Quaint Oak Bancorp (QNTO) 10-Q 2013 Q1 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 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:	March 31, 2013
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)	(IRS Employer Identification No.)

501 Knowles Avenue, Southampton, Pennsylvania 18966
(Address of principal executive offices)
(215) 364-4059
(Registrant’s telephone number)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
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. Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.:
Large accelerated filer[ ]	Accelerated filer[ ]
Non-accelerated filer[ ]	Smaller reporting company[X]
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: As of May 10, 2013, 966,121 shares of the Registrant's common stock were issued and outstanding.

PART I - FINANCIAL INFORMATION	Page
Item 1 -               Financial Statements
Consolidated Balance Sheets as of March 31, 2013 and December 31, 2012 (Unaudited)	1
Consolidated Statements of Income for the Three Months Ended March 31, 2013 and 2012 (Unaudited)	2
Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2013 and 2012 (Unaudited)	3
Consolidated Statement of Stockholders’ Equity for the Three Months Ended March 31, 2013 (Unaudited)	4
Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2013 and 2012 (Unaudited)	5
Notes to the Unaudited Consolidated Financial Statements	6
Item 2 -               Management’s Discussion and Analysis of Financial Condition and Results of Operations	29
Item 3 -               Quantitative and Qualitative Disclosures About Market Risk	37
Item 4 -               Controls and Procedures	37
PART II - OTHER INFORMATION
Item 1 -               Legal Proceedings	38
Item 1A -            Risk Factors	38
Item 2 -               Unregistered Sales of Equity Securities and Use of Proceeds	38
Item 3 -               Defaults Upon Senior Securities	38
Item 4 -               Mine Safety Disclosures	38
Item 5 -               Other Information	38
Item 6 -               Exhibits	39
SIGNATURES

 ITEM 1. FINANCIAL STATEMENTS

Quaint Oak Bancorp, Inc.

Consolidated Balance Sheets (Unaudited)

	At March 31,			At December 31,
	2013				2012
Assets	(In thousands, except share data)
Due from banks, non-interest-bearing	$	2,438			$	1,629
Due from banks, interest-bearing		9,556				10,771
Cash and cash equivalents		11,994				12,400
Investment in interest-earning time deposits		8,137				8,132
Investment securities available for sale at fair value		3,530				3,994
Loans held for sale		5,090				4,875
Loans receivable, net of allowance for loan losses
(2013 $912; 2012 $860)		90,302				84,291
Accrued interest receivable		736				657
Investment in Federal Home Loan Bank stock, at cost		373				437
Premises and equipment, net		1,707				1,608
Other real estate owned, net		199				170
Prepaid expenses and other assets		731				811
Total Assets	$	122,799			$	117,375
Liabilities and Stockholders’ Equity
Liabilities
Deposits, interest-bearing	$	103,085			$	97,038
Federal Home Loan Bank advances		2,000				2,000
Accrued interest payable		84				81
Advances from borrowers for taxes and insurance		543				991
Accrued expenses and other liabilities		288				428
Total Liabilities		106,000				100,538
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; 1,388,625 issued;  969,921 and  983,821 outstanding at March 31, 2013 and December 31, 2012, respectively		14				14
Additional paid-in capital		13,598				13,559
Treasury stock, at cost: 2013  418,704 shares;  2012 404,804 shares		(3,926	)			(3,716	)
Unallocated common stock held by: Employee Stock  Ownership Plan (ESOP)		(606	)			(623	)
Recognition & Retention Plan Trust (RRP)		(200	)			(200	)
Accumulated other comprehensive income (loss)		76				(60	)
Retained earnings		7,843				7,743
Total Stockholders' Equity		16,799				16,837
Total Liabilities and Stockholders’ Equity	$	122,799			$	117,375

See accompanying notes to consolidated financial statements.

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Quaint Oak Bancorp, Inc.

Consolidated Statements of Income (Unaudited)

	For the Three Months Ended
	March 31,
	2013		2012
Interest Income	(In thousands, except share data)
Interest on loans		1,430		1,303
Interest and dividends on short-term investments and investment securities		64		132
Total Interest Income		1,494		1,435

Interest Expense
Interest on deposits	414	411
Interest on Federal Home Loan Bank advances	21	40

Total Interest Expense 435 451

Net Interest Income 1,059 984

Provision for Loan Losses 52 71

Net Interest Income after Provision for Loan Losses 1,007 913

Non-Interest Income
Mortgage banking and title abstract fees	144	70
Other fees and services charges	8	12
Net gain on the sales of loans	187	81
Gain on sale of SBA loan	-	32
Loss on sales of other real estate owned	-	(6	)
Other	8	10
Total Non-Interest Income, net	347	199
Non-Interest Expense Salaries and employee benefits	705	493
Directors’ fees and expenses	59	55
Occupancy and equipment	108	75
Professional fees	100	78
FDIC deposit insurance assessment	30	32
Other real estate owned expenses	9	8
Advertising	26	14
Other	91	68
Total Other Expenses	1,128	823

Income before Income Taxes 226 289

Income Taxes 86 113

Net Income $ 140 $ 176

Earnings per share – basic	$	0.16	$	0.20
Average shares outstanding - basic		892,666		880,380
Earnings per share - diluted	$	0.15	$	0.20
Average shares outstanding - diluted		930,816		886,222

See accompanying notes to consolidated financial statements.

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Quaint Oak Bancorp, Inc.

Consolidated Statements of Comprehensive Income (Unaudited)

	Three Months Ended March 31,
	2013			2012
	(In thousands)
Net Income	$	140		$	176
Other Comprehensive Income:
Unrealized gains on investment securities available-for-sale		23			53
Income tax effect		(7	)		(18	)
Reclassification adjustment for transfer of investment securities from    held-to-maturity to available-for-sale		-			351
Income tax effect		-			(120	)
Other comprehensive income		16			266
Total Comprehensive Income	$	156		$	442

See accompanying notes to consolidated financial statements.

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Quaint Oak Bancorp, Inc.

Consolidated Statements of Stockholder’s Equity (Unaudited)

Three Months Ended March 31, 2013

											Unallocated
	Common Stock										Common			Accumulated
	Number of					Additional					Stock Held			Other					Total
	Shares					Paid-in		Treasury			by Benefit			Comprehensive		Retained			Stockholders'
	Outstanding			Amount		Capital		Stock			Plans			Income		Earnings			Equity
						(In thousands, except share data)
BALANCE – December 31, 2012	983,821		$	14	$	13,559	$	(3,716	)	$	(823	)	$	60	$	7,743		$	16,837
Common stock released  by ESOP						9					17								26
Treasury stock purchased	(13,900	)						(210	)										(210	)
Stock based compensation expense						30													30
Cash dividends declared ($0.04 per share)																(40	)		(40	)
Net income																140			140
Other comprehensive income														16					16
BALANCE –March 31, 2013	969,921		$	14	$	13,598	$	(3,926	)	$	(806	)	$	76	$	7,843		$	16,799

See accompanying notes to consolidated financial statements.

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Quaint Oak Bancorp, Inc.

