QUAINT OAK BANCORP INC (Form: 10-K, Received: 03/27/2020 14:51:47)

The following table sets forth the amount of investment securities which mature during each of the periods indicated and the weighted average yields for each range of maturities at December 31, 2019.

	Amounts at December 31, 2019 Which Mature In
	One Year or Less		Weighted Average Yield			Over One Year Through Five Years		Weighted Average Yield			Over Five Years Through Ten Years		Weighted Average Yield			Over Ten Years		Weighted Average Yield
	(Dollars in Thousands)
Interest-earning time deposits with other financial institutions	$	2,026		2.78	%	$	8,146		2.82	%	$	--		--	%	$	--		--	%
Mortgage-backed securities:
Governmental National Mortgage Association		--		--			--		--			--		--			5,841		2.42
Federal National Mortgage Association		--		--			--		--			--		--			258		3.92
Debt securities, Corporate Notes		--		--			--		--			1,500		4.25	%		--		--
	$	2,026		1.21	%	$	8,146		2.82	%	$	1,500		4.25	%	$	6,099		2.48	%

Sources of Funds

General. Deposits are the primary source of Quaint Oak Bank’s funds for lending and other investment purposes. In addition to deposits, principal and interest payments on loans are a source of funds. Loan payments are a relatively stable source of funds, while deposit inflows and outflows are significantly influenced by general interest rates and money market conditions. Borrowings may also be used on a short-term basis to compensate for reductions in the availability of funds from other sources and on a longer-term basis for general business purposes.

Deposits. Deposits are attracted by Quaint Oak Bank principally from southwestern Bucks and southeastern Montgomery Counties, northeast Philadelphia and Lehigh Valley areas of Pennsylvania, although we also attract deposits from outside our market area and the Commonwealth of Pennsylvania. Deposit account terms vary, with the principal differences being the minimum balance required, the time periods the funds must remain on deposit, and the interest rate. Quaint Oak Bank offers a variety of deposit accounts with a range of rates and terms. Our deposit accounts consist of certificates of deposit and various savings products, including non-interest bearing business and consumer checking accounts.

Quaint Oak Bank generally does not solicited deposits from outside Pennsylvania or pay fees to brokers to solicit funds for deposit. At December 31, 2019, approximately 14% of Quaint Oak Bank’s total deposits were held by customers outside the Commonwealth of Pennsylvania.

Interest rates paid, maturity terms, service fees and withdrawal penalties are established on a periodic basis. Management determines the rates and terms based on rates paid by competitors, the need for funds or liquidity, growth goals and federal regulations. Management attempts to control the flow of deposits by pricing the accounts to remain generally competitive with other financial institutions in our market area.

The following table shows the distribution of, and certain other information relating to, our deposits by type of deposit, as of the dates indicated.

		December 31,
		2019					2018					2017
		Amount		%			Amount		%			Amount		%
		(Dollars in Thousands)
Certificate accounts:
	0.00% - 0.99%	$	--		--	%	$	--		--	%	$	5,121		2.8	%
	1.00% - 1.99%		51,180		22.5			60,568		28.6			86,685		46.5
	2.00% - 2.99%		125,566		55.2			102,539		48.4			53,232		28.6
	3.00% - 3.99%		7,706		3.4			3,109		1.4			--		--
Total certificate accounts			184,452		81.1			166,216		78.4			145,038		77.9
Transaction accounts:
Non-interest bearing checking accounts			15,775		6.9			17,542		8.3			7,956		4.3
Passbook accounts			5		--			192		0.1			463		0.2
Savings accounts			1,722		0.8			1,120		0.5			2,353		1.3
Money market accounts			25,504		11.2			26,841		12.7			30,411		16.3
Total transaction accounts			43,006		18.9			45,695		21.6			41,183		22.1
Total deposits		$	227,458		100.0	%	$	211,911		100.0	%	$	186,221		100.0	%

The following table shows the average balance of each type of deposit and the average rate paid on each type of deposit for the periods indicated.

	Year Ended December 31,
	2019							2018							2017
	Average Balance		Interest Expense		Average Rate Paid			Average Balance		Interest Expense		Average Rate Paid			Average Balance		Interest Expense		Average Rate Paid
	(Dollars in Thousands)
Passbook accounts	$	53	$	--		--	%	$	310	$	--		--	%	$	694	$	1		0.14	%
Savings accounts		1,629		3		0.18			1,906		4		0.21			1,584		3		0.19
Money market accounts		27,550		221		0.80			29,982		239		0.80			32,255		258		0.80
Certificates of deposit		177,000		4,063		2.30			156,696		3,021		1.93			139,126		2,419		1.74
Total interest-bearing deposits	$	206,232	$	4,287		2.08	%	$	188,894	$	3,264		1.73	%	$	173,659	$	2,681		1.54	%
Non-interest bearing deposits	$	16,148	$	--		--	%	$	11,645	$	--		--	%	$	6,907	$	--		--	%
Total deposits	$	222,380	$	4,287		1.93	%	$	200,539	$	3,264		1.63	%	$	180,566	$	2,681		1.48	%

The following table sets forth the net deposit flows of the Company during the periods indicated.

	Year Ended December 31,
	2019		2018		2017
	(In Thousands)
Increase before interest credited	$	11,303	$	22,455	$	6,533
Interest credited		4,244		3,235		2,681
Total increase in deposits	$	15,547	$	25,690	$	9,214

The following table presents, by various interest rate categories and maturities, the amount of certificates of deposit at December 31, 2019.

		Balance at December 31, 2019 Maturing in the Twelve Months Ending December 31,
Certificates of Deposit		2020		2021		2022		Thereafter		Total
		(In Thousands)
	1.00% - 1.99%	$	37,442	$	9,521	$	2,366	$	1,851	$	51,180
	2.00% - 2.99%		56,680		42,925		9,716		16,245		125,566
	3.00% - 3.99%		--		51		--		7,655		7,706
Total certificate accounts		$	94,122	$	52,497	$	12,082	$	25,751	$	184,452

The following table shows the maturities of our certificates of deposit of $100,000 or more at December 31, 2019 by time remaining to maturity.

Quarter Ending:	Amount		Weighted Average Rate
	(Dollars in Thousands)
March 31, 2020	$	8,134		2.17	%
June 30, 2020		19,282		2.03
September 30, 2020		9,555		2.07
December 31, 2020		14,338		2.36
After December 31, 2020		52,720		2.44
Total certificates of deposit with balances of $100,000 or more	$	104,029		2.30	%

Borrowings. Quaint Oak Bank may obtain advances from the Federal Home Loan Bank of Pittsburgh upon the security of the common stock it owns in that bank and certain of its residential mortgage loans and mortgage-backed and other investment securities, provided certain standards related to creditworthiness have been met. These advances are made pursuant to several credit programs, each of which has its own interest rate and range of maturities. Federal Home Loan Bank advances are generally available to meet seasonal and other withdrawals of deposit accounts and to permit increased lending.

As of December 31, 2019, Quaint Oak Bank has a maximum borrowing capacity with the Federal Home Loan Bank of approximately $145.7 million. Quaint Oak Bank’s Federal Home Loan Bank advances outstanding were $36.3 million and $24.0 million at December 31, 2019 and 2018, respectively. As of December 31, 2019, Quaint Oak Bank has $892,000 in borrowing capacity with the Federal Reserve Bank of Philadelphia. There were no borrowings under this facility at December 31, 2019 or 2018.

The following table shows certain information regarding our borrowings at or for the dates indicated:

	At or For the Year Ended December 31,
	2019			2018			2017
	(Dollars in Thousands)
FHLB short-term borrowings:
Average balance outstanding	$	5,585		$	9,745		$	8,654
Maximum amount outstanding at any month-end during the period		11,000			10,000			11,500
Balance outstanding at end of period		10,000			9,000			10,000
Average interest rate during the period		2.52	%		2.02	%		1.17	%
Weighted average interest rate at end of period		1.81	%		2.62	%		1.54	%

	At or For the Year Ended December 31,
		2019			2018			2017
	(Dollars in Thousands)
FHLB long-term borrowings:
Average balance outstanding	$	21,327		$	17,236		$	12,278
Maximum amount outstanding at any month-end during the period		26,271			18,000			18,000
Balance outstanding at end of period		26,271			15,000			18,000
Average interest rate during the period		2.25	%		2.04	%		1.79	%
Weighted average interest rate at end of period		2.16	%		2.12	%		2.01	%

Total Employees

We had 79 full-time employees and one part-time employee at December 31, 2019. None of these employees are represented by a collective bargaining agreement, and we believe that the Company enjoys good relations with its personnel.

Market Area

As of December 31, 2019, our primary market area for loans and deposits is in Bucks, Montgomery and Philadelphia Counties, Pennsylvania, and the Lehigh Valley area of Pennsylvania, although we also attract deposits from outside our market area and the Commonwealth of Pennsylvania. Our operating strategy is based on strong personal service and operating efficiency.

Quaint Oak Bank is headquartered in Southampton in Bucks County, Pennsylvania and operates one regional office in Southampton and one in Allentown, Pennsylvania. The Bank opened its third regional office in Philadelphia on February 26, 2020. Bucks County lies north of Philadelphia, bordering Montgomery County on the west and New Jersey to the east. In recent years, population growth has been above Pennsylvania averages in both Bucks and Montgomery Counties. We expect population growth and new housing growth will likely remain above the state average in the near term. Income and wealth demographics are also above both national and Pennsylvania averages. The Lehigh Valley area is one of the fastest growing regions in Pennsylvania due in part to its reasonable business climate and lower cost of living in comparison to its surrounding areas and states. The Lehigh Valley is particularly noteworthy for its unusually balanced and multi-faceted economy. Far from depending on a single industry, the top four sub-sectors of the regional GDP are all extremely close to one another, which ultimately means a healthier and more vibrant regional economy.

Competition

Quaint Oak Bank faces significant competition both in attracting deposits and in making loans. Its most direct competition for deposits has come historically from commercial banks, credit unions and other savings institutions located in its primary market area, including many large financial institutions which have greater financial and marketing resources available to them. In addition, Quaint Oak Bank faces significant competition for investors’ funds from short-term money market securities, mutual funds and other corporate and government securities. Also, given Quaint Oak Bank’s operating strategies and reliance on savings accounts and certificates of deposit, Quaint Oak Bank also faces intense competition from money market mutual funds and national savings products. Quaint Oak Bank does not rely upon any individual group or entity for a material portion of its deposits. The ability of Quaint Oak Bank to attract and retain deposits depends on its ability to generally provide a rate of return, liquidity and risk comparable to that offered by competing investment opportunities.

Quaint Oak Bank’s competition for loans comes principally from mortgage banking companies, commercial banks, other savings institutions and credit unions. Quaint Oak Bank competes for loan originations primarily through the interest rates and loan fees it charges, and the efficiency and quality of services it provides borrowers. Factors that affect competition include general and local economic conditions, current interest rate levels and volatility in the mortgage markets.

REGULATION

Regulation of Quaint Oak Bancorp

General. Quaint Oak Bancorp is subject to regulation as a savings and loan holding company under the Home Owners’ Loan Act, as amended, because we made an election under Section 10(l) of the Home Owners’ Loan Act to be treated as a “savings association” for purposes of Section 10 of the Home Owners’ Loan Act. As a result, Quaint Oak Bancorp is currently regulated by the Federal Reserve Board and is subject to the regulations, examinations, supervision and reporting requirements relating to savings and loan holding companies. Quaint Oak Bancorp is also required to file certain reports with, and otherwise comply with the rules and regulations of, the Pennsylvania Department of Banking and Securities and the Securities and Exchange Commission. As a subsidiary of a savings and loan holding company, Quaint Oak Bank is subject to certain restrictions in its dealings with Quaint Oak Bancorp and affiliates thereof, including the Federal Reserve Board’s Qualified Thrift Lender test, dividend restrictions and transactions with affiliates regulations.

In the last several years, Quaint Oak Bancorp has experienced heightened regulatory requirements and scrutiny following the global financial crisis and as a result of the enactment in 2010 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). Resulting reforms have caused Quaint Oak Bancorp’s compliance and risk management processes, and the costs thereof, to increase. The legislation enacted in 2018 and summarized below may reduce some of the burdens associated with implementation of the Dodd-Frank Act, but the actual impact of this administration’s policies regarding the Dodd-Frank Act reforms is impossible to predict with any certainty.

2018 Regulatory Reform. In May 2018 the Economic Growth, Regulatory Relief and Consumer Protection Act (the “Act”), was enacted to modify or remove certain financial reform rules and regulations, including some of those implemented under the Dodd-Frank Act. While the Act maintains most of the regulatory structure established by the Dodd-Frank Act, it amends certain aspects of the regulatory framework for small depository institutions with assets of less than $10 billion and for large banks with assets of more than $50 billion. Many of these changes could result in meaningful regulatory relief for community banks such as Quaint Oak Bank.

The Act, among other matters, expands the definition of qualified mortgages which may be held by a financial institution and simplifies the regulatory capital rules for financial institutions and their holding companies with total consolidated assets of less than $10 billion by instructing the federal banking regulators to establish a single “Community Bank Leverage Ratio” of between 8 and 10 percent to replace the leverage and risk-based regulatory capital ratios. The Act also expands the category of holding companies that may rely on the “Small Bank Holding Company and Savings and Loan Holding Company Policy Statement” by raising the maximum amount of assets a qualifying holding company may have from $1.0 billion to $3.0 billion. This expansion also excludes such holding companies from the minimum capital requirements of the Dodd-Frank Act. In addition, the Act includes regulatory relief for community banks regarding regulatory examination cycles, call reports, the Volcker Rule (proprietary trading prohibitions), mortgage disclosures and risk weights for certain high-risk commercial real estate loans.

It is difficult at this time to predict when or how any new standards under the Act will ultimately be applied to us or what specific impact the Act and the implementing rules and regulations will have on community banks.

Restrictions Applicable to Quaint Oak Bancorp. As a non-grandfathered savings and loan holding company, Quaint Oak Bancorp is permitted to engage only in the following activities:

•	furnishing or performing management services for a subsidiary savings institution;

•	conducting an insurance agency or escrow business;

•	holding, managing, or liquidating assets owned or acquired from a subsidiary savings institution;

•	holding or managing properties used or occupied by a subsidiary savings institution;

•	acting as trustee under a deed of trust;

•

any other activity (i) that the Federal Reserve Board, by regulation, has determined to be permissible for bank holding companies under Section 4(c) of the Bank Holding Company Act of 1956, unless the Federal Reserve Board, by regulation, prohibits or limits any such activity for savings and loan holding companies, or (ii) in which multiple savings and loan holding companies were authorized by regulation to directly engage in on March 5, 1987;

•	purchasing, holding, or disposing of stock acquired in connection with a qualified stock issuance if the purchase of such stock by such holding company is approved by the Federal Reserve Board; and

•	any activity permissible for financial holding companies under section 4(k) of the Bank Holding Company Act.

Permissible activities which are deemed to be financial in nature or incidental thereto under section 4(k) of the Bank Holding Company Act include:

•	lending, exchanging, transferring, investing for others, or safeguarding money or securities;

•	insurance activities or providing and issuing annuities, and acting as principal, agent, or broker;

•	financial, investment, or economic advisory services;

•	issuing or selling instruments representing interests in pools of assets that a bank is permitted to hold directly;

•	underwriting, dealing in, or making a market in securities;

•	activities previously determined by the Federal Reserve Board to be closely related to banking;

•	activities that bank holding companies are permitted to engage in outside of the U.S.; and

•	portfolio investments made by an insurance company.

In addition, Quaint Oak Bancorp cannot be acquired unless the acquirer is engaged solely in financial activities or acquire a company unless the company is engaged solely in financial activities.

If a savings and loan holding company acquires or merges with another holding company, the holding company acquired or the holding company resulting from such merger or acquisition may only invest in assets and engage in the activities listed above, and it has a period of two years to cease any non-conforming activities and divest any non-conforming investments. As of December 31, 2019, Quaint Oak Bancorp was not engaged in any non-conforming activities and it did not have any non-conforming investments.

If the subsidiary savings association fails to meet the Qualified Thrift Lender test set forth in Section 10(m) of the Home Owners’ Loan Act, as discussed below, then the savings and loan holding company must register with the Federal Reserve Board as a bank holding company, unless the savings institution requalifies as a Qualified Thrift Lender within one year thereafter.

Qualified Thrift Lender Test. A savings association can comply with the Qualified Thrift Lender test by either meeting the Qualified Thrift Lender test set forth in the Home Owners’ Loan Act and implementing regulations or qualifying as a domestic building and loan association as defined in Section 7701(a)(19) of the Internal Revenue Code of 1986, as amended. Currently the Qualified Thrift Lender test in the Home Owners’ Loan Act requires that 65% of an institution’s portfolio assets (as defined) consist of certain housing and consumer-related assets on a monthly average basis in nine out of every twelve months. To be a Qualified Thrift Lender under the IRS test, the savings institution must meet the “business operations test” and a “60 percent assets test”, each defined in the Internal Revenue Code. A savings association subsidiary of a savings and loan holding company that does not comply with the Qualified Thrift Lender test is immediately subject to the following restrictions on its operations:

•	the institution may not engage in any new activity or make any new investment, directly or indirectly, unless such activity or investment is permissible for both a national bank and a savings association;

•	the branching powers of the institution shall be restricted to those of a national bank; and

•	payment of dividends by the institution shall be subject to the rules regarding payment of dividends by a national bank and must be necessary to meet the obligations of its holding company.

Upon the expiration of three years from the date the institution ceases to meet the Qualified Thrift Lender test, it must cease any activity and not retain any investment not permissible for both a national bank and a savings association (subject to safety and soundness considerations). A savings institution not in compliance with the Qualified Thrift Lender test is also subject to an enforcement action for violation of the Home Owners’ Loan Act, as amended.

Quaint Oak Bank believes that it meets the provisions of the Qualified Thrift Lender test and for the year ended December 31, 2019, 76% of its portfolio assets meet the requirements.

Regulatory Capital Requirements. The Federal Reserve Board has adopted capital adequacy guidelines pursuant to which it assesses the adequacy of capital in examining and supervising a savings and loan holding company and in analyzing applications to it under the Savings and Loan Holding Company Act. The Federal Reserve Board’s capital adequacy guidelines for Quaint Oak Bancorp, on a consolidated basis, are similar to those imposed on Quaint Oak Bank by the Federal Deposit Insurance Corporation. See “-Regulation of Quaint Oak Bank - Capital Requirements.” Moreover, certain of the savings and loan holding company capital requirements promulgated by the Federal Reserve Board in 2013 became effective as of January 1, 2015. Those requirements establish four minimum capital ratios that Quaint Oak Bancorp had to comply with as of that date. However, in May 2015, amendments to the Federal Reserve Board’s small bank holding company policy statement (the “SBHC Policy”) (which also applies to small savings and loan holding companies) became effective which increased the asset threshold to qualify to utilize the provisions of the SBHC Policy from $500 million to $1.0 billion. In 2018, the Act increased the asset threshold to $3.0 billion. Savings and loan holding companies which are subject to the SBHC Policy are not subject to compliance with the regulatory capital requirements set forth in the table below until they exceed $3.0 billion in assets. As a consequence, as of December 31, 2019, Quaint Oak Bancorp was not required to comply with the requirements until such time that its consolidated total assets exceed $3.0 billion or the Federal Reserve Board determines that Quaint Oak Bancorp is no longer deemed to be a small savings and loan holding company. However, if Quaint Oak Bancorp had been subject to the requirements, it would have been in compliance with such requirements.

