UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
 
 _______________________________
 
FORM 10-Q
(Mark One)
[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2019March 31, 2020
OR
[   ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from to  
 
Commission file number: 000-52694
 
QUAINT OAK BANCORP, INC.
(Exact Name of Registrant as Specified in Its Charter)
 
Pennsylvania
35-2293957
(State or Other Jurisdiction of Incorporation or Organization)
(I.R.S. Employer Identification No.)
 
 
 
501 Knowles Avenue, Southampton, Pennsylvania  18966
(Address of Principal Executive Offices)
 
(215) 364-4059
(Registrant’s Telephone Number, Including Area Code)
 
Not applicable
(Former name, former address and former fiscal year, if changed since last report)

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

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




Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  [X]  Yes  [  ]  No
     
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  [X] Yes  [  ] No
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-acceleratednon- accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
 
 
Large accelerated filer[   ]Accelerated filer[  ]
Non-accelerated filer[X]Smaller reporting company[X]
             

Emerging growth company[  ]

 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.   [  ]
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).          [  ] Yes     [X]  No
                                                                                                                                                                                                              
 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:  As of November 7, 2019, 1,996,642May 8, 2020, 1,995,067 shares of the Registrant’s common stock were issued and outstanding.
 
 
 
 
INDEX


Page
PART I - FINANCIAL INFORMATION
Page
 
Item 1 -                Financial Statements
 
Consolidated Balance Sheets as of September 30, 2019March 31, 2020 and December 31, 20182019 (Unaudited)1


Consolidated Statements of Income for the Three and Nine Months Ended September 30,March 31, 2020 and 2019 and 2018 (Unaudited)2
Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2019 and 2018 (Unaudited)
3
 
Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2020 and 2019 (Unaudited)3

Consolidated Statement of Stockholders’ Equity for the Three and Nine Months Ended September 30,March 31, 2020 and 2019 (Unaudited)4
 
Consolidated Statements of Cash Flows for the NineThree Months Ended September,March 31, 2020 and 2019 and 2018 (Unaudited)65
 
Notes to Unaudited Consolidated Financial Statements                                                           76
  
Item 2 -                Management’s Discussion and Analysis of Financial Condition and Results of Operations3836
 
Item 3 -                Quantitative and Qualitative Disclosures About Market Risk                                                                          5147
 
Item 4 -                Controls and Procedures                                                                                     5147
 
PART II - OTHER INFORMATION
 
Item 1 -                Legal Proceedings                                                                                                                   5248
 
Item 1A -             Risk Factors     5248
 
Item 2 -                Unregistered Sales of Equity Securities and Use of Proceeds5249
 
Item 3 -                Defaults Upon Senior Securities                                                                                                              5250
 
Item 4 -                Mine Safety Disclosures                                                                                              5250
 
Item 5 -                Other Information                                                                                                         5350
 
Item 6 -                Exhibits                                                                                                         5350
 
SIGNATURES 
 
 
ITEM 1. FINANCIAL STATEMENTS
 
 
Quaint Oak Bancorp, Inc.
Consolidated Balance Sheets (Unaudited)

At September 30,  At December 31,   At March 31,  At December 31, 
2019  2018   2020  2019 
(In thousands, except share data)   (In thousands, except share data) 
AssetsAssets  Assets   
Due from banks, non-interest-bearingDue from banks, non-interest-bearing
$
420
  
$
369
 Due from banks, non-interest-bearing 
$
328
  
$
541
 
Due from banks, interest-bearingDue from banks, interest-bearing 
5,086
   
25,643
 Due from banks, interest-bearing  
14,615
   
14,014
 
Cash and cash equivalentsCash and cash equivalents 
5,506
  
26,012
 Cash and cash equivalents 
14,943
  
14,555
 
Investment in interest-earning time depositsInvestment in interest-earning time deposits 
10,172
  
4,927
 Investment in interest-earning time deposits 
9,922
  
10,172
 
Investment securities available for sale Investment securities available for sale 
9,314
  
6,680
 Investment securities available for sale 
7,332
  
7,623
 
Loans held for saleLoans held for sale 
16,483
  
5,103
 Loans held for sale 
10,923
  
8,928
 
Loans receivable, net of allowance for loan losses (2019 $2,283; 2018 $1,965) 237,379
  216,898
 
Loans receivable, net of allowance for loan losses (2020 $2,346; 2019 $2,231)Loans receivable, net of allowance for loan losses (2020 $2,346; 2019 $2,231) 251,088
  246,692
 
Accrued interest receivableAccrued interest receivable 
1,408
  
1,153
 Accrued interest receivable 
1,528
  
1,349
 
Investment in Federal Home Loan Bank stock, at costInvestment in Federal Home Loan Bank stock, at cost 
1,500
  
1,086
 Investment in Federal Home Loan Bank stock, at cost 
1,340
  
1,580
 
Bank-owned life insuranceBank-owned life insurance 
3,954
  
3,894
 Bank-owned life insurance 
3,993
  
3,974
 
Premises and equipment, netPremises and equipment, net 
2,121
  
2,058
 Premises and equipment, net 
2,309
  
2,226
 
GoodwillGoodwill 
515
  
515
 Goodwill 
515
  
515
 
Other intangible, net of accumulated amortizationOther intangible, net of accumulated amortization 
331
  
368
 Other intangible, net of accumulated amortization 
307
  
319
 
Other real estate owned, netOther real estate owned, net 
1,969
  
1,650
 Other real estate owned, net 
1,931
  
1,824
 
Prepaid expenses and other assetsPrepaid expenses and other assets 
3,168
   
1,060
 Prepaid expenses and other assets  
3,315
   
2,783
 
Total AssetsTotal Assets
$
293,820
  
$
271,404
 Total Assets 
$
309,446
  
$
302,540
 
   
Liabilities and Stockholders’ EquityLiabilities and Stockholders’ Equity Liabilities and Stockholders’ Equity 
LiabilitiesLiabilities      Liabilities      
Deposits:Deposits:      Deposits:      
Non-interest bearingNon-interest bearing
$
17,045
  
$
17,542
 Non-interest bearing 
$
17,619
  
$
15,775
 
Interest-bearingInterest-bearing 
205,105
   
194,369
 Interest-bearing  
222,735
   
211,683
 
Total depositsTotal deposits 
222,150
  
211,911
 Total deposits 
240,354
  
227,458
 
Federal Home Loan Bank short-term borrowingsFederal Home Loan Bank short-term borrowings 
9,000
  
9,000
 Federal Home Loan Bank short-term borrowings 
-
  
10,000
 
Federal Home Loan Bank long-term borrowingsFederal Home Loan Bank long-term borrowings 
25,271
  
15,000
 Federal Home Loan Bank long-term borrowings 
30,193
  
26,271
 
Subordinated debtSubordinated debt 
7,856
  
7,831
 Subordinated debt 
7,873
  
7,865
 
Accrued interest payableAccrued interest payable 
283
  
221
 Accrued interest payable 
313
  
314
 
Advances from borrowers for taxes and insuranceAdvances from borrowers for taxes and insurance 
1,758
  
2,568
 Advances from borrowers for taxes and insurance 
1,908
  
2,780
 
Accrued expenses and other liabilitiesAccrued expenses and other liabilities 
1,954
   
1,037
 Accrued expenses and other liabilities  
2,576
   
1,945
 
Total LiabilitiesTotal Liabilities 
268,272
   
247,568
 Total Liabilities  
283,217
   
276,633
 
        
Stockholders’ EquityStockholders’ Equity      Stockholders’ Equity      
Preferred stock – $0.01 par value, 1,000,000 shares authorized; none issued or
outstanding
Preferred stock – $0.01 par value, 1,000,000 shares authorized; none issued or
outstanding
 
-
  
-
 Preferred stock – $0.01 par value, 1,000,000 shares authorized;
none issued or outstanding		 
--
  
--
 
Common stock – $0.01 par value; 9,000,000 sharesCommon stock – $0.01 par value; 9,000,000 shares      Common stock – $0.01 par value; 9,000,000 shares      
authorized; 2,777,250 issued; 1,996,489 and 1,975,947
outstanding at September 30, 2019 and December 31, 2018, respectively
 
28
  
28
 
authorized; 2,777,250 issued; 1,986,836 and 1,984,857
outstanding at March 31, 2020 and December 31, 2019, respectively
authorized; 2,777,250 issued; 1,986,836 and 1,984,857
outstanding at March 31, 2020 and December 31, 2019, respectively
 
28
  
28
 
Additional paid-in capitalAdditional paid-in capital 
14,910
  
14,683
 Additional paid-in capital 
15,088
  
14,990
 
Treasury stock, at cost: 780,761 shares at September 30, 2019 and 801,303 shares at
December 31, 2018
 
(4,800
)
 
(4,824
)
Unallocated common stock held by Employee Stock Ownership Plan (ESOP) 
(135
)
 
(185
)
Accumulated other comprehensive income (loss) 
25
  
(2
)
Treasury stock, at cost: 790,414 and 792,393 shares at March 31, 2020
and December 31, 2019, respectively
Treasury stock, at cost: 790,414 and 792,393 shares at March 31, 2020
and December 31, 2019, respectively
 
(4,973
)
 
(4,950
)
Unallocated common stock held by:Unallocated common stock held by:      
Employee Stock Ownership Plan (ESOP)Employee Stock Ownership Plan (ESOP) 
(101
)
 
(118
)
Accumulated other comprehensive (loss) incomeAccumulated other comprehensive (loss) income 
(4
)
 
20
 
Retained earningsRetained earnings 
15,520
   
14,136
 Retained earnings  
16,191
   
15,937
 
Total Stockholders’ EquityTotal Stockholders’ Equity 
25,548
   
23,836
 Total Stockholders’ Equity  
26,229
   
25,907
 
Total Liabilities and Stockholders’ EquityTotal Liabilities and Stockholders’ Equity
$
293,820
  
$
271,404
 Total Liabilities and Stockholders’ Equity 
$
309,446
  
$
302,540
 




See accompanying notes to the unaudited consolidated financial statements.
1
Quaint Oak Bancorp, Inc.
Consolidated Statement of Income (Unaudited)
Consolidated Statements of Income (Unaudited)

 For the Three Months Ended 
  
March 31,
 
  2020  2019 
  (In thousands, except share 
  and per share data) 
Interest Income      
Interest on loans, including fees 
$
3,472
  
$
3,137
 
Interest and dividends on time deposits, investment securities, interest-bearing        
deposits with others, and Federal Home Loan Bank stock  
199
   
265
 
Total Interest Income  
3,671
   
3,402
 
Interest Expense        
Interest on deposits  
1,121
   
999
 
Interest on Federal Home Loan Bank short-term borrowings  
30
   
58
 
Interest on Federal Home Loan Bank long-term borrowings  
147
   
79
 
Interest on subordinated debt  
130
   
129
 
Total Interest Expense  
1,428
   
1,265
 
Net Interest Income  
2,243
   
2,137
 
Provision for Loan Losses  
115
   
85
 
Net Interest Income after Provision for Loan Losses  
2,128
   
2,052
 
Non-Interest Income        
Mortgage banking and title abstract fees  
294
   
145
 
Real estate sales commissions, net  
33
   
18
 
Insurance commissions  
97
   
92
 
Other fees and services charges  
83
   
28
 
Income from bank-owned life insurance  
19
   
20
 
Net gain on loans held for sale  
781
   
433
 
Gain on the sale of SBA loans  
-
   
106
 
Total Non-Interest Income  
1,307
   
842
 
Non-Interest Expense        
Salaries and employee benefits  
1,978
   
1,626
 
Directors’ fees and expenses  
61
   
57
 
Occupancy and equipment  
205
   
160
 
Data processing  
137
   
102
 
Professional fees  
114
   
82
 
FDIC deposit insurance assessment  
21
   
28
 
Other real estate owned expenses  
14
   
7
 
Advertising  
75
   
71
 
Amortization of other intangible  
12
   
12
 
Other  
210
   
162
 
Total Non-Interest Expense  
2,827
   
2,307
 
Income before Income Taxes  
608
   
587
 
Income Taxes  
176
   
174
 
Net Income 
$
432
  
$
413
 
Earnings per share – basic 
$
0.22
  
$
0.21
 
Average shares outstanding - basic  
1,964,132
   
1,940,363
 
Earnings per share - diluted 
$
0.21
  
$
0.21
 
Average shares outstanding - diluted  
2,031,494
   
1,991,779
 


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

See accompanying notes to the unaudited consolidated financial statements.
2
Quaint Oak Bancorp, Inc.
Consolidated StatementStatements of Comprehensive Income (Unaudited)

 For the Three Months Ended 
  March 31, 
  
2020
  
2019
 
  (In Thousands) 
       
Net Income 
$
432
  
$
413
 
         
Other Comprehensive (Loss) Income:        
Unrealized (losses) gains on investment securities available for sale  
(29
)
  
2
 
            Income tax effect  
5
   
(1
)
Net other comprehensive (loss) income  
(24
)
  
1
 
         
Total Comprehensive Income 
$
408
  
$
414
 

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

















See accompanying notes to the unaudited consolidated financial statements.
3
Quaint Oak Bancorp, Inc.
Consolidated Statements of Stockholders’ Equity (Unaudited)

For the Three Months Ended March 31, 2020
 
  
              Unallocated          
  Common Stock        Common  Accumulated       
  Number     Additional     Stock Held  Other     Total 
  of     Paid-In  Treasury  by Benefit  Comprehensive  Retained  Stockholders’ 
  Shares  Amount  Capital  Stock  Plans  Income (Loss)  Earnings  Equity 
  (In thousands, except share data) 
BALANCE –DECEMBER 31, 2019  1,984,857  $28  $14,990  $(4,950) $(118) $20  $15,937  $25,907 
                                 
Common stock allocated by ESOP (3,607 shares)          35       17           52 
                                 
Treasury stock purchase  (5,372)          (67)              (67)
                                 
Reissuance of treasury stock under 401(k) Plan  851       7   5               12 
                                 
Reissuance of treasury stock for exercised stock options  6,500       13   39               52 
                                 
Stock based compensation expense          43                   43 
                                 
Cash dividends declared ($0.09 per share)                          (178)  (178)
                                 
Net income                          432   432 
                                 
Other comprehensive (loss), net                      (24)      (24)
                                 
BALANCE – March 31, 2020  1,986,836  $28  $15,088  $(4,973) $(101) $(4) $16,191  $26,229 



For the Three Months Ended March 31, 2019
 
                         
              Unallocated          
  Common Stock   
        Common  Accumulated       
  Number     Additional     Stock Held  Other     Total 
  of     Paid-In  Treasury  by Benefit  Comprehensive  Retained  Stockholders’ 
  Shares  Amount  Capital  Stock  Plans  Income (Loss)  Earnings  Equity 
  (In thousands, except share data) 
BALANCE –DECEMBER 31, 2018  1,975,947  $28  $14,683  $(4,824) $(185) $(2) $14,136  $23,836 
                                 
Common stock allocated by ESOP (3,607 shares)          28       17           45 
                                 
Treasury stock purchase  (9,326)          (115)              (115)
                                 
Reissuance of treasury stock under 401(k) Plan  970       6   6               12 
                                 
Reissuance of treasury stock for exercised stock options  13,500       30   79               109 
                                 
Stock based compensation expense          43                   43 
                                 
Cash dividends declared ($0.07 per share)                          (138)  (138)
                                 
Net income                          413   413 
                                 
Other comprehensive income, net                      1       1 
                                 
BALANCE – March 31, 2019  1,981,091  $28  $14,790  $(4,854) $(168) $(1) $14,411  $24,206 






See accompanying notes to the unaudited consolidated financial statements.
3
Quaint Oak Bancorp, Inc.
Consolidated Statement of Stockholders’ Equity (Unaudited)


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

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





See accompanying notes to the unaudited consolidated financial statements.