Consolidated Statements of Cash Flows (Unaudited)

		Years the Three Months Ended March 31,
		2013			2012
Cash Flows from Operating Activities		(In Thousands)
Net income	$	140		$	176
Adjustments to reconcile net income to net cash used in operating activities:
Provision for loan losses		52			71
Depreciation expense		31			19
Net accretion of securities discounts		(1	)		(3	)
Amortization of deferred loan fees and costs		26			8
Stock-based compensation expense		56			46
Gain on the sale of loans held for sale		(187	)		(81	)
Gain on the sale of SBA loans		-			(32	)
Net loss on sale of other real estate owned		-			6
Loans held for sale-originations		(12,392	)		(5,665	)
Loans held for sale-proceeds		12,364			2,813
Changes in assets and liabilities which provided (used) cash:
Accrued interest receivable		(79	)		(72	)
Prepaid expenses and other assets		73			(120	)
Accrued interest payable		3			(2	)
Accrued expenses and other liabilities		(140	)		(57	)
Net Cash Used in Operating Activities		(54	)		(2,893	)

Cash Flows from Investing Activities,

Net increase in investment in interest-earning time deposits	(5	)	(11	)
Purchase of investment securities available for sale	(12	)	(514	)
Proceeds from calls of investment securities available for sale	500		-
Principal payments received on mortgage-backed securities held to maturity	-		299
Net increase in loans receivable	(6,089	)	(2,690	)
Net decrease in investment in Federal Home Loan Bank stock	64		31
Proceeds from the sale of other real estate owned	-		154
Capitalized expenditures on other real estate owned	(29	)	-
Purchase of premises and equipment	(130	)	(316	)
Net Cash Used in Investing Activities	(5,701	)	(3,047	)

Cash Flows from Financing Activities

Net increase in deposits		6,047			(2,166	)
Dividends paid		(40	)		-
Purchase of treasury stock		(210	)		(35	)
Decrease in advances from borrowers for taxes and insurance		(448	)		(338	)
Net Cash Provided by (Used in ) Financing Activities		5,349			(2,539	)
Net Decrease in Cash and Cash Equivalents		(406	)		(8,479	)
Cash and Cash Equivalents – Beginning of Year		12,400			11,687
Cash and Cash Equivalents – End of Year	$	11,994		$	3,208

Supplementary Disclosure of Cash Flow and Non-Cash Information:

Cash payments for interest	$	432	$	453
Cash payments for income taxes	$	15	$	113
Transfer of mortgage-backed securities held to maturity to investment and mortgage-backed securities available for sale	$	-	$	3,591

See accompanying notes to consolidated financial statements.

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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. (the “Company”) and its wholly owned subsidiary, Quaint Oak Bank (the “Bank”) along with its wholly owned subsidiaries.  At March 31, 2013, the Bank has five wholly-owned subsidiaries, Quaint Oak Mortgage, LLC, Quaint Oak Real Estate, LLC, Quaint Oak Abstract, LLC, Quaint Oak Insurance Agency, LLC, and QOB Properties, LLC, each a Pennsylvania limited liability company.  The mortgage, real estate and abstract companies offer mortgage banking, real estate sales and title abstract services, respectively, in the Lehigh Valley region of Pennsylvania, and began operation in July 2009.  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 is currently inactive.  In October 2010, the mortgage company also commenced operations at the Bank’s main office.  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 includes Bucks and Montgomery Counties, Pennsylvania, northeast Philadelphia and the surrounding area and the Lehigh Valley area of Pennsylvania.  In February 2010, the Bank opened a branch banking office in the Lehigh Valley area of Pennsylvania.  The principal deposit products offered by the Bank are certificates of deposit, passbook savings accounts, statement savings accounts and eSavings accounts.  Loan products offered are fixed and adjustable rate residential and commercial mortgages, construction loans, home equity loans, auto 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, 2012 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 2012 Annual Report on Form 10-K.  The results of operations for the three months ended March 31, 2013 are not necessarily indicative of the results that may be expected for the year ending December 31, 2013.

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, the assessment of other-than-temporary impairment of investment and mortgage-backed securities, valuation of other real estate owned, and the valuation of deferred tax assets.

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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 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.  The consumer loan segment consists of the following classes: home equity loans and consumer non-real estate loans.  Included in the home equity class are home equity loans and home equity lines of credit.  Included in the consumer non-real estate loans are loans secured by saving accounts and auto loans.

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, loans are restored to accrual status when the obligation is brought current, 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.

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

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Quaint Oak Bancorp, Inc.

Notes to Unaudited Consolidated Financial Statements

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

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.

8

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 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 and fees are deferred at origination of the loan and are recognized in noninterest income upon sale of the loan.

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 months ended March 31, 2013 and 2012.  In December 2008, the FHLB of Pittsburgh notified member banks that it was suspending dividend payments and restricting the repurchase of capital stock, to preserve capital.  On October 29, 2010, the FHLB of Pittsburgh resumed the repurchase of capital stock.  From October 29, 2010 through March 31, 2013 a total of 424,200 shares have been repurchased at $1.00 per share from the Bank.  In February 2012, the FHLB of Pittsburgh announced that it would begin paying dividends based on the stockholders’ average capital stock held during the quarter prior to payment.

Other Real Estate Owned.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.

9

Quaint Oak Bancorp, Inc.

Notes to Unaudited Consolidated Financial Statements

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

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 March 31, 2013, the Company has two share-based plans: the 2008 Recognition and Retention Plan (“RRP”) and the 2008 Stock Option Plan.  Awards under both plans were made in May 2008.  These plans are more fully described in Note 8.

The Company also has an employee stock ownership plan (“ESOP”).  This plan is more fully described in Note 8.  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 (Loss).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 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.

Recent Accounting Pronouncements.  In June 2011, the FASB issued ASU No. 2011-05, Comprehensive Income (Topic 220) – Presentation of Comprehensive Income. The intent of this standard is to increase the prominence of comprehensive income in the financial statements. This standard requires the components of comprehensive income be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The single format would include the traditional income statement and the components of other comprehensive income, total other comprehensive income and total comprehensive income. In the two statement approach, the first statement would be the traditional income statement, which would be immediately followed by a separate statement which would include the components of other comprehensive income, total other comprehensive income and total comprehensive income. The amendments in this ASU will be applied retrospectively, and were required for the Company beginning in the first quarter 2012. The adoption of this new guidance did not have an impact on our financial position or results of operations.

10

Quaint Oak Bancorp, Inc.

Notes to Unaudited Consolidated Financial Statements

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

In February 2013, the FASB issued ASU No. 2013-02, Comprehensive Income, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income.  The objective of ASU 2013-02 is to improve the reporting of reclassifications out of accumulated other comprehensive income. The amendments included in ASU 2013-02 do not change the current requirements for reporting net income or other comprehensive income in financial statements.  However, the amendments require an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. For public entities, the amendments are effective prospectively for reporting periods beginning after December 15, 2012.  As the adoption of ASU 2013-02 amends only disclosure requirements, the adoption had no impact on the Company’s results of operations or financial position.

Reclassifications. Certain items in the 2012 consolidated financial statements have been reclassified to conform to the presentation in the 2013 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.

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 months ended March 31, 2013, all outstanding stock options (107,570) were dilutive.  For the three months ended March 31, 2012 all outstanding stock options were antidilutive.

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

	For the Three Months Ended March 31,
	2013		2012
Net Income	$	140,000	$	176,000
Weighted average shares outstanding – basic		892,666		880,380
Effect of dilutive common stock equivalents		38,150		5,842
Adjusted weighted average shares outstanding – diluted		930,816		886,222
Basic earnings per share	$	0.16	$	0.20
Diluted earnings per share	$	0.15	$	0.20

11

Quaint Oak Bancorp, Inc.

Notes to Unaudited Consolidated Financial Statements

Note 3 – Investment in Interest-Earning Time Deposits

The investment in interest-earning time deposits as of March 31, 2013 and December 31, 2012, by contractual maturity, are shown below:

	March 31, 2013		December 31, 2012
	(In Thousands)
Due in one year or less	$	2,575	$	3,325
Due after one year through five years		5,562		4,807
	$	8,137	$	8,132

Note 4 – Investment Securities Available for Sale

The amortized cost and fair value of investment securities available for sale at March 31, 2013 and December 31, 2012 are summarized below (in thousands):

	March 31, 2013
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Corporate securities	$	1,748	$	106	$	-		$	1,854
Short-term bond fund		1,137		12		-			1,149
Limited-term bond fund		530		-		(3	)		527
	$	3,415	$	118	$	(3	)	$	3,530

	December 31, 2012
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
U.S. Government agency securities	$	500	$	1	$	-		$	501
Corporate securities		1,747		81		(2	)		1,826
Short-term bond fund		1,127		15		-			1,142
Limited-term bond fund		528		-		(3	)		525
	$	3,902	$	97	$	(5	)	$	3,994

The amortized cost and fair value of available for sale debt securities at March 31, 2013, 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.

