Quaint Oak Bancorp (QNTO) 10-Q 2019 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 _______________________________

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2019

OR

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

For the transition period from to

Commission file number: 000-52694

QUAINT OAK BANCORP, INC.

(Exact Name of Registrant as Specified in Its Charter)

Pennsylvania	35-2293957
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)

501 Knowles Avenue, Southampton, Pennsylvania  18966

(Address of Principal Executive Offices)

(215) 364-4059

(Registrant’s Telephone Number, Including Area Code)

Not applicable

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:  None

 Title of each class
 Trading Symbol(s)
 Name of each exchange on which registered

              Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  [X]  Yes  [  ]  No

              Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  [X] Yes  [  ] No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	[   ]	Accelerated filer	[  ]
Non-accelerated filer	[X]	Smaller reporting company	[X]
		Emerging growth company	[  ]

              If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.   [  ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).          [  ] Yes     [X]  No

              Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:  As of November 7, 2019, 1,996,642 shares of the Registrant’s common stock were issued and outstanding.

INDEX

	Page
PART I - FINANCIAL INFORMATION
Item 1 -                Financial Statements
Consolidated Balance Sheets as of September 30, 2019 and December 31, 2018 (Unaudited)	1
Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2019 and 2018 (Unaudited)	2
Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2019 and 2018 (Unaudited)	3
Consolidated Statements of Stockholders’ Equity for the Three and Nine Months Ended September 30, 2019 (Unaudited)	4
Consolidated Statements of Cash Flows for the Nine Months Ended September, 2019 and 2018 (Unaudited)	6
Notes to Unaudited Consolidated Financial Statements	7
Item 2 -                Management’s Discussion and Analysis of Financial Condition and Results of Operations	38
Item 3 -                Quantitative and Qualitative Disclosures About Market Risk	51
Item 4 -                Controls and Procedures	51
PART II - OTHER INFORMATION
Item 1 -                Legal Proceedings	52
Item 1A -             Risk Factors	52
Item 2 -                Unregistered Sales of Equity Securities and Use of Proceeds	52
Item 3 -                Defaults Upon Senior Securities	52
Item 4 -                Mine Safety Disclosures	52
Item 5 -                Other Information	53
Item 6 -                Exhibits	53
SIGNATURES

ITEM 1. FINANCIAL STATEMENTS

Quaint Oak Bancorp, Inc.

Consolidated Balance Sheets (Unaudited)

	At September 30,			At December 31,
	2019			2018
	(In thousands, except share data)
Assets
Due from banks, non-interest-bearing	$	420		$	369
Due from banks, interest-bearing		5,086			25,643
Cash and cash equivalents		5,506			26,012
Investment in interest-earning time deposits		10,172			4,927
Investment securities available for sale		9,314			6,680
Loans held for sale		16,483			5,103
Loans receivable, net of allowance for loan losses (2019 $2,283; 2018 $1,965)		237,379			216,898
Accrued interest receivable		1,408			1,153
Investment in Federal Home Loan Bank stock, at cost		1,500			1,086
Bank-owned life insurance		3,954			3,894
Premises and equipment, net		2,121			2,058
Goodwill		515			515
Other intangible, net of accumulated amortization		331			368
Other real estate owned, net		1,969			1,650
Prepaid expenses and other assets		3,168			1,060
Total Assets	$	293,820		$	271,404
Liabilities and Stockholders’ Equity
Liabilities
Deposits:
Non-interest bearing	$	17,045		$	17,542
Interest-bearing		205,105			194,369
Total deposits		222,150			211,911
Federal Home Loan Bank short-term borrowings		9,000			9,000
Federal Home Loan Bank long-term borrowings		25,271			15,000
Subordinated debt		7,856			7,831
Accrued interest payable		283			221
Advances from borrowers for taxes and insurance		1,758			2,568
Accrued expenses and other liabilities		1,954			1,037
Total Liabilities		268,272			247,568
Stockholders’ Equity
Preferred stock – $0.01 par value, 1,000,000 shares authorized; none issued or         outstanding		-			-
Common stock – $0.01 par value; 9,000,000 shares
authorized; 2,777,250 issued; 1,996,489 and 1,975,947 outstanding at September 30, 2019 and December 31, 2018, respectively		28			28
Additional paid-in capital		14,910			14,683
Treasury stock, at cost: 780,761 shares at September 30, 2019 and 801,303 shares at         December 31, 2018		(4,800	)		(4,824	)
Unallocated common stock held by Employee Stock Ownership Plan (ESOP)		(135	)		(185	)
Accumulated other comprehensive income (loss)		25			(2	)
Retained earnings		15,520			14,136
Total Stockholders’ Equity		25,548			23,836
Total Liabilities and Stockholders’ Equity	$	293,820		$	271,404

1

Quaint Oak Bancorp, Inc.

Consolidated Statement of Income (Unaudited)

	For the Three Months Ended					For the Nine Months Ended
	September 30,					September 30,
	2019			2018		2019		2018
	(In thousands, except for share data)
Interest Income
Interest and fees on loans	$	3,325		$	2,932	$	9,662	$	8,490
Interest and dividends on time deposits, investment securities, interest-bearing deposits with other banks, and Federal Home Loan Bank stock		213			181		755		457
Total Interest Income		3,538			3,113		10,417		8,947
Interest Expense
Interest on deposits		1,093			856		3,185		2,384
Interest on Federal Home Loan Bank short-term borrowings		7			57		101		142
Interest on Federal Home Loan Bank long-term borrowings		137			88		336		270
Interest on subordinated debt		130			-		389		-
Total Interest Expense		1,367			1,001		4,011		2,796
Net Interest Income		2,171			2,112		6,406		6,151
Provision for Loan Losses		157			183		318		348
Net Interest Income after Provision for Loan Losses		2,014			1,929		6,088		5,803
Non-Interest Income
Mortgage banking and title abstract fees		349			273		819		600
Real estate sales commissions, net		77			41		128		143
Insurance commissions		109			101		307		283
Other fees and services charges		(5	)		32		85		150
Income from bank-owned life insurance		21			19		60		60
Net gain on loans held for sale		996			673		2,296		1,579
Gain on sale of SBA loans		98			82		238		105
Gain on sales of other real estate owned		-			-		-		63
Total Non-Interest Income		1,645			1,221		3,933		2,983
Non-Interest Expense
Salaries and employee benefits		1,776			1,569		5,173		4,858
Directors’ fees and expenses		54			54		167		148
Occupancy and equipment		181			150		515		446
Data processing		121			108		341		287
Professional fees		108			108		282		291
FDIC deposit insurance assessment		-			47		40		140
Other real estate owned expense		12			8		23		10
Advertising		70			53		212		161
Amortization of other intangible		13			12		37		36
Other		200			166		579		486
Total Non-Interest Expense		2,535			2,275		7,369		6,863
Income before Income Taxes		1,124			875		2,652		1,923
Income Taxes		322			217		772		442
Net Income	$	802		$	658	$	1,880	$	1,481
Earnings per share - basic	$	0.41		$	0.34	$	0.96	$	0.77
Average shares outstanding - basic		1,966,003			1,945,553		1,953,367		1,916,817
Earnings per share - diluted	$	0.40		$	0.33	$	0.94	$	0.75
Average shares outstanding - diluted		2,011,575			2,016,537		1,999,794		1,978,517

See accompanying notes to the unaudited consolidated financial statements.

2

Quaint Oak Bancorp, Inc.

Consolidated Statement of Comprehensive Income (Unaudited)

	For the Three Months Ended						For the Nine Months Ended
	September 30,						September 30,
	2019			2018			2019			2018
	(In thousands)
Net Income	$	802		$	658		$	1,880		$	1,481
Other Comprehensive Income  (Loss):
Unrealized gains (losses) on investment securities available-for-sale		12			(9	)		34			5
Income tax effect		(2	)		2			(7	)		(1	)
Other comprehensive income (loss)		10			(7	)		27			4
Total Comprehensive Income	$	812		$	651		$	1,907		$	1,485

See accompanying notes to the unaudited consolidated financial statements.

3

Quaint Oak Bancorp, Inc.

Consolidated Statement of Stockholders’ Equity (Unaudited)

For the Three Months Ended September 30, 2019
	Common Stock
	Number of Shares Outstanding			Amount		Additional Paid-in Capital		Treasury Stock			Unallocated Common Stock Held by Benefit Plans			Accumulated Other Comprehensive Income (Loss)		Retained Earnings			Total Stockholders’ Equity
	(In thousands, except share data)
BALANCE – JUNE 30, 2019		1,996,688		$	28	$	14,832	$	(4,793	)	$	(151	)	$	15	$	14,897		$	24,828
ESOP shares committed to be     released (3,607 shares)							30					16								46
Treasury stock purchase		(985	)						(12	)										(12	)
Reissuance of treasury stock under     401(k) Plan		786					5		5											10
Stock based compensation expense							43													43
Cash dividends declared ($0.09 per     share)																	(179	)		(179	)
Net income																	802			802
Other comprehensive income, net															10					10
BALANCE – SEPTEMBER 30, 2019		1,996,489		$	28	$	14,910	$	(4,800	)	$	(135	)	$	25	$	15,520		$	25,548

For the Three Months Ended September 30, 2018
	Common Stock
	Number of Shares Outstanding		Amount		Additional Paid-in Capital		Treasury Stock			Unallocated Common Stock Held by Benefit Plans			Accumulated Other Comprehensive Income (Loss)			Retained Earnings			Total Stockholders’ Equity
	(In thousands, except share data)
BALANCE – JUNE 30, 2018		1,990,556	$	28	$	14,520	$	(4,627	)	$	(219	)	$	(4	)	$	13,234		$	22,932
ESOP shares committed to be     released (3,607 shares)						32					17									49
Treasury stock  purchase																				-
Reissuance of treasury stock under     401(k) Plan		1,067				8		6												14
Stock based compensation expense						44														44
Cash dividends declared ($0.07 per     share)																	(140	)		(140	)
Net income																	658			658
Other comprehensive loss, net														(7	)					(7	)
BALANCE – SEPTEMBER 30, 2018		1,991,623	$	28	$	14,604	$	(4,621	)	$	(202	)	$	(11	)	$	13,752		$	23,550

See accompanying notes to the unaudited consolidated financial statements.

4

Quaint Oak Bancorp, Inc.

Consolidated Statement of Stockholders’ Equity (Unaudited)

For the Nine Months Ended September 30, 2019
	Common Stock
	Number of Shares Outstanding			Amount		Additional Paid-in Capital			Treasury Stock			Unallocated Common Stock Held by Benefit Plans			Accumulated Other Comprehensive Income (Loss)			Retained Earnings			Total Stockholders’ Equity
	(In thousands, except share data)
BALANCE – DECEMBER 31, 2018		1,975,947		$	28	$	14,683		$	(4,824	)	$	(185	)	$	(2	)	$	14,136		$	23,836
ESOP shares committed to be      released (10,821 shares)							86						50									136
Treasury stock purchase		(15,146	)							(186	)											(186	)
Reissuance of treasury stock under     401(k) Plan		2,467					16			15												31
Reissuance of treasury stock under     stock incentive plan		9,721					(57	)		57												-
Reissuance of treasury stock for     exercised stock options		23,500					52			138												190
Stock based compensation expense							130															130
Cash dividends declared ($0.25 per     share)																			(496	)		(496	)
Net income																			1,880			1,880
Other comprehensive income, net																27						27
BALANCE – SEPTEMBER 30, 2019		1,996,489		$	28	$	14,910		$	(4,800	)	$	(135	)	$	25		$	15,520		$	25,548

For the Nine Months Ended September 30, 2018
	Common Stock
	Number of Shares Outstanding			Amount		Additional Paid-in Capital			Treasury Stock			Unallocated Common Stock Held by Benefit Plans			Accumulated Other Comprehensive Income (Loss)			Retained Earnings			Total Stockholders’ Equity
	(In thousands, except share data)
BALANCE – DECEMBER 31, 2017		1,920,024		$	28	$	14,481		$	(4,675	)	$	(277	)	$	(15	)	$	12,643		$	22,185
ESOP shares committed to be     released (10,821 shares)							94						51									145
Treasury stock  purchase		(44,311	)							(588	)		2									(586	)
Reissuance of treasury stock under     401(k) Plan		4,069					31			23												54
Reissuance of treasury stock under     stock incentive plan		4,997					(28	)		28												-
Reissuance of treasury stock for     exercised stock options		106,844					(57	)		591												534
Stock based compensation expense							105															105
Release of 4,664 vested RRP shares							(22	)					22									-
Cash dividends declared ($0.19 per     share)																			(372	)		(372	)
Net income																			1,481			1,481
Other comprehensive income, net																4						4
BALANCE – SEPTEMBER 30, 2018		1,991,623		$	28	$	14,604		$	(4,621	)	$	(202	)	$	(11	)	$	13,752		$	23,550

See accompanying notes to the unaudited consolidated financial statements.

5

Quaint Oak Bancorp, Inc.

Consolidated Statement of Cash Flows (Unaudited)

	For the Nine Months
	Ended September 30,
	2019			2018
	(In thousands)
Cash Flows from Operating Activities
Net income	$	1,880		$	1,481
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Provision for loan losses		318			348
Depreciation of premises and equipment		149			153
Amortization of operating right-of-use assets		69			-
Amortization of subordinated debt issuance costs		25			-
Amortization of other intangible		37			36
Net amortization of securities premiums		14			15
Accretion of deferred loan fees and costs, net		(313	)		(269	)
Stock-based compensation expense		266			250
Net gain on loans held for sale		(2,296	)		(1,579	)
Loans held for sale-originations		(97,973	)		(80,537	)
Loans held for sale-proceeds		88,889			81,689
Gain on the sale of SBA loans		(238	)		(105	)
Net loss on sale and write-downs of other real estate owned		-			(63	)
Increase in the cash surrender value of bank-owned life insurance		(60	)		(60	)
Changes in assets and liabilities which provided (used) cash:
Accrued interest receivable		(255	)		(96	)
Prepaid expenses and other assets		(818	)		(203	)
Accrued interest payable		62			16
Accrued expenses and other liabilities		(449	)		(188	)
Net Cash (Used in) Provided by Operating Activities		(10,693	)		888
Cash Flows from Investing Activities
Purchase of interest-earning time deposits		(6,849	)		(809	)
Redemption of interest-earning time deposits		1,604			761
Purchase of investment securities available for sale		(3,319	)		-
Principal repayments on investment securities available for sale		705			952
Net increase in loans receivable		(20,248	)		(13,828	)
Purchase of Federal Home Loan Bank stock		(454	)		(12	)
Proceeds from the redemption of Federal Home Loan Bank stock		40			160
Proceeds from the sale of other real estate owned		-			63
Capitalized expenditures on other real estate owned		(319	)		(59	)
Purchase of premises and equipment		(212	)		(262	)
Net Cash Used in Investing Activities		(29,052	)		(13,034	)
Cash Flows from Financing Activities
Net increase in demand deposits, money markets, and savings accounts		1,191			5,878
Net increase in certificate accounts		9,048			16,900
Decrease in advances from borrowers for taxes and insurance		(810	)		(612	)
Proceeds from Federal Home Loan Bank short-term borrowings		9,000			-
Repayment of Federal Home Loan Bank short-term borrowings		(9,000	)		(1,000	)
Proceeds from Federal Home Loan Bank long-term borrowings		12,271			-
Repayment of Federal Home Loan Bank long-term borrowings		(2,000	)		(3,000	)
Dividends paid		(496	)		(372	)
Purchase of treasury stock		(186	)		(586	)
Proceeds from the reissuance of treasury stock		31			54
Proceeds from the exercise of stock options		190			534
Net Cash Provided by Financing Activities		19,239			17,796
Net (Decrease) Increase in Cash and Cash Equivalents		(20,506	)		5,650
Cash and Cash Equivalents – Beginning of Year		26,012			7,910
Cash and Cash Equivalents – End of Year	$	5,506		$	13,560
Supplementary Disclosure of Cash Flow and Non-Cash Information:
Cash payments for interest	$	3,949		$	2,780
Cash payments for income taxes	$	739		$	321
Transfer of loans to other real estate owned	$	-		$	1,541
Initial recognition of operating lease right-of use assets	$	1,366		$	-
Initial recognition of operating lease obligations	$	1,366		$	-

See accompanying notes to the unaudited consolidated financial statements.