Limitations on Transactions with Affiliates. Transactions between savings associations and any affiliate are governed by Sections 23A and 23B of the Federal Reserve Act as made applicable to savings associations by Section 11 of the Home Owners’ Loan Act. An affiliate of a savings association includes any company or entity which controls the savings association or that is controlled by a company that controls the savings association. In a holding company context, the holding company of a savings association (such as Quaint Oak Bancorp) and any companies which are controlled by such holding company are affiliates of the savings association. Generally, Section 23A limits the extent to which the savings association or its subsidiaries may engage in “covered transactions” with any one affiliate to an amount equal to 10% of such association’s capital stock and surplus, and contains an aggregate limit on all such transactions with all affiliates to an amount equal to 20% of such capital stock and surplus. Section 23B applies to “covered transactions” as well as certain other transactions and requires that all transactions be on terms substantially the same, or at least as favorable, to the savings association as those provided to a non-affiliate. The term “covered transaction” includes the making of loans to, purchase of assets from and issuance of a guarantee to an affiliate and similar transactions. Section 23B transactions also include the provision of services and the sale of assets by a savings association to an affiliate. In addition to the restrictions imposed by Sections 23A and 23B, Section 11 of the Home Owners’ Loan Act prohibits a savings association from (i) making a loan or other extension of credit to an affiliate, except for any affiliate which engages only in certain activities which are permissible for bank holding companies, or (ii) purchasing or investing in any stocks, bonds, debentures, notes or similar obligations of any affiliate, except for affiliates which are subsidiaries of the savings association.

In addition, Sections 22(g) and (h) of the Federal Reserve Act as made applicable to savings associations by Section 11 of the Home Owners’ Loan Act, place restrictions on loans to executive officers, directors and principal stockholders of the savings association and its affiliates. Under Section 22(h), loans to a director, an executive officer and to a greater than 10% stockholder of a savings association, and certain affiliated interests of either, may not exceed, together with all other outstanding loans to such person and affiliated interests, the savings association’s loans to one borrower limit (generally equal to 15% of the association’s unimpaired capital and surplus). Section 22(h) also requires that loans to directors, executive officers and principal stockholders be made on terms substantially the same as offered in comparable transactions to other persons unless the loans are made pursuant to a benefit or compensation program that (i) is widely available to employees of the association and (ii) does not give preference to any director, executive officer or principal stockholder, or certain affiliated interests of either, over other employees of the savings association. Section 22(h) also requires prior board approval for certain loans. In addition, the aggregate amount of extensions of credit by a savings association to all insiders cannot exceed the association’s unimpaired capital and surplus. Furthermore, Section 22(g) places additional restrictions on loans to executive officers. As an insured state-chartered savings bank, Quaint Oak Bank currently is subject to Sections 22(g) and (h) of the Federal Reserve Act and at December 31, 2019, was in compliance with the above restrictions.

Restrictions on Acquisitions. Except under limited circumstances, savings and loan holding companies are prohibited from acquiring, without prior approval of the Federal Reserve Board, (i) control of any other savings association or savings and loan holding company or substantially all the assets thereof or (ii) more than 5% of the voting shares of a savings association or holding company thereof which is not a subsidiary. Except with the prior approval of the Federal Reserve Board, no director or officer of a savings and loan holding company or person owning or controlling by proxy or otherwise more than 25% of such company’s stock, may acquire control of any savings association, other than a subsidiary savings association, or of any other savings and loan holding company.

The Federal Reserve Board may only approve acquisitions resulting in the formation of a multiple savings and loan holding company which controls savings associations in more than one state if (i) the multiple savings and loan holding company involved controls a savings association which operated a home or branch office located in the state of the association to be acquired as of March 5, 1987; (ii) the acquirer is authorized to acquire control of the savings association pursuant to the emergency acquisition provisions of the Federal Deposit Insurance Act; or (iii) the statutes of the state in which the association to be acquired is located specifically permit associations to be acquired by the state-chartered associations or savings and loan holding companies located in the state where the acquiring entity is located (or by a holding company that controls such state-chartered savings associations).

Federal Securities Laws. Quaint Oak Bancorp’s common stock is registered with the Securities and Exchange Commission under Section 12(g) of the Securities Exchange Act of 1934, as amended. Quaint Oak Bancorp is subject to information, proxy solicitation, insider trading restrictions, and other requirements under the Securities Exchange Act of 1934.

The Sarbanes-Oxley Act. As a public company, Quaint Oak Bancorp is subject to the Sarbanes-Oxley Act of 2002 which addresses, among other issues, corporate governance, auditing and accounting, executive compensation, and enhanced and timely disclosure of corporate information. As directed by the Sarbanes-Oxley Act, our principal executive officer and principal financial officer are required to certify that our quarterly and annual reports do not contain any untrue statement of a material fact. The rules adopted by the Securities and Exchange Commission under the Sarbanes-Oxley Act have several requirements, including having these officers certify that: they are responsible for establishing, maintaining and regularly evaluating the effectiveness of our internal control over financial reporting; they have made certain disclosures to our auditors and the audit committee of the Board of Directors about our internal control over financial reporting; and they have included information in our quarterly and annual reports about their evaluation and whether there have been changes in our internal control over financial reporting or in other factors that could materially affect internal control over financial reporting.

Volcker Rule Regulations. Regulations have been adopted by the federal banking agencies to implement the provisions of the Dodd Frank Act commonly referred to as the Volcker Rule. The regulations contain prohibitions and restrictions on the ability of financial institutions holding companies and their affiliates to engage in proprietary trading and to hold certain interests in, or to have certain relationships with, various types of investment funds, including hedge funds and private equity funds. Recently promulgated federal regulations exclude from the Volcker Rule restriction community banks with $10 billion or less in total consolidated and total trading assets and liabilities of five percent or less of total consolidated assets. Quaint Oak qualifies for the exclusion from Volcker Rule restrictions.

Regulation of Quaint Oak Bank

Pennsylvania Banking Law. The Pennsylvania Banking Code contains detailed provisions governing the organization, location of offices, rights and responsibilities of directors, officers and employees, as well as corporate powers, savings and investment operations and other aspects of Quaint Oak Bank and its affairs. The Pennsylvania Banking Code delegates extensive rulemaking power and administrative discretion to the Pennsylvania Department of Banking and Securities so that the supervision and regulation of state-chartered savings banks may be flexible and readily responsive to changes in economic conditions and in savings and lending practices.

One of the purposes of the Pennsylvania Banking Code is to provide savings banks with the opportunity to be competitive with each other and with other financial institutions existing under other Pennsylvania laws and other state, federal and foreign laws. A Pennsylvania savings bank may locate or change the location of its principal place of business and establish an office anywhere in the Commonwealth, with the prior approval of the Pennsylvania Department of Banking and Securities.

The Pennsylvania Department of Banking and Securities generally examines each savings bank not less frequently than once every two years. Although the Pennsylvania Department of Banking and Securities may accept the examinations and reports of the Federal Deposit Insurance Corporation in lieu of its own examination, the present practice is for the Pennsylvania Department of Banking and Securities to conduct individual examinations. The Pennsylvania Department of Banking and Securities may order any savings bank to discontinue any violation of law or unsafe or unsound business practice and may direct any director, trustee, officer, attorney or employee of a savings bank engaged in an objectionable activity, after the Pennsylvania Department of Banking and Securities has ordered the activity to be terminated, to show cause at a hearing before the Pennsylvania Department of Banking and Securities why such person should not be removed.

Insurance of Accounts. The deposits of Quaint Oak Bank are insured to the maximum extent permitted by the Deposit Insurance Fund, administered by the Federal Deposit Insurance Corporation, and are backed by the full faith and credit of the U.S. Government. The 2010 financial institution reform legislation permanently increased deposit insurance on most accounts to $250,000. As insurer, the Federal Deposit Insurance Corporation is authorized to conduct examinations of, and to require reporting by, insured institutions. It also may prohibit any insured institution from engaging in any activity determined by regulation or order to pose a serious threat to the Federal Deposit Insurance Corporation.

The Dodd Frank Act raises the minimum reserve ratio of the Deposit Insurance Fund from 1.15% to 1.35% and requires the FDIC to offset the effect of this increase on insured institutions with assets of less than $10 billion (small institutions). In March 2016, the FDIC adopted a rule to accomplish this by imposing a surcharge on larger institutions commencing when the reserve ratio reaches 1.15% and ending when it reaches 1.35%. The reserve ratio reached 1.15% effective as of June 30, 2016 and exceeded 1.35% effective as of September 30, 2018. Small institutions will receive credits for the portion of their regular assessments that contributed to growth in the reserve ratio between 1.15% and 1.35%. The credits will apply to reduce regular assessments by 2.0 basis points for quarters when the reserve ratio is at least 1.38%.

Effective July 1, 2016, the FDIC adopted changes that eliminated its risk-based premium system. Under the new premium system, the FDIC assesses deposit insurance premiums on the assessment base of a depository institution, which is its average total assets reduced by the amount of its average tangible equity. For a small institution (one with assets of less than $10 billion) that has been federally insured for at least five years, effective July 1, 2016, the initial base assessment rate ranges from 3 to 30 basis points, based on the institution’s CAMELS composite and component ratings and certain financial ratios; its leverage ratio; its ratio of net income before taxes to total assets; its ratio of nonperforming loans and leases to gross assets; its ratio of other real estate owned to gross assets; its brokered deposits ratio (excluding reciprocal deposits if the institution is well capitalized and has a CAMELS composite rating of 1 or 2); its one year asset growth ratio (which penalizes growth adjusted for mergers in excess of 10%); and its loan mix index (which penalizes higher risk loans based on historical industry charge off rates). The initial base assessment rate is subject to downward adjustment (not below 1.5%) based on the ratio of unsecured debt the institution has issued to its assessment base, and to upward adjustment (which can cause the rate to exceed 30 basis points) based on its holdings of unsecured debt issued by other insured institutions. Institutions with assets of $10 billion or more are assessed using a scorecard method.

In addition, through March 29, 2019, all institutions with deposits insured by the Federal Deposit Insurance Corporation were required to pay assessments to fund interest payments on bonds issued by the Financing Corporation, a mixed-ownership government corporation established to recapitalize a predecessor to the Deposit Insurance Fund. The assessment rate is adjusted quarterly. The Financing Corporation bonds matured in 2019.

The Federal Deposit Insurance Corporation may terminate the deposit insurance of any insured depository institution, including Quaint Oak Bank, if it determines after a hearing that the institution has engaged or is engaging in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, order or any condition imposed by an agreement with the Federal Deposit Insurance Corporation. It also may suspend deposit insurance temporarily during the hearing process for the permanent termination of insurance, if the institution has no tangible capital. If insurance of accounts is terminated, the accounts at the institution at the time of the termination, less subsequent withdrawals, shall continue to be insured for a period of six months to two years, as determined by the Federal Deposit Insurance Corporation. Management is aware of no existing circumstances which would result in termination of Quaint Oak Bank’s deposit insurance.

Recent Regulatory Capital Regulations. In July of 2013 the respective U.S. federal banking agencies issued final rules implementing Basel III and the Dodd-Frank Act capital requirements which became fully phased in on a global basis on January 1, 2019. The regulations established a new tangible common equity capital requirement, increase the minimum requirement for the current Tier 1 risk-weighted asset (“RWA”) ratio, phase out certain kinds of intangibles treated as capital and certain types of instruments and change the risk weightings of certain assets used to determine required capital ratios. The common equity Tier 1 capital component requires capital of the highest quality – predominantly composed of retained earnings and common stock instruments. For community banks, such as Quaint Oak Bank, the new capital rules required a common equity Tier 1 capital ratio of 4.5% and also increased the current minimum Tier 1 capital ratio from 4.0% to 6.0%. In addition, in order to make capital distributions and pay discretionary bonuses to executive officers without restriction, an institution must also maintain greater than 2.5% in common equity attributable to a capital conservation buffer which became fully phased in on January 1, 2019. The rules also increase the risk weights for several categories of assets, including an increase from 100% to 150% for certain acquisition, development and construction loans and more than 90-day past due exposures. The capital rules maintain the general structure of the prompt corrective action rules (described below), but incorporate the new common equity Tier 1 capital requirement and the increased Tier 1 RWA requirement into the prompt corrective action framework.

Effective January 1, 2020, qualifying community banking organizations may elect to comply with a greater than 9% community bank leverage ratio (the “CBLR”) requirement in lieu of the currently applicable requirements for calculating and reporting risk-based capital ratios. The CBLR is equal to Tier 1 capital divided by average total consolidated assets. In order to qualify for the CBLR election, a community bank must (i) have a leverage capital ratio greater than 9 percent, (2) have less than $10 billion in average total consolidated assets, (3) not exceed certain levels of off-balance sheet exposure and trading assets plus trading liabilities and (4) not be an advanced approaches banking organization. A community bank that meets the above qualifications and elects to utilize the CBLR is considered to have satisfied the risk-based and leverage capital requirements in the generally applicable capital rules and is also considered to be “well capitalized” under the prompt corrective action rules.

Regulatory Capital Requirements. Unless a community bank qualifies for and elects to comply with the CBLR beginning on January 1, 2020, federally insured state-chartered non-member banks and savings banks are required to maintain the minimum levels of regulatory capital described below. Current Federal Deposit Insurance Corporation capital standards require these institutions to satisfy a common equity Tier 1 capital requirement, a leverage capital requirement and a risk-based capital requirement. The common equity Tier 1 capital component generally consists of retained earnings and common stock instruments and must equal at least 4.5% of risk-weighted assets. Leverage capital, also known as “core” capital, must equal at least 3.0% of adjusted total assets for the most highly rated state-chartered non-member banks and savings banks. Core capital generally consists of common stockholders’ equity (including retained earnings). An additional cushion of at least 100 basis points is required for all other institutions, which effectively increases their minimum Tier 1 leverage ratio to 4.0% or more. Under the Federal Deposit Insurance Corporation’s regulations, the most highly-rated banks are those that the Federal Deposit Insurance Corporation determines are strong banking organization and are rated composite 1 under the Uniform Financial Institutions Rating System. Under the risk-based capital requested, “total” capital (a combination of core and “supplementary” capital) must equal at least 8.0% of “risk-weighted” assets. The Federal Deposit Insurance Corporation also is authorized to impose capital requirements in excess of these standards on individual institutions on a case-by-case basis.

In determining compliance with the risk-based capital requirement, a savings bank is allowed to include both core capital and supplementary capital in its total capital, provided that the amount of supplementary capital included does not exceed the savings bank’s core capital. Supplementary capital generally consists of general allowances for loan losses up to a maximum of 1.25% of risk-weighted assets, together with certain other items. In determining the required amount of risk-based capital, total assets, including certain off-balance sheet items, are multiplied by a risk weight based on the risks inherent in the type of assets. The risk weights range from 0% for cash and securities issued by the U.S. Government or unconditionally backed by the full faith and credit of the U.S. Government to 100% for loans (other than qualifying residential loans weighted at 80%) and repossessed assets.

Savings banks must value securities available for sale at amortized cost for regulatory capital purposes. This means that in computing regulatory capital, savings banks should add back any unrealized losses and deduct any unrealized gains, net of income taxes, on debt securities reported as a separate component of capital, as defined by generally accepted accounting principles.

Any savings bank that fails any of the capital requirements is subject to possible enforcement action by the Federal Deposit Insurance Corporation. Such action could include a capital directive, a cease and desist order, civil money penalties, the establishment of restrictions on the institution’s operations, termination of federal deposit insurance and the appointment of a conservator or receiver. The Federal Deposit Insurance Corporation’s capital regulations provide that such actions, through enforcement proceedings or otherwise, could require one or more of a variety of corrective actions.

At December 31, 2019, Quaint Oak Bank’s capital ratios exceeded each of its capital requirements. See Note 18 to the notes to our financial statements included in Exhibit 13.0 hereto.

Pennsylvania Department of Banking and Securities Capital Requirements. Quaint Oak Bank is also subject to more stringent Pennsylvania Department of Banking and Securities capital guidelines. Although not adopted in regulation form, the Pennsylvania Department of Banking and Securities utilizes capital standards requiring a minimum of 6% leverage capital and 10% risk-based capital. The components of leverage and risk-based capital are substantially the same as those defined by the Federal Deposit Insurance Corporation. At December 31, 2019, Quaint Oak Bank’s capital ratios exceeded each of its capital requirements.

Prompt Corrective Action. The following table shows the amount of capital associated with the different capital categories set forth in the prompt corrective action regulations.

Capital Category	Total Risk-Based Capital	Tier 1 Risk- Based Capital	Tier 1 Common Equity Capital	Tier 1 Leverage Capital
Well capitalized	10% or more	8% or more	6.5% or more	5% or more
Adequately capitalized	8% or more	6% or more	4.5% or more	4% or more
Undercapitalized	Less than 8%	Less than 6%	Less than 4.5%	Less than 4%
Significantly undercapitalized	Less than 6%	Less than 4%	Less than 3%	Less than 3%

In addition, an institution is “critically undercapitalized” if it has a ratio of tangible equity to total assets that is equal to or less than 2.0%. Under specified circumstances, a federal banking agency may reclassify a well-capitalized institution as adequately capitalized and may require an adequately capitalized institution or an undercapitalized institution to comply with supervisory actions as if it were in the next lower category (except that the Federal Deposit Insurance Corporation may not reclassify a significantly undercapitalized institution as critically undercapitalized).

An institution generally must file a written capital restoration plan which meets specified requirements within 45 days of the date that the institution receives notice or is deemed to have notice that it is undercapitalized, significantly undercapitalized or critically undercapitalized. A federal banking agency must provide the institution with written notice of approval or disapproval within 60 days after receiving a capital restoration plan, subject to extensions by the agency. An institution which is required to submit a capital restoration plan must concurrently submit a performance guaranty by each company that controls the institution. In addition, undercapitalized institutions are subject to various regulatory restrictions, and the appropriate federal banking agency also may take any number of discretionary supervisory actions.

At December 31, 2019, Quaint Oak Bank was deemed a well-capitalized institution for purposes of the prompt corrective regulations and as such is not subject to the above mentioned restrictions.

Activities and Investments of Insured State-Chartered Savings Banks. The activities and equity investments of Federal Deposit Insurance Corporation-insured, state-chartered savings banks are generally limited to those that are permissible for national banks. Under regulations dealing with equity investments, an insured state bank generally may not directly or indirectly acquire or retain any equity investment of a type, or in an amount, that is not permissible for a national bank. An insured state bank is not prohibited from, among other things:

•	acquiring or retaining a majority interest in a subsidiary;

•	investing as a limited partner in a partnership the sole purpose of which is direct or indirect investment in the acquisition, rehabilitation or new construction of a qualified housing project, provided that such limited partnership investments may not exceed 2% of the bank’s total assets;

•	acquiring up to 10% of the voting stock of a company that solely provides or reinsures directors’, trustees’ and officers’ liability insurance coverage or bankers’ blanket bond group insurance coverage for insured depository institutions; and

•	acquiring or retaining the voting shares of a depository institution if certain requirements are met.