		Amortized Cost		Fair Value
		(In Thousands)
Due in one year or less	$	-	$	-
Due after one year through five years		1,748		1,854
Due after five years through ten years		-		-
	$	1,748	$	1,854

12

Quaint Oak Bancorp, Inc.

Notes to Unaudited Consolidated Financial Statements

Note 4 – Investment Securities Available for Sale (Continued)

The following table shows the Company’s gross unrealized losses and fair value, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position at March 31, 2013 and December 31, 2012 (in thousands):

	March 31, 2013
			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
Limited-term bond fund		1	$	-		$	-	$	527	$	(3	)	$	527	$	(3	)
	December 31, 2012
			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
Corporate securities		1	$	-		$	-	$	248	$	(2	)	$	248	$	(2	)
Limited-term bond fund		1		-			-		525		(3	)		525		(3	)
Total		2	$	-		$	-	$	773	$	(5	)	$	773	$	(5	)

At March 31, 2013, there was one bond fund in an unrealized loss position that at such date had an aggregated depreciation of 0.57% 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 and 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 security until the anticipated recovery of fair value occurs. Management does not believe any individual unrealized loss as of March 31, 2013 represents an other-than-temporary impairment. There were no impairment charges recognized during the three months ended March 31, 2013 or 2012.

On March 30, 2012, the Company transferred all securities designated as held to maturity into the investment and mortgage-backed securities available for sale category. Management determined that it no longer had the positive intent to hold its investment in securities held to maturity for an indefinite period of time because of management’s desire to have more flexibility in managing the investment portfolio. The securities transferred had an amortized cost of $3.6 million and unrealized gross gains of $351,000 at the time of transfer. The net unrealized gain of $231,000 was recorded as other comprehensive income. In the second quarter of 2012, the Company sold these mortgage-backed securities and realized a gain of $331,000.

13

Quaint Oak Bancorp, Inc.

Notes to Unaudited Consolidated Financial Statements

Note 5 - Loans Receivable, Net and Allowance for Loan Losses

The composition of net loans receivable is as follows:

	March 31, 2013		December 31, 2012
Real estate loans:
One-to-four family residential:
Owner occupied	$	9,991	$	10,272	��
Non-owner occupied		37,121		35,118
Total one-to-four family residential		47,112		45,390
Multi-family (five or more) residential		4,070		3,315
Commercial real estate		20,726		18,694
Commercial lines of credit		2,191		1,901
Construction		11,497		9,765
Home equity loans		5,646		6,029
Total real estate loans		91,242		85,094
Auto and equipment loans		77		93
Loans secured by deposits		49		69
Total Loans		91,368		85,256

Deferred loan fees and costs		(154	)		(105	)
Allowance for loan losses		(912	)		(860	)
Net Loans	$	90,302		$	84,291

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 March 31, 2013 and December 31, 2012(in thousands):

	March 31, 2013
	Pass		Special Mention		Substandard		Doubtful		Total
One-to-four family residential owner occupied	$	9,197	$	425	$	70	$	299	$	9,991
One-to-four family residential non-owner occupied		35,629		354		596		542		37,121
Multi-family residential		4,070		-		-		-		4,070
Commercial real estate and lines of credit		21,867		736		314		-		22,917
Construction		11,497		-		-		-		11,497
Home equity		4,882		232		496		36		5,646
Consumer non-real estate		121		5		-		-		126
	$	87,263	$	1,752	$	1,476	$	877	$	91,368

14

Quaint Oak Bancorp, Inc.

Notes to Unaudited Consolidated Financial Statements

Note 5 - Loans Receivable, Net and Allowance for Loan Losses (Continued)

	December 31, 2012
	Pass		Special Mention		Substandard		Doubtful		Total
One-to-four family residential owner occupied	$	9,641	$	500	$	72	$	59	$	10,272
One-to-four family residential non-owner occupied		34,328		95		504		191		35,118
Multi-family residential		3,315		-		-		-		3,315
Commercial real estate and lines of credit		19,536		565		364		130		20,595
Construction		9,765		-		-		-		9,765
Home equity		5,295		428		268		38		6,029
Consumer non-real estate		156		-		6		-		162
	$	82,036	$	1,588	$	1,214	$	418	$	85,256

The following tables summarize information in regards to impaired loans by loan portfolio class as of March 31, 2013 and December 31, 2012 (in thousands):

	March 31, 2013
	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	$	368	$	368	$	-	$	371	$	3
One-to-four family residential non-owner occupied		491		491		-		491		4
Multi-family residential		-		-		-		-		-
Commercial real estate and lines of credit		-		-		-		-		-
Construction		-		-		-		-		-
Home equity		458		458		-		462		12
Consumer non-real estate		-		-		-		-		-
With an allowance recorded:
One-to-four family residential owner occupied	$	-	$	-	$	-	$	-	$	-
One-to-four family residential non-owner occupied		647		647		72		649		3
Multi-family residential		-		-		-		-		-
Commercial real estate and lines of credit		314		314		26		314		3
Construction		-		-		-		-		-
Home equity		73		73		53		73		-
Consumer non-real estate		-		-		-		-		-
Total:
One-to-four family residential owner occupied	$	368	$	368	$	-	$	371	$	3
One-to-four family residential non-owner occupied		1,138		1,138		72		1,140		7
Multi-family residential		-		-		-		-		-
Commercial real estate and lines of credit		314		314		26		314		3
Construction		-		-		-		-		-
Home equity		531		531		53		535		12
Consumer non-real estate		-		-		-		-		-

15

Quaint Oak Bancorp, Inc.

Notes to Unaudited Consolidated Financial Statements

Note 5 - Loans Receivable, Net and Allowance for Loan Losses (Continued)

	December 31, 2012
	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	$	131	$	131	$	-	$	131	$	9
One-to-four family residential non-owner occupied		393		393		-		396		17
Multi-family residential		-		-		-		-		-
Commercial real estate and lines of credit		130		130		-		131		8
Construction		-		-		-		-		-
Home equity		244		244		-		246		14
Consumer non-real estate		6		6		-		9		1
With an allowance recorded:
One-to-four family residential owner occupied	$	-	$	-	$	-	$	-	$	-
One-to-four family residential non-owner occupied		302		302		24		304		13
Multi-family residential		-		-		-		-		-
Commercial real estate and lines of credit		364		364		88		366		15
Construction		-		-		-		-		-
Home equity		62		62		28		64		4
Consumer non-real estate		-		-		-		-		-
Total:
One-to-four family residential owner occupied	$	131	$	131	$	-	$	131	$	9
One-to-four family residential non-owner occupied		695		695		24		700		30
Multi-family residential		-		-		-		-		-
Commercial real estate and lines of credit		494		494		88		497		23
Construction		-		-		-		-		-
Home equity		306		306		28		310		18
Consumer non-real estate		6		6		-		9		1

At March 31, 2013, the Company had eight loans totaling $613,000 identified as troubled debt restructurings (TDRs).  All eight loans are considered impaired.  Any TDR that is placed on non-accrual is not reverted back to accruing status until the borrower makes timely payments as contracted for at least six months and future collection under the revised terms is probable. None of the restructurings were made under a government assistance program. These restructurings were allowed in an effort to maximize the Company’s ability to collect on loans where borrowers were experiencing financial difficulty. All the Company’s TDRs as of March 31, 2013 have modifications with terms of interest-only payments for a period of nine months. In some cases the modification terms may include a small payment of principal in addition to interest.  The following table presents the Company’s TDR loans as of March 31, 2013 (dollar amounts in thousands):

	March 31, 2013
	Number of Contracts		Recorded Investment		Non-Accrual		Accruing		Related Allowance
One-to-four family residential owner occupied		1	$	69		-	$	69	$	-
One-to-four family residential non-owner occupied		4		301		-		301		-
Multi-family residential		-		-		-		-		-
Commercial real estate and lines of credit		-		-		-		-		-
Construction		-		-		-		-		-
Home equity		3		243		-		243		-
Consumer non-real estate		-		-		-		-		-
Total		8	$	613	$	-	$	613	$	-

16

Quaint Oak Bancorp, Inc.