4
Quaint Oak Bancorp, Inc.
Consolidated StatementStatements of Stockholders’ EquityCash Flows (Unaudited)

  For the Three Months 
  Ended March 31, 
  2020  2019 
  (In Thousands) 
Cash Flows from Operating Activities   
Net income 
$
432
  
$
413
 
Adjustments to reconcile net income to net cash (used in) provided by operating activities:        
Provision for loan losses  
115
   
85
 
Depreciation of premises and equipment  
53
   
50
 
Amortization of operating right-of-use assets  
28
   
29
 
Amortization of subordinated debt issuance costs  
8
   
9
 
Amortization of other intangible  
12
   
12
 
Net amortization of securities premiums  
3
   
5
 
Accretion of deferred loan fees and costs, net  
(116
)
  
(125
)
Stock-based compensation expense  
95
   
88
 
Net gain on loans held for sale  
(781
)
  
(433
)
Loans held for sale-originations  
(34,672
)
  
(17,843
)
Loans held for sale-proceeds  
33,458
   
19,167
 
Gain on the sale of SBA loans  
-
   
(106
)
Increase in the cash surrender value of bank-owned life insurance  
(19
)
  
(20
)
Changes in assets and liabilities which provided (used) cash:        
Accrued interest receivable  
(179
)
  
(102
)
Prepaid expenses and other assets  
77
   
87
 
Accrued interest payable  
(1
)
  
143
 
Accrued expenses and other liabilities  
(1
)
  
(570
)
                Net Cash (Used in) Provided by Operating Activities  
(1,488
)
  
889
 
Cash Flows from Investing Activities        
       Purchase of interest-earning time deposits
  
(499
)
  
(6,297
)
       Redemption of interest-earning time deposits  
749
   
1,071
 
Principal repayments on investment securities available for sale  
259
   
183
 
Net increase in loans receivable  
(4,395
)
  
(2,398
)
       Redemption of Federal Home Loan Bank stock
  
240
   
-
 
Capitalized expenditures on other real estate owned  
(107
)
  
(94
)
Purchase of premises and equipment  
(136
)
  
(53
)
Net Cash Used in Investing Activities  
(3,889
)
  
(7,588
)
Cash Flows from Financing Activities        
Net increase (decrease) in demand deposits, money market, and savings accounts  
4,501
   
(2,815
)
       Net increase in certificate accounts
  
8,395
   
12,890
 
Decrease in advances from borrowers for taxes and insurance  
(872
)
  
(878
)
Repayments of Federal Home Loan Bank short-term borrowings (10,000)
  
-
 
Proceeds from Federal Home Loan Bank long-term borrowings  
3,922
   
-
 
Dividends paid  
(178
)
  
(138
)
Purchase of treasury stock  
(67
)
  
(115
)
Proceeds from the reissuance of treasury stock  
12
   
12
 
Proceeds from the exercise of stock options  
52
   
109
 
Net Cash Provided by Financing Activities  
5,765
   
9,065
 
Net Increase in Cash and Cash Equivalents  
388
   
2,366
 
Cash and Cash Equivalents – Beginning of Year  
14,555
   
26,012
 
Cash and Cash Equivalents – End of Year 
$
14,943
  
$
28,378
 
 
Supplementary Disclosure of Cash Flow and Non-Cash Information:
        
Cash payments for interest 
$
1,430
  
$
1,122
 
Cash payments for income taxes 
$
60
  
$
45
 
Initial recognition of operating lease right-of use assets 
$
632
  
$
1,366
 
Initial recognition of operating lease obligations 
$
632
  
$
1,366
 
         

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


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



See accompanying notes to the unaudited consolidated financial statements.
5
Quaint Oak Bancorp, Inc.
Consolidated Statement of Cash Flows (Unaudited)
Notes to Unaudited Consolidated Financial Statements


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



See accompanying notes to the unaudited consolidated financial statements.
6
Quaint Oak Bancorp, Inc.
Notes to Unaudited Consolidated Financial Statements

Note 1 – Financial Statement Presentation and Significant Accounting Policies
Basis of Financial Presentation.   The consolidated financial statements include the accounts of Quaint Oak Bancorp, Inc., a Pennsylvania chartered corporation (the “Company” or “Quaint Oak Bancorp”) and its wholly owned subsidiary, Quaint Oak Bank, a Pennsylvania chartered stock savings bank, along with its wholly owned subsidiaries.  At September 30, 2019,March 31, 2020, the Bank has five wholly-owned subsidiaries, Quaint Oak Mortgage, LLC, Quaint Oak Real Estate, LLC, Quaint Oak Abstract, LLC, QOB Properties, LLC, and Quaint Oak Insurance Agency, LLC, each a Pennsylvania limited liability company.  The mortgage company offers mortgage banking in the Lehigh Valley, Delaware Valley and Philadelphia County region of Pennsylvania.  The real estate and abstract companies offer real estate sales and title abstract services, respectively, primarily in the Lehigh Valley region of Pennsylvania.  These companies began operation in July 2009.  In February, 2019, Quaint Oak Mortgage opened a mortgage banking office in Philadelphia, Pennsylvania.  QOB Properties, LLC began operations in July 2012 and holds Bank properties acquired through a foreclosure proceeding or acceptance of a deed in lieu of foreclosure.  Quaint Oak Insurance Agency, LLC began operations in August 2016 and provides a broad range of personal and commercial insurance coverage solutions. All significant intercompany balances and transactions have been eliminated.
The Bank is subject to regulation by the Pennsylvania Department of Banking and Securities and the Federal Deposit Insurance Corporation.  Pursuant to the Bank’s election under Section 10(l) of the Home Owners’ Loan Act, the Company is a savings and loan holding company regulated by the Board of Governors of the Federal Reserve System.  The market area served by the Bank is principally Bucks, Montgomery and Philadelphia Counties in Pennsylvania and the Lehigh Valley area in Pennsylvania.  The Bank has twothree banking locations: the main office location in Southampton, Pennsylvania and a regional banking officeoffices in the Lehigh Valley area ofand Philadelphia. The Bank also has a mortgage office in Philadelphia and an insurance agency office in New Britain Township, Pennsylvania. The principal deposit products offered by the Bank are certificates of deposit, money market accounts, non-interest bearing checking accounts for businesses and consumers, and savings accounts.  In May 2019, the Bank opened a commercial loan office in Philadelphia.  In October 2019, the Bank received regulatory approval to open a regional banking office in the Northern Liberties section of Philadelphia.  The Bank anticipates a January 2020 opening.  The principal loan products offered by the Bank are fixed and adjustable rate residential and commercial mortgages, construction loans, commercial business loans, home equity loans, and lines of credit.
The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (US GAAP) for interim information and with the instructions to Form 10-Q, as applicable to a smaller reporting company.  Accordingly, they do not include all the information and footnotes required by US GAAP for complete financial statements.
The foregoing consolidated financial statements are unaudited; but in the opinion of management include all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation thereof.  The balances as of December 31, 20182019 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 20182019 Annual Report on Form 10-K.  The results of operations for the three and nine months ended September 30, 2019March 31, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019.2020.
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.



76
Quaint Oak Bancorp, Inc.
Notes to Unaudited Consolidated Financial Statements
Notes to Unaudited Consolidated Financial Statements

Note 1 – Financial Statement Presentation and Significant Accounting Policies (Continued)
Loans Receivable.  Loans receivable that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are stated at their outstanding unpaid principal balances, net of an allowance for loan losses and any deferred fees and costs.  Interest income is accrued on the unpaid principal balance.  Loan origination fees and costs are deferred and recognized as an adjustment of the yield (interest income) of the related loans.  The Bank is generally amortizing these amounts over the contractual life of the loan.
The loans receivable portfolio is segmented into residential loans, commercial real estate loans, construction loans, commercial business loans, and consumer loans.  The residential loan segment has two classes: one-to-four family residential owner occupied loans and one-to-four residential family non-owner occupied loans.  The commercial real estate loan segment consists of the following classes: multi-family (five or more) residential, commercial real estate and commercial lines of credit.  Construction loans are generally granted for the purpose of building a single residential home.  Commercial business loans are loans to businesses for working capital, purchase of a business, tenant improvements, receivables, purchase of inventory, and for the purchase of business essential equipment.  Business essential equipment is equipment necessary for a business to support or assist with the day-to-day operation or profitability of the business.   The consumer loan segment consists of the following classes: home equity loans and other consumer loans.  Included in the home equity class are home equity loans and home equity lines of credit.  Included in the other consumer are loans secured by saving accounts.
The accrual of interest is generally discontinued when principal or interest has become 90 days past due unless the loan is in the process of collection and is either guaranteed or well secured.  When a loan is placed on nonaccrual status, unpaid interest credited to income in the current year is reversed and unpaid interest accrued in prior years is charged against the allowance for loan losses.  Interest received on nonaccrual loans generally is either applied against principal or reported as interest income, according to management’s judgment as to the collectability of principal.  Generally, a loan is restored to accrual status when the obligation is brought current, it has performed in accordance with the contractual terms for a reasonable period of time and the ultimate collectability of the total contractual principal and interest is no longer in doubt.
Allowance for Loan Losses.  The allowance for loan losses represents management’s estimate of losses inherent in the loan portfolio as of the balance sheet date and is recorded as a reduction to loans receivable. The allowance for loan losses is increased by the provision for loan losses, and decreased by charge-offs, net of recoveries. Loans deemed to be uncollectible are charged against the allowance for loan losses, and subsequent recoveries, if any, are credited to the allowance. All, or part, of the principal balance of loans receivable are charged off to the allowance as soon as it is determined that the repayment of all, or part, of the principal balance is highly unlikely. Because all identified losses are immediately charged off, no portion of the allowance for loan losses is restricted to any individual loan or groups of loans, and the entire allowance is available to absorb any and all loan losses.
The allowance for loan losses is maintained at a level considered adequate to provide for losses that can be reasonably anticipated. Management performs a quarterly evaluation of the adequacy of the allowance. The allowance is based on the Company’s past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, composition of the loan portfolio, current economic conditions and other relevant factors. This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant revision as more information becomes available.


87
Quaint Oak Bancorp, Inc.
Notes to Unaudited Consolidated Financial Statements
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.


98
Quaint Oak Bancorp, Inc.
Notes to Unaudited Consolidated Financial Statements
Notes to Unaudited Consolidated Financial Statements

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

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

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

Federal Home Loan Bank Stock.  Federal law requires a member institution of the Federal Home Loan Bank (FHLB) system to hold restricted stock of its district Federal Home Loan Bank according to a predetermined formula.  FHLB stock is carried at cost and evaluated for impairment. When evaluating FHLB stock for impairment, its value is determined based on the ultimate recoverability of the par value of the stock. We evaluate our holdings of FHLB stock for impairment each reporting period. No impairment charges were recognized on FHLB stock during the three or nine months ended September 30, 2019March 31, 2020 and 2018.2019.

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

Intangible Assets.   Intangible assets on the consolidated balance sheets represent the acquisition by Quaint Oak Insurance Agency of the renewal rights to the book of business produced and serviced by an independent insurance agencySignature 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.



109
Quaint Oak Bancorp, Inc.
Notes to Unaudited Consolidated Financial Statements

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

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

Other Real Estate Owned, Net. Other real estate owned or foreclosed assets are comprised of property acquired through a foreclosure proceeding or acceptance of a deed in lieu of foreclosure and loans classified as in-substance foreclosures.  A loan is classified as in-substance foreclosure when the Bank has taken possession of the collateral regardless of whether formal foreclosure proceedings take place.  Other real estate properties are initially recorded at fair value, net of estimated selling costs at the date of
foreclosure, establishing a new cost basis. After foreclosure, valuations are periodically performed by management and the real estate is carried at the lower of cost or fair value less estimated costs to sell.  Net revenue and expenses from operations and additions to the valuation allowance are included in other expenses.  At September 30, 2019March 31, 2020 the Company had four properties in other real estate owned (OREO) totaling $2.0$1.9 million.  The balance of thesethis OREO propertiesproperty amounted to $1.7$1.8 million at December 31, 2018.2019.

Share-Based Compensation.  Compensation expense for share-based compensation awards is based on the grant date fair value of the award.  ThatCompensation expense for stock options is based on a Black-Scholes model to estimate the fair value.  The cost is recognized over the period during which an employee is required to provide service in exchange for the award.
At September 30, 2019,March 31, 2020, the Company has outstanding equity awards under two share-based plans: the 2013 Stock Incentive Plan and the 2018 Stock Incentive Plan.  Awards under these plans were made in May 2013 and May 2018.  These plans are more fully described in Note 10.
The Company also has an employee stock ownership plan (“ESOP”).  This plan is more fully described in Note 10.  As ESOP shares are committed to be released and allocated among participants, the Company recognizes compensation expense equal to the average market price of the shares over the period earned.
Comprehensive Income.  Accounting principles generally accepted in the United States of America require that recognized revenue, expenses, gains and losses be included in net income.  Certain changes in assets and liabilities, such as unrealized gains and losses on available for sale securities, are reported as a separate component of the equity section of the consolidated balance sheet,Consolidated Balance Sheet, and along with net income, are components of comprehensive income.
Earnings per Share.  Amounts reported in earnings per share reflect earnings available to common stockholders’ for the period divided by the weighted average number of shares of common stock outstanding during the period, exclusive of unearned ESOP shares, unvested restricted stock (RRP) shares and treasury shares.  Stock options and unvested restricted stock are regarded as potential common stock and are considered in the diluted earnings per share calculations to the extent they would have a dilutive effect if converted to common stock, computed using the “treasury stock” method.
Revenue from Contracts with Customers.   The Company records revenue from contracts with customers in accordance with Accounting Standards Codification Topic 606, “Revenue from Contracts with Customers” (“Topic 606”). Under Topic 606, the Company must identify the contract with a customer, identify the performance obligations in the contract, determine the transaction price, allocate the transaction price to the performance obligations in the contract, and recognize revenue when (or as) the Company satisfies a performance obligation. Significant revenue has not been recognized in the current reporting period that results from performance obligations satisfied in previous periods.



1110
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.
Abstract Title Fees:  The Bank provides abstract title services through its wholly owned subsidiary, Quaint Oak Abstract, LLC.  Fees for these services are recognized as revenue immediately after the completion of the real estate settlement.

Real Estate Sales Commissions, Net:  The Bank provides real estate sales services through its wholly owned subsidiary, Quaint Oak Real Estate, LLC.  Commission income is earned for these services and recognized as revenue immediately after the completion of the real estate settlement.

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

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

Recently Adopted Accounting Pronouncements.  In February 2016,August 2018, the FASB issued ASU 2016-02,2018-13, LeasesFair Value Measurement (Topic 842)820): Disclosure Framework – Changes the Disclosure Requirements for Fair Value Measurements.  The standardUpdate removes the requirement to disclose the amount of and reasons for transfers between Level I and Level II of the fair value hierarchy; the policy for timing of transfers between levels; and the valuation processes for Level III fair value measurements. The Update requires lessees to recognize the assetsdisclosure of changes in unrealized gains 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 assetlosses for the lease term.  A short-term lease is defined as one in which (a) the lease term is 12 months or less and (b) there is not an option to purchase the underlying asset that the lessee is reasonably certain to exercise.  For short-term leases, lessees may elect to recognize lease payments over the lease term on a straight-line basis.  For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2018, and interim periods within those years.  The amendments should be applied at the beginning of the earliest period presented using a modified retrospective approach with earlier application permitted as of the beginning of an interim or annual reporting period.   The Company adopted this standard Effective January 1, 2019 which resulted in the recording of a right of use (“ROU”) asset and associated lease liability of approximately $1.4 million.  The ROU asset is included in other assetscomprehensive income (loss) for recurring Level III fair value measurements held at the end of the reporting period and the lease liability is included in other liabilities in the September 30, 2019 consolidated balance sheet.range and weighted average of significant unobservable inputs used to develop Level III fair value measurements.


1211
Quaint Oak Bancorp, Inc.
Notes to Unaudited Consolidated Financial Statements
Notes to Unaudited Consolidated Financial Statements

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

This Update is effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019.  This Update did not have a significant impact on the Company’s financial statements.

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

In November 2019, the FASB voted to defer the effective date for ASC 326,issued ASU 2019-10, Financial Instruments – Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842). This Update defers the effective date of ASU 2016-13 for SEC filers that are eligible to be smaller reporting companies, non-SEC filers, and all other companies to fiscal years beginning after December 15, 2022, andincluding interim periods within those fiscal years.  The final ASU is expected to be issued in mid-November. We expect to recognize a one-time cumulative effect adjustment to the allowance for loan losses as of the beginning of the first reporting period in which the new standard is effective, but cannot yet determine the magnitude of any such one-time adjustment or the overall impact of the new guidance on the consolidated financial statements.

In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment. To simplify the subsequent measurement of goodwill, the FASB eliminated Step 2 from the goodwill impairment test.  In computing the implied fair value of goodwill under Step 2, an entity had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities (including unrecognized assets and liabilities) following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination.  Instead, under the amendments in this Update, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount.  An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unitsunit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit.  A public business entity that is a U.S. Securities and Exchange Commission (“SEC”) filer should adopt the amendments in this Update for its annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019.  On October 16,In November 2019, the FASB voted to deferissued ASU 2019-10, Financial Instruments– Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842), which deferred the effective date for ASC 350, Intangibles – Goodwill and Other, for smaller reporting companies to fiscal years beginning after December 15, 2022, and interim periods within those fiscal years.  The final ASU is expected to be issued in mid-November.  This Updateupdate is not expected to have a significant impact on the Company’s financial statements.



1312

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

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

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

In May 2019, the FASB issued ASU 2019-05, Financial Instruments – Credit Losses, Topic 326, which allows entities to irrevocably elect the fair value option for certain financial assets previously measured at amortized cost upon adoption of the new credit losses standard. To be eligible for the transition election, the existing financial asset must otherwise be both within the scope of the new credit losses standard and eligible for the applying the fair value option in ASC 825-10.3. The election must be applied on an instrument-by-instrument basis and is not available for either available-for-sale or held-to-maturity debt securities. For entities that elect the fair value option, the difference between the carrying amount and the fair value of the financial asset would be recognized through a cumulative-effect adjustment to opening retained earnings as of the date an entity adopted ASU 2016-13. Changes in fair value of that financial asset would subsequently be reported in current earnings.  For entities that have not yet adopted ASU 2016-13, the effective dates and transition requirements are the same as those in ASU 2016-13. For entities that have adopted ASU 2016-13, ASU 2019-05 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted once ASU 2016-13 has been adopted. On October 16,In November, 2019, the FASB voted to deferissued ASU 2019-10, Financial Instruments – Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842), which deferred the effective date for ASC 326,944, Financial InstrumentsServices – Credit Losses,Insurance, for public business entities that are SEC filers, except for smaller reporting companies, to fiscal years beginning after December 15, 2022,2021, and interim periods within those fiscal years.  The final ASU is expectedyears and for all other entities, including smaller reporting companies, to be issued in mid-November.fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024.  This Update is not expected to have a significant impact on the Company’s financial statements.

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740), to simplify the accounting for income taxes, change the accounting for certain tax transactions, and make minor improvements to the codification. This Update provides a policy election to not allocate consolidated income taxes when a member of a consolidated tax return is not subject to income tax and provides guidance to evaluate whether a step-up in tax basis of goodwill relates to a business combination in which book goodwill was recognized or a separate transaction. The Update also changes current guidance for making an intraperiod allocation, if there is a loss in continuing operations and gains outside of continuing operations; determining when a deferred tax liability is recognized after an investor in a foreign entity transitions to or from the equity method of accounting; accounting for tax law changes and year-to-date losses in interim periods; and determining how to apply the income tax guidance to franchise taxes that are partially based on income. 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, 2020. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. This Update is not expected to have a significant impact on the Company’s financial statements.

In January 2020, the FASB issued ASU 2020-02, Financial Instruments – Credit Losses (Topic 326) and Leases (Topic 842): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 119 and Update to SEC Section on Effective Date Related to Accounting Standards Update No. 2016-02, Leases (Topic 842), February 2020, to add and amend SEC paragraphs in the Accounting Standards Codification to reflect the issuance of SEC Staff Accounting Bulletin No. 119, related to the new credit losses standard, and comments by the SEC staff related to the revised effective date of the new leases standard. This ASU is effective upon issuance. This did not have a significant impact on the Company’s financial statements.


13

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

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

In March 2020, the FASB issued ASU 2020-03, Codification Improvements to Financial Instruments. This ASU was issued to improve and clarify various financial instruments topics, including the current expected credit losses (CECL) standard issued in 2016. The ASU includes seven issues that describe the areas of improvement and the related amendments to GAAP; they are intended to make the standards easier to understand and apply and to eliminate inconsistencies, and they are narrow in scope and are not expected to significantly change practice for most entities. Among its provisions, the ASU clarifies that all entities, other than public business entities that elected the fair value option, are required to provide certain fair value disclosures under ASC 825, Financial Instruments, in both interim and annual financial statements. It also clarifies that the contractual term of a net investment in a lease under Topic 842 should be the contractual term used to measure expected credit losses under Topic 326. Amendments related to ASU 2019-04 are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is not permitted before an entity’s adoption of ASU 2016-01. Amendments related to ASU 2016-13 for entities that have not yet adopted that guidance are effective upon adoption of the amendments in ASU 2016-13. Early adoption is not permitted before an entity’s adoption of ASU 2016-13. Amendments related to ASU 2016-13 for entities that have adopted that guidance are effective for fiscal years beginning after December 15, 2019, including interim periods within those years. Other amendments are effective upon issuance of this ASU. This Update is not expected to have a significant impact on the Company’s financial statements.

