UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
 
 _______________________________
 
FORM 10-Q
(Mark One)
[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended SeptemberJune 30, 20172018
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)
 
Pennsylvania35-2293957
(State or Other Jurisdiction of Incorporation or Organization)(I.R.S. Employer Identification No.)
  
 
501 Knowles Avenue, Southampton, Pennsylvania  18966
(Address of Principal Executive Offices)
 
(215) 364-4059
(Registrant's Telephone Number, Including Area Code)
 
Not applicable
(Former name, former address and former fiscal year, if changed since last report)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.                                                                                                                                                                                                                                                                                  [X]  Yes     [   ]  No
 
Indicate by check mark whether the registrant has submitted electronically 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).                                                                                                                                                                                                                                                                                 [X]  Yes      [   ]   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 or an emerging growth company.  See the definitions of "large accelerated filer," "accelerated filer" andfiler," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
 
 
Large accelerated filer[   ]Accelerated filer[   ]
Non-accelerated filer[   ](Do not check if a smaller reporting company) 
               Smaller reporting company[X]Emerging growth company[   ]
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.   [   ]
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).         
                                                                     ��                                                                                                                                          [  ] Yes     [X]  No
 
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:  As of November 8, 2017, 1,917,223August 9, 2018, 1,990,898 shares of the Registrant's common stock were issued and outstanding.
 
 
 
 
INDEX


PART I - FINANCIAL INFORMATION
Page
 
Item 1 -                Financial Statements
 
 Consolidated Balance Sheets as of SeptemberJune 30, 20172018 and December 31, 20162017 (Unaudited)1
Consolidated Statements of Income for the Three and NineSix Months Ended SeptemberJune 30, 20172018 and 20162017 (Unaudited)
2
 
Consolidated Statements of Comprehensive Income for the Three and Nine Six Months Ended SeptemberJune 30, 2017
2018 and 20162017 (Unaudited)
3
 
Consolidated Statement of Stockholders' Equity for the NineSix Months Ended SeptemberJune 30, 20172018 (Unaudited)
4
 
Consolidated Statements of Cash Flows for the NineSix Months Ended SeptemberJune 30, 20172018 and 20162017 (Unaudited)
5
 
Notes to Unaudited Consolidated Financial Statements                                                           6
  
Item 2 -                Management's Discussion and Analysis of Financial Condition and Results of Operations
35
 
Item 3 -                Quantitative and Qualitative Disclosures About Market Risk                                                                          
4746
 
Item 4 -                Controls and Procedures                                                                                     
4746
 
PART II - OTHER INFORMATION
 
Item 1 -                Legal Proceedings                                                                                                                   
4847
 
Item 1A -             Risk Factors     4847
 
Item 2 -                Unregistered Sales of Equity Securities and Use of Proceeds4847
 
Item 3 -                Defaults Upon Senior Securities                                                                                                              
4847
 
Item 4 -                Mine Safety Disclosures                                                                                              
4847
 
Item 5 -                Other Information                                                                                                         
4948
 
Item 6 -                Exhibits                                                                                                         
4948
 
SIGNATURES 
 

 
ITEM 1. FINANCIAL STATEMENTS
 
Quaint Oak Bancorp, Inc.
Consolidated Balance Sheets (Unaudited)

 At June 30, At December 31, 
 2018 2017 
 (In thousands, except share data) 
Assets  
Due from banks, non-interest-bearing$413 $64 
Due from banks, interest-bearing 17,806  7,846 
Cash and cash equivalents 18,219  7,910 
Investment in interest-earning time deposits 4,920  4,879 
 Investment securities available for sale 7,337  7,912 
Loans held for sale 5,199  7,006 
Loans receivable, net of allowance for loan losses (2018 $1,830; 2017 $1,812) 208,178  201,667 
Accrued interest receivable 1,013  1,021 
Investment in Federal Home Loan Bank stock, at cost 1,246  1,234 
Bank-owned life insurance 3,855  3,814 
Premises and equipment, net 2,130  1,988 
Goodwill 515  515 
Other intangible, net of accumulated amortization 392  416 
Other real estate owned, net 1,674  - 
Prepaid expenses and other assets 1,254  1,234 
Total Assets$255,932 $239,596 
  
Liabilities and Stockholders' Equity 
Liabilities      
Deposits:      
 Non-interest bearing$11,873 $7,956 
 Interest-bearing 190,125  178,265 
Total deposits 201,998  186,221 
Federal Home Loan Bank short-term borrowings 10,000  10,000 
Federal Home Loan Bank long-term borrowings 18,000  18,000 
Accrued interest payable 176  167 
Advances from borrowers for taxes and insurance 2,330  2,423 
Accrued expenses and other liabilities 496  600 
Total Liabilities 233,000  217,411 
        
Stockholders' Equity      
Preferred stock – $0.01 par value, 1,000,000 shares authorized;
        none issued or outstanding
 
-
  
-
 
Common stock – $0.01 par value; 9,000,000 shares      
authorized; 2,777,250 issued; 1,990,556 and 1,920,024
outstanding at June 30, 2018 and December 31, 2017, respectively
 
28
  
28
 
Additional paid-in capital 14,520  14,481 
Treasury stock, at cost: 2018 786,694 shares; 2017 857,226 shares (4,627) (4,675)
Unallocated common stock held by:      
Employee Stock Ownership Plan (ESOP) (219) (253)
Recognition & Retention Plan Trust (RRP) -  (24)
Accumulated other comprehensive loss (4) (15)
Retained earnings 13,234  12,643 
Total Stockholders' Equity 22,932  22,185 
Total Liabilities and Stockholders' Equity$255,932 $239,596 
 
  At September 30,  At December 31, 
  2017  2016 
  (In thousands, except share data) 
Assets   
Due from banks, non-interest-bearing $547  $399 
Due from banks, interest-bearing  7,682   8,901 
Cash and cash equivalents  8,229   9,300 
Investment in interest-earning time deposits  4,879   6,098 
 Investment securities available for sale  8,434   9,555 
Loans held for sale  6,473   4,712 
Loans receivable, net of allowance for loan losses
         (2017 $1,735; 2016 $1,605)
 193,771   176,807 
Accrued interest receivable  925   862 
Investment in Federal Home Loan Bank stock, at cost  1,134   713 
Bank-owned life insurance  3,793   3,728 
Premises and equipment, net  1,973   1,730 
Goodwill  515   515 
Other intangible, net of accumulated amortization 428   465 
Other real estate owned, net  185   435 
Prepaid expenses and other assets  1,467   1,243 
Total Assets $232,206  $216,163 
  
Liabilities and Stockholders' Equity 
Liabilities        
Deposits:        
Non-interest bearing $7,713  $5,852 
Interest-bearing  174,685   171,155 
Total deposits  182,398   177,007 
Federal Home Loan Bank short-term borrowings  11,500   7,000 
Federal Home Loan Bank long-term borrowings  14,000   8,500 
Accrued interest payable  147   142 
Advances from borrowers for taxes and insurance 1,781   2,210 
Accrued expenses and other liabilities  362   514 
Total Liabilities  210,188   195,373 
          
Stockholders' Equity        
Preferred stock – $0.01 par value, 1,000,000 shares
         authorized; none issued or outstanding  
 
-
   
-
 
Common stock – $0.01 par value; 9,000,000 shares authorized; 2,777,250       
issued; 1,914,486 and 1,891,150 outstanding at September 30,
2017 and December 31, 2016, respectively   
28
   
28
 
Additional paid-in capital  14,415   14,240 
Treasury stock, at cost: 2017 862,764 shares; 2016 886,100 shares  (4,689)  (4,611)
   Unallocated common stock held by:        
         Employee Stock Ownership Plan (ESOP)  (270)  (320)
Recognition & Retention Plan Trust (RRP)  (24)  (47)
Accumulated other comprehensive loss  (1)  (38)
Retained earnings  12,559   11,538 
Total Stockholders' Equity  22,018   20,790 
Total Liabilities and Stockholders' Equity $232,206  $216,163 
 
 
See accompanying notes to the unaudited consolidated financial statements.
1
ITEM 1. FINANCIAL STATEMENTS
Quaint Oak Bancorp, Inc.
Consolidated Statements of Income (Unaudited)
 
 
For the Three
Months Ended
  
For the Nine
Months Ended
  
For the Three
Months Ended
  
For the Six
Months Ended
 
 September 30,  September 30,  June 30,  June 30, 
 2017  2016  2017  2016  2018  2017  2018  2017 
  (In thousands, except for share data)  (In thousands, except for share data) 
Interest Income     
Interest on loans $2,577  $2,213  $7,530  $6,497 
Interest and fees on loans $2,849  $2,523  $5,558  $4,953 
Interest and dividends on short-term investments and investment securities  
96
   
96
   
262
   
244
   
150
   
81
   
276
   
166
 
Total Interest Income  2,673   2,309   7,792   6,741   2,999   2,604   5,834   5,119 
                                
Interest Expense                                
Interest on deposits  685   638   1,987   1,774   800   654   1,529   1,302 
Interest on Federal Home Loan Bank borrowings  100   34   207   100 
Interest on Federal Home Loan Bank short-term borrowings  48   21   84   33 
Interest on Federal Home Loan Bank long-term borrowings  91   40   182   74 
Total Interest Expense  785   672   2,194   1,874   939   715   1,795   1,409 
                                
Net Interest Income  1,888   1,637   5,598   4,867   2,060   1,889   4,039   3,710 
                                
Provision for Loan Losses  83   61   189   172   94   64   165   106 
                                
Net Interest Income after Provision for Loan Losses  1,805   1,576   5,409   4,695   1,966   1,825   3,874   3,604 
                                
Non-Interest Income                                
Mortgage banking and title abstract fees  229   129   487   409   217   147   327   258 
Other fees and services charges  5   (20)  49   32   44   18   118   44 
Insurance commissions  90   60   256   60   103   89   182   166 
Income from bank-owned life insurance  21   23   65   67   21   22   41   44 
Net gain on the sale of residential mortgage loans
  687   531   1,511   1,289 
Net gain on loans held for sale
  585   716   906   824 
Gain on sale of SBA loans  32   51   48   108   -   16   23   16 
Loss on sales and write-downs on other real estate owned  -   (54)  (63)  (126)
Gain (loss) on sales and write-downs on other real estate owned
  -   (67)  63   (63)
Other  32   13   61   36   50   20   102   29 
Total Non-Interest Income  1,096   733   2,414   1,875   1,020   961   1,762   1,318 
                                
Non-Interest Expense                                
Salaries and employee benefits  1,324   1,132   3,994   3,321   1,621   1,353   3,289   2,670 
Directors' fees and expenses  52   48   154   155   40   50   94   102 
Occupancy and equipment  137   143   427   413   146   145   296   290 
Data processing  86   52   219   137   93   86   179   133 
Professional fees  105   94   289   291   123   94   183   184 
FDIC deposit insurance assessment  44   35   131   103   46   43   93   87 
Other real estate owned expense  4   13   12   32   2   1   2   8 
Advertising  39   23   117   84   54   39   108   78 
Amortization of other intangible  13   8   37   8   12   12   24   24 
Other  144   109   447   333   144   165   320   303 
Total Non-Interest Expense  1,948   1,657   5,827   4,877   2,281   1,988   4,588   3,879 
                                
Income before Income Taxes  953   652   1,996   1,693   705   798   1,048   1,043 
Income Taxes  358   250   706   650   170   274   225   348 
Net Income $595  $402  $1,290  $1,043  $535  $524  $823  $695 
                                
Earnings per share - basic $0.32  $0.22  $0.69  $0.59  $0.28  $0.28  $0.43  $0.38 
Average shares outstanding - basic  1,868,969   1,792,673   1,857,682   1,774,343   1,904,344   1,865,612   1,903,658   1,851,945 
Earnings per share - diluted $0.30  $0.21  $0.65  $0.54  $0.27  $0.26  $0.42  $0.35 
Average shares outstanding - diluted  2,007,819   1,950,413   1,998,138   1,935,757   1,963,852   2,008,404   1,962,954   1,993,280 
 
See accompanying notes to the unaudited consolidated financial statements.
 
2
ITEM 1. FINANCIAL STATEMENTS
Quaint Oak Bancorp, Inc.
Consolidated Statements of Comprehensive Income (Unaudited)
 
 
For the Three
Months Ended
  
For the Nine
Months Ended
  
For the Three
Months Ended
  
For the Six
Months Ended
 
 September 30,  September 30,  June 30,  June 30, 
 2017  2016  2017  2016  2018  2017  2018  2017 
 (In thousands)     (In thousands)    
Net Income $595  $402  $1,290  $1,043  $535  $524  $823  $695 
                                
Other Comprehensive Income (Loss):                                
Unrealized gains (losses) on investment securities available-for-sale  11   (5)  56   15   (1)  25   14   45 
Income tax effect  (4)  2   (19)  (5)  -   (8)  (3)  (15)
                                
Other comprehensive income (loss)  7   (3)  37   10   (1)  17   11   30 
                                
Total Comprehensive Income $602  $399  $1,327  $1,053  $534  $541  $834  $725 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
See accompanying notes to the unaudited consolidated financial statements.
3
ITEM 1. FINANCIAL STATEMENTS
Quaint Oak Bancorp, Inc.
Consolidated Statements of Stockholders' Equity (Unaudited)
 
For the Nine Months Ended September 30, 2017
                   
                         
           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 (Loss)  Earnings  Equity 
  (In thousands, except share data) 
BALANCE –DECEMBER 31, 2016  1,891,150  $28  $14,240  $(4,611) $(367) $(38) $11,538  $20,790 
                                 
Common stock allocated by ESOP
          87       51           138 
                                 
Treasury stock  purchase  (27,363)          (341)              (341)
                                 
Reissuance of treasury stock
   under 401(k) Plan
  6,502       49   34               83 
                                 
Reissuance of treasury stock
   under stock incentive plan
  5,397       (28)  28               - 
                                 
Reissuance of treasury stock
   for exercised stock options
  38,800       (8)  201               193 
                                 
Stock based compensation expense          97                   97 
                                 
Release of 4,864 vested RRP shares          (22)      22           - 
                                 
Cash dividends declared ($0.14 per share)
                          (269)  (269)
                                 
Net income                          1,290   1,290 
                                 
Other comprehensive income, net
                      37       37 
                                 
BALANCE – SEPTEMBER 30,  2017  1,914,486  $28  $14,415  $(4,689) $(294) $(1) $12,559  $22,018 
For the Six Months Ended June 30, 2018                                 
                    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    Loss    Earnings    Equity  
                                 
BALANCE –DECEMBER 31, 2017  1,920,024  $28  $14,481  $(4,675) $(277) $(15) $12,643  $22,185 
                                 
Common stock allocated by ESOP          62       34           96 
                                 
Treasury stock  purchased  (44,311)          (588)  2           (586)
                                 
Reissuance of treasury stock under 
   401(k) Plan  
3,002       23   17               40 
                                 
Reissuance of treasury stock under 
    stock ncentive plan
4,997       (28)  28               - 
                                 
Reissuance of treasury stock for
    exercise stock options
106,844       (57)  591               534 
                                 
Stock based compensation expense          61                   61 
                                 
Release of 4,664 vested RRP shares          (22)      22           - 
                                 
Cash dividends declared ($0.12 per share)                       (232)  (232)
                                 
Net income                          823   823 
                                 
Other comprehensive income, net                      11       11 
                                 
BALANCE – JUNE 30,  2018  1,990,556  $28  $14,520  $(4,627) $(219) $(4) $13,234  $22,932 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
See accompanying notes to the unaudited consolidated financial statements.
 
4
ITEM 1. FINANCIAL STATEMENTS
Quaint Oak Bancorp, Inc.
Consolidated Statements of Cash Flows (Unaudited)
 
 
For the Nine Months
Ended September 30,
  
For the Six Months
Ended June 30,
 
 2017  2016  2018  2017 
  (In thousands)  (In Thousands) 
Cash Flows from Operating Activities     
Net income $1,290  $1,043  $823  $695 
Adjustments to reconcile net income to net cash provided by (used in) operating activities:        
Adjustments to reconcile net income to net cash provided by operating activities:        
Provision for loan losses  189   172   165   106 
Depreciation expense  121   140   102   91 
Amortization of intangibles  37   8   24   24 
Net amortization of securities premiums  15   14   10   9 
Accretion of deferred loan fees and costs, net  (253)  (227)  (169)  (178)
Stock-based compensation expense  235   225   157   156 
Net gain on the sale of loans  (1,511)  (1,289)
Net gain on loans held for sale  (906)  (824)
Loans held for sale-originations  (44,934)  (34,193)
Loans held for sale-proceeds  47,647   32,510 
Gain on the sale of SBA loans  (48)  (108)  (23)  (16)
Net loss on sale and write-downs of other real estate owned  63   126 
Net (gain) loss on sale and write-downs of other real estate owned  (63)  63 
Increase in the cash surrender value of bank-owned life insurance  (65)  (67)  (41)  (44)
Changes in assets and liabilities which provided (used) cash:                
Loans held for sale-originations  (62,106)  (47,942)
Loans held for sale-proceeds  61,856   50,048 
Accrued interest receivable  (63)  51   8   (13)
Prepaid expenses and other assets  (243)  (166)  (23)  (599)
Accrued interest payable  5   13   9   5 
Accrued expenses and other liabilities  (152)  45   (104)  (42)
Net Cash Provided by (Used in) Operating Activities  (630)  2,086   2,682   (2,250)
Cash Flows from Investing Activities                
Net decrease in investment in interest-earning time deposits  1,219   73 
Purchase of investment securities available for sale  -   (7,833)
Purchase of interest-earning time deposits  (541)  (562)
Redemption of interest-earning time deposits  500   1,295 
Principal repayments of investment securities available for sale  1,162   784   579   698 
Net increase in loans receivable  (16,852)  (18,159)  (8,140)  (12,151)
Net increase (decrease) in investment in Federal Home Loan Bank stock  (421)  25 
Purchase of Federal Home Loan Bank stock  (12)  (421)
Proceeds from the sale of other real estate owned  210   844   63   210 
Capitalized expenditures on other real estate owned  (23)  (280)  (18)  (23)
Purchase of premises and equipment  (364)  (50)  (244)  (354)
Purchase of insurance agency  -   (1,000)
Net Cash Used in Investing Activities  (15,069)  (25,596)  (7,813)  (11,308)
Cash Flows from Financing Activities                
Net increase in demand deposits and savings accounts  43   3,273 
Net increase in demand deposits, money markets, and savings accounts  3,760   1,636 
Net increase in certificate accounts  5,348   22,149   12,017   460 
Decrease in advances from borrowers for taxes and insurance  (93)  (47)
Net proceeds from Federal Home Loan Bank short-term borrowings  4,500   -   -   3,000 
Proceeds from Federal Home Loan Bank long-term borrowings  8,000   -   -   8,000 
Repayment of Federal Home Loan Bank long-term borrowings  (2,500)  (1,000)  -   (1,000)
Dividends paid  (269)  (218)  (232)  (172)
Purchase of treasury stock  (341)  (13)  (586)  (5)
Proceeds from the reissuance of treasury stock  83   82   40   68 
Proceeds from the exercise of stock options  193   133   534   193 
Decrease in advances from borrowers for taxes and insurance  (429)  (422)
Net Cash Provided by Financing Activities  14,628   23,984   15,440   12,133 
Net Increase (Decrease) in Cash and Cash Equivalents  (1,071)  474   10,309   (1,425)
Cash and Cash Equivalents – Beginning of Period  9,300   17,206 
Cash and Cash Equivalents – End of Period $8,229  $17,680 
Cash and Cash Equivalents – Beginning of Year  7,910   9,300 
Cash and Cash Equivalents – End of Year $18,219  $7,875 
                
Cash payments for interest $2,189  $1,861  $1,786  $1,404 
Cash payments for income taxes $789  $560  $290  $505 
Transfer of loans to other real estate owned $1,656  $- 
 
 
See accompanying notes to the unaudited consolidated financial statements.
 