Notes to Unaudited Consolidated Financial Statements

Note 5 - Loans Receivable, Net and Allowance for Loan Losses (Continued)

	December 31, 2012
	Number of Contracts		Recorded Investment		Non-Accrual		Accruing		Related Allowance
One-to-four family residential owner occupied		1	$	71	$	71	$	-	$	-
One-to-four family residential non-owner occupied		4		302		-		302		10
Multi-family residential		-		-		-		-		-
Commercial real estate and lines of credit		-		-		-		-		-
Construction		-		-		-		-		-
Home equity		3		245		-		245		1
Consumer non-real estate		-		-		-		-		-
Total		8	$	618	$	71	$	547	$	11

The contractual aging of the TDRs in the table above as of March 31, 2013 is as follows (in thousands):

			March 31, 2013
	Current & Past Due Less than 30 Days		Past Due 30- 89 Days		Greater than 90 Days		Non-Accrual		Total
One-to-four family residential owner occupied	$	69	$	-	$	-	$	-	$	69
One-to-four family residential non-owner occupied		-		-		301		-		301
Multi-family residential		-		-		-		-		-
Commercial real estate and lines of credit		-		-		-		-		-
Construction		-		-		-		-		-
Home equity		179		-		64		-		243
Consumer non-real estate		-		-		-		-		-
Total	$	248	$	-	$	365	$	-	$	613

During the three months ended March 31, 2013 there were no new TDRs identified.

The 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 March 31, 2013 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. As March 31, 2013 all of our loans identified as TDRs were performing in accordance with their modified terms.

17

Quaint Oak Bancorp, Inc.

Notes to Unaudited Consolidated Financial Statements

Note 5 - 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 months ended March 31, 2013 and recorded investment in loans receivable as of March 31, 2013 (in thousands):

									March 31, 2013
		1-4 Family Residential Owner Occupied			1-4 Family Residential Non-Owner Occupied		Multi- Family Residential		Commercial Real Estate and Lines of Credit			Construction		Home Equity		Consumer Non-Real Estate		Unallocated		Total
Allowance for loan    losses:
Beginning balance	$	77		$	368	$	20	$	219		$	63	$	68	$	1	$	44	$	860
Charge-offs		-			-		-		-			-		-		-		-		-
Recoveries		-			-		-		-			-		-		-		-		-
Provision		(5	)		64		5		(46	)		12		21		-		1		52
Ending balance	$	72		$	432	$	25	$	173		$	75	$	89	$	1	$	45	$	912

Ending balance    evaluated for    impairment:
Individually	$	-	$	72	$	-	$	26	$	-	$	53	$	-	$	-	$	151
Collectively	$	72	$	360	$	25	$	147	$	75	$	36	$	1	$	45	$	761
Loans receivable:
Ending balance:	$	9,991	$	37,121	$	4,070	$	22,917	$	11,497	$	5,646	$	126	$	-	$	91,368
Ending balance     evaluated for
impairment:
Individually	$	368	$	1,138	$	-	$	314	$	-	$	531	$	-	$	-	$	2,351
Collectively	$	9,623	$	35,983	$	4,070	$	22,603	$	11,497	$	5,115	$	126	$	-	$	89,017

18

Quaint Oak Bancorp, Inc.

Notes to Unaudited Consolidated Financial Statements

Note 5 - 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, 2012 and recorded investment in loans receivable as of December 31, 2012 (in thousands):

							��				December 31, 2012
		1-4 Family Residential Owner Occupied			1-4 Family Residential Non-Owner Occupied			Multi- Family Residential			Commercial Real Estate and Lines of Credit		Construction		Home Equity			Consumer Non-Real Estate		Unallocated			Total
Allowance for loan    losses:
Beginning balance	$	114		$	351		$	26		$	148	$	35	$	83		$	1	$	47		$	805
Charge-offs		-			(103	)		-			-		-		(4	)		-		-			(107	)
Recoveries		-			-			-			-		-		-			-		-			-
Provision		(37	)		120			(6	)		71		28		(11	)		-		(3	)		162
Ending balance	$	77		$	368		$	20		$	219	$	63	$	68		$	1	$	44		$	860

Ending balance    evaluated for     impairment:
Individually	$	-	$	24	$	-	$	88	$	-	$	28	$	-	$	-	$	140
Collectively	$	77	$	344	$	20	$	131	$	63	$	40	$	1	$	44	$	720

Loans receivable:
Ending balance	$	10,272	$	35,118	$	3,315	$	20,595	$	9,765	$	6,029	$	162	$	-	$	85,256
Ending balance    evaluated for    impairment:
Individually	$	131	$	695	$	-	$	494	$	-	$	306	$	6	$	-	$	1,632
Collectively	$	10,141	$	34,423	$	3,315	$	20,101	$	9,765	$	5,723	$	156	$	-	$	83,624

19

Quaint Oak Bancorp, Inc.

Notes to Unaudited Consolidated Financial Statements

Note 5 - 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 months ended March 31, 2012 (in thousands):

									March 31, 2012
	1-4 Family Residential Owner Occupied			1-4 Family Residential Non-Owner Occupied		Multi-Family Residential			Commercial Real Estate and Lines of Credit		Construction		Home  Equity			Consumer Non-Real Estate		Unallocated		Total
Allowance for   loan losses:
Beginning   balance	$	114		$	351	$	26		$	148	$	35	$	83		$	1	$	47	$	805
Charge-offs		-			-		-			-		-		(3	)		-		-		(3	)
Recoveries		-			-		-			-		-		-			-		-		-
Provision		(7	)		24		(2	)		34		7		5			-		10		71

Ending balance	$	107	$	375	$	24	$	182	$	42	$	85	$	1	$	57	$	873
Ending balance   evaluated for   impairment:
Individually	$	-	$	105	$	-	$	59	$	-	$	42	$	-	$	-	$	206
Collectively	$	107	$	270	$	24	$	123	$	42	$	43	$	1	$	57	$	667

The following table presents nonaccrual loans by classes of the loan portfolio as of March 31, 2013 and December 31, 2012 (in thousands):

	March 31, 2013		December 31, 2012
One-to-four family residential owner occupied	$	299	$	131
One-to-four family residential non-owner occupied		837		488
Multi-family residential		-		-
Commercial real estate and lines of credit		314		445
Construction		-		-
Home equity		288		256
Consumer non-real estate		-		-
	$	1,738	$	1,320

Non-performing loans, which consist of non-accruing loans plus accruing loans 90 days or more past due, amounted to $2.6 million and $2.1 million at March 31, 2013 and December 31, 2012, 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 months ended March 31, 2013 and 2012, approximately $12,000 and $16,000 of interest income was recognized on non-accrual loans. Gross interest income that would have been recorded on non-accrual loans had they been current in accordance with their original terms, was approximately $20,000 and $40,000 for the three months ended March 31, 2013 and 2012, respectively.

20

Quaint Oak Bancorp, Inc. 