The Federal Deposit Insurance Corporation has adopted regulations pertaining to the other activity restrictions imposed upon insured state banks and their subsidiaries. Pursuant to such regulations, insured state banks engaging in impermissible activities may seek approval from the Federal Deposit Insurance Corporation to continue such activities. State banks not engaging in such activities but that desire to engage in otherwise impermissible activities either directly or through a subsidiary may apply for approval from the Federal Deposit Insurance Corporation to do so; however, if such bank fails to meet the minimum capital requirements or the activities present a significant risk to the Deposit Insurance Fund, such application will not be approved by the Federal Deposit Insurance Corporation. Pursuant to this authority, the Federal Deposit Insurance Corporation has determined that investments in certain majority-owned subsidiaries of insured state banks do not represent a significant risk to the deposit insurance funds. Investments permitted under that authority include real estate activities and securities activities.

Restrictions on Capital Distributions. Federal Reserve Board and Federal Deposit Insurance Corporation regulations govern capital distributions by savings institutions, which include cash dividends, stock repurchases and other transactions charged to the capital account of a savings institution to make capital distributions. These regulations apply to Quaint Oak Bancorp because Quaint Oak Bank is considered a savings association for certain purposes under Home Owners’ Loan Act, as amended. Under applicable regulations, a savings association must file an application for Federal Deposit Insurance Corporation approval of the capital distribution if:

•	the total capital distributions for the applicable calendar year exceed the sum of the institution’s net income for that year to date plus the institution’s retained net income for the preceding two years;

•	the institution would not be at least adequately capitalized following the distribution;

•	the distribution would violate any applicable statute, regulation, agreement or Federal Deposit Insurance Corporation-imposed condition; or

•	the institution is not eligible for expedited treatment of its filings with the Federal Deposit Insurance Corporation.

If an application is not required to be filed, state savings banks that elect to be treated as savings associations such as Quaint Oak Bank must still file a notice with the Federal Deposit Insurance Corporation at least 30 days before the board of directors declares a dividend or approves a capital distribution if either (1) the institution would not be well-capitalized following the distribution; or (2) the proposed distribution would reduce the amount or retire any part of its common or preferred stock or retire any part of a debt instrument included in its regulatory capital. In addition, a savings institution, such as Quaint Oak Bank, that is the subsidiary of a stock saving and loan holding company, must also file a notice with the appropriate Federal Reserve Bank at least 30 days before the proposed declaration of a dividend by its board of directors.

A savings association that either before or after a proposed capital distribution fails to meet its then applicable minimum capital requirement or that has been notified that it needs more than normal supervision may not make any capital distributions without the prior written approval of the Federal Deposit Insurance Corporation. In addition, the Federal Deposit Insurance Corporation may prohibit a proposed capital distribution, which would otherwise be permitted by Federal Deposit Insurance Corporation regulations, if the Federal Deposit Insurance Corporation determines that such distribution would constitute an unsafe or unsound practice.

The Federal Deposit Insurance Corporation prohibits an insured depository institution from paying dividends on its capital stock or interest on its capital notes or debentures (if such interest is required to be paid only out of net profits) or distributing any of its capital assets while it remains in default in the payment of any assessment due the Federal Deposit Insurance Corporation. Quaint Oak Bank is currently not in default in any assessment payment to the Federal Deposit Insurance Corporation.

Privacy Requirements of the Gramm-Leach-Bliley Act. Federal law places limitations on financial institutions like Quaint Oak Bank regarding the sharing of consumer financial information with unaffiliated third parties. Specifically, these provisions require all financial institutions offering financial products or services to retail customers to provide such customers with the financial institution’s privacy policy and provide such customers the opportunity to “opt out” of the sharing of personal financial information with unaffiliated third parties. Quaint Oak Bank currently has a privacy protection policy in place and believes such policy is in compliance with the regulations.

Consumer Financial Services. The historical structure of federal consumer protection regulation applicable to all providers of consumer financial products and services changed significantly with the establishment of the Consumer Financial Protection Bureau (“CFPB”) as part of the Dodd-Frank Act reforms. On July 21, 2011, the CFPB commenced operations to supervise and enforce consumer protection laws. The CFPB has broad rulemaking authority for a wide range of consumer protection laws that apply to all providers of consumer products and services, including Quaint Oak Bank, as well as the authority to prohibit “unfair, deceptive or abusive” acts and practices. The CFPB has examination and enforcement authority over providers with more than $10 billion in assets. FDIC-insured institutions with $10 billion or less in assets, like Quaint Oak Bank, continue to be examined by their applicable bank regulators.

Anti-Money Laundering. Federal anti-money laundering rules impose various requirements on financial institutions intended to prevent the use of the U.S. financial system to fund terrorist activities. These provisions include a requirement that financial institutions operating in the United States have anti-money laundering compliance programs, due diligence policies and controls to ensure the detection and reporting of money laundering. Such compliance programs supplement existing compliance requirements, also applicable to financial institutions, under the Bank Secrecy Act and the Office of Foreign Assets Control Regulations. Quaint Oak Bank has established policies and procedures to ensure compliance with the federal anti-laundering provisions.

Regulatory Enforcement Authority. The federal banking laws provide substantial enforcement powers available to federal banking regulators. This enforcement authority includes, among other things, the ability to assess civil money penalties, to issue cease-and-desist or removal orders and to initiate injunctive actions against banking organizations and institution-affiliated parties, as defined. In general, these enforcement actions may be initiated for violations of laws and regulations and unsafe or unsound practices. Other actions or inactions may provide the basis for enforcement action, including misleading or untimely reports filed with regulatory authorities.

Community Reinvestment Act. All insured depository institutions have a responsibility under the Community Reinvestment Act and related regulations to help meet the credit needs of their communities, including low- and moderate-income neighborhoods. An institution’s failure to comply with the provisions of the Community Reinvestment Act could result in restrictions on its activities. Quaint Oak Bank received an “Outstanding” Community Reinvestment Act rating in its most recently completed examination.

Federal Home Loan Bank System. Quaint Oak Bank is a member of the Federal Home Loan Bank of Pittsburgh, which is one of 11 regional Federal Home Loan Banks. Each Federal Home Loan Bank serves as a reserve or central bank for its members within its assigned region. It is funded primarily from proceeds from the sale of consolidated obligations of the Federal Home Loan Bank System. It makes loans to members (i.e., advances) in accordance with policies and procedures established by the board of directors of the Federal Home Loan Bank.

As a member, Quaint Oak Bank is required to purchase and maintain stock in the Federal Home Loan Bank of Pittsburgh in an amount in accordance with the Federal Home Loan Bank’s capital plan and sufficient to ensure that the Federal Home Loan Bank remains in compliance with its minimum capital requirements. At December 31, 2019, Quaint Oak Bank was in compliance with this requirement.

Federal Reserve Board System. The Federal Reserve Board requires all depository institutions to maintain non-interest bearing reserves at specified levels against their transaction accounts, which are primarily checking and NOW accounts, and non-personal time deposits. The balances maintained to meet the reserve requirements imposed by the Federal Reserve Board may be used to satisfy the liquidity requirements that are imposed by the Pennsylvania Department of Banking and Securities. At December 31, 2019, Quaint Oak Bank was in compliance with these reserve requirements.

TAXATION

Federal Taxation

General. Quaint Oak Bancorp and Quaint Oak Bank are subject to federal income tax provisions of the Internal Revenue Code of 1986, as amended, in the same general manner as other corporations with some exceptions listed below. For federal income tax purposes, Quaint Oak Bancorp files a consolidated federal income tax return with its wholly owned subsidiaries on a fiscal year basis. The applicable federal income tax expense or benefit will be properly allocated to each entity based upon taxable income or loss calculated on a separate company basis.

Method of Accounting. For federal income tax purposes, income and expenses are reported on the accrual method of accounting and Quaint Oak Bancorp files its federal income tax return using a December 31 fiscal year end.

Taxable Distributions and Recapture. Prior to the Small Business Job Protection Act, bad debt reserves created prior to January 1, 1988 were subject to recapture into taxable income if a savings bank failed to meet certain thrift asset and definitional tests. New federal legislation eliminated these thrift related recapture rules. However, under current law, pre-1988 reserves remain subject to recapture should a savings bank make certain non-dividend distributions or cease to maintain a savings bank charter. At December 31, 2019, Quaint Oak Bank did not have federal pre-1988 reserves subject to recapture.

Corporate Dividends Received Deduction. Quaint Oak Bancorp may exclude from income 100% of dividends received from a member of the same affiliated group of corporations. The corporate dividends received deduction is 80% in the case of dividends received from corporations, which a corporate recipient owns less than 80%, but at least 20% of the distribution corporation. Corporations that own less than 20% of the stock of a corporation distributing a dividend may deduct only 70% of dividends received.

Other Matters. The Company is no longer subject to examination by taxing authorities for the years before January 1, 2016.

State

and Local Taxation

Pennsylvania Taxation. Quaint Oak Bancorp is subject to the Pennsylvania Corporate Net Income Tax. The Corporation Net Income Tax rate for 2019 is 9.99% and is imposed on unconsolidated taxable income for federal purposes with certain adjustments.

Quaint Oak Bank is subject to tax under the Pennsylvania Mutual Thrift Institutions Tax Act (the “MTIT”), as amended to include thrift institutions having capital stock. Pursuant to the MTIT, the tax rate is 11.5%. The MTIT exempts Quaint Oak Bank from other taxes imposed by the Commonwealth of Pennsylvania for state income tax purposes and from all local taxation imposed by political subdivisions, except taxes on real estate and real estate transfers. The MTIT is a tax upon net earnings, determined in accordance with U.S. generally accepted accounting principles with certain adjustments. The MTIT, in computing income under U.S. generally accepted accounting principles, allows for the deduction of interest earned on state and federal obligations, while disallowing a percentage of thrift’s interest expense deduction in the proportion of interest income on those securities to the overall interest income of Quaint Oak Bank. Net operating losses, if any, thereafter can be carried forward three years for MTIT purposes.

Item 1A. Risk Factors.

Not applicable.

Item 1B. Unresolved Staff Comments.

Not applicable.

Item 2. Properties.

The following table provides certain information as of December 31, 2019 with respect to our main office located in Southampton, Pennsylvania, our regional offices located in Allentown and Philadelphia, Pennsylvania, mortgage banking, real estate sales and title abstract property in Allentown, Pennsylvania, our insurance agency office in Chalfont, Pennsylvania, and a mortgage loan production office in Philadelphia.

Description/Address

Leased/Owned

Date of Lease

Expiration

Net Book Value of

Property

Amount of

Deposits

(In Thousands)

501-503 Knowles Avenue

Southampton, Pennsylvania 18966

Leased

11/30/2021(1)

150,020

1710 Union Boulevard

Allentown, Pennsylvania 18019

Owned

1,528

77,438

4275 County Line Road (Suite #14)

Chalfont, Pennsylvania 18914

Leased

5/31/2027(2)

Not applicable

100 Spring Garden Street

Philadelphia, Pennsylvania 19123

Leased

8/31/2023(3)

Not applicable

117-21 Spring Garden Street (Suite A)

Philadelphia, Pennsylvania 19123

Leased

3/15/2030(4)

Not applicable

___________________

(1) Such lease has a five year renewal option which would commence on December 1, 2021 and end on November 30, 2026.

(2) Such lease has a five year renewal option which would commence on June 1, 2027 and end on May 31, 2032.

(3) Such lease has three consecutive five year renewal options which would commence on September 1, 2023 and end on August 31, 2038.

(4) Such lease was executed on August 15, 2019 and commenced on March 15, 2020.

Item 3. Legal Proceedings.

Quaint Oak Bancorp is not involved in any legal proceedings except nonmaterial litigation incidental to the ordinary course of business.

Item 4. Mine Safety Disclosures.

Not applicable.

PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

(a) Quaint Oak Bancorp’s common shares trade on the OTCQB, the OTC market tier for companies that report to the SEC or a U.S. banking or insurance regulator, under the symbol “QNTO.” As of March 24, 2020 Quaint Oak Bancorp had 1,985,018 common shares outstanding held of record by 157 shareholders. The number of shareholders does not reflect the number of persons or entities who may hold stock in nominee or “street” name through brokerage firms or others.

(b) Not applicable.

Quaint Oak Bancorp’s repurchases of its common stock made during the quarter ended December 31, 2019, including stock-for-stock option exercises of outstanding stock options, are set forth in the table below:

Period	Total Number of Shares Purchased		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs (1)
October 1, 2019 – October 31, 2019		--	$	--		--		39,675
November 1, 2019 – November 30, 2019		--		--		--		39,675
December 1, 2019 – December 31, 2019		12,151		12.54		--		39,675
Total		12,151	$	12.54		--		39,675

Notes to this table:

(1)

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

Item 6. Selected Financial Data.

The information required herein is incorporated by reference from page 1 of the Annual Report attached hereto as Exhibit 13.0 (“Annual Report”).

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The information required herein is incorporated by reference from pages 2 to 16 of the Annual Report.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

As a smaller reporting company (as defined) we are not required to provide this information.

Item 8. Financial Statements and Supplementary Data.

The information required herein is incorporated by reference from pages 17 to 65 of the Annual Report.

Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.

Not Applicable.

Item 9A. Controls and Procedures.

(a) 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 December 31, 2019. Based on their evaluation of Quaint Oak Bancorp’s disclosure controls and procedures, Quaint Oak Bancorp’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 Quaint Oak Bancorp 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.

(b) Management’s Annual Report on Internal Control over Financial Reporting

Management of Quaint Oak Bancorp is responsible for establishing and maintaining an adequate system of internal control over financial reporting. An adequate system of internal control encompasses the processes and procedures that have been established by management to:

•	Maintain records that accurately reflect Quaint Oak Bancorp’s transactions;

•	Prepare financial statements and footnote disclosures in accordance with GAAP that can be relied upon by external users;

•	Prevent and detect unauthorized acquisition, use or disposition of Quaint Oak Bancorp’s assets that could have a material effect of the financial statements.

Management, including the Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of Quaint Oak Bancorp’s controls over financial reporting based on the framework in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in 2013. Based on our evaluation under the framework in Internal Control – Integrated Framework, management concluded that Quaint Oak Bancorp’s internal control over financial reporting was effective as of December 31, 2019. Furthermore, during the conduct of its assessment, management identified no material weakness in its financial reporting control system.

(c) 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 fourth fiscal quarter of fiscal 2019 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Item 9B. Other Information.

Not applicable.

PART III

Item 10. Directors and Executive Officers and Corporate Governance.

The information required herein is incorporated by reference from the information contained in the section captioned “Information with Respect to Nominees for Director, Continuing Directors and Executive Officers” in Quaint Oak Bancorp’s definitive Proxy Statement for the Annual Meeting of Shareholders to be held May 13, 2020 (the “Proxy Statement”), a copy of which will be filed with the Securities and Exchange Commission.

Quaint Oak Bancorp has adopted a Code of Conduct and Ethics that applies to its principal executive officer and principal financial officer, as well as other officers and employees of Quaint Oak Bancorp and Quaint Oak Bank. A copy of the Code of Ethics is available on the Company’s website at www.quaintoak.com.

Item 11. Executive Compensation.

The information required herein is incorporated by reference from the information contained in the sections captioned “Information with Respect to Nominees for Director, Continuing Directors and Executive Officers – Director Compensation” and “Executive Compensation” in the Proxy Statement.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

The information required herein is incorporated by reference from the information contained in the section captioned “Beneficial Ownership of Common Stock by Certain Beneficial Owners and Management” in the Proxy Statement.

Equity Compensation Plan Information. The following table provides information as of December 31, 2019 with respect to shares of common stock that may be issued under our existing equity compensation plans, which consist of the 2013 and 2018 Stock Incentive Plans. Both of these plans were approved by our shareholders.

Plan Category	Number of securities to be issued upon exercise of outstanding options, warrants and rights (a)			Weighted-average exercise price of outstanding options, warrants and rights (b)			Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c)
Equity compensation plans approved by security holders		295,223	(1)	$	11.19	(1)		49,000
Equity compensation plans not approved by security holders		--			--			--
Total		295,223		$	11.19			49,000

___________________

(1)	Includes 38,887 shares subject to restricted stock grants which were not vested as of December 31, 2019. The weighted-average exercise price excludes such restricted stock grants.

Item 13. Certain Relationships and Related Transactions, and Director Independence.

Item 14. Principal Accounting Fees and Services.

The information required herein is incorporated by reference from the information contained in the section captioned “Ratification of Appointment of Independent Registered Public Accounting Firm – Audit Fees” in the Proxy Statement.

PART IV

Item 15. Exhibits, Financial Statement Schedules.

(a) (1) The following financial statements are incorporated by reference from Item 8 hereof (see Exhibit 13.0):

	Report of Independent Registered Public Accounting Firm
	Consolidated Balance Sheets as of December 31, 2019 and 2018
	Consolidated Statements of Income for the Years Ended December 31, 2019 and 2018
	Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2019 and 2018
	Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2019 and 2018
	Consolidated Statements of Cash Flows for the Years Ended December 31, 2019 and 2018
	Notes to Consolidated Financial Statements

(2) All schedules are omitted because they are not required or applicable, or the required information is shown in the consolidated financial statements or the notes thereto.

(3) The following exhibits are filed as part of this Form 10-K and this list includes the Exhibit Index.

No.	Exhibits	Location
3.1	Articles of Incorporation of Quaint Oak Bancorp, Inc.	(1)
3.2	Bylaws of Quaint Oak Bancorp, Inc.	(1)
4.1	Form of Stock Certificate of Quaint Oak Bancorp, Inc.	(1)
4.2	Form of Subordinated Note	(2)
4.3	Description of Securities Registered under Section 12 of the Securities Exchange Act of 1934	Filed herewith
10.1	Amended and Restated Employment Agreement by and between Robert T. Strong and Quaint Oak Bank*	(3)
10.2	Quaint Oak Bancorp, Inc. 2008 Stock Option Plan*	(4)
10.3	Employment Agreement between Quaint Oak Bank and John J. Augustine*	(5)
10.4	Quaint Oak Bancorp, Inc. 2013 Stock Incentive Plan*	(6)
10.5	Employment Agreement between Quaint Oak Mortgage, LLC, Quaint Oak Real Estate, LLC, and Quaint Oak Abstract, LLC, and William R. Gonzalez, as amended*	(7)
10.6	Quaint Oak Bancorp, Inc. 2018 Stock Incentive Plan*	(8)
10.7	Form of Subordinated Note Purchase Agreement	(2)
13.0	Annual Report to Shareholders	Filed herewith
21.0	Subsidiaries of the Registrant	Filed herewith
23.1	Consent of S.R. Snodgrass, P.C.	Filed herewith
31.1	Certification of Chief Executive Officer	Filed herewith
31.2	Certification of Chief Financial Officer	Filed herewith
32.0	Section 1350 Certification of the Chief Executive Officer and Chief Financial Officer	Filed herewith
101.INS	XBRL Instance Document	Filed herewith
101.SCH	XBRL Taxonomy Extension Schema Document	Filed herewith
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document	Filed herewith
101.LAB	XBRL Taxonomy Extension Label Linkbase Document	Filed herewith
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document	Filed herewith
101.DEF	XBRL Taxonomy Extension Definitions Linkbase Document	Filed herewith
____________________
* Denotes management compensation plan or arrangement. (1) Incorporated by reference from the Company’s Registration Statement on Form SB-2, filed on March 21, 2007, as amended, and declared effective on May 14, 2007 (File No. 333-141474).