6

Quaint Oak Bancorp, Inc.

Notes to Unaudited Consolidated Financial Statements

Note 1 – Financial Statement Presentation and Significant Accounting Policies

Basis of Financial Presentation.   The consolidated financial statements include the accounts of Quaint Oak Bancorp, Inc., a Pennsylvania chartered corporation (the “Company” or “Quaint Oak Bancorp”) and its wholly owned subsidiary, Quaint Oak Bank, a Pennsylvania chartered stock savings bank, along with its wholly owned subsidiaries.  At September 30, 2019, the Bank has five wholly-owned subsidiaries, Quaint Oak Mortgage, LLC, Quaint Oak Real Estate, LLC, Quaint Oak Abstract, LLC, QOB Properties, LLC, and Quaint Oak Insurance Agency, LLC, each a Pennsylvania limited liability company.  The mortgage company offers mortgage banking in the Lehigh Valley, Delaware Valley and Philadelphia County region of Pennsylvania.  The real estate and abstract companies offer real estate sales and title abstract services, respectively, primarily in the Lehigh Valley region of Pennsylvania.  These companies began operation in July 2009.  In February, 2019, Quaint Oak Mortgage opened a mortgage banking office in Philadelphia, Pennsylvania.  QOB Properties, LLC began operations in July 2012 and holds Bank properties acquired through a foreclosure proceeding or acceptance of a deed in lieu of foreclosure.  Quaint Oak Insurance Agency, LLC began operations in August 2016 and provides a broad range of personal and commercial insurance coverage solutions. All significant intercompany balances and transactions have been eliminated.

The Bank is subject to regulation by the Pennsylvania Department of Banking and Securities and the Federal Deposit Insurance Corporation.  Pursuant to the Bank’s election under Section 10(l) of the Home Owners’ Loan Act, the Company is a savings and loan holding company regulated by the Board of Governors of the Federal Reserve System.  The market area served by the Bank is principally Bucks, Montgomery and Philadelphia Counties in Pennsylvania and the Lehigh Valley area in Pennsylvania.  The Bank has two banking locations: the main office location in Southampton, Pennsylvania and a regional banking office in the Lehigh Valley area of Pennsylvania. The principal deposit products offered by the Bank are certificates of deposit, money market accounts, non-interest bearing checking accounts for businesses and consumers, and savings accounts.  In May 2019, the Bank opened a commercial loan office in Philadelphia.  In October 2019, the Bank received regulatory approval to open a regional banking office in the Northern Liberties section of Philadelphia.  The Bank anticipates a January 2020 opening.  The principal loan products offered by the Bank are fixed and adjustable rate residential and commercial mortgages, construction loans, commercial business loans, home equity loans, and lines of credit.

The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (US GAAP) for interim information and with the instructions to Form 10-Q, as applicable to a smaller reporting company.  Accordingly, they do not include all the information and footnotes required by US GAAP for complete financial statements.

The foregoing consolidated financial statements are unaudited; but in the opinion of management include all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation thereof.  The balances as of December 31, 2018 have been derived from the audited financial statements.  These financial statements should be read in conjunction with the financial statements and notes thereto included in Quaint Oak Bancorp’s 2018 Annual Report on Form 10-K.  The results of operations for the three and nine months ended September 30, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019.

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

7

Quaint Oak Bancorp, Inc.

Notes to Unaudited Consolidated Financial Statements

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

Loans Receivable.  Loans receivable that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are stated at their outstanding unpaid principal balances, net of an allowance for loan losses and any deferred fees and costs.  Interest income is accrued on the unpaid principal balance.  Loan origination fees and costs are deferred and recognized as an adjustment of the yield (interest income) of the related loans.  The Bank is generally amortizing these amounts over the contractual life of the loan.

The loans receivable portfolio is segmented into residential loans, commercial real estate loans, construction loans, commercial business loans, and consumer loans.  The residential loan segment has two classes: one-to-four family residential owner occupied loans and one-to-four residential family non-owner occupied loans.  The commercial real estate loan segment consists of the following classes: multi-family (five or more) residential, commercial real estate and commercial lines of credit.  Construction loans are generally granted for the purpose of building a single residential home.  Commercial business loans are 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.   The consumer loan segment consists of the following classes: home equity loans and other consumer loans.  Included in the home equity class are home equity loans and home equity lines of credit.  Included in the other consumer are loans secured by saving accounts.

The accrual of interest is generally discontinued when principal or interest has become 90 days past due unless the loan is in the process of collection and is either guaranteed or well secured.  When a loan is placed on nonaccrual status, unpaid interest credited to income in the current year is reversed and unpaid interest accrued in prior years is charged against the allowance for loan losses.  Interest received on nonaccrual loans generally is either applied against principal or reported as interest income, according to management’s judgment as to the collectability of principal.  Generally, a loan is restored to accrual status when the obligation is brought current, it has performed in accordance with the contractual terms for a reasonable period of time and the ultimate collectability of the total contractual principal and interest is no longer in doubt.

Allowance for Loan Losses.  The allowance for loan losses represents management’s estimate of losses inherent in the loan portfolio as of the balance sheet date and is recorded as a reduction to loans receivable. The allowance for loan losses is increased by the provision for loan losses, and decreased by charge-offs, net of recoveries. Loans deemed to be uncollectible are charged against the allowance for loan losses, and subsequent recoveries, if any, are credited to the allowance. All, or part, of the principal balance of loans receivable are charged off to the allowance as soon as it is determined that the repayment of all, or part, of the principal balance is highly unlikely. Because all identified losses are immediately charged off, no portion of the allowance for loan losses is restricted to any individual loan or groups of loans, and the entire allowance is available to absorb any and all loan losses.

The allowance for loan losses is maintained at a level considered adequate to provide for losses that can be reasonably anticipated. Management performs a quarterly evaluation of the adequacy of the allowance. The allowance is based on the Company’s past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, composition of the loan portfolio, current economic conditions and other relevant factors. This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant revision as more information becomes available.

8

Quaint Oak Bancorp, Inc.

Notes to Unaudited Consolidated Financial Statements

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

The allowance consists of specific, general and unallocated components. The specific component relates to loans that are designated as impaired. For loans that are designated as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers pools of loans by loan class. These pools of loans are evaluated for loss exposure based upon historical loss rates for each of these categories of loans, adjusted for qualitative factors. These significant factors may include changes in lending policies and procedures, changes in existing general economic and business conditions affecting our primary lending areas, credit quality trends, collateral value, loan volumes and concentrations, seasoning of the loan portfolio, recent loss experience in particular segments of the portfolio, duration of the current business cycle and bank regulatory examination results. The applied loss factors are reevaluated quarterly to ensure their relevance in the current economic environment.  Residential owner occupied mortgage lending generally entails a lower risk of default than other types of lending. Consumer loans and commercial real estate loans generally involve more risk of collectability because of the type and nature of the collateral and, in certain cases, the absence of collateral. It is the Company’s policy to establish a specific reserve for loss on any delinquent loan when it determines that a loss is probable. An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not considered impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis by either the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral if the loan is collateral dependent.  An allowance for loan losses is established for an impaired loan if its carrying value exceeds its estimated fair value. The estimated fair values of substantially all of the Company’s impaired loans are measured based on the estimated fair value of the loan’s collateral.

A loan is identified as a troubled debt restructuring (“TDR”) if the Company, for economic or legal reasons related to a debtor’s financial difficulties, grants a concession to the debtor that it would not otherwise consider. Concessions granted under a TDR typically involve a temporary or permanent reduction in payments or interest rate or an extension of a loan’s stated maturity date at less than a current market rate of interest. Loans identified as TDRs are designated as impaired.

For loans secured by real estate, estimated fair values are determined primarily through third-party appraisals. When a real estate secured loan becomes impaired, a decision is made regarding whether an updated certified appraisal of the real estate is necessary. This decision is based on various considerations, including the age of the most recent appraisal, the loan-to-value ratio based on the original appraisal and the condition of the property. Appraised values are discounted to arrive at the estimated selling price of the collateral, which is considered to be the estimated fair value. The discounts also include estimated costs to sell the property.

9

Quaint Oak Bancorp, Inc.

Notes to Unaudited Consolidated Financial Statements

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

The allowance calculation methodology includes further segregation of loan classes into risk rating categories. The borrower’s overall financial condition, repayment sources, guarantors and value of collateral, if appropriate, are evaluated annually for all loans (except one-to-four family residential owner-occupied loans) where the total amount outstanding to any borrower or group of borrowers exceeds $500,000, or when credit deficiencies arise, such as delinquent loan payments. Credit quality risk ratings include regulatory classifications of special mention, substandard, doubtful and loss. Loans criticized as special mention have potential weaknesses that deserve management’s close attention. If uncorrected, the potential weaknesses may result in deterioration of the repayment prospects. Loans classified substandard have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They include loans that are inadequately protected by the current sound net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans classified doubtful have all the weaknesses inherent in loans classified substandard with the added characteristic that collection or liquidation in full, on the basis of current conditions and facts, is highly improbable. Loans classified as a loss are considered uncollectible and are charged to the allowance for loan losses. Loans not classified are rated pass. In addition, Federal regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan losses and may require the Company to recognize additions to the allowance based on their judgments about information available to them at the time of their examination, which may not be currently available to management. Based on management’s comprehensive analysis of the loan portfolio, management believes the current level of the allowance for loan losses is adequate.

Loans Held for Sale.  Loans originated by the Bank’s mortgage banking subsidiary, Quaint Oak Mortgage, LLC, are intended for sale in the secondary market and are carried at the lower of cost or fair value (LOCOM). Gains and losses on loan sales (sales proceeds minus carrying value) are recorded in noninterest income, and direct loan origination costs, commissions and fees are deferred at origination of the loan and are recognized in noninterest income upon sale of the loan.  To a lesser extent, the Bank originates equipment loans for sale primarily to other financial institutions.

Federal Home Loan Bank Stock.  Federal law requires a member institution of the Federal Home Loan Bank (FHLB) system to hold restricted stock of its district Federal Home Loan Bank according to a predetermined formula.  FHLB stock is carried at cost and evaluated for impairment. When evaluating FHLB stock for impairment, its value is determined based on the ultimate recoverability of the par value of the stock. We evaluate our holdings of FHLB stock for impairment each reporting period. No impairment charges were recognized on FHLB stock during the three or nine months ended September 30, 2019 and 2018.

Bank Owned Life Insurance (BOLl).  The Company purchases bank owned life insurance as a mechanism for funding various employee benefit costs.  The Company is the beneficiary of these policies that insure the lives of certain officers of its subsidiaries. The Company has recognized the cash surrender value under the insurance policies as an asset in the consolidated balance sheets. Changes in the cash surrender value are recorded in non-interest income in the consolidated statements of income.

Intangible Assets.   Intangible assets on the consolidated balance sheets represent the acquisition by Quaint Oak Insurance Agency of the renewal rights to the book of business produced and serviced by an independent insurance agency on August 1, 2016 at a total cost of $1.0 million. Based on a valuation, $515,000 of the purchase price was determined to be goodwill and $485,000 was determined to be related to the renewal rights to the book of business and deemed an other intangible asset.  The renewal rights are being amortized over a ten year period based upon the annual retention rate of the book of business.

10

Quaint Oak Bancorp, Inc.

Notes to Unaudited Consolidated Financial Statements

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

The Company will complete a goodwill and other intangible asset analysis at least on an annual basis or more often if events and circumstances indicate that there may be impairment.

Other Real Estate Owned, Net. Other real estate owned or foreclosed assets are comprised of property acquired through a foreclosure proceeding or acceptance of a deed in lieu of foreclosure and loans classified as in-substance foreclosures.  A loan is classified as in-substance foreclosure when the Bank has taken possession of the collateral regardless of whether formal foreclosure proceedings take place.  Other real estate properties are initially recorded at fair value, net of estimated selling costs at the date of
foreclosure, establishing a new cost basis. After foreclosure, valuations are periodically performed by management and the real estate is carried at the lower of cost or fair value less estimated costs to sell.  Net revenue and expenses from operations and additions to the valuation allowance are included in other expenses.  At September 30, 2019 the Company had four properties in other real estate owned (OREO) totaling $2.0 million.  The balance of these OREO properties amounted to $1.7 million at December 31, 2018.

Share-Based Compensation.  Compensation expense for share-based compensation awards is based on the grant date fair value of the award. That cost is recognized over the period during which an employee is required to provide service in exchange for the award.

At September 30, 2019, the Company has outstanding equity awards under two share-based plans: the 2013 Stock Incentive Plan and the 2018 Stock Incentive Plan.  Awards under these plans were made in May 2013 and May 2018.  These plans are more fully described in Note 10.

The Company also has an employee stock ownership plan (“ESOP”).  This plan is more fully described in Note 10.  As ESOP shares are committed to be released and allocated among participants, the Company recognizes compensation expense equal to the average market price of the shares over the period earned.

Comprehensive Income.  Accounting principles generally accepted in the United States of America require that recognized revenue, expenses, gains and losses be included in net income.  Certain changes in assets and liabilities, such as unrealized gains and losses on available for sale securities, are reported as a separate component of the equity section of the consolidated balance sheet, and along with net income, are components of comprehensive income.

Earnings per Share.  Amounts reported in earnings per share reflect earnings available to common stockholders’ for the period divided by the weighted average number of shares of common stock outstanding during the period, exclusive of unearned ESOP shares, unvested restricted stock (RRP) shares and treasury shares.  Stock options and unvested restricted stock are regarded as potential common stock and are considered in the diluted earnings per share calculations to the extent they would have a dilutive effect if converted to common stock, computed using the “treasury stock” method.

Revenue from Contracts with Customers.   The Company records revenue from contracts with customers in accordance with Accounting Standards Codification Topic 606, “Revenue from Contracts with Customers” (“Topic 606”). Under Topic 606, the Company must identify the contract with a customer, identify the performance obligations in the contract, determine the transaction price, allocate the transaction price to the performance obligations in the contract, and recognize revenue when (or as) the Company satisfies a performance obligation. Significant revenue has not been recognized in the current reporting period that results from performance obligations satisfied in previous periods.

11

Quaint Oak Bancorp, Inc.

Notes to Unaudited Consolidated Financial Statements

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

The Company’s primary sources of revenue are derived from interest and dividends earned on loans and investment securities, gains on the sale of loans, income from bank-owned life insurance, and other financial instruments that are not within the scope of Topic 606.  The main types of non-interest income within the scope of the standard are as follows:

Service Charges on Deposits. The Bank has contracts with its commercial checking deposit customers where fees are charged if the account balance falls below predetermined levels defined as compensating balances. These agreements can be cancelled at any time by either the Bank or the deposit customer. Revenue from these transactions is recognized on a monthly basis as the Bank has an unconditional right to the fee consideration. The Bank also has transaction fees related to specific transactions or activities resulting from customer request or activity that include overdraft fees, wire fees, and other transaction fees. All of these fees are attributable to specific performance obligations of the Bank where the revenue is recognized at a defined point in time, completion of the requested service/transaction.