Notes to Unaudited Consolidated Financial Statements

Note 5 - Loans Receivable, Net and Allowance for Loan Losses (Continued)

The performance and credit quality of the loan portfolio is also monitored by analyzing the age of the loans receivable as determined by the length of time a recorded payment is past due. The following tables present the classes of the loan portfolio summarized by the past due status as of March 31, 2013 and December 31, 2012 (in thousands):

	March 31, 2013
	30-90 Days Past  Due		Greater than 90 Days		Total  Past Due		Current		Total Loans Receivable		Loans Receivable > 90 Days and Accruing
One-to-four family residential owner     occupied	$	635	$	299	$	934	$	9,057	$	9,991	$	-
One-to-four family residential non-     owner occupied		925		1,472		2,397		34,724		37,121		635
Multi-family residential		77		-		77		3,993		4,070		-
Commercial real estate and lines of     credit		1,861		420		2,281		20,636		22,917		106
Construction		-		-		-		11,497		11,497		-
Home equity		543		384		927		4,719		5,646		96
Consumer non-real estate		22		5		27		99		126		5
	$	4,063	$	2,580	$	6,643	$	84,725	$	91,368	$	842

	December 31, 2012
	30-90 Days Past Due		Greater than 90 Days		Total Past Due		Current		Total Loans Receivable		Loans Receivable > 90 Days and Accruing
One-to-four family residential owner     occupied	$	348	$	373	$	721	$	9,551	$	10,272	$	242
One-to-four family residential non-     owner occupied		1,506		790		2,296		32,822		35,118		302
Multi-family residential		79		-		79		3,236		3,315		-
Commercial real estate and lines of     credit		756		657		1,413		19,182		20,595		212
Construction		382		-		382		9,383		9,765		-
Home equity		238		321		559		5,470		6,029		65
Consumer non-real estate		6		-		6		156		162		-
	$	3,315	$	2,141	$	5,456	$	79,800	$	85,256	$	821

Note 6 – Deposits

Deposits consist of the following classifications (in thousands):

	March 31, 2013		December 31, 2012
Passbook savings accounts	$	2,861	$	2,890
Statement savings accounts		5,863		5,843
eSavings accounts		13,424		10,604
Certificates of deposit		80,937		77,701
Total deposits	$	103,085	$	97,038

21

Quaint Oak Bancorp, Inc.

Notes to Unaudited Consolidated Financial Statements

Note 7 – Borrowings

Federal Home Loan Bank advances consist of the following at both March 31, 2013 and December 31, 2012 (in thousands):

Maturity Period	Amount		Weighted Interest Rate
1 to 12 months	$	2,000		4.19	%

Note 8 – Stock Compensation Plans

Employee Stock Ownership Plan

The Company adopted an Employee Stock Ownership Plan (ESOP) during fiscal 2007 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 111,090 shares of the Company’s then outstanding common stock in the open market at an average price of $9.35 for a total of $1.0 million.  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 months March 31, 2013 and 2012 the Company recognized $26,000 and $16,000 of ESOP expense, respectively.

Recognition & Retention Plan

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 (the “RRP Trust”) acquired 55,545 shares of the Company’s stock in the open market at an average price of $9.36 totaling $520,000.  Pursuant to the RRP, 43,324 shares acquired by the RRP Trust were granted to certain officers, employees and directors of the Company in May 2008, with 12,221 shares remaining available for future grant.  Due to forfeiture of shares by certain employees in addition to unawarded shares, as of March 31, 2013, 12,459 shares remain available for future grant.  The RRP share awards have vesting periods from five to seven years.

22

Quaint Oak Bancorp, Inc.

Notes to Unaudited Consolidated Financial Statements

Note 8 – Stock Compensation Plans (Continued)

Recognition & Retention Plan (Continued)

A summary of the status of the shares under the RRP as of March 31, 2013 and 2012 and changes during the three months ended March 31, 2013 and 2012 is as follows:

	March 31, 2013				March 31, 2012
	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		8,894	$	9.05		17,440	$	9.05
Granted		-		-		-		-
Vested		-		-		-		9.05
Forfeited		-		-		-		-
Unvested at the end of the period		8,894	$	9.05		17,440	$	9.05

The weighted average grant date fair value is the last sale price as quoted on the OTC Bulletin Board on May 14, 2008.  Compensation expense on the RRP shares granted is recognized ratably over the five to seven year vesting period in an amount which is equal to the fair value of the common stock at the date of grant.  During each of the three months ended March 31, 2013 and 2012, approximately $19,000 in compensation expense was recognized.  A tax benefit of approximately $6,000 was recognized during each of these periods.  As of March 31, 2013, approximately $13,000 in additional compensation expense will be recognized over the remaining service period of approximately 0.2 years.

Stock Option Plan

In May 2008, the shareholders of Quaint Oak Bancorp approved the adoption of the 2008 Stock Option Plan (the “Option Plan”).  The Option Plan authorizes the grant of stock options to officers, employees and directors of the Company to acquire 138,863 shares of common stock with an exercise price no less than the fair market value on the date of the grant.  The Compensation Committee of the Board of Directors determined to grant the stock options in May 2008 at an exercise price equal to $10.00 per share which is higher than the fair market value of the common stock on the grant date.  All incentive stock options issued under the Option Plan are intended to comply with the requirements of Section 422 of the Internal Revenue Code.  Options will become vested and exercisable over a five to seven year period and are generally exercisable for a period of ten years after the grant date.  Pursuant to the Option Plan, 108,311 stock options were granted to certain officers, employees and directors of the Company in May 2008. Due to forfeiture of stock options by certain employees in addition to unawarded stock options, as of March 31, 2013, 31,293 stock options remain available for future grant.

23

Quaint Oak Bancorp, Inc.

Notes to Unaudited Consolidated Financial Statements

Note 8 – Stock Compensation Plans (Continued)

Stock Option Plan  (Continued)

A summary of option activity under the Company’s Option Plan as of March 31, 2013 and 2012 and changes during the three months ended March 31, 2013 and 2012 is as follows:

	2013						2012
	Number of Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (in years)			Number of Shares		Weighted Average Exercise Price
Outstanding at the beginning of the year		107,570	$	10.00		5.4			107,570	$	10.00
Granted		-		-		-			-		-
Exercised		-		-		-			-		-
Forfeited		-		-		-			--		-
Outstanding at the end of the period		107,570	$	10.00		5.1			107,570	$	10.00
Exercisable at the end of the period		85,332	$	10.00		5.1			63,999	$	10.00

During each of the three months ended March 31, 2013 and 2012, approximately $11,000 in compensation expense was recognized.  A tax benefit of approximately $2,000 was recognized during each of these periods.  As of March 31, 2013, approximately $7,000 in additional compensation expense will be recognized over the remaining service period of approximately 0.2 years.

Note 9 – Fair Value Measurements

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

Investment and Mortgage-Backed Securities Available-For-Sale:The fair value of securities available for sale (carried at fair value) and held to maturity (carried at amortized cost) 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.

24

Quaint Oak Bancorp, Inc.

Notes to Unaudited Consolidated Financial Statements

Note 9 – Fair Value Measurements (Continued)

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

Impaired Loans: Impaired loans are carried at the lower of cost or the fair value of the collateral for collateral-dependent loans. 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 March 31, 2013 (in thousands):

	March 31, 2013
	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
Corporate securities	$	1,854	$	1,854	$	-	$	-
Short-term bond fund		1,149		1,149		-		-
Limited-term bond fund		527		527		-		-
Total investment securities available for sale	$	3,530	$	3,530	$	-	$	-
Total recurring fair value measurements	$	3,350	$	3,350	$	-	$	-
Nonrecurring fair value measurements
Impaired loans	$	883	$	-	$	-	$	883
Other real estate owned		199		-		-		199
Total nonrecurring fair value measurements	$	1,082	$	-	$	-	$	1,082

25

Quaint Oak Bancorp, Inc.