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, March 2020, to provide temporary optional expedients and exceptions to the U.S. GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens of the expected market transition from LIBOR and other interbank offered rates to alternative reference rates, such as Secured Overnight Financing Rate. Entities can elect not to apply certain modification accounting requirements to contracts affected by what the guidance calls reference rate reform, if certain criteria are met. An entity that makes this election would not have to re-measure the contracts at the modification date or reassess a previous accounting determination. Also, entities can elect various optional expedients that would allow them to continue applying hedge accounting for hedging relationships affected by reference rate reform, if certain criteria are met, and can make a one-time election to sell and/or reclassify held-to-maturity debt securities that reference an interest rate affected by reference rate reform. The amendments in this ASU are effective for all entities upon issuance through December 31, 2022. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations.

Reclassifications.   Certain items in the 20182019 consolidated financial statements have been reclassified to conform to the presentation in the 20192020 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.







14

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 nine months ended September 30,March 31, 2020 and 2019, and 2018, all unvested restricted stock program awards and outstanding stock options under the 2008 Stock Option Plan and the 2013 Stock Incentive Plan representing shares were dilutive.  AllFor the three months ended March 31, 2020, all outstanding stock options awarded in 2018 under the 2013 and 2018 Stock Incentive Plans representing shares were dilutive. For the three months ended March 31, 2019, all outstanding stock options awarded in 2018 under the 2013 and 2018 Stock Incentive Plans representing shares were anti-dilutive.

14
Quaint Oak Bancorp, Inc.
Notes to Unaudited Consolidated Financial Statements

Note 2 – Earnings Per Share (Continued)

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

 
For the Three Months Ended
September 30,
  
For the Nine Months Ended
September 30,
  
For the Three Months Ended March 31,
 
 
2019
  
2018
  
2019
  
2018
  
2020
  
2019
 
Net Income $802,000  $658,000  $1,880,000  $1,481,000  
$
432,000
  
$
413,000
 
                  
Weighted average shares outstanding – basic 1,966,003  1,945,553  1,953,367  1,916,817  
1,964,132
  
1,940,363
 
Effect of dilutive common stock equivalents 45,572  70,984  46,427  61,700  
67,362
  
51,416
 
Adjusted weighted average shares outstanding – diluted 2,011,575  2,016,537  1,999,794  1,978,517  
2,031,494
  
1,991,779
 
                  
Basic earnings per share $0.41  $0.34  $0.96  $0.77  
$
0.22
  
$
0.21
 
Diluted earnings per share $0.40  $0.33  $0.94  $0.75  
$
0.21
  
$
0.21
 


Note 3 – Accumulated Other Comprehensive Income (Loss)

The following table presents the changes in accumulated other comprehensive income (loss) by component, net of tax, for the three and nine months ended September 30,March 31, 2020 and 2019 and 2018 (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 March 31,
 
 
2019
  
2018
  
2019
  
2018
  
2020
  
2019
 
Balance at the beginning of the period $15  $(4) $(2) $(15) 
$
20
  
$
(2
)
Other comprehensive income (loss) before classifications 10  (7) 27  4 
Other comprehensive (loss) income before classifications
 
(24
)
 
1
 
Amount reclassified from accumulated other comprehensive income  
-
   
-
   
-
   
-
   -
   -
 
Total other comprehensive income (loss)  10   (7)  27   4 
Total other comprehensive (loss) income
  
(24
)
  
1
 
Balance at the end of the period $25  $(11) $25  $(11) 
$
(4
)
 
$
(1
)
_________________
(1)All amounts are net of tax.  Amounts in parentheses indicate debits.

15

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 September 30, 2019March 31, 2020 and December 31, 2018,2019, by contractual maturity, are shown below (in thousands):

  
September 30,
2019
  
December 31,
2018
 
Due in one year or less $2,026  $1,604 
Due after one year through five years  8,146   3,323 
Total $10,172  $4,927 
  
March 31,
2020
  
December 31,
2019
 
Due in one year or less
 
$
2,776
  
$
2,026
 
Due after one year through five years
  
7,146
   
8,146
 
Total 
$
9,922
  
$
10,172
 


15
Quaint Oak Bancorp, Inc.
Notes to Unaudited Consolidated Financial Statements

Note 5 – Investment Securities Available for Sale
The amortized cost, gross unrealized gains and losses, and fair value of investment securities available for sale at September 30, 2019March 31, 2020 and December 31, 20182019 are summarized below (in thousands): 

 September 30, 2019  March 31, 2020 
 
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 $6,097  $21  $-  $6,118  
$
5,587
  
$
4
  
$
(51
)
 
$
5,540
 
Federal Home Loan Mortgage Corporation securities 1,052  4  (3) 1,053 
Federal National Mortgage Association securities  273   2   -   275   
250
   
-
   
(2
)
  
248
 
Total mortgage-backed securities 7,422  27  (3) 7,446  
5,837
  
4
  
(53
)
 
5,788
 
Debt securities:                        
U.S. government agency 360  -  -  360 
Corporate notes  1,500   8   -   1,508   
1,500
   
44
   
-
   
1,544
 
Total available-for-sale-securities $9,282  $35  $(3) $9,314  
$
7,337
  
$
48
  
$
(53
)
 
$
7,332
 


 December 31, 2018  December 31, 2019 
 
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 $4,844  $29  $-  $4,873  
$
5,841
  
$
13
  
$
(1
)
 
$
5,853
 
Federal Home Loan Mortgage Corporation securities 1,111  -  (29) 1,082 
Federal National Mortgage Association securities  367   -   -   367   
258
   
2
   
--
   
260
 
Total mortgage-backed securities 6,322  29  (29) 6,322  
6,099
  
15
  
(1
)
 
6,113
 
Debt securities:                        
U.S. government agency  360   -   (2)  358 
Corporate notes  
1,500
   
10
   
--
   
1,510
 
Total available-for-sale-securities $6,682  $29  $(31) $6,680  
$
7,599
  
$
25
  
$
(1
)
 
$
7,623
 










16

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

Note 5 – Investment Securities Available for Sale (Continued)
The amortized cost and fair value of debt securities at September 30, 2019,March 31, 2020, 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
  
Available for Sale
 
 
Amortized Cost
  
Fair Value
  
Amortized Cost
  
Fair Value
 
Due after one year through five years $360  $360  
$
1,500
  
$
1,544
 
Due after five years through ten years 1,500  1,508 
Due after ten years  7,422   7,446   
5,837
   
5,788
 
Total $9,282  $9,314  
$
7,337
  
$
7,332
 


16
Quaint Oak Bancorp, Inc.
Notes to Unaudited Consolidated Financial Statements

Note 5 – Investment Securities Available for Sale (Continued)
The following tables show the Company’s gross unrealized losses and fair value, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position at September 30, 2019March 31, 2020  and December 31, 20182019 (in thousands):

 
September 30, 2019
  
March 31, 2020
 
    
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
 
                     
Federal Home Loan Mortgage Corporation
mortgage-backed securities
  1  $
-  $
-  $486  $(3) $
486  $(3)
Government National Mortgage Association securities 
8
  
$
4,496
  
$
(51
)
 
$
-
  
$
-
  
$
4,496
  
$
(51
)
Federal National Mortgage Association securities  
1
   
248
   
(2
)
  
-
   
-
   
248
   
(2
)
Total  1  $-  $-  $486  $(3) $486  $(3)  
9
  
$
4,744
  
$
(53
)
 
$
-
  
$
-
  
$
4,744
  
$
(53
)


  
December 31, 2018
 
     
Less than Twelve Months
  
Twelve Months or Greater
  
Total
 
  
Number of
Securities
  
Fair Value
  
Gross
Unrealized
Losses
  
Fair Value
  
Gross
Unrealized
Losses
  
Fair Value
  
Gross
Unrealized
Losses
 
Federal Home Loan Mortgage Corporation
    mortgage-backed securities
  2  $-  $-  $1,082  $(29) $1,082  $(29)
Debt securities, U.S. government agency  1   -   -   358   (2)  358   (2)
        Total  3  $-  $-  $1,440  $(31) $1,440  $(31)
  
March 31, 2019
 
     
Less than Twelve Months
  
Twelve Months or Greater
  
Total
 
  
Number of
Securities
  
Fair Value
  
Gross
Unrealized
Losses
  
Fair Value
  
Gross
Unrealized
Losses
  
Fair Value
  
Gross
Unrealized
Losses
 
Government National Mortgage Association securities  
4
  
$
2,295
  
$
(1
)
 
$
-
  
$
-
  
$
2,295
  
$
(1
)


At September 30, 2019,March 31, 2020, there was one securitywere nine securities in an unrealized loss position that at such date had an aggregate depreciation of 0.72%1.10% from the Company’s amortized cost basis. Management believes that the estimated fair value of the securities disclosed above is primarily dependent on the movement of market interest rates.  Management evaluated the length of time and the extent to which the fair value has been less than cost and the financial condition and near term prospects of the issuer, including any specific events which may influence the operations of the issuer.  The Company has the ability and intent to hold the securities until the anticipated recovery of fair value occurs. Management does not believe any individual unrealized loss as of September 30, 2019March 31, 2020 represents an other-than-temporary impairment. There were no impairment charges recognized during the three months ended March 31, 2020 or nine months ended September 30, 2019 or 2018.2019.







17

Quaint Oak Bancorp, Inc.
Notes to Unaudited Consolidated Financial Statements
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):follows:
 
September 30,
2019
  
December 31,
2018
  
March 31,
2020
  
December 31,
2019
 
Real estate loans:            
One-to-four family residential:            
Owner occupied $5,814  $6,603  
$
6,446
  
$
6,298
 
Non-owner occupied  42,206   47,361   
39,427
   
39,897
 
Total one-to-four family residential 48,020  53,964  
45,873
  
46,195
 
Multi-family (five or more) residential 23,125  23,967  
24,061
  
22,233
 
Commercial real estate 110,864  103,819  
123,902
  
119,323
 
Construction 13,447  9,998  
9,327
  
12,523
 
Home equity  3,989   4,347   
4,247
   
3,726
 
Total real estate loans 199,445  196,095  
207,410
  
204,000
 
            
Commercial business 40,985  23,616  
46,797
  
45,745
 
Other consumer  27   19   
16
   
22
 
Total Loans 240,457  219,730  
254,223
  
249,767
 
            
Deferred loan fees and costs (795) (867) 
(789
)
 
(844
)
Allowance for loan losses  (2,283)  (1,965)  
(2,346
)
  
(2,231
)
Net Loans $237,379  $216,898  
$
251,088
  
$
246,692
 

The following tables present the classes of the loan portfolio summarized by the aggregate pass rating and the classified ratings of special mention, substandard and doubtful within the Company’s internal risk rating system as of September 30, 2019March 31, 2020 and December 31, 2018 (in2019 (in thousands): 

 September 30, 2019  March 31, 2020 
 
Pass
  
Special Mention
  
Substandard
  
Doubtful
  
Total
  
Pass
  
Special
Mention
  
Substandard
  
Doubtful
  
Total
 
One-to-four family residential owner occupied $5,642  $-  $172  $-  $5,814  $6,274  $-  $172  $-  $6,446 
One-to-four family residential non-owner occupied 41,412  -  794  -  42,206  39,110  -  317  -  39,427 
Multi-family residential 23,125  -  -  -  23,125  24,061  -  -  -  24,061 
Commercial real estate 107,598  952  2,314  -  110,864  123,102  508  292  -  123,902 
Construction 13,447  -  -  -  13,447  9,327  -  -  -  9,327 
Home equity 3,989  -  -  -  3,989  4,247  -  -  -  4,247 
Commercial business 40,936  -  49  -  40,985  46,797  -  -  -  46,797 
Other consumer  27   -   -   -   27   16   -   -   -   16 
Total $236,176  $952  $3,329  $-  $240,457  $252,934  $508  $781  $-  $254,223 

 December 31, 2018  December 31, 2019 
 
Pass
  
Special Mention
  
Substandard
  
Doubtful
  
Total
  
Pass
  
Special
Mention
  
Substandard
  
Doubtful
  
Total
 
One-to-four family residential owner occupied $6,421  $-  $182  $-  $6,603  
$
6,126
  
$
-
  
$
172
  
$
-
  
$
6,298
 
One-to-four family residential non-owner occupied 46,534  -  827  -  47,361  
39,579
  
-
  
318
  
-
  
39,897
 
Multi-family residential 23,967  -  -  -  23,967  
22,233
  
-
  
-
  
-
  
22,233
 
Commercial real estate 101,821  -  1,998  -  103,819  
118,233
  
798
  
292
  
-
  
119,323
 
Construction 9,998  -  -  -  9,998  
12,523
  
-
  
-
  
-
  
12,523
 
Home equity 4,347  -  -  -  4,347  
3,726
  
-
  
-
  
-
  
3,726
 
Commercial business 23,149  -  467  -  23,616  
45,745
  
-
  
-
  
-
  
45,745
 
Other consumer  19   -   -   -   19   
22
   
-
   
-
   
-
   
22
 
Total $216,256  $-  $3,374  $-  $219,730  
$
248,187
  
$
798
  
$
782
  
$
-
  
$
249,767
 


18

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


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

The following table presents impaired loans by class, segregated by those for which a specific allowance was required and those for which a specific allowance was not necessary as of September 30, 2019March 31, 2020 as well as the average recorded investment and related interest income for the period then ended (in thousands):

 September 30, 2019  March 31, 2020 
 
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 $172  $178  $-  $173  $-  
$
172
  
$
178
  
$
-
  
$
178
  
$
-
 
One-to-four family residential non-owner occupied 426  426  -  426  12  
19
  
19
  
-
  
19
  
1
 
Multi-family residential -  -  -  -  -  
-
  
-
  
-
  
-
  
-
 
Commercial real estate -  -  -  -  -  
-
  
-
  
-
  
-
  
-
 
Construction -  -  -  -  -  
-
  
-
  
-
  
-
  
-
 
Home equity -  -  -  -  -  
-
  
-
  
-
  
-
  
-
 
Commercial business -  -  -  -  -  
-
  
-
  
-
  
-
  
-
 
Other consumer -  -  -  -  -  
-
  
-
  
-
  
-
  
-
 
          -              
-
    
With an allowance recorded:                              
One-to-four family residential owner occupied $-  $-  $-  $-  $-  
$
-
  
$
-
  
$
-
  
$
-
  
$
-
 
One-to-four family residential non-owner occupied 68  68  50  68  -  
-
  
-
  
-
  
-
  
-
 
Multi-family residential -  -  -  -  -  
-
  
-
  
-
  
-
  
-
 
Commercial real estate 133  133  4  133  9  
131
  
131
  
3
  
131
  
3
 
Construction -  -  -  -  -  
-
  
-
  
-
  
-
  
-
 
Home equity -  -  -  -  -  
-
  
-
  
-
  
-
  
-
 
Commercial business -  -  -  -  -  
-
  
-
  
-
  
-
  
-
 
Other consumer -  -  -  -  -  
-
  
-
  
-
  
-
  
-
 
                              
Total:                              
One-to-four family residential owner occupied $172  $178  $-  $173  $-  
$
172
  
$
178
  
$
-
  
$
178
  
$
-
 
One-to-four family residential non-owner occupied 494  494  50  494  12  
19
  
19
  
-
  
19
  
1
 
Multi-family residential -  -  -  -  -  
-
  
-
  
-
  
-
  
-
 
Commercial real estate 133  133  4  133  9  
131
  
131
  
3
  
131
  
3
 
Construction -  -  -  -  -  
-
  
-
  
-
  
-
  
-
 
Home equity -  -  -  -  -  
-
  
-
  
-
  
-
  
-
 
Commercial business -  -  -  -  -  
-
  
-
  
-
  
-
  
-
 
Other consumer  -   -   -   -   -   
-
   
-
   
-
   
-
   
-
 
Total $799  $805  $54  $800  $21  
$
322
  
$
328
  
$
3
  
$
328
  
$
4
 










19

Quaint Oak Bancorp, Inc.
Notes to Unaudited Consolidated Financial Statements
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, 20182019 as well as the average recorded investment and related interest income for the year then ended (in thousands):

 December 31, 2018  December 31, 2019 
 
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 $182  $185  $-  $417  $23  $172  $178  $-  $178  $- 
One-to-four family residential non-owner occupied 265  265  -  324  17  19  19  -  225  13 
Multi-family residential -  -  -  -  -  -  -  -  -  - 
Commercial real estate -  -  -  -  -  -  -  -  -  - 
Construction -  -  -  2,050  37  -  -  -  -  - 
Home equity -  -  -  44  2  -  -  -  -  - 
Commercial business -  -  -  -  -  -  -  -  -  - 
Other consumer -  -  -  -  -  -  -  -  -  - 
                              
With an allowance recorded:                              
One-to-four family residential owner occupied $-  $-  $-  $-  $-  $-  $-  $-  $-  $- 
One-to-four family residential non-owner occupied 68  68  50  162  4  -  -  -  -  - 
Multi-family residential -  -  -  -  -  -  -  -  -  - 
Commercial real estate 133  133  5  133  10  132  132  4  133  12 
Construction -  -  -  -  -  -  -  -  -  - 
Home equity -  -  -  -  -  -  -  -  -  - 
Commercial business -  -  -  -  -  -  -  -  -  - 
Other consumer -  -  -  -  -  -  -  -  -  - 
                              
Total:                              
One-to-four family residential owner occupied $182  $185  $-  $417  $23  $172  178  $-  $178  $- 
One-to-four family residential non-owner occupied 333  333  50  486  21  19  19  -  225  13 
Multi-family residential -  -  -  -  -  -  -  -  -  - 
Commercial real estate 133  133  5  133  10  132  132  4  133  12 
Construction -  -  -  2,050  37  -  -  -  -  - 
Home equity -  -  -  44  2  -  -  -  -  - 
Commercial business -  -  -  -  -  -  -  -  -  - 
Other consumer  -   -   -   -   -   -   -   -   -   - 
Total $648  $651  $55  $3,130  $93  $323  $329  $4  $536  $25 

The loan portfolio also includes certain loans that have been modified in a troubled debt restructuring, where economic concessions have been granted to borrowers who have experienced or are expected to experience financial difficulties. These concessions typically result from loss mitigation activities and could include reductions in the interest rate, payment extensions, forbearance, or other actions.  At September 30, 2019,March 31, 2020, the Company had two loans totaling $397,000$150,000 that were identified as troubled debt restructurings.  BothOne of these loans werewas performing in accordance with theirits modified terms.terms and one was over 90 days delinquent but still accruing interest.  During the ninethree months ended September 30, 2019,March 31, 2020, no new loans were identified as TDRs.  At December 31, 2018,2019, the Company had two loans totaling $398,000$151,000 that were identified as troubled debt restructurings.  If a TDR is placed on non-accrual it is not reverted back to accruing status until the borrower makes timely payments as contracted for at least ninesix months and future collection under the revised terms is probable.