Insurance Commissions.Insurance income generally consists of commissions from the sale of insurance policies and performance-based commissions from insurance companies.  The Bank recognizes commission income from the sale of insurance policies when it acts as an agent between the insurance carrier and policyholder, arranging for the insurance carrier to provide policies to policyholders, and acts on behalf of the insurance carrier by providing customer service to the policyholder during the policy period. Commission income is recognized over time, using the output method of time elapsed, which corresponds with the underlying insurance policy period, for which the Bank is obligated to perform under contract with the insurance carrier. Commission income is variable, as it is comprised of a certain percentage of the underlying policy premium. The Bank estimates the variable consideration based upon the “most likely amount” method, and does not expect or anticipate a significant reversal of revenue in future periods, based upon historical experience.  Payment is due from the insurance carrier for commission income once the insurance policy has been sold. The Bank has elected to apply a practical expedient related to capitalizable costs, which are the commissions paid to insurance producers, and will expense these commissions paid to insurance producers as incurred, as these costs are related to the commission income and would have been amortized within one year or less if they had been capitalized, the same period over which the commission income was earned. Performance-based commissions from insurance companies are recognized at a point in time, when received, and no contingencies remain.

Change in Accounting Principal.  In March 2017, the FASB issued ASU 2017-08, Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20). The amendments in this Update shorten the amortization period for certain callable debt securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. The Company adopted this accounting standard on January 1, 2019.  Because the Company did not have any callable debt securities held at a premium during the three and nine months ended September 30, 2019, there was no impact to the Company’s financial statements as of September 30, 2019.

Recently Adopted Accounting Pronouncements.  In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842).  The standard requires lessees to recognize the assets and liabilities that arise from leases on the balance sheet.  A lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term.  A short-term lease is defined as one in which (a) the lease term is 12 months or less and (b) there is not an option to purchase the underlying asset that the lessee is reasonably certain to exercise.  For short-term leases, lessees may elect to recognize lease payments over the lease term on a straight-line basis.  For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2018, and interim periods within those years.  The amendments should be applied at the beginning of the earliest period presented using a modified retrospective approach with earlier application permitted as of the beginning of an interim or annual reporting period.   The Company adopted this standard Effective January 1, 2019 which resulted in the recording of a right of use (“ROU”) asset and associated lease liability of approximately $1.4 million.  The ROU asset is included in other assets and the lease liability is included in other liabilities in the September 30, 2019 consolidated balance sheet.

12

Quaint Oak Bancorp, Inc.

Notes to Unaudited Consolidated Financial Statements

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

Recent Accounting Pronouncements Not Yet Adopted. In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments, which changes the impairment model for most financial assets. This Update is intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations.  The underlying premise of the Update is that financial assets measured at amortized cost should be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis. The allowance for credit losses should reflect management’s current estimate of credit losses that are expected to occur over the remaining life of a financial asset.  The income statement will be effected for the measurement of credit losses for newly recognized financial assets, as well as the expected increases or decreases of expected credit losses that have taken place during the period. ASU 2016-13 is effective for annual and interim periods beginning after December 15, 2019, and early adoption is permitted for annual and interim periods beginning after December 15, 2018. With certain exceptions, transition to the new requirements will be through a cumulative effect adjustment to opening retained earnings as of the beginning of the first reporting period in which the guidance is adopted.  On October 16, 2019, the FASB voted to defer the effective date for ASC 326, Financial Instruments – Credit Losses, for smaller reporting companies to fiscal years beginning after December 15, 2022, and interim periods within those fiscal years.  The final ASU is expected to be issued in mid-November.  We expect to recognize a one-time cumulative effect adjustment to the allowance for loan losses as of the beginning of the first reporting period in which the new standard is effective, but cannot yet determine the magnitude of any such one-time adjustment or the overall impact of the new guidance on the consolidated financial statements.

In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment. To simplify the subsequent measurement of goodwill, the FASB eliminated Step 2 from the goodwill impairment test.  In computing the implied fair value of goodwill under Step 2, an entity had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities (including unrecognized assets and liabilities) following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination.  Instead, under the amendments in this Update, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount.  An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting units fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit.  A public business entity that is a U.S. Securities and Exchange Commission (“SEC”) filer should adopt the amendments in this Update for its annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019.  On October 16, 2019, the FASB voted to defer the effective date for ASC 350, Intangibles – Goodwill and Other, for smaller reporting companies to fiscal years beginning after December 15, 2022, and interim periods within those fiscal years.  The final ASU is expected to be issued in mid-November.  This Update is not expected to have a significant impact on the Company’s financial statements.

13

Quaint Oak Bancorp, Inc.

Notes to Unaudited Consolidated Financial Statements

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

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes the Disclosure Requirements for Fair Value Measurements.  The Update removes the requirement to disclose the amount of and reasons for transfers between Level I and Level II of the fair value hierarchy; the policy for timing of transfers between levels; and the valuation processes for Level III fair value measurements. The Update requires disclosure of changes in unrealized gains and losses for the period included in other comprehensive income (loss) for recurring Level III fair value measurements held at the end of the reporting period and the range and weighted average of significant unobservable inputs used to develop Level III fair value measurements. This Update is effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019.  This Update is not expected to have a significant impact on the Company’s financial statements.

In May 2019, the FASB issued ASU 2019-05, Financial Instruments – Credit Losses, Topic 326, which allows entities to irrevocably elect the fair value option for certain financial assets previously measured at amortized cost upon adoption of the new credit losses standard. To be eligible for the transition election, the existing financial asset must otherwise be both within the scope of the new credit losses standard and eligible for the applying the fair value option in ASC 825-10.3. The election must be applied on an instrument-by-instrument basis and is not available for either available-for-sale or held-to-maturity debt securities. For entities that elect the fair value option, the difference between the carrying amount and the fair value of the financial asset would be recognized through a cumulative-effect adjustment to opening retained earnings as of the date an entity adopted ASU 2016-13. Changes in fair value of that financial asset would subsequently be reported in current earnings. For entities that have not yet adopted ASU 2016-13, the effective dates and transition requirements are the same as those in ASU 2016-13. For entities that have adopted ASU 2016-13, ASU 2019-05 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted once ASU 2016-13 has been adopted. On October 16, 2019, the FASB voted to defer the effective date for ASC 326, Financial Instruments – Credit Losses, for smaller reporting companies to fiscal years beginning after December 15, 2022, and interim periods within those fiscal years.  The final ASU is expected to be issued in mid-November.  This Update is not expected to have a significant impact on the Company’s financial statements.

Reclassifications.  Certain items in the 2018 consolidated financial statements have been reclassified to conform to the presentation in the 2019 consolidated financial statements. Such reclassifications did not have a material impact on the presentation of the overall financial statements.  The reclassifications had no effect on net income or stockholders’ equity.

Note 2 – Earnings Per Share

Earnings per share (“EPS”) consists of two separate components, basic EPS and diluted EPS.  Basic EPS is computed based on the weighted average number of shares of common stock outstanding for each period presented.  Diluted EPS is calculated based on the weighted average number of shares of common stock outstanding plus dilutive common stock equivalents (“CSEs”).  CSEs consist of shares that are assumed to have been purchased with the proceeds from the exercise of stock options, as well as unvested restricted stock (RRP) shares. Common stock equivalents which are considered antidilutive are not included for the purposes of this calculation. For the three and nine months ended September 30, 2019 and 2018, all unvested restricted stock program awards and outstanding stock options under the Option Plan and the 2013 Stock Incentive Plan representing shares were dilutive.  All outstanding stock options awarded in 2018 under the 2013 and 2018 Stock Incentive Plans representing shares were anti-dilutive.

14

Quaint Oak Bancorp, Inc.

Notes to Unaudited Consolidated Financial Statements

Note 2 – Earnings Per Share (Continued)

The following table sets forth the composition of the weighted average shares (denominator) used in the basic and dilutive earnings per share computations.

	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2019		2018		2019		2018
Net Income	$	802,000	$	658,000	$	1,880,000	$	1,481,000
Weighted average shares outstanding – basic		1,966,003		1,945,553		1,953,367		1,916,817
Effect of dilutive common stock equivalents		45,572		70,984		46,427		61,700
Adjusted weighted average shares outstanding – diluted		2,011,575		2,016,537		1,999,794		1,978,517
Basic earnings per share	$	0.41	$	0.34	$	0.96	$	0.77
Diluted earnings per share	$	0.40	$	0.33	$	0.94	$	0.75

Note 3 – Accumulated Other Comprehensive Income (Loss)

The following table presents the changes in accumulated other comprehensive income (loss) by component, net of tax, for the three and nine months ended September 30, 2019 and 2018 (in thousands):

	Unrealized Gains (Losses) on Investment Securities Available for Sale (1)
	For the Three Months Ended September 30,					For the Nine Months Ended September 30,
	2019		2018			2019			2018
Balance at the beginning of the period	$	15	$	(4	)	$	(2	)	$	(15	)
Other comprehensive income (loss) before classifications		10		(7	)		27			4
Amount reclassified from accumulated other comprehensive income		-		-			-			-
Total other comprehensive income (loss)		10		(7	)		27			4
Balance at the end of the period	$	25	$	(11	)	$	25		$	(11	)

_________________

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

Note 4 – Investment in Interest-Earning Time Deposits

The investment in interest-earning time deposits as of September 30, 2019 and December 31, 2018, by contractual maturity, are shown below (in thousands):

	September 30, 2019		December 31, 2018
Due in one year or less	$	2,026	$	1,604
Due after one year through five years		8,146		3,323
Total	$	10,172	$	4,927

15

Quaint Oak Bancorp, Inc.

Notes to Unaudited Consolidated Financial Statements

Note 5 – Investment Securities Available for Sale

The amortized cost, gross unrealized gains and losses, and fair value of investment securities available for sale at September 30, 2019 and December 31, 2018 are summarized below (in thousands): 

	September 30, 2019
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized (Losses)			Fair Value
Available for Sale:
Mortgage-backed securities:
Governmental National Mortgage Association securities	$	6,097	$	21	$	-		$	6,118
Federal Home Loan Mortgage Corporation securities		1,052		4		(3	)		1,053
Federal National Mortgage Association securities		273		2		-			275
Total mortgage-backed securities		7,422		27		(3	)		7,446
Debt securities:
U.S. government agency		360		-		-			360
Corporate notes		1,500		8		-			1,508
Total available-for-sale-securities	$	9,282	$	35	$	(3	)	$	9,314

	December 31, 2018
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized (Losses)			Fair Value
Available for Sale:
Mortgage-backed securities:
Governmental National Mortgage Association securities	$	4,844	$	29	$	-		$	4,873
Federal Home Loan Mortgage Corporation securities		1,111		-		(29	)		1,082
Federal National Mortgage Association securities		367		-		-			367
Total mortgage-backed securities		6,322		29		(29	)		6,322
Debt securities:
U.S. government agency		360		-		(2	)		358
Total available-for-sale-securities	$	6,682	$	29	$	(31	)	$	6,680

The amortized cost and fair value of debt securities at September 30, 2019, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties (in thousands):

	Available for Sale
	Amortized Cost		Fair Value
Due after one year through five years	$	360	$	360
Due after five years through ten years		1,500		1,508
Due after ten years		7,422		7,446
Total	$	9,282	$	9,314

16

Quaint Oak Bancorp, Inc.

Notes to Unaudited Consolidated Financial Statements

Note 5 – Investment Securities Available for Sale (Continued)

The following tables show the Company’s gross unrealized losses and fair value, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position at September 30, 2019  and December 31, 2018 (in thousands):

	September 30, 2019
			Less than Twelve Months				Twelve Months or Greater					Total
	Number of Securities		Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses
Federal Home Loan Mortgage Corporation     mortgage-backed securities		1	$	-	$	-	$	486	$	(3	)	$	486	$	(3	)
Total		1	$	-	$	-	$	486	$	(3	)	$	486	$	(3	)

	December 31, 2018
			Less than Twelve Months				Twelve Months or Greater					Total
	Number of Securities		Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses
Federal Home Loan Mortgage Corporation     mortgage-backed securities		2	$	-	$	-	$	1,082	$	(29	)	$	1,082	$	(29	)
Debt securities, U.S. government agency		1		-		-		358		(2	)		358		(2	)
Total		3	$	-	$	-	$	1,440	$	(31	)	$	1,440	$	(31	)

At September 30, 2019, there was one security in an unrealized loss position that at such date had an aggregate depreciation of 0.72% from the Company’s amortized cost basis. Management believes that the estimated fair value of the securities disclosed above is primarily dependent on the movement of market interest rates.  Management evaluated the length of time and the extent to which the fair value has been less than cost and the financial condition and near term prospects of the issuer, including any specific events which may influence the operations of the issuer.  The Company has the ability and intent to hold the securities until the anticipated recovery of fair value occurs. Management does not believe any individual unrealized loss as of September 30, 2019 represents an other-than-temporary impairment. There were no impairment charges recognized during the three months or nine months ended September 30, 2019 or 2018.

17

Quaint Oak Bancorp, Inc.

Notes to Unaudited Consolidated Financial Statements

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

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

	September 30, 2019			December 31, 2018
Real estate loans:
One-to-four family residential:
Owner occupied	$	5,814		$	6,603
Non-owner occupied		42,206			47,361
Total one-to-four family residential		48,020			53,964
Multi-family (five or more) residential		23,125			23,967
Commercial real estate		110,864			103,819
Construction		13,447			9,998
Home equity		3,989			4,347
Total real estate loans		199,445			196,095
Commercial business		40,985			23,616
Other consumer		27			19
Total Loans		240,457			219,730
Deferred loan fees and costs		(795	)		(867	)
Allowance for loan losses		(2,283	)		(1,965	)
Net Loans	$	237,379		$	216,898

The following tables present the classes of the loan portfolio summarized by the aggregate pass rating and the classified ratings of special mention, substandard and doubtful within the Company’s internal risk rating system as of September 30, 2019 and December 31, 2018 (in thousands): 

	September 30, 2019
	Pass		Special Mention		Substandard		Doubtful		Total
One-to-four family residential owner occupied	$	5,642	$	-	$	172	$	-	$	5,814
One-to-four family residential non-owner occupied		41,412		-		794		-		42,206
Multi-family residential		23,125		-		-		-		23,125
Commercial real estate		107,598		952		2,314		-		110,864
Construction		13,447		-		-		-		13,447
Home equity		3,989		-		-		-		3,989
Commercial business		40,936		-		49		-		40,985
Other consumer		27		-		-		-		27
Total	$	236,176	$	952	$	3,329	$	-	$	240,457

	December 31, 2018
	Pass		Special Mention		Substandard		Doubtful		Total
One-to-four family residential owner occupied	$	6,421	$	-	$	182	$	-	$	6,603
One-to-four family residential non-owner occupied		46,534		-		827		-		47,361
Multi-family residential		23,967		-		-		-		23,967
Commercial real estate		101,821		-		1,998		-		103,819
Construction		9,998		-		-		-		9,998
Home equity		4,347		-		-		-		4,347
Commercial business		23,149		-		467		-		23,616
Other consumer		19		-		-		-		19
Total	$	216,256	$	-	$	3,374	$	-	$	219,730

18

Quaint Oak Bancorp, Inc.