Notes to Unaudited Consolidated Financial Statements

Note 9 – Fair Value Measurements (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, 2012 (in thousands):

	December 31, 2012
	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
U.S. Government agency securities	$	501	$	-	$	501	$	-
Corporate securities		1,826		1,826		-		-
Short-term bond fund		1,142		1,142		-		-
Limited-term bond fund		525		525		-		-
Total investment securities available for sale	$	3,994	$	3,493	$	501	$	-
Total recurring fair value measurements	$	3,994	$	3,493	$	501	$	-
Nonrecurring fair value measurements
Impaired loans	$	588	$	-	$	-	$	588
Other real estate owned		170		-		-		170
Total nonrecurring fair value measurements	$	758	$	-	$	-	$	758

The following table presents additional quantitative information about assets measured at fair value on a nonrecurring basis and for which the Company has used level 3 inputs to determine fair value as of March 31, 2013 and December 31, 2012 (in thousands):

	March 31, 2013
	Quantitative Information About Level 3 Fair Value Measurements
		Total Fair	Valuation	Unobservable	Range (Weighted
		Value	Techniques	Input	Average)
Impaired loans	$	883	Appraisal of collateral (1)	Appraisal adjustments (2)	8%-40% (24%)
Other real estate owned	$	199	Appraisal of collateral (1)	Appraisal adjustments (2)	8%-29% (17%)

	December 31, 2012
	Quantitative Information About Level 3 Fair Value Measurements
	Total Fair Value		Valuation Techniques	Unobservable Input	Range (Weighted Average)
Impaired loans	$	588	Appraisal of collateral (1)	Appraisal adjustments (2)		8%-58% (31%)
Other real estate owned	$	170	Appraisal of  collateral (1)	Appraisal adjustments (2)		8%-29% (17%)

(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.

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Quaint Oak Bancorp, Inc.

Notes to Unaudited Consolidated Financial Statements

Note 9 – Fair Value Measurements (Continued)

The estimated fair values of the Company’s financial instruments were as follows at March 31, 2013 and December 31, 2012 (in thousands):

					Fair Value Measurements at
					March 31, 2013
	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
Cash and cash equivalents	$	11,994	$	11,994	$	11,994	$	-	$	-
Investment in interest-earning time deposits		8,137		8,316		-		8,316		-
Investment securities available for sale		3,530		3,530		3,530		-		-
Loans held for sale		5,090		5,252		-		5,252		-
Loans receivable, net		90,302		91,485		-		-		91,485
Accrued interest receivable		736		736		736		-		-
Investment in FHLB stock		373		373		-		373		-
Financial Liabilities
Deposits		103,085		105,498		22,148		83,350		-
FHLB advances, short-term		2,000		2,000		-		2,000		-
Accrued interest payable		84		84		84		-		-

					Fair Value Measurements at
					December 31, 2012
	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
Cash and cash equivalents	$	12,400	$	12,400	$	12,400	$	-	$	-
Investment in interest-earning time deposits		8,132		8,234		-		8,234		-
Investment securities available for sale		3,994		3,994		3,493		501		-
Loans held for sale		4,875		5,053		-		5,053		-
Loans receivable, net		84,291		86,503		-		-		86,503
Accrued interest receivable		657		657		657		-		-
Investment in FHLB stock		437		437		-		437		-
Financial Liabilities
Deposits		97,038		98,279		19,337		78,942		-
FHLB advances, short-term		2,000		2,000		-		2,000		-
Accrued interest payable		81		81		81		-		-

27

Quaint Oak Bancorp, Inc.

Notes to Unaudited Consolidated Financial Statements

Note 9 – Fair Value Measurements (Continued)

The following methods and assumptions were used to measure the fair value of financial instruments recorded at cost on the Company’s consolidated balance sheets:

Cash and Cash Equivalents.  The carrying amounts reported in the balance sheet for cash and short-term instruments approximate those assets’ fair values.

Interest-Earning Time Deposits. Fair values for interest-earning time deposits are estimated using a discounted cash flow calculation that applies interest rates currently being offered in the market on certificates to a schedule of aggregated expected monthly maturities on time deposits. The Company generally purchases amounts below the insured limit, limiting the amount of credit risk on these time deposits.

Loans Held for Sale.  Fair values of loans held for sale are based on commitments on hand from investors at prevailing market rates.

Loans Receivable, Net.  The fair values of loans are estimated using discounted cash flow methodology.  The discount rates take into account interest rates currently being offered to customers for loans with similar terms, the credit risk associated with the loan and market factors, including liquidity.  The valuation of the loan portfolio reflects discounts that the Company believes are consistent with transactions occurring in the market place for both performing and distressed loan types.  The carrying value that fair value is compared to is net of the allowance for loan losses and other associated premiums and discounts.  Due to the significant judgment involved in evaluating credit quality, loans are classified with level 3 of the fair value hierarchy.

Accrued Interest Receivable.  The carrying amount of accrued interest receivable approximates its fair value.

Federal Home Loan Bank Stock.  The carrying amount of restricted investment in Federal Home Loan Bank stock approximates fair value, and considers the limited marketability of such securities.

Deposits.  The carrying amount is considered a reasonable estimate of fair value for demand savings deposit accounts.  The fair value of fixed maturity certificates of deposit is estimated by a discounted cash flow method using the rates currently offered for deposits of similar maturities.

Federal Home Loan Bank Borrowings.  Fair values of FHLB advances are estimated based on rates currently available to the Company for similar terms and remaining maturities.

Accrued Interest Receivable.  The carrying amount of accrued interest payable approximates its fair value.

Off-Balance Sheet Financial Instruments.  Off-balance sheet financial instruments consist of commitments to extend credit.  Fair values for commitments to extend credit are estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreement and the present credit standing of the counterparties.  The estimated fair value of the commitments to extend credit are insignificant and therefore are not presented in the above table.

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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, professional fees, 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 March 31, 2013 the Bank had five subsidiaries, Quaint Oak Mortgage, LLC, Quaint Oak Real Estate, LLC, Quaint Oak Abstract, LLC, Quaint Oak Insurance Agency, LLC, and QOB Properties, LLC, each a Pennsylvania limited liability company.  The mortgage, real estate and abstract companies offer mortgage banking, real estate sales and title abstract services, respectively, in the Lehigh Valley region of Pennsylvania, and began operation in July 2009.  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 is currently inactive.   The mortgage company also began operating at our main office in the Delaware Valley Region of Pennsylvania in October 2010.  In connection with the expansion into these activities, the Company acquired an office building in Allentown, Pennsylvania from which the subsidiaries operate.  The Bank also opened a new branch office at this location in February 2010.

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.

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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. 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.

30

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.

 Other-Than-Temporary Impairment of Securities. Securities are evaluated on at least a quarterly basis, and more frequently when market conditions warrant such an evaluation, to determine whether a decline in their value is other-than-temporary. To determine whether a loss in value is other-than-temporary, management utilizes criteria such as the reasons underlying the decline, the magnitude and duration of the decline and whether or not management intends to sell or expects that it is more likely than not that it will be required to sell the security prior to an anticipated recovery of the fair value. The term “other-than-temporary” is not intended to indicate that the decline is permanent, but indicates that the prospects for a near-term recovery of value are not necessarily favorable, or that there is a lack of evidence to support a realizable value equal to or greater than the carrying value of the investment. Once a decline in value for a debt security is determined to be other-than-temporary, the other-than-temporary impairment is separated into (a) the amount of the total other-than-temporary impairment related to a decrease in cash flows expected to be collected from the debt security (the credit loss) and (b) the amount of the total other-than-temporary impairment related to all other factors. The amount of the total other-than-temporary impairment related to the credit loss is recognized in earnings. The amount of the total other-than-temporary impairment related to all other factors is recognized in other comprehensive income, except for equity securities, where the full amount of the other-than-temporary impairment is recognized in earnings.

31

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.

Comparison of Financial Condition at March 31, 2013 and December 31, 2012

General. The Company’s total assets at March 31, 2013 were $122.8 million, an increase of $5.4 million, or 4.6%, from $117.4 million at December 31, 2012.  This growth in total assets was primarily due to increases in loans receivable, net of $6.0 million and loans held for sale of $215,000.  Offsetting these increases were decreases in investment securities of $464,000, as a result of calls, and cash and cash equivalents of $406,000.