5
Quaint Oak Bancorp, Inc.
Notes to Unaudited Consolidated Financial Statements
 
Note 1 – Financial Statement Presentation and Significant Accounting Policies
Basis of Financial Presentation.   The consolidated financial statements include the accounts of Quaint Oak Bancorp, Inc., a Pennsylvania chartered corporation (the "Company" or "Quaint Oak Bancorp") and its wholly owned subsidiary, Quaint Oak Bank, a Pennsylvania chartered stock savings bank, ("Bank"), along with its wholly owned subsidiaries.  At SeptemberJune 30, 2017,2018, the Bank has five wholly-owned subsidiaries, Quaint Oak Mortgage, LLC, Quaint Oak Real Estate, LLC, Quaint Oak Abstract, LLC, QOB Properties, LLC, and Quaint Oak Insurance Agency, LLC, each a Pennsylvania limited liability company.  The mortgage, 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.  On August 1, 2016, Quaint Oak Insurance Agency, LLC began operations by acquiring the renewal rights to the book of business producedin August 2016 and serviced by Signature Insurance Services, LLC, an independent insurance agency located in New Britain, Pennsylvania, that provides a broad range of personal and commercial insurance coverage solutions. All significant intercompany balances and transactions have been eliminated.
The Bank is subject to regulation by the Pennsylvania Department of Banking and Securities and the Federal Deposit Insurance Corporation.  Pursuant to the Bank's election under Section 10(l) of the Home Owners' Loan Act, the Company is a savings and loan holding company regulated by the Board of Governors of the Federal Reserve System.  The market area served by the Bank is principally Bucks County, Pennsylvania and to a lesser extent, Montgomery and Philadelphia Counties in Pennsylvania.  The Bank has two locations: the main office location in Southampton, Pennsylvania and a regional banking office in the Lehigh Valley area of Pennsylvania. The principal deposit products offered by the Bank are certificates of deposit, money market accounts, savings accounts and, beginning in December 2014, non-interest bearing checking accounts for businesses and consumers.consumers, and savings accounts.  The principal loan products offered by the Bank are fixed and adjustable rate residential and commercial mortgages, construction loans, commercial business loans, home equity loans, and lines of credit, and commercial business loans.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, 20162017 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 20162017 Annual Report on Form 10-K.  The results of operations for the three or nine months ended SeptemberJune 30, 20172018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017.2018.
Use of Estimates in the Preparation of Financial Statements. The preparation of the financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period.  Actual results could differ from those estimates.  The Company's most significant estimates are the determination of the allowance for loan losses and the valuation of deferred tax assets.
 
6
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.  Commercial business loans are loans to businesses for working capital, purchase of a business, tenant improvements, receivables, purchase of inventory, and for the purchase of business essential equipment.  Business essential equipment is equipment necessary for a business to support or assist with the day-to-day operation or profitability of the business.   The consumer loan segment consists of the following classes: home equity loans and other consumer loans.  Included in the home equity class are home equity loans and home equity lines of credit.  Included in the other consumer are loans secured by saving accounts.
The accrual of interest is generally discontinued when principal or interest has become 90 days past due unless the loan is in the process of collection and is either guaranteed or well secured.  When a loan is placed on nonaccrual status, unpaid interest credited to income in the current year is reversed and unpaid interest accrued in prior years is charged against the allowance for loan losses.  Interest received on nonaccrual loans generally is either applied against principal or reported as interest income, according to management's judgment as to the collectability of principal.  Generally, a loan is restored to accrual status when the obligation is brought current, it has performed in accordance with the contractual terms for a reasonable period of time and the ultimate collectability of the total contractual principal and interest is no longer in doubt.
Allowance for Loan Losses.  The allowance for loan losses represents management's estimate of losses inherent in the loan portfolio as of the balance sheet date and is recorded as a reduction to loans receivable. The allowance for loan losses is increased by the provision for loan losses, and decreased by charge-offs, net of recoveries. Loans deemed to be uncollectible are charged against the allowance for loan losses, and subsequent recoveries, if any, are credited to the allowance. All, or part, of the principal balance of loans receivable are charged off to the allowance as soon as it is determined that the repayment of all, or part, of the principal balance is highly unlikely. Because all identified losses are immediately charged off, no portion of the allowance for loan losses is restricted to any individual loan or groups of loans, and the entire allowance is available to absorb any and all loan losses.
The allowance for loan losses is maintained at a level considered adequate to provide for losses that can be reasonably anticipated. Management performs a quarterly evaluation of the adequacy of the allowance. The allowance is based on the Company's past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower's ability to repay, the estimated value of any underlying collateral, composition of the loan portfolio, current economic conditions and other relevant factors. This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant revision as more information becomes available.


7
Quaint Oak Bancorp, Inc.
Notes to Unaudited Consolidated Financial Statements
 
Note 1 – Financial Statement Presentation and Significant Accounting Policies (Continued)
The allowance consists of specific, general and unallocated components. The specific component relates to loans that are designated as impaired. For loans that are designated as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers pools of loans by loan class. These pools of loans are evaluated for loss exposure based upon historical loss rates for each of these categories of loans, adjusted for qualitative factors. These significant factors may include changes in lending policies and procedures, changes in existing general economic and business conditions affecting our primary lending areas, credit quality trends, collateral value, loan volumes and concentrations, seasoning of the loan portfolio, recent loss experience in particular segments of the portfolio, duration of the current business cycle and bank regulatory examination results. The applied loss factors are reevaluated quarterly to ensure their relevance in the current economic environment.  Residential owner occupied mortgage lending generally entails a lower risk of default than other types of lending. Consumer loans and commercial real estate loans generally involve more risk of collectability because of the type and nature of the collateral and, in certain cases, the absence of collateral. It is the Company's policy to establish a specific reserve for loss on any delinquent loan when it determines that a loss is probable. An unallocated component is maintained to cover uncertainties that could affect management's estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.
A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not considered impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower's prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis by either the present value of expected future cash flows discounted at the loan's effective interest rate or the fair value of the collateral if the loan is collateral dependent.  An allowance for loan losses is established for an impaired loan if its carrying value exceeds its estimated fair value. The estimated fair values of substantially all of the Company's impaired loans are measured based on the estimated fair value of the loan's collateral.

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

For loans secured by real estate, estimated fair values are determined primarily through third-party appraisals. When a real estate secured loan becomes impaired, a decision is made regarding whether an updated certified appraisal of the real estate is necessary. This decision is based on various considerations, including the age of the most recent appraisal, the loan-to-value ratio based on the original appraisal and the condition of the property. Appraised values are discounted to arrive at the estimated selling price of the collateral, which is considered to be the estimated fair value. The discounts also include estimated costs to sell the property.
 
 
 
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 as special mention have potential weaknesses that deserve management's close attention. If uncorrected, the potential weaknesses may result in deterioration of the repayment prospects. Loans classified substandard have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They include loans that are inadequately protected by the current sound net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans classified doubtful have all the weaknesses inherent in loans classified substandard with the added characteristic that collection or liquidation in full, on the basis of current conditions and facts, is highly improbable. Loans classified as a loss are considered uncollectible and are charged to the allowance for loan losses. Loans not classified are rated pass. In addition, Federal regulatory agencies, as an integral part of their examination process, periodically review the Company's allowance for loan losses and may require the Company to recognize additions to the allowance based on their judgments about information available to them at the time of their examination, which may not be currently available to management. Based on management's comprehensive analysis of the loan portfolio, management believes the current level of the allowance for loan losses is adequate.

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

Federal Home Loan Bank Stock.  Federal law requires a member institution of the Federal Home Loan Bank (FHLB) system to hold restricted stock of its district Federal Home Loan Bank according to a predetermined formula.  FHLB stock is carried at cost and evaluated for impairment. When evaluating FHLB stock for impairment, its value is determined based on the ultimate recoverability of the par value of the stock. We evaluate our holdings of FHLB stock for impairment each reporting period. No impairment charges were recognized on FHLB stock during the three or ninesix months ended SeptemberJune 30, 20172018 and 2016.2017.

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

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

 
9
Quaint Oak Bancorp, Inc.
Notes to Unaudited Consolidated Financial Statements

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

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

Other Real Estate Owned, Net. Other real estate owned or foreclosed assets are comprised of property acquired through a foreclosure proceeding or acceptance of a deed in lieu of foreclosure and loans classified as in-substance foreclosures.  A loan is classified as in-substance foreclosure when the Bank has taken possession of the collateral regardless of whether formal foreclosure proceedings take place.  Other real estate properties are initially recorded at fair value, net of estimated selling costs at the date of
foreclosure, establishing a new cost basis. After foreclosure, valuations are periodically performed by management and the real estate is carried at the lower of cost or fair value less estimated costs to sell.  Net revenue and expenses from operations and additions to the valuation allowance are included in other expenses.  The Company had notwo one-to-four family residential properties for which foreclosure proceedings are in process at SeptemberJune 30, 2017.2018.  The total investment is $242,000.

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 SeptemberJune 30, 2017,2018, the Company has threeoutstanding equity awards under two share-based plans: the 2008 Recognition and Retention Plan ("RRP"), the 20082013 Stock OptionIncentive Plan and the 20132018 Stock Incentive Plan.  Awards under these plans were made in May 20082013 and 2013.2018.  These plans are more fully described in Note 10.
The Company also has an employee stock ownership plan ("ESOP").  This plan is more fully described in Note 10.  As ESOP shares are committed to be released and allocated among participants, the Company recognizes compensation expense equal to the average market price of the shares over the period earned.
Comprehensive Income (Loss).Income..  Accounting principles generally accepted in the United States of America require that recognized revenue, expenses, gains and losses be included in net income.  Certain changes in assets and liabilities, such as unrealized gains and losses on available for sale securities, are reported as a separate component of the equity section of the consolidated balance sheet and  along with net income, are components of comprehensive income.
Earnings per Share.  Amounts reported in earnings per share reflect earnings available to common stockholders' for the period divided by the weighted average number of shares of common stock outstanding during the period, exclusive of undeserved 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 May 2014, the FASB issued ASU 2014-09,Revenue from Contracts with CustomersCustomers.   (a newThe Company records revenue recognition standard). The Update's core principle is that a company will recognize revenue to depict the transfer of goods or services tofrom contracts with customers in an amount that reflectsaccordance with Accounting Standards Codification Topic 606, "Revenue from Contracts with Customers" ("Topic 606"). Under Topic 606, the consideration to whichCompany must identify the entity expects to be entitled in exchange for those goods or services. In addition, this Update specifies the accounting for certain costs to obtain or fulfill a contract with a customer, identify the performance obligations in the contract, determine the transaction price, allocate the transaction price to the performance obligations in the contract, and expands disclosure requirements forrecognize revenue recognition. This Update is effective for annualwhen (or as) the Company satisfies a performance obligation. Significant revenue has not been recognized in the current reporting periods beginning after December 15, 2016, including interim periods withinperiod that reporting period. Because the guidance does not apply to revenue associated with financial instruments, including loans and securities, we do not expect the new standard, or any of the amendments, to resultresults from performance obligations satisfied in a material change from our current accounting for revenue because the majority of the Company's financial instruments are not within the scope of Topic 606.  However, we do expect that the standard will result in new disclosure requirements, which are currently being evaluated.previous periods.
 
10
Quaint Oak Bancorp, Inc.
Notes to Unaudited Consolidated Financial Statements
 
Note 1 – Financial Statement Presentation and Significant Accounting Policies (Continued)

The Company's primary sources of revenue are derived from interest and dividends earned on loans and investment securities, gains on the sale of loans, income from bank-owned life insurance, and other financial instruments that are not within the scope of Topic 606.  The main types of non-interest income within the scope of the standard are as follows:
Service Charges on Deposits: The Bank has contracts with its commercial checking deposit customers where fees are charged if the account balance falls below predetermined levels defined as compensating balances. These agreements can be cancelled at any time by either the Bank or the deposit customer. Revenue from these transactions is recognized on a monthly basis as the Bank has an unconditional right to the fee consideration. The Bank also has transaction fees related to specific transactions or activities resulting from customer request or activity that include overdraft fees, wire fees, and other transaction fees. All of these fees are attributable to specific performance obligations of the Bank where the revenue is recognized at a defined point in time, completion of the requested service/transaction.
Insurance Commissions:  Insurance income generally consist of commissions from the sale of insurance policies and performance-based commissions from insurance companies.  The Bank recognizes commission income from the sale of insurance policies when it acts as an agent between the insurance carrier and policyholder, arranging for the insurance carrier to provide policies to policyholders, and acts on behalf of the insurance carrier by providing customer service to the policyholder during the policy period. Commission income is recognized over time, using the output method of time elapsed, which corresponds with the underlying insurance policy period, for which the Bank is obligated to perform under contract with the insurance carrier. Commission income is variable, as it is comprised of a certain percentage of the underlying policy premium. The Bank estimates the variable consideration based upon the "most likely amount" method, and does not expect or anticipate a significant reversal of revenue in future periods, based upon historical experience.  Payment is due from the insurance carrier for commission income once the insurance policy has been sold. The Bank has elected to apply a practical expedient related to capitalizable costs, which are the commissions paid to insurance producers, and will expense these commissions paid to insurance producers as incurred, as these costs are related to the commission income and would have been amortized within one year or less if they had been capitalized, the same period over which the commission income was earned. Performance-based commissions from insurance companies are recognized at a point in time, when received, and no contingencies remain.

Recent Accounting Pronouncements.In January 2016, the FASB issued ASU 2016-01,Financial Instruments – Overall (Subtopic 825-10):  Recognition and Measurement of Financial Assets and Financial Liabilities.  This Update applies to all entities that hold financial assets or owe financial liabilities and is intended to provide more useful information on the recognition, measurement, presentation, and disclosure of financial instruments.  Among other things, this Update (a) requires equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income; (b) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment; (c) eliminates the requirement to disclose the fair value of financial instruments measured at amortized cost for entities that are not public business entities; (d) eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; (e) requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; (f) requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements; and (g) clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity's other deferred tax assets.  For public business entities,
11
Quaint Oak Bancorp, Inc.
Notes to Unaudited Consolidated Financial Statements
Note 1 – Financial Statement Presentation and Significant Accounting Policies (Continued)

The Bank has adopted this standard effective January 1, 2018.  On a prospective basis, the amendments in this Update are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company is currently evaluatingBank implemented changes to the impact the adoptionmeasurement of the standard will havefair value of financial instruments using an exit price notion for disclosure purposes included in Note 11 to the financial statements.  The Bank estimated the fair value based on guidance from ASC 820-10, Fair Value Measurements, which defines fair value as the Company's financial positionprice which would be received to sell an asset or resultspaid to transfer a liability in an orderly transaction between market participants at the measurement date. There is no active observable market for sale information on community bank loans and, thus, Level III fair value procedures were utilized, primarily in the use of operations.present value techniques incorporating assumptions that market participants would use in estimating fair values. In the absence of reliable market information, the Bank used its own assumptions in an effort to determine a reasonable estimate of fair value.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842).  The standard requires lessees to recognize the assets and liabilities that arise from leases on the balance sheet.  A lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term.  A short-term lease is defined as one in which (a) the lease term is 12 months or less and (b) there is not an option to purchase the underlying asset that the lessee is reasonably certain to exercise.  For short-term leases, lessees may elect to recognize lease payments over the lease term on a straight-line basis.  For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2018, and interim periods within those years.  The amendments should be applied at the beginning of the earliest period presented using a modified retrospective approach with earlier application permitted as of the beginning of an interim or annual reporting period.   The Company is currently assessing the practical expedients it may elect at adoption, but does not anticipate the amendments will have a significant impact to the financial statements. Based on the Company's preliminary analysis of its current portfolio, the impact to the Company's balance sheet is estimated to result in less than a 1% increase in assets and liabilities. The Company also anticipates additional disclosures to be provided at adoption.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments, which changes the impairment model for most financial assets. This Update is intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations.  The underlying premise of the Update is that financial assets measured at amortized cost should be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis. The allowance for credit losses should reflect management's current estimate of credit losses that are expected to occur over the remaining life of a financial asset.  The income statement will be effected for the measurement of credit losses for newly recognized financial assets, as well as the expected increases or decreases of expected credit losses that have taken place during the period. ASU 2016-13 is effective for annual and interim periods beginning after December 15, 2019, and early adoption is permitted for annual and interim periods beginning after December 15, 2018. With certain exceptions, transition to the new requirements will be through a cumulative effect adjustment to opening retained earnings as of the beginning of the first reporting period in which the guidance is adopted..adopted.  We expect to recognize a one-time cumulative effect adjustment to the allowance for loan losses as of the beginning of the first reporting period in which the new standard is effective, but cannot yet determine the magnitude of any such one-time adjustment or the overall impact of the new guidance on the consolidated financial statements.
 