20

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

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

The following tables present the Company’s TDR loans as of September 30, 2019March 31, 2020 and December 31, 20182019 (dollar amounts in thousands):

 September 30, 2019  March 31, 2020 
 
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
 
1
  
264
  
-
  
264
  
-
  1  19  -  19  - 
Multi-family residential
 
-
  
-
  
-
  
-
  
-
  -  -  -  -  - 
Commercial real estate
 
1
  
133
  
-
  
133
  
4
  1  131  -  131  3 
Construction
 
-
  
-
  
-
  
-
  
-
  -  -  -  -  - 
Home equity
 
-
  
-
  
-
  
-
  
-
  -  -  -  -  - 
Commercial business
 
-
  
-
  
-
  
-
  
-
  -  -  -  -  - 
Other consumer
  
-
   
-
   
-
   
-
   
-
   -   -   -   -   - 
Total  
2
  
$
397
  
$
-
  
$
397
  
$
4
   2  $150  $-  $150  $3 

 December 31, 2018  December 31, 2019 
 
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
 1  265  -  265  -  1  19  -  19  - 
Multi-family residential
 -  -  -  -  -  -  -  -  -  - 
Commercial real estate
 1  133  -  133  5  1  132  -  132  3 
Construction
 -  -  -  -  -  -  -  -  -  - 
Home equity
 -  -  -  -  -  -  -  -  -  - 
Commercial business
 -  -  -  -  -  -  -  -  -  - 
Other consumer
  -   -   -   -   -   -   -   -   -   - 
Total  2  $398  $-  $398  $5   2  $151  $-  $151  $3 

The contractual aging of the TDRs in the table above as of September 30, 2019March 31, 2020 and December 31, 20182019 is as follows (in thousands):

 
September 30, 2019
  
March 31, 2020
 
 
Accruing
Past Due
Less than 30
Days
  
Past Due
30-89 Days
  
90 Days or
More Past
Due
  
Non-
Accrual
  
Total
  
Current
  
Past Due
 30-89 Days
  
90 Days or
More Past
Due
  
Non-
Accrual
  
Total
 
One-to-four family residential owner occupied
 
$
-
  
$
-
  
$
-
  
$
-
  
$
-
  
$
-
  
$
-
  
$
-
  
$
-
  
$
-
 
One-to-four family residential non-owner occupied
 
264
  
-
  
-
  
-
  
264
  
-
  
-
  
19
  
-
  
19
 
Multi-family residential
 
-
  
-
  
-
  
-
  
-
  
-
  
-
  
-
  
-
  
-
 
Commercial real estate
 
133
  
-
  
-
  
-
  
133
  
131
  
-
  
-
  
-
  
131
 
Construction
 
-
  
-
  
-
  
-
  
-
  
-
  
-
  
-
  
-
  
-
 
Home equity
 
-
  
-
  
-
  
-
  
-
  
-
  
-
  
-
  
-
  
-
 
Commercial business
 
-
  
-
  
-
  
-
  
-
  
-
  
-
  
-
  
-
  
-
 
Other consumer
  
-
   
-
   
-
   
-
   
-
   
-
   
-
   
-
   
-
   
-
 
Total 
$
397
  
$
-
  
$
-
  
$
-
  
$
397
  
$
131
  
$
-
  
$
19
  
$
-
  
$
150
 





21
Quaint Oak Bancorp, Inc.
Notes to Unaudited Consolidated Financial Statements
Notes to Unaudited Consolidated Financial Statements

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

 
December 31, 2018
  
December 31, 2019
 
 
Accruing
Past Due
Less than 30
Days
  
Past Due
30-89 Days
  
90 Days or
More Past
Due
  
Non-
Accrual
  
Total
  
Current
  
Past Due
30-89 Days
  
90 Days or
More Past
Due
  
Non-
Accrual
  
Total
 
One-to-four family residential owner occupied
 $-  
$
-
  
$
-
  
$
-
  $-  $-  
$
-
  
$
-
  
$
-
  $- 
One-to-four family residential non-owner occupied
 265  
-
  
-
  
-
  265  
-
  
19
  
-
  
-
  
19
 
Multi-family residential
 -  
-
  
-
  
-
  -  
-
  
-
  
-
  
-
  
-
 
Commercial real estate
 133  
-
  
-
  
-
  133  
132
  
-
  
-
  
-
  
132
 
Construction
 -  
-
  
-
  
-
  -  
-
  
-
  
-
  
-
  
-
 
Home equity
 -  
-
  
-
  
-
  -  
-
  
-
  
-
  
-
  
-
 
Commercial business
 -  
-
  
-
  
-
  -  
-
  
-
  
-
  
-
  
-
 
Other consumer
  -   
-
   
-
   
-
   -   
-
   
-
   
-
   
-
   
-
 
Total $398  
$
-
  
$
-
  
$
-
  $398  
$
132
  
$
19
  
$
-
  
$
-
  
$
151
 

Any reserve for an impaired TDR loan is based upon the present value of the future expected cash flows discounted at the loan’s original effective rate or upon the fair value of the collateral less costs to sell, if the loan is deemed collateral dependent. At September 30, 2019March 31, 2020 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.

Following is a summary, by loan portfolio class, of changes in the allowance for loan losses for the three months ended March 31, 2020 and recorded investment in loans receivable as of March 31, 2020 (in thousands):

  
March 31, 2020
 
  
1-4 Family
Residential
Owner
Occupied
  
1-4 Family
Residential
Non-
Owner
Occupied
  
Multi-
Family
Residential
  
Commercial
Real Estate
  
Construction
  
Home
Equity
  
Commercial
Business
and Other
Consumer
  
Unallocated
  
Total
 
Allowance for loan losses: 
Beginning balance $52  $351  $145  $854  $250  $19  $500  $60  $2,231 
    Charge-offs  -   -   -   -   -   -   -   -   - 
    Recoveries  -   -   -   -   -   -   -   -   - 
    Provision  (5)  (44)  72   90   (82)  7   37   40   115 
Ending balance $47  $307  $217  $944  $168  $26  $537  $100  $2,346 
Ending balance evaluated for impairment: 
    Individually $-  $-  $-  $3  $-  $-  $-  $-  $3 
    Collectively $47  $307  $217  $941  $168  $26  $537  $100  $2.343 
 
Loans receivable:
       
Ending balance $6,446  $39,427  $24,061  $123,902  $9,327  $4,247  $46,813      $254,223 
Ending balance evaluated for impairment: 
    Individually $172  $19  $-  $131  $-  $-  $-      $322 
   Collectively $6,274  $39,408  $24,061  $123,771  $9,327  $4,247  $46,813      $253,901 










22
Quaint Oak Bancorp, Inc.
Notes to Unaudited Consolidated Financial Statements
Notes to Unaudited Consolidated Financial Statements

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

The Bank allocated increased allowance for loan loss provisions to the commercial real estate loan portfolio class for the three months ended March 31, 2020, due primarily to increased balances in this portfolio class.  The Bank allocated increased allowance for loan loss provisions to the multi-family residential loan and commercial business portfolio classes for the three months ended March 31, 2020, due primarily to changes in volume and qualitative factors in these portfolio classes.  The Bank allocated decreased allowance for loan loss provisions to the construction loan and 1-4 family non-owner occupied loan portfolio classes for the three months ended March 31, 2020, due primarily to a decrease in balances and delinquencies in this portfolio class and qualitative factors in these portfolio classes. In general, the primary driver of the increase in qualitative factors was the economic trends factor associated with the COVID-19 pandemic.

Following is a summary, by loan portfolio class, of changes in the allowance for loan losses for the three and nine months ended September 30,March 31, 2019 (in thousands):

  
March 31, 2019
 
  
1-4 Family
Residential
Owner
Occupied
  
1-4 Family
Residential
Non-
Owner
Occupied
  
Multi-
Family
Residential
  
Commercial
Real Estate
  
Construction
  
Home
Equity
  
Commercial
Business
and Other
Consumer
  
Unallocated
  
Total
 
Allowance for loan losses: 
Beginning balance $51  $435  $156  $839  $175  $21  $247  $41  $1,965 
    Charge-offs  -   -   -   -   -   -   -   -   - 
    Recoveries  -   -   -   -   -   -   -   -   - 
    Provision  (2)  28   4   (30)  (33)  3   56   59   85 
Ending balance $49  $463  $160  $809  $142  $24  $303  $100  $2,050 
Ending balance evaluated for impairment: 
    Individually $-  $50  $-  $5  $-  $-  $-  $-  $55 
    Collectively $49  $413  $160  $804  $142  $24  $303  $100  $1,995 

The Bank allocated increased allowance for loan loss provisions to the commercial business portfolio class for the three months ended March 31, 2019, due primarily to increased balances in this portfolio class.  The Bank allocated increased allowance for loan loss provisions to the 1-4 family non-owner occupied loan portfolio class for the three months ended March 31, 2019, due primarily to changes in qualitative factors in this portfolio class.  The Bank allocated decreased allowance for loan loss provisions to the construction loan portfolio class for the three months ended March 31, 2019, due primarily to a decrease in balances and delinquencies in this portfolio class.  The Bank allocated decreased allowance for loan loss provisions to the commercial real estate loan portfolio class for the three months ended March 31, 2019, due primarily to a decrease 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, 2019 and recorded investment in loans receivable based on impairment evaluation as of September 30,December 31, 2019 (in thousands):

 
September 30, 2019
  
December 31, 2019
 
 
1-4 Family
Residential
Owner
Occupied
  
1-4 Family
Residential Non-Owner Occupied
  
Multi-Family
Residential
  
Commercial
Real Estate
  
Construction
  
Home
Equity
  
Commercial Business
and Other Consumer
  
Unallocated
  
Total
  
1-4 Family
Residential
Owner
Occupied
  
1-4 Family
Residential
Non-
Owner
Occupied
  
Multi-
Family
Residential
  
Commercial
Real Estate
  
Construction
  
Home
Equity
  
Commercial
Business
and Other
Consumer
  
Unallocated
  
Total
 
For the Three Months Ended September 30, 2019 
Allowance for loan losses:Allowance for loan losses: Allowance for loan losses: 
Beginning balance $49  $437  $153  $835  $180  $23  $370  $79  $2,126  $51  $435  $156  $839  $175  $21  $247  $41  $1,965 
Charge-offs -  -  -  -  -  -  -  -  -  -  (37) -  -  -  -  -  --  (37)
Recoveries -  -  -  -  -  -  -  -  -  -  -  -  -  -  -  -  --  - 
Provision  (1)  (20)  (3)  -   89   (3)  74   21   157   1   (47)  (11)  15   75   (2)  253   19   303 
Ending balance $48  $417  $150  $835  $269  $20  $444  $100  $2,283  $52  $351  $145  $854  $250  $19  $500  $60  $2,231 
                           
For the Nine Months Ended September 30, 2019 
Allowance for loan losses: 
Beginning balance $51  $435  $156  $839  $175  $21  $247  $41  $1,965 
Charge-offs -  -  -  -  -  -  -  -  - 
Recoveries -  -  -  -  -  -  -  -  - 
Provision  (3)  (18)  (6)  (4)  94   (1)  197   59   318 
Ending balance $48  $417  $150  $835  $269  $20  $444  $100  $2,283 
                           
Ending balance evaluated for impairment:Ending balance evaluated for impairment: Ending balance evaluated for impairment: 
Individually $-  $50  $-  $4  $-  $-  $-  $-  $54  $-  $-  $-  $4  $-  $-  $-  $-  $4 
Collectively $48  $367  $150  $831  $269  $20  $444  $100  $2,229  $52  $351  $145  $850  $250  $19  $500  $60  $2,227 
                           
Loans receivable:Loans receivable:                               
Ending balance: $5,814  $42,206  $23,125  $110,864  $13,447  $3,989  $41,012     $240,457 
                           
Ending balance $6,298  $39,897  $22,233  $119,323  $12,523  $3,726  $45,767     $249,767 
Ending balance evaluated for impairment:Ending balance evaluated for impairment:                      Ending balance evaluated for impairment: 
Individually $172  $494  $-  $133  $-  $-  $-     $799  $172  $19  $-  $132  $-  $-  $-     $323 
Collectively $5,642  $41,712  $23,125  $110,731  $13,447  $3,989  $41,012     $239,658  $6,126  $39,878  $22,233  $119,191  $12,523  $3,726  $45,767     $249,444 


The Bank allocated increased allowance for loan loss provisions to the commercial business loan portfolio class, the construction loan portfolio class, and the commercial businessreal estate loan portfolio class for the three and nine monthsyear ended September 30,December 31, 2019, due primarily to increased balances in these portfolio classes.  The Bank allocated decreased allowance for loan loss provisions to the 1-4 family non-owner occupied loan portfolio class for the three and nine monthsyear ended September 30,December 31, 2019, due primarily to a decrease in balances in this portfolio class.






23
Quaint Oak Bancorp, Inc.
Notes to Unaudited Consolidated Financial Statements

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

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

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

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









24
Quaint Oak Bancorp, Inc.
Notes to Unaudited Consolidated Financial Statements

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

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

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

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

The following table presents nonaccrual loans by classes of the loan portfolio as of September 30, 2019March 31, 2020 and December 31, 20182019 (in thousands):

 
September 30,
2019
  
December 31,
2018
  
March 31,
2020
  
December 31,
2019
 
One-to-four family residential owner occupied $172  $182  
$
172
  
$
172
 
One-to-four family residential non-owner occupied 230  68  
-
  
-
 
Multi-family residential -  -  
-
  
-
 
Commercial real estate -  -  
-
  
-
 
Construction -  -  
-
  
-
 
Home equity -  -  
-
  
-
 
Commercial business -  -  
-
  
-
 
Other consumer  -   -   
-
   
-
 
Total $402  $250  
$
172
  
$
172
 



2524

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

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

Non-performing loans, which consist of non-accruing loans plus accruing loans 90 days or more past due, amounted to $932,000$860,000 and $1.2 million$362,000 at September 30, 2019March 31, 2020 and December 31, 2018,2019, respectively.  For the delinquent loans in our portfolio, we have considered our ability to collect the past due interest, as well as the principal balance of the loan, in order to determine whether specific loans should be placed on non-accrual status. In cases where our evaluations have determined that the principal and interest balances are collectible, we have continued to accrue interest.

For the three and nine months ended September 30,March 31, 2020 and 2019 and 2018 there was no interest income recognized on non-accrual loans on a cash basis.  Interest income foregone on non-accrual loans was approximately $18,000$3,000 and $27,000$5,000 for the three and nine months ended September 30,March 31, 2020 and 2019, respectively.  Interest income foregone on non-accrual loans was approximately $6,000 and $18,000 for the three and nine months ended September 30, 2018, respectively.

The performance and credit quality of the loan portfolio is also monitored by analyzing the age of the loans receivable as determined by the length of time a recorded payment is past due. The following tables present the classes of the loan portfolio summarized by the past due status as of September 30, 2019March 31, 2020 and December 31, 20182019 (in thousands):

 
March 31, 2020
 
 
September 30, 2019
  
30-89
Days Past
Due
  
90 Days
or More
Past Due
  
Total
Past Due
  
Current
  
Total Loans
Receivable
  
Loans
Receivable
90 Days or
More Past
Due and
Accruing
 
 
30-89
Days Past
Due
  
90 Days
or More
Past Due
  
Total
Past Due
  
Current
  
Total Loans
Receivable
  
Loans
Receivable
90 Days or
More Past
Due and
Accruing
    
One-to-four family residential owner occupied $888  $172  $1,060  $4,754  $5,814  $-  $547  $172  $719  $5,727  $6,446  $- 
One-to-four family residential non-owner
occupied
 
411
  
478
  
889
  
41,317
  
42,206
  
248
  
719
  
66
  
785
  
38,642
  
39,427
  
66
 
Multi-family residential -  -  -  23,125  23,125  -  32  -  32  24,029  24,061  - 
Commercial real estate 588  282  870  109,994  110,864  282  1,072  292  1,364  122,538  123,902  292 
Construction 916  -  916  12,531  13,447  -  -  330  330  8,997  9,327  330 
Home equity -  -  -  3,989  3,989  -  97  -  97  4,150  4,247  - 
Commercial business -  -  -  40,985  40,985  -  181  -  181  46,616  46,797  - 
Other consumer  -   -   -   27   27   -   -   -   -   16   16   - 
Total $2,803  $932  $3,735  $236,722  $240,457  $530  $2,648  $860  $3,508  $250,715  $254,223  $688 


 
December 31, 2019
 
 
December 31, 2018
  
30-89
Days Past
Due
  
90 Days
or More
Past Due
  
Total
Past Due
  
Current
  
Total Loans
Receivable
  
Loans
Receivable
90 Days or
More Past
Due and
Accruing
 
 
30-89
Days Past
Due
  
90 Days
or More
Past Due
  
Total
Past Due
  
Current
  
Total Loans
Receivable
  
Loans
Receivable
90 Days or
More Past
Due and
Accruing
    
One-to-four family residential owner occupied $1,096  $182  $1,278  $5,325  $6,603  $-  $1,199  $172  $1,371  $4,927  $6,298  $- 
One-to-four family residential non-owner
occupied
 
1,259
  
68
  
1,327
  
46,034
  
47,361
  
-
  
1,069
  
-
  
1,069
  
38,828
  
39,897
  
-
 
Multi-family residential 371  --  371  23,596  23,967  -  -  -  -  22,233  22,233  - 
Commercial real estate 2,070  548  2,618  101,201  103,819  548  986  190  1,176  118,147  119,323  190 
Construction 2,231  -  2,231  7,767  9,998  -  1,120  -  1,120  11,403  12,523  - 
Home equity 31  -  31  4,316  4,347  -  -  -  -  3,726  3,726  - 
Commercial business 3  380  383  23,233  23,616  380  66  -  66  45,679  45,745  - 
Other consumer  -   -   -   19   19   -   -   -   -   22   22   - 
Total $7,061  $1,178  $8,239  $211,491  $219,730  $928  $4,440  $362  $4,802  $244,965  $249,767  $190 


2625

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

Note 7 – Goodwill and Other Intangible, Net

On August 1, 2016, Quaint Oak Insurance Agency, LLC began operations by acquiring the renewal rights to the book of business produced and serviced by an independent insurance agency located in New Britain, Pennsylvania, that provides a broad range of personal and commercial insurance coverage solutions.  The Company paid $1.0 million for these rights.  Based on a valuation, $515,000 of the purchase price was determined to be goodwill and $485,000 was determined to be related to the renewal rights to the book of business and deemed to be an other intangible asset.  This other intangible asset is being amortized over a ten year period based upon the annual retention rate of the book of business.  The balance of other intangible asset at September 30, 2019March 31, 2020 was $331,000$307,000 net of accumulated amortization of $154,000.$178,000.  Amortization expense for the three and nine months ended September 30,March 31, 2020 and 2019 amounted to $13,000 and $37,000,approximately $12,000, respectively.  Amortization expense for the three and nine months ended September 30, 2018 amounted to $12,000 and $36,000, respectively.