Cash and Cash Equivalents. Cash and cash equivalents decreased $406,000 or 3.3%, from $12.4 million at December 31, 2012 to $12.0 million at March 31, 2013 as excess liquidity was used to fund loans.

Investment Securities Available for Sale.  Investment securities decreased $464,000, or 11.6%, to $3.5 million at March 31, 2013 from $4.0 million at December 31, 2012.  The decrease was due primarily to a call of a U.S. Government agency security in the amount of $500,000.

Loans Held for Sale.  Loans held for sale increased $215,000 to $5.1 million at March 31, 2013 from $4.9 million at December 31, 2012 as the Bank’s mortgage banking subsidiary, Quaint Oak Mortgage, LLC, originated $12.4 million of one-to-four family residential loans during the three months ended March 31, 2013 and sold $12.2 million of these loans in the secondary market during this same period.

Loans Receivable, Net.  Loans receivable, net, increased $6.0 million, or 7.1%, to $90.3 million at March 31, 2013 from $84.3 million December 31, 2012.  This increase was funded primarily from the increase in deposits, proceeds from the call of investment securities available for sale, and excess liquidity in cash and cash equivalents.  Increases within the portfolio occurred in the commercial real estate category which increased $2.0 million, or 10.9%, inone-to-four family residential non-owner occupied loans which increased $2.0 million, or 5.7%, in construction loans which increased $1.7 million, or 17.7%,  in multi-family residential loans which increased $755,000, or 22.8%, and in commercial lines of credit which increased $290,000, or 15.3%.  These increases were partially offset by decreases of $383,000, or 6.4%, in home equity loans and $281,000, or 2.7%, in residential mortgage one-to-four family owner occupied 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.

Premises and Equipment, Net.  Premises and equipment, net, increased $99,000, or 6.2%, to $1.7 million at March 31, 2013 from $1.6 million at December 31, 2012 primarily due to the capital expenditures made during the three months ended March 31, 2013 in connection with the Company’s upgrade of its core processing computer system.

Other Real Estate Owned, Net.  Other real estate owned (OREO) amounted to $199,000 at March 31, 2013, consisting of three properties.  These are the same three properties that totaled $170,000 at December 31, 2012.  The $29,000 increase is attributable to capital improvements made on two of the properties during the quarter ended March 31, 2013.

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Deposits. Total interest-bearing deposits increased $6.0 million, or 6.2%, to $103.1 million at March 31, 2013 from $97.0 million at December 31, 2012. This increase in deposits was primarily attributable to increases of $3.2 million in certificates of deposit and $2.8 million in eSavings accounts.

Stockholders’ Equity.  Total stockholders’ equity decreased $38,000 to $16.80 million at March 31, 2013 from $16.84 million at December 31, 2012. Contributing to the decrease were dividends paid of $40,000 and the purchase of 13,900 shares of the Company’s stock as part of the Company’s stock repurchase program, for an aggregate purchase price of $210,000.  These decreases were partially offset by net income for the quarter ended March 31, 2013 of $140,000, amortization of stock awards and options under our stock compensation plans of $30,000, common stock earned by participants in the employee stock ownership plan of $26,000, and accumulated other comprehensive income of $16,000.

Comparison of Operating Results for the Three Months Ended March 31, 2013 and 2012

General.  Net income amounted to $140,000 for the three months ended March 31, 2013, a decrease of $36,000, or 20.5%, compared to net income of $176,000 for three months ended March 31, 2012.  The decrease in net income on a comparative quarterly basis was primarily the result of an increase in non-interest expense of $305,000, offset by increases in net interest income of $75,000 and non-interest income of $148,000, and decreases in the provision for loan losses of $19,000 and the provision for income taxes of $27,000.

 Net Interest Income.Net interest income increased $75,000, or 7.6%, to $1.1 million for the three months ended March 31, 2013 from $984,000 for the three months ended March 31, 2012.  The increase was driven by a $59,000, or 4.1%, increase in interest income and a $16,000, or 3.5%, decrease in interest expense.

Interest Income.  Interest income increased $59,000, or 4.1%, to $1.49 million for the three months ended March 31, 2013 from $1.44 million for the three months ended March 31, 2012.  The increase in interest income was primarily due to a $13.4 million increase in average loans receivable, net, including loans held for sale, which had the effect of increasing interest income $222,000, and a $1.2 million increase in average short-term investments and investment securities available for sale, which had the effect of increasing interest income $5,000.  Offsetting these increases was a 41 basis point decline in the yield on loans receivable, net, including loans held for sale which had the effect of decreasing interest income $96,000, and a 47 basis point decline in average short-term investments and investment securities available for sale which had the effect of decreasing interest income $27,000.  Also contributing to offsetting the increases in interest income was the $3.8 million decrease in average mortgage-backed securities held to maturity which had the effect of decreasing interest income $45,000. The decrease in rates was consistent with the decrease in market interest rates from March 2012 to March 2013.  The decrease in average mortgage-backed securities held to maturity was due to the sale of mortgage-backed securities in the second quarter of 2012 after their transfer to the available for sale category at the end of the first quarter of 2012. In accordance with regulatory and accounting requirements, the Company is prohibited from classifying security purchases as held to maturity for a period of two years after the transfer.

Interest Expense.  Interest expense decreased $16,000, or 3.5%, to $435,000 for the three months ended March 31, 2013 from $451,000 for the three months ended March 31, 2012.  The decrease was primarily attributable to a 28 basis point decline in the overall cost of average interest-bearing liabilities from 1.98% for the three months ended March 31, 2013 to 1.70% for the three months ended March 31, 2012 which had the effect of decreasing interest expense by $48,000.  This decrease due to rate combined with a decrease of $1.8 million in average FHLB advances which had the effect of decreasing interest expense by $19,000.  These decreases were offset by an increase of $7.8 million in average eSavings accounts which had the effect of increasing interest expense by $18,000, and an increase of $6.2 million in average certificates of deposits which had the effect of increasing interest expense by $33,000.  The overall decrease in rates was consistent with the decrease in market interest rates from March 2012 to March 2013.  The decrease in the average FHLB advances was attributable to the scheduled repayments while the increases in average eSavings accounts and certificates of deposit accounts on a comparative quarterly basis were due to rates offered by the Company in these two deposit categories.

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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 March 31,
	2013							2012
	Average Balance		Interest		Average Yield/ Rate			Average Balance		Interest		Average Yield/ Rate
Interest-earning assets:	(Dollars in thousands)
Short-term investments and investment and mortgage-backed securities available for sale	$	22,975	$	64		1.11	%	$	1,792	$	87		1.60	%
Mortgage-backed securities held to   maturity		-		-		-			3,787		45		4.75
Loans receivable, net (1) (2)		99,991		1,430		6.22			78,574		1,303		6.63
Total interest-earning assets		114,966		1,494		5.20	%		104,153		1,435		5.51	%
Non-interest-earning assets		5,083							3,796
Total assets	$	120,049						$	107,949
Interest-bearing liabilities:
Passbook accounts	$	2,853		2		0.28	%	$	2,948		2		0.27	%
Statement savings accounts		5,720		6		0.42			6,674		7		0.42
eSavings accounts		12,021		26		0.87			4,258		10		0.94
Certificate of deposit accounts		79,608		380		1.91			73,449		392		2.13
Total deposits		100,202		414		1.65			87,329		411		1.88
FHLB advances		2,000		21		4.20			3,800		40		4.21
Total interest-bearing liabilities		102,202		435		1.70	%		91,129		451		1.98	%
Non-interest-bearing liabilities		1,056							1,031
Total liabilities		103,258							92,160
Stockholders’ Equity		16,791							15,789
Total liabilities and Stockholders’ Equity	$	120,049						$	107,949
Net interest-earning assets	$	12,764						$	11,489
Net interest income; average interest rate spread			$	1,059		3.50	%			$	984		3.53	%
Net interest margin (3)						3.68	%						3.78	%
Average interest-earning assets to average interest-bearing liabilities						112.49	%						114.29	%

_______________________

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

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Provision for Loan Losses.  The Company’s provision for loan losses decreased by $19,000, or 26.8%, from $71,000 for the three months ended March 31, 2012 to $52,000 for the three months ended March  31, 2013, 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 March 31, 2013.