(Footnotes continued on following page)

_______________

(2)	Incorporated by reference from the Company’s Current Report on Form 8-K, filed on December 28, 2018 (File No. 000-52694).

(3)	Incorporated by reference from the Company’s Current Report on Form 8-K, filed on December 16, 2008 (File No. 000-52694).

(4)	Incorporated by reference from the Company’s definitive proxy statement for the Annual Meeting of Shareholders held on May 14, 2008 (Commission File No. 000-52694) filed with the Commission on April 11, 2008.

(5)	Incorporated by reference from the Company’s Current Report on Form 8-K, filed on September 18, 2012 (File No. 000-52694).

(6)	Incorporated by reference from the Company’s definitive proxy statement for the Annual Meeting of Shareholders held on May 8, 2013 (Commission File No. 000-526341) filed with the Commission on April 8, 2013.

(7)	Incorporated by reference from the Company’s Annual Report on Form 10-K, filed with the Commission on March 26, 2015 (File No. 000-52694).

(8)	Incorporated by reference from the Company’s definitive proxy statement for the Annual Meeting of Shareholders held on May 9, 2018 (Commission File No. 000-526341) filed with the Commission on April 6, 2018.

(b)

Exhibits

The exhibits listed under (a)(3) of this Item 15 are filed herewith.

(c)	Reference is made to (a)(2) of this Item 15.

Item 16. Form 10-K Summary.

None.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.

		QUAINT OAK BANCORP, INC.


March 27, 2020	By:	/s/Robert T. Strong
		Robert T. Strong
		President and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated.

Name	Title	Date


/s/Robert T. Strong	President and Chief Executive Officer	March 27, 2020
Robert T. Strong


/s/John J. Augustine	Executive Vice President and Chief Financial Officer	March 27, 2020
John J. Augustine


/s/Robert J. Phillips	Chairman	March 27, 2020
Robert J. Phillips


/s/George M. Ager, Jr.	Director	March 27, 2020
George M. Ager, Jr.


/s/James J. Clarke	Director	March 27, 2020
James J. Clarke


/s/Andrew E. DiPiero, Jr.	Director	March 27, 2020
Andrew E. DiPiero, Jr.


/s/Kenneth R. Gant	Director	March 27, 2020
Kenneth R. Gant

Quaint Oak Bancorp, Inc.

PRESIDENT’S LETTER TO SHAREHOLDERS

To our Valued Shareholders:

On behalf of the Board of Directors, Senior Management and Employees of the Quaint Oak Family of Companies, I am pleased to present our 2019 Annual Report to Shareholders.

I am very pleased to report on both earnings and asset growth for the 2019 year. I would first, however, like to express to our Shareholders my concern for the well-being of our entire Quaint Oak Community. This includes our Team Members, our Families, our Customers and Shareholders, and in a broader sense, the communities in which we live and work. At this moment, we are all affected by the spread of COVID-19. We at Quaint Oak are making every effort, wherever possible, to follow the CDC guidelines. Beyond that, we have additional control over our own response to certain personal, community and market disruptions that it brings. As an example, we have, in recent years, improved and completely revamped our Internet Banking program along with our capability to work and communicate remotely. We did this in an effort to be a competitive and digitally relevant organization. I never dreamed that these service enhancements or our customer motto of “In Your Best Interest” would apply to the health and safety of both our Team Members and our Customers in a pandemic setting, yet, here we are. These enhancements have provided us with the ability to accomplish significant health and safety related controls throughout the Company while continuing to provide our Customers with complete access to our products and services. Forward thinking is always our driver, even if we never know what the future holds in store. Currently, we are devoting our efforts to servicing our depositors, supporting our borrowers and contributing to the needs of our Community.

My reflection on 2019 is the following: The capital infusion of late 2018 provided us the fuel to enhance earnings and growth as we moved through 2019. Earnings improved approximately 24% during the calendar year of 2019 approaching $2.5 million in net income when compared to the 2018 calendar year. Our asset growth of 11.5% for the calendar year of 2019 is primarily the result of an increase in loans receivable, net of allowance for loan losses at year-end of 13.7% when compared to the 2018 calendar year.

Our Mortgage Banking Company subsidiary achieved an annual record high in loan production and earnings. Once again, Lehigh Valley Business identified it as a “Fastest Growing Company in the Greater Lehigh Valley.” In February 2019, we relocated an existing Philadelphia Mortgage Banking office to achieve more visibility and public access. That office set a new Company production record in December of 2019.

As previously announced, we had committed to open an additional full-service Regional Banking Office in the Northern Liberties Community of Greater Philadelphia. That office opened on February 26, 2020.

During the year ended December 31, 2019, the Company has repurchased an additional 27,297 shares. To date, we have repurchased 39% of the original shares issued in our initial public offering. Stockholders’ equity has increased by $2.1 million or 8.7% year over year. During 2019, we increased the dividend rate by 28.6% to $.09 cents per share. Finally, and very importantly, basic per share earnings for 2019 came in at $1.27 as compared to $1.04 per share in 2018.

As always, in conjunction with having maintained a strong repurchase plan, our current and continued business strategy includes long-term profitability and payment of dividends reflecting our strong commitment to shareholder value.

In closing, my best wishes to all as we navigate this challenging time. Be well.

Robert T. Strong

President and Chief Executive Officer

Quaint Oak Family of Companies

Quaint Oak Bancorp, Inc.

Quaint Oak Bank

Quaint Oak Abstract, LLC ׀ Quaint Oak Mortgage, LLC ׀ Quaint Oak Real Estate, LLC ׀ Quaint Oak Insurance Agency, LLC

Serving the Delaware Valley, Lehigh Valley, and Greater Philadelphia Markets.

Quaint Oak Bancorp, Inc.

TABLE OF CONTENTS

	Page
Selected Consolidated Financial and Other Data	1

Management’s Discussion and Analysis of Financial Condition and Results of Operations	2

Reports of Independent Registered Public Accounting Firm	17

Consolidated Balance Sheets	18

Consolidated Statements of Income	19

Consolidated Statements of Comprehensive Income	20

Consolidated Statements of Stockholders’ Equity	21

Consolidated Statements of Cash Flows	22

Notes to Consolidated Financial Statements	23

Banking Locations	66

Directors and Executive Officers	67

Transfer Agent/Registrar	67

Investor Relations Contact	67

Quaint Oak Bancorp, Inc.

SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA

Set forth below is selected financial and other data of Quaint Oak Bancorp, Inc. You should read the financial statements and related notes contained in this Annual Report which provide more detailed information.

	At or For the Years Ended December 31,
	2019			2018
	(Dollars in Thousands)
Selected Financial and Other Data:
Total assets	$	302,540		$	271,404
Cash and cash equivalents		14,555			26,012
Investment in interest-earning time deposits		10,172			4,927
Investment securities available for sale at fair value (cost-2019 $7,599; 2018 $6,682)		7,623			6,680
Loans held for sale		8,928			5,103
Loans receivable, net		246,692			216,898
Federal Home Loan Bank stock, at cost		1,580			1,086
Premises and equipment, net		2,226			2,058
Deposits		227,458			211,911
Federal Home Loan Bank borrowings		36,271			24,000
Subordinated debt		7,865			7,831
Stockholders’ Equity		25,907			23,836


Selected Operating Data:
Total interest income	$	14,111		$	12,125
Total interest expense		5,426			3,820
Net interest income		8,685			8,305
Provision for loan losses		303			415
Net interest income after provision for loan losses		8,382			7,890
Total non-interest income		4,953			3,947
Total non-interest expense		9,908			9,166
Income before income taxes		3,427			2,671
Income taxes		950			667
Net income	$	2,477		$	2,004

Selected Operating Ratios(1):
Average yield on interest-earning assets		5.17	%		4.98	%
Average rate on interest-bearing liabilities		2.25			1.77
Average interest rate spread(2)		2.92			3.21
Net interest margin(2)		3.11			3.41
Average interest-earning assets to average interest-bearing liabilities		113.58			112.68
Net interest income after provision for loan losses to non-interest expense		84.60			86.08
Total non-interest expense to average assets		3.46			3.62
Efficiency ratio(3)		72.65			74.81
Return on average assets		0.87			0.79
Return on average equity		10.03			8.70
Average equity to average assets		8.63			9.11

Asset Quality Ratios(4):
Non-performing loans as a percent of loans receivable, net(5)		0.15	%		0.54	%
Non-performing assets as a percent of total assets(5)		0.72			1.04
Non-performing assets and troubled debt restructurings as a percent of total assets		0.77			1.19
Allowance for loan losses as a percent of non-performing loans		616.30			166.81
Allowance for loan losses as a percent of total loans receivable		0.90			0.90
Net charge-offs to average loans receivable		0.02			0.13

Capital Ratios(4):
Tier 1 leverage ratio		10.35	%		10.92	%
Common Tier 1 capital ratio		13.42			14.45
Tier 1 risk-based capital ratio		13.42			14.45
Total risk-based capital ratio		14.41			15.49

___________________

(1)	With the exception of end of period ratios, all ratios are based on average daily balances during the indicated periods.

(2)	Average interest rate spread represents the difference between the average yield on interest-earning assets and the average rate paid on interest-bearing liabilities, and net interest margin represents net interest income as a percentage of average interest-earning assets.

(3)	The efficiency ratio represents the ratio of non-interest expense divided by the sum of net interest income and non-interest income.

(4)	Asset quality ratios and capital ratios are end of period ratios, except for net charge-offs to average loans receivable.

(5)	Non-performing assets consist of non-performing loans and other real estate owned at December 31, 2019 and 2018. Non-performing loans consist of non-accruing loans plus accruing loans 90 days or more past due.

Quaint Oak Bancorp, Inc.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

General

Quaint Oak Bancorp, Inc. (the “Company”) was formed in connection with Quaint Oak Bank’s (the “Bank”) conversion to a stock savings bank completed on July 3, 2007. The Company’s results of operations are dependent primarily on the results of Quaint Oak Bank, a wholly owned subsidiary of the Company, along with the Bank’s wholly owned subsidiaries. At December 31, 2019, the Bank has five wholly-owned subsidiaries, Quaint Oak Mortgage, LLC, Quaint Oak Real Estate, LLC, Quaint Oak Abstract, LLC, QOB Properties, LLC, and Quaint Oak Insurance Agency, LLC, each a Pennsylvania limited liability company. The mortgage company offers mortgage banking services in the Lehigh Valley, Delaware Valley and Philadelphia County region of Pennsylvania. The real estate and abstract companies offer real estate sales and title abstract services, respectively, primarily in the Lehigh Valley region of Pennsylvania. These companies began operation in July 2009. In February 2019, Quaint Oak Mortgage opened a mortgage banking office in Philadelphia, Pennsylvania. QOB Properties, LLC began operations in July 2012 and holds Bank properties acquired through a foreclosure proceeding or acceptance of a deed in lieu of foreclosure. Quaint Oak Insurance Agency, LLC, located in Chalfont, Pennsylvania, began operations in August 2016 and provides a broad range of personal and commercial insurance coverage solutions. In February 2020, Quaint Oak Bank opened a full-service retail banking office in Philadelphia, Pennsylvania.

Quaint Oak Bank’s profitability depends, 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.

Quaint Oak Bank’s business consists primarily of originating residential, multi-family and commercial real estate loans secured by property, commercial business loans, and to a lesser extent other consumer loans in its market area. At December 31, 2019, commercial real estate loans comprise the largest percentage of Quaint Oak Bank’s loan portfolio, before net items, at 47.8%. Quaint Oak Bank’s loans are primarily funded by certificates of deposit, which typically have a higher interest rate than passbook, savings and money market accounts. At December 31, 2019, certificates of deposit amounted to 61.0% of total assets compared to 61.2% of total assets at December 31, 2018. In conjunction with the expansion of our commercial lending activities, we began offering a business checking account, along with a consumer checking account product in December 2014. At December 31, 2019, non-interest bearing checking accounts amounted to 6.9% of total deposits compared to 8.3% of total deposits at December 31, 2018. Management anticipates that certificates of deposit will continue to be a primary source of funding for Quaint Oak Bank’s assets.

Our results of operations are significantly affected by general economic and competitive conditions, particularly with respect to changes in interest rates, government policies and actions of regulatory authorities as well as other factors beyond our control. Future changes in applicable law, regulations or government policies may materially affect our financial condition and results of operations.

Forward-Looking Statements Are Subject to Change

This Annual Report contains certain forward-looking statements (as defined in the Securities Exchange Act of 1934 and the regulations thereunder). Forward-looking statements are 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 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." Forward-looking statements include, 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 control of and its management, that could cause actual results to differ materially from those expressed 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: (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 doing 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 occur after the date on which such statements were made.

Quaint Oak Bancorp, Inc.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Critical Accounting Policies

In reviewing and understanding financial information for the Company, you are encouraged to read and understand the significant accounting policies used in preparing our financial statements. These policies are described in Note 2 of the notes to our financial statements. 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.

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

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

The allowance consists of specific, general and unallocated components. The specific component relates to loans that are identified as impaired. For loans that are identified 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 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.

Quaint Oak Bancorp, Inc.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

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 considered 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.

Quaint Oak Bancorp, Inc.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

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

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

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

General. The Company’s total assets at December 31, 2019 were $302.5 million, an increase of $31.1 million, or 11.5%, from $271.4 million at December 31, 2018. This growth in total assets was primarily due to a $29.8 million, or 13.7%, increase in loans receivable, net, a $5.2 million, or 106.5%, increase in investment in interest-earning time deposits, a $3.8 million, or 75.0%, increase in loans held for sale, a $1.7 million, or 162.5%, increase in prepaid expenses and other assets, and a $943,000, or 14.1%, increase in investment securities available for sale. These increases were partially offset by an $11.5 million, or 44.0%, decrease in cash and cash equivalents. The largest increases within the loan portfolio occurred in commercial business loans which increased $22.1 million, or 93.7%, commercial real estate loans which increased a $15.5 million, or 14.9%, and construction loans which increased $2.5 million, or 25.3%. These increases were partially offset by a $7.5 million, or 15.8%, decrease in one-to-four family residential non-owner occupied loans and a $1.7 million, or 7.2%, decrease in multi-family residential loans.

Cash and Cash Equivalents. Cash and cash equivalents decreased $11.5 million, or 44.0%, from $26.0 million at December 31, 2018 to $14.6 million at December 31, 2019 as excess liquidity was used to fund loans.

Investment Securities Available for Sale. Investment securities available for sale increased $943,000, or 14.1%, from $6.7 million at December 31, 2018 to $7.6 million at December 31, 2019 due primarily to the purchase of three securities totaling $3.3 million. These purchases were offset by the sale of two securities totaling $1.0 million, the call of one security in the amount of $360,000 and principal repayments of $1.0 million on these securities during the year ended December 31, 2019.

Loans Held for Sale. Loans held for sale increased $3.8 million, or 75.0%, from $5.1 million at December 31, 2018 to $8.9 million at December 31, 2019 as the Bank’s mortgage banking subsidiary, Quaint Oak Mortgage, LLC, originated $135.3 million of one-to-four family residential loans during the year ended December 31, 2019 and sold $131.5 million of these loans in the secondary market during this same period. In addition, the Bank sold $258,000 of commercial business loans for purchases of business essential equipment held for sale during the year ended December 31, 2019. The Bank did not originate commercial business loans held for sale during the same period.

Quaint Oak Bancorp, Inc.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Loans Receivable, Net. Loans receivable, net, increased $29.8 million, or 13.7% funded primarily from deposits, FHLB borrowings and excess liquidity. Increases within the portfolio consisted of commercial business loans which increased $22.1 million, or 93.7%, commercial real estate loans which increased a $15.5 million, or 14.9%, construction loans which increased $2.5 million, or 25.3%, and other consumer loans which increased $3,000, or 15.8%. These increases were partially offset by a $7.5 million, or 15.8%, decrease in one-to-four family residential non-owner occupied loans, a $1.7 million, or 7.2%, decrease in multi-family residential loans, a $621,000, or 14.3%, decrease in home equity loans, and a $305,000, or 4.6% decrease in one-to-four family residential owner occupied loans. The Company continues its strategy of diversifying its loan portfolio with higher yielding and shorter-term loan products and selling substantially all of its newly originated one-to-four family owner-occupied loans into the secondary market.

Federal Home Loan Bank Stock. Federal Home Loan Bank stock increased $494,000, or 45.5%, from $1.1 million at December 31, 2018 to $1.6 million at December 31, 2019 as the Bank increased its level of FHLB borrowings.

Bank-Owned Life Insurance. The Company purchased $3.5 million in bank-owned life insurance (BOLI) 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 cash surrender value of the insurance policies amounted to $4.0 million and $3.9 million at December 31, 2019 and 2018, respectively.

Premises and Equipment, Net. Premises and equipment, net, increased $168,000, or 8.2%, to $2.2 million at December 31, 2019 from $2.1 million at December 31, 2018. The increase was due primarily to expenditures related to our third regional office in Philadelphia which opened in February 2020, the renovation of our 1710 Union Boulevard location and computer system upgrades.

Goodwill and Other Intangible, Net. Goodwill and other intangible assets, net of accumulated amortization, is related to the acquisition by Quaint Oak Insurance Agency of the renewal rights to a book of business 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 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 December 31, 2019 was $319,000, net of accumulated amortization of $166,000.

Other Real Estate Owned, Net. Other real estate owned (OREO) amounted to $1.8 million at December 31, 2019, consisting of four properties that were collateral for a non-performing construction loan. During the year ended December 31, 2019, the Company made a total of $395,000 in capital improvements to the properties and wrote-down one property $221,000. The balance of OREO totaled $1.7 million at December 31, 2018. Non-performing assets amounted to $2.2 million, or 0.72% of total assets at December 31, 2019 compared to $2.8 million, or 1.04% of total assets at December 31, 2018.

Deposits. Total deposits increased $15.5 million, or 7.3%, to $227.5 million at December 31, 2019 from $211.9 million at December 31, 2018. This increase in deposits was primarily attributable to increases of $18.2 million, or 11.0%, in certificates of deposit and $602,000, or 53.8%, in savings accounts. These increases were partially offset by decreases of $1.8 million, or 10.1%, in non-interest bearing checking accounts, $1.3 million, or 5.0%, in money market accounts, and $187,000, or 97.4%, in passbook accounts.

Federal Home Loan Bank Borrowings. Aggregate FHLB borrowings increased $12.3 million, or 51.1%, from $24.0 million at December 31, 2018 to $36.3 million at December 31, 2019. Long-term borrowings increased $11.3 million, or 75.1%, from $15.0 million at December 31, 2018 to $26.3 million at December 31, 2019, as a result of a $9.0 million term-out of short-term borrowings at varying maturities and $5.3 million of additional long-term borrowings, partially offset by the repayment of $3.0 million of long-term borrowings that matured in 2019. Short-term borrowings increased $1.0 million, or 11.1%, from $9.0 million at December 31, 2018 to $10.0 million at December 31, 2019. During the year end December 31, 2019, $13.0 million of short-term borrowings were used to fund loan demand, $10.0 million in short-term borrowings were termed-out, and $2.0 million were paid-off.

Quaint Oak Bancorp, Inc.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

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 and $7.8 million at December 31, 2019 and 2018, respectively.