Note 8 – Deposits

Deposits consist of the following classifications (in thousands):

 
September 30,
2019
  
December 31,
2018
  
March 31,
2020
  
December 31,
2019
 
Non-interest bearing checking accounts $17,045  $17,542  $17,619  $15,775 
Passbook accounts 8  192  6  5 
Savings accounts 1,754  1,120  1,890  1,722 
Money market accounts 28,079  26,841  27,993  25,504 
Certificates of deposit  175,264   166,216   192,846   184,452 
Total deposits $222,150  $211,911  $240,354  $227,458 


Note 9 – Borrowings

Federal Home Loan Bank advances consist of the following at September 30, 2019March 31, 2020 and December 31, 20182019 (in thousands):

        September 30, 2019
        December 31, 2019
 
March 31, 2020
     
December 31, 2019
 
 

Amount
   
Weighted
Interest
Rate
   

 
Amount
   
 Weighted
Interest
Rate
  
Amount
  
Weighted
Weighted
Rate
   Amount  
Weighted
Interest
Rate
 
Short-term borrowings $9,000   2.08% $9,000   2.62% 
$
-
   -
%
 
$
10,000
   
1.81
%
                        
Fixed rate borrowings maturing:                        
2019 1,000  1.88  3,000  1.86 
2020 2,000  2.00  2,000  2.00  
2,000
  
2.00
  
2,000
  
2.00
 
2021 5,000  2.20  3,000  2.05  
5,000
  
2.20
  
5,000
  
2.20
 
2022 6,171  2.16  3,000  2.18  
7,171
  
2.10
  
7,171
  
2.10
 
2023 6,000  2.23  3,000  2.33  
7,000
  
2.16
  
7,000
  
2.16
 
2024  5,100  2.28   1,000  2.54  
6,167
  
2.05
  
5,100
  
2.28
 
2025  
2,855
  
1.25
   
-
  
-
 
Total FHLB long-term debt $25,271   2.20% $15,000   2.12% 
$
30,193
   
2.03
%
 
$
26,271
   
2.16
%




2726

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

Note 10 – Stock Compensation Plans

Employee Stock Ownership Plan

The Company maintains an Employee Stock Ownership Plan (ESOP) for the benefit of employees who meet the eligibility requirements of the plan.  Using proceeds from a loan from the Company, the ESOP purchased 8%, or 222,180 shares of the Company’s then outstanding common stock in the open market during 2007.  The Bank makes cash contributions to the ESOP on a quarterly basis sufficient to enable the ESOP to make the required loan payments to the Company.  The loan bears an interest rate of 7.75% per annum, with principal and interest to be paid quarterly in equal installments over 15 years.years pursuant to the terms of the original note.  The loan is secured by the unallocated shares of common stock held by the ESOP.  As of March 31, 2020 there were six quarterly payments remaining on the 2007 loan.

Shares of the Company’s common stock purchased by the ESOP are held in a suspense account and reported as unallocated common stock held by the ESOP in stockholders’ equity until released for allocation to participants.  As the debt is repaid, shares are released from collateral and are allocated to each eligible participant based on the ratio of each such participant’s base compensation to the total base compensation of eligible plan participants.  As the unearned shares are committed to be released and allocated among participants, the Company recognizes compensation expense equal to the average market value of the shares, and the shares become outstanding for earnings per share computations.  During the three and nine months ended September 30,March 31, 2020 and 2019, the Company recognized $46,000$52,000 and $136,000 of ESOP expense, respectively.  During the three and nine months ended September 30, 2018, the Company recognized $49,000 and $145,000$45,000 of ESOP expense, respectively.

Recognition & Retention and Stock Incentive Plans

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

As of September 30, 2019March 31, 2020 a total of 38,887 share awards were unvested under the 2013 and 2018 Stock Incentive Plans and up to 11,750 share awards were available for future grant under the 2018 Stock Incentive Plan and none under the 2013 Stock Incentive Plan.  The 2013 and 2018 Stock Incentive Plan share awards have vesting periods of five years.

A summary of the status of the share awards under the 2013 and 2018 RRP and Stock Incentive PlanPlans as of September 30,March 31, 2020 and 2019 and 2018 and changes during the ninethree months ended September 30,March 31, 2020 and 2019 and 2018 is as follows:

 
September 30, 2019
  
September 30, 2018
  
March 31, 2020
  
March 31, 2019
 
 
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 48,608  $13.30  10,061  $8.10  38,887  $13.30  48,608  $13.30 
Granted -  -  48,608  13.30  -  -  -  - 
Vested (9,721) 13.30  (9,661) 8.10  -  -  -  - 
Forfeited  -  -   (400) 8.10   -  -   -  - 
Unvested at the end of the period  38,887  $13.30   48,608  $13.30   38,887  $13.30   48,608  $13.30 




2827

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

Note 10 – Stock Compensation Plans (Continued)

Recognition & Retention and Stock Incentive Plans (Continued)

Compensation expense on the restricted stock awards is recognized ratably over the five year vesting period in an amount which is equal to the fair value of the common stock at the date of grant.  During both the three months ended September 30,March 31, 2020 and 2019, and 2018, the Company recognized approximately $32,000 and $33,000 of compensation expense, respectively.expense.  A tax benefit of approximately $7,000 was recognized during both the three months ended September 30,March 31, 2020 and 2019, and 2018.  During the nine months ended September 30, 2019 and 2018, the Company recognized approximately $97,000 and $75,000 of compensation expense, respectively.  A tax benefit of approximately $20,000 and $16,000 was recognized during the nine months ended September 30, 2019 and 2018, respectively.  As of September 30, 2019,March 31, 2020, approximately $469,000$405,000 in additional compensation expense will be recognized over the remaining service period of approximately 3.63.1 years.

Stock Option and Stock Incentive Plans

In May 2008, the shareholders of Quaint Oak Bancorp approved the adoption of the 2008 Stock Option Plan (the “Option Plan”).  In May 2013, the shareholders of Quaint Oak Bancorp approved the adoption of the 2013 Stock Incentive Plan (the “2013 Stock Incentive Plan”).  The Option Plan authorized the grant of stock options to officers, employees and directors of the Company to acquire 277,726 shares of common stock with an exercise price no less than the fair market value on the date of the grant.  The Option Plan expired February 13, 2018, however, outstanding options granted in 2013 remain valid and existing for the remainder of their 10 year terms.  In May 2013, the shareholders of Quaint Oak Bancorp approved the adoption of the 2013 Stock Incentive Plan (the “2013 Stock Incentive Plan”).  The 2013 Stock Incentive Plan approved by shareholders in May 2013 covered a total of 195,000 shares, of which 48,750, or 25%, may be restricted stock awards, for a balance of 146,250 stock options assuming all the restricted shares are awarded.  In May 2018, the shareholders of Quaint Oak Bancorp approved the adoption of the 2018 Stock Incentive Plan (the “2018 Stock Incentive Plan”).  The 2018 Stock Incentive Plan approved by shareholders in May 2018 covered a total of 155,000 shares, of which 38,750, or 25%, may be restricted stock awards, for a balance of 116,250 stock options assuming all the restricted shares are awarded.

For grants in May 2008, the Compensation Committee of the Board of Directors determined to grant the stock options at an exercise price equal to $5.00 per share (split-adjusted) which is higher than the fair market value of the common stock on the grant date.  All of the options granted in May 2008 were either exercised or expired in May 2018.  All incentive stock options issued under the Option Plan and the 2013 and 2018 Stock Incentive PlanPlans are intended to comply with the requirements of Section 422 of the Internal Revenue Code.  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.
As of September 30, 2019,March 31, 2020, a total of 256,336249,836 grants of stock options were outstanding under the Option Plan and 2013 and 2018 Stock Incentive PlanPlans and 37,250 stock options were available for future grant under the 2018 Stock Incentive Plan and none under the 2013 Stock Incentive Plan or 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.











2928

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

Note 10 – Stock Compensation Plans (Continued)

Stock Option and Stock Incentive Plans (Continued)

A summary of option activity under the Company’sCompany’s Option Plan and 2013 and 2018 Stock Incentive PlanPlans of September 30,March 31, 2020 and 2019 and 2018 and changes during the ninethree months ended September 30,March 31, 2020 and 2019 and 2018 is as follows:

 2019  
2018
  2020  
2019
 
 
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 
279,836
  $10.64  
6.8
  
265,302
  $6.74  
3.2
  
256,336
  $10.87  
6.0
  
279,836
  $10.64  
6.8
 
Granted -  -  -  136,636  13.30  9.9  -  -  -  -  -  - 
Exercised (23,500) 8.10  -  (106,844) 5.00  -  (6,500) 8.10  -  (13,500) 8.10  - 
Forfeited  -  -  -   (15,258) 6.22  -   -  -  -   -  -  - 
Outstanding at end of period  256,336  $10.87   6.3   279,836  $10.64   7.7   249,836  $10.94   5.9   266,336  $10.77   6.9 
Exercisable at end of period  147,027  $9.07   3.6   143,200  $8.10   4.9   140,527  $9.11   4.4   129,700  $8.10   4.1 

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

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

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

During both the three months ended September 30,March 31, 2020 and 2019, and 2018, approximately $11,000 ofin compensation expense on stock options was recognized.  A tax benefit of approximately $1,000, was recognized during the three months ended September 30, 2019 and none during the three months ended September 30, 2018.  During the nine months ended September 30, 2019 and 2018, compensation expense was recognized in the amounteach of $33,000 and $30,000, respectively.  A tax benefit of approximately $2,000 was recognized during the nine months ended September 30, 2019 and none during the nine months ended September 30, 2018.these periods.  As of September 30, 2019,March 31, 2020, approximately $160,000$138,000 in additional compensation expense will be recognized over the remaining service period of approximately 3.63.1 years.






3029

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

Note 11 – Fair Value Measurements and Fair Values of Financial Instruments
Fair value estimates are based on quoted market prices, if available, quoted market prices of similar assets or liabilities, or the present value of expected future cash flows and other valuation techniques. These valuations are significantly affected by discount rates, cash flow assumptions, and risk assumptions used. Therefore, fair values estimates may not be substantiated by comparison to independent markets and are not intended to reflect the proceeds that may be realizable in an immediate settlement of the instruments.
Fair value is determined at one point in time and is not representative of future value. These amounts do not reflect the total value of a going concern organization. Management does not have the intention to dispose of a significant portion of its assets and liabilities and therefore, the unrealized gains or losses should not be interpreted as a forecast of future earnings and cash flows.

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

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

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

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

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

In accordanceThe methods of determining the fair value of assets and liabilities presented in this note are consistent with ASU 2016-01,our methodologies disclosed in Note 19 of the Company’s 2019 Form 10-K, as the fair value of loans, excluding previously presented impaired loans measured at fair value on a non-recurring basis, is estimated using discounted cash flow analyses.  The discount rates used to determine fair value use interest rate spreads that reflect factors such as liquidity, credit and non-performance risk.  Loans are considered a Level 3 classification.
The following is a discussion of assets and liabilities measured at fair value on a recurring and non-recurring basis and valuation techniques applied:
Investment Securities Available For Sale: The fair value of securities available for sale are determined by obtaining quoted market prices on nationally recognized securities exchanges (Level 1), or matrix pricing (Level 2), which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted market prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted prices.
We may be required from time to time to measure certain assets at fair value on a nonrecurring basis in accordance with U.S. GAAP. These adjustments to fair value usually result from application of lower-of-cost-or-market accounting or write-downs of individual assets.

3130

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

Note 11 – Fair Value Measurements and Fair Values of Financial Instruments (Continued)
Impaired Loans: Impaired loans are carried at the lower of cost or the fair value of the collateral for collateral-dependent loans less estimated costs to sell. Collateral is primarily in the form of real estate. The use of independent appraisals, discounted cash flow models and management’s best judgment are significant inputs in arriving at the fair value measure of the underlying collateral and impaired loans are therefore classified within Level 3 of the fair value hierarchy.

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

The table below sets forth the financial assets and liabilities that were accounted for on a recurring and nonrecurring basis by level within the fair value hierarchy as of September 30, 2019March 31, 2020 (in thousands):
 
September 30, 2019
  
March 31, 2020
 
 
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:   
Mortgage-backed securities:   
Recurring fair value measurements:   
Investment securities available for sale   
Governmental National Mortgage Association mortgage-backed securities $6,118  $-  $6,118  $-  $5,540  $-  $5,540  $- 
Federal Home Loan Mortgage Corporation mortgage-backed securities 
1,053
  
-
  
1,053
  
-
 
Federal National Mortgage Association mortgage-backed securities 
275
  
-
  
275
  
-
  
248
  
-
  
248
  
-
 
Debt securities:            
U.S. government agency 360  -  360  - 
Corporate note  1,508   -   1,508   - 
Corporate notes  1,544   -   1,544   - 
Total investment securities available for sale $9,314  $-  $9,314  $-  $7,332  $-  $7,332  $- 
Total recurring fair value measurements $9,314  $-  $9,314  $-  $7,332  $-  $7,332  $- 
      
Nonrecurring fair value measurements      
Impaired loans $745  $-  $-  $745  $319  $-  $--  $319 
Other Real Estate Owned  1,969   -   -   1,969   1,931   -   --   1,931 
Total nonrecurring fair value measurements $2,714  $-  $-  $2,714  $2,250  $-  $--  $2,250 








3231

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

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

The table below sets forth the financial assets and liabilities that were accounted for on a recurring and nonrecurring basis by level within the fair value hierarchy as of December 31, 20182019 (in thousands):
 
December 31, 2018
  
December 31, 2019
 
 
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:   
Mortgage-backed securities:   
Recurring fair value measurements:   
Investment securities available for sale   
Governmental National Mortgage Association mortgage-backed securities $4,873  $-  $4,873  $-  $5,853  $-  $5,853  $- 
Federal Home Loan Mortgage Corporation mortgage-backed securities 1,082  -  1,082  - 
Federal National Mortgage Association mortgage-backed securities 367  -  367  -  
260
  
-
  
260
  
-
 
Debt securities:            
U.S. government agency  358   -   358   - 
Corporate notes  1,510   -   1,510   - 
Total investment securities available for sale $6,680  $-  $6,680  $-  $7,623  $-  $7,623  $- 
Total recurring fair value measurements $6,680  $-  $6,680  $-  $7,623  $-  $7,623  $- 
      
Nonrecurring fair value measurements      
Impaired loans $593  $-  $-  $593  $319  $-  $--  $319 
Other Real Estate Owned  1,650   -   -   1,650   1,824   -   --   1,824 
Total nonrecurring fair value measurements $2,243  $-  $-  $2,243  $2,143  $-  $--  $2,143 


The following table presents additional quantitative information about assets measured at fair value on a nonrecurring basis and for which the Company has used Level 3 inputs to determine fair value as of September 30, 2019March 31, 2020 and December 31, 20182019 (in thousands):

September 30, 2019
Quantitative Information About Level 3 Fair Value Measurements
Total Fair
Value
Valuation
Techniques
  
March 31, 2020
  
Quantitative Information About Level 3 Fair Value Measurements
 
  
Total Fair
Value
 
Valuation
Techniques
 
Unobservable
Input
 
Range (Weighted
Average)
 
Impaired loans $319 Appraisal of collateral (1) Appraisal adjustments (2)  0%-2% (1%)
            
Other real estate owned $1,931 Appraisal of collateral (1) Appraisal adjustments (2)  0%-12% (12%)


 Unobservable
Input
Range (Weighted
Average)
Impaired loans
$
745
Appraisal of collateral (1)Appraisal adjustments (2)0%-73% (7
%)
Other real estate owned
$
1,969
Appraisal of collateral (1)
Appraisal adjustments (2)
0%-12% (12
%)







3332

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

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

  December 31, 2019
 
December 31, 2019
         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
 
$
593
 
Appraisal of collateral (1)
 
Appraisal adjustments (2)
 
0%-73% (8
%)
 $319 Appraisal of collateral (1) Appraisal adjustments (2) 0%-3% (1%)
                  
Other real estate owned
 
$
1,650
 
Appraisal of collateral (1)
 
Appraisal adjustments (2)
 
0%-12% (12
%)
 $1,824 Appraisal of collateral (1) Appraisal adjustments (2) 0%-12% (12%)
________________
(1)Fair value is generally determined through independent appraisals of the underlying collateral, which generally include various Level 3 inputs which are identifiable.
(2)Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses.  The range and weighted average of liquidation expenses and other appraisal adjustments are presented as a percentage of the appraisal.