Notes to Unaudited Consolidated Financial Statements

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

The following table presents impaired loans by class, segregated by those for which a specific allowance was required and those for which a specific allowance was not necessary as of September 30, 2019 as well as the average recorded investment and related interest income for the period then ended (in thousands):

	September 30, 2019
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
One-to-four family residential owner occupied	$	172	$	178	$	-	$	173	$	-
One-to-four family residential non-owner occupied		426		426		-		426		12
Multi-family residential		-		-		-		-		-
Commercial real estate		-		-		-		-		-
Construction		-		-		-		-		-
Home equity		-		-		-		-		-
Commercial business		-		-		-		-		-
Other consumer		-		-		-		-		-
								-
With an allowance recorded:
One-to-four family residential owner occupied	$	-	$	-	$	-	$	-	$	-
One-to-four family residential non-owner occupied		68		68		50		68		-
Multi-family residential		-		-		-		-		-
Commercial real estate		133		133		4		133		9
Construction		-		-		-		-		-
Home equity		-		-		-		-		-
Commercial business		-		-		-		-		-
Other consumer		-		-		-		-		-
Total:
One-to-four family residential owner occupied	$	172	$	178	$	-	$	173	$	-
One-to-four family residential non-owner occupied		494		494		50		494		12
Multi-family residential		-		-		-		-		-
Commercial real estate		133		133		4		133		9
Construction		-		-		-		-		-
Home equity		-		-		-		-		-
Commercial business		-		-		-		-		-
Other consumer		-		-		-		-		-
Total	$	799	$	805	$	54	$	800	$	21

19

Quaint Oak Bancorp, Inc.

Notes to Unaudited Consolidated Financial Statements

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

The following table presents impaired loans by class, segregated by those for which a specific allowance was required and those for which a specific allowance was not necessary as of December 31, 2018 as well as the average recorded investment and related interest income for the year then ended (in thousands):

	December 31, 2018
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
One-to-four family residential owner occupied	$	182	$	185	$	-	$	417	$	23
One-to-four family residential non-owner occupied		265		265		-		324		17
Multi-family residential		-		-		-		-		-
Commercial real estate		-		-		-		-		-
Construction		-		-		-		2,050		37
Home equity		-		-		-		44		2
Commercial business		-		-		-		-		-
Other consumer		-		-		-		-		-
With an allowance recorded:
One-to-four family residential owner occupied	$	-	$	-	$	-	$	-	$	-
One-to-four family residential non-owner occupied		68		68		50		162		4
Multi-family residential		-		-		-		-		-
Commercial real estate		133		133		5		133		10
Construction		-		-		-		-		-
Home equity		-		-		-		-		-
Commercial business		-		-		-		-		-
Other consumer		-		-		-		-		-
Total:
One-to-four family residential owner occupied	$	182	$	185	$	-	$	417	$	23
One-to-four family residential non-owner occupied		333		333		50		486		21
Multi-family residential		-		-		-		-		-
Commercial real estate		133		133		5		133		10
Construction		-		-		-		2,050		37
Home equity		-		-		-		44		2
Commercial business		-		-		-		-		-
Other consumer		-		-		-		-		-
Total	$	648	$	651	$	55	$	3,130	$	93

The loan portfolio also includes certain loans that have been modified in a troubled debt restructuring, where economic concessions have been granted to borrowers who have experienced or are expected to experience financial difficulties. These concessions typically result from loss mitigation activities and could include reductions in the interest rate, payment extensions, forbearance, or other actions.  At September 30, 2019, the Company had two loans totaling $397,000 that were identified as troubled debt restructurings.  Both of these loans were performing in accordance with their modified terms.  During the nine months ended September 30, 2019, no new loans were identified as TDRs.  At December 31, 2018, the Company had two loans totaling $398,000 that were identified as troubled debt restructurings.  If a TDR is placed on non-accrual it is not reverted back to accruing status until the borrower makes timely payments as contracted for at least nine months and future collection under the revised terms is probable.

20

Quaint Oak Bancorp, Inc.

Notes to Unaudited Consolidated Financial Statements

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

The following tables present the Company’s TDR loans as of September 30, 2019 and December 31, 2018 (dollar amounts in thousands):

	September 30, 2019
	Number of Contracts		Recorded Investment		Non- Accrual		Accruing		Related Allowance
One-to-four family residential owner occupied		-	$	-	$	-	$	-	$	-
One-to-four family residential non-owner occupied		1		264		-		264		-
Multi-family residential		-		-		-		-		-
Commercial real estate		1		133		-		133		4
Construction		-		-		-		-		-
Home equity		-		-		-		-		-
Commercial business		-		-		-		-		-
Other consumer		-		-		-		-		-
Total		2	$	397	$	-	$	397	$	4

	December 31, 2018
	Number of Contracts		Recorded Investment		Non- Accrual		Accruing		Related Allowance
One-to-four family residential owner occupied		-	$	-	$	-	$	-	$	-
One-to-four family residential non-owner occupied		1		265		-		265		-
Multi-family residential		-		-		-		-		-
Commercial real estate		1		133		-		133		5
Construction		-		-		-		-		-
Home equity		-		-		-		-		-
Commercial business		-		-		-		-		-
Other consumer		-		-		-		-		-
Total		2	$	398	$	-	$	398	$	5

The contractual aging of the TDRs in the table above as of September 30, 2019 and December 31, 2018 is as follows (in thousands):

	September 30, 2019
	Accruing Past Due Less than 30 Days		Past Due 30-89 Days		90 Days or More Past Due		Non- Accrual		Total
One-to-four family residential owner occupied	$	-	$	-	$	-	$	-	$	-
One-to-four family residential non-owner occupied		264		-		-		-		264
Multi-family residential		-		-		-		-		-
Commercial real estate		133		-		-		-		133
Construction		-		-		-		-		-
Home equity		-		-		-		-		-
Commercial business		-		-		-		-		-
Other consumer		-		-		-		-		-
Total	$	397	$	-	$	-	$	-	$	397

21

Quaint Oak Bancorp, Inc.

Notes to Unaudited Consolidated Financial Statements

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

	December 31, 2018
	Accruing Past Due Less than 30 Days		Past Due 30-89 Days		90 Days or More Past Due		Non- Accrual		Total
One-to-four family residential owner occupied	$	-	$	-	$	-	$	-	$	-
One-to-four family residential non-owner occupied		265		-		-		-		265
Multi-family residential		-		-		-		-		-
Commercial real estate		133		-		-		-		133
Construction		-		-		-		-		-
Home equity		-		-		-		-		-
Commercial business		-		-		-		-		-
Other consumer		-		-		-		-		-
Total	$	398	$	-	$	-	$	-	$	398

Any reserve for an impaired TDR loan is based upon the present value of the future expected cash flows discounted at the loan’s original effective rate or upon the fair value of the collateral less costs to sell, if the loan is deemed collateral dependent. At September 30, 2019 there were no commitments to lend additional funds to debtors whose loan terms have been modified as TDRs.

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

22

Quaint Oak Bancorp, Inc.

Notes to Unaudited Consolidated Financial Statements

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

Following is a summary, by loan portfolio class, of changes in the allowance for loan losses for the three and nine months ended September 30, 2019 and recorded investment in loans receivable as of September 30, 2019 (in thousands):

	September 30, 2019
	1-4 Family Residential Owner Occupied			1-4 Family Residential Non-Owner Occupied			Multi-Family Residential			Commercial Real Estate			Construction		Home Equity			Commercial Business and Other Consumer		Unallocated		Total
For the Three Months Ended September 30, 2019
Allowance for loan losses:
Beginning balance	$	49		$	437		$	153		$	835		$	180	$	23		$	370	$	79	$	2,126
Charge-offs		-			-			-			-			-		-			-		-		-
Recoveries		-			-			-			-			-		-			-		-		-
Provision		(1	)		(20	)		(3	)		-			89		(3	)		74		21		157
Ending balance	$	48		$	417		$	150		$	835		$	269	$	20		$	444	$	100	$	2,283
For the Nine Months Ended September 30, 2019
Allowance for loan losses:
Beginning balance	$	51		$	435		$	156		$	839		$	175	$	21		$	247	$	41	$	1,965
Charge-offs		-			-			-			-			-		-			-		-		-
Recoveries		-			-			-			-			-		-			-		-		-
Provision		(3	)		(18	)		(6	)		(4	)		94		(1	)		197		59		318
Ending balance	$	48		$	417		$	150		$	835		$	269	$	20		$	444	$	100	$	2,283
Ending balance evaluated for impairment:
Individually	$	-		$	50		$	-		$	4		$	-	$	-		$	-	$	-	$	54
Collectively	$	48		$	367		$	150		$	831		$	269	$	20		$	444	$	100	$	2,229
Loans receivable:
Ending balance:	$	5,814		$	42,206		$	23,125		$	110,864		$	13,447	$	3,989		$	41,012			$	240,457
Ending balance evaluated for impairment:
Individually	$	172		$	494		$	-		$	133		$	-	$	-		$	-			$	799
Collectively	$	5,642		$	41,712		$	23,125		$	110,731		$	13,447	$	3,989		$	41,012			$	239,658

The Bank allocated increased allowance for loan loss provisions to the construction loan portfolio class and the commercial business portfolio class for the three and nine months ended September 30, 2019, due primarily to increased balances in these portfolio classes.  The Bank allocated decreased allowance for loan loss provisions to the 1-4 family non-owner occupied loan portfolio class for the three and nine months ended September 30, 2019, due primarily to a decrease in balances in this portfolio class.

23

Quaint Oak Bancorp, Inc.

Notes to Unaudited Consolidated Financial Statements

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

Following is a summary, by loan portfolio class, of changes in the allowance for loan losses for the three and nine and months ended September 30, 2018 (in thousands):

	September 30, 2018
	1-4 Family Residential Owner Occupied			1-4 Family Residential Non-Owner Occupied			Multi-Family Residential		Commercial Real Estate		Construction			Home Equity			Commercial Business and Other Consumer			Unallocated			Total
For the Three Months Ended September 30, 2018
Allowance for loan losses:
Beginning balance	$	60		$	439		$	166	$	728	$	179		$	24		$	201		$	33		$	1,830
Charge-offs		-			-			-		-		(115	)		-			-			-			(115	)
Recoveries		-			-			-		-		-			-			-			-			-
Provision		(9	)		(14	)		7		203		98			(17	)		(72	)		(13	)		183
Ending balance	$	51		$	425		$	173	$	931	$	162		$	7		$	129		$	20		$	1,898
For the Nine Months Ended September 30, 2018
Allowance for loan losses:
Beginning balance	$	48		$	540		$	152	$	687	$	136		$	27		$	140		$	82		$	1,812
Charge-offs		-			(47	)		-		-		(215	)		-			-			-			(262	)
Recoveries		-			-			-		-		-			-			-			-			-
Provision		3			(68	)		21		244		241			(20	)		(11	)		(62	)		348
Ending balance	$	51		$	425		$	173	$	931	$	162		$	7		$	129		$	20		$	1,898
Ending balance evaluated for impairment:
Individually	$	-		$	-		$	-	$	5	$	-		$	-		$	-		$	-		$	5
Collectively	$	51		$	425		$	173	$	926	$	162		$	7		$	129		$	20		$	1,893

The Bank allocated increased allowance for loan loss provisions to the commercial real estate portfolio classes for the three and nine months ended September 30, 2018, due primarily to increased balances and delinquencies in this portfolio class. The Bank allocated increased allowance for loan loss provisions to the construction loan portfolio classes for the three and nine months ended September 30, 2018, due primarily to charge-offs in this portfolio class.  The Bank allocated decreased allowance for loan loss provisions to the commercial business portfolio classes for the three and nine months ended September 30, 2018, due primarily to changes in qualitative factors in this portfolio class.

24

Quaint Oak Bancorp, Inc.

Notes to Unaudited Consolidated Financial Statements

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

Following is a summary, by loan portfolio class, of changes in the allowance for loan losses for the year ended December 31, 2018 and recorded investment in loans receivable based on impairment evaluation as of December 31, 2018 (in thousands):

	December 31, 2018
	1-4 Family Residential Owner Occupied		1-4 Family Residential Non- Owner Occupied			Multi- Family Residential		Commercial Real Estate		Construction			Home Equity			Commercial Business and Other Consumer		Unallocated			Total
Allowance for loan losses:
Beginning balance	$	48	$	540		$	152	$	687	$	136		$	27		$	140	$	82		$	1,812
Charge-offs		-		(47	)		-		-		(215	)		-			-		-			(262	)
Recoveries		-		-			-		-		-			-			-		-			-
Provision		3		(58	)		4		152		254			(6	)		107		(41	)		415
Ending balance	$	51	$	435		$	156	$	839	$	175		$	21		$	247	$	41		$	1,965
Ending balance evaluated for impairment:
Individually	$	-	$	50		$	-	$	5	$	-		$	-		$	-	$	-		$	55
Collectively	$	51	$	385		$	156	$	834	$	175		$	21		$	247	$	41		$	1,910
Loans receivable:
Ending balance	$	6,603	$	47,361		$	23,967	$	103,819	$	9,998		$	4,347		$	23,635				$	219,730
Ending balance evaluated for impairment:
Individually	$	182	$	333		$	-	$	133	$	-		$	-		$	-				$	648
Collectively	$	6,421	$	47,028		$	23,967	$	103,686	$	9,998		$	4,347		$	23,635				$	219,082

The Bank allocated increased allowance for loan loss provisions to the construction loan portfolio class for the year ended December 31, 2018, due primarily to charge-offs in this portfolio class.  The Bank allocated increased allowance for loan loss provisions to the commercial real estate portfolio class for the year ended December 31, 2018, due primarily to increased balances and delinquencies in this portfolio class. The Bank allocated increased allowance for loan loss provisions to the commercial business portfolio class for the year ended December 31, 2018, due primarily to increased balances in this portfolio class.  The Bank allocated decreased allowance for loan loss provisions to the 1-4 family non-owner occupied loan portfolio class for the year ended December 31, 2018, due primarily to a decrease in balances and changes in qualitative factors in this portfolio class.

The following table presents nonaccrual loans by classes of the loan portfolio as of September 30, 2019 and December 31, 2018 (in thousands):

	September 30, 2019		December 31, 2018
One-to-four family residential owner occupied	$	172	$	182
One-to-four family residential non-owner occupied		230		68
Multi-family residential		-		-
Commercial real estate		-		-
Construction		-		-
Home equity		-		-
Commercial business		-		-
Other consumer		-		-
Total	$	402	$	250

25

Quaint Oak Bancorp, Inc.

Notes to Unaudited Consolidated Financial Statements

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

Non-performing loans, which consist of non-accruing loans plus accruing loans 90 days or more past due, amounted to $932,000 and $1.2 million at September 30, 2019 and December 31, 2018, respectively.  For the delinquent loans in our portfolio, we have considered our ability to collect the past due interest, as well as the principal balance of the loan, in order to determine whether specific loans should be placed on non-accrual status. In cases where our evaluations have determined that the principal and interest balances are collectible, we have continued to accrue interest.

For the three and nine months ended September 30, 2019 and 2018 there was no interest income recognized on non-accrual loans on a cash basis.  Interest income foregone on non-accrual loans was approximately $18,000 and $27,000 for the three and nine months ended September 30, 2019, respectively.  Interest income foregone on non-accrual loans was approximately $6,000 and $18,000 for the three and nine months ended September 30, 2018, respectively.