 
1112
Quaint Oak Bancorp, Inc.
Notes to Unaudited Consolidated Financial Statements
 
Note 1 – Financial Statement Presentation and Significant Accounting Policies (Continued)
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230):  Classification of Certain Cash Receipts and Cash Payments, which addresses eight specific cash flow issues with the objective of reducing diversity in practice.  Among these include recognizing cash payments for debt prepayment or debt extinguishment as cash outflows for financing activities; cash proceeds received from the settlement of insurance claims should be classified on the basis of the related insurance coverage; and cash proceeds received from the settlement of bank-owned life insurance policies should be classified as cash inflows from investing activities while the cash payments for premiums on bank-owned policies may be classified as cash outflows for investing activities, operating activities, or a combination of investing and operating activities.  The amendments in this Update are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. An entity that elects early adoption must adopt all of the amendments in the same period. The amendments in this Update should be applied using a retrospective transition method to each period presented. If it is impracticable to apply the amendments retrospectively for some of the issues, the amendments for those issues would be applied prospectively as of the earliest date practicable. The Company is currently evaluating the impact the adoption of the standard will have on the Company's statement of cash flows.
In December 2016, the FASB issued ASU 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customer. This Update, among others things, clarifies that guarantee fees within the scope of Topic 460, Guarantees, (other than product or service warranties) are not within the scope of Topic 606. The effective date and transition requirements for ASU 2016-20 are the same as the effective date and transition requirements for the new revenue recognition guidance. For public entities with a calendar year-end, the new guidance is effective in the quarter and year beginning January 1, 2018.  The Company is currently evaluating the impact the adoption of the standard will have on the Company's financial position or results of operations.

In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment. To simplify the subsequent measurement of goodwill, the FASB eliminated Step 2 from the goodwill impairment test.  In computing the implied fair value of goodwill under Step 2, an entity had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities (including unrecognized assets and liabilities) following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination.  Instead, under the amendments in this Update, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting units fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit.  A public business entity that is a U.S. Securities and Exchange Commission ("SEC") filer should adopt the amendments in this Update for its annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019.  This Update is not expected to have a significant impact on the Company's financial statements.
12
Quaint Oak Bancorp, Inc.
Notes to Unaudited Consolidated Financial Statements
Note 1 – Financial Statement Presentation and Significant Accounting Policies (Continued)statements.

In March 2017, the FASB issued ASU 2017-08, Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20). The amendments in this Update shorten the amortization period for certain callable debt securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity.  For public business entities, the amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018.  Early adoption is permitted, including adoption in an interim period.  If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period.  An entity should apply the amendments in this Update on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. Additionally, in the period of adoption, an entity should provide disclosures about a change in accounting principle.  This Update is not expected to have a significant impact on the Company's financial statements.

In May 2017,January 2018, the FASB issued ASU 2017-09, 2018-01, Compensation – Stock CompensationLeases (Topic 718)842), which affects anyprovides an optional transition practical expedient to not evaluate under Topic 842 existing or expired land easements that were not previously accounted for as leases under the current lease guidance in Topic 840.  An entity that changeselects this practical expedient should evaluate new or modified land easements under Topic 842 beginning at the termsdate the entity adopts Topic 842; otherwise, an entity should evaluate all existing or conditionsexpired land easements in connection with the adoption of a share-based payment award.  This Update amendsthe new lease requirements in Topic 842 to assess whether they meet the definition of modification by qualifying that modification accounting does not apply to changes to outstanding share-based payment awards that do not affecta lease.  The effective date and transition requirements for the total fair value, vestingamendments are the same as the effective date and transition requirements or equity/liability classification of the awards.  The amendments in this Update are effective for all entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted, including adoption in any interim period, for (1) public business entities for reporting periods for which financial statements have not yet been issued and (2) all other entities for reporting periods for which financial statements have not yet been made available for issuance. The amendments in this Update should be applied prospectively to an award modified on or after the adoption date. ASU 2016-02.  This Update is not expected to have a significant impact on the Company's financial statements.

Reclassifications.   Certain items in the 20162017 consolidated financial statements have been reclassified to conform to the presentation in the 20172018 consolidated financial statements. Such reclassifications did not have a material impact on the presentation of the overall financial statements.  The reclassifications had no effect on net income or stockholders' equity.

13
Quaint Oak Bancorp, Inc.
Notes to Unaudited Consolidated Financial Statements
Note 2 – Earnings Per Share

Earnings per share ("EPS") consists of two separate components, basic EPS and diluted EPS.  Basic EPS is computed based on the weighted average number of shares of common stock outstanding for each period presented.  Diluted EPS is calculated based on the weighted average number of shares of common stock outstanding plus dilutive common stock equivalents ("CSEs").  CSEs consist of shares that are assumed to have been purchased with the proceeds from the exercise of stock options, as well as unvested restricted stock (RRP) shares. Common stock equivalents which are considered antidilutive are not included for the purposes of this calculation. For the three and ninesix months ended SeptemberJune 30, 20172018 and 2016,2017, all unvested restricted stock program awards and outstanding stock options representing shares were dilutive.

13
Quaint Oak Bancorp, Inc.
Notes to Unaudited Consolidated Financial Statements
The following table sets forth the composition of the weighted average shares (denominator) used in the basic and dilutive earnings per share computations.

 
For the Three Months Ended
September 30,
  
For the Nine Months Ended
September 30,
  
For the Three Months Ended
June 30,
  
For the Six Months Ended
June 30,
 
 2017  2016  2017  2016  2018  2017  2018  2017 
Net Income $
595,000
  $402,000  $1,290,000  $1,043,000  $
535,000
  $
524,000
  $
823,000
  $
695,000
 
                                
Weighted average shares outstanding – basic  1,868,969   1,792,673   1,857,682   1,774,343   1,904,344   1,865,612   1,903,658   
1,851,945
 
Effect of dilutive common stock equivalents  138,850   157,740   140,456   161,414   59,508   142,792   59,296   141,335 
Adjusted weighted average shares outstanding – diluted  2,007,819   1,950,413   1,998,138   1,935,757   1,963,852   2,008,404   1,962,954   
1,993,280
 
                                
Basic earnings per share $0.32  $0.22  $0.69  $0.59  $0.28  $0.28  $0.43  $0.38 
Diluted earnings per share $0.30  $0.21  $0.65  $0.54  $0.27  $0.26  $0.42  $0.35 

Note 3 – Accumulated Other Comprehensive Income (Loss)

The following table presents the changes in accumulated other comprehensive income (loss) by component, net of tax, for the three and ninesix months ended SeptemberJune 30, 20172018 and 20162017 (in thousands):

 
Unrealized Gains (Losses) on Investment Securities
Available for Sale (1)
  Unrealized Gains (Losses) on Investment Securities Available for Sale (1) 
 
For the Three Months Ended
September 30,
  
For the Nine Months Ended
September 30,
  
For the Three Months Ended
June 30,
  
For the Six Months Ended
 June 30,
 
 2017  2016  2017  2016  2018  2017  2018  2017 
Balance at the beginning of the period $(8) $1  $(38) $(12) $(3) $(25) $(15) $(38)
Other comprehensive income (loss) before classifications  7   (3)  37   10   (1)  17   11   30 
Amount reclassified from accumulated other comprehensive income (loss)  
-
   
-
   
-
   
-
   
-
   
-
   
-
   
-
 
Total other comprehensive income (loss)  7   
(3
)  37   10   (1)  17   11   30 
Balance at the end of the period $
(1
) $(2) $(1) $(2) $
(4
) $
(8
) $(4) $(8)
_____________________________
(1)          All amounts are net of tax.  Amounts in parentheses indicate debits.

14
Quaint Oak Bancorp, Inc.
Notes to Unaudited Consolidated Financial Statements
Note 4 – Investment in Interest-Earning Time Deposits
The investment in interest-earning time deposits as of SeptemberJune 30, 20172018 and December 31, 2016,2017, by contractual maturity, are shown below (in thousands):

 
September 30,
2017
  
December 31,
2016
  
June 30,
2018
  
December 31,
2017
 
Investment in interest-earning time deposits   
Due in one year or less $761  $2,849  $1,604  $761 
Due after one year through five years  4,118   3,249   3,316   4,118 
Total $4,879  $6,098  $4,920  $4,879 

14
Quaint Oak Bancorp, Inc.
Notes to Unaudited Consolidated Financial Statements
Note 5 – Investment Securities Available for Sale
The amortized cost, gross unrealized gains and losses, and fair value of investment securities available for sale at SeptemberJune 30, 20172018 and December 31, 20162017 are summarized below (in thousands): 

 September 30, 2017  June 30, 2018 
 
Amortized Cost
  Gross Unrealized Gains  Gross Unrealized (Losses)  
Fair Value
  
Amortized
Cost
  
Gross
Unrealized
Gains
  
Gross
 Unrealized
(Losses)
  
Fair Value
 
Available for Sale:                        
Mortgage-backed securities:                        
Governmental National Mortgage Association securities $5,884  $20  $-  $5,904  $5,241  $32  $(1) $5,272 
Federal Home Loan Mortgage Corporation securities  1,605   -   (15)  1,590   1,286   -   (32)  1,254 
Federal National Mortgage Association securities  586   -   (3)  583   455   1   -   456 
Total mortgage-backed securities  8,075   20   (18)  8,077   6,982   33   (33)  6,982 
Debt securities:                                
U.S. government agency  360   -   (3)  357   360   -   (5)  355 
Total available-for-sale securities $8,435  $20  $(21) $8,434 
Total available-for-sale-securities $7,342  $33  $(38) $7,337 

 December 31, 2016  December 31, 2017 
 
Amortized Cost
  Gross Unrealized Gains  Gross Unrealized (Losses)  
Fair Value
  
Amortized
Cost
  
Gross
Unrealized
Gains
  
Gross
 Unrealized
(Losses)
  
Fair Value
 
Available for Sale:                        
Mortgage-backed securities:                        
Governmental National Mortgage Association securities $6,608  $1  $(19) $6,590  $5,624  $19  $-  $5,643 
Federal Home Loan Mortgage Corporation securities  1,892   -   (21)  1,871   1,377   -   (35)  1,342 
Federal National Mortgage Association securities  752   -   (12)  740   570   -   -   570 
Total mortgage-backed securities  9,252   1   (52)  9,201   7,571   19   (35)  7,555 
Debt securities:                                
U.S. government agency  360   -   (6)  354   360   -   (3)  357 
Total available-for-sale securities $9,612  $1  $(58) $9,555 
Total available-for-sale-securities $7,931  $19  $(38) $7,912 

The amortized cost and fair value of debt securities at SeptemberJune 30, 2017,2018, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties (in thousands):

  Available for Sale 
  Amortized Cost  Fair Value 
Debt securities      
     Due after one year through five years $360  $357 
     Due after ten years  8,075   8,077 
Total $8,435  $8,434 

  Available for Sale 
  Amortized Cost  Fair Value 
Debt securities      
     Due after one year through five years $360  $355 
     Due after ten years  6,982   6,982 
Total $7,342  $7,337 
 
 
15
Quaint Oak Bancorp, Inc.
Notes to Unaudited Consolidated Financial Statements
 
Note 5 – Investment Securities Available for Sale (Continued)

The following tables show the Company's gross unrealized losses and fair value, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position at SeptemberJune 30, 20172018  and December 31, 20162017 (in thousands):

 September 30, 2017  June 30, 2018 
    Less than Twelve Months  Twelve Months or Greater  Total     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
  
Number of
Securities
  Fair Value  
Gross
Unrealized
Losses
  Fair Value  
Gross
Unrealized
Losses
  Fair Value  
Gross
Unrealized
Losses
 
                     
Governmental National Mortgage Association mortgage-backed securities  2  $734  $(1) $-  $-  $734  $(1)
Federal Home Loan
Mortgage Corporation mortgage-backed
securities
  2  $768  $(8) $822  $(7) $1,590  $(15)  2   -   -  $1,254  $(32) $1,254  $(32)
Federal National Mortgage Association mortgage-backed securities  1   -   -   583   (3)  583   (3)
Debt securities, U.S. government agency  1   -   -   357   (3)  357   (3)  1   -   -   355   (5)  355   (5)
Total  4  $768  $(8) $1,762  $(13) $2,530  $(21)  5  $734  $(1) $1,609  $(37) $2,343  $(38)

 December 31, 2016  December 31, 2017 
    Less than Twelve Months  Twelve Months or Greater  Total     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
  
Number of
Securities
  Fair Value  
Gross
Unrealized
Losses
  Fair Value  
Gross
Unrealized
Losses
  Fair Value  
Gross
Unrealized
Losses
 
Governmental National Mortgage Association mortgage-backed securities  8  $5,874  $(19) $-  $-  $5,874  $(19)
Federal Home Loan Mortgage Corporation mortgage-backed securities  2   1,871   (21)  -   -   1,871   (21)  2  $-  $-  $1,342  $(35) $1,342  $(35)
Federal National Mortgage Association mortgage-backed securities  1   740   (12)  -   -   740   (12)
Debt securities, U.S. government agency  1   354   (6)  -   -   354   (6)  1   -   -   357   (3)  357   (3)
Total  12  $8,839  $(58) $-  $-  $8,839  $(58)  3  $-  $-  $1,699  $(38) $1,699  $(38)


At SeptemberJune 30, 2017,2018, there were fourfive securities in an unrealized loss position that at such date had an aggregate depreciation of 0.80%1.60% from the Company's amortized cost basis. Management believes that the estimated fair value of the securities disclosed above is primarily dependent on the movement of market interest rates.  Management evaluated the length of time and the extent to which the fair value has been less than cost and the financial condition and near term prospects of the issuer, including any specific events which may influence the operations of the issuer.  The Company has the ability and intent to hold the securities until the anticipated recovery of fair value occurs. Management does not believe any individual unrealized loss as of SeptemberJune 30, 20172018 represents an other-than-temporary impairment. There were no impairment charges recognized during the three and ninesix months ended SeptemberJune 30, 20172018 or 2016.2017.
 
 
 
16
Quaint Oak Bancorp, Inc.
Notes to Unaudited Consolidated Financial Statements
 
Note 6 - Loans Receivable, Net and Allowance for Loan Losses

The composition of net loans receivable is as follows (in thousands):
 
September 30,
2017
  
December 31,
2016
  
June 30,
2018
  
December 31,
2017
 
Real estate loans:            
One-to-four family residential:            
Owner occupied $5,434  $5,389  $6,965  $5,681 
Non-owner occupied  52,501   51,893   47,935   51,833 
Total one-to-four family residential  57,935   57,282   54,900   57,514 
Multi-family (five or more) residential  20,326   14,641   23,663   21,715 
Commercial real estate  86,800   77,730   96,999   92,234 
Construction  15,387   15,355   13,056   15,632 
Home equity  4,201   4,775   4,313   5,129 
Total real estate loans  184,649   169,783   192,931   192,224 
                
Commercial business  11,571   9,295   17,793   11,954 
Other consumer  43   26   125   138 
Total Loans  196,263   179,104   210,849   204,316 
                
Deferred loan fees and costs  (757)  (692)  (841)  (837)
Allowance for loan losses  (1,735)  (1,605)  (1,830)  (1,812)
Net Loans $193,771  $176,807  $208,178  $201,667 

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 SeptemberJune 30, 20172018 and December 31, 20162017  (in thousands): 

  September 30, 2017 
  Pass  
Special
Mention
  Substandard  Doubtful  Total 
One-to-four family residential owner occupied $5,434  $-  $-  $-  $5,434 
One-to-four family residential non-owner occupied  51,963   -   538   -   52,501 
Multi-family residential  20,326   -   -   -   20,326 
Commercial real estate  85,716   117   967   -   86,800 
Construction  13,318   -   2,069   -   15,387 
Home equity  4,201   -   -   -   4,201 
Commercial business  11,535   36   -   -   11,571 
Other consumer  43   -   -   -   43 
Total $192,536  $153  $3,574  $-  $196,263 
  June 30, 2018 
  Pass  
Special
Mention
  Substandard  Doubtful  Total 
One-to-four family residential owner occupied $6,543  $180  $242  $-  $6,965 
One-to-four family residential non-owner occupied  47,624   -   311   -   47,935 
Multi-family residential  23,663   -   -   -   23,663 
Commercial real estate  95,091   1,908   -   -   96,999 
Construction  12,774   -   282   -   13,056 
Home equity  4,313   -   -   -   4,313 
Commercial business  17,267   526   -   -   17,793 
Other consumer  125   -   -   -   125 
Total $207,400  $2,614  $835  $-  $210,849 
 
 
 
 
 
 
 
 
 
 
 
17
Quaint Oak Bancorp, Inc.
Notes to Unaudited Consolidated Financial Statements
 
Note 6 - Loans Receivable, Net and Allowance for Loan Losses (Continued)

 December 31, 2016  December 31, 2017 
 Pass  
Special
Mention
  Substandard  Doubtful  Total  Pass  
Special
Mention
  Substandard  Doubtful  Total 
One-to-four family residential owner occupied $5,389  $-  $-  $-  $5,389  $5,258  $423  $-  $-  $5,681 
One-to-four family residential non-owner occupied  50,864   122   907   -   51,893   51,372   29   432   -   51,833 
Multi-family residential  14,641   -   -   -   14,641   21,715   -   -   -   21,715 
Commercial real estate  76,281   117   1,332   -   77,730   91,549   399   286   -   92,234 
Construction  13,355   -   2,000   -   15,355   13,563   -   2,069   -   15,632 
Home equity  4,775   -   -   -   4,775   5,129   -   -   -   5,129 
Commercial business  9,295   -   -   -   9,295   11,419   535   -   -   11,954 
Other consumer  26   -   -   -   26   138   -   -   -   138 
Total $174,626  $239  $4,239  $-  $179,104  $200,143  $1,386  $2,787  $-  $204,316 


The following table presents impaired loans by class, segregated by those for which a specific allowance was required and those for which a specific allowance was not necessary as of SeptemberJune 30, 20172018 as well as the average recorded investment and related interest income for the period then ended (in thousands):

 September 30, 2017  June 30, 2018 
 
Recorded
Investment
  
Unpaid
Principal
Balance
  
Related
Allowance
  
Average
Recorded
Investment
  
Interest
Income
Recognized
  
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 $-  $-  $-  $-  $-  $242  $242  $-  $242  $- 
One-to-four family residential non-owner occupied  565   565   -   1,058   18   323   323   -   325   9 
Multi-family residential  -   -   -   -   -   -   -   -   -   - 
Commercial real estate  398   398   -   398   -   -   -   -   -   - 
Construction  2,069   2,069   -   2,061   58   282   282   -   2,054   - 
Home equity  46   46   -   48   4   -   -   -   44   2 
Commercial business  -   -   -   -   -   -   -   -   -   - 
Other consumer  -   -   -   -   -   -   -   -   -   - 
                                        
With an allowance recorded:                                        
One-to-four family residential owner occupied $-  $-  $-  $-  $-  $-  $-  $-  $-  $- 
One-to-four family residential non-owner occupied  170   170   38   95   4   93   93   20   93   3 
Multi-family residential  -   -   -   -   -   -   -   -   -   - 
Commercial real estate  133   133   1   395   7   133   133   5   133   5 
Construction  -   -   -   -   -   -   -   -   -   - 
Home equity  -   -   -   -   -   -   -   -   -   - 
Commercial business  -   -   -   -   -   -   -   -   -   - 
Other consumer  -   -   -   -   -   -   -   -   -   - 
                                        