The estimated fair values of the Company’s financial instruments that are not required to be measured or reported at fair value were as follows at September 30, 2019March 31, 2020 and December 31, 20182019 (in thousands):

       
Fair Value Measurements at
        
Fair Value Measurements at
 
       
September 30, 2019
        
March 31, 2020
 
 



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                  
Investment in interest-earning time deposits 
$
10,172
  
$
10,553
  
$
-
  
$
-
  
$
10,553
  $9,922  $10,207  $-  $-  $10,207 
Loans held for sale 
16,483
  
17,062
  
-
  
17,062
  
-
  10,923  11,301  -  11,301  - 
Loans receivable, net 
237,379
  
236,172
  
-
  
-
  
236,172
  251,088  255,181  -  -  255,181 
                              
Financial Liabilities                              
Deposits 
222,150
  
225,576
  
46,886
  
-
  
178,690
  240,354  244,766  47,508  -  197,258 
FHLB long-term borrowings 
25,271
  
25,294
  
-
  
-
  
25,294
  30,193  30,276  -  -  30,276 
Subordinated debt 
7,856
  
8,149
  
-
  
-
  
8,149
  7,873  8,071  -  -  8,071 

       
Fair Value Measurements at
        
Fair Value Measurements at
 
       
December 31, 2018
        
December 31, 2019
 
 



Carrying
Amount
  



Fair Value
 Estimate
  

Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
  
Significant
Other
Observable
Inputs
(Level 2)
  


Unobservable
Inputs
(Level 3)
  



Carrying
Amount
  



Fair Value
Estimate
  
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
  
Significant
Other
Observable
Inputs
(Level 2)
  


Unobservable
Inputs
(Level 3)
 
Financial Assets                  
Investment in interest-earning time deposits 
$
4,927
  
$
4,927
  
$
-
  
$
-
  
$
4,927
  $10,172  $10,536  $--  $--  $10,536 
Loans held for sale 
5,103
  
5,254
  
-
  
5,254
  
-
  8,928  9,205  --  9,205  -- 
Loans receivable, net 
216,898
  
214,351
  
-
  
-
  
214,351
  246,692  250,550  --  --  250,550 
                              
Financial Liabilities                              
Deposits 
211,911
  
212,320
  
45,695
  
-
  
166,625
  227,458  230,521  43,006  --  187,515 
FHLB long-term borrowings 
15,000
  
14,973
  
-
  
-
  
14,973
  26,271  26,292  --  --  26,292 
Subordinated debt 
7,831
  
7,831
  
-
  
-
  
7,831
  7,865  8,146  --  --  8,146 


3433

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

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

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

Note 12 – Operating Segments

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

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

The Mortgage Banking Segment originates residential mortgage loans which are sold into the secondary market along with the loans’ servicing rights.  The profitability of this segment’s operations depends primarily on the gains realized from the sale of loans and processing fees. The Mortgage Banking Segment
is also subject to an extensive system of laws and regulations that are intended primarily for the protection of consumers.










3534

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

Note 12 – Operating Segments (Continued)

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

 
As of or for the Three Months Ended September 30,
  
As of or for the Three Months Ended March 31,
 
 
2019
  
2018
  
2020
  
2019
 
 Quaint Oak Bank(1)  Quaint Oak Mortgage  Consolidated  Quaint Oak Bank(1)  Quaint Oak Mortgage  Consolidated  
Quaint
Oak
Bank(1)
  
Quaint
Oak
Mortgage
  Consolidated  
Quaint
Oak
Bank(1)
  
Quaint
Oak
Mortgage
  Consolidated 
Net Interest Income $2,225  $(54) $2,171  $2,127  $(15) $2,112  
$
2,290
  
$
(47
)
 
$
2,243
  
$
2,156
  
$
(19
)
 
$
2,137
 
Provision for Loan Losses  
157
   
-
   
157
   
183
   
-
   
183
   
115
   
-
   
115
   
85
   
-
   
85
 
Net Interest Income after Provision for Loan LossesNet Interest Income after Provision for Loan Losses 
2,068
   (54)  
2,014
   
1,944
   (15)  
1,929
   
2,175
   
(47
)
  
2,128
   
2,071
   
(19
)
  
2,052
 
                                    
Non-Interest Income                                    
Mortgage banking and title abstract fees 181  168  349  135  138  273  
144
  
150
  
294
  
85
  
60
  
145
 
Real estate sales commissions, net 77  -  77  41  -  41  
33
  
-
  
33
  
18
  
-
  
18
 
Insurance commissions 109  -  109  101  -  101  
97
  
-
  
97
  
92
  
-
  
92
 
Other fees and services charges (5) -  (5) 32  -  32  
83
  
-
  
83
  
28
  
-
  
28
 
Income from bank-owned life insurance 21  -  21  19  -  19  
19
  
-
  
19
  
20
  
-
  
20
 
Net gain on loans held for sale -  996  996  2  671  673  
-
  
781
  
781
  
-
  
433
  
433
 
Gain on the sale of SBA loans 98  -  98  82  -  82   
-
   
-
   
-
   
106
   
-
   
106
 
Gain on sales of other real estate owned  -   -   -   -   -   - 
Total Non-Interest Income  481   1,164   1,645   412   809   1,221   
376
   
931
   
1,307
   
349
   
493
   
842
 
                                    
Non-Interest Expense                                    
Salaries and employee benefits 1,485  291  1,776  1,277  292  1,569  
1,667
  
311
  
1,978
  
1,322
  
304
  
1,626
 
Directors’ fees and expenses 54  -  54  54  -  54  
61
  
-
  
61
  
57
  
-
  
57
 
Occupancy and equipment 126  55  181  109  41  150  
135
  
70
  
205
  
111
  
49
  
160
 
Data processing 92  29  121  72  36  108  
108
  
29
  
137
  
80
  
22
  
102
 
Professional fees 96  12  108  96  12  108  
97
  
17
  
114
  
69
  
13
  
82
 
FDIC deposit insurance assessment -  -  -  47  -  47  
21
  
-
  
21
  
28
  
-
  
28
 
Other real estate owned expenses 12  -  12  8  -  8  
14
  
-
  
14
  
7
  
-
  
7
 
Advertising 60  10  70  48  5  53  
61
  
14
  
75
  
61
  
10
  
71
 
Amortization of other intangible 13  -  13  12  -  12  
12
  
-
  
12
  
12
  
-
  
12
 
Other  185   15   200   154   12   166   
196
   
14
   
210
   
148
   
14
   
162
 
Total Non-Interest Expense  2,123   412   2,535   1,877   398   2,275   
2,372
   
455
   
2,827
   
1,895
   
412
   
2,307
 
                                    
Pretax Segment Profit $426  $698  $1,124  $479  $396  $875  
$
179
  
$
429
  
$
608
  
$
525
  
$
62
  
$
587
 
                                    
Segment Assets $270,502  $23,318  $293,820  $246,807  $12,148  $258,955  
$
291,392
  
$
18,054
  
$
309,446
  
$
272,241
  
$
9,678
  
$
281,919
 
                  
                  

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





3635
Quaint Oak Bancorp, Inc.
Notes to Unaudited Consolidated Financial Statements
  
As of or for the Nine Months Ended September 30,
 
  
2019
  
2018
 
  Quaint Oak Bank(1)  Quaint Oak Mortgage  Consolidated  Quaint Oak Bank(1)  Quaint Oak Mortgage  Consolidated 
Net Interest Income $6,504  $(98) $6,406  $6,183  $(32) $6,151 
Provision for Loan Losses  
318
   
-
   
318
   
348
   
-
   
348
 
Net Interest Income after Provision for Loan Losses  
6,186
   (98)  
6,088
   
5,835
   (32)  
5,803
 
                         
Non-Interest Income                        
Mortgage banking and title abstract fees  442   377   819   377   223   600 
Real estate sales commissions, net  128   -   128   143   -   143 
Insurance commissions  307   -   307   283   -   283 
Other fees and services charges  85   -   85   150   -   150 
Income from bank-owned life insurance  60   -   60   60   -   60 
Net gain on loans held for sale  -   2,296   2,296   5   1,574   1,579 
Gain on the sale of SBA loans  238   -   238   105   -   105 
Gain on sales of other real estate owned  -   -   -   63   -   63 
Total Non-Interest Income  1,260   2,673   3,933   1,186   1,797   2,983 
                         
Non-Interest Expense                        
Salaries and employee benefits  4,272   901   5,173   3,968   890   4,858 
Directors’ fees and expenses  167   -   167   148   -   148 
Occupancy and equipment  354   161   515   326   120   446 
Data processing  253   88   341   201   86   287 
Professional fees  244   38   282   253   38   291 
FDIC deposit insurance assessment  40   -   40   140   -   140 
Other real estate owned expenses  23   -   23   10   -   10 
Advertising  182   30   212   146   15   161 
Amortization of other intangible  37   -   37   36   -   36 
Other  538   41   579   443   43   486 
Total Non-Interest Expense  6,110   1,259   7,369   5,671   1,192   6,863 
                         
Pretax Segment Profit 
$
1,336
  
$
1,316
  
$
2,652
  
$
1,350
  
$
573
  
$
1,923
 
                         
Segment Assets 
$
270,502
  
$
23,318
  
$
293,820
  
$
246,807
  
$
12,148
  
$
258,955
 

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

37
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements Are Subject to Change

We makeThis Quarterly Report contains certain forward-looking statements in this document as to what we expect may happen(as defined in the future. TheseSecurities Exchange Act of 1934 and the regulations thereunder).  Forward-looking statements usually containare not historical facts but instead represent only the beliefs, expectations or opinions of the Company and its management regarding future events, many of which, by their nature, are inherently uncertain. Forward-looking statements may be identified by the use of such words “believe,as: “believe”, “expect”, “anticipate”, “intend”, “plan”, “estimate”, or words of similar meaning, or future or conditional terms such as “will”, “would”, “should”, “could”, “may”, “likely”, “probably”, or “possibly.”  “estimate,” “project,” “expect,” “anticipate,” “intend” or similar expressions. Because theseForward-looking statements lookinclude, but are not limited to, financial projections and estimates and their underlying assumptions; statements regarding plans, objectives and expectations with respect to future operations, products and services; and statements regarding future performance. Such statements are subject to certain risks, uncertainties and assumptions, many of which are difficult to predict and generally are beyond the future, they are based on our current expectationscontrol of  and beliefs. Actualits management, that could cause actual results or events mayto differ materially from those reflectedexpressed in, or implied or projected by, forward-looking statements.  The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements. You shouldstatements: (1) economic and competitive conditions which could affect the volume of loan originations, deposit flows and real estate values; (2) the levels of non-interest income and expense and the amount of loan losses; (3) competitive pressure among depository institutions increasing significantly; (4) changes in the interest rate environment causing reduced interest margins; (5) general economic conditions, either nationally or in the markets in which the Company is or will be awaredoing business, being less favorable than expected;(6) political and social unrest, including acts of war or terrorism; (7) the impact of the current outbreak of the novel coronavirus (COVID-19) or (8) legislation or changes in regulatory requirements adversely affecting the business in which the Company is or will be engaged.  The Company undertakes no obligation to update these forward-looking statements to reflect events or circumstances that our current expectations and beliefs as to future events are subject to change at any time, and we can give you no assurances thatoccur after the future events will actually occur.date on which such statements were made.

General

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

At September 30, 2019,March 31, 2020, the Bank has five wholly-owned subsidiaries, Quaint Oak Mortgage, LLC, Quaint Oak Real Estate, LLC, Quaint Oak Abstract, LLC, QOB Properties, LLC, and Quaint Oak Insurance Agency, LLC, each a Pennsylvania limited liability company.  The mortgage, company offers mortgage banking in the Lehigh Valley, Delaware Valley and Philadelphia County region of Pennsylvania.  The real estate and abstract companies offer mortgage banking, real estate sales and title abstract services, respectively, primarily in the Lehigh Valley region of Pennsylvania.  These companiesPennsylvania, and began operation in July 2009.  In February 2019, Quaint Oak Mortgage opened a mortgage banking office in Philadelphia, Pennsylvania.  QOB Properties, LLC began operations in July 2012 and holds Bank properties acquired through a foreclosure proceeding or acceptance of a deed in lieu of foreclosure.  Quaint Oak Insurance Agency, LLC, located in Chalfont, Pennsylvania, began operations in August 2016 and provides a broad range of personal and commercial insurance coverage solutions.  In February 2020, Quaint Oak Bank opened a full-service retail banking office in Philadelphia, Pennsylvania.

36
COVID-19

On March 11, 2020, the World Health Organization declared COVID-19 a pandemic. The effects of COVID-19 did not have a material impact on the financial results of the Company as of March 31, 2020.  Due to orders issued by the governor of Pennsylvania and for the health of our customers and employees, the Bank closed lobbies to all three branch offices but remained fully operational. Other immediate responses to the pandemic included some of the following actions by the Company:

•Moved more than 92% of its employees to remote work-from-home status.
•Waived fees on deposit accounts and cash management services.

In response to the COVID-19 crisis, the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act was passed by Congress and signed into law on March 27, 2020. The CARES Act provides an estimated $2.2 trillion of economy-wide financial stimulus to combat the pandemic and stimulate the economy in the form of financial aid to individuals, businesses, nonprofits, states, and municipalities through loans, grants, tax changes, and other types of relief.

The following describes some of our responses to COVID-19 relative to the CARES Act, and other effects of the pandemic on our business.

Paycheck Protection Program. The CARES Act authorized the Small Business Administration (“SBA”) to temporarily guarantee loans under a new 7(a) loan program called the Paycheck Protection Program (“PPP”). As a qualified SBA lender, we were automatically authorized to originate PPP loans and chose to participate.

Through May 7, 2020, the Bank funded 217 PPP loans with total principal balances of $37.3 million and received SBA approval for another 712 PPP loans for $65.9 million.

Paycheck Protection Program Liquidity Facility. The CARES Act also allocated a limited amount of funds to the Federal Reserve Board (FRB) with a broad mandate to provide liquidity to eligible businesses, states or municipalities in light of COVID-19. On April 9, 2020, the U.S. Department of the Treasury announced several new or expanded lending programs to provide relief for businesses and governments. One of these programs was the Paycheck Protection Program Liquidity Facility (PPPLF). Under the PPPLF, all depository institutions that originate PPP loans are eligible to borrow on a non-recourse basis from their regional Federal Reserve Bank using SBA PPP loans as collateral. The principal amount of loans will be equal to the PPP loans pledged as collateral. There are no fees associated with these loans and the interest rate will be 35 basis points. The maturity date of PPPLF loans will be the same as the maturity date of the PPP loans pledged as collateral. The PPPLF loan maturity date will be accelerated if the underlying PPP loan goes into default and the lender sells the PPP loan to the SBA under the SBA guarantee. The PPPLF loan maturity date also will be accelerated for any loan forgiveness reimbursement received by the lender from the SBA.

In April 2020, the Bank received approval to borrow from the FRB under the PPPLF program to assist in funding PPP loans.  Through May 7, 2020, the Bank used the FRB program to fund $30.9 million of PPP loans.

37
Loan Modifications/Troubled Debt Restructurings. Under the CARES Act, loans less than 30 days past due as of December 31, 2019 will be considered current for COVID-19 modifications. A financial institution can then suspend the requirements under GAAP for loan modifications related to COVID-19 that would otherwise be categorized as a troubled debt restructuring (“TDR”), and suspend any determination of a loan modified as a result of COVID-19 as being a TDR, including the requirement to determine impairment for accounting purposes. Financial institutions wishing to utilize this authority must make a policy election, which applies to any COVID-19 modification made between March 1, 2020 and the earlier of either December 31, 2020 or the 60th day after the end of the COVID-19 national emergency. Quaint Oak Bank has made that election. Similarly, the Financial Accounting Standards Board has confirmed that short-term modifications made on a good-faith basis in response to COVID-19 to loan customers who were current prior to any relief will not be considered TDRs.

Prior to the enactment of the CARES Act, the banking regulatory agencies provided guidance as to how certain short-term modifications would not be considered TDRs, and have subsequently confirmed that such guidance could be applicable for loans that do not qualify for favorable accounting treatment under Section 4013 of the CARES Act.

The Bank addresses loan payment modification requests on a case-by-case basis considering the effects of the COVID-19 pandemic, related economic slow-down and stay-at-home orders on our customer and their current and projected cash flows through the term of the loan. Through April 30, 2020, we modified 203 loans with principal balances totaling $81.7 million representing  32.1% of our March 31, 2020 loan balances and have 23 additional applications with pricipal balances of  $15.7 million which would represent another 6.2% of March 31, 2020 loan balances. A majority of deferrals are two-month payment deferrals of principal and interest, with payments after deferral increased to collect amounts deferred. It is too early to determine if these modified loans will perform in accordance with their modified terms.

Details with respect to actual loan modifications are as follows:

  
Number of
Covid-19
Deferments
 04/30/2020
  
Balance
(in thousands)
  
Percent of
Total Loans
at March 31,
2020
 

One-to-four family residential owner occupied  7
  $3,149
 48.8
%
One-to-four family residential non-owner occupied  47   7,434 18.9

Multi-family residential  10
   8,074 33.6

Commercial real estate  88
   49.987
  40.3
Construction  2
   811
  8.7
Home equity  1
   47
  1.1
Commercial business  48
   12,177
  26.0
Other consumer  -
   -  -
 Total  203  $
81,679
 32.1
%







38
Critical Accounting Policies

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

38
Allowance for Loan Losses.  The allowance for loan losses represents management’s estimate of losses inherent in the loan portfolio as of the balance sheet date and is recorded as a reduction to loans receivable. The allowance for loan losses is increased by the provision for loan losses, and decreased by charge-offs, net of recoveries. Loans deemed to be uncollectible are charged against the allowance for loan losses, and subsequent recoveries, if any, are credited to the allowance. All, or part, of the principal balance of loans receivable are charged off to the allowance as soon as it is determined that the repayment of all, or part, of the principal balance is highly unlikely. Because all identified losses are immediately charged off, no portion of the allowance for loan losses is restricted to any individual loan or groups of loans, and the entire allowance is available to absorb any and all loan losses.

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

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


39
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.

39
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.


40
Comparison of Financial Condition at September 30, 2019March 31, 2020 and December 31, 20182019

General.   The Company’s total assets at September 30, 2019March 31, 2020 were $293.8$309.4 million, an increase of $22.4$6.9 million, or 8.3%2.3%, from $271.4$302.5 million at December 31, 2018.2019.  This growth in total assets was primarily due to a $20.5$4.4 million, or 9.4%1.8%, increase, in loans receivable, net, an $11.4and a $2.0 million, or 223.0%22.3%, increase in loans held for sale, a $5.2 million, or 106.5%, increase in investment in interest-earning time deposits, a $2.6 million, or 39.5%, increase in investment securities available for sale, and a $2.1 million, or 198.9%, increase in prepaid expenses and other assets.  These increases were partially offset by a $20.5 million, or 78.8%, decrease in cash and cash equivalents.sale.

Cash and Cash Equivalents. Cash and cash equivalents decreased $20.5 million,increased $388,000, or 78.8%2.7%, from $26.0$14.6 million at December 31, 20182019 to $5.5$14.9 million at September 30, 2019 asMarch 31, 2020 with the expectation that excess liquidity along with deposits and Federal Home Loan Bank borrowings, werewill be used primarily to fund a $20.5 million increase in loans receivable, net, an $11.4 million increase in loans held for sale, a $5.2 million increase in investment in interest-earning time deposits, and a $2.6 million increase in investment securities available for sale.loans.