Stockholders’ Equity. Total stockholders’ equity increased $2.1 million, or 8.7%, to $25.9 million at December 31, 2019 from $23.8 million at December 31, 2018. Contributing to the increase was net income for the year ended December 31, 2019 of $2.5 million, the reissuance of treasury stock for exercised stock options of $190,000, common stock earned by participants in the employee stock ownership plan of $186,000, amortization of stock awards and options under our stock compensation plans of $173,000, the reissuance of treasury stock under the Bank’s 401(k) Plan of $38,000, and other comprehensive income, net of $22,000. These increases were partially offset by dividends paid of $676,000 and by the purchase of treasury stock of $339,000.

Comparison of Operating Results for the Years Ended December 31, 2019 and 2018

General. Net income amounted to $2.5 million for the year ended December 31, 2019 compared to $2.0 million for the year ended December 31, 2018, an increase of $473,000, or 23.6%. The increase was primarily the result of an increase in non-interest income of $1.0 million, an increase in net interest income of $380,000, and a decrease in the provision for loan losses of $112,000, partially offset by an increase in non-interest expense of $742,000 and an increase in the provision for income taxes of $283,000.

Net Interest Income. Net interest income increased $380,000, or 4.6%, to $8.7 million for the year ended December 31, 2019 from $8.3 million for the year ended December 31, 2018. The increase in net interest income was driven by a $2.0 million, or 16.4% increase in interest income, partially offset by a $1.6 million, or 42.0%, increase in interest expense.

Interest Income. Interest income increased $2.0 million, or 16.4%, to $14.1 million for the year ended December 31, 2019 from $12.1 million for the year ended December 31, 2018. The increase in interest income was primarily due to a $23.5 million increase in average loans receivable, net, including loans held for sale, which increased from an average balance of $214.7 million for the year ended December 31, 2018 to an average balance of $238.2 million for the year ended December 31, 2019, and had the effect of increasing interest income $1.2 million. Also contributing to this increase was a 16 basis point increase in the yield on average loans receivable, net, including loans held for sale, which increased from 5.37% for the year ended December 31, 2018 to 5.53% for the year ended December 31, 2019, which had the effect of increasing interest income $374,000. The increase in interest income was also due to a $4.7 million increase in investment in interest-earning time deposits which increased from an average balance of $4.9 million for the year ended December 31, 2018 to an average balance of $9.6 million for the year ended December 31, 2019, which had the effect of increasing interest income $88,000. 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 year ended December 31, 2018 to 2.79% for the year ended December 31, 2019, which had the effect of increasing interest income $90,000. The increase in interest income was also due to a $1.1 million increase in average cash and cash equivalents due from banks, interest bearing, which increased from an average balance of $15.2 million for the year ended December 31, 2018 to an average balance of $16.3 million for the year ended December 31, 2019, and had the effect of increasing interest income $21,000. Also contributing to this increase was a 42 basis point increase in the yield on average cash and cash equivalents due from banks, interest bearing, which increased from 1.82% for the year ended December 31, 2018 to 2.24% for the year ended December 31, 2019, and had the effect of increasing interest income $69,000. The increase in interest income was also due to a $1.0 million increase in average investment securities available for sale, which increased from an average balance of $7.4 million for the year ended December 31, 2018 to an average balance of $8.3 million for the year ended December 31, 2019, and had the effect of increasing interest income $20,000. Also contributing to this increase was a 70 basis point increase in the yield on average investment securities available for sale, which increased from 2.04% for the year ended December 31, 2018 to 2.74% for the year ended December 31, 2019, and had the effect of increasing interest income $58,000.

Quaint Oak Bancorp, Inc.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Interest Expense. Interest expense increased $1.6 million, or 42.0%, to $5.4 million for the year ended December 31, 2019 from $3.8 million for the year ended December 31, 2018. The increase in interest expense was primarily attributable to a $20.3 million increase in average certificate of deposit accounts which increased from an average balance of $156.7 million for the year ended December 31, 2018 to an average balance of $177.0 million for the year ended December 31, 2019, and had the effect of increasing interest expense $392,000. Also contributing to this increase was a 37 basis point increase in rate on average certificate of deposit accounts, which increased from 1.93% for the year ended December 31, 2018 to 2.30% for the year ended December 31, 2019, and had the effect of increasing interest expense by $650,000. The increase in interest expense was also due to the $7.7 million increase in average subordinated debt which increased from an average balance of $107,000 for the year ended December 31, 2018 to an average balance of $7.8 million for the year ended December 31, 2019 and had the effect of increasing interest expense $521,000. The average interest rate spread decreased from 3.21% for the year ended December 31, 2018 to 2.92% for the year ended December 31, 2019 while the net interest margin decreased from 3.41% for the year ended December 31, 2018 to 3.11% for the year ended December 31, 2019.

Quaint Oak Bancorp, Inc.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

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.

	Year Ended December 31,
	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	$	16,315	$	366		2.24	%	$	15,166	$	276		1.82	%
Investment in interest-earning time deposits		9,635		269		2.79			4,914		91		1.85
Investment securities available for sale		8,321		228		2.74			7,351		150		2.04
Loans receivable, net (1) (2) (3)		238,238		13,167		5.53			214,729		11,530		5.37
Investment in FHLB stock		1,206		81		5.16			1,203		78		6.48
Total interest-earning assets		273,715		14,111		5.17	%		243,363		12,125		4.98	%
Non-interest-earning assets		12,348							9,787
Total assets	$	286,063						$	253,150
Interest-bearing liabilities:
Passbook accounts	$	53	$	*		*	%	$	310	$	*		*	%
Savings accounts		1,629		3		0.18			1,906		4		0.21
Money market accounts		27,550		221		0.80			29,982		239		0.80
Certificate of deposit accounts		177,000		4,063		2.30			156,696		3,021		1.93
Total deposits		206,232		4,287		2.08			188,894		3,264		1.73
FHLB short-term borrowings		5,585		141		2.52			9,745		197		2.02
FHLB long-term borrowings		21,327		479		2.25			17,236		352		2.04
Subordinated debt		7,845		519		6.62			107		7		6.54
Total interest-bearing liabilities		240,989		5,426		2.25	%		215,982		3,820		1.77	%
Non-interest-bearing liabilities		20,385							14,118
Total liabilities		261,374							230,100
Stockholders’ Equity		24,689							23,050
Total liabilities and Stockholders’ Equity	$	286,063						$	253,150
Net interest-earning assets	$	32,796						$	27,381
Net interest income; average interest rate spread			$	8,685		2.92	%			$	8,305		3.21	%
Net interest margin (4)						3.11	%						3.41	%
Average interest-earning assets to average interest-bearing liabilities						113.58	%						112.68	%

___________________

* 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 $1,000 and an average yield of 4.22% for the year ended December 31, 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.

Quaint Oak Bancorp, Inc.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Rate/Volume Analysis. The following table shows the extent to which changes in interest rates and changes in volume of interest-earning assets and interest-bearing liabilities affected our interest income and expense during the periods indicated. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (1) changes in rate, which is the change in rate multiplied by prior year volume, (2) changes in volume, which is the change in volume multiplied by prior year rate, and (3) changes in rate/volume, which is the change in rate multiplied by the change in volume.

	2019 vs. 2018												2018 vs. 2017
	Increase (Decrease) Due to									Total Increase (Decrease)			Increase (Decrease) Due to									Total Increase (Decrease)
	Rate			Volume			Rate/ Volume			Total Increase (Decrease)			Rate			Volume			Rate/ Volume			Total Increase (Decrease)
	(In Thousands)
Interest income:
Due from banks, interest-bearing	$	64		$	21		$	5		$	90		$	54		$	81		$	46		$	181
Investment in interest-earning time deposits		46			88			44			178			10			(8	)		(1	)		1
Investment securities available for sale		51			20			7			78			47			(23	)		(8	)		16
Loans receivable, net (1) (2)		338			1,262			37			1,637			141			1,142			16			1,299
Investment in FHLB stock		3			--			--			3			24			10			6			40
Total interest-earning assets		502			1,391			93			1,986			276			1,202			59			1,537
Interest expense:
Passbook accounts		--			--			--			--			--			--			--			--
Savings accounts		--			(1	)		--			(1	)		--			--			--			--
Money market accounts		1			(19	)		--			(18	)		(1	)		(18	)		--			(19	)
Certificate of deposit accounts		576			391			75			1,042			264			305			33			602
Total deposits		577			371			75			1,023			263			287			33			583
FHLB short-term borrowings		49			(84	)		(21	)		(56	)		74			13			9			96
FHLB long-term borrowings		35			84			8			127			31			89			12			132
Subordinated debt		--			521			(9	)		512			--			--			7			7
Total interest-bearing liabilities		661			892			53			1,606			368			389			61			818
Increase (decrease) in net interest income	$	(159	)	$	499		$	40		$	380		$	(92	)	$	813		$	(2	)	$	719

_______________________

(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.

Provision for Loan Losses. The Company decreased its provision for loan losses by $112,000, or 27.0%, from $415,000 for the year ended December 31, 2018 to $303,000 for the year ended December 31, 2019, based on an evaluation of the allowance relative to such factors as volume of the loan portfolio, concentrations of credit risk, prevailing economic conditions, prior loan loss experience and amount of non-performing loans at December 31, 2019.

Non-performing loans amounted to $362,000 or 0.15% of net loans receivable at December 31, 2019, consisting of two loans, one loan is on non-accrual status and one loan is 90 days or more past due and accruing interest. Comparably, non-performing loans amounted to $1.2 million, or 0.54% of net loans receivable at December 31, 2018, consisting of six loans, three of which were on non-accrual status and three of which were 90 days or more past due and accruing interest. The non-performing loans at December 31, 2019 include one one-to-four family non-owner occupied residential loan and one commercial real estate loan, and both are generally well-collateralized or adequately reserved for. The allowance for loan losses as a percent of total loans receivable was 0.90% at December 31, 2019 and 2018.

Other real estate owned (OREO) amounted to $1.8 million at December 31, 2019, consisting of four properties that were collateral for a non-performing construction loan. During the year ended December 31, 2019, the Company made a total of $395,000 in capital improvements to the properties and wrote-down one property $221,000. The balance of OREO totaled $1.7 million at December 31, 2018. Non-performing assets amounted to $2.2 million, or 0.72% of total assets at December 31, 2019 compared to $2.8 million, or 1.04% of total assets at December 31, 2018.

Quaint Oak Bancorp, Inc.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Non-Interest Income. Non-interest income increased $1.0 million, or 25.5%, from $3.9 million for the year ended December 31, 2018 to $5.0 million for the year ended December 31, 2019. The increase was primarily attributable to an $894,000, or 42.2%, increase in net gain on loans held for sale, a $326,000, or 39.5%, increase in mortgage banking and title abstract fees, and a $160,000, or 152.4%, increase in gain on the sales of SBA loans. These increases were partially offset by a $284,000, or 450.8%, decrease in (loss) gain on sales and write-downs of other real estate owned, a $63,000, or 48.1%, decrease in other fees and service charges, a $12,000, or 6.3%, decrease in real estate sales commissions, net, earned by Quaint Oak Real Estate, a wholly owned subsidiary of Quaint Oak Bank, an $11,000, or 2.6%, decrease in other fees and services charges, and a $4,000 loss on the sale of investment securities available for sale.

Non-Interest Expense. Non-interest expense increased $742,000, or 8.1%, from $9.2 million for the year ended December 31, 2018 to $9.9 million for the year ended December 31, 2019. Salaries and employee benefits expense accounted for $540,000 of the change as this expense increased 8.4%, from $6.4 million for the year ended December 31, 2018 to $6.9 million for the year ended December 31, 2019 due to expanding and improving the level of staff at the Bank and its subsidiary companies, primarily in the area of lending operations. Other expense accounted for $126,000 of the change as this expense increased 17.6%, from $716,000 for the year ended December 31, 2018 to $842,000 for the year ended December 31, 2019 due primarily to an increase in amortization of subordinated debt issuance costs and the increase in subscription costs related to installing a new real estate closing platform at Quaint Oak Abstract, LLC. Data processing costs accounted for $110,000 of the change as this expense increased 27.6%, from $398,000 for the year ended December 31, 2018 to $508,000 for the year ended December 31, 2019, due primarily to recurring costs associated with the Bank’s checking and other transaction account products. Occupancy and equipment expense accounted for $91,000 of the change as this expense increased 15.1%, from $601,000 for the year ended December 31, 2018 to $692,000 for the year ended December 31, 2019. Professional fees accounted for $51,000 of the change as this expense increased 14.0%, from $365,000 for the year ended December 31, 2018 to $416,000 for the year ended December 31, 2019, due primarily to increased audit and compliance costs. Directors’ fees and expenses accounted for $15,000 of the change as this expensed increased 7.2%, from $208,000 for the year ended December 2018 to $223,000 for the year ended December 31, 2019. Other real estate owned expense accounted for $2,000 of the change as this expense increased 10.0%, from $20,000 for the year ended December 31, 2018 to $22,000 for the year ended December 31, 2019. Partially offsetting these increases were decreases in FDIC deposit insurance assessment which declined $171,000, or 91.9%, from $186,000 for the year ended December 31, 2018 to $15,000 for the year ended December 31, 2019 and advertising expense which declined $22,000, or 10.1%, from $217,000 for the year ended December 31, 2018 to $195,000 for the year ended December 31, 2019. The decrease in FDIC deposit insurance assessment was due to a reduction in the Bank’s assessment multiplier and the FDIC Small Bank Assessment credits applied in 2019.

Provision for Income Tax. The provision for income tax increased $283,000, or 42.4%, from $667,000 for the year ended December 31, 2018 to $950,000 for the year ended December 31, 2019 due primarily to an increase in pre-tax income and an increase in our effective tax rate from 25.0% for the year ended December 31, 2018 to 27.7% for the year ended December 31, 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.

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 19 in the Notes to Consolidated Financial Statements.

Quaint Oak Bancorp, Inc.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Our Banking Segment reported a pre-tax segment profit (“PTSP”) for the year ended December 31, 2019 of $1.8 million, a $100,000, or 5.3%, decrease from the year ended December 31, 2018. This decrease in PTSP was due to a $610,000 increase in non-interest expense and an $87,000 decrease in non-interest income, partially offset by a $485,000 increase in net interest income and a $112,000 decrease in the provision for loan losses. The increase in non-interest expense was due primarily to increases in salaries and employees benefits expense and other expense. The decrease in non-interest income was primarily due to a write down of one other real estate owned property. The increase in net interest income was primarily attributable to an increase in interest income, driven by higher average loan balances and yields, partially offset by a higher cost of funds. The increase in cost of funds was impacted by the interest expense related to $8.0 million in subordinated debt issued in December 2018.

Our Mortgage Banking Segment reported a PTSP for the year ended December 31, 2019 of $1.6 million, an $856,000, or 108.4%, increase from the year ended December 31, 2018. The increase in PTSP was primarily due to a $1.1 million increase in non-interest income which was driven by increases in net gain on the sale of loans and processing fees. This increase was partially offset by a $105,000 decrease in net interest income and a $132,000 increase in non-interest expense.

Exposure to Changes in Interest Rates

The Company’s ability to maintain net interest income depends upon its ability to earn a higher yield on assets than the rates it pays on deposits and borrowings. The Company’s interest-earning assets consist primarily of loans collateralized by real estate which have longer maturities than our liabilities, consisting primarily of certificates of deposit, money market accounts and to a lesser extent borrowings. Consequently, the Company’s ability to maintain a positive spread between the interest earned on assets and the interest paid on deposits and borrowings can be adversely affected when market rates of interest rise. At December 31, 2019 and 2018, certificates of deposit amounted to $184.5 million and $166.2 million, respectively, or 61.0% and 61.2%, respectively, of total assets at such dates.

Quaint Oak Bancorp, Inc.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Gap Analysis. The matching of assets and liabilities may be analyzed by examining the extent to which such assets and liabilities are “interest rate sensitive” and by monitoring a bank’s interest rate sensitivity “gap.” An asset and liability is said to be interest rate sensitive within a specific time period if it will mature or reprice within that time period. The interest rate sensitivity gap is defined as the difference between the amount of interest-earning assets maturing or repricing within a specific time period and the amount of interest-bearing liabilities maturing or repricing within that same time period. A gap is considered positive when the amount of interest rate sensitive assets exceeds the amount of interest rate sensitive liabilities. A gap is considered negative when the amount of interest rate sensitive liabilities exceeds the amount of interest rate sensitive assets. During a period of rising interest rates, a negative gap would tend to adversely affect net interest income while a positive gap would tend to result in an increase in net interest income. Conversely, during a period of falling interest rates, a negative gap would tend to result in an increase in net interest income while a positive gap would tend to affect adversely net interest income. Our current interest rate risk management policy provides that our one-year interest rate gap as a percentage of total assets should not exceed positive or negative 20%. This policy was adopted by our management and Board of Directors based upon their judgment that it established an appropriate benchmark for the level of interest-rate risk, expressed in terms of the one-year gap, for the Company. If our one-year gap position approaches or exceeds the 20% policy limit, management will obtain simulation results in order to determine what steps might appropriately be taken, in order to maintain our one-year gap in accordance with the policy. Alternatively, depending on the then-current economic scenario, we could determine to make an exception to our policy or we could determine to revise our policy. Our one-year cumulative gap was a negative 7.9% at December 31, 2019, compared to a positive 10.4% at December 31, 2018.

The following table sets forth the amounts of our interest-earning assets and interest-bearing liabilities outstanding at December 31, 2019, which we expect, based upon certain assumptions, to reprice or mature in each of the future time periods shown. Except as stated below, the amount of assets and liabilities shown which reprice or mature during a particular period were determined in accordance with the earlier of term to repricing or the contractual maturity of the asset or liability. The table sets forth an approximation of the projected repricing of assets and liabilities at December 31, 2019, on the basis of contractual maturities, anticipated prepayments, and scheduled rate adjustments within a three-month period and subsequent selected time intervals. The loan amounts in the table reflect principal balances expected to be redeployed and/or repriced as a result of contractual amortization and anticipated prepayments of adjustable-rate loans and fixed-rate loans, and as a result of contractual rate adjustments on adjustable-rate loans. The Company’s annual historical prepayment rates are applied to loans. Money market, savings and passbook accounts are assumed to have annual rates of withdrawal, or “decay rates,” of 40%, 40%, and 20%, respectively.