Total:                                        
One-to-four family residential owner occupied $-  $-  $-  $-  $-  $242  $242  $-  $242  $- 
One-to-four family residential non-owner occupied  735   735   38   1,153   22   416   416   20   418   12 
Multi-family residential  -   -   -   -   -   -   -   -   -   - 
Commercial real estate  531   531   1   793   7   133   133   5   133   5 
Construction  2,069   2,069   -   2,061   58   282   282   -   2,054   - 
Home equity  46   46   -   48   4   -   -   -   44   2 
Commercial business  -   -   -   -   -   -   -   -   -   - 
Other consumer  -   -   -   -   -   -   -   -   -   - 
Total $3,381  $3,381  $39  $4,055  $91  $1,073  $1,073  $25  $2,891  $19 
 

 
18
Quaint Oak Bancorp, Inc.
Notes to Unaudited Consolidated Financial Statements
 
Note 6 - Loans Receivable, Net and Allowance for Loan Losses (Continued)

The following table presents impaired loans by class, segregated by those for which a specific allowance was required and those for which a specific allowance was not necessary as of December 31, 20162017 as well as the average recorded investment and related interest income for the year then ended (in thousands):

 December 31, 2016  December 31, 2017 
 
Recorded
Investment
  
Unpaid
Principal
Balance
  
Related
Allowance
  
Average
Recorded
Investment
  
Interest
Income
Recognized
  
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 $-  $-  $-  $-  $-  $-  $-  $-  $-  $- 
One-to-four family residential non-owner occupied  925   925   -   1,208   56   442   442   -   937   24 
Multi-family residential  -   -   -   -   -   -   -   -   -   - 
Commercial real estate  660   660   -   660   7   -   -   -   398   38 
Construction  -   -   -   -   -   2,069   2,069   -   2,064   58 
Home equity  49   49   -   82   6   45   45   -   47   5 
Commercial business  -   -   -   -   -   -   -   -   -   - 
Other consumer  -   -   -   -   -   -   -   -   -   - 
                                        
With an allowance recorded:                                        
One-to-four family residential owner occupied $-  $-  $-  $-  $-  $-  $-  $-  $-  $- 
One-to-four family residential non-owner occupied  167   167   28   169   8   214   214   70   214   5 
Multi-family residential  -   -   -   -   -   --   --   -   -   - 
Commercial real estate  133   133   11   133   9   133   133   1   395   9 
Construction  -   -   -   -   -   -   -   -   -   - 
Home equity  -   -   -   -   -   -   -   -   -   - 
Commercial business  -   -   -   -   -   -   -   -   -   - 
Other consumer  -   -   -   -   -   -   -   -   -   - 
                                        
Total:                                        
One-to-four family residential owner occupied $-  $-  $-  $-  $-  $-  $-  $-  $-  $- 
One-to-four family residential non-owner occupied  1,092   1,092   28   1,377   64   656   656   70   1,151   29 
Multi-family residential  -   -   -   -   -   -   -   -   -   - 
Commercial real estate  793   793   11   793   16   133   133   1   793   47 
Construction  -   -   -   -   -   2,069   2,069   -   2,064   58 
Home equity  49   49   -   82   6   45   45   -   47   5 
Commercial business  -   -   -   -   -   -   -   -   -   - 
Other consumer  -   -   -   -   -   -   -   -   -   - 
Total $1,934  $1,934  $39  $2,252  $86  $2,903  $2,903  $71  $4,055  $139 

The loan portfolio also includes certain loans that have been modified in a troubled debt restructuring, where economic concessions have been granted to borrowers who have experienced or are expected to experience financial difficulties. These concessions typically result from loss mitigation activities and could include reductions in the interest rate, payment extensions, forbearance, or other actions.  At SeptemberJune 30, 2017,2018, the Company had eightfour loans totaling $719,000$549,000 that were identified as troubled debt restructurings.  All eightfour of these loans were performing in accordance with their modified terms.  At December 31, 2016,2017, the Company had eight loans totaling $733,000$714,000 that were identified as troubled debt restructurings ("TDR").restructurings.  If a TDR is placed on non-accrual it is not reverted back to accruing status until the borrower makes timely payments as contracted for at least ninesix months and future collection under the revised terms is probable.  During the ninesix months ended SeptemberJune 30, 2017,2018, no new loans were identified as TDRs.TDRs and four loans previously identified as TDRs were paid off.

 
19
Quaint Oak Bancorp, Inc.
Notes to Unaudited Consolidated Financial Statements
 
Note 6 - Loans Receivable, Net and Allowance for Loan Losses (Continued)

The following tables present the Company's TDR loans as of SeptemberJune 30, 20172018 and December 31, 20162017 (dollar amounts in thousands):

 September 30, 2017  June 30, 2018 
 
Number of
Contracts
  
Recorded
Investment
  
Non-
Accrual
  Accruing  
Related
Allowance
  
Number of
Contracts
  
Recorded
Investment
  
Non-
Accrual
  Accruing  
Related
Allowance
 
One-to-four family residential owner occupied  -  $-  $-  $-  $-   -  $-  $-  $-  $- 
One-to-four family residential non-owner occupied  5   540   -   540   21   3   416   -   416   20 
Multi-family residential  -   -   -   -   -   -   -   -   -   - 
Commercial real estate  1   133   -   133   1   1   133   -   133   5 
Construction  -   -   -   -   -   -   -   -   -   - 
Home equity  2   46   -   46   -   -   -   -   -   - 
Commercial business  -   -   -   -   -   -   -   -   -   - 
Other consumer  -   -   -   -   -   -   -   -   -   - 
Total  8  $719  $-  $719  $22   4  $549  $-  $549  $25 

 December 31, 2016  December 31, 2017 
 
Number of
Contracts
  
Recorded
Investment
  
Non-
Accrual
  Accruing  
Related
Allowance
  
Number of
Contracts
  
Recorded
Investment
  
Non-
Accrual
  Accruing  
Related
Allowance
 
One-to-four family residential owner occupied  -  $-  $-  $-  $-   -  $-  $-  $-  $- 
One-to-four family residential non-owner occupied  5   551   -   551   28   5   536   -   536   25 
Multi-family residential  -   -   -   -   -   -   -   -   -   - 
Commercial real estate  1   133   -   133   11   1   133   -   133   1 
Construction  -   -   -   -   -   -   -   -   -   - 
Home equity  2   49   -   49   -   2   45   -   45   - 
Commercial business  -   -   -   -   -   -   -   -   -   - 
Other consumer  -   -   -   -   -   -   -   -   -   - 
Total  8  $733  $-  $733  $39   8  $714  $-  $714  $26 

The contractual aging of the TDRs in the table above as of SeptemberJune 30, 20172018 and December 31, 20162017 is as follows (in thousands):

  September 30, 2017 
  
Accruing
Past Due
Less than 30
Days
  
Past Due
30-89 Days
  
90 Days or
More Past
Due
  
Non-
Accrual
  Total 
One-to-four family residential owner occupied $-  $-  $-  $-  $- 
One-to-four family residential non-owner occupied  540   -   -   -   540 
Multi-family residential  -   -   -   -   - 
Commercial real estate  133   -   -   -   133 
Construction  -   -   -   -   - 
Home equity  46   -   -   -   46 
Commercial business  -   -   -   -   - 
Other consumer  -   -   -   -   - 
Total $719  $-  $-  $-  $719 
  June 30, 2018 
  
Accruing
Past Due
Less than 30
Days
  
Past Due
30-89 Days
  
90 Days or
 More Past Due
  
Non-
Accrual
  Total 
One-to-four family residential owner occupied $-  $-  $-  $-  $- 
One-to-four family residential non-owner occupied  416   -   -   -   416 
Multi-family residential  -   -   -   -   - 
Commercial real estate  133   -   -   -   133 
Construction  -   -   -   -   - 
Home equity  -   -   -   -   - 
Commercial business  -   -   -   -   - 
Other consumer  -   -   -   -   - 
Total $549  $-  $-  $-  $549 
 
 
 
 
 
20
Quaint Oak Bancorp, Inc.
Notes to Unaudited Consolidated Financial Statements
 
Note 6 - Loans Receivable, Net and Allowance for Loan Losses (Continued)

 December 31, 2016  December 31, 2017 
 
Accruing
Past Due
Less than 30
Days
  
Past Due
30-89 Days
  
90 Days or
More Past
Due
  
Non-
Accrual
  Total  
Accruing
Past Due
 Less than 30
 Days
  
Past Due
 30-89 Days
  
90 Days or
 More Past
Due
  
Non-
Accrual
  Total 
One-to-four family residential owner occupied $-  $-  $-  $-  $-  $-  $-  $-  $-  $- 
One-to-four family residential non-owner occupied  551   -   -   -   551   536   -   -   -   536 
Multi-family residential  -   -   -   -   -   -   -   -   -   - 
Commercial real estate  133   -   -   -   133   133   -   -   -   133 
Construction  -   -   -   -   -   -   -   -   -   - 
Home equity  49   -   -   -   49   45   -   -   -   45 
Commercial business  -   -   -   -   -   -   -   -   -   - 
Other consumer  -   -   -   -   -   -   -   -   -   - 
Total $733  $-  $-  $-  $733  $714  $-  $-  $-  $714 

Any reserve for an impaired TDR loan is based upon the present value of the future expected cash flows discounted at the loan's original effective rate or upon the fair value of the collateral less costs to sell, if the loan is deemed collateral dependent. At SeptemberJune 30, 20172018 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.
 
 
 
 
 
 
 

 
 
 
 
 
 
21
Quaint Oak Bancorp, Inc.
Notes to Unaudited Consolidated Financial Statements
 
Note 6 - Loans Receivable, Net and Allowance for Loan Losses (Continued)

Following is a summary, by loan portfolio class, of changes in the allowance for loan losses for the three and ninesix months ended SeptemberJune 30, 20172018 and recorded investment in loans receivable as of SeptemberJune 30, 20172018 (in thousands):
  
September 30, 2017
 
  
1-4 Family
Residential
Owner
Occupied
  
1-4 Family
Residential
Non-Owner
Occupied
  
Multi-Family
Residential
  
Commercial
Real Estate
  Construction  Home Equity  
Commercial
Business
and Other
Consumer
  
Unallocated
  Total 
For the Three Months Ended September 30, 2017 
Allowance for loan losses: 
Beginning balance $45  $465  $156  $645  $137  $41  $111  $90  $1,690 
Charge-offs  -   (38)  -   -   -   -   -   -   (38)
Recoveries  -   -   -   -   -   -   -   -   - 
Provision  (2)  93   (14)  10   (4)  (18)  18   -   83 
Ending balance $43  $520  $142  $655  $133  $23  $129  $90  $1,735 
                                     
For the Nine Months Ended September 30, 2017 
Allowance for loan losses: 
Beginning balance $41  $503  $103  $616  $138  $37  $87  $80  $1,605 
Charge-offs  -   (38)  -   (24)  -   -   -   -   (62)
Recoveries  -   -   -   3   -   -   -   -   3 
Provision  2   55   39   60   (5)  
(14
)  42   10   189 
Ending balance $43  $520  $142  $655  $133  $23  $129  $90  $1,735 
                                     
Ending balance evaluated 
for impairment:                                    
Individually $-  $38  $-  $1  $-  $-  $-  $-  $39 
Collectively $43  $482  $142  $654  $133  $23  $129  $90  $1,696 
                                     
Loans receivable:                                 
Ending balance: $5,434  $52,501  $20,326  $86,800  $15,387  $4,201  $11,614  $-  $196,263 
                                     
Ending balance evaluated                                 
  for impairment:                                    
Individually $-  $735  $-  $531  $2,069  $46  $-  $-  $3,381 
Collectively $5,434  $51,766  $20,326  $86,269  $13,318  $4,155  $11,614  $-  $192,882 
  
June 30, 2018
 
  
1-4 Family
Residential
Owner
Occupied
  
1-4 Family
Residential
 Non-Owner
Occupied
  
Multi-Family
Residential
  
Commercial
 Real Estate
  Construction  
Home
Equity
  
Commercial
Business
and Other
Consumer
  
Unallocated
  Total 
For the Three Months Ended June 30, 2018 
Allowance for loan losses: 
Beginning balance $54  $495  $164  $720  $142  $26  $170  $65  $1,836 
Charge-offs  -   -   -   -   (100)  -   -   -   (100)
Recoveries  -   -   -   -   -   -   -   -   - 
Provision  6   (56)  2   8   137   (2)  31   (32)  94 
Ending balance $60  $439  $166  $728  $179  $24  $201  $33  $1,830 
                                     
For the Six Months Ended June 30, 2018 
Allowance for loan losses: 
Beginning balance $48  $540  $152  $687  $136  $27  $140  $82  $1,812 
Charge-offs  -   (47)  -   -   (100)  -   -   -   (147)
Recoveries  -   -   -   -   -   -   -   -   - 
Provision  12   (54)  14   41   143   (3)  61   (49)  165 
Ending balance $60  $439  $166  $728  $179  $24  $201  $33  $1,830 
                                     
Ending balance evaluated for impairment: 
Individually $-  $20  $-  $5  $-  $-  $-  $-  $25 
Collectively $60  $419  $166  $723  $179  $24  $201  $33  $1,805 
                                     
Loans receivable:                                 
Ending balance: $6,965  $47,935  $23,663  $96,999  $13,056  $4,313  $17,918      $210,849 
                                     
Ending balance evaluated for impairment:                         
Individually $242  $416  $-  $133  $282  $-  $-      $1,073 
Collectively $6,723  $47,519  $23,663  $96,866  $12,774  $4,313  $17,918      $209,776 

The Bank allocated increaseddecreased allowance for loan loss provisions to the 1-4 family residential non-owner occupied portfolio class for the three and ninesix months ended SeptemberJune 30, 2017,2018, due primarily to charge-offsdecreased balances and changes to qualitative factors in this portfolio class. The Bank allocated increased allowance for loan loss provisions to the commercial real estate portfolio classclasses for the three and ninesix months ended SeptemberJune 30, 2017,2018, due primarily to increased balances and delinquencies in this portfolio class. The Bank allocated increased allowance for loan loss provisions to the commercial businessconstruction loan portfolio classclasses for the three and ninesix months ended SeptemberJune 30, 2017,2018, due primarily to increased balances and changes to qualitative factorscharge-offs in this portfolio class.  The Bank allocated increased allowance for loan loss provisions to the multi-family residentialcommercial business portfolio classclasses for the ninethree and six months ended SeptemberJune 30, 2017,2018, due primarily to increased balances in this portfolio class.  The Bank allocated decreased allowance for loan loss provisions to the home equity portfolio class for the three and nine months ended September 30, 2017, due primarily to decreased balances and delinquencies in this portfolio class.


22
Quaint Oak Bancorp, Inc.
Notes to Unaudited Consolidated Financial Statements
 
Note 6 - Loans Receivable, Net and Allowance for Loan Losses (Continued)

Following is a summary, by loan portfolio class, of changes in the allowance for loan losses for the three and ninesix months ended SeptemberJune 30, 20162017 (in thousands):

 
September 30, 2016
  
June 30, 2017
 
 
1-4 Family
Residential
Owner
Occupied
  
1-4 Family
Residential
Non-Owner
Occupied
  
Multi-Family
Residential
  
Commercial
Real Estate
  Construction  
Home
Equity
  
Commercial
Business
and Other
Consumer
  
Unallocated
  Total  
1-4 Family
Residential
Owner
Occupied
  
1-4 Family
Residential
 Non-Owner
Occupied
  
Multi-Family
Residential
  
Commercial
Real Estate
  Construction  Home Equity  
Commercial
 Business
and Other
Consumer
  
Unallocated
  Total 
For the Three Months Ended September 30, 2016 
For the Three Months Ended June 30, 2017For the Three Months Ended June 30, 2017 
Allowance for loan losses:Allowance for loan losses: Allowance for loan losses: 
Beginning balance $46  $525  $66  $484  $115  $51  $37  $100  $1,424  $44  $524  $108  $612  $127  $51  $94  $90  $1,650 
Charge-offs  -   -   -   -   -   -   -   -   -   -   -   -   (24)  -   -   -   -   (24)
Recoveries  -   -   -   -   -   -   -   -   -   -   -   -   -   -   -   -   -   - 
Provision  (9)  25   (11)  63   28   (19)  14   (30)  61   1   (59)  48   57   10   (10)  17   -   64 
Ending balance $37  $550  $55  $547  $143  $32  $51  $70  $1,485  $45  $465  $156  $645  $137  $41  $111  $90  $1,690 
                                                                        
For the Nine Months Ended September 30, 2016 
For the Six Months Ended June 30, 2017For the Six Months Ended June 30, 2017 
Allowance for loan losses:Allowance for loan losses: Allowance for loan losses: 
Beginning balance $55  $486  $81  $389  $153  $50  $18  $81  $1,313  $41  $503  $103  $616  $138  $37  $87  $80  $1,605 
Charge-offs  -   -   -   -   -   -   -   -   -   -   -   -   (24)  -   -   -   -   (24)
Recoveries  -   -   -   -   -   -   -   -   -   -   -   -   3   -   -   -   -   3 
Provision  (18)  64   (26)  158   (10)  (18)  33   (11)  172   4   (38)  53   50   (1)  4   24   10   106 
Ending balance $37  $550  $55  $547  $143  $32  $51  $70  $1,485  $45  $465  $156  $645  $137  $41  $111  $90  $1,690 
                                                                        
Ending balance evaluated 
for impairment:                                    
Ending balance evaluated for impairment:Ending balance evaluated for impairment: 
Individually $-  $30  $-  $11  $-  $-  $-  $-  $41  $-  $21  $-  $1  $-  $-  $-  $-  $22 
Collectively $37  $520  $55  $536  $143  $32  $51  $70  $1,444  $45  $444  $156  $644  $137  $41  $111  $90  $1,668 
                                                                        

The Bank allocated decreased allowance for loan loss provisions to the 1-4 family residential non-owner occupied portfolio class  for the three and six months ended June 30, 2017, due primarily to decreased delinquencies and changes to qualitative factors in this portfolio class. The Bank allocated increased allowance for loan loss provisions to the multi-family residential and commercial real estate and lines of credit, the 1-4 family residential non-owner occupied, and the commercial business loans portfolio classes for the three and ninesix months ended SeptemberJune 30, 2016,2017, due primarily to increased balances in these portfolio classes.  The Bank allocated increased allowance for loan loss provisions to the construction loan portfolio class for the three months ended September 30, 2016, due primarily to an increase in delinquencies in this portfolio class.
 