The performance and credit quality of the loan portfolio is also monitored by analyzing the age of the loans receivable as determined by the length of time a recorded payment is past due. The following tables present the classes of the loan portfolio summarized by the past due status as of September 30, 2019 and December 31, 2018 (in thousands):

	September 30, 2019
	30-89 Days Past Due		90 Days or More Past Due		Total Past Due		Current		Total Loans Receivable		Loans Receivable 90 Days or More Past Due and Accruing
One-to-four family residential owner occupied	$	888	$	172	$	1,060	$	4,754	$	5,814	$	-
One-to-four family residential non-owner occupied		411		478		889		41,317		42,206		248
Multi-family residential		-		-		-		23,125		23,125		-
Commercial real estate		588		282		870		109,994		110,864		282
Construction		916		-		916		12,531		13,447		-
Home equity		-		-		-		3,989		3,989		-
Commercial business		-		-		-		40,985		40,985		-
Other consumer		-		-		-		27		27		-
Total	$	2,803	$	932	$	3,735	$	236,722	$	240,457	$	530

	December 31, 2018
	30-89 Days Past Due		90 Days or More Past Due		Total Past Due		Current		Total Loans Receivable		Loans Receivable 90 Days or More Past Due and Accruing
One-to-four family residential owner occupied	$	1,096	$	182	$	1,278	$	5,325	$	6,603	$	-
One-to-four family residential non-owner occupied		1,259		68		1,327		46,034		47,361		-
Multi-family residential		371		--		371		23,596		23,967		-
Commercial real estate		2,070		548		2,618		101,201		103,819		548
Construction		2,231		-		2,231		7,767		9,998		-
Home equity		31		-		31		4,316		4,347		-
Commercial business		3		380		383		23,233		23,616		380
Other consumer		-		-		-		19		19		-
Total	$	7,061	$	1,178	$	8,239	$	211,491	$	219,730	$	928

26

Quaint Oak Bancorp, Inc.

Notes to Unaudited Consolidated Financial Statements

Note 7 – Goodwill and Other Intangible, Net

On August 1, 2016, Quaint Oak Insurance Agency, LLC began operations by acquiring the renewal rights to the book of business produced and serviced by an independent insurance agency located in New Britain, Pennsylvania, that provides a broad range of personal and commercial insurance coverage solutions.  The Company paid $1.0 million for these rights.  Based on a valuation, $515,000 of the purchase price was determined to be goodwill and $485,000 was determined to be related to the renewal rights to the book of business and deemed to be an other intangible asset.  This other intangible asset is being amortized over a ten year period based upon the annual retention rate of the book of business.  The balance of other intangible asset at September 30, 2019 was $331,000 net of accumulated amortization of $154,000.  Amortization expense for the three and nine months ended September 30, 2019 amounted to $13,000 and $37,000, respectively.  Amortization expense for the three and nine months ended September 30, 2018 amounted to $12,000 and $36,000, respectively.

Note 8 – Deposits

Deposits consist of the following classifications (in thousands):

	September 30, 2019		December 31, 2018
Non-interest bearing checking accounts	$	17,045	$	17,542
Passbook accounts		8		192
Savings accounts		1,754		1,120
Money market accounts		28,079		26,841
Certificates of deposit		175,264		166,216
Total deposits	$	222,150	$	211,911

Note 9 – Borrowings

Federal Home Loan Bank advances consist of the following at September 30, 2019 and December 31, 2018 (in thousands):

	September 30, 2019					December 31, 2019
	Amount			Weighted Interest Rate			Amount	Weighted Interest Rate
Short-term borrowings		$	9,000	2.08	%	$	9,000	2.62	%
Fixed rate borrowings maturing:
2019			1,000	1.88			3,000	1.86
2020			2,000	2.00			2,000	2.00
2021			5,000	2.20			3,000	2.05
2022			6,171	2.16			3,000	2.18
2023			6,000	2.23			3,000	2.33
2024			5,100	2.28			1,000	2.54
Total  FHLB long-term debt		$	25,271	2.20	%	$	15,000	2.12	%

27

Quaint Oak Bancorp, Inc.

Notes to Unaudited Consolidated Financial Statements

Note 10 – Stock Compensation Plans

Employee Stock Ownership Plan

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

Shares of the Company’s common stock purchased by the ESOP are held in a suspense account and reported as unallocated common stock held by the ESOP in stockholders’ equity until released for allocation to participants.  As the debt is repaid, shares are released from collateral and are allocated to each eligible participant based on the ratio of each such participant’s base compensation to the total base compensation of eligible plan participants.  As the unearned shares are committed to be released and allocated among participants, the Company recognizes compensation expense equal to the average market value of the shares, and the shares become outstanding for earnings per share computations.  During the three and nine months ended September 30, 2019, the Company recognized $46,000 and $136,000 of ESOP expense, respectively.  During the three and nine months ended September 30, 2018, the Company recognized $49,000 and $145,000 of ESOP expense, respectively.

Recognition & Retention and Stock Incentive Plans

In May 2008, the shareholders of Quaint Oak Bancorp approved the adoption of the 2008 Recognition and Retention Plan (the “RRP”) and Trust Agreement.  In order to fund the RRP, the 2008 Recognition and Retention Plan Trust acquired 111,090 shares of the Company’s stock in the open market at an average price of $4.68 totaling $520,000.  The RRP terminated on May 8, 2018.  In May 2013, the shareholders of Quaint Oak Bancorp approved the adoption of the 2013 Stock Incentive Plan (the “2013 Stock Incentive Plan”).  The 2013 Stock Incentive Plan approved by shareholders in May 2013 covered a total of 195,000 shares, of which 48,750, or 25%, may be restricted stock awards, for a balance of 146,250 stock options assuming all the restricted shares are awarded.  In May 2018, the shareholders of Quaint Oak Bancorp approved the adoption of the 2018 Stock Incentive Plan (the “2018 Stock Incentive Plan”).  The 2018 Stock Incentive Plan approved by shareholders in May 2018 covered a total of 155,000 shares, of which 38,750, or 25%, may be restricted stock awards, for a balance of 116,250 stock options assuming all the restricted shares are awarded.

As of September 30, 2019 a total of 38,887 share awards were unvested under the 2013 and 2018 Stock Incentive Plans and up to 11,750 share awards were available for future grant under the 2018 Stock Incentive Plan and none under the 2013 Stock Incentive Plan.  The 2013 and 2018 Stock Incentive Plan share awards have vesting periods of five years.

A summary of the status of the share awards under the RRP and Stock Incentive Plan as of September 30, 2019 and 2018 and changes during the nine months ended September 30, 2019 and 2018 is as follows:

	September 30, 2019					September 30, 2018
	Number of Shares			Weighted Average Grant Date Fair Value		Number of Shares			Weighted Average Grant Date Fair Value
Unvested at the beginning of the period		48,608		$	13.30		10,061		$	8.10
Granted		-			-		48,608			13.30
Vested		(9,721	)		13.30		(9,661	)		8.10
Forfeited		-			-		(400	)		8.10
Unvested at the end of the period		38,887		$	13.30		48,608		$	13.30

28

Quaint Oak Bancorp, Inc.

Notes to Unaudited Consolidated Financial Statements

Note 10 – Stock Compensation Plans (Continued)

Recognition & Retention and Stock Incentive Plans (Continued)

Compensation expense on the restricted stock awards is recognized ratably over the five year vesting period in an amount which is equal to the fair value of the common stock at the date of grant.  During the three months ended September 30, 2019 and 2018, the Company recognized approximately $32,000 and $33,000 of compensation expense, respectively.  A tax benefit of approximately $7,000 was recognized during both the three months ended September 30, 2019 and 2018.  During the nine months ended September 30, 2019 and 2018, the Company recognized approximately $97,000 and $75,000 of compensation expense, respectively.  A tax benefit of approximately $20,000 and $16,000 was recognized during the nine months ended September 30, 2019 and 2018, respectively.  As of September 30, 2019, approximately $469,000 in additional compensation expense will be recognized over the remaining service period of approximately 3.6 years.

Stock Option and Stock Incentive Plans

In May 2008, the shareholders of Quaint Oak Bancorp approved the adoption of the 2008 Stock Option Plan (the “Option Plan”).  In May 2013, the shareholders of Quaint Oak Bancorp approved the adoption of the 2013 Stock Incentive Plan (the “2013 Stock Incentive Plan”).  The Option Plan authorized the grant of stock options to officers, employees and directors of the Company to acquire 277,726 shares of common stock with an exercise price no less than the fair market value on the date of the grant.  The Option Plan expired February 13, 2018, however, outstanding options granted in 2013 remain valid and existing for the remainder of their terms.  The 2013 Stock Incentive Plan approved by shareholders in May 2013 covered a total of 195,000 shares, of which 48,750, or 25%, may be restricted stock awards, for a balance of 146,250 stock options assuming all the restricted shares are awarded.  In May 2018, the shareholders of Quaint Oak Bancorp approved the adoption of the 2018 Stock Incentive Plan (the “2018 Stock Incentive Plan”).  The 2018 Stock Incentive Plan approved by shareholders in May 2018 covered a total of 155,000 shares, of which 38,750, or 25%, may be restricted stock awards, for a balance of 116,250 stock options assuming all the restricted shares are awarded.

For grants in May 2008, the Compensation Committee of the Board of Directors determined to grant the stock options at an exercise price equal to $5.00 per share (split-adjusted) which is higher than the fair market value of the common stock on the grant date.  All of the options granted in May 2008 were either exercised or expired in May 2018.  All incentive stock options issued under the Option Plan and the Stock Incentive Plan are intended to comply with the requirements of Section 422 of the Internal Revenue Code. As of September 30, 2019, a total of 256,336 grants of stock options were outstanding under the Option Plan and Stock Incentive Plan and 37,250 stock options were available for future grant under the Stock Incentive Plan and none under the Option Plan.  Options will become vested and exercisable over a five year period and are generally exercisable for a period of ten years after the grant date.

29

Quaint Oak Bancorp, Inc.

Notes to Unaudited Consolidated Financial Statements

Note 10 – Stock Compensation Plans (Continued)

Stock Option and Stock Incentive Plans (Continued)

A summary of option activity under the Company’s Option Plan and Stock Incentive Plan of September 30, 2019 and 2018 and changes during the nine months ended September 30, 2019 and 2018 is as follows:

	2019							2018
	Number of Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (in years)		Number of Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (in years)
Outstanding at the beginning of the year		279,836		$	10.64		6.8		265,302		$	6.74		3.2
Granted		-			-		-		136,636			13.30		9.9
Exercised		(23,500	)		8.10		-		(106,844	)		5.00		-
Forfeited		-			-		-		(15,258	)		6.22		-
Outstanding at end of period		256,336		$	10.87		6.3		279,836		$	10.64		7.7
Exercisable at end of  period		147,027		$	9.07		3.6		143,200		$	8.10		4.9

The estimated fair value of the options granted in May 2018 was $1.75 per share. The fair value was estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions:

Expected dividend yield	2.11%
Risk-free interest rate	2.96%
Expected life of options	6.5 years
Expected stock-price volatility	12.42%

The dividend yield was calculated on the dividend amount and stock price existing at the grant date.  The risk free interest rate used was based on the rates of United States Treasury securities with maturities equal to the expected lives of the options.  Although the contractual term of the options granted is ten years, the expected term of the options is less.  Management estimated the expected term of the stock options to be the average of the vesting period and the contractual term.  The expected stock-price volatility was estimated by considering the Company’s own stock volatility.  The actual future volatility may differ from our historical volatility.

During both the three months ended September 30, 2019 and 2018, approximately $11,000 of compensation expense was recognized.  A tax benefit of approximately $1,000 was recognized during the three months ended September 30, 2019 and none during the three months ended September 30, 2018.  During the nine months ended September 30, 2019 and 2018, compensation expense was recognized in the amount of $33,000 and $30,000, respectively.  A tax benefit of approximately $2,000 was recognized during the nine months ended September 30, 2019 and none during the nine months ended September 30, 2018. As of September 30, 2019, approximately $160,000 in additional compensation expense will be recognized over the remaining service period of approximately 3.6 years.

30

Quaint Oak Bancorp, Inc.

Notes to Unaudited Consolidated Financial Statements

Note 11 – Fair Value Measurements and Fair Values of Financial Instruments

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

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

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

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

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

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

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

In accordance with ASU 2016-01, the fair value of loans, excluding previously presented impaired loans measured at fair value on a non-recurring basis, is estimated using discounted cash flow analyses.  The discount rates used to determine fair value use interest rate spreads that reflect factors such as liquidity, credit and non-performance risk.  Loans are considered a Level 3 classification.

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

Investment Securities Available For Sale: The fair value of securities available for sale are determined by obtaining quoted market prices on nationally recognized securities exchanges (Level 1), or matrix pricing (Level 2), which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted market prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted prices.

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

31

Quaint Oak Bancorp, Inc.

Notes to Unaudited Consolidated Financial Statements

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

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

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

The table below sets forth the financial assets and liabilities that were accounted for on a recurring and nonrecurring basis by level within the fair value hierarchy as of September 30, 2019 (in thousands):

	September 30, 2019
	Fair Value Measurements Using:
	Total Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Unobservable Inputs (Level 3)
Recurring fair value measurements
Investment securities available for sale:
Mortgage-backed securities:
Governmental National Mortgage Association mortgage-backed securities	$	6,118	$	-	$	6,118	$	-
Federal Home Loan Mortgage Corporation mortgage-backed securities		1,053		-		1,053		-
Federal National Mortgage Association mortgage-backed securities		275		-		275		-
Debt securities:
U.S. government agency		360		-		360		-
Corporate note		1,508		-		1,508		-
Total investment securities available for sale	$	9,314	$	-	$	9,314	$	-
Total recurring fair value measurements	$	9,314	$	-	$	9,314	$	-
Nonrecurring fair value measurements
Impaired loans	$	745	$	-	$	-	$	745
Other Real Estate Owned		1,969		-		-		1,969
Total nonrecurring fair value measurements	$	2,714	$	-	$	-	$	2,714

32

Quaint Oak Bancorp, Inc.

Notes to Unaudited Consolidated Financial Statements

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

The table below sets forth the financial assets and liabilities that were accounted for on a recurring and nonrecurring basis by level within the fair value hierarchy as of December 31, 2018 (in thousands):

	December 31, 2018
	Fair Value Measurements Using:
	Total Fair Value		Quoted Prices in Active  Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Unobservable Inputs (Level 3)
Recurring fair value measurements
Investment securities available for sale:
Mortgage-backed securities:
Governmental National Mortgage Association mortgage-backed securities	$	4,873	$	-	$	4,873	$	-
Federal Home Loan Mortgage Corporation mortgage-backed securities		1,082		-		1,082		-
Federal National Mortgage Association mortgage-backed securities		367		-		367		-
Debt securities:
U.S. government agency		358		-		358		-
Total investment securities available for sale	$	6,680	$	-	$	6,680	$	-
Total recurring fair value measurements	$	6,680	$	-	$	6,680	$	-
Nonrecurring fair value measurements
Impaired loans	$	593	$	-	$	-	$	593
Other Real Estate Owned		1,650		-		-		1,650
Total nonrecurring fair value measurements	$	2,243	$	-	$	-	$	2,243

The following table presents additional quantitative information about assets measured at fair value on a nonrecurring basis and for which the Company has used Level 3 inputs to determine fair value as of September 30, 2019 and December 31, 2018 (in thousands):

	September 30, 2019
	Quantitative Information About Level 3 Fair Value Measurements
	Total Fair Value		Valuation Techniques	Unobservable Input	Range (Weighted Average)
Impaired loans	$	745	Appraisal of collateral (1)	Appraisal adjustments (2)		0%-73% (7	%)
Other real estate owned	$	1,969	Appraisal of collateral (1)	Appraisal adjustments (2)		0%-12% (12	%)

33

Quaint Oak Bancorp, Inc.

