceeds of the offerings for general corporate purposes.
Total stockholders’ equity decreased $319,000, or 0.6%, to $48.8 million at June 30, 2023 from $49.1 million at December 31, 2022. Contributing to the decrease was the noncontrolling interest distribution of $866,000, dividends paid of $568,000, net loss attributable to noncontrolling interest of $419,000, and purchase of treasury stock of $306,000, partially offset by net income for the six months ended June 30, 2023 of $1.1 million, the reissuance of treasury stock for exercised stock options of $529,000, amortization of stock awards and options under the Company’s stock compensation plans of $104,000, the reissuance of treasury stock under the Bank’s 401(k) Plan of $66,000, and other comprehensive income, net of $8,000.
Non-performing loans at June 30, 2023 consisted of one SBA loan on non-accrual status in the amount of $73,000. The non-performing loan at June 30, 2023 is generally well-collateralized or adequately reserved for. During the six months ended June 30, 2023, one commercial business loan and one commercial real estate loan totaling $231,000 that were previously on non-accrual were charged-off through the allowance for credit losses. The allowance for credit losses as a percent of total loans receivable, net was 1.18% at June 30, 2023 and 1.22% at December 31, 2022. Non-performing assets amounted to $73,000, or 0.01% of total assets at June 30, 2023 compared to $2.0 million, or 0.25%, of total net assets at December 31, 2022.
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