 
 
 
 
 
 
 
23
Quaint Oak Bancorp, Inc.
Notes to Unaudited Consolidated Financial Statements
 
Note 6 - Loans Receivable, Net and Allowance for Loan Losses (Continued)

Following is a summary, by loan portfolio class, of changes in the allowance for loan losses for the year ended December 31, 20162017 and recorded investment in loans receivable based on impairment evaluation as of December 31, 20162017 (in thousands):

 
December 31, 2016
  December 31, 2017 
 
1-4 Family
Residential
Owner
Occupied
  
1-4 Family
Residential
Non-Owner
Occupied
  
Multi-
Family
Residential
  
Commercial
Real Estate
  Construction  
Home
Equity
  
Commercial
Business
and Other
Consumer
  
Unallocated
  Total  
1-4 Family
Residential
Owner
 Occupied
  
1-4 Family
Residential
Non-Owner
Occupied
  
Multi-Family
Residential
  
Commercial
 Real Estate
  Construction  Home Equity  
Commercial
Business
and Other
Consumer
  
Unallocated
  Total 
Allowance for loan losses:Allowance for loan losses: Allowance for loan losses: 
Beginning balance $55  $486  $81  $389  $153  $50  $18  $81  $1,313  $41  $503  $103  $616  $138  $37  $87  $80  $1,605 
Charge-offs  -   -   -   -   -   -   -   -   -   -   (56)  -   (24)  -   -   -   -   (80)
Recoveries  -   -   -   -   -   -   -   -   -   -   -   -   3   -   -   -   -   3 
Provision  (14)  17   22   227   (15)  (13)  69   (1)  292   7   93   49   92   (2)  (10)  53   2   284 
Ending balance $41  $503  $103  $616  $138  $37  $87  $80  $1,605  $
48
  $540  $152  $687  $136  $27  $140  $82  $1,812 
Ending balance evaluated 
for impairment:                                    
 
Ending balance evaluated for impairment:Ending balance evaluated for impairment: 
Individually $-  $28  $-  $11  $-  $-  $-  $-  $39  $-  $70  $-  $1  $-  $-  $-  $-  $71 
Collectively $41  $475  $103  $605  $138  $37  $87  $80  $1,566  $48  $470  $152  $686  $136  $27  $140  $82  $1,741 
       
Loans receivable:              
Ending balance $5,389  $51,893  $14,641  $77,730  $15,355  $4,775  $9,321  $-  $179,104  $5,681  $51,833  $21,715  $92,234  $15,632  $5,129  $12,092      $204,316 
Ending balance evaluated 
for impairment:                                    
 
Ending balance evaluated for impairment:Ending balance evaluated for impairment: 
Individually $-  $1,092  $-  $793  $-  $49  $-  $-  $1,934  $-  $656  $-  $133  $2,069  $45  $-      $2,903 
Collectively $5,389  $50,801  $14,641  $76,937  $15,355  $4,726  $9,321  $-  $177,170  $5,681  $51,177  $21,715  $92,101  $13,563  $5,084  $12,092      $201,413 

The Bank allocated increased allowance for loan loss provisions to the commercial real estate, commercial business, and multi-family portfolio classes for the year ended December 31, 2016,2017, due primarily to increased balances in these portfolio classes.  The Bank allocated increased allowance for loan loss provisions to the one-to-four1-4 family residential non-owner occupied portfolio class for the year ended December 31, 2016,2017, due primarily to increased specific reserves in this portfolio class.  The Bank allocated decreased allowance for loan loss provisions to the construction, home equity, and one-to-four family owner occupied classes for the year ended December 31, 2016 due decreased balances or changes to qualitative factors in these portfolio classes.


 
 
 
 
 
 
 
 
 
24
Quaint Oak Bancorp, Inc.
Notes to Unaudited Consolidated Financial Statements
 
Note 6 - Loans Receivable, Net and Allowance for Loan Losses (Continued)

The following table presents nonaccrual loans by classes of the loan portfolio as of SeptemberJune 30, 20172018 and December 31, 20162017 (in thousands):
  
September 30,
2017
  
December 31,
2016
 
One-to-four family residential owner occupied $-  $- 
One-to-four family residential non-owner occupied  195   541 
Multi-family residential  -   -- 
Commercial real estate  398   660 
Construction  2,069   - 
Home equity  -   - 
Commercial business  -   - 
Other consumer  -   - 
 Total $2,662  $1,201 
  
June 30,
2018
  
December 31,
2017
 
One-to-four family residential owner occupied $242  $- 
One-to-four family residential non-owner occupied  -   120 
Multi-family residential  -   - 
Commercial real estate  -   - 
Construction  282   2,069 
Home equity  -   - 
Commercial business  -   - 
Other consumer  -   - 
 Total $524  $2,189 

Non-performing loans, which consist of non-accruing loans plus accruing loans 90 days or more past due, amounted to $3.5 million$785,000 and $1.9$3.1 million at SeptemberJune 30, 20172018 and December 31, 2016,2017, respectively.  For the delinquent loans in our portfolio, we have considered our ability to collect the past due interest, as well as the principal balance of the loan, in order to determine whether specific loans should be placed on non-accrual status. In cases where our evaluations have determined that the principal and interest balances are collectible, we have continued to accrue interest.

For the three and ninesix months ended SeptemberJune 30, 20172018 and 20162017 there was no interest income recognized on non-accrual loans on a cash basis.  Interest income foregone on non-accrual loans was approximately $63,000$9,000 and $103,000$18,000 for the three and ninesix months ended SeptemberJune 30, 2017,2018, respectively.   Interest income foregone on non-accrual loans was approximately $26,000$30,000 and $82,000$55,000 for the three and ninesix months ended SeptemberJune 30, 2016,2017, respectively.

The performance and credit quality of the loan portfolio is also monitored by analyzing the age of the loans receivable as determined by the length of time a recorded payment is past due. The following tables present the classes of the loan portfolio summarized by the past due status as of SeptemberJune 30, 20172018 and December 31, 20162017 (in thousands):

 September 30, 2017  June 30, 2018 
 
30-89
Days Past
Due
  
90 Days
or More
Past Due
  
Total
Past Due
  
Current
  
Total Loans
Receivable
  
Loans
Receivable
90 Days or
More Past
Due and
Accruing
  
30-89
Days Past
Due
  
90 Days
 or More
Past Due
  
Total
Past Due
  
Current
  
Total Loans
 Receivable
  
Loans
Receivable
 90 Days or
More Past
Due and
Accruing
 
      
One-to-four family residential owner occupied $468  $417  $885  $4,549  $5,434  $417 One-to-four family residential owner occupied$316  $422  $738  $6,227  $6,965  $180 
One-to-four family residential non-owner
occupied
  
611
   
439
   
1,050
   
51,451
   
52,501
   
244
   
974
   
81
   
1,055
   
46,880
   
47,935
   
81
 
Multi-family residential  81   -   81   20,245   20,326   -   -   -   -   23,663   23,663   - 
Commercial real estate  2,603   617   3,220   83,580   86,800   219   867   -   867   96,132   96,999   - 
Construction  509   2,069   2,578   12,809   15,387   -   353   282   635   12,421   13,056   - 
Home equity  34   -   34   4,167   4,201   -   32   -   32   4,281   4,313   - 
Commercial business  -   -   -   11,571   11,571   -   446   -   446   17,347   17,793   - 
Other consumer  -   -   -   43   43   -   -   -   -   125   125   - 
Total $4,306  $3,542  $7,848  $188,415  $196,263  $880  $2,988  $785  $3,773  $207,076  $210,849  $261 

 
25
Quaint Oak Bancorp, Inc.
Notes to Unaudited Consolidated Financial Statements
 
Note 6 - Loans Receivable, Net and Allowance for Loan Losses (Continued)

 December 31, 2016  December 31, 2017 
 
30-89
Days Past
Due
  
90 Days
or More
Past Due
  
Total
Past Due
  
Current
  
Total Loans
Receivable
  
Loans
Receivable
90 Days or
More Past
Due and
Accruing
  
30-89
Days Past
Due
  
90 Days
or More
 Past Due
  
Total
 Past Due
  
Current
  
Total Loans
Receivable
  
Loans
Receivable
 90 Days or
 More Past
Due and
 Accruing
 
      
One-to-four family residential owner occupied $310  $9  $319  $5,070  $5,389  $9 One-to-four family residential owner occupied$670  $423  $1,093  $4,588  $5,681  $423 
One-to-four family residential non-owner
occupied
  
271
   
778
   
1,049
   
50,844
   
51,893
   
237
   
969
   
337
   
1,306
   
50,527
   
51,833
   
217
 
Multi-family residential  -   -   -   14,641   14,641   -   313   -   313   21,402   21,715   - 
Commercial real estate  385   777   1,162   76,568   77,730   117   505   241   746   91,488   92,234   241 
Construction  596   308   904   14,451   15,355   308   407   2,069   2,476   13,156   15,632   - 
Home equity  115   -   115   4,660   4,775   -   51   -   51   5,078   5,129   - 
Commercial business  43   -   43   9,252   9,295   -   -   -   -   11,954   11,954   - 
Other consumer  -   -   -   26   26   -   -   -   -   138   138   - 
Total $1,720  $1,872  $3,592  $175,512  $179,104  $671  $2,915  $3,070  $5,985  $198,331  $204,316  $881 


Note 7 – Goodwill and Other Intangible, Net

On August 1, 2016, Quaint Oak Insurance Agency, LLC began operations by acquiring the renewal rights to the book of business produced and serviced by Signature Insurance Services, LLC, an independent insurance agency located in New Britain, Pennsylvania, that provides a broad range of personal and commercial insurance coverage solutions.  The Company paid $1.0 million for these rights.  Based on a valuation, $515,000 of the purchase price was determined to be goodwill and $485,000 was determined to be related to the renewal rights to the book of business and deemed to be an other intangible asset.  This other intangible asset is being amortized over a ten year period based upon the annual retention rate of the book of business.  The balance of other intangible assetsasset at SeptemberJune 30, 20172018 was $428,000$392,000 net of accumulated amortization of $57,000.$93,000.  Amortization expense for the three and ninesix months ended Septemberfor both June 30, 2018 and 2017 amounted to $13,000$12,000 and $37,000,$24,000, respectively.


Note 8 – Deposits

Deposits consist of the following classifications (in thousands):

 
September 30,
2017
  
December 31,
 2016
  
 
June 30,
2018
  
 
December 31,
 2017
 
Non-interest bearing checking accounts $7,713  $5,852  $11,873  $7,956 
Passbook accounts  534   1,189   303   463 
Savings accounts  1,584   1,784   1,912   2,353 
Money market accounts  30,151   31,114   30,855   30,411 
Certificates of deposit  142,416   137,068   157,055   145,038 
Total deposits $182,398  $177,007  $201,998  $186,221 
 
 
 
26
Quaint Oak Bancorp, Inc.
Notes to Unaudited Consolidated Financial Statements
 
Note 9 – Borrowings

Federal Home Loan Bank advances consist of the following at SeptemberJune 30, 20172018 and December 31, 20162017 (in thousands):

   June 30, 2018    December 31, 2017  
   Amount    
Weighted
Interest
Rate 
   Amount    
Weighted
Interest
Rate 
 
Short-term borrowings $10,000   2.10% $10,000   1.54%
                 
Fixed rate borrowings maturing:                
2018  3,000   1.46   3,000   1.46 
2019  3,000   1.86   3,000   1.86 
2020  2,000   2.00   2,000   2.00 
2021  3,000   2.05   3,000   2.05 
2022  3,000   2.18   3,000   2.18 
2023  3,000   2.33   3,000   2.33 
2024  1,000   2.54   1,000   2.54 
     Total  FHLB long-term debt $18,000   2.01% $18,000   2.01%

  September 30, 2017  December 31, 2016 
  Amount  
Weighted
Interest
Rate
   Amount  
Weighted
Interest
Rate
 
Short-term borrowings $11,500   1.27% $7,000   0.54%
                 
Fixed rate borrowings maturing:                
2017 $-   -% $2,500   1.15%
2018  3,000   1.46   3,000   1.46 
2019  3,000   1.86   2,000   1.95 
2020  2,000   2.00   1,000   2.15 
2021  2,000   1.96   -   - 
2022  2,000   2.12   -   - 
2023  2,000   2.28   -   - 
     Total  FHLB long-term debt $14,000   1.90% $8,500   1.56%

Note 10 – Stock Compensation Plans

Employee Stock Ownership Plan

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

Shares of the Company's common stock purchased by the ESOP are held in a suspense account and reported as unallocated common stock held by the ESOP in stockholders' equity until released for allocation to participants.  As the debt is repaid, shares are released from collateral and are allocated to each eligible participant based on the ratio of each such participant's base compensation to the total base compensation of eligible plan participants.  As the unearned shares are committed to be released and allocated among participants, the Company recognizes compensation expense equal to the average market value of the shares, and the shares become outstanding for earnings per share computations.  During the three and ninesix months ended SeptemberJune 30, 2017,2018, the Company recognized $46,000$48,000 and $138,000$96,000 of ESOP expense, respectively.  During the three and ninesix months ended SeptemberJune 30, 2016,2017, the Company recognized $43,000$47,000 and $129,000$92,000 of ESOP expense, respectively.


Recognition & Retention and Stock Incentive Plans

In May 2008, the shareholders of Quaint Oak Bancorp approved the adoption of the 2008 Recognition and Retention Plan (the "RRP") and Trust Agreement.  In order to fund the RRP, the 2008 Recognition and Retention Plan Trust acquired 111,090 shares of the Company's stock in the open market at an average price of $4.68 totaling $520,000.  In May 2013, the shareholders of Quaint Oak Bancorp approved the adoption of the 2013 Stock Incentive Plan (the "Stock Incentive Plan").  The 2013 Stock Incentive Plan provides that no more thanapproved by shareholders in May 2013 covered a total of 195,000 shares, of which 48,750, or 25%, may be restricted stock awards, for a balance of 146,250 stock options assuming all the restricted shares are awarded.  In May 2018, the shareholders of Quaint Oak Bancorp approved the adoption of the 2018 Stock Incentive Plan (the "Stock Incentive Plan").  The Stock Incentive Plan approved by shareholders in May 2018 covered a total of 155,000 shares, of which 37,750, or 25%, may be granted as restricted stock awards.

awards, for a balance of 117,250 stock options assuming all the restricted shares are awarded.
 
27
Quaint Oak Bancorp, Inc.
Notes to Unaudited Consolidated Financial Statements
 
Note 10 – Stock Compensation Plans (Continued)
Recognition & Retention and Stock Incentive Plans (Continued)
As of SeptemberJune 30, 2017,2018, a total of 10,26148,608 share awards were unvested under the RRP2013 and 2018 Stock Incentive Plan and up to 21,96811,750 share awards were available for future grant under the 2018 Stock Incentive Plan and none under the RRP.2013 Stock Incentive Plan.  The RRP2013 and 2018 Stock Incentive Plan share awards have vesting periods of five years.

A summary of the status of the share awards under the RRP2013 and 2018 Stock Incentive Plan as of SeptemberJune 30, 20172018 and 20162017 and changes during the ninesix months ended SeptemberJune 30, 20172018 and 20162017 is as follows:

 September 30, 2017  September 30, 2016  June 30, 2018  June 30, 2017 
 
Number of
Shares
  
Weighted
Average Grant
Date Fair Value
  
Number of
Shares
  
Weighted
Average Grant
Date Fair Value
  
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  20,524  $8.10   30,784  $8.10   10,061  $8.10   20,524  $8.10 
Granted  -   -   -   -   48,608   13.30   -   - 
Vested  (10,263)  8.10   (10,260)  8.10   (9,661)  8.10   (10,263)  8.10 
Forfeited  -   -   -   -   (400)  8.10   -   - 
Unvested at the end of the period  10,261  $8.10   20,524  $8.10   48,608  $13.30   10,261  $8.10 

Compensation expense on the restricted stock awards is recognized ratably over the five year vesting period in an amount which is equal to the fair value of the common stock at the date of grant.  During both the three and ninesix months ended SeptemberJune 30, 2017and 2016,2018 and 2017, the Company recognized approximately $21,000 and $63,000 in$42,000 of compensation expense was recognized, respectively.expense.  A tax benefit of approximately $7,000$9,000 and $21,000, respectively,$14,000 was recognized during each of these periods.the three months ended June 30, 2018 and 2017, respectively.  As of SeptemberJune 30, 2017,2018, approximately $52,000$630,000 in additional compensation expense will be recognized over the remaining service period of approximately 0.64.9 years.

Stock Option and Stock Incentive Plans

In May 2008, the shareholders of Quaint Oak Bancorp approved the adoption of the 2008 Stock Option Plan (the "Option Plan").  In May 2013, the shareholders of Quaint Oak Bancorp approved the adoption of the 2013 Stock Incentive Plan (the "Stock Incentive Plan").  The Option Plan authorizes the grant of stock options to officers, employees and directors of the Company to acquire 277,726 shares of common stock with an exercise price no less than the fair market value on the date of the grant.  The 2013 Stock Incentive Plan approved by shareholders in May 2013 covered a total of 195,000 shares, of which 48,750, or 25%, may be restricted stock awards, for a balance of 146,250 stock options assuming all the restricted shares are awarded.  In May 2018, the shareholders of Quaint Oak Bancorp approved the adoption of the 2018 Stock Incentive Plan (the "Stock Incentive Plan").  The Stock Incentive Plan approved by shareholders in May 2018 covered a total of 155,000 shares, of which 37,750, or 25%, may be restricted stock awards, for a balance of 117,250 stock options assuming all the restricted shares are awarded.

28
Quaint Oak Bancorp, Inc.
Notes to Unaudited Consolidated Financial Statements
Note 10 – Stock Compensation Plans (Continued)

Stock Option and Stock Incentive Plans (Continued)

For grants in May 2008, the Compensation Committee of the Board of Directors determined to grant the stock options at an exercise price equal to $5.00 per share (split-adjusted) which is higher than the fair market value of the common stock on the grant date.  All incentive stock options issued under the Option Plan and the Stock Incentive Plan are intended to comply with the requirements of Section 422 of the Internal Revenue Code.
28
Quaint Oak Bancorp, Inc.
Notes to Unaudited Consolidated Financial Statements
Note 10 – Stock Compensation Plans (Continued)

Stock Option and Stock Incentive Plans (Continued)

As of SeptemberJune 30, 2017,2018, a total of 277,548279,836 grants of stock options were outstanding under the Option Plan and Stock Incentive Plan and 56,27638,250 stock options were available for future grant under the Stock Incentive Plan and none under the Option Plan.  Options will become vested and exercisable over a five year period and are generally exercisable for a period of ten years after the grant date.