Quaint Oak Bancorp, Inc.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

	3 Months or Less			More than 3 Months to 1 Year			More than 1 Year to 3 Years			More than 3 Years to 5 Years			More than 5 Years			Total Amount
	(Dollars In Thousands)
Interest-earning assets (1):
Due from banks, interest-bearing	$	14,014		$	--		$	--		$	--		$	--		$	14,014
Investment in interest-earning time deposits		--			2,026			5,606			2,540			--			10,172
Investment securities available for sale		5,504			47			327			235			1,510			7,623
Loans held for sale		8,928			--			--			--			--			8,928
Loans receivable (2)		27,825			34,647			58,167			82,047			47,081			249,767
Investment in Federal Home Loan Bank stock		--			--			--			--			1,580			1,580
Total interest-earning assets	$	56,271		$	36,720		$	64,100		$	84,822		$	50,171		$	292,084

Interest-bearing liabilities:
Passbook accounts	$	1		$	1		$	3		$	--		$	--		$	5
Savings accounts		344			344			689			173			172			1,722
Money market accounts		5,101			5,101			10,202			2,550			2,550			25,504
Certificate accounts		17,668			76,454			64,579			25,751			--			184,452
FHLB borrowings		10,000			2,000			12,171			12,100			--			36,271
Subordinated debt		--			--			--			--			7,865			7,865
Total interest-bearing liabilities	$	33,114		$	83,900		$	87,644		$	40,574		$	10,587		$	255,819

Interest-earning assets less interest-bearing liabilities	$	23,157		$	(47,180	)	$	(23,544	)	$	44,248		$	39,584

Cumulative interest-rate sensitivity gap (3)	$	23,157		$	(24,023	)	$	(47,567	)	$	(3,319	)	$	36,265

Cumulative interest-rate gap as a percentage of total assets at December 31, 2019		7.7	%		(7.9	)%		(15.7	)%		(1.1	)%		12.0	%

Cumulative interest-earning assets as a percentage of cumulative interest-bearing liabilities at December 31, 2019		169.9	%		79.5	%		76.8	%		98.6	%		114.2	%

_____________________

(1)	Interest-earning assets are included in the period in which the balances are expected to be redeployed and/or repriced as a result of anticipated prepayments, scheduled rate adjustments and contractual maturities.

(2)	For purposes of the gap analysis, loans receivable includes non-performing loans gross of the allowance for loan losses and deferred loan fees.

(3)	Interest-rate sensitivity gap represents the difference between net interest-earning assets and interest-bearing liabilities.

Qualitative Analysis. Our ability to maintain a positive “spread” between the interest earned on assets and the interest paid on deposits and borrowings is affected by changes in interest rates. The Company’s fixed-rate loans generally are profitable if interest rates are stable or declining since these loans have yields that exceed its cost of funds. If interest rates increase, however, the Company would have to pay more on its deposits and new borrowings, which would adversely affect its interest rate spread. In order to counter the potential effects of dramatic increases in market rates of interest, the Company intends to continue to originate more variable rate loans and increase core deposits. The Company also intends to place a greater emphasis on shorter-term home equity loans and commercial business loans.

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 December 31, 2019, the Company’s cash and cash equivalents amounted to $14.6 million. At such date, the Company also had $2.0 million invested in interest-earning time deposits maturing in one year or less.

Quaint Oak Bancorp, Inc.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

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 December 31, 2019, Quaint Oak Bank had outstanding commitments to originate loans of $10.2 million, commitments under unused lines of credit of $15.2 million, and $38,000 under standby letters of credit.

At December 31, 2019, certificates of deposit scheduled to mature in one year or less totaled $94.1 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 December 31, 2019, we had $36.3 million of borrowings from the FHLB and had $145.7 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 December 31, 2019 Quaint Oak Bank had $892,000 in borrowing capacity with the Federal Reserve Bank of Philadelphia. There were no borrowings under this facility at December 31, 2019.

Our stockholders’ equity amounted to $25.9 million at December 31, 2019, an increase of $2.1 million, or 8.7% from $23.8 million at December 31, 2018. Contributing to the increase was net income for the year ended December 31, 2019 of $2.5 million, the reissuance of treasury stock for exercised stock options of $190,000, common stock earned by participants in the employee stock ownership plan of $186,000, amortization of stock awards and options under our stock compensation plans of $173,000, the reissuance of treasury stock under the Bank’s 401(k) Plan of $38,000, and other comprehensive income, net of $22,000. These increases were partially offset by dividends paid of $676,000 and by the purchase of treasury stock of $339,000. For further discussion of the stock compensation plans, see Note 14 in the Notes to 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 December 31, 2019, Quaint Oak Bank exceeded each of its capital requirements with ratios of 10.35%, 13.42%, 13.42% and 14.41%, respectively. As a small savings and loan holding company, the Company is not currently subject to any regulatory capital requirements. For further discussion of the Bank’s regulatory capital requirements, see Note 17 in the Notes to Consolidated Financial Statements contained elsewhere herein.

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 December 31, 2019, we had unfunded commitments under lines of credit of $15.2 million, $10.2 million of commitments to originate loans, and $38,000 under standby letters of credit. We had no commitments to advance additional amounts pursuant to outstanding lines of credit or undisbursed construction loans.

Quaint Oak Bancorp, Inc.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Contractual Cash Obligations

The following table summarizes our contractual cash obligations at December 31, 2019. The balances in the table do not reflect interest due on these obligations.

			Payments Due By Period
	Total		To 1 Year		1-3 Years		4-5 Years		After 5 Years
	(In Thousands)
Operating leases	$	1,390	$	217	$	404	$	273	$	496
Certificates of deposit		184,452		94,122		64,579		25,751		--
FHLB borrowings		36,271		12,000		12,171		12,100		--
Total contractual obligations	$	222,113	$	106,339	$	77,154	$	38,124	$	496

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.

Quaint Oak Bancorp, Inc.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders and the Board of Directors of Quaint Oak Bancorp, Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Quaint Oak Bancorp, Inc. and subsidiary (the “Company”) as of December 31, 2019 and 2018; the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for the years then ended; and the related notes to the consolidated financial statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent, with respect to the Company, in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

We have served as the Company’s auditor since 2013.

Cranberry Township, Pennsylvania

Quaint Oak Bancorp, Inc.

Consolidated Balance Sheets

		At December 31,			At December 31,
		2019			2018
		(In thousands, except share data)
Assets
Due from banks, non-interest-bearing		$	541		$	369
Due from banks, interest-bearing			14,014			25,643
Cash and cash equivalents			14,555			26,012
Investment in interest-earning time deposits			10,172			4,927
Investment securities available for sale (cost-2019 $7,599; 2018 $6,682)			7,623			6,680
Loans held for sale			8,928			5,103
Loans receivable, net of allowance for loan losses
	(2019 $2,231; 2018 $1,965)		246,692			216,898
Accrued interest receivable			1,349			1,153
Investment in Federal Home Loan Bank stock, at cost			1,580			1,086
Bank-owned life insurance			3,974			3,894
Premises and equipment, net			2,226			2,058
Goodwill			515			515
Other intangible, net of accumulated amortization			319			368
Other real estate owned, net			1,824			1,650
Prepaid expenses and other assets			2,783			1,060
Total Assets		$	302,540		$	271,404

Liabilities and Stockholders’ Equity
Liabilities
Deposits:
Non-interest bearing		$	15,775		$	17,542
Interest-bearing			211,683			194,369
Total deposits			227,458			211,911
Federal Home Loan Bank short-term borrowings			10,000			9,000
Federal Home Loan Bank long-term borrowings			26,271			15,000
Subordinated debt			7,865			7,831
Accrued interest payable			314			221
Advances from borrowers for taxes and insurance			2,780			2,568
Accrued expenses and other liabilities			1,945			1,037
Total Liabilities			276,633			247,568

Stockholders’ Equity
Preferred stock – $0.01 par value, 1,000,000 shares authorized; none issued or outstanding			--			--
Common stock – $0.01 par value; 9,000,000 shares
authorized; 2,777,250 issued; 1,984,857 and 1,975,947 outstanding at December 31, 2019 and 2018, respectively			28			28
Additional paid-in capital			14,990			14,683
Treasury stock, at cost: 792,393 and 801,303 shares at December 31, 2019 and 2018, respectively			(4,950	)		(4,824	)
Unallocated common stock held by:
Employee Stock Ownership Plan (ESOP)			(118	)		(185	)
Accumulated other comprehensive income (loss)			20			(2	)
Retained earnings			15,937			14,136
Total Stockholders’ Equity			25,907			23,836
Total Liabilities and Stockholders’ Equity		$	302,540		$	271,404

See accompanying notes to consolidated financial statements.

Quaint Oak Bancorp, Inc.

Consolidated Statements of Income

	Years Ended December 31,
	2019		2018
	(In thousands, except share
	and per share data)
Interest Income
Interest on loans, including fees	$	13,167	$	11,530
Interest and dividends on investment securities, interest-bearing deposits with others, and Federal Home Loan Bank stock		944		595
Total Interest Income		14,111		12,125

Interest Expense
Interest on deposits		4,287		3,264
Interest on Federal Home Loan Bank short-term borrowings		141		197
Interest on Federal Home Loan Bank long-term borrowings		479		352
Interest on subordinated debt		519		7
Total Interest Expense		5,426		3,820

Net Interest Income		8,685		8,305

Provision for Loan Losses		303		415

Net Interest Income after Provision for Loan Losses		8,382		7,890

Non-Interest Income
Mortgage banking and title abstract fees	1,152		826
Real estate sales commissions, net	180		192
Insurance commissions	419		430
Other fees and services charges	68		131
Income from bank-owned life insurance	80		80
Net gain on loans held for sale	3,014		2,120
Gain on the sale of SBA loans	265		105
Loss on sale of investment securities available for sale	(4	)	--
(Loss) gain on sales and write-downs of other real estate owned	(221	)	63
Total Non-Interest Income, net	4,953		3,947

Non-Interest Expense
Salaries and employee benefits	6,947	6,407
Directors’ fees and expenses	223	208
Occupancy and equipment	692	601
Data processing	508	398
Professional fees	416	365
FDIC deposit insurance assessment	15	186
Other real estate owned expenses	22	20
Advertising	195	217
Amortization of other intangible	49	48
Other	841	716
Total Non-Interest Expense	9,908	9,166

Income before Income Taxes		3,427		2,671
Income Taxes		950		667
Net Income	$	2,477	$	2,004

Earnings per share – basic	$	1.27	$	1.04
Average shares outstanding - basic		1,956,612		1,923,491
Earnings per share - diluted	$	1.24	$	1.01
Average shares outstanding - diluted		2,005,438		1,982,998

See accompanying notes to consolidated financial statements.

Quaint Oak Bancorp, Inc.

Consolidated Statements of Comprehensive Income

	Years Ended December 31,
	2019			2018
	(In Thousands)

Net Income	$	2,477		$	2,004

Other Comprehensive Income:
Unrealized gains on investment securities available for sale		22			16
Income tax effect		(3	)		(3	)
Reclassification adjustment for losses on sale of investment securities included in net income		4			--
Income tax effect		(1	)		--
Net other comprehensive income		22			13

Total Comprehensive Income	$	2,499		$	2,017

See accompanying notes to consolidated financial statements.

Quaint Oak Bancorp, Inc.

Consolidated Statements of Stockholders’ Equity

												Unallocated
	Common Stock											Common			Accumulated
	Number of					Additional						Stock Held			Other						Total
	Shares					Paid-in			Treasury			by Benefit			Comprehensive			Retained			Stockholders'
(In thousands, except share and per share data)	Outstanding			Amount		Capital			Stock			Plans			Income (Loss)			Earnings			Equity

BALANCE – DECEMBER 31, 2017	1,920,024		$	28	$	14,481		$	(4,675	)	$	(277	)	$	(15	)	$	12,643		$	22,185

Common stock allocated by ESOP (14,428 shares)						124						68									192

Treasury stock purchased	(60,711	)							(795	)		2									(793	)

Reissuance of treasury stock under 401(k) Plan	4,793					37			27												64

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						148															148

Release of 4,664 vested RRP shares						(22	)					22									--

Cash dividends declared ($0.26 per share)																		(511	)		(511	)

Net income																		2,004			2,004

Other comprehensive income, net															13						13

BALANCE – DECEMBER 31, 2018	1,975,947		$	28	$	14,683		$	(4,824	)	$	(185	)	$	(2	)	$	14,136		$	23,836

Common stock allocated by ESOP (14,428 shares)						119						67									186

Treasury stock purchased	(27,297	)							(339	)											(339	)

Reissuance of treasury stock under 401(k) Plan	2,986					20			18												38

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						173															173

Cash dividends declared ($0.34 per share)																		(676	)		(676	)

Net income																		2,477			2,477

Other comprehensive income, net															22						22

BALANCE –DECEMBER 31, 2019	1,984,857		$	28	$	14,990		$	(4,950	)	$	(118	)	$	20		$	15,937		$	25,907

See accompanying notes to consolidated financial statements.

Quaint Oak Bancorp, Inc.

Consolidated Statements of Cash Flows
	Years Ended
	December 31,
	2019			2018
	(In Thousands)
Cash Flows from Operating Activities
Net income	$	2,477		$	2,004
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Provision for loan losses		303			415
Depreciation expense		200			202
Amortization of operating right-of-use assets		95			--
Amortization of subordinated debt issuance costs		34			--
Amortization of other intangible		49			48
Net amortization of securities premiums		28			19
Accretion of deferred loan fees and costs, net		(435	)		(348	)
Deferred income taxes		(41	)		(26	)
Stock-based compensation expense		359			340
Loss on sale of investment securities available for sale		4			--
Net gain on loans held for sale		(3,014	)		(2,120	)
Loans held for sale-originations		(135,310	)		(100,138	)
Loans held for sale-proceeds		134,499			104,160
Gain on the sale of SBA loans		(265	)		(105	)
Net loss (gain) on sale and write-downs of other real estate owned		221			(63	)
Increase in the cash surrender value of bank-owned life insurance		(80	)		(80	)
Changes in assets and liabilities which provided (used) cash:
Accrued interest receivable		(196	)		(132	)
Prepaid expenses and other assets		(395	)		197
Accrued interest payable		93			54
Accrued expenses and other liabilities		(478	)		437
Net Cash (Used in) Provided by Operating Activities		(1,852	)		4,864
Cash Flows from Investing Activities
Purchase of interest-earning time deposits		(6,849	)		(809	)
Redemption of interest-earning time deposits		1,603			761
Purchase of investment securities available for sale		(3,319	)		--
Principal repayments on investment securities available for sale		1,341			1,230
Proceeds from the sales of investment securities available for sale		1,030			--
Net increase in loans receivable		(29,397	)		(16,734	)
Purchase of Federal Home Loan Bank stock		(614	)		(12	)
Redemption of Federal Home Loan Bank stock		120			160
Proceeds from the sale of other real estate owned		--			63
Capitalized expenditures on other real estate owned		(395	)		(109	)
Purchase of premises and equipment		(368	)		(272	)
Net Cash Used in Investing Activities		(36,848	)		(15,722	)
Cash Flows from Financing Activities
Net (decrease) increase in demand deposits, money markets, and savings accounts		(2,689	)		4,512
Net increase in certificate accounts		18,236			21,178
Increase in advances from borrowers for taxes and insurance		212			145
Net proceeds (repayments) from Federal Home Loan Bank short-term borrowings		1,000			(1,000	)
Proceeds from Federal Home Loan Bank long-term borrowings		14,271			--
Repayment of Federal Home Loan Bank long-term borrowings		(3,000	)		(3,000	)
Net proceeds from the issuance of subordinated debt		--			7,831
Dividends paid		(676	)		(511	)
Purchase of treasury stock		(339	)		(793	)
Proceeds from the reissuance of treasury stock		38			64
Proceeds from the exercise of stock options		190			534
Net Cash Provided by Financing Activities		27,243			28,960
Net (Decrease) Increase in Cash and Cash Equivalents		(11,457	)		18,102
Cash and Cash Equivalents – Beginning of Year		26,012			7,910
Cash and Cash Equivalents – End of Year	$	14,555		$	26,012
Supplementary Disclosure of Cash Flow and Non-Cash Information:
Cash payments for interest	$	5,333		$	3,766
Cash payments for income taxes	$	1,034		$	561
Transfer of loans to other real estate owned	$	--		$	1,541
Initial recognition of operating lease right-of use assets	$	1,386		$	--
Initial recognition of operating lease obligations	$	1,386		$	--

See accompanying notes to consolidated financial statements.

Quaint Oak Bancorp, Inc.

Notes to Consolidated Financial Statements

Note 1 - Nature of Operations

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 (the “Bank”), along with its wholly owned subsidiaries. At December 31, 2019, the Bank has five wholly-owned subsidiaries, Quaint Oak Mortgage, LLC, Quaint Oak Real Estate, LLC, Quaint Oak Abstract, LLC, QOB Properties, LLC, and Quaint Oak Insurance Agency, LLC, each a Pennsylvania limited liability company. The mortgage company offers mortgage banking in the Lehigh Valley, Delaware Valley and Philadelphia County regions of Pennsylvania. The real estate and abstract companies offer real estate sales and title abstract services, respectively, primarily in the Lehigh Valley region of Pennsylvania. These companies began operation in July 2009. In February, 2019, Quaint Oak Mortgage opened a mortgage banking office in Philadelphia, Pennsylvania. QOB Properties, LLC began operations in July 2012 and holds Bank properties acquired through a foreclosure proceeding or acceptance of a deed in lieu of foreclosure. Quaint Oak Insurance Agency, LLC began operations in August 2016 and provides a broad range of personal and commercial insurance coverage solutions. All significant intercompany balances and transactions have been eliminated.

The Bank is subject to regulation by the Pennsylvania Department of Banking and Securities and the Federal Deposit Insurance Corporation. Pursuant to the Bank’s election under Section 10(l) of the Home Owners’ Loan Act, the Company is a savings and loan holding company regulated by the Board of Governors of the Federal Reserve System. The market area served by the Bank is principally Bucks, Montgomery and Philadelphia Counties in Pennsylvania and the Lehigh Valley area in Pennsylvania. The Bank has two banking locations: the main office location in Southampton, Pennsylvania and a regional banking office in the Lehigh Valley area of Pennsylvania. The principal deposit products offered by the Bank are certificates of deposit, money market accounts, non-interest bearing checking accounts for businesses and consumers, and savings accounts. In February 2020, Quaint Oak Bank opened a retail banking office in Philadelphia, Pennsylvania. 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.

Note 2 - Summary of Significant Accounting Policies

Use of Estimates

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 valuation of deferred tax assets.

Significant Group Concentrations of Credit Risk

The Bank has a significant concentration of loans in Philadelphia County, Pennsylvania. The concentration of credit by type of loan is set forth in Note 7. Although the Bank has a diversified loan portfolio, its debtors’ ability to honor their contracts is influenced by the region’s economy. During the year ended December 31, 2019, one investor purchased a total of 44% of all loans sold by the Bank from its mortgage loans held for sale, and the sales to this investor accounted for approximately 40% of the gain on loans sold during the year.

Cash and Cash Equivalents

For purposes of reporting cash flows, cash and cash equivalents include non-interest earning and interest-earning demand deposits and money market accounts with various financial institutions, all of which mature within ninety days of acquisition.

Quaint Oak Bancorp, Inc.

Notes to Consolidated Financial Statements (Continued)

Note 2 - Summary of Significant Accounting Policies (Continued)

Investment Securities

Management determines the appropriate classification of debt securities at the time of purchase and reevaluates such designation as of each balance sheet date.

Securities classified as available for sale are those securities that the Company intends to hold for an indefinite period of time but not necessarily to maturity. Any decision to sell a security classified as available for sale would be based on various factors, including significant movement in interest rates, changes in maturity mix of the Company’s assets and liabilities, liquidity needs, regulatory capital requirements, and other similar factors. Securities available for sale are carried at fair value. Unrealized gains and losses are reported in other comprehensive income, net of related deferred tax effects. Realized gains and losses, determined on the basis of the cost of the specific securities sold, are included in earnings. Premiums and discounts are recognized in interest income using the interest method over the terms of the securities.