Investment in Interest-Earning Time Deposits.  Investment in interest-earning time deposits increased $5.2 million,decreased $250,000, or 106.5%2.5%, from $4.9$10.2 million at December 31, 20182019 to $10.2$9.9 million at September 30, 2019March 31, 2020 as one interest-earning time deposit matured during the Company invested excess liquidity into higher yielding interest-earning assets.three months ended March 31, 2020.

Investment Securities Available for Sale.  Investment securities available for sale increased $2.6 million,decreased $291,000, or 39.5%3.8%, from $6.7$7.6 million at December 31, 20182019 to $9.3$7.3 million at September 30, 2019, asMarch 31, 2020, due primarily to the Company invested excess liquidity into higher yielding interest-earning assets.principal repayments on these securities during the three months ended March 31, 2020.

Loans Held for Sale.  Loans held for sale increased $11.4$2.0 million, or 223.0%22.3%, from $5.1$8.9 million at December 31, 20182019 to $16.5$10.9 million at September 30, 2019March 31, 2020 as the Bank’s mortgage banking subsidiary, Quaint Oak Mortgage, LLC, originated $98.0$34.7 million of one-to-four family residential loans during the ninethree months ended September 30, 2019March 31, 2020 and sold $86.3$32.7 million of loans in the secondary market during this same period. The Bank did not originate or sell any equipment loans held for sale during the ninethree months ended September 30, 2019 but sold $258,000 of equipment loans during this same period.March 31, 2020.

Loans Receivable, Net.  Loans receivable, net, increased $20.5$4.4 million, or 9.4%1.8%, to $237.4$251.1 million at September 30, 2019March 31, 2020 from $216.9$246.7 million December 31, 2018.2019.  This increase was funded primarily from deposits, FHLB borrowings, and excess liquidity.deposits.  Increases within the loan portfolio occurred in commercial business loans which increased $17.4 million, or 73.5%, commercial real estate loans which increased a $7.0$4.6 million, or 6.8%3.8%, constructionmulti-family residential loans which increased $3.4$1.8 million, or 34.5%8.2%, and other consumercommercial business loans which increased $8,000,$1.1 million, or 42.1%2.3%, home equity loans which increased $521,000, or 14.0%, and one-to-four family residential owner occupied loans which increased $148,000, or 2.3%.  These increases were partially offset by a $5.2decreases of $3.2 million, or 10.9%25.5%, decreasein construction loans, $470,000, or 1.2%, in one-to-four family residential non-owner occupied loans, an $842,000,and $6,000, or 3.5%27.3%, decrease in multi-family residential loans, a $789,000, or 11.9%, decrease in one-to-four family residential owner occupied loan, and a $358,000, or 8.2%, decrease in home equityother 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.  Other real estate owned (OREO) amounted to $2.0$1.9 million at September 30, 2019,March 31, 2020, consisting of four properties that were collateral for a non-performing construction loan.  During the nine monthsquarter ended September 30, 2019,March 31, 2020, the Company made a total$107,000 of $319,000 in capital improvements to the properties.  The balance of these OREO properties totaled $1.7amounted to $1.8 million at December 31, 2018.2019.  Non-performing assets amounted to $2.9$2.8 million, or 0.99%0.90% of total assets at September 30, 2019March 31, 2020 compared to $2.8$2.2 million, or 1.04%0.72% of total assets at December 31, 2018.
2019.

41
Prepaid Expenses and Other Assets.  Prepaid expenses and other assets increased $2.1 million,$532,000, or 198.9%19.1%, due primarily to the adoption of Financial Accounting Standards Board accounting standard ASU 2016-02, Leases (Topic 842) byfor the Companylease on January 1, 2019.our new regional banking office in Philadelphia which opened in February 2020.  This standard requires a lessee to recognize the assets and liabilities that arise from leases on the balance sheet by recognizing a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term.  The impact of adopting this accounting standard on the Company’s balance sheet was approximately $1.3 million$628,000 at September 30, 2019.March 31, 2020.

Deposits.  Total deposits increased $10.2$12.9 million, or 4.8%5.7%, to $222.2$240.4 million at September 30, 2019March 31, 2020 from $211.9$227.5 million at December 31, 2018.2019. This increase in deposits was primarily attributable to increases of $9.0$8.4 million, or 5.4%4.6%, in certificates of deposit, $1.2$2.5 million, or 4.6%9.8%, in money market accounts, and $634,000$1.8 million, or 56.6%, in savings accounts. These increases were partially offset by decreases of $497,000, or 2.8%11.7%, in non-interest bearing checking accounts, $168,000, 9.8%, in savings accounts, and $184,000,$1,000, or 95.8%20%, in passbook accounts.

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

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

Stockholders’ Equity.  Total stockholders’ equity increased $1.7 million,$322,000, or 7.2%1.2%, to $25.5$26.2 million at September 30, 2019March 31, 2020 from $23.8$25.9 million at December 31, 2018.2019.  Contributing to the increase was net income for the ninethree months ended September 30, 2019March 31, 2020 of $1.9 million,$432,000, the reissuance of treasury stock for exercised stock options of $190,000,$52,000, common stock earned by participants in the employee stock ownership plan of $136,000,$52,000, amortization of stock awards and options under our stock compensation plans of $130,000,$43,000, and the reissuance of treasury stock under the Bank’s 401(k) Plan of $31,000, and other comprehensive income, net of $27,000.$12,000.  These increases were partially offset by dividends paid of $496,000 and by$178,000, the purchase of treasury stock of $186,000.$67,000, and other comprehensive loss, net of $24,000.

Comparison of Operating Results for the Three Months Ended September 30,March 31, 2020 and 2019 and 2018

General.  Net income amounted to $802,000$432,000 for the three months ended September 30, 2019,March 31, 2020, an increase of $144,000,$19,000, or 21.9%4.6%, compared to net income of $658,000$413,000 for the three months ended September 30, 2018.March 31, 2019.  The increase in net income on a comparative quarterly basis was primarily the result of an increase in non-interest income of $424,000,$465,000 and an increase in net interest income of $59,000, and a decrease$106,000, partially offset by increases in non-interest expense of $520,000, the provision for loan losses of $26,000, partially offset by an increase in non-interest expense of $260,000$30,000, and an increase in the provision for income taxes of $105,000.$2,000.

Net Interest Income.  Net interest income increased $59,000,$106,000, or 2.8%5.0%, to $2.17$2.2 million for the three months ended September 30, 2019March 31, 2020 from $2.12$2.1 million for the three months ended September 30, 2018.March 31, 2019.  The increase was driven by a $425,000,$269,000 or 13.7%7.9%, increase in interest income, partially offset by a $366,000,$163,000 or 36.6%12.9%, increase in interest expense.

42
Interest Income.  Interest income increased $425,000$269,000 or 13.7%7.9%, to $3.5$3.7 million for the three months ended September 30, 2019March 31, 2020 from $3.1$3.4 million for the three months ended September 30, 2018.March 31, 2019. The increase in interest income was primarily due to a $26.8$32.6 million increase in average loans receivable, net, including loans held for sale, which increased from an average balance of $215.9$223.2 million for the three months ended September 30, 2018March 31, 2019 to an average balance of $242.7$255.8 million for the three months ended September 30, 2019,March 31, 2020, and had the effect of increasing interest income $364,000.  Also contributing to this$458,000. This increase in interest income was partially offset by a five19 basis point increasedecrease in the yield on average loans receivable, net, including loans held for sale, which increaseddecreased from 5.62% for the three months ended March 31, 2019 to 5.43% for the three months ended September 30, 2018 to 5.48% for the three months ended September 30, 2019, whichMarch 31, 2020, and had the effect of increasingdecreasing interest income $29,000  The increase in interest income was also due to a $5.3 million increase in investment in interest-earning time deposits which increased from an average balance of $4.9 million for the three months ended September 30, 2018 to an average balance of $10.2 million for the three months ended September 30, 2019, which had the effect of increasing interest income $25,000.$123,000. Also contributing tooffsetting this increase was a 108 basis point increase in the yield on investment in interest-earning time deposits which increased from 1.87% for the three months ended September 30, 2018 to 2.95% for the three months ended September 30, 2019, which had the effect of increasing interest income $27,000.  The increase in interest income was partially offset by an $11.8 million$11.9 decrease in average cash and cash equivalents due from banks, interest bearing, which decreased from an average balance of $19.6$29.4 million for the three months ended September 30, 2018March 31, 2019 to an average balance of $7.8$17.5 million for the three months ended September 30,March 31, 2020, and had the effect of reducing interest income $62,000.  In addition, this increase was offset by a 73 basis point decrease in the yield on average cash and cash equivalents due from banks, interest bearing, which decreased from 2.10% for the three months ended March 31, 2019 to 1.37% for the three months ended March 31, 2020, and had the effect of decreasing interest income $60,000.$32,000.

42
Interest Expense.  Interest expense increased $366,000$163,000 or 36.6%12.9%, to $1.4 million for the three months ended September 30, 2019March 31, 2020 from $1.0$1.3 million for the three months ended September 30, 2018.March 31, 2019.  The increase in interest expense was primarily attributable to a $15.3$16.1 million increase in average certificate of deposit accounts which increased from an average balance of $160.7$172.4 million for the three months ended September 30, 2018March 31, 2019 to an average balance of $176.0$188.6 million for the three months ended September 30, 2019,March 31, 2020, and had the effect of increasing interest expense $76,000.$88,000.  Also contributing to this increase was a 38seven basis point increase in rate on average certificate of deposit accounts, which increased from 1.98%2.19% for the three months ended September 30, 2018March 31, 2019 to 2.36%2.26% for the three months ended September 30, 2019,March 31, 2020, and had the effect of increasing interest expense by $166,000.$35,000.  The increase in interest expense was also due to a $7.6 million increase in average subordinated debtFederal Home Loan Bank borrowings which increased from an average balance of $7.9$24.0 million for the three months ended September 30,March 31, 2019 atto $31.6 million for the applicable interest rate of 6.5%,three months ended March 31, 2020, and which had the effect of increasing interest expense by $130,000 compared to none for the three months ended September 30, 2018.$34,000.  The average interest rate spread decreased from 3.18%2.90% for the three months ended September 30, 2018March 31, 2019 to 2.92%2.79% for the three months ended September 30, 2019March 31, 2020 while the net interest margin decreased from 3.39%3.19% for the three months ended September 30, 2018March 31, 2019 to 3.20%3.07% for the three months ended September 30, 2019.March 31, 2020.














43
Average Balances, Net Interest Income, Yields Earned and Rates Paid. The following table shows for the periods indicated the total dollar amount of interest from average interest-earning assets and the resulting yields, as well as the interest expense on average interest-bearing liabilities, expressed both in dollars and rates, and the net interest margin.  All average balances are based on daily balances.

 
Three Months Ended September 30,
 
 
2019
  
2018
 
  
Average
Balance
  
Interest
  
Average
Yield/
Rate
  
Average
Balance
  
Interest
  
Average
Yield/
Rate
 
  (Dollars in thousands) 
Interest-earning assets:   
  Due from banks, interest-bearing $7,774  $51   2.62% $19,587  $99   2.02%
  Investment in interest-earning time deposits  10,172   75   2.95   4,925   23   1.87 
  Investment securities available for sale  9,530   67   2.81   7,211   39   2.16 
  Loans receivable, net (1) (2) (3)  242,734   3,325   5.48   215,922   2,932   5.43 
  Investment in FHLB stock  1,110   20   7.21   1,245   20   6.43 
     Total interest-earning assets  271,320   3,538   5.22%  248,890   3,113   5.00%
Non-interest-earning assets  12,518           10,837         
     Total assets $283,838          $259,727         
Interest-bearing liabilities:                        
   Passbook accounts $37  $*   *% $276  $*   *%
   Savings accounts  1,762   1   0.23   1,887   1   0.21 
   Money market accounts  27,621   55   0.80   29,634   60   0.81 
   Certificate of deposit accounts  176,009   1,037   2.36   160,717   795   1.98 
      Total deposits  205,429   1,093   2.13   192,514   856   1.78 
   FHLB short-term borrowings  920   7   3.04   9,989   57   2.28 
   FHLB long-term borrowings  23,785   137   2.30   17,967   88   1.96 
   Subordinated debt  7,851   130   6.62   -   -   - 
     Total interest-bearing liabilities  237,985   1,367   2.30%  220,470   1,001   1.82%
Non-interest-bearing liabilities  20,909           16,052         
     Total liabilities  258,894           236,522         
Stockholders’ Equity  24,944           23,205         
     Total liabilities and Stockholders’ Equity $283,838          $259,727         
Net interest-earning assets $33,335          $28,420         
Net interest income; average interest rate spread     $2,171   2.92%     $2,112   3.18%
Net interest margin (4)          3.20%          3.39%
Average interest-earning assets to average interest-
   bearing liabilities
          114.01%          112.89%
________________________
*
Not meaningful.
(1)
Includes loans held for sale.
(2)
Includes non-accrual loans during the respective periods.  Calculated net of deferred fees and discounts, loans in process and allowance for loan losses.
(3)
Includes tax free municipal leases with an aggregate average balance of $10,000 and an average yield of 4.06% for the three months ended September 30, 2018.  The tax-exempt income from such loans has not been calculated on a tax equivalent basis.
(4)
Equals net interest income divided by average interest-earning assets.

 
Three Months Ended March 31,
 

 
2020
  
2019
 
  
Average
Balance
  
Interest
  
Average
Yield/
Rate
  
Average
Balance
  
Interest
  
Average
Yield/
Rate
 
  (Dollars in thousands) 
Interest-earning assets:   
  Due from banks, interest-bearing $17,522  $60   1.37% $29,384  $154   2.10%
  Investment in interest-earning time deposits  10,057   63   2.51   8,015   49   2.45 
  Investment securities available for sale  7,540   47   2.49   6,630   42   2.53 
  Loans receivable, net (1) (2)  255,770   3,472   5.43   223,167   3,137   5.62 
  Investment in FHLB stock  1,419   29   8.17   1,086   20   7.37 
     Total interest-earning assets  292,308   3,671   5.02%  268,282   3,402   5.07%
Non-interest-earning assets  12,804           11,385         
     Total assets $305,112          $279,667         
Interest-bearing liabilities:                        
   Passbook accounts $5  $*   *% $97  $-   -%
   Savings accounts  1,805   1   0.22   1,215   1   0.33 
   Money market accounts  26,290   53   0.81   27,636   54   0.78 
   Certificate of deposit accounts  188,553   1,067   2.26   172,448   944   2.19 
      Total deposits  216,653   1,121   2.07   201,396   999   1.98 
FHLB short-term borrowings  3,956   30   3.03   9,000   58   2.58 
FHLB long-term borrowings  27,651   147   2.13   15,000   79   2.11 
Subordinated debt  7,868   130   6.60   7,827   129   6.59 
     Total interest-bearing liabilities  256,128   1,428   2.23%  233,223   1,265   2.17%
Non-interest-bearing liabilities  22,920           22,491         
     Total liabilities  279,048           255,714         
Stockholders’ Equity  26,064           23,953         
     Total liabilities and Stockholders’ Equity $305,112          $279,667         
Net interest-earning assets $36,180          $35,059         
Net interest income; average interest rate spread     $2,243   2.79%     $2,137   2.90%
Net interest margin (3)          3.07%          3.19%
Average interest-earning assets to average interest-bearing liabilities          114.13%          115.03%

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

Provision for Loan Losses.  The Company’s provision for loan losses decreased $26,000,increased $30,000, or 14.2%35.3%, from $183,000$85,000 for the three months ended September 30, 2018March 31, 2019 to $157,000$115,000 for the three months ended September 30, 2019,March 31, 2020, based on an evaluation of the allowance relative to such factors as volume of the loan portfolio, concentrations of credit risk, prevailing economic conditions, prior loan loss experience and amount of non-performing loans at September 30,March 31, 2020. The ratio of the allowance for loan losses to loans outstanding increased to 0.93% at March 31, 2020 from 0.90% at December 31, 2019, primarily from increased allocations for economic factors associated with the COVID-19 pandemic.  The allowance for loan losses as a percent of total loans receivable was 0.93% at March 31, 2020 and 0.90% at December 31, 2019.



44
Non-performing loans amounted to $932,000$860,000 or 0.39%0.34% of net loans receivable at September 30, 2019,March 31, 2020, consisting of sevensix loans, three of which areone loan is on non-accrual status and four of whichfive loans are 90 days or more past due and accruing interest. Comparably, non-performing loans amounted to $1.2 million,$362,000 or 0.54%0.15% of net loans receivable at December 31, 2018,2019, consisting of ninetwo loans, three of which wereone loan was on non-accrual status and three of which wereone loan was 90 days or more past due and accruing interest.  The non-performing loans at September 30, 2019March 31, 2020 include fourtwo one-to-four family non-owner occupied residential loans, two commercial real estate loans, and one one-to-four family owner occupied residential loan, and one construction loan, and all are generally well-collateralized or adequately reserved for.  The allowance for loan losses as a percent of total loans receivable was 0.95% at September 30, 2019 and 0.90% at December 31, 2018.

44
Non-Interest Income.  Non-interest income increased $424,000$465,000, or 34.7%55.2%, from $1.2 million for the three months ended September 30, 2018 to $1.6 million forMarch 31, 2020 over the three months ended September 30,comparable period in 2019 primarily due primarily to a $323,000,$348,000, or 48.0%80.4%, increase in net gain on loans held for sale, a $76,000,$149,000, or 27.8%102.8%, increase in mortgage banking and title abstract fees, a $36,000,$55,000, or 87.8%196.4%, increase in other fees and service charges, a $15,000, or 83.3%, increase in real estate sales commissions, net, and a $16,000,$5,000, or 19.5%, increase in gain on the sales of SBA loans, an $8,000, or 7.9%5.4%, increase in insurance commissions, and a $2,000, or 10.5%,commissions.  The increase in income from bank-owned life insurance.other fees and service charges was driven by an increase in loan prepayment fees.  These increases were partially offset by a $37,000,$106,000, or 115.6%100.0%, decrease in other feesthe gain on the sale of SBA loans and service charges.a $1,000, or 5.0%, decrease in income from bank-owned life insurance.