Notes to Unaudited Consolidated Financial Statements

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

	December 31, 2019
	Quantitative Information About Level 3 Fair Value Measurements
	Total Fair Value		Valuation Techniques	Unobservable Input	Range (Weighted Average)
Impaired loans	$	593	Appraisal of collateral (1)	Appraisal adjustments (2)		0%-73% (8	%)
Other real estate owned	$	1,650	Appraisal of collateral (1)	Appraisal adjustments (2)		0%-12% (12	%)

________________

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

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

The estimated fair values of the Company’s financial instruments that are not required to be measured or reported at fair value were as follows at September 30, 2019 and December 31, 2018 (in thousands):

					Fair Value Measurements at
					September 30, 2019
	Carrying Amount		Fair Value Estimate		Quoted Prices in Active Markets  for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Unobservable Inputs (Level 3)
Financial Assets
Investment in interest-earning time deposits	$	10,172	$	10,553	$	-	$	-	$	10,553
Loans held for sale		16,483		17,062		-		17,062		-
Loans receivable, net		237,379		236,172		-		-		236,172
Financial Liabilities
Deposits		222,150		225,576		46,886		-		178,690
FHLB long-term borrowings		25,271		25,294		-		-		25,294
Subordinated debt		7,856		8,149		-		-		8,149

					Fair Value Measurements at
					December 31, 2018
	Carrying Amount		Fair Value  Estimate		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Unobservable Inputs (Level 3)
Financial Assets
Investment in interest-earning time deposits	$	4,927	$	4,927	$	-	$	-	$	4,927
Loans held for sale		5,103		5,254		-		5,254		-
Loans receivable, net		216,898		214,351		-		-		214,351
Financial Liabilities
Deposits		211,911		212,320		45,695		-		166,625
FHLB long-term borrowings		15,000		14,973		-		-		14,973
Subordinated debt		7,831		7,831		-		-		7,831

34

Quaint Oak Bancorp, Inc.

Notes to Unaudited Consolidated Financial Statements

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

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

Note 12 – Operating Segments

The Company’s operations currently consist of two reportable operating segments: Banking and Mortgage Banking. The Company offers different products and services through its two segments. The accounting policies of the segments are generally the same as those of the consolidated company.

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

The Mortgage Banking Segment originates residential mortgage loans which are sold into the secondary market along with the loans’ servicing rights.  The profitability of this segment’s operations depends primarily on the gains realized from the sale of loans and processing fees. The Mortgage Banking Segment

is also subject to an extensive system of laws and regulations that are intended primarily for the protection of consumers.

35

Quaint Oak Bancorp, Inc.

Notes to Unaudited Consolidated Financial Statements

Note 12 – Operating Segments (Continued)

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

	As of or for the Three Months Ended September 30,
	2019									2018
	Quaint Oak Bank(1)			Quaint Oak Mortgage			Consolidated			Quaint Oak Bank(1)		Quaint Oak Mortgage			Consolidated
Net Interest Income	$	2,225		$	(54	)	$	2,171		$	2,127	$	(15	)	$	2,112
Provision for Loan Losses		157			-			157			183		-			183
Net Interest Income after Provision for Loan Losses		2,068			(54	)		2,014			1,944		(15	)		1,929
Non-Interest Income
Mortgage banking and title abstract fees		181			168			349			135		138			273
Real estate sales commissions, net		77			-			77			41		-			41
Insurance commissions		109			-			109			101		-			101
Other fees and services charges		(5	)		-			(5	)		32		-			32
Income from bank-owned life insurance		21			-			21			19		-			19
Net gain on loans held for sale		-			996			996			2		671			673
Gain on the sale of SBA loans		98			-			98			82		-			82
Gain on sales of other real estate owned		-			-			-			-		-			-
Total Non-Interest Income		481			1,164			1,645			412		809			1,221
Non-Interest Expense
Salaries and employee benefits		1,485			291			1,776			1,277		292			1,569
Directors’ fees and expenses		54			-			54			54		-			54
Occupancy and equipment		126			55			181			109		41			150
Data processing		92			29			121			72		36			108
Professional fees		96			12			108			96		12			108
FDIC deposit insurance assessment		-			-			-			47		-			47
Other real estate owned expenses		12			-			12			8		-			8
Advertising		60			10			70			48		5			53
Amortization of other intangible		13			-			13			12		-			12
Other		185			15			200			154		12			166
Total Non-Interest Expense		2,123			412			2,535			1,877		398			2,275
Pretax Segment Profit	$	426		$	698		$	1,124		$	479	$	396		$	875
Segment Assets	$	270,502		$	23,318		$	293,820		$	246,807	$	12,148		$	258,955

(1) Includes Quaint Oak Bancorp, Inc. and the Bank’s Subsidiaries, Quaint Oak Real Estate, Quaint Oak Abstract, Quaint Oak Insurance Agency, and QOB Properties.

36

Quaint Oak Bancorp, Inc.

Notes to Unaudited Consolidated Financial Statements

	As of or for the Nine Months Ended September 30,
	2019							2018
	Quaint Oak Bank(1)		Quaint Oak Mortgage			Consolidated		Quaint Oak Bank(1)		Quaint Oak Mortgage			Consolidated
Net Interest Income	$	6,504	$	(98	)	$	6,406	$	6,183	$	(32	)	$	6,151
Provision for Loan Losses		318		-			318		348		-			348
Net Interest Income after Provision for Loan Losses		6,186		(98	)		6,088		5,835		(32	)		5,803
Non-Interest Income
Mortgage banking and title abstract fees		442		377			819		377		223			600
Real estate sales commissions, net		128		-			128		143		-			143
Insurance commissions		307		-			307		283		-			283
Other fees and services charges		85		-			85		150		-			150
Income from bank-owned life insurance		60		-			60		60		-			60
Net gain on loans held for sale		-		2,296			2,296		5		1,574			1,579
Gain on the sale of SBA loans		238		-			238		105		-			105
Gain on sales of other real estate owned		-		-			-		63		-			63
Total Non-Interest Income		1,260		2,673			3,933		1,186		1,797			2,983
Non-Interest Expense
Salaries and employee benefits		4,272		901			5,173		3,968		890			4,858
Directors’ fees and expenses		167		-			167		148		-			148
Occupancy and equipment		354		161			515		326		120			446
Data processing		253		88			341		201		86			287
Professional fees		244		38			282		253		38			291
FDIC deposit insurance assessment		40		-			40		140		-			140
Other real estate owned expenses		23		-			23		10		-			10
Advertising		182		30			212		146		15			161
Amortization of other intangible		37		-			37		36		-			36
Other		538		41			579		443		43			486
Total Non-Interest Expense		6,110		1,259			7,369		5,671		1,192			6,863
Pretax Segment Profit	$	1,336	$	1,316		$	2,652	$	1,350	$	573		$	1,923
Segment Assets	$	270,502	$	23,318		$	293,820	$	246,807	$	12,148		$	258,955

(1) Includes Quaint Oak Bancorp, Inc. and the Bank’s Subsidiaries, Quaint Oak Real Estate, Quaint Oak Abstract, Quaint Oak Insurance Agency, and QOB Properties.

37

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements Are Subject to Change

We make certain statements in this document as to what we expect may happen in the future. These statements usually contain the words “believe,” “estimate,” “project,” “expect,” “anticipate,” “intend” or similar expressions. Because these statements look to the future, they are based on our current expectations and beliefs. Actual results or events may differ materially from those reflected in the forward-looking statements. You should be aware that our current expectations and beliefs as to future events are subject to change at any time, and we can give you no assurances that the future events will actually occur.

General

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

At September 30, 2019, the Bank has five wholly-owned subsidiaries, Quaint Oak Mortgage, LLC, Quaint Oak Real Estate, LLC, Quaint Oak Abstract, LLC, QOB Properties, LLC, and Quaint Oak Insurance Agency, LLC, each a Pennsylvania limited liability company.  The mortgage company offers mortgage banking in the Lehigh Valley, Delaware Valley and Philadelphia County region of Pennsylvania.  The real estate and abstract companies offer real estate sales and title abstract services, respectively, primarily in the Lehigh Valley region of Pennsylvania.  These companies began operation in July 2009.   In February 2019, Quaint Oak Mortgage opened a mortgage banking office in Philadelphia, Pennsylvania.  QOB Properties, LLC began operations in July 2012 and holds Bank properties acquired through a foreclosure proceeding or acceptance of a deed in lieu of foreclosure.  Quaint Oak Insurance Agency, LLC, located in Chalfont, Pennsylvania, began operations in August 2016 and provides a broad range of personal and commercial insurance coverage solutions.

Critical Accounting Policies

The accounting and financial reporting policies of the Company conform to accounting principles generally accepted in the United States of America and to general practices within the banking industry. Accordingly, the consolidated financial statements require certain estimates, judgments, and assumptions, which are believed to be reasonable, based upon the information available. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the periods presented. The following accounting policies comprise those that management believes are the most critical to aid in fully understanding and evaluating our reported financial results. These policies require numerous estimates or economic assumptions that may prove inaccurate or may be subject to variations which may significantly affect our reported results and financial condition for the period or in future periods.

38

Allowance for Loan Losses.  The allowance for loan losses represents management’s estimate of losses inherent in the loan portfolio as of the balance sheet date and is recorded as a reduction to loans receivable. The allowance for loan losses is increased by the provision for loan losses, and decreased by charge-offs, net of recoveries. Loans deemed to be uncollectible are charged against the allowance for loan losses, and subsequent recoveries, if any, are credited to the allowance. All, or part, of the principal balance of loans receivable are charged off to the allowance as soon as it is determined that the repayment of all, or part, of the principal balance is highly unlikely. Because all identified losses are immediately charged off, no portion of the allowance for loan losses is restricted to any individual loan or groups of loans, and the entire allowance is available to absorb any and all loan losses.

The allowance for loan losses is maintained at a level considered adequate to provide for losses that can be reasonably anticipated. Management performs a quarterly evaluation of the adequacy of the allowance. The allowance is based on the Company’s past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, composition of the loan portfolio, current economic conditions and other relevant factors. This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant revision as more information becomes available.

The allowance consists of specific, general and unallocated components. The specific component relates to loans that are designated as impaired. For loans that are designated as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers pools of loans by loan class. These pools of loans are evaluated for loss exposure based upon historical loss rates for each of these categories of loans, adjusted for qualitative factors. These significant factors may include changes in lending policies and procedures, changes in existing general economic and business conditions affecting our primary lending areas, credit quality trends, collateral value, loan volumes and concentrations, seasoning of the loan portfolio, recent loss experience in particular segments of the portfolio, duration of the current business cycle and bank regulatory examination results. The applied loss factors are reevaluated quarterly to ensure their relevance in the current economic environment.  Residential owner occupied mortgage lending generally entails a lower risk of default than other types of lending. Consumer loans and commercial real estate loans generally involve more risk of collectability because of the type and nature of the collateral and, in certain cases, the absence of collateral. It is the Company’s policy to establish a specific reserve for loss on any delinquent loan when it determines that a loss is probable. An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not considered impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis by either the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral if the loan is collateral dependent.  An allowance for loan losses is established for an impaired loan if its carrying value exceeds its estimated fair value. The estimated fair values of substantially all of the Company’s impaired loans are measured based on the estimated fair value of the loan’s collateral.

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A loan is identified as a troubled debt restructuring (“TDR”) if the Company, for economic or legal reasons related to a debtor’s financial difficulties, grants a concession to the debtor that it would not otherwise consider. Concessions granted under a TDR typically involve a temporary or permanent reduction in payments or interest rate or an extension of a loan’s stated maturity date at less than a current market rate of interest. Loans identified as TDRs are designated as impaired.

For loans secured by real estate, estimated fair values are determined primarily through third-party appraisals. When a real estate secured loan becomes impaired, a decision is made regarding whether an updated certified appraisal of the real estate is necessary. This decision is based on various considerations, including the age of the most recent appraisal, the loan-to-value ratio based on the original appraisal and the condition of the property. Appraised values are discounted to arrive at the estimated selling price of the collateral, which is considered to be the estimated fair value. The discounts also include estimated costs to sell the property.

The allowance calculation methodology includes further segregation of loan classes into risk rating categories. The borrower’s overall financial condition, repayment sources, guarantors and value of collateral, if appropriate, are evaluated annually for all loans (except one-to-four family residential owner-occupied loans) where the total amount outstanding to any borrower or group of borrowers exceeds $500,000, or when credit deficiencies arise, such as delinquent loan payments. Credit quality risk ratings include regulatory classifications of special mention, substandard, doubtful and loss. Loans criticized special mention have potential weaknesses that deserve management’s close attention. If uncorrected, the potential weaknesses may result in deterioration of the repayment prospects. Loans classified substandard have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They include loans that are inadequately protected by the current sound net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans classified doubtful have all the weaknesses inherent in loans classified substandard with the added characteristic that collection or liquidation in full, on the basis of current conditions and facts, is highly improbable. Loans classified as a loss are considered uncollectible and are charged to the allowance for loan losses. Loans not classified are rated pass. In addition, Federal regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan losses and may require the Company to recognize additions to the allowance based on their judgments about information available to them at the time of their examination, which may not be currently available to management. Based on management’s comprehensive analysis of the loan portfolio, management believes the current level of the allowance for loan losses is adequate.

Income Taxes.  Deferred income tax assets and liabilities are determined using the liability (or balance sheet) method.  Under this method, the net deferred tax asset or liability is determined based on the tax effects of the temporary differences between the book and tax bases of the various assets and liabilities and net operating loss carryforwards and gives current recognition to changes in tax rates and laws.  The realization of our deferred tax assets principally depends upon our achieving projected future taxable income.  We may change our judgments regarding future profitability due to future market conditions and other factors.  We may adjust our deferred tax asset balances if our judgments change.

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Comparison of Financial Condition at September 30, 2019 and December 31, 2018

General.   The Company’s total assets at September 30, 2019 were $293.8 million, an increase of $22.4 million, or 8.3%, from $271.4 million at December 31, 2018.  This growth in total assets was primarily due to a $20.5 million, or 9.4%, increase in loans receivable, net, an $11.4 million, or 223.0%, increase in loans held for sale, a $5.2 million, or 106.5%, increase in investment in interest-earning time deposits, a $2.6 million, or 39.5%, increase in investment securities available for sale, and a $2.1 million, or 198.9%, increase in prepaid expenses and other assets.  These increases were partially offset by a $20.5 million, or 78.8%, decrease in cash and cash equivalents.

Cash and Cash Equivalents. Cash and cash equivalents decreased $20.5 million, or 78.8%, from $26.0 million at December 31, 2018 to $5.5 million at September 30, 2019 as excess liquidity, along with deposits and Federal Home Loan Bank borrowings, were used primarily to fund a $20.5 million increase in loans receivable, net, an $11.4 million increase in loans held for sale, a $5.2 million increase in investment in interest-earning time deposits, and a $2.6 million increase in investment securities available for sale.

Investment in Interest-Earning Time Deposits.  Investment in interest-earning time deposits increased $5.2 million, or 106.5%, from $4.9 million at December 31, 2018 to $10.2 million at September 30, 2019 as the Company invested excess liquidity into higher yielding interest-earning assets.

Investment Securities Available for Sale.  Investment securities available for sale increased $2.6 million, or 39.5%, from $6.7 million at December 31, 2018 to $9.3 million at September 30, 2019, as the Company invested excess liquidity into higher yielding interest-earning assets.