Securities classified as held to maturity are those debt securities the Company has both the intent and ability to hold to maturity regardless of the changes in market conditions, liquidity needs, or changes in general economic conditions. These securities are carried at cost adjusted for amortization of premium and accretion of discount, which are recognized in interest income using the interest method over the terms of the securities.

The Company follows the accounting guidance related to recognition and presentation of other-than-temporary impairment. This accounting guidance specifies that (a) if a company does not have the intent to sell a debt security prior to recovery and (b) it is more likely than not that it will not have to sell the debt security prior to recovery, the security would not be considered other-than-temporarily impaired unless there is a credit loss. When an entity does not intend to sell the security, and it is more likely than not the entity will not have to sell the security before recovery of its cost basis, it will recognize the credit component of an other-than-temporary impairment of a debt security in earnings and the remaining portion in other comprehensive income. For held-to-maturity debt securities, the amount of an other-than-temporary impairment recorded in other comprehensive income for the noncredit portion of a previous other-than-temporary impairment should be amortized prospectively over the remaining life of the security on the basis of the timing of future estimated cash flows of the security. The Company recognized no other-than-temporary impairment charges during the years ended December 31, 2019 and 2018.

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 years ended December 31, 2019 and 2018.

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. 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.

Quaint Oak Bancorp, Inc.

Notes to Consolidated Financial Statements (Continued)

Note 2 - Summary of Significant Accounting Policies (Continued)

Loans Receivable (Continued)

The loans receivable portfolio is segmented into residential loans, commercial real estate loans, construction loans, commercial business, and consumer loans. The residential loan segment has two classes: one-to-four family residential owner occupied loans and one-to-four family residential 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 primarily for 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, loans are restored to accrual status when the obligation is brought current, has performed in accordance with the contractual terms for a reasonable period of time and the ultimate collectability of the total contractual principal and interest is no longer in doubt.

Allowance for Loan Losses

The allowance for loan losses represents management’s estimate of losses inherent in the loan portfolio as of the balance sheet date and is recorded as a reduction to loans. 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 consists of specific, general and unallocated components. The specific component relates to loans that are identified as impaired. For loans that are identified 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 re-evaluated quarterly to ensure their relevance in the current economic environment. Residential 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.

Quaint Oak Bancorp, Inc.

Notes to Consolidated Financial Statements (Continued)

Note 2 - Summary of Significant Accounting Policies (Continued)

Allowance for Loan Losses (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.

Quaint Oak Bancorp, Inc.

Notes to Consolidated Financial Statements (Continued)

Note 2 - Summary of Significant Accounting Policies (Continued)

Allowance for Loan Losses (Continued)

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 commercial business loans for the purchase of business essential equipment for sale primarily to other financial institutions.

Bank Owned Life Insurance (“BOLl”)

The Company purchases bank owned life insurance as a mechanism for funding various employee benefit costs. The Company is the beneficiary of these policies that insure the lives of certain officers of its subsidiaries. The Company has recognized the cash surrender value under the insurance policies as an asset in the Consolidated Balance Sheets. Changes in the cash surrender value are recorded in non-interest income in the Consolidated Statements of Income.

Premises and Equipment

Land is carried at cost. Premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed on the straight-line method over the expected useful lives of the related assets that range from three to thirty-nine years. The costs of maintenance and repairs are expensed as incurred. Costs of major additions and improvements are capitalized.

Intangible Assets

Intangible assets on the consolidated balance sheets represent the acquisition by Quaint Oak Insurance Agency of the renewal rights to a book of business 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.

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.

Quaint Oak Bancorp, Inc.

Notes to Consolidated Financial Statements (Continued)

Note 2 - Summary of Significant Accounting Policies (Continued)

Other Real Estate Owned

Other real estate owned or foreclosed assets are comprised of property acquired through a foreclosure proceeding or acceptance of a deed in lieu of foreclosure and loans classified as in-substance foreclosures. A loan is classified as in-substance foreclosure when the Bank has taken possession of the collateral regardless of whether formal foreclosure proceedings take place. Other real estate properties are initially recorded at fair value, net of estimated selling costs at the date of foreclosure, establishing a new cost basis. After foreclosure, valuations are periodically performed by management and the real estate is carried at the lower of cost or fair value less estimated costs to sell. Net revenue and expenses from operations and additions to the valuation allowance are included in other expenses.

The Company had four properties in other real estate owned (OREO) totaling $1.8 million at December 31, 2019. The balance of these OREO properties amounted to $1.7 million at December 31, 2018.

Mortgage Servicing Rights

Included in other assets are mortgage servicing rights recognized as separate assets when mortgage loans are sold and the servicing rights are retained. These capitalized mortgage servicing rights are amortized into non-interest income in proportion to, and over the period of, the estimated future net servicing period of the underlying mortgage loans. Mortgage servicing rights totaled $128,000 and $87,000 at December 31, 2019 and 2018, respectively. During the year ended December 31, 2019 and 2018, approximately $13,000 and $10,000 in amortization was recognized, respectively.

Advertising Costs

The Company expenses all advertising costs as incurred. Advertising costs are included in non-interest expense on the Consolidated Statements of Income.

Transfers of Financial Assets

Transfers of financial assets are accounted for as sales, when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity or the ability to unilaterally cause the holder to return specific assets.

Income Taxes

Deferred income taxes are provided on the liability method whereby deferred tax assets are recognized for deductible temporary differences and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax basis. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.

Quaint Oak Bancorp, Inc.

Notes to Consolidated Financial Statements (Continued)

Note 2 - Summary of Significant Accounting Policies (Continued)

Income Taxes (Continued)

The Company follows guidance related to accounting for uncertainty in income taxes, which sets out a consistent framework to determine the appropriate level of tax reserves to maintain for uncertain tax positions. A tax position is recognized as a benefit only if it is more likely than not that the tax position would be sustained in a tax examination, with a tax examination presumed to occur. The amount recognized is the largest amount of tax benefit that has more than 50 percent likelihood of being realized upon examination. For tax positions not meeting the more likely than not test, no tax benefit is recorded. The Company had no material uncertain tax positions or accrued interest and penalties as of December 31, 2019 and 2018. The Company’s policy is to account for interest as a component of interest expense and penalties as components of other expense. The Company is no longer subject to examination by taxing authorities for the years before January 1, 2016.

Comprehensive Income (Loss)

Accounting principles generally accepted in the United States of America require that recognized revenue, expenses, gains and losses be included in net income. Although 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 stockholders’ equity section of the balance sheet, such items, along with net income, are components of comprehensive income (loss).

Treasury Stock and Unallocated Common Stock

The acquisition of treasury stock by the Company, including unallocated stock held by certain benefit plans, is recorded under the cost method. At the date of subsequent reissue, treasury stock is reduced by the cost of such stock based on an average cost method with any excess proceeds credited to additional paid-in capital.

Share-Based Compensation

Stock compensation accounting guidance requires that the compensation cost relating to share-based payment transactions be recognized in financial statements. That cost is measured based on the grant date fair value of the equity or liability instruments issued. The stock compensation accounting guidance covers a wide range of share-based compensation arrangements including stock option and restricted share plans.

The stock compensation accounting guidance requires that compensation cost for all stock awards be calculated and recognized over the employees’ service period, generally defined as the vesting period. For awards with graded-vesting, compensation cost is recognized on a straight-line basis over the requisite service period for the entire award. A Black-Scholes model is used to estimate the fair value of stock options, while the closing price of the Company’s common stock on the grant date is used for restricted stock awards.

At December 31, 2019, the Company has outstanding equity awards under two share-based plans: the 2013 Stock Incentive Plan and the 2018 Stock Incentive Plan. Awards under these plans were made in May 2013 and 2018. These plans are more fully described in Note 14.

The Company also has an employee stock ownership plan (“ESOP”). This plan is more fully described in Note 14. 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.

Quaint Oak Bancorp, Inc.

Notes to Consolidated Financial Statements (Continued)

Note 2 - Summary of Significant Accounting Policies (Continued)

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. In certain circumstances, noninterest income is reported net of associated expenses.

The Company’s primary sources of revenue are derived from interest and dividends earned on loans and investment securities, mortgage banking revenue, including gains on the sale of mortgage 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 consist of commissions from the sale of insurance policies and performance-based commissions from insurance companies. The Bank recognizes commission income from the sale of insurance policies when its wholly owned subsidiary, Quaint Oak Insurance Agency, LLC, 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.

Quaint Oak Bancorp, Inc.

Notes to Consolidated Financial Statements (Continued)

Note 2 - Summary of Significant Accounting Policies (Continued)

Revenue from Contracts with Customers (Continued)

Off-Balance Sheet Financial Instruments

In the ordinary course of business, the Bank has entered into off-balance sheet financial instruments consisting of commitments to extend credit. Such financial instruments are recorded in the consolidated balance sheet when they are funded.

Reclassifications

Certain items in the 2018 consolidated financial statements have been reclassified to conform to the presentation in the 2019 consolidated financial statements. Such reclassifications did not have a material impact on the overall consolidated financial statements.

Recently Adopted Accounting Pronouncements

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The standard requires lessees to recognize the assets and liabilities that arise from leases on the balance sheet. A lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. A short-term lease is defined as one in which (a) the lease term is 12 months or less and (b) there is not an option to purchase the underlying asset that the lessee is reasonably certain to exercise. For short-term leases, lessees may elect to recognize lease payments over the lease term on a straight-line basis. For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2018, and interim periods within those years. The amendments should be applied at the beginning of the earliest period presented using a modified retrospective approach with earlier application permitted as of the beginning of an interim or annual reporting period. The Company adopted this standard Effective January 1, 2019 which resulted in the recording of a right of use (“ROU”) asset and associated lease liability of approximately $1.4 million. The ROU asset is included in other assets and the lease liability is included in other liabilities in the December 31, 2019 consolidated balance sheet.

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.

Quaint Oak Bancorp, Inc.

Notes to Consolidated Financial Statements (Continued)

Note 2 - Summary of Significant Accounting Policies (Continued)

Recent Accounting Pronouncements Not Yet Adopted (Continued)

In November 2019, the FASB 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, including interim periods within those fiscal years. 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 unit’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. In November 2019, the FASB issued 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. This update is not expected to have a significant impact on the Company’s financial statements.

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. In November, 2019, the FASB issued 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 944, Financial Services – Insurance, for public business entities that are SEC filers, except for smaller reporting companies, to fiscal years beginning after December 15, 2021, and interim periods within those fiscal years and for all other entities, including smaller reporting companies, to 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.

Quaint Oak Bancorp, Inc.

Notes to Consolidated Financial Statements (Continued)

Note 2 - Summary of Significant Accounting Policies (Continued)

Recent Accounting Pronouncements Not Yet Adopted (Continued)

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.

Note 3 – 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 years ended December 31, 2019 and 2018, all unvested restricted stock program awards and outstanding stock options representing shares were dilutive.

Quaint Oak Bancorp, Inc.

Notes to Consolidated Financial Statements (Continued)

Note 3 – 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 Year Ended December 31,
	2019		2018
Net Income	$	2,477,000	$	2,004,000

Weighted average shares outstanding – basic		1,956,612		1,923,491
Effect of dilutive common stock equivalents		48,826		59,507
Adjusted weighted average shares outstanding – diluted		2,005,438		1,982,998

Basic earnings per share	$	1.27	$	1.04
Diluted earnings per share	$	1.24	$	1.01

Note 4 – Accumulated Other Comprehensive Income (Loss)

The following table presents the changes in accumulated other comprehensive income (loss) by component, net of tax, for the years ended December 31, 2019 and 2018 (in thousands):

	Unrealized Losses on Investment Securities Available for Sale (1)
	2019			2018
Balance beginning of the year	$	(2	)	$	(15	)

Other comprehensive income before reclassifications		19			13
Amount reclassified from accumulated other comprehensive income (loss)		3			--
Total other comprehensive income		22			13

Balance end of the year	$	20		$	(2	)

________________________

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

The following table presents significant amounts reclassified out of each component of accumulated other comprehensive loss for the years ended December 31, 2019 and 2018 (in thousands):

Details About Other Comprehensive Income	Amount Reclassified from Accumulated Other Comprehensive Income (Loss) (1)					Affected Line Item in the Statement of Income
	For the Year Ended December 31,
	2019			2018
Unrealized losses on investment securities available for sale	$	(4	)	$	--	Loss on sales of investment securities
		1			--	Income taxes
	$	(3	)	$	--

___________________

(1)	Amounts in parentheses indicate debits.

Quaint Oak Bancorp, Inc.

Notes to Consolidated Financial Statements (Continued)

Note 5 – Investment in Interest-Earning Time Deposits

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

	2019		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

Note 6 – Investment Securities Available for Sale

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

	December 31, 2019
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized (Losses)			Fair Value
Available for Sale:
Mortgage-backed securities:
Governmental National Mortgage Association securities	$	5,841	$	13	$	(1	)	$	5,853
Federal National Mortgage Association securities		258		2		--			260
Total mortgage-backed securities		6,099		15		(1	)		6,113
Debt securities:
Corporate notes		1,500		10		--			1,510
Total available-for-sale-securities	$	7,599	$	25	$	(1	)	$	7,623

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

The amortized cost and fair value of mortgage-backed and debt securities at December 31, 2019, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties (in thousands):

	Available for Sale
	Amortized Cost		Fair Value
Due after five through ten years	$	1,500	$	1,510
Due after ten years		6,099		6,113
Total	$	7,599	$	7,623

Quaint Oak Bancorp, Inc.

Notes to Consolidated Financial Statements (Continued)

Note 6 – 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 December 31, 2019 and 2018 (in thousands):

	December 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	)

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

At December 31, 2019, there were four securities in an unrealized loss position that at such date had an aggregate depreciation of 0.05% 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 December 31, 2019 represents an other-than-temporary impairment. There were no impairment charges recognized during the year ended December 31, 2019 or 2018.

Quaint Oak Bancorp, Inc.

Notes to Consolidated Financial Statements (Continued)

Note 7 - Loans Receivable, Net and Allowance for Loan Losses

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

	December 31, 2019			December 31, 2018
Real estate loans:
One-to-four family residential:
Owner occupied	$	6,298		$	6,603
Non-owner occupied		39,897			47,361
Total one-to-four family residential		46,195			53,964
Multi-family (five or more) residential		22,233			23,967
Commercial real estate		119,323			103,819
Construction		12,523			9,998
Home equity		3,726			4,347
Total real estate loans		204,000			196,095

Commercial business		45,745			23,616
Other consumer		22			19
Total Loans		249,767			219,730

Deferred loan fees and costs		(844	)		(867	)
Allowance for loan losses		(2,231	)		(1,965	)
Net Loans	$	246,692		$	216,898

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

	December 31, 2019
	Pass		Special Mention		Substandard		Doubtful		Total
One-to-four family residential owner occupied	$	6,126	$	--	$	172	$	--	$	6,298
One-to-four family residential non-owner occupied		39,579		--		318		--		39,897
Multi-family residential		22,233		--		--		--		22,233
Commercial real estate		118,233		798		292		--		119,323
Construction		12,523		--		--		--		12,523
Home equity		3,726		--		--		--		3,726
Commercial business		45,745		--		--		--		45,745
Other consumer		22		--		--		--		22
Total	$	248,187	$	798	$	782	$	--	$	249,767

Quaint Oak Bancorp, Inc.

Notes to Consolidated Financial Statements (Continued)

Note 7 - Loans Receivable, Net and Allowance for Loan Losses (Continued)

	December 31, 2018
	Pass		Special Mention		Substandard		Doubtful		Total
One-to-four family residential owner occupied	$	6,421	$	--	$	182	$	--	$	6,603
One-to-four family residential non-owner occupied		46,534		--		827		--		47,361
Multi-family residential		23,967		--		--		--		23,967
Commercial real estate		101,821		--		1,998		--		103,819
Construction		9,998		--		--		--		9,998
Home equity		4,347		--		--		--		4,347
Commercial business		23,149		--		467		--		23,616
Other consumer		19		--		--		--		19
Total	$	216,256	$	--	$	3,474	$	--	$	219,730

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, 2019 as well as the average recorded investment and related interest income for the year then ended (in thousands):

	December 31, 2019
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
One-to-four family residential owner occupied	$	172	$	178	$	--	$	178	$	--
One-to-four family residential non-owner occupied		19		19		--		225		13
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		--		--		--		--		--
Multi-family residential		--		--		--		--		--
Commercial real estate		132		132		4		133		12
Construction		--		--		--		--		--
Home equity		--		--		--		--		--
Commercial business		--		--		--		--		--
Other consumer		--		--		--		--		--

Total:
One-to-four family residential owner occupied	$	172		178	$	--	$	178	$	--
One-to-four family residential non-owner occupied		19		19		--		225		13
Multi-family residential		--		--		--		--		--
Commercial real estate		132		132		4		133		12
Construction		--		--		--		--		--
Home equity		--		--		--		--		--
Commercial business		--		--		--		--		--
Other consumer		--		--		--		--		--
Total	$	323	$	329	$	4	$	536	$	25

Quaint Oak Bancorp, Inc.

Notes to Consolidated Financial Statements (Continued)

Note 7 - Loans Receivable, Net and Allowance for Loan Losses (Continued)

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

	December 31, 2018
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
One-to-four family residential owner occupied	$	182	$	185	$	--	$	417	$	23
One-to-four family residential non-owner occupied		265		265		--		324		17
Multi-family residential		--		--		--		--		--
Commercial real estate		--		--		--		--		--
Construction		--		--		--		2,050		37
Home equity		--		--		--		44		2
Commercial business		--		--		--		--		--
Other consumer		--		--		--		--		--

With an allowance recorded:
One-to-four family residential owner occupied	$	--	$	--	$	--	$	--	$	--
One-to-four family residential non-owner occupied		68		68		50		162		4
Multi-family residential		--		--		--		--		--
Commercial real estate		133		133		5		133		10
Construction		--		--		--		--		--
Home equity		--		--		--		--		--
Commercial business		--		--		--		--		--
Other consumer		--		--		--		--		--

Total:
One-to-four family residential owner occupied	$	182		185	$	--	$	417	$	23
One-to-four family residential non-owner occupied		333		333		50		486		21
Multi-family residential		--		--		--		--		--
Commercial real estate		133		133		5		133		10
Construction		--		--		--		2,050		37
Home equity		--		--		--		44		2
Commercial business		--		--		--		--		--
Other consumer		--		--		--		--		--
Total	$	648	$	651	$	55	$	3,130	$	93

The loan portfolio also includes certain loans that have been modified in a troubled debt restructuring, where economic concessions have been granted to borrowers who have experienced or are expected to experience financial difficulties. These concessions typically result from loss mitigation activities and could include reductions in the interest rate, payment extensions, forbearance, or other actions. At December 31, 2019, the Company had two loans totaling $151,000 that were identified as troubled debt restructurings. One of these loans was performing in accordance with its modified terms and one was 31 days delinquent as of December 31, 2019. During the year ended December 31, 2019, no new loans were identified as TDRs. At December 31, 2018, the Company had two loans totaling $398,000 that were identified as troubled debt restructurings. Both of these loans were performing in accordance with their modified terms. 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 six months and future collection under the revised terms is probable.

Quaint Oak Bancorp, Inc.