Non-performing loans amounted to $2.6 million, or 2.86% of net loans receivable at March 31, 2013, consisting of thirty-two loans, twenty-one of which are on non-accrual status and eleven of which are 90 days or more past due and accruing interest. Comparably, non-performing loans amounted to $2.1 million, or 2.54% of net loans receivable at December 31, 2012, consisting of twenty-six loans, seventeen of which were on non-accrual status and nine of which were 90 days or more past due and accruing interest.  The non-performing loans at March 31, 2013 include sixteen one-to-four family non-owner occupied residential loans, nine home equity loans, three commercial real estate loans, three one-to-four family owner-occupied residential loans, and one consumer non-real estate loan, and all are generally well-collateralized or adequately reserved for.  During the quarter ended March 31, 2013, six loans were placed on non-accrual status resulting in the reversal of approximately $17,000 of previously accrued interest income and two loans that were on non-accrual were returned to accrual status.  Included in non-performing loans are six loans identified as troubled debt restructurings which totaled $365,000 at March 31, 2013.  The Company had two additional troubled debt restructuring not included in non-performing loans at March 31, 2013 in the amount of $248,000 that were current.  The allowance for loan losses as a percent of total loans receivable was 1.00% at March 31, 2013 and 1.01% at December 31, 2012.

Other real estate owned (OREO) amounted to $199,000 at March 31, 2013, consisting of three properties.  These are the same three properties that totaled $170,000 at December 31, 2012.  The $29,000 increase is attributable to capital improvements made on two of the properties during the quarter ended March 31, 2013.

Non-Interest Income.  Non-interest income increased $148,000 or 74.4%, for the three months ended March 31, 2013 over the comparable period in 2012 due primarily to a $106,000 increase in the net gain on the sales of loans held for sale and a $74,000 increase in fee income generated by Quaint Oak Bank’s mortgage banking and title abstract subsidiaries. These increases were offset by a $32,000 decrease in the gain on sale of an SBA loan which was sold during the quarter ended March 31, 2012.

Non-Interest Expense.Non-interest expense increased $305,000, or 37.1%, from $823,000 for the three months ended March 31, 2012 to $1.1 million for the three months ended March 31, 2013.  Salaries and employee benefits expense accounted for $212,000 of the change as this expense increased 43.0%, from $493,000 for the three months ended March 31, 2012 to $705,000 for the three months ended March 31, 2013 due primarily to increased staff as the Company expanded its mortgage banking and lending operations.  Also contributing to the period over period increase was a $33,000, or 44.0%, increase in occupancy and equipment expense, a $23,000, or 33.8%, increase in other expense, a $22,000, or 28.2%, increase in professional fees, and a $12,000, or 85.7%, increase in advertising expense.  The increase in occupancy and equipment expense was primarily related to the move of our Delaware Valley office from 607 Lakeside Office Park, Southampton, PA to a larger facility at 501 Knowles Avenue, Southampton, PA and computer system upgrades. The increase in professional fees was primarily due to costs related to compliance and loan collections.

Provision for Income Tax.  The provision for income tax decreased $27,000, or 23.9%,  from $113,000 for the three months ended March 31, 2012 to $86,000 for the three months ended March 31, 2013 due primarily to the increase in pre-tax income,as our effective tax rate remained relatively consistent at 38.1% for the 2013 period compared to 39.1% for the comparable period in 2012.

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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 March 31, 2013 the Company's cash and cash equivalents amounted to $12.0 million.  At such date, the Company also had $2.6 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 March 31, 2013, Quaint Oak Bank had outstanding commitments to originate loans of $3.5 million and commitments under unused lines of credit of $11.1 million.

At March 31, 2013, certificates of deposit scheduled to mature in less than one year totaled $28.8 million.  Based on prior experience, management believes that a significant portion of such deposits will remain with us, although it is dependent on our deposit pricing strategy at the time of maturity and 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, which provide an additional source of funds.  As of March 31, 2013, we had $2.0 million of advances from the Federal Home Loan Bank of Pittsburgh and had $46.7 million in borrowing capacity.  We are reviewing our continued utilization of advances from the Federal Home Loan Bank as a source of funding based on the decision in December 2008 by the Federal Home Loan Bank to suspend the dividend on, and restrict the repurchase of, Federal Home Loan Bank stock.  The amount of Federal Home Loan Bank stock that a member institution is required to hold is directly proportional to the volume of advances taken by that institution.  Should we decide to utilize sources of funding other than advances from the Federal Home Loan Bank, we believe that additional funding is available in the form of advances or repurchase agreements through various other sources.  As of March 31, 2013 Quaint Oak Bank has $2.1 million in borrowing capacity with the Federal Reserve Bank of Philadelphia.  There were no borrowings under this facility at March 31, 2013.  Quaint Oak Bank currently has two additional line of credit commitments with two different banks totaling $1.5 million.  There were no borrowings under these lines of credit at March 31, 2013.

Our stockholders’ equity amounted to $16.80 million at March 31, 2013, a decrease of $38,000 from $16.84 million at December 31, 2012.  Contributing to the decrease were dividends paid of $40,000 and the purchase of 13,900 shares of the Company’s stock as part of the Company’s stock repurchase program, for an aggregate purchase price of $210,000.  These decreases were partially offset by net income for the quarter ended March 31, 2013 of $140,000, amortization of stock awards and options under our stock compensation plans of $30,000, common stock earned by participants in the employee stock ownership plan of $26,000, and accumulated other comprehensive income of $16,000.  For further discussion of the stock compensation plans, see Note 8 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, tier 1 risk-based and total risk-based capital ratios of at least 4.00%, 4.00% and 8.00%, respectively.  At March 31, 2013, Quaint Oak Bank exceeded each of its capital requirements with ratios of  12.93%, 19.75% and 20.93% , respectively. As a savings and loan holding company, the Company is not currently subject to any regulatory capital requirements.

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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 March 31, 2013, we had unfunded commitments under lines of credit of $11.1 million and $3.5 million of commitments to originate loans.  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 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 March 31, 2013.  Based on their evaluation of the Company’s disclosure controls and procedures, the Company’s 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 first fiscal quarter of fiscal 2013 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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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 March 31, 2013 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)
January 1, 2013 – January 31, 2013		-	$	-		-		59,920
February 1, 2013 – February 28, 2013		5,000		13.98		1,600		58,320
March 1, 2013 – March 31, 2013		8,900		15.67		8,900		49,420
Total		13,900	$	15.06		10,500		49,420

Notes to this table:

(1) On September 10, 2010, the Company announced by press release its third repurchase program to repurchase up to an additional 69,431 shares, or approximately 6.2% of the Company's then current outstanding shares of common stock.  The Company commenced this third stock repurchase program upon the completion of its prior repurchase program on December 3, 2010.  The repurchase program does not have an expiration date.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

Not applicable.

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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.
The following Exhibits are being furnished as part of this report:
No.		Description
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.*

______________________

* The interactive data files are being furnished on Exhibit 101 hereto and, in accordance with Rule 402 of Regulation S-T, shall not be deemed filed for purposes of Section 11 or 12 of the Securities Act of 1933, as amended, or Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability under those sections.

39

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:  May 14, 2013	By:	/s/ Robert T. Strong Robert T. Strong President and Chief Executive Officer
Date:  May 14, 2013	By:	/s/ John J. Augustine John J. Augustine Chief Financial Officer