A summary of option activity under the Company's Option Plan and 2013 and 2018 Stock Incentive PlanPlans of SeptemberJune 30, 20172018 and 20162017 and changes during the ninesix months ended SeptemberJune 30, 20172018 and 20162017 is as follows:

 2017  2016  2018  2017 
 
Number
of
Shares
  
Weighted
Average
Exercise
Price
  
Weighted
Average
 Remaining
Contractual
Life (in
years)
  
Number
of
Shares
  
Weighted
Average
Exercise
Price
  
Weighted
Average
Remaining
Contractual
Life (in
years)
  
Number of
Shares
  
Weighted
Average
Exercise
Price
  
Weighted
Average
Remaining
Contractual
Life (in
years)
  
Number of
Shares
  
Weighted
Average
Exercise
Price
  
Weighted
Average
 Remaining
 Contractual
 Life (in
years)
 
Outstanding at the beginning of the year Outstanding at the beginning of the year
316,348
  $6.49   
3.8
   
354,266
  $6.33   
4.7
   
265,302
  $6.74   
3.2
   
316,348
  $6.49   
3.8
 
Granted  -   -   -   -   -   -   136,636   13.30   9.9   -   -   - 
Exercised  (38,800)  5.00   -   (26,518)  5.00   -   (106,844)  5.00   -   (38,800)  5.00   - 
Forfeited  -   -   -   -   -   -   (15,258)  6.22   -   -   -   - 
Outstanding at end of period  277,548  $6.70   3.4   327,748  $6.44   4.0   279,836  $10.64   7.8   277,548  $6.70   3.6 
Exercisable at end of period  247,228  $6.53   3.1   266,148  $6.06   1.6   143,200  $8.10   4.9   247,228  $6.53   3.4 

During both the threesix month periods ended June 30, 2018 and nine months ended September 30, 2017, and 2016, approximately $12,000 and $34,000 in compensation expense was recognized in the amount of approximately $19,000 and $22,000, respectively.  A tax expense of approximately $1,000 was recognized during the six months ended June 30, 2018.  A tax benefit of approximately $1,000 and $3,000, respectively,$2,000 was recognized during each of these periods.the six months ended June 30, 2018.  As of SeptemberJune 30, 2017,2018, approximately $28,000$127,000 in additional compensation expense will be recognized over the remaining service period of approximately 0.64.9 years.


Note 11 – Fair Value Measurements and Fair Values of Financial Instruments
Fair value estimates are based on quoted market prices, if available, quoted market prices of similar assets or liabilities, or the present value of expected future cash flows and other valuation techniques. These valuations are significantly affected by discount rates, cash flow assumptions, and risk assumptions used. Therefore, fair 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.
29
Quaint Oak Bancorp, Inc.
Notes to Unaudited Consolidated Financial Statements
Note 11 – Fair Value Measurements and Fair Values of Financial Instruments (Continued)
The following disclosures show the hierarchal disclosure framework associated with the level of pricing observations utilized in measuring assets and liabilities at fair value.  The three broad levels of pricing are as follows:
29
Quaint Oak Bancorp, Inc.
Notes to Unaudited Consolidated Financial Statements
Note 11 – Fair Value Measurements and Fair Values of Financial Instruments (Continued)
Level I: Quoted prices are available in active markets for identical assets or liabilities as of the reported date.
Level II: Pricing inputs are other than the quoted prices in active markets, which are either directly or indirectly observable as of the reported date.  The nature of these assets and liabilities includes items for which quoted prices are available but traded less frequently and items that are fair-valued using other financial instruments, the parameters of which can be directly observed.
Level III: Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.
This hierarchy requires the use of observable market data when available.
The following is a discussion of assets and liabilities measured at fair value on a recurring basis and valuation techniques applied:
Investment Securities Available-For-Sale: The fair value of securities available for sale are determined by obtaining quoted market prices on nationally recognized securities exchanges (Level 1), or matrix pricing (Level 2), which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted market prices for the specific securities but rather by relying on the securities' relationship to other benchmark quoted prices.

We may be required from time to time to measure certain assets at fair value on a nonrecurring basis in accordance with U.S. GAAP. These adjustments to fair value usually result from application of lower-of-cost-or-market accounting or write-downs of individual assets.
Impaired Loans: Impaired loans are carried at the lower of cost or the fair value of the collateral for collateral-dependent loans less estimated costs to sell. Collateral is primarily in the form of real estate. The use of independent appraisals, discounted cash flow models and management's best judgment are significant inputs in arriving at the fair value measure of the underlying collateral and impaired loans are therefore classified within level 3 of the fair value hierarchy.

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


 
 
 
 
 
30
Quaint Oak Bancorp, Inc.
Notes to Unaudited Consolidated Financial Statements
 
Note 11 – Fair Value Measurements and Fair Values of Financial Instruments (Continued)
The table below sets forth the financial assets and liabilities that were accounted for on a recurring and nonrecurring basis by level within the fair value hierarchy as of SeptemberJune 30, 20172018 (in thousands):
 September 30, 2017  June 30, 2018 
 Fair Value Measurements Using:  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)
  
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      
Governmental National Mortgage Association
mortgage-backed securities
 $5,904  $-  $5,904  $-  $5,272  $-  $5,272  $- 
Federal Home Loan Mortgage Corporation
mortgage-backed securities
  
1,590
   
-
   
1,590
   
-
   
1,254
   
-
   
1,254
   
-
 
Federal National Mortgage Association mortgage-backed securities  
583
   
-
   
583
   
-
   
456
   
-
   
456
   
-
 
Debt securities, U.S. government agency  357   -   357   -   355   -   355   - 
�� Total investment securities available for sale $8,434  $-  $8,434  $- 
Total investment securities available for sale $7,337  $-  $7,337  $- 
Total recurring fair value measurements $7,337  $-  $7,337  $- 
      
Nonrecurring fair value measurements      
Impaired loans $3,342  $-  $-  $3,342  $1,048  $-  $-  $1,048 
Other real estate owned  185   -   -   185   1,674   -   -   1,674 
                
Total nonrecurring fair value measurements $1,722  $-  $-  $1,722 

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, 20162017 (in thousands):
 December 31, 2016  December 31, 2017 
 Fair Value Measurements Using:  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)
  
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      
Governmental National Mortgage Association
mortgage-backed securities
 $6,590  $-  $6,590  $-  $5,643  $-  $5,643  $- 
Federal Home Loan Mortgage Corporation
mortgage-backed securities
  
1,871
   
-
   
1,871
   
-
   
1,342
   
-
   
1,342
   
-
 
Federal National Mortgage Association mortgage-backed securities  
740
   
-
   
740
   
-
   
570
   
-
   
570
   
-
 
Debt securities, U.S. government agency  354   -   354   -   357   -   357   - 
Total investment securities available for sale $9,555  $-  $9,555  $-  $7,912  $-  $7,912  $- 
Total recurring fair value measurements $7,912  $-  $7,912  $- 
      
Nonrecurring fair value measurements      
Impaired loans $1,895  $-  $-  $1,895  $2,832  $-  $-  $2,832 
Other real estate owned  435   -   -   435 
                
Total nonrecurring fair value measurements $2,832  $-  $-  $2,832 

 
 
31
Quaint Oak Bancorp, Inc.
Notes to Unaudited Consolidated Financial Statements
 
Note 11 – Fair Value Measurements and Fair Values of Financial Instruments (Continued)
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 SeptemberJune 30, 20172018 and December 31, 20162017 (in thousands):

 September 30, 2017  June 30, 2018 
 Quantitative Information About Level 3 Fair Value Measurements  Quantitative Information About Level 3 Fair Value Measurements 
 
 
Total Fair
Value
 
 
Valuation
Techniques
 
 
Unobservable
Input
 
 
Range (Weighted
Average)
  
Total Fair
Value
 
Valuation
Techniques
 
Unobservable
 Input
 
Range (Weighted
 Average)
 
Impaired loans $3,342 
Appraisal of collateral (1)
 
Appraisal adjustments (2)
  0%-23% (1%) $1,048 
Appraisal of collateral (1)
 
Appraisal adjustments (2)
  8%-22% (1%)
                      
Other real estate owned $185 
Appraisal of collateral (1)
 
Appraisal adjustments (2)
  0%-10% (10%) $1,674 
Appraisal of collateral (1)
 
Appraisal adjustments (2)
  0%-6% (6%)

  December 31, 2016 
  Quantitative Information About Level 3 Fair Value Measurements 
  
 
Total Fair
Value
 
 
Valuation
Techniques
 
 
Unobservable
Input
 
 
Range (Weighted
Average)
 
Impaired loans $1,895 
Appraisal of collateral (1)
 
Appraisal adjustments (2)
  0%-22% (2%)
            
Other real estate owned $435 
Appraisal of collateral (1)
 
Appraisal adjustments (2)
  0%-29% (12%)
  December 31, 2017 
  Quantitative Information About Level 3 Fair Value Measurements 
  
Total Fair
Value
 
Valuation
Techniques
 
Unobservable
Input
 
Range (Weighted
Average)
 
Impaired loans $2,832 
Appraisal of collateral (1)
 
Appraisal adjustments (2)
  0%-27% (1%)
_________________________________
(1)Fair value is generally determined through independent appraisals of the underlying collateral, which generally include various Level 3 inputs which are identifiable.
(2)Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses.  The range and weighted average of liquidation expenses and other appraisal adjustments are presented as a percentage of the appraisal.


The estimated fair values of the Company's financial instruments that are not required to be measured or reported at fair value were as follows at SeptemberJune 30, 20172018 and December 31, 20162017 (in thousands):

       Fair Value Measurements at        Fair Value Measurements at 
       September 30, 2017        June 30, 2018 
 
 
 
 
Carrying
Amount
  
 
 
 
Fair Value
Estimate
  
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
  
Significant
Other
Observable
Inputs
(Level 2)
  
 
 
Unobservable
Inputs
(Level 3)
  
 
 
 
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 $8,229  $8,229  $8,229  $-  $-  $18,219  $18,219  $18,219  $-  $-��
Investment in interest-earning time deposits  4,879   4,935   -   -   4,935   4,920   4,943   -   -   4,943 
Investment securities available for sale  8,434   8,434   -   8,434   - 
Loans held for sale  6,473   6,741   -   6,741   -   5,199   5,384   5,384   -   - 
Loans receivable, net  193,771   194,955   -   -   194,955   208,178   209,716   -   -   209,716 
Accrued interest receivable  925   925   925   -   -   1,013   1,013   1,013   -   - 
Investment in FHLB stock  1,134   1,134   1,134   -   -   1,246   1,246   1,246   -   - 
Bank-owned life insurance  3,793   3,793   3,793   -   -   3,855   3,855   3,855   -   - 
                                        
Financial Liabilities                                        
Deposits  182,398   183,882   39,982   -   143,900   201,998   202,732   44,943   -   157,789 
FHLB short-term borrowings  11,500   11,500   11,500   -   -   10,000   10,000   10,000   -   - 
FHLB long-term borrowings  14,000   13,997   -   -   13,997   18,000   16,962   -   -   16,962 
Accrued interest payable  147   147   147   -   -   176   176   176   -   - 
Advances from borrowers for taxes and insurance  
2,330
   
2,330
   
2,330
   
-
   
-
 
 
32
Quaint Oak Bancorp, Inc.
Notes to Unaudited Consolidated Financial Statements
 
Note 11 – Fair Value Measurements and Fair Values of Financial Instruments (Continued)
       Fair Value Measurements at        Fair Value Measurements at 
       December 31, 2016        December 31, 2017 
 
 
 
 
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)
  
 
 
 
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 $9,300  $9,300  $9,300  $-  $-  $7,910  $7,910  $7,910  $-  $- 
Investment in interest-earning time deposits  6,098   6,163   -   -   6,163   4,879   4,912   -   -   4,912 
Investment securities available for sale  9,555   9,555   -   9,555   - 
Loans held for sale  4,712   4,879   -   4,879   -   7,006   7,232   7,232   -   - 
Loans receivable, net  176,807   177,870   -   -   177,870   201,667   202,803   -   -   202,803 
Accrued interest receivable  862   862   862   -   -   1,021   1,021   1,021   -   - 
Investment in FHLB stock  713   713   713   -   -   1,234   1,234   1,234   -   - 
Bank-owned life insurance  3,728   3,728   3,728   -   -   3,814   3,814   3,814   -   - 
                                        
Financial Liabilities                                        
Deposits  177,007   179,050   39,939   -   139,111   186,221   187,309   41,183   -   146,126 
FHLB short-term borrowings  7,000   7,000   7,000   -   -   10,000   10,000   10,000   -   - 
FHLB long-term borrowings  8,500   8,507   -   -   8,507   18,000   16,982   -   -   16,982 
Accrued interest payable  142   142   142   -   -   167   167   167   -   - 
Advances from borrowers for taxes and insurance  
2,423
   
2,423
   
2,423
   
-
   
-
 

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 consolidated balance sheets 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.
 
33
Quaint Oak Bancorp, Inc.
Notes to Unaudited Consolidated Financial Statements
 
Note 11 – Fair Value Measurements and Fair Values of Financial Instruments (Continued)
Investment in 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.
Bank-Owned Life Insurance.  The carrying amount of the investment in bank-owned life insurance approximates its cash surrender value under the insurance policies.
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 borrowings are estimated based on rates currently available to the Company for similar terms and remaining maturities.
Accrued Interest Payable.  The carrying amount of accrued interest payable approximates its fair value.
Advances from Borrowers for Taxes and Insurance.  The carrying amount of advances from borrowers for taxes and insurance 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.
 
 
 
 
 
 
 
 
 
 
 
34
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements Are Subject to Change

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

General

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

At SeptemberJune 30, 20172018, the Bank hadhas five wholly-owned subsidiaries, Quaint Oak Mortgage, LLC, Quaint Oak Real Estate, LLC, Quaint Oak Abstract, LLC, QOB Properties, LLC, and Quaint Oak Insurance Agency, LLC, 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.  On August 1, 2016, Quaint Oak Insurance Agency, LLC began operations by acquiring the renewal rights to the book of business producedin August 2016 and serviced by Signature Insurance Services, LLC, an independent insurance agency located in New Britain, Pennsylvania, that provides a broad range of personal and commercial insurance coverage solutions.

Critical Accounting Policies

The accounting and financial reporting policies of the Company conform to accounting principles generally accepted in the United States of America and to general practices within the banking industry. Accordingly, the consolidated financial statements require certain estimates, judgments, and assumptions, which are believed to be reasonable, based upon the information available. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the periods presented. The following accounting policies comprise those that management believes are the most critical to aid in fully understanding and evaluating our reported financial results. These policies require numerous estimates or economic assumptions that may prove inaccurate or may be subject to variations which may significantly affect our reported results and financial condition for the period or in future periods.
 
 
35
Allowance for Loan Losses.  The allowance for loan losses represents management's estimate of losses inherent in the loan portfolio as of the balance sheet date and is recorded as a reduction to loans receivable. The allowance for loan losses is increased by the provision for loan losses, and decreased by charge-offs, net of recoveries. Loans deemed to be uncollectible are charged against the allowance for loan losses, and subsequent recoveries, if any, are credited to the allowance. All, or part, of the principal balance of loans receivable are charged off to the allowance as soon as it is determined that the repayment of all, or part, of the principal balance is highly unlikely. Because all identified losses are immediately charged off, no portion of the allowance for loan losses is restricted to any individual loan or groups of loans, and the entire allowance is available to absorb any and all loan losses.

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

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

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

36
A loan is identified as a troubled debt restructuring ("TDR") if the Company, for economic or legal reasons related to a debtor's financial difficulties, grants a concession to the debtor that it would not otherwise consider. Concessions granted under a TDR typically involve a temporary or permanent reduction in payments or interest rate or an extension of a loan's stated maturity date at less than a current market rate of interest. Loans identified as TDRs are designated as impaired.

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

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

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

 

37
Comparison of Financial Condition at SeptemberJune 30, 20172018 and December 31, 20162017

General.   The Company's total assets at SeptemberJune 30, 20172018 were $232.2$255.9 million, an increase of $16.0$16.3 million, or 7.4%6.8%, from $216.2$239.6 million at December 31, 2016.2017.  This growth in total assets was primarily due to a $17.0$10.3 million, or 9.6%130.3% increase in cash and cash equivalents, a $6.5 million, or 3.2%, increase in loans receivable, net, and a $1.7 million increase in other real estate owned, net, partially offset by a $1.8 million, or 37.4%25.8%, increasedecrease in loans held for sale.   These increases were partially offset bysale and a $1.2 million,$575,000, or 20.0%,7.3% decrease in investment in interest-earning time deposits, a $1.1 million, or 11.7%, decrease in investment securities available for sale, and a $1.1sales.  Asset growth was funded primarily by deposits which increased $15.8 million, or 11.5%8.5%, decrease in cash and cash equivalents.to $202.0 million at June 30, 2018 from $186.2 million at December 31, 2017.

Cash and Cash Equivalents. Cash and cash equivalents decreased $1.1increased $10.3 million, or 11.5%130.3%, from $9.3$7.9 million at December 31, 20162017 to $8.2$18.2 million at SeptemberJune 30, 2017 as2018 with the expectation that excess liquidity was primarilywill be used to fund loans.

Investment in Interest-Earning Time Deposits.  Investment in interest-earning time deposits decreased $1.2 million, or 20.0%, from $6.1 million at December 31, 2016 to $4.9 million at September 30, 2017 primarily due to the maturity and redemption of time deposits. The proceeds were used primarily to fund loans.

Investment Securities Available for Sale.  Investment securities available for sale decreased $1.1 million,$575,000, or 11.7%7.3%, from $9.6$7.9 million at December 31, 20162017 to $8.4$7.3 million at SeptemberJune 30, 20172018, due primarily to the principal repayments on these securities during the ninesix months ended SeptemberJune 30, 2017.2018.

Loans Held for Sale.  Loans held for sale increaseddecreased $1.8 million, or 37.4%25.8%, from $4.7$7.0 million at December 31, 20162017 to $6.5$5.2 million at SeptemberJune 30, 20172018 as the Bank's mortgage banking subsidiary, Quaint Oak Mortgage, LLC, originated $62.1$43.4 million of one-to-four family residential loans during the ninesix months ended SeptemberJune 30, 20172018 and sold $60.3$45.1 million of loans in the secondary market during this same period. In addition, the Bank originated $1.5 million of equipment loans held for sale during the six months ended June 30, 2018 and sold $1.6 million of equipment loans during this same period.

Loans Receivable, Net.  Loans receivable, net, increased $17.0$6.5 million, or 9.6%3.2%, to $193.8$208.2 million at SeptemberJune 30, 20172018 from $176.8$201.7 million December 31, 2016.2017.  This increase was funded primarily from Federal Home Loan Bank borrowingsdeposits and deposits.proceeds from the sale of loans held for sale.  Increases within the portfolio occurred in commercial real estate loans which increased $9.1$4.8 million, or 11.7%5.2%, commercial business loans which increased $5.8 million, or 48.8%, multi-family residential loans which increased $5.7$1.9 million, or 38.8%9.0%, commercial business loans which increased $2.3 million, or 24.5%, one-to-four family residential non-owner occupied loans which increased $608,000, or 1.2%,and one-to-four family residential owner occupied loans which increased $45,000,$1.3 million, or 0.8%, construction loans which increases $32,000, or 0.2%, and other consumer loans which increased $17,000, or 65.4%22.6%.  These increases were partially offset by a $574,000,$3.9 million, or 12.0%7.5%, decrease in one-to-four family residential non-owner occupied loans, a $2.6 million, or 16.5%, decrease in construction loans an $816,000, or 15.9%, decrease in home equity loans, and a $13,000, or 9.4%, decrease in other consumer loans.  The Company continues its strategy of diversifying its loan portfolio with higher yielding and shorter-term loan products and selling substantially all of its newly originated one-to-four family owner-occupied loans into the secondary market.