Notes to Consolidated Financial Statements (Continued)

Note 7 - Loans Receivable, Net and Allowance for Loan Losses (Continued)

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

	December 31, 2019
	Number of Contracts		Recorded Investment		Non- Accrual		Accruing		Related Allowance
One-to-four family residential owner occupied		--	$	--	$	--	$	--	$	--
One-to-four family residential non-owner occupied		1		19		--		19		--
Multi-family residential		--		--		--		--		--
Commercial real estate		1		132		--		132		4
Construction		--		--		--		--		--
Home equity		--		--		--		--		--
Commercial business		--		--		--		--		--
Other consumer		--		--		--		--		--
Total		2	$	151	$	--	$	151	$	4

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

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

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

Quaint Oak Bancorp, Inc.

Notes to Consolidated Financial Statements (Continued)

Note 7 - Loans Receivable, Net and Allowance for Loan Losses (Continued)

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

Any reserve for an impaired TDR loan is based upon the present value of the future expected cash flows discounted at the loan’s original effective rate or upon the fair value of the collateral less costs to sell, if the loan is deemed collateral dependent. At December 31, 2019 there were no commitments to lend additional funds to debtors whose loan terms have been modified as TDRs.

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

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 December 31, 2019 (in thousands):

	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
Allowance for loan losses:
Beginning balance	$	51	$	435		$	156		$	839	$	175	$	21		$	247	$	41	$	1,965
Charge-offs		--		(37	)		--			--		--		--			--		--		(37	)
Recoveries		--		--			--			--		--		--			--		--		--
Provision		1		(47	)		(11	)		15		75		(2	)		253		19		303
Ending balance	$	52	$	351		$	145		$	854	$	250	$	19		$	500	$	60	$	2,231
Ending balance evaluated for impairment:
Individually	$	--	$	--		$	--		$	4	$	--	$	--		$	--	$	--	$	4
Collectively	$	52	$	351		$	145		$	850	$	250	$	19			500	$	60	$	2,227
Loans receivable:
Ending balance	$	6,298	$	39,897		$	22,233		$	119,323	$	12,523	$	3,726		$	45,767			$	249,767
Ending balance evaluated for impairment:
Individually	$	172	$	19		$	--		$	132	$	--	$	--		$	--			$	323
Collectively	$	6,126	$	39,878		$	22,233		$	119,191	$	12,523	$	3,726		$	45,767			$	249,444

Quaint Oak Bancorp, Inc.

Notes to Consolidated Financial Statements (Continued)

Note 7 - Loans Receivable, Net and Allowance for Loan Losses (Continued)

The Bank allocated increased allowance for loan loss provisions to the commercial business loan portfolio class, the construction loan portfolio class, and the commercial real estate loan portfolio class for the year ended 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 year ended December 31, 2019, due primarily to a decrease in balances in this portfolio class.

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.

Quaint Oak Bancorp, Inc.

Notes to Consolidated Financial Statements (Continued)

Note 7 - Loans Receivable, Net and Allowance for Loan Losses (Continued)

The following table presents non-accrual loans by classes of the loan portfolio as of December 31, 2019 and 2018 (in thousands):

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

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

For the years ended December 31, 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 $10,000 and $16,000 for the years ended December 31, 2019 and 2018, respectively.

The performance and credit quality of the loan portfolio are 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 December 31, 2019 and 2018 (in thousands):

	December 31, 2019
	30-89 Days Past Due		90 Days or More Past Due		Total Past Due		Current		Total Loans Receivable		Loans Receivable > 90 Days and Accruing

One-to-four family residential owner occupied	$	1,199	$	172	$	1,371	$	4,927	$	6,298	$	--
One-to-four family residential non-owner occupied		1,069		--		1,069		38,828		39,897		--
Multi-family residential		--		--		--		22,233		22,233		--
Commercial real estate		986		190		1,176		118,147		119,323		190
Construction		1,120		--		1,120		11,403		12,523		--
Home equity		--		--		--		3,726		3,726		--
Commercial business		66		--		66		45,679		45,745		--
Other consumer		--		--		--		22		22		--
Total	$	4,440	$	362	$	4,802	$	244,965	$	249,767	$	190

Quaint Oak Bancorp, Inc.

Notes to Consolidated Financial Statements (Continued)

Note 7 - Loans Receivable, Net and Allowance for Loan Losses (Continued)

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

Note 8 - Premises and Equipment

The components of premises and equipment at December 31, 2019 and 2018 are as follows (in thousands):

	2019			2018
Land and land improvements	$	292		$	298
Buildings		1,695			1,456
Leasehold improvements		441			439
Furniture, fixtures and equipment		1,444			1,311
		3,872			3,504
Accumulated depreciation		(1,646	)		(1,446	)
Premises and equipment, net	$	2,226		$	2,058

Depreciation expense for the years ended December 31, 2019 and 2018 amounted to approximately $200,000 and $202,000, respectively.

Note 9 – Goodwill and Other Intangible, Net

On August 1, 2016, Quaint Oak Insurance Agency, LLC began operations by acquiring the renewal rights to a 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 December 31, 2019 was $319,000, net of accumulated amortization of $166,000. Amortization expense for the years ended December 31, 2019 and 2018 amounted to approximately $49,000 and $48,000, respectively.

Quaint Oak Bancorp, Inc.

Notes to Consolidated Financial Statements (Continued)

Note 9 – Goodwill and Other Intangible, Net (Continued)

Estimated amortization expense of other intangible for each of the next five years and thereafter is as follows (in thousands):

2020	$	49
2021		49
2022		49
2023		49
2024		49
Thereafter		74
Total	$	319

Note 10 - Deposits

Deposits and the weighted average interest rate at December 31, 2019 and 2018 consist of the following (in thousands):

		2019			2018
		Amount	Weighted Average Interest Rate			Amount	Weighted Average Interest Rate
Non-interest bearing checking accounts	$	15,775	--	%	$	17,542	--	%
Passbook accounts		5	0.15			192	0.15
Savings accounts		1,722	0.20			1,120	0.20
Money market accounts		25,504	0.80			26,841	0.80
Certificate of deposit accounts		184,452	2.27			166,216	2.10
Total	$	227,458	1.87	%	$	211,911	1.69	%

A summary of certificates of deposit by maturity at December 31, 2019 is as follows (in thousands):

Years ending December 31:
2020	$	94,122
2021		52,497
2022		12,082
2023		14,813
2024		10,938
Total	$	184,452

The aggregate amount of certificates of deposit with a minimum denomination of $250,000 was $29.9 million and $25.7 million at December 31, 2019 and 2018, respectively.

Quaint Oak Bancorp, Inc.

Notes to Consolidated Financial Statements (Continued)

Note 11 - Borrowings

Federal Home Loan Bank short-term borrowings and the weighted interest rate consist of the following at December 31, 2019 and 2018 (dollars in thousands):

	At or For the Year Ended December 31,
	2019			2018
FHLB short-term borrowings:
Average balance outstanding	$	5,585		$	9,745
Maximum amount outstanding at any month-end during the period		11,000			10,000
Balance outstanding at end of period		10,000			9,000
Average interest rate during the period		2.52	%		2.02	%
Weighted average interest rate at end of period		1.81	%		2.62	%

Federal Home Loan Bank long-term borrowings and the weighted interest rate consist of the following at December 31, 2019 and 2018 (in thousands):

		December 31, 2019				December 31, 2018
		Amount	Weighted Interest Rate			Amount	Weighyed Interest Rate
2019	$	--	--	%	$	3,000	1.86	%
2020		2,000	2.00			2,000	2.00
2021		5,000	2.20			3,000	2.05
2022		7,171	2.10			3,000	2.18
2023		7,000	2.16			3,000	2.33
2024		5,100	2.28			1,000	--
Total FHLB long-term debt	$	26,271	2.16	%	$	15,000	2.12	%

Quaint Oak Bancorp, Inc.

Notes to Consolidated Financial Statements (Continued)

Note 12 – Subordinated Debt

On December 27, 2018, the Quaint Oak Bancorp, Inc. 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 and unamortized issuance costs of subordinated debt at December 31, 2019 are as follows (in thousands):

	Principal		Unamortized Debt Issuance Costs		Net
6.5% subordinated notes, due December 31, 2028	$	8,000	$	135	$	7,865

All subordinated notes are not subject to repayment at the option of the noteholders. These notes are all unsecured and rank junior in right of payment to the Company’s obligations to its general creditors.

Quaint Oak Bancorp, Inc.

Notes to Consolidated Financial Statements (Continued)

Note 13 - Income Taxes

The components of income tax expense for the years ended December 31, 2019 and 2018 are as follows (in thousands):

	2019			2018
Federal:
Current	$	724		$	507
Deferred		(41	)		(26	)
Total federal		683			481
State, current		267			186
Total	$	950		$	667

The following table presents the reconciliation between the reported income tax expense and the income tax expense which would be computed by applying the normal federal income tax rate of 21% to income before taxes for the years ended December 31, 2019 and 2018, respectively, as follows (in thousands):

		2019					2018
		Amount		Rate			Amount		Rate
Federal income tax at statutory rate	$	719		21.0	%	$	560		21.0	%
State tax, net of federal benefit		211		6.2			151		5.7
Stock compensation expense		30		0.9			(33	)	(1.2	)
Other		(10	)	(0.2	)		(11	)	(0.5	)
Total	$	950		27.9	%	$	667		25.0	%

The components of the net deferred tax asset at December 31, 2019 and 2018 are as follows (in thousands):

	2019		2018
Deferred tax assets:
Allowance for loan losses	$	468	$	413
Stock-based compensation		8		7
Interest on non-accrual loans		2		2
Deferred loan fees		177		182
Organization cost		1		1
Total deferred tax assets		656		605

Deferred tax liabilities:
Bank premises and equipment		(100	)		(93	)
Unrealized gain on investment securities available for sale		(5	)		--
Intangible		(13	)		(9	)
Total deferred tax liabilities		(118	)		(102	)

Net Deferred Tax Asset	$	538		$	503

The net deferred tax asset at December 31, 2019 and 2018 of $538,000 and $503,000, respectively, is included in other assets. No valuation allowance was established at December 31, 2019 and 2018, in view of the Company’s tax strategies and anticipated future taxable income as evidenced by the Company’s earnings potential.

Quaint Oak Bancorp, Inc.

Notes to Consolidated Financial Statements (Continued)

Note 14 – 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 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 December 31, 2019, there were seven 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 years ended December 31, 2019 and 2018, the Company recognized $186,000 and $192,000 of ESOP expense, respectively.

The following table represents the components of the ESOP shares at December 31, 2019 and 2018:

	2019		2018
Allocated shares		180,959		179,637
Unreleased shares		25,249		39,677
Total ESOP shares		206,208		219,314

Fair value of unreleased shares (in thousands)	$	372	$	469

Recognition and 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 and as of December 31, 2019 there were no shares remaining in the RRP Trust. 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.

Quaint Oak Bancorp, Inc.

Notes to Consolidated Financial Statements (Continued)

Note 14 – Stock Compensation Plans (Continued)

Recognition and Retention and Stock Incentive Plans (Continued)

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

A summary of the status of the shares awarded under the RRP and the 2013 and 2018 Stock Incentive Plans as of December 31, 2019 and 2018 and changes during the year ended December 31, 2019 and 2018 is as follows:

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

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 each of the years ended December 31, 2019 and 2018, the Company recognized $129,000 and $107,000 of compensation expense. A tax benefit of approximately $27,000 and $22,000 was recognized during the year ended December 31, 2019 and 2018, respectively. As of December 31, 2019, approximately $437,000 in additional compensation expense will be recognized over the remaining service period of approximately 3.4 years.

Stock Options

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

For grants in May 2008, the Compensation Committee of the Board of Directors determined to grant the stock options at an exercise price equal to $5.00 per share (split-adjusted) which is higher than the fair market value of the common stock on the grant date. All of the options granted in May 2008 were either exercised or expired in May 2018. All incentive stock options issued under the Option Plan and the Stock Incentive Plan are intended to comply with the requirements of Section 422 of the Internal Revenue Code.

Quaint Oak Bancorp, Inc.

Notes to Consolidated Financial Statements (Continued)

Note 14 – Stock Compensation Plans (Continued)

Stock Options (Continued)

As of December 31, 2019, a total of 256,336 grants of stock options were outstanding under the Option Plan and Stock Incentive Plan and 37,250 stock options were available for future grant under the Stock Incentive Plan and none under the Option Plan. Options will become vested and exercisable over a five year period and are generally exercisable for a period of ten years after the grant date.

A summary of option activity under the Company’s Option Plan and Stock Incentive Plan for the years ended December 31, 2019 and 2018 and changes during the years ended December 31, 2019 and 2018 is as follows:

	2019							2018
	Number of Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (in years)		Number of Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (in years)
Outstanding at the beginning of the year		279,836		$	10.64		6.8		265,302		$	6.74		3.2
Granted		--			--		--		136,636			13.30		9.4
Exercised		(23,500	)		8.10		--		(106,844	)		5.00		--
Forfeited		--			--		--		(15,258	)		6.22		--
Outstanding at the end of the period		256,336		$	10.87		6.0		279,836		$	10.64		6.8
Exercisable at the end of the period		147,027		$	9.07		4.8		143,200		$	8.10		4.4

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

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

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

At December 31, 2019, the aggregate intrinsic value of options outstanding was $994,000 and options exercisable was $836,000. At December 31, 2018, the aggregate intrinsic value of the options outstanding was $330,000 on and options exercisable was $533,000. The aggregate intrinsic value of a stock option represents the total pre-tax intrinsic value (the amount by which the current market value of the underlying stock exceeds the exercise price of the option) that would have been received by the option holder had all option holders exercised their options on December 31, 2019 and December 31, 2018. This amount changes based on changes in the market value of the Company’s common stock.

During the years ended December 31, 2019 and 2018, the Company recognized $44,000 and $41,000 of compensation expense, respectively. A tax benefit of approximately $2,000 and $1,000 was recognized during the years ended December 31, 2019 and 2018. As of December 31, 2019, approximately $149,000 in additional compensation expense will be recognized over the remaining service period of approximately 3.4 years.

Quaint Oak Bancorp, Inc.

Notes to Consolidated Financial Statements (Continued)

Note 15 - Transactions with Executive Officers and Directors

Certain directors and executive officers of the Company, their families and their affiliates are customers of the Bank. Any transactions with such parties, including loans and commitments, are in the ordinary course of business at normal terms, including interest rate and collateralization, prevailing at the time and do not represent more than normal risks of collectability. None of these individuals were indebted to the Company for loans at December 31, 2019 and 2018, respectively.

Note 16 - Financial Instruments with Off-Balance Sheet Risk

The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit. Those instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheet.

The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments as it does for on-balance sheet instruments.

A summary of the Company’s financial instrument commitments at December 31, 2019 and 2018 is as follows (in thousands):

	2019		2018
Commitments to originate loans	$	10,184	$	17,593
Unfunded commitments under lines of credit		15,181		14,569
Standby letters of credit		38		83

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Since the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The Company evaluates each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation. Collateral held varies, but includes principally residential and commercial real estate.

Note 17 - Leases

The Company leases its office at 501 Knowles Avenue in Southampton, Pennsylvania as well as other office facilities and equipment. Due to the adoption of ASU 2016-02, Leases (Topic 842), the Company completed a comprehensive review and analysis of all its property contracts. As a result of this review, it was determined that the Company leases three office locations under operating leases. Several assumptions and judgments were made when applying the requirements of Topic 842 to the Corporation’s existing lease commitments, including the allocation of consideration in the contracts between lease and nonlease components, determination of the lease term, and determination of the discount rate used in calculating the present value of the lease payments.

The Company has elected to account for the variable nonlease components, such as common area maintenance charges, utilities, real estate taxes, and insurance, separately from the lease component. Such variable nonlease components are reported in net occupancy expense on the Consolidated Statements of Income when paid. These variable nonlease components were excluded from the calculation of the present value of the remaining lease payments, therefore, they are not included in the right-of-use assets and lease liabilities reported on the Consolidated Balance Sheets. The lease cost associated with the operating leases for the year ending December 31, 2019 amounted to $139,000.

Quaint Oak Bancorp, Inc.

Notes to Consolidated Financial Statements (Continued)

Note 17 – Leases (Continued)

Certain of the Company’s leases contain options to renew the lease after the initial term. Management considers the Corporation’s historical pattern of exercising renewal options on leases and the positive performance of the leased locations, when determining whether it is reasonably certain that the leases will be renewed. If management concludes that there is reasonable certainty about the renewal option, it is included in the calculation of the remaining term of each applicable lease. The discount rate utilized in calculating the present value of the remaining lease payments for each lease was the Federal Home Loan Bank of Pittsburgh advance rate corresponding to the remaining maturity of the lease as of January 1, 2019. The following table presents the weighted-average remaining lease term and discount rate for the leases outstanding at December 31, 2019.

	Operating
Weighted average remaining term (years)		12.5
Weighted average discount rate		3.06	%

The following table presents the undiscounted cash flows due related to operating leases as of December 31, 2019, along with a reconciliation to the discounted amount recorded on the Consolidated Balance Sheets:

Undiscounted cash flows due (In thousands):	Operating
2020	$	138
2021		140
2022		141
2023		139
2024		143
2025 and thereafter		934
Total undiscounted cash flows		1,635
Discount on cash flows		(330	)
Total lease liabilities	$	1,305

Under Topic 842, the lessee can elect to not record on the Consolidated Balance Sheets a lease whose term is twelve months or less and does not include a purchase option that the lessee is reasonably certain to exercise. As of December 31, 2019, the Corporation had no leases that had a term of twelve months or less.

Rental expense under operating leases totaled approximately $187,000 in 2019 and $165,000 in 2018.

Quaint Oak Bancorp, Inc.

Notes to Consolidated Financial Statements (Continued)

Note 18 - Regulatory Matters

The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk-weightings and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth below) of total, Tier 1, and common equity Tier 1 capital (as defined in the regulations) to risk-weighted assets, and of Tier 1 capital to average assets. Management believes, as of December 31, 2019, that the Bank meets all capital adequacy requirements to which it is subject.

In July of 2013 the respective U.S. federal banking agencies issued final rules implementing Basel III and the Dodd-Frank Act capital requirements to be fully-phased in on a global basis on January 1, 2019. The new regulations established a new tangible common equity capital requirement, increase the minimum requirement for the current Tier 1 risk-weighted asset (“RWA”) ratio, phase out certain kinds of tangibles treated as capital and certain types of instruments and change the risk weightings of certain assets used to determine requirement capital ratios. Provisions of the Dodd-Frank Act generally require these capital rules to apply to bank holding companies and their subsidiaries. The new common equity Tier 1 capital component requires capital of the highest quality-predominantly composed of retained earnings and common stock instruments. For community banks, such as Quaint Oak Bank, a common equity Tier 1 capital ratio of 4.5% became effective on January 1, 2015. The new capital rules also increased the current minimum of Tier 1 capital ratio from 4.0% to 6.0% beginning on January 1, 2015. In addition, in order to make capital distributions and pay discretionary bonuses to executive officers without restriction, an institution must also maintain greater than 2.5% in common equity attributable to a capital conservation buffer to be phased in from January 1, 2016 until January 1, 2019. The new rules also increase the risk weights for several categories of assets, including an increase from 100% to 150% for certain acquisition, development and construction loans and more than 90-day past due exposures. The new capital rules maintain the general structure of the prompt corrective action rules, but incorporate the new common equity Tier 1 capital requirement and the increased Tier 1 RWA requirement into the prompt corrective action framework