Non-Interest Expense.  Total non-interest expense increased $260,000,$520,000, or 11.4%, from $2.3 million22.5% for the three months ended September 30, 2018 to $2.5 million forMarch 31, 2020 over the three months ended September 30,comparable period in 2019 primarily due primarily to a $207,000,$352,000, or 13.2%21.6%, increase in salaries and employee benefits, expense, a $34,000,$48,000, or 20.5%29.6%, increase in other expenses,expense, a $31,000,$45,000, or 20.7%28.1%, increase in occupancy and equipment expense, a $17,000,$35,000, or 32.1%, increase in advertising expense, a $13,000, or 12.0%34.3%, increase in data processing expense, a $4,000,$32,000, or 50.0%39.0%, increase in professional fees, a $7,000, or 100.0%, increase in other real estate owned expense, andexpenses, a $1,000,$4,000, or 8.3%7.0%, increase in amortizationdirectors’ fees and expenses, and a $4,000, or 5.6% increase in advertising expense. The increase in salaries and benefits is primarily due to expanding and improving the level of other intangible.staff at the Bank and its subsidiary companies, primarily in the area of lending operations.  The increase in occupancy and equipment expense was primarily attributable to the opening of our new retail banking office in Philadelphia, Pennsylvania in February 2020.  These increases were partially offset by a $47,000$7,000, or 25.0%, decrease in FDIC deposit insurance expense.  The increase in salaries and employee benefits expense was due primarily to increased staff in lending, compliance and information technology.  The decrease in FDIC deposit insurance assessment was due to an FDIC Small Bank Assessment credit which was applied to and reduced the September quarterly 2019 assessment to zero.assessment.

Provision for Income Tax.  The provision for income tax increased $105,000,$2,000, or 48.4%1.1%, from $217,000$174,000 for the three months ended September 30, 2018March 31, 2019 to $322,000$176,000 for the three months ended September 30, 2019March 31, 2020 due primarily to anthe increase in pre-tax income and an increase in our effective tax rate from 24.8% for the three months ended September 30, 2018 to 28.6% for the three months ended September 30, 2019.  The increase in our effective tax rate was primarily due to a tax deduction taken in 2018 related to the exercise of non-qualified stock options.income.

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

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

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


45
Interest Income.  Interest income increased $1.5 million, or 16.4%, to $10.4 million for the nine months ended September 30, 2019 from $8.9 million for the nine months ended September 30, 2018.  The increase in interest income was primarily due to a $19.5 million increase in average loans receivable, net, including loans held for sale, which increased from an average balance of $212.5 million for the nine months ended September 30, 2018 to an average balance of $232.0 million for the nine months ended September 30, 2019, and had the effect of increasing interest income $779,000.  Also contributing to this increase was a 22 basis point increase in the yield on average loans receivable, net, including loans held for sale, which increased from 5.33% for the nine months ended September 30, 2018 to 5.55% for the nine months ended September 30, 2019, which had the effect of increasing interest income $393,000. The increase in interest income was also due to a $4.6 million increase in investment in interest-earning time deposits which increased from an average balance of $4.9 million for the nine months ended September 30, 2018 to an average balance of $9.5 million for the nine months ended September 30, 2019, which had the effect of increasing interest income $63,000.  Also contributing to this increase was a 94 basis point increase in the yield on investment in interest-earning time deposits which increased from 1.85% for the nine months ended September 30, 2018 to 2.79% for the nine months ended September 30, 2019, which had the effect of increasing interest income $67,000.  The increase in interest income was also due to a $1.8 million increase in average cash and cash equivalents due from banks, interest bearing, which increased from an average balance of $16.4 million for the nine months ended September 30, 2018 to an average balance of $18.2 million for the nine months ended September 30, 2019, and had the effect of increasing interest income $24,000.  Also contributing to this increase was a 63 basis point increase in the yield on average cash and cash equivalents due from banks, interest bearing, which increased from 1.80% for the nine months ended September 30, 2018 to 2.43% for the nine months ended September 30, 2019, and had the effect of increasing interest income $87,000.

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


46
Average Balances, Net Interest Income, Yields Earned and Rates Paid. The following table shows for the periods indicated the total dollar amount of interest from average interest-earning assets and the resulting yields, as well as the interest expense on average interest-bearing liabilities, expressed both in dollars and rates, and the net interest margin.  All average balances are based on daily balances.

 
Nine Months Ended September 30,
 
 
2019
  
2018
 
  
Average
Balance
  
Interest
  
Average
Yield/
Rate
  
Average
Balance
  
Interest
  
Average
Yield/
Rate
 
  (Dollars in thousands) 
Interest-earning assets:   
  Due from banks, interest-bearing $18,204  $332   2.43% $16,383  $221   1.80%
  Investment in interest-earning time deposits  9,455   198   2.79   4,910   68   1.85 
  Investment securities available for sale  8,144   165   2.70   7,523   110   1.95 
  Loans receivable, net (1) (2) (3)  231,967   9,662   5.55   212,465   8,490   5.33 
  Investment in FHLB stock  1,095   60   7.30   1,242   58   6.23 
     Total interest-earning assets  268,865   10,417   5.17%  242,523   8,947   4.92%
Non-interest-earning assets  12,193           9,447         
     Total assets $281,058          $251,970         
Interest-bearing liabilities:                        
   Passbook accounts $70  $*   *% $333  $*   *%
   Savings accounts  1,579   1   0.25   1,953   3   0.20 
   Money market accounts  27,657   165   0.80   30,925   185   0.80 
   Certificate of deposit accounts  175,920   3,017   2.29   154,795   2,196   1.89 
      Total deposits  205,226   3,185   2.07   188,006   2,384   1.69 
   FHLB short-term borrowings  4,233   101   3.18   9,996   142   1.89 
   FHLB long-term borrowings  19,994   336   2.24   17,989   270   2.00 
   Subordinated debt  7,840   389   6.62   -   -   - 
     Total interest-bearing liabilities  237,293   4,011   2.25%  215,991   2,796   1.73%
Non-interest-bearing liabilities  19,330           13,224         
     Total liabilities  256,623           229,215         
Stockholders’ Equity  24,435           22,755         
     Total liabilities and Stockholders’ Equity $281,058          $251,970         
Net interest-earning assets $31,572          $26,532         
Net interest income; average interest rate spread     $6,406   2.92%     $6,151   3.19%
Net interest margin (4)          3.18%          3.38%
Average interest-earning assets to average interest-
   bearing liabilities
          113.30%          112.28%
_______________________
(1)Operating
Includes loans held for sale.
Segments
(2)
Includes non-accrual loans during the respective periods.  Calculated net of deferred fees and discounts, loans in process and allowance for loan losses.
(3)
Includes tax free municipal leases with an aggregate average balance of $21,000 and an average yield of 4.21% for the nine months ended September 30, 2018. The tax-exempt income from such loans has not been calculated on a tax equivalent basis.
(4)
Equals net interest income divided by average interest-earning assets.

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


47
Non-Interest Income.  Non-interest income increased $950,000, or 31.8%, from $3.0 million for the nine months ended September 30, 2018 to $3.9 million for the nine months ended September 30, 2019 primarily due to a $717,000, or 45.4%, increase in net gain on loans held for sale, a $219,000, or 36.5%, increase in mortgage banking and title abstract fees, a $133,000, or 126.7%, increase in gain on the sales of SBA loans, and a $24,000, or 8.5%, increase in insurance commissions.  These increases were partially offset by a $65,000, or 43.3%, decrease in other fees and service charges, a $63,000, or 100%, decrease in the gain on the sales of other real estate owned, and a $15,000, or 10.5%, decrease in real estate sales commissions, net.

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

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












48
Operating Segments

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

Our Banking Segment reported a pre-tax segment profit (“PTSP”) for the three months ended September 30, 2019March 31, 2020 of $426,000,$179,000, a $53,000,$346,000, or 11.1%65.9%, decrease from the same period in 2018.three months ended March 31, 2019.  This decrease in PTSP was primarily due to ana $477,000, or 25.2%, increase in non-interest expense which wasand $30,000, or 35.3%, increase in the provision for loan losses, partially offset by increasesa $134,000, or 6.2%, increase in net interest income and a $27,000, or 7.7%, increase in non-interest income and a decrease in the provision for loan losses.income.  The increase in non-interest expense was due primarily to a $345,000, or 26.1%, increases in salaries and employees benefits expense and other expense.  Thea $48,000, or 32.4%, increase in net interest income was primarily attributable to an increase in interest income, driven by higher average loan balances and yields, partially offset by a higher cost of funds.  The increase in cost of funds was impacted by the interest expense related to $8.0 million in subordinated debt issued in December 2018. The increase in non-interest income, was primarily due to an increase in title abstract fees and the gain on the sale of SBA loans.other expense.

45
Our Mortgage Banking Segment reported a PTSP for the three months ended September 30, 2019March 31, 2020 of $698,000,$429,000, a $302,000,$367,000, or 76.3%591.9%, increase from the same period in 2018.three months ended March 31, 2019.  The increase in PTSP was primarily due to thea $438,000, or 88.8%, increase in non-interest income which was driven by an increasesa $348,000, or 80.4%, increase in net gain on the sale of loans and a $90,000, or 150.0% increase in mortgage processing fees.  This increase was partially offset by a decrease in net interest income and an$43,000, or 10.4%, increase in non-interest expense.

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

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






49

Liquidity and Capital Resources

The Company’s primary sources of funds are deposits, amortization and prepayment of loans and to a lesser extent, loan sales and other funds provided from operations.  While scheduled principal and interest payments on loans are a relatively predictable source of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions and competition.  The Company sets the interest rates on its deposits to maintain a desired level of total deposits.  In addition, the Company invests excess funds in short-term interest-earning assets that provide additional liquidity.  At September 30, 2019,March 31, 2020, the Company’s cash and cash equivalents amounted to $5.5$14.9 million.  At such date, the Company also had $2.0$2.8 million invested in interest-earning time deposits maturing in one year or less.

The Company uses its liquidity to fund existing and future loan commitments, to fund deposit outflows, to invest in other interest-earning assets and to meet operating expenses.  At September 30, 2019,March 31, 2020, Quaint Oak Bank had outstanding commitments to originate loans of $10.2$18.9 million, commitments under unused lines of credit of $20.3$15.1 million, and $1.8$2.1 million under standby letters of credit.

At September 30, 2019,March 31, 2020, certificates of deposit scheduled to mature in less than one year or less totaled $66.6$114.8 million.  Based on prior experience, management believes that a significant portion of such deposits will remain with us, although there can be no assurance that this will be the case.

In addition to cash flow from loan payments and prepayments and deposits, the Company has significant borrowing capacity available to fund liquidity needs.  If the Company requires funds beyond its ability to generate them internally, borrowing agreements exist with the Federal Home Loan Bank of Pittsburgh (FHLB), which provide an additional source of funds.  As of September 30, 2019,March 31, 2020, we had $34.3$30.2 million of borrowings from the FHLB and had $141.0$150.3 million in borrowing capacity. Under terms of the collateral agreement with the FHLB of Pittsburgh, we pledge residential mortgage loans as well as Quaint Oak Bank’s FHLB stock as collateral for such advances.  In addition, as of September 30, 2019March 31, 2020 Quaint Oak Bank had $725,000$816,000 in borrowing capacity with the Federal Reserve Bank of Philadelphia.  There were no borrowings under this facility at September 30, 2019.March 31, 2020.

Our stockholders’ equity amounted to $25.5$26.2 million at September 30, 2019,March 31, 2020, an increase of $1.7 million,$322,000, or 7.2%1.2%, from $23.8$25.9 million at December 31, 2018.2019.  Contributing to the increase was net income for the ninethree months ended September 30, 2019March 31, 2020 of $1.9 million,$432,000, the reissuance of treasury stock for exercised stock options of $190,000,$52,000, common stock earned by participants in the employee stock ownership plan of $136,000,$52,000, amortization of stock awards and options under our stock compensation plans of $130,000,$43,000, and the reissuance of treasury stock under the Bank’s 401(k) Plan of $31,000, and other comprehensive income, net of $27,000.$12,000.  These increases were partially offset by dividends paid of $496,000 and by$178,000, the purchase of treasury stock of $186,000.$67,000, and other comprehensive income, net of $24,000.  For further discussion of the stock compensation plans, see Note 10 in the Notes to Unaudited Consolidated Financial Statements contained elsewhere herein.

Quaint Oak Bank is required to maintain regulatory capital sufficient to meet tier 1 leverage, common equity tier 1 capital, tier 1 risk-based and total risk-based capital ratios of at least 4.00%, 4.50%, 6.00%, and 8.00%, respectively.  At September 30, 2019,March 31, 2020, Quaint Oak Bank exceeded each of its capital requirements with ratios of 10.72%10.38%, 13.43%13.10%, 13.43%13.10% and 14.46%14.09%, respectively. As a small savings and loan holding company eligible for exemption, the Company is not currently subject to any regulatory capital requirements.



5046
Off-Balance Sheet Arrangements

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

Commitments.  At September 30, 2019,March 31, 2020, we had unfunded commitments under lines of credit of $20.3$15.1 million, $10.2$18.9 million of commitments to originate loans, and $1.8$2.1 million under standby letters of credit.  We had no commitments to advance additional amounts pursuant to outstanding lines of credit or undisbursed construction loans.

Impact of Inflation and Changing Prices

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


ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not Applicable.

ITEM 4. CONTROLS AND PROCEDURES

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)) as of September 30, 2019.March 31, 2020.  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 thirdfirst fiscal quarter of fiscal 20192020 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

5147

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
The COVID-19 pandemic has adversely impacted our ability to conduct business and is expected to adversely impact our financial results and those of our customers. The ultimate impact will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic and actions taken by governmental authorities in response to the pandemic.
The COVID-19 pandemic has significantly adversely affected our operations and the way we provide banking services to businesses and individuals, most of whom are currently under government issued stay-at-home orders.  As an essential business, we continue to provide banking and financial services to our customers in an environment compliant with federal and state COVID-19 guidelines.  In addition, we continue to provide access to banking and financial services through online banking, ATMs and by telephone. If the COVID-19 pandemic worsens it could limit or disrupt our ability to provide banking and financial services to our customers.
In response to the stay-at-home orders, the majority of our employees currently are working remotely to enable us to continue to provide banking services to our customers.  Heightened cybersecurity, information security and operational risks may result from these remote work-from-home arrangements. We also could be adversely affected if key personnel or a significant number of employees were to become unavailable due to the effects and restrictions of the COVID-19 pandemic.  We also rely upon our third-party vendors to conduct business and to process, record and monitor transactions. If any of these vendors are unable to continue to provide us with these services, it could negatively impact our ability to serve our customers. Although we have business continuity plans and other safeguards in place, there is no assurance that such plans and safeguards will be effective.
There is pervasive uncertainty surrounding the future economic conditions that will emerge in the months and years following the start of the pandemic. As a result, management is confronted with a significant and unfamiliar degree of uncertainty in estimating the impact of the pandemic on credit quality, revenues and asset values. To date, the COVID-19 pandemic has resulted in declines in loan demand and loan originations, other than through government sponsored programs such as the Payroll Protection Program, deposit availability, market interest rates and negatively impacted many of our business and consumer borrower’s ability to make their loan payments. Because the length of the pandemic and the efficacy of the extraordinary measures being put in place to address its economic consequences are unknown, including recent reductions in the targeted federal funds rate, until the pandemic subsides, we expect our net interest income and net interest margin will be adversely affected. Many of our borrowers have become unemployed or may face unemployment, and certain businesses are at risk of insolvency as their revenues decline precipitously, especially in businesses related to travel, hospitality, leisure and physical personal services. Businesses may ultimately not reopen as there is a significant level of uncertainty regarding the level of economic activity that will return to our markets over time, the impact of governmental assistance, the speed of economic recovery, the resurgence of COVID-19 in subsequent seasons and changes to demographic and social norms that will take place.

Not applicable.
48
The impact of the pandemic is expected to continue to adversely affect us during 2020 and possibly longer as the ability of many of our customers to make loan payments has been significantly affected. Although the Company makes estimates of loan losses related to the pandemic as part of its evaluation of the allowance for loan losses, such estimates involve significant judgment and are made in the context of significant uncertainty as to the impact the pandemic will have on the credit quality of our loan portfolio. It is likely that increased loan delinquencies, adversely classified loans and loan charge-offs will increase in the future as a result of the pandemic.  Consistent with guidance provided by banking regulators, we have modified loans by providing various loan payment deferral options to our borrowers affected by the COVID-19 pandemic. Notwithstanding these modifications, these borrowers may not be able to resume making full payments on their loans once the COVID-19 pandemic is resolved. Any increases in the allowance for credit losses will result in a decrease in net income and, most likely, capital, and may have a material negative effect on our financial condition and results of operations.
Even after the COVID-19 pandemic subsides, the U.S. economy will likely require some time to recover from its effects, the length of which is unknown. and during which we may experience a recession. As a result, we anticipate our business may be materially and adversely affected during this recovery.

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

(a)Not applicable.

(b)Not applicable.

(c)Purchases of Equity Securities


The Company’s repurchases of its common stock made during the quarter ended September 30, 2019March 31, 2020, including stock-for-stock option exercises of outstanding stock options, are set forth in the table below:

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

Period
 
Total Number
of Shares
Purchased
  
Average
Price
Paid per
Share
  
Total Number of
Shares Purchased
 as Part of Publicly Announced Plans
or Programs
  
Maximum
Number of Shares
that May Yet Be
Purchased Under
the Plans or
Programs (1)
 
January 1, 2020 – January 31, 2020  -  $-   -   39,675 
February 1, 2020 – February 28, 2020  -   -   -   39,675 
March 1, 2020 – March 31, 2020  5,372   12.48   5,000   34,675 
Total  5,372  $12.48   5,000   34,675 
Notes to this table:
(1)
On December 12, 2018, the Board of Directors of Quaint Oak Bancorp approved its fifth share repurchase program which provides for the repurchase of up to 50,000 shares, or approximately 2.5% of the Company’s then issued and outstanding shares of common stock, and announced the fifth repurchase program on Form 8-K filed on December 13, 2018.  The repurchase program does not have an expiration date.


49
ITEM 3.DEFAULTS UPON SENIOR SECURITIES

Not applicable.


ITEM 4.MINE SAFETY DISCLOSURES


52
Not applicable.


ITEM 5.OTHER INFORMATION

Not applicable.


ITEM 6.EXHIBITS

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










5350
SIGNATURES


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





Date:  November 13, 2019
May 14, 2020
By:
By:
/s/Robert T. Strong
  
Robert T. Strong
President and Chief Executive Officer
   
   
Date:  May 14, 2020By:
/s/John J. Augustine
 Date:  November 13, 2019
By:
John J. Augustine
Executive Vice President and
Chief Financial Officer