Other Real Estate Owned, Net.Owned.  Other real estate owned net(OREO) amounted to $185,000$1.7 million at SeptemberJune 30, 2017,2018, consisting of one property.  This compares to threeThere were no properties totaling $435,000in other real estate owned at December 31, 2016. For2017.  During the nine months ended September 30, 2017, $23,000quarter, collateral for a non-performing construction loan with an aggregate outstanding balance of capital improvements were made to$1.8 million at the properties, onetime of foreclosure, was transferred into OREO.  In conjunction with this transfer, $100,000 of the properties incurred a write-down totaling $48,000, and two properties with a carrying value of $225,000 were sold.  Followingoutstanding loan balance was charged-off through the end of the quarter, the Company sold the remaining property and a loss of $6,000 was realized on the transaction.allowance for loan losses.  Non-performing assets amounted to $3.7$2.5 million, or 1.60%,0.96% of total assets at SeptemberJune 30, 20172018 compared to $2.3$3.1 million, or 1.07%,1.28% of total assets at December 31, 2016.2017.

38
Deposits.  Total deposits increased $5.4$15.8 million, or 3.0%8.5%, to $182.4$202.0 million at SeptemberJune 30, 20172018 from $177.0$186.2 million at December 31, 2016.2017. This increase in deposits was primarily attributable to increases of $5.3$12.0 million, or 3.9%8.3%, in certificates of deposit, and $1.9$3.9 million, or 31.8%,49.2% in non-interest bearing checking accounts, and $444,000, or 1.5%, in money market accounts, partially offset by a $963,000,$441,000, or 3.1%18.7% decrease in money marketsavings accounts and a $655,000,$160,000, or 55.1%,34.6% decrease in passbook accounts, and a $200,000, or 11.2%, decrease in savings accounts.

 Federal Home Loan bank Borrowings. Total Federal Home Loan Bank borrowings increased $10.0 million, or 64.5%, from $15.5 million at December 31, 2016 to $25.5 million at September 30, 2017.  During the nine months ended September 30, 2017, the Company borrowed $4.5 million of short-term and $8.0 million of long-term fixed rate borrowings primarily to fund loan growth. During the same time period, the Company repaid $2.5 million of long-term fixed rate borrowings.

38
Stockholders' Equity.  Total stockholders' equity increased $1.2 million,$747,000, or 5.9%3.4%, to $22.0$22.9 million at SeptemberJune 30, 20172018 from $20.8$22.2 million at December 31, 2016.2017.  Contributing to the increase was net income for the ninesix months ended SeptemberJune 30, 20172018 of $1.3 million,$823,000, the reissuance of treasury stock for exercised stock options of $534,000, common stock earned by participants in the employee stock ownership plan of $138,000,$96,000, amortization of stock awards and options under our stock compensation plans of $97,000, the reissuance of treasury stock for exercised stock options of $193,000,$61,000, the reissuance of treasury stock under the Bank's 401(k) Plan of $83,000,$40,000, and other comprehensive income, net of $37,000.$11,000.  These increases were partially offset by the purchase of treasury stock of $341,000$586,000 and by dividends paid of $269,000.$232,000.

Comparison of Operating Results for the Three Months Ended SeptemberJune 30, 20172018 and 20162017

General.  Net income amounted to $595,000$535,000 for the three months ended SeptemberJune 30, 2017,2018, an increase of $193,000,$11,000, or 48.0%2.1%, compared to net income of $402,000$524,000 for three months ended SeptemberJune 30, 2016.2017.  The increase in net income on a comparative quarterly basis was primarily the result of increasesan increase in non-interest income of $363,000 and net interest income of $251,000, partially offset by increases$171,000, a decrease in non-interest expense of $291,000, the provision for income taxes of $108,000,$104,000, and an increase in non-interest income of $59,000, partially offset by an increase in non-interest expense of $293,000 and an increase in the provision for loan losses of $22,000.$30,000.

Net Interest Income.  Net interest income increased $251,000,$171,000, or 15.3%9.1%, to $2.1 million for the three months ended June 30, 2018 from $1.9 million for the three months ended SeptemberJune 30, 2017 from $1.6 million for the three months ended September 30, 2016.2017.  The increase was driven by a $364,000,$395,000, or 15.8%15.2%, increase in interest income, partially offset by a $113,000,$224,000, or 16.8%31.3%, increase in interest expense.

Interest Income.  Interest income increased $364,000,$395,000, or 15.8%15.2%, to $2.7$3.0 million for the three months ended SeptemberJune 30, 20172018 from $2.3$2.6 million for the three months ended SeptemberJune 30, 2016.2017. The increase in interest income was primarily due to a $37.0$25.7 million increase in average loans receivable, net, including loans held for sale, which increased from an average balance of $161.8$187.9 million for the three months ended SeptemberJune 30, 20162017 to an average balance of $198.8$213.6 million for the three months ended SeptemberJune 30, 2017,2018, and had the effect of increasing interest income $505,000.  Partially offsetting this$345,000.  The increase in interest income was also due to a 28 basis point decline$10.4 million increase in the average yield on loans receivable, net, including loans held for sale,cash and cash equivalents due from 5.47%banks, interest bearing, which increased from an average balance of $6.7 million for the three months ended SeptemberJune 30, 20162017 to 5.19%an average balance of $17.1 million for the three months ended SeptemberJune 30, 2018, and had the effect of increasing interest income $27,000.  Also contributing to this increase was a 64 basis point increase in the yield on average cash and cash equivalents due from banks, interest bearing, which increased from 1.02% for the three months ended June 30, 2017 to 1.66% for the three months ended June 30, 2018, which had the effect of decreasingincreasing interest income by $142,000.$27,000.

39
Interest Expense.  Interest expense increased $113,000,$224,000, or 16.8%31.3%, to $785,000$939,000 for the three months ended SeptemberJune 30, 20172018 from $672,000$715,000 for the three months ended SeptemberJune 30, 2016.2017.  The increase in interest expense was primarily attributable to a $19.3$28.2 million increase in average interest-bearing liabilities, which increased from an average balance of $180.4$189.0 million for the three months ended SeptemberJune 30, 20162017 to an average balance of $199.7$217.2 million for the three months ended SeptemberJune 30, 2017,2018, and had the effect of increasing interest expense $61,000.$122,000.  This increase in average interest-bearing liabilities was primarily attributable to a $5.8an $18.7 million increase in average certificate of deposit accounts which increased from an average balance of $134.1$136.2 million for the three months ended SeptemberJune 30, 20162017 to an average balance of $139.9$154.9 million for the three months ended SeptemberJune 30, 2017,2018, and had the effect of increasing interest expense $25,000,$81,000, and a $12.2an $11.1 million increase in average Federal Home Loan Bank borrowings which increased from $13.3an average balance of $16.9 million for the three months ended SeptemberJune 30, 20162017 to an average balance of $25.5$28.0 million for the three months ended SeptemberJune 30, 2016,2018, and had the effect of increasing interest expense $32,000.$45,000.  Also contributing to this increase was an eighta 22 basis point increase in the average rate on interest-bearing liabilities, from 1.49%1.51% for the three months ended SeptemberJune 30, 20162017 to 1.57%1.73% for the three months ended SeptemberJune 30, 2017,2018, which had the effect of increasing interest expense by $52,000.$102,000.  This increase in rate was primarily attributable to a fivean 18 basis point increase in rate on average certificate of deposit accounts, which increased from 1.72% for the three months ended SeptemberJune 30, 20162017 to 1.77%1.90% for the three months ended SeptemberJune 30, 2017,2018, and had the effect of increasing interest expense by $18,000,$68,000, and a 55 basis point  increase in rate on average Federal Home Loan Bank borrowings, which increased from 1.02%1.44% for the three months ended SeptemberJune 30, 20162017 to 1.57%1.99% for the three months ended SeptemberJune 30, 2017,2018, which had the effect of increasing interest expense by $33,000.$34,000.

 
 
4039
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 June 30, 
 Three Months Ended September 30,  2018  2017 
 2017  2016  
Average
Balance
  Interest  
Average
Yield/
Rate
  
Average
Balance
  Interest  
Average
Yield/
Rate
 
 
Average
Balance
  Interest  
Average
Yield/
Rate
  
Average
Balance
  Interest  
Average
Yield/
Rate
  (Dollars in thousands) 
Interest-earning assets: (Dollars in thousands)   
Due from banks, interest-bearing $8,247  $30   1.46% $18,833  $26   0.55% $17,070  $71   1.66% $6,697  $17   1.02%
Investment in interest-earning time deposits  5,370   21   1.56   6,120   32   2.09   4,920   22   1.79   5,361   20   1.49 
Investment securities available for sale  8,774   36   1.64   8,547   30   1.40   7,554   37   1.96   9,102   36   1.58 
Loans receivable, net (1) (2) (3)  198,780   2,577   5.19   161,840   2,214   5.47   213,555   2,849   5.34   187,863   2,523   5.37 
Investment in FHLB stock  1,134   9   3.17   633   7   4.42   1,246   20   6.42   797   8   4.02 
Total interest-earning assets  222,305   2,673   4.81%  195,973   2,309   4.71%  244,345   2,999   4.91%  209,820   2,604   4.96%
Non-interest-earning assets  9,159           9,425           8,812           9,034         
Total assets $231,464          $205,398          $253,157          $218,854         
Interest-bearing liabilities:                                                
Passbook accounts $671  $*   *% $1,182  $*   *% $329  $*   *% $721  $*   *%
Savings accounts  1,550   1   0.26   2,173   1   0.18   1,968   1   0.20   1,437   1   0.28 
Money market accounts  32,070   65   0.81   29,614   60   0.81   31,948   64   0.80   33,718   67   0.79 
Certificate of deposit accounts  139,918   619   1.77   134,099   577   1.72   154,925   735   1.90   136,170   586   1.72 
Total deposits  174,209   685   1.57   167,068   638   1.53   189,170   800   1.69   172,046   654   1.52 
FHLB short-term borrowings  9,875   32   1.30   6,000   8   0.53   10,000   48   1.92   7,750   21   1.08 
FHLB long-term borrowings  15,625   68   1.74   7,294   26   1.43   18,000   91   2.02   9,179   40   1.74 
Total interest-bearing liabilities  199,709   785   1.57%  180,362   672   1.49%  217,170   939   1.73%  188,975   715   1.51%
Non-interest-bearing liabilities  9,787           5,038           13,299           8,406         
Total liabilities  209,496           185,400           230,469           197,381         
Stockholders' Equity  21,968           19,998           22,688           21,473         
Total liabilities and Stockholders' Equity $231,464          $205,398          $253,157          $218,854         
Net interest-earning assets $22,596          $15,661          $27,175          $20,845         
Net interest income; average interest rate spread     $1,888   3.24%     $1,637   3.22%     $2,060   3.18%     $1,889   3.45%
Net interest margin (4)          3.40%          3.34%          3.37%          3.60%
Average interest-earning assets to average interest-bearing liabilities Average interest-earning assets to average interest-bearing liabilities         111.31%          108.66%          112.51%          111.03%

_______________
*Not meaningful.
(1)Includes loans held for sale.
(2)Includes non-accrual loans during the respective periods.  Calculated net of deferred fees and discounts, loans in process and allowance for loan losses.
(3)Includes tax free municipal leases with an aggregate average balance of $64,000$20,000 and an average yield of 3.98%3.63% for the three months ended SeptemberJune 30, 20172018 and an aggregate average balance of $111,000$73,000 and an average yield of 4.02%4.04% for the three months ended SeptemberJune 30, 2016.2017.  The tax-exempt income from such loans has not been calculated on a tax equivalent basis.
 (4)Equals net interest income divided by average interest-earning assets.

40

Provision for Loan Losses.  The provision for loan losses increased $22,000,$30,000, or 36.1%46.9%, from $61,000$64,000 for the three months ended SeptemberJune 30, 20162017 to $83,000$94,000 for the three months ended SeptemberJune 30, 2017.2018.  The increase was based on an evaluation of the allowance relative to such factors as volume of the loan portfolio, concentrations of credit risk, prevailing economic conditions, prior loan loss experience and amount of non-performing loans at SeptemberJune 30, 2017.
2018.

41
Non-performing loans amounted to $3.5 million,$785,000, or 1.83%,0.38% of net loans receivable at SeptemberJune 30, 2017,2018, consisting of thirteenfive loans, fivethree of which are on non-accrual status and eighttwo of which are 90 days or more past due and accruing interest. Comparably, non-performing loans amounted to $1.9$3.1 million, or 1.06%,1.52% of net loans receivable at December 31, 2016,2017, consisting of fourteeneleven loans, seventhree of which were on non-accrual status and seveneight of which were 90 days or more past due and accruing interest.  The non-performing loans at SeptemberJune 30, 20172018 include six one-to-four family non-owner occupied residential loans, three commercial real estate loans, two one-to-four family owner occupied residential loans, one construction loan, and two construction loans,one commercial real estate loan, and all are generally well-collateralized or adequately reserved for.  During the quarter ended SeptemberJune 30, 2017, one2018, no new loan wasloans were placed on non-accrual status resulting in the reversal of approximately $48,000 of previously accrued interest income and two loans previously on non-accrual status were paid-off.one loan was transferred to other real estate owned.  The allowance for loan losses as a percent of total loans receivable was 0.89%0.87% at SeptemberJune 30, 2017,2018 and 0.90%0.89% at December 31, 2016.2017.

Other real estate owned net(OREO) amounted to $185,000$1.7 million at SeptemberJune 30, 2017,2018, consisting of one property.  This compares to threeThere were no properties totaling $435,000in other real estate owned at December 31, 2016.  Following2017.  During the endquarter, collateral for a non-performing construction loan with an aggregate outstanding balance of $1.8 million at the time of foreclosure, was transferred into OREO. In conjunction with this transfer, $100,000 of the quarter,outstanding loan balance was charged-off through the Company sold the remaining property and a loss of $6,000 was realized on the transaction.allowance for loan losses.  Non-performing assets amounted to $3.7$2.5 million, or 1.60%,0.96% of total assets at SeptemberJune 30, 20172018 compared to $2.3$3.1 million, or 1.07%,1.28% of total assets at December 31, 2016.2017.

                Non-Interest Income.  Non-interest income increased $363,000,$59,000, or 49.5%6.1%, from $733,000$961,000 for the three months ended SeptemberJune 30, 20162017 to $1.1$1.0 million for the three months ended SeptemberJune 30, 20172018 due primarily to a $156,000,$70,000, or 29.4%, increase in net gain on the sales of residential mortgage loans, a $100,000, or 77.5%47.6%, increase in mortgage banking and title abstract fees, a $54,000$67,000 decrease in loss on sales and write-downs on other real estate owned, a $30,000, or 50.0%150.0%, increase in other non-interest income, a $26,000, or 144.4%, increase in other fees and service charges, and a $14,000, or 15.7%, increase in insurance commissions earned by Quaint Oak Insurance Agency, a wholly owned insurance subsidiary of Quaint Oak Bank which began operations on August 1, 2016, a $25,000, or 125.0%, increase in other fees and services charges, and a $19,000, or 146.2%, increase in other non-interest income,Bank.  These increases were partially offset by a $19,000,$131,000, or 37.3%18.3%, decrease in net gain on loans held for sale, a $16,000 decrease in gain on the sale of SBA loans, and a $2,000,$1,000, or 8.7%4.5%, decrease in income from bank-owned life insurance.

Non-Interest Expense.  Non-interest expense increased $291,000,$293,000, or 17.6%14.8%, from $1.7$2.0 million for the three months ended SeptemberJune 30, 20162017 to $1.9$2.3 million for the three months ended SeptemberJune 30, 2017.2018.  Salaries and employee benefits expense accounted for $192,000$268,000 of the change as this expense increased 17.0%19.8%, from $1.1$1.4 million for the three months ended SeptemberJune 30, 20162017 to $1.3$1.6 million for the three months ended SeptemberJune 30, 2017 2018 due primarily to increased staff related to the continued expansion of the Company's mortgage banking and lending operations, and the launchexpansion of Quaint Oak Insurance Agency onour real estate agency subsidiary through the acquisition of a local real estate agency in August 1, 2016.2017.  Also contributing to the increase was a $35,000,$29,000, or 32.1%30.9%, increase in otherprofessional fees, a $15,000, or 38.5%, increase in advertising expense, a $34,000,$7,000, or 65.4%8.1%, increase in data processing expense, a $16,000,$3,000, or 69.6%,  increase in advertising expense,  an $11,000, or 11.7%, increase in professional fees, a $9,000, or 25.7%7.0%, increase in FDIC insurance assessment, a $4,000,$1,000, or 8.3%0.7%, increase in directors' feesoccupancy and expenses,equipment expense, and a $5,000,$1,000, or 62.5%100.0%, increase in amortization of other intangible related to the renewal rights of the book of business acquired from Signature Insurance Services, LLC on August 1, 2016.  real estate owned expense.  These increases were partially offset by a $9,000,$21,000, or 69.2%12.7%, deceasedecrease in other real estate ownednon-interest expense and a $6,000,$10,000, or 4.2%20.0%, decrease in occupancydirectors' fees and equipment expense.expenses.

41
Provision for Income Tax.  The provision for income tax increased $108,000,decreased $104,000, or 43.2%38.0%, from $250,000$274,000 for the three months ended SeptemberJune 30, 20162017 to $358,000$170,000 for the three months ended SeptemberJune 30, 2017 due primarily to the increase in pre-tax income. Our2018 as our effective tax rate decreased from 38.3%34.3% for the three months ended SeptemberJune 30, 20162017 to 37.6%24.1% for the three months ended  SeptemberJune 30, 2018 primarily due to the decrease in the Company's federal income tax rate from 34% in 2017 to 21% in 2018 as a result of the Tax Cuts and Jobs Act which was signed into law on December 22, 2017.