Loans Held for Sale.  Loans held for sale increased $11.4 million or 223.0%, from $5.1 million at December 31, 2018 to $16.5 million at September 30, 2019 as the Bank’s mortgage banking subsidiary, Quaint Oak Mortgage, LLC, originated $98.0 million of one-to-four family residential loans during the nine months ended September 30, 2019 and sold $86.3 million of loans in the secondary market during this same period. The Bank did not originate any equipment loans held for sale during the nine months ended September 30, 2019 but sold $258,000 of equipment loans during this same period.

Loans Receivable, Net.  Loans receivable, net, increased $20.5 million, or 9.4%, to $237.4 million at September 30, 2019 from $216.9 million December 31, 2018.  This increase was funded primarily from deposits, FHLB borrowings, and excess liquidity. Increases within the loan portfolio occurred in commercial business loans which increased $17.4 million, or 73.5%, commercial real estate loans which increased a $7.0 million, or 6.8%, construction loans which increased $3.4 million, or 34.5%, and other consumer loans which increased $8,000, or 42.1%.   These increases were partially offset by a $5.2 million, or 10.9%, decrease in one-to-four family residential non-owner occupied loans, an $842,000, or 3.5%, decrease in multi-family residential loans, a $789,000, or 11.9%, decrease in one-to-four family residential owner occupied loan, and a $358,000, or 8.2%, decrease in home equity loans.  The Company continues its strategy of diversifying its loan portfolio with higher yielding and shorter-term loan products and selling substantially all of its newly originated one-to-four family owner-occupied loans into the secondary market.

Other Real Estate Owned.  Other real estate owned (OREO) amounted to $2.0 million at September 30, 2019, consisting of four properties that were collateral for a non-performing construction loan.  During the nine months ended September 30, 2019, the Company made a total of $319,000 in capital improvements to the properties.  The balance of these OREO properties totaled $1.7 million at December 31, 2018.  Non-performing assets amounted to $2.9 million, or 0.99% of total assets at September 30, 2019 compared to $2.8 million, or 1.04% of total assets at December 31, 2018.

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Prepaid Expenses and Other Assets.  Prepaid expenses and other assets increased $2.1 million, or 198.9%, due primarily to the adoption of Financial Accounting Standards Board accounting standard ASU 2016-02, Leases (Topic 842) by the Company on January 1, 2019.  This standard requires a lessee to recognize the assets and liabilities that arise from leases on the balance sheet by recognizing a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term.  The impact of adopting this accounting standard on the Company’s balance sheet was approximately $1.3 million at September 30, 2019.

Deposits.  Total deposits increased $10.2 million, or 4.8%, to $222.2 million at September 30, 2019 from $211.9 million at December 31, 2018. This increase in deposits was primarily attributable to increases of $9.0 million, or 5.4%, in certificates of deposit, $1.2 million, or 4.6%, in money market accounts, and $634,000 or 56.6%, in savings accounts. These increases were partially offset by decreases of $497,000, or 2.8%, in non-interest bearing checking accounts and $184,000, or 95.8%, in passbook accounts.

Federal Home Loan Bank Advances. Aggregate FHLB borrowings increased $10.3 million, or 42.8%, from $24.0 million at December 31, 2018 to $34.3 million at September 30, 2019. Long-term borrowings increased $10.3 million, or 68.5%, from $15.0 million at December 31, 2018 to $25.3 million at September 30, 2019, as a result of a $9.0 million term-out of short-term borrowings at varying maturities and $3.3 million of additional long-term borrowings, partially offset by the repayment of $2.0 million of long-term borrowings that matured in June and September 2019. Short-term borrowings were $9.0 mllion at both December 31, 2018 and September 30, 2019, as a result of the $9.0 million term-out of short-term borrowings replaced in the third quarter of 2019, with $9.0 million of short-term borrowings in order to fund loan demand.

Subordinated Debt. On December 27, 2018, the Company issued $8.0 million in subordinated notes. These notes have a maturity date of December 31, 2028, and bear interest at a fixed rate of 6.50%. The Company may, at its option, at any time on an interest payment date on or after December 31, 2023, redeem the notes, in whole or in part, at par plus accrued interest to the date of redemption. The balance of subordinated debt, net of unamortized debt issuance costs, was $7.9 million at September 30, 2019 and $7.8 million at December 31, 2018.

Stockholders’ Equity.  Total stockholders’ equity increased $1.7 million, or 7.2%, to $25.5 million at September 30, 2019 from $23.8 million at December 31, 2018.  Contributing to the increase was net income for the nine months ended September 30, 2019 of $1.9 million, the reissuance of treasury stock for exercised stock options of $190,000, common stock earned by participants in the employee stock ownership plan of $136,000, amortization of stock awards and options under our stock compensation plans of $130,000, the reissuance of treasury stock under the Bank’s 401(k) Plan of $31,000, and other comprehensive income, net of $27,000.  These increases were partially offset by dividends paid of $496,000 and by the purchase of treasury stock of $186,000.

Comparison of Operating Results for the Three Months Ended September 30, 2019 and 2018

General.  Net income amounted to $802,000 for the three months ended September 30, 2019, an increase of $144,000, or 21.9%, compared to net income of $658,000 for three months ended September 30, 2018.  The increase in net income on a comparative quarterly basis was primarily the result of an increase in non-interest income of $424,000, an increase in net interest income of $59,000, and a decrease in the provision for loan losses of $26,000, partially offset by an increase in non-interest expense of $260,000 and an increase in the provision for income taxes of $105,000.

Net Interest Income.  Net interest income increased $59,000, or 2.8%, to $2.17 million for the three months ended September 30, 2019 from $2.12 million for the three months ended September 30, 2018.  The increase was driven by a $425,000, or 13.7%, increase in interest income, partially offset by a $366,000, or 36.6%, increase in interest expense.

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Interest Income.  Interest income increased $425,000 or 13.7%, to $3.5 million for the three months ended September 30, 2019 from $3.1 million for the three months ended September 30, 2018. The increase in interest income was primarily due to a $26.8 million increase in average loans receivable, net, including loans held for sale, which increased from an average balance of $215.9 million for the three months ended September 30, 2018 to an average balance of $242.7 million for the three months ended September 30, 2019, and had the effect of increasing interest income $364,000.  Also contributing to this increase was a five basis point increase in the yield on average loans receivable, net, including loans held for sale, which increased from 5.43% for the three months ended September 30, 2018 to 5.48% for the three months ended September 30, 2019, which had the effect of increasing interest income $29,000  The increase in interest income was also due to a $5.3 million increase in investment in interest-earning time deposits which increased from an average balance of $4.9 million for the three months ended September 30, 2018 to an average balance of $10.2 million for the three months ended September 30, 2019, which had the effect of increasing interest income $25,000.  Also contributing to this increase was a 108 basis point increase in the yield on investment in interest-earning time deposits which increased from 1.87% for the three months ended September 30, 2018 to 2.95% for the three months ended September 30, 2019, which had the effect of increasing interest income $27,000.  The increase in interest income was partially offset by an $11.8 million decrease in average cash and cash equivalents due from banks, interest bearing, which decreased from an average balance of $19.6 million for the three months ended September 30, 2018 to an average balance of $7.8 million for the three months ended September 30, 2019, and had the effect of decreasing interest income $60,000.

Interest Expense.  Interest expense increased $366,000 or 36.6%, to $1.4 million for the three months ended September 30, 2019 from $1.0 million for the three months ended September 30, 2018.  The increase in interest expense was primarily attributable to a $15.3 million increase in average certificate of deposit accounts which increased from an average balance of $160.7 million for the three months ended September 30, 2018 to an average balance of $176.0 million for the three months ended September 30, 2019, and had the effect of increasing interest expense $76,000.  Also contributing to this increase was a 38 basis point increase in rate on average certificate of deposit accounts, which increased from 1.98% for the three months ended September 30, 2018 to 2.36% for the three months ended September 30, 2019, and had the effect of increasing interest expense by $166,000.  The increase in interest expense was also due to average subordinated debt of $7.9 million for the three months ended September 30, 2019, at the applicable interest rate of 6.5%, which had the effect of increasing interest expense by $130,000 compared to none for the three months ended September 30, 2018.  The average interest rate spread decreased from 3.18% for the three months ended September 30, 2018 to 2.92% for the three months ended September 30, 2019 while the net interest margin decreased from 3.39% for the three months ended September 30, 2018 to 3.20% for the three months ended September 30, 2019.

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

	Three Months Ended September 30,
	2019							2018
	Average Balance		Interest		Average Yield/ Rate			Average Balance		Interest		Average Yield/ Rate
	(Dollars in thousands)
Interest-earning assets:
Due from banks, interest-bearing	$	7,774	$	51		2.62	%	$	19,587	$	99		2.02	%
Investment in interest-earning time deposits		10,172		75		2.95			4,925		23		1.87
Investment securities available for sale		9,530		67		2.81			7,211		39		2.16
Loans receivable, net (1) (2) (3)		242,734		3,325		5.48			215,922		2,932		5.43
Investment in FHLB stock		1,110		20		7.21			1,245		20		6.43
Total interest-earning assets		271,320		3,538		5.22	%		248,890		3,113		5.00	%
Non-interest-earning assets		12,518							10,837
Total assets	$	283,838						$	259,727
Interest-bearing liabilities:
Passbook accounts	$	37	$	*		*	%	$	276	$	*		*	%
Savings accounts		1,762		1		0.23			1,887		1		0.21
Money market accounts		27,621		55		0.80			29,634		60		0.81
Certificate of deposit accounts		176,009		1,037		2.36			160,717		795		1.98
Total deposits		205,429		1,093		2.13			192,514		856		1.78
FHLB short-term borrowings		920		7		3.04			9,989		57		2.28
FHLB long-term borrowings		23,785		137		2.30			17,967		88		1.96
Subordinated debt		7,851		130		6.62			-		-		-
Total interest-bearing liabilities		237,985		1,367		2.30	%		220,470		1,001		1.82	%
Non-interest-bearing liabilities		20,909							16,052
Total liabilities		258,894							236,522
Stockholders’ Equity		24,944							23,205
Total liabilities and Stockholders’ Equity	$	283,838						$	259,727
Net interest-earning assets	$	33,335						$	28,420
Net interest income; average interest rate spread			$	2,171		2.92	%			$	2,112		3.18	%
Net interest margin (4)						3.20	%						3.39	%
Average interest-earning assets to average interest-    bearing liabilities						114.01	%						112.89	%

________________________

* Not meaningful.

(1) Includes loans held for sale.

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

(3) Includes tax free municipal leases with an aggregate average balance of $10,000 and an average yield of 4.06% for the three months ended September 30, 2018.  The tax-exempt income from such loans has not been calculated on a tax equivalent basis.

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

Provision for Loan Losses.  The Company’s provision for loan losses decreased $26,000, or 14.2%, from $183,000 for the three months ended September 30, 2018 to $157,000 for the three months ended September 30, 2019, based on an evaluation of the allowance relative to such factors as volume of the loan portfolio, concentrations of credit risk, prevailing economic conditions, prior loan loss experience and amount of non-performing loans at September 30, 2019.

Non-performing loans amounted to $932,000 or 0.39% of net loans receivable at September 30, 2019, consisting of seven loans, three of which are on non-accrual status and four of which are 90 days or more past due and accruing interest. Comparably, non-performing loans amounted to $1.2 million, or 0.54% of net loans receivable at December 31, 2018, consisting of nine loans, three of which were on non-accrual status and three of which were 90 days or more past due and accruing interest.  The non-performing loans at September 30, 2019 include four one-to-four family non-owner occupied residential loans, two commercial real estate loans, and one one-to-four family owner occupied residential loan, and all are generally well-collateralized or adequately reserved for.  The allowance for loan losses as a percent of total loans receivable was 0.95% at September 30, 2019 and 0.90% at December 31, 2018.

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Non-Interest Income.  Non-interest income increased $424,000 or 34.7%, from $1.2 million for the three months ended September 30, 2018 to $1.6 million for the three months ended September 30, 2019 due primarily to a $323,000, or 48.0%, increase in net gain on loans held for sale, a $76,000, or 27.8%, increase in mortgage banking and title abstract fees, a $36,000, or 87.8%, increase in real estate sales commissions, net, a $16,000, or 19.5%, increase in gain on the sales of SBA loans, an $8,000, or 7.9%, increase in insurance commissions, and a $2,000, or 10.5%, increase in income from bank-owned life insurance.  These increases were partially offset by a $37,000, or 115.6%, decrease in other fees and service charges.

Non-Interest Expense.  Total non-interest expense increased $260,000, or 11.4%, from $2.3 million for the three months ended September 30, 2018 to $2.5 million for the three months ended September 30, 2019 due primarily to a $207,000, or 13.2%, increase in salaries and employee benefits expense, a $34,000, or 20.5%, increase in other expenses, a $31,000, or 20.7%, increase in occupancy and equipment expense, a $17,000, or 32.1%, increase in advertising expense, a $13,000, or 12.0%, increase in data processing expense, a $4,000, or 50.0%, increase in other real estate owned expense, and a $1,000, or 8.3%, increase in amortization of other intangible.  These increases were partially offset by a $47,000 decrease in FDIC deposit insurance expense.  The increase in salaries and employee benefits expense was due primarily to increased staff in lending, compliance and information technology.  The decrease in FDIC deposit insurance assessment was due to an FDIC Small Bank Assessment credit which was applied to and reduced the September quarterly 2019 assessment to zero.

Provision for Income Tax.  The provision for income tax increased $105,000, or 48.4%, from $217,000 for the three months ended September 30, 2018 to $322,000 for the three months ended September 30, 2019 due primarily to an increase in pre-tax income and an increase in our effective tax rate from 24.8% for the three months ended September 30, 2018 to 28.6% for the three months ended September 30, 2019.  The increase in our effective tax rate was primarily due to a tax deduction taken in 2018 related to the exercise of non-qualified stock options.

Comparison of Operating Results for the Nine Months Ended September 30, 2019 and 2018

General.  Net income amounted to $1.9 million for the nine months ended September 30, 2019, an increase of $399,000, or 26.9%, compared to net income of $1.5 million for nine months ended September 30, 2018.  The increase in net income was primarily the result of an increase in non-interest income of $950,000, an increase in net interest income of $255,000, and a decrease in the provision for loan losses of $30,000, partially offset by an increase in non-interest expense of $506,000 and an increase in the provision for income taxes of $330,000.

Net Interest Income.  Net interest income increased $255,000, or 4.1%, to $6.41 million for the nine months ended September 30, 2019 from $6.15 million for the nine months ended September 30, 2018.  The increase was driven by a $1.5 million, or 16.4%, increase in interest income, partially offset by a $1.2 million, or 43.5%, increase in interest expense.

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Interest Income.  Interest income increased $1.5 million, or 16.4%, to $10.4 million for the nine months ended September 30, 2019 from $8.9 million for the nine months ended September 30, 2018.  The increase in interest income was primarily due to a $19.5 million increase in average loans receivable, net, including loans held for sale, which increased from an average balance of $212.5 million for the nine months ended September 30, 2018 to an average balance of $232.0 million for the nine months ended September 30, 2019, and had the effect of increasing interest income $779,000.  Also contributing to this increase was a 22 basis point increase in the yield on average loans receivable, net, including loans held for sale, which increased from 5.33% for the nine months ended September 30, 2018 to 5.55% for the nine months ended September 30, 2019, which had the effect of increasing interest income $393,000. The increase in interest income was also due to a $4.6 million increase in investment in interest-earning time deposits which increased from an average balance of $4.9 million for the nine months ended September 30, 2018 to an average balance of $9.5 million for the nine months ended September 30, 2019, which had the effect of increasing interest income $63,000.  Also contributing to this increase was a 94 basis point increase in the yield on investment in interest-earning time deposits which increased from 1.85% for the nine months ended September 30, 2018 to 2.79% for the nine months ended September 30, 2019, which had the effect of increasing interest income $67,000.  The increase in interest income was also due to a $1.8 million increase in average cash and cash equivalents due from banks, interest bearing, which increased from an average balance of $16.4 million for the nine months ended September 30, 2018 to an average balance of $18.2 million for the nine months ended September 30, 2019, and had the effect of increasing interest income $24,000.  Also contributing to this increase was a 63 basis point increase in the yield on average cash and cash equivalents due from banks, interest bearing, which increased from 1.80% for the nine months ended September 30, 2018 to 2.43% for the nine months ended September 30, 2019, and had the effect of increasing interest income $87,000.

Interest Expense.  Interest expense increased $1.2 million, or 43.5%, to $4.0 million for the nine months ended September 30, 2019 from $2.8 million for the nine months ended September 30, 2018.  The increase in interest expense was primarily attributable to a $21.1 million increase in average certificate of deposit accounts which increased from an average balance of $154.8 million for the nine months ended September 30, 2018 to an average balance of $175.9 million for the nine months ended September 30, 2019, and had the effect of increasing interest expense $300,000.  Also contributing to this increase was a 40 basis point increase in rate on average certificate of deposit accounts, which increased from 1.89% for the nine months ended September 30, 2018 to 2.29% for the nine months ended September 30, 2019, and had the effect of increasing interest expense by $521,000.  The increase in interest expense was also due to average subordinated debt of $7.8 million for the nine months ended September 30, 2019, at the applicable interest rate of 6.5%, which had the effect of increasing interest expense by $389,000 compared to none for the nine months ended September 30, 2018.  The average interest rate spread decreased from 3.19% for the nine months ended September 30, 2018 to 2.92% for the nine months ended September 30, 2019 while the net interest margin decreased from 3.38% for the nine months ended September 30, 2018 to 3.18% for the nine months ended September 30, 2019.

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

	Nine Months Ended September 30,
	2019							2018
	Average Balance		Interest		Average Yield/ Rate			Average Balance		Interest		Average Yield/ Rate
	(Dollars in thousands)
Interest-earning assets:
Due from banks, interest-bearing	$	18,204	$	332		2.43	%	$	16,383	$	221		1.80	%
Investment in interest-earning time deposits		9,455		198		2.79			4,910		68		1.85
Investment securities available for sale		8,144		165		2.70			7,523		110		1.95
Loans receivable, net (1) (2) (3)		231,967		9,662		5.55			212,465		8,490		5.33
Investment in FHLB stock		1,095		60		7.30			1,242		58		6.23
Total interest-earning assets		268,865		10,417		5.17	%		242,523		8,947		4.92	%
Non-interest-earning assets		12,193							9,447
Total assets	$	281,058						$	251,970
Interest-bearing liabilities:
Passbook accounts	$	70	$	*		*	%	$	333	$	*		*	%
Savings accounts		1,579		1		0.25			1,953		3		0.20
Money market accounts		27,657		165		0.80			30,925		185		0.80
Certificate of deposit accounts		175,920		3,017		2.29			154,795		2,196		1.89
Total deposits		205,226		3,185		2.07			188,006		2,384		1.69
FHLB short-term borrowings		4,233		101		3.18			9,996		142		1.89
FHLB long-term borrowings		19,994		336		2.24			17,989		270		2.00
Subordinated debt		7,840		389		6.62			-		-		-
Total interest-bearing liabilities		237,293		4,011		2.25	%		215,991		2,796		1.73	%
Non-interest-bearing liabilities		19,330							13,224
Total liabilities		256,623							229,215
Stockholders’ Equity		24,435							22,755
Total liabilities and Stockholders’ Equity	$	281,058						$	251,970
Net interest-earning assets	$	31,572						$	26,532
Net interest income; average interest rate spread			$	6,406		2.92	%			$	6,151		3.19	%
Net interest margin (4)						3.18	%						3.38	%
Average interest-earning assets to average interest-    bearing liabilities						113.30	%						112.28	%

_______________________

(1) Includes loans held for sale.

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

(3) Includes tax free municipal leases with an aggregate average balance of $21,000 and an average yield of 4.21% for the nine months ended September 30, 2018. The tax-exempt income from such loans has not been calculated on a tax equivalent basis.

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

Provision for Loan Losses.  The Company decreased its provision for loan losses by $30,000, or 8.6%, from $348,000 for the nine months ended September 30, 2018 to $318,000 for the nine months ended September 30, 2019.  As was the case for the quarter, the decrease was based on an evaluation of the allowance relative to such factors as volume of the loan portfolio, concentrations of credit risk, prevailing economic conditions, prior loan loss experience and amount of non-performing loans.  See additional discussion under “Comparison of Operating Results for the Three Months Ended September 30, 2019 and 2018-Provision for Loan Losses.”

47

Non-Interest Income.  Non-interest income increased $950,000, or 31.8%, from $3.0 million for the nine months ended September 30, 2018 to $3.9 million for the nine months ended September 30, 2019 primarily due to a $717,000, or 45.4%, increase in net gain on loans held for sale, a $219,000, or 36.5%, increase in mortgage banking and title abstract fees, a $133,000, or 126.7%, increase in gain on the sales of SBA loans, and a $24,000, or 8.5%, increase in insurance commissions.  These increases were partially offset by a $65,000, or 43.3%, decrease in other fees and service charges, a $63,000, or 100%, decrease in the gain on the sales of other real estate owned, and a $15,000, or 10.5%, decrease in real estate sales commissions, net.

Non-Interest Expense.  Non-interest expense increased $506,000, or 7.4%, from $6.9 million for the nine months ended September 30, 2018 to $7.4 million for the nine months ended September 30, 2019 due primarily to a $315,000, or 6.5%, increase in salaries and employee benefits expense, a $93,000, or 19.1%, increase in other expenses, a $69,000, or 15.5%, increase in occupancy and equipment expenses, a $54,000, or 18.8%, increase in data processing expense, a $51,000, or 31.7%, increase in advertising expense, a $19,000, or 12.8%, increase in directors’ fees and expenses, a $13,000, or 130.0% increase in other real estate owned expense, and a $1,000, or 2.8%, increase in amortization of other intangible.  These increases were partially offset by a $100,000, or 71.4% decrease in FDIC deposit insurance expense and a $9,000, or 3.1%, decrease in professional fees.  The increase in salaries and employee benefits expense was due primarily to increased staff in lending, compliance and information technology.  The decrease in FDIC deposit insurance assessment was due to a reduction in the Bank’s assessment multiplier and the FDIC Small Bank Assessment credit which was applied to and reduced the September quarterly 2019 assessment to zero.

Provision for Income Tax.  The provision for income tax increased $330,000, or 74.7%, from $442,000 for the nine months ended September 30, 2018 to $772,000 for the nine months ended September 30, 2019 due primarily to an increase in pre-tax income and an increase in our effective tax rate from 23.0% for the nine months ended September 30, 2018 to 29.1% for the nine months ended September 30, 2019.  The increase in our effective tax rate was primarily due to a tax deduction taken in 2018 related to the exercise of non-qualified stock options

48

Operating Segments

The Company’s operations consist of two reportable operating segments: Banking and Mortgage Banking. Our Banking Segment generates revenues primarily from its lending, deposit gathering and fee business activities. Our Mortgage Banking Segment originates residential mortgage loans which are sold into the secondary market along with the loans’ servicing rights.   Detailed segment information appears in Note 12 in the Notes to Consolidated Financial Statements.

Our Banking Segment reported a pre-tax segment profit (“PTSP”) for the three months ended September 30, 2019 of $426,000, a $53,000, or 11.1%, decrease from the same period in 2018.  This decrease in PTSP was due to an increase in non-interest expense which was partially offset by increases in net interest income and non-interest income and a decrease in the provision for loan losses.  The increase in non-interest expense was due primarily to increases in salaries and employees benefits expense and other expense.  The increase in net interest income was primarily attributable to an increase in interest income, driven by higher average loan balances and yields, partially offset by a higher cost of funds.  The increase in cost of funds was impacted by the interest expense related to $8.0 million in subordinated debt issued in December 2018. The increase in non-interest income, was primarily due to an increase in title abstract fees and the gain on the sale of SBA loans.

Our Mortgage Banking Segment reported a PTSP for the three months ended September 30, 2019 of $698,000, a $302,000, or 76.3%, increase from the same period in 2018.  The increase in PTSP was primarily due to the increase in non-interest income which was driven by an increases in net gain on the sale of loans and processing fees.  This increase was partially offset by a decrease in net interest income and an increase in non-interest expense.

Our Banking Segment reported a pre-tax segment profit (“PTSP”) for the nine months ended September 30, 2019 of $1.3 million, a $14,000, or 1.0%, decrease from the same period in 2018.  This decrease in PTSP was primarily due to an increase in non-interest expense, which was partially offset by an increase in net interest income.  The increase in net interest income was primarily attributable to an increase in interest income, driven by higher average loan balances and yields, partially offset by a higher cost of funds.  As was the case with the quarter the increase in cost of funds was impacted by the interest expense related to $8.0 million in subordinated debt issued in December 2018.  Also as was the case for the quarter, the increase in non-interest expense was due primarily to increases in salaries and employees benefits expense and other expense.

Our Mortgage Banking Segment reported a PTSP for the nine months ended September 30, 2019 of $1.3 million, a $743,000, or 129.7%, increase from the same period in 2018.  The increase in PTSP was primarily due to the increase in non-interest income which was driven by an increases in net gain on the sale of loans and processing fees.  This increase was partially offset by an increase in non-interest expense and decrease in net interest income.

49

Liquidity and Capital Resources

The Company’s primary sources of funds are deposits, amortization and prepayment of loans and to a lesser extent, loan sales and other funds provided from operations.  While scheduled principal and interest payments on loans are a relatively predictable source of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions and competition.  The Company sets the interest rates on its deposits to maintain a desired level of total deposits.  In addition, the Company invests excess funds in short-term interest-earning assets that provide additional liquidity.  At September 30, 2019, the Company’s cash and cash equivalents amounted to $5.5 million.  At such date, the Company also had $2.0 million invested in interest-earning time deposits maturing in one year or less.

The Company uses its liquidity to fund existing and future loan commitments, to fund deposit outflows, to invest in other interest-earning assets and to meet operating expenses.  At September 30, 2019, Quaint Oak Bank had outstanding commitments to originate loans of $10.2 million, commitments under unused lines of credit of $20.3 million, and $1.8 million under standby letters of credit.

At September 30, 2019, certificates of deposit scheduled to mature in less than one year totaled $66.6 million.  Based on prior experience, management believes that a significant portion of such deposits will remain with us, although there can be no assurance that this will be the case.

In addition to cash flow from loan payments and prepayments and deposits, the Company has significant borrowing capacity available to fund liquidity needs.  If the Company requires funds beyond its ability to generate them internally, borrowing agreements exist with the Federal Home Loan Bank of Pittsburgh (FHLB), which provide an additional source of funds.  As of September 30, 2019, we had $34.3 million of borrowings from the FHLB and had $141.0 million in borrowing capacity. Under terms of the collateral agreement with the FHLB of Pittsburgh, we pledge residential mortgage loans as well as Quaint Oak Bank’s FHLB stock as collateral for such advances.  In addition, as of September 30, 2019 Quaint Oak Bank had $725,000 in borrowing capacity with the Federal Reserve Bank of Philadelphia.  There were no borrowings under this facility at September 30, 2019.

Our stockholders’ equity amounted to $25.5 million at September 30, 2019, an increase of $1.7 million, or 7.2%, from $23.8 million at December 31, 2018.  Contributing to the increase was net income for the nine months ended September 30, 2019 of $1.9 million, the reissuance of treasury stock for exercised stock options of $190,000, common stock earned by participants in the employee stock ownership plan of $136,000, amortization of stock awards and options under our stock compensation plans of $130,000, the reissuance of treasury stock under the Bank’s 401(k) Plan of $31,000, and other comprehensive income, net of $27,000.  These increases were partially offset by dividends paid of $496,000 and by the purchase of treasury stock of $186,000.  For further discussion of the stock compensation plans, see Note 10 in the Notes to Unaudited Consolidated Financial Statements contained elsewhere herein.

Quaint Oak Bank is required to maintain regulatory capital sufficient to meet tier 1 leverage, common equity tier 1 capital, tier 1 risk-based and total risk-based capital ratios of at least 4.00%, 4.50%, 6.00%, and 8.00%, respectively.  At September 30, 2019, Quaint Oak Bank exceeded each of its capital requirements with ratios of 10.72%, 13.43%, 13.43% and 14.46%, respectively. As a small savings and loan holding company eligible for exemption, the Company is not currently subject to any regulatory capital requirements.

50

Off-Balance Sheet Arrangements

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

Commitments.  At September 30, 2019, we had unfunded commitments under lines of credit of $20.3 million, $10.2 million of commitments to originate loans, and $1.8 million under standby letters of credit.  We had no commitments to advance additional amounts pursuant to outstanding lines of credit or undisbursed construction loans.

Impact of Inflation and Changing Prices

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not Applicable.

ITEM 4. CONTROLS AND PROCEDURES

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)) as of September 30, 2019.  Based on their evaluation of the Company’s disclosure controls and procedures, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and regulations are operating in an effective manner.

No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15(d)-15(f) under the Securities Exchange Act of 1934) occurred during the third fiscal quarter of fiscal 2019 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

51

PART II

ITEM 1. LEGAL PROCEEDINGS

The Company is not involved in any pending legal proceedings other than routine legal proceedings occurring in the ordinary course of business, which involve amounts in the aggregate believed by management to be immaterial to the financial condition and operating results of the Company.

ITEM 1A. RISK FACTORS

Not applicable.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

(a)Not applicable.

(b)Not applicable.

(c)Purchases of Equity Securities

The Company’s repurchases of its common stock made during the quarter ended September 30, 2019 including stock-for-stock option exercises of outstanding stock options, are set forth in the table below:

Period	Total Number of Shares Purchased		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs (1)
July 1, 2019 – July 30, 2019		-	$	-		-		39,675
August 1, 2019 – August 31, 2019		985		12.45		-		39,675
September 1, 2019 – September 30, 2019		-		-		-		39,675
Total		985	$	12.45		-		39,675

Notes to this table:

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

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4. MINE SAFETY DISCLOSURES

52

Not applicable.

ITEM 5. OTHER INFORMATION

Not applicable.

ITEM 6. EXHIBITS

No.		Description
	31.1	Rule 13a-14(d) and 15d-14(d) Certification of the Chief Executive Officer.
	31.2	Rule 13a-14(d) and 15d-14(d) Certification of the Chief Financial Officer.
	32.0	Section 1350 Certification.
101.INS		XBRL Instance Document.
101.SCH		XBRL Taxonomy Extension Schema Document.
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document.
101.LAB		XBRL Taxonomy Extension Label Linkbase Document.
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document.
101.DEF		XBRL Taxonomy Extension Definitions Linkbase Document.

53

SIGNATURES

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

Date:  November 13, 2019	By:	/s/Robert T. Strong
		Robert T. Strong President and Chief Executive Officer
		/s/John J. Augustine
Date:  November 13, 2019	By:	John J. Augustine Executive Vice President and Chief Financial Officer