42
Comparison of Operating Results for the NineSix Months Ended SeptemberJune 30, 20172018 and 20162017

General.  Net income amounted to $1.3 million$823,000 for the ninesix months ended SeptemberJune 30, 2017,2018, an increase of $247,000,$128,000, or 23.7%18.4%, compared to net income of $1.0 million$695,000 for ninesix months ended SeptemberJune 30, 2016.2017.  The increase in net income was primarily the result of increases in non-interest income of $444,000 and net interest income of $731,000$329,000, and non-interest income of $539,000, partially offset by increasesa decrease in non-interest expense of $950,000, the provision for income taxes of $56,000,$123,000, partially offset by an increase in non-interest expense of $709,000 and an increase in the provision for loan losses of $17,000.$59,000.

 Net Interest Income.  Net interest income increased $731,000,$329,000, or 15.0%8.9%, to $5.6$4.0 million for the ninesix months ended SeptemberJune 30, 20172018 from $4.9$3.7 million for the ninesix months ended SeptemberJune 30, 20162017 due primarily to a $1.1 million,$715,000, or 15.6%14.0%, increase in interest income, partially offset by a $320,000,$386,000, or 17.1%27.4%, increase in interest expense.

Interest Income.  Interest income increased $1.1 million,$715,000, or 15.6%14.0%, to $7.8$5.8 million for the ninesix months ended SeptemberJune 30, 20172018 from $6.7$5.1 million for the ninesix months ended SeptemberJune 30, 2016.2017.  The increase in interest income was primarily due to a $34.1$25.9 million increase in average loans receivable, net, including loans held for sale, which increased from an average balance of $155.4$184.8 million for the ninesix months ended SeptemberJune 30, 20162017 to an average balance of $189.5$210.7 million for the ninesix months ended SeptemberJune 30, 2017,2018, and had the effect of increasing interest income $1.4 million.$694,000.  Partially offsetting this increase was a 27an eight basis point decline in the average yield on loans receivable, net, including loans held for sale, from 5.57%5.36% for the ninesix months ended SeptemberJune 30, 20162017 to 5.30%5.28% for the ninesix months ended SeptemberJune 30, 2017,2018, which had the effect of decreasing interest income by $391,000.$89,000.  The increase in interest income was also due to a $6.3 million increase in average cash and cash equivalents due from banks, interest bearing, which increased from an average balance of $8.4 million for the six months ended June 30, 2017 to an average balance of $14.7 million for the six months ended June 30, 2018, and had the effect of increasing interest income $30,000.  Also contributing to this increase was a 69 basis point increase in the yield on average cash and cash equivalents due from banks, interest bearing, which increased from 0.95% for the six months ended June 30, 2017 to 1.64% for the six months ended June 30, 2018, which had the effect of increasing interest income by $51,000.

Interest Expense.  Interest expense increased $320,000,$386,000, or 17.1%27.4%, to $2.2$1.8 million for the ninesix months ended SeptemberJune 30, 20172018 from $1.9$1.4 million for the ninesix months ended SeptemberJune 30, 2016.2017.  The increase in interest expense was primarily attributable to a $21.4$25.0 million increase in average interest-bearing liabilities, which increased from an average balance of $170.9$188.6 million for the ninesix months ended SeptemberJune 30, 20162017 to an average balance of $192.3$213.6 million for the ninesix months ended SeptemberJune 30, 2017,2018, and had the effect of increasing interest expense $228,000.$210,000.  This increase in average interest-bearing liabilities was primarily attributable to a $12.4$14.8 million increase in average certificate of deposit accounts which increased from an average balance of $125.6$137.0 million for the ninesix months ended SeptemberJune 30, 20162017 to an average balance of $138.0$151.8 million for the ninesix months ended SeptemberJune 30, 2017,2018, and had the effect of increasing interest expense $158,000,$127,000, and a $5.9an $11.8 million increase in average Federal Home Loan Bank borrowings which increased from $13.4an average balance of $16.2 million for the ninesix months ended SeptemberJune 30, 20162017 to an average balance of $19.4$28.0 million for the ninesix months ended SeptemberJune 30, 2017,2018, and had the effect of increasing interest expense $44,000.$89,000.  Also contributing to this increase was a six19 basis point increase in the average rate on interest-bearing liabilities, from 1.46%1.49% for the ninesix months ended SeptemberJune 30, 20162017 to 1.52%1.68% for the ninesix months ended SeptemberJune 30, 2017,2018, which had the effect of increasing interest expense by $92,000.$176,000.  This increase in rate was primarily attributable to a three14 basis point increase in rate on average certificate of deposit accounts, which increased from 1.70%1.71% for the ninesix months ended SeptemberJune 30, 20162017 to 1.73%1.85% for the ninesix months ended SeptemberJune 30, 2017,2018, and had the effect of increasing interest expense by $30,000,$106,000, and a 4458 basis point  increase in rate on average Federal Home Loan Bank borrowings, which increased from 0.99%1.32% for the ninesix months ended SeptemberJune 30, 20162017 to 1.43%1.90% for the ninesix months ended SeptemberJune 30, 2017,2018, which had the effect of increasing interest expense by $62,000.$70,000.
 
 
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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.

 Six Months Ended June 30, 
 Nine Months Ended September 30,  2018  2017 
 2017  2016  
Average
Balance
  Interest  
Average
Yield/
Rate
  
Average
Balance
  Interest  
Average
Yield/
Rate
 
 
Average
Balance
  Interest  
Average
Yield/
Rate
  
Average
Balance
  Interest  
Average
Yield/
Rate
  (Dollars in thousands) 
Interest-earning assets: (Dollars in thousands)   
Due from banks, interest-bearing $8,428  $70   1.11% $17,994  $70   0.52% $14,754  $121   1.64% $8,453  $40   0.95%
Investment in interest-earning time deposits  5,597   67   1.60   6,135   82   1.78   4,903   45   1.84   5,712   46   1.61 
Investment securities available for sale  9,092   101   1.48   6,080   70   1.54   7,681   72   1.87   9,254   65   1.40 
Loans receivable, net (1) (2) (3)  189,527   7,530   5.30   155,459   6,497   5.57   210,708   5,558   5.28   184,824   4,953   5.36 
Investment in FHLB stock  883   24   3.62   631   22   4.65   1,240   38   6.13   755   15   3.97 
Total interest-earning assets  213,527   7,792   4.87%  186,299   6,741   4.82%  239,286   5,834   4.88%  208,998   5,119   4.90%
Non-interest-earning assets  9,143           8,995           8,741           9,135         
Total assets $222,670          $195,294          $248,027          $218,133         
Interest-bearing liabilities:                                                
Passbook accounts $768  $1   0.17% $1,268  $1   0.11% $362  $*   *% $817  $1   0.24%
Savings accounts  1,588   2   0.17   2,527   4   0.21   1,986   2   0.20   1,608   2   0.25 
Money market accounts  32,687   196   0.80   28,099   169   0.80   31,509   125   0.79   33,000   131   0.79 
Certificate of deposit accounts  137,957   1,788   1.73   125,589   1,600   1.70   151,785   1,402   1.85   136,961   1,168   1.71 
Total deposits  173,000   1,987   1.53   157,483   1,774   1.50   185,642   1,529   1.65   172,386   1,302   1.51 
FHLB short-term borrowings  8,350   68   1.09   6,000   24   0.53   10,000   84   1.68   7,429   33   0.89 
FHLB long-term borrowings  10,996   139   1.69   7,434   76   1.36   18,000   182   2.02   8,789   74   1.68 
Total interest-bearing liabilities  192,346   2,194   1.52%  170,917   1,874   1.46%  213,642   1,795   1.68%  188,604   1,409   1.49%
Non-interest-bearing liabilities  8,820           4,791           11,858           8,261         
Total liabilities  201,166           175,708           225,500           196,865         
Stockholders' Equity  21,504           19,586           22,527           21,268         
Total liabilities and Stockholders' Equity $222,670          $195,294          $248,027          $218,133         
Net interest-earning assets $21,181          $15,382          $25,644          $20,394         
Net interest income; average interest rate spread     $5,598   3.35%     $4,867   3.36%     $4,039   3.20%     $3,710   3.41%
Net interest margin (4)          3.50%          3.48%          3.38%          3.55%
Average interest-earning assets to average interest-bearing liabilities Average interest-earning assets to average interest-bearing liabilities         111.01%          109.00%          112.00%          110.81%
_______________________
(1)Includes loans held for sale.
(2)Includes non-accrual loans during the respective periods.  Calculated net of deferred fees and discounts, loans in process and allowance for loan losses.
(3)Includes tax free municipal leases with an aggregate average balance of $74,000$27,000 and an average yield of 4.02%4.23% for the ninesix months ended SeptemberJune 30, 20172018 and an aggregate average balance of $104,000$79,000 and an average yield of 4.02%4.03% for the ninesix months ended SeptemberJune 30, 2016.2017.  The tax-exempt income from such loans has not been calculated on a tax equivalent basis.
(4)Equals net interest income divided by average interest-earning assets.
 
43
Provision for Loan Losses.  The Company increased its provision for loan losses by $17,000,$59,000, or 9.9%55.7%, from $172,000$106,000 for the ninesix months ended SeptemberJune 30, 20162017 to $189,000$165,000 for the ninesix months ended SeptemberJune 30, 2017.2018.  As was the case for the quarter, the increase was based on an evaluation of the allowance relative to such factors as volume of the loan portfolio, concentrations of credit risk, prevailing economic conditions, prior loan loss experience and amount of non-performing loans.  See additional discussion under "Comparison of Operating Results for the Three Months Ended SeptemberJune 30, 20172018 and 2016-Provision2017-Provision for Loan Losses."

44
Non-Interest Income.  Non-interest income increased $539,000,$444,000, or 28.7%33.7%, for the ninesix months ended SeptemberJune 30, 20172018 over the comparable period in 20162017 primarily due to a $222,000,$126,000 net increase in gain on sales and write-downs on other real estate owned, an $82,000, or 17.2%10.0%, increase in net gain on the sales of residentialloans held for sale, a $74,000, or 168.2%, increase in other fees and services charges, a $73,000, or 251.7%, increase in other non-interest income, a $69,000, or 26.7%, increase in mortgage loans,banking and title abstract fees, a $196,000,$16,000, or 326.7%9.6%, increase in insurance commissions earned by Quaint Oak Insurance Agency, a wholly owned insurance subsidiary of Quaint Oak Bank, which began operations on August 1, 2016,and a $78,000,$7,000, or 19.1%43.8%, increase in mortgage banking and title abstract fees, a $63,000, or 50.0%, decrease in lossgain on sales and write-downs on other real estate owned, a $25,000, or 69.4%, increase in other non-interest income, and a $17,000, or 53.1%, increase in other fees and services charges,sale of SBA loans.  These increases were partially offset by a $60,000,$3,000, or 55.6%, decrease in gain on the sale of SBA loans and a $2,000, or 3.0%6.8%, decrease in income from bank-owned life insurance.

Non-Interest Expense.  Non-interest expense increased $950,000,$709,000, or 19.5%18.3%, from $4.9$3.9 million for the ninesix months ended SeptemberJune 30, 20162017 to $5.8$4.6 million for the ninesix months ended SeptemberJune 30, 2017.2018.  Salaries and employee benefits expense accounted for $673,000$619,000 of the change as this expense increased 20.3%23.2%, from $2.7 million for the six months ended June 30, 2017 to $3.3 million for the ninesix months ended SeptemberJune 30, 2016 to $4.0 million for the nine months ended September 30, 20172018 due primarily to increased staff related to the continued expansion of the Company's mortgage banking and lending operations, and the launchexpansion of Quaint Oak Insurance Agency onour real estate agency subsidiary through the acquisition of a local real estate agency in August 1, 2016.2017. Also contributing to the increase was a  $114,000,$46,000, or 34.2%, increase in other expense due primarily to a $76,000 increase in recruiting fees, an $82,000, or 59.9%34.6%, increase in data processing expense, a $33,000,$30,000, or 39.3%38.5%, increase in advertising expense, a $28,000,$17,000, or 27.2%5.6%, increase in FDIC insurance assessment,other non-interest expense, a $29,000,$6,000, or 362.5% increase in amortization of other intangible related to the renewal rights of the book of business acquired from Signature Insurance Services, LLC on August 1, 2016, and a $14,000, or 3.4%2.1%, increase in occupancy and equipment expense.expense, and a $6,000, or 6.9%, increase in FDIC insurance assessment.  These increases were partially offset by an $8,000, or 7.8%, decrease in directors' fees and expenses, a $20,000,$6,000, or 62.5%75.0%, decrease in other real estate owned expense, and a $2,000,$1,000, or 0.7%0.5%, decrease in professional fees, and a $1,000, or 0.6% decrease in directors' fees and expenses.fees.

Provision for Income Tax.  The provision for income tax increased $56,000,decreased $123,000, or 8.6%35.3%, from $650,000$348,000 for the ninesix months ended SeptemberJune 30, 20162017 to $706,000$225,000 for the ninesix months ended SeptemberJune 30, 2017 due primarily to the increase in pre-tax income. Our2018 as our effective tax rate decreased from 38.4%33.4% for the ninesix months ended SeptemberJune 30, 20162017 to 35.4%21.5% for the ninesix months ended  SeptemberJune 30, 20172018 primarily due to the decrease in the Company's federal income tax rate from 34% in 2017 to 21% in 2018 as a result of the Tax Cuts and Jobs Act, and an increase in a tax deduction taken in the second quarter of 2017 related to the exercise of non-qualified stock options during the nine months ended September 30, 2017.this same period.

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 SeptemberJune 30, 2017,2018, the Company's cash and cash equivalents amounted to $8.2$18.2 million.  At such date, the Company also had $761,000$1.6 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 SeptemberJune 30, 2017,2018, Quaint Oak Bank had outstanding commitments to originate loans of $9.5$12.8 million and commitments under unused lines of credit of $18.8$13.3 million.
 
 
4544
At SeptemberJune 30, 2017,2018, certificates of deposit scheduled to mature in less than one year totaled $42.1$47.7 million.  Based on prior experience, management believes that a significant portion of such deposits will remain with us, although there can be no assurance that this will be the case.

In addition to cash flow from loan payments and prepayments and deposits, the Company has significant borrowing capacity available to fund liquidity needs.  If the Company requires funds beyond its ability to generate them internally, borrowing agreements exist with the Federal Home Loan Bank of Pittsburgh (FHLB), which provide an additional source of funds.  As of SeptemberJune 30, 2017,2018, we had $25.5$28.0 million of borrowings from the FHLB and had $114.0$125.2 million in borrowing capacity. Under terms of the collateral agreement with the FHLB of Pittsburgh, we pledge residential mortgage loans as well as Quaint Oak Bank's FHLB stock as collateral for such advances.  In addition, as of SeptemberJune 30, 20172018 Quaint Oak Bank had $539,000$850,000 in borrowing capacity with the Federal Reserve Bank of Philadelphia.  There were no borrowings under this facility at SeptemberJune 30, 2017.2018.

Our stockholders' equity amounted to $22.0$22.9 million at SeptemberJune 30, 2017,2018, an increase of $1.2$747,000 million, or 5.9%3.4%, from $20.8$22.2 million at December 31, 2016.2017. Contributing to the increase was net income for the ninesix months ended SeptemberJune 30, 20172018 of $1.3 million,$823,000, the reissuance of treasury stock for exercised stock options of $534,000, common stock earned by participants in the employee stock ownership plan of $138,000,$96,000, amortization of stock awards and options under our stock compensation plans of $97,000, the reissuance of treasury stock for exercised stock options of $193,000,$61,000, the reissuance of treasury stock under the Bank's 401(k) Plan of $83,000,$40,000, and other comprehensive income, net of $37,000.$11,000.  These increases were partially offset by the purchase of treasury stock of $341,000$586,000 and by dividends paid of $269,000.$232,000. For further discussion of the stock compensation plans, see Note 10 in the Notes to Unaudited Consolidated Financial Statements contained elsewhere herein.

Quaint Oak Bank is required to maintain regulatory capital sufficient to meet tier 1 leverage, common equity tier 1 capital, tier 1 risk-based and total risk-based capital ratios of at least 4.00%, 4.50%, 6.00%, and 8.00%, respectively.  At SeptemberJune 30, 2017,2018, Quaint Oak Bank exceeded each of its capital requirements with ratios of 8.61%8.17%, 11.72%11.14%, 11.72%11.14 and 12.77%12.15%, respectively. As a small savings and loan holding company eligible for exemption, the Company is not currently subject to any regulatory capital requirements.

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 SeptemberJune 30, 2017,2018, we had unfunded commitments under lines of credit of $18.8$13.3 million and $9.5$12.8 million of commitments to originate loans.  We had no commitments to advance additional amounts pursuant to outstanding lines of credit or undisbursed construction loans.


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Impact of Inflation and Changing Prices

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


ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not Applicable.


ITEM 4. CONTROLS AND PROCEDURES

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act")) as of SeptemberJune 30, 2017.2018.  Based on their evaluation of the Company's disclosure controls and procedures, the Company's Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and regulations are operating in an effective manner.

No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15(d)-15(f) under the Securities Exchange Act of 1934) occurred during the thirdsecond fiscal quarter of fiscal 20172018 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 SeptemberJune 30, 20172018 are set forth in the table below:

Period 
Total Number
of Shares
Purchased
  
Average
Price
Paid per
Share
  
Total Number of
Shares Purchased
as Part of Publicly Announced Plans
or Programs
  
Maximum
Number of Shares
that May Yet Be
Purchased Under
the Plans or
Programs (1)
 
July 1, 2017 – July 31, 2017  -  $-   -   38,344 
August 1, 2017 – August 31, 2017  4,440   13.00   -   38,344 
September 1, 2017 – September 30, 2017  22,538   12.34   15,000   23,344 
Total  26,978  $12.46   15,000   23,344 
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)
 
April 1, 2018 – April 30, 2018  5,000  $13.14   5,000   14,344 
May 1, 2018 – May 31, 2018  19,210   13.07   -   14,344 
June 1, 2018 – June 30, 2018  -   -   -   14,344 
Total  24,210  $13.08   5,000   14,344 

Notes to this table:

(1)On February 21, 2014, the Board of Directors of Quaint Oak Bancorp approved its fourth share repurchase program which provides for the repurchase of up to 69,432 shares (adjusted to reflect the two-for-one stock split), or approximately 2.5% of the Company's then issued and outstanding shares of common stock, and announced the fourth repurchase program on Form 8-K filed on February 26, 2014.  The repurchase program does not have an expiration date.


ITEM 3.DEFAULTS UPON SENIOR SECURITIES

Not applicable.


ITEM 4.MINE SAFETY DISCLOSURES

Not applicable.

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ITEM 5.OTHER INFORMATION

Not applicable.



ITEM 6.EXHIBITS

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



49
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:  NovemberAugust 13, 20172018
By:
/s/Robert T. Strong
Robert T. Strong
President and Chief Executive Officer
   
   
Date:  NovemberAugust 13, 20172018
By:/s/John J. Augustine
  
John J. Augustine
Executive Vice President and
Chief Financial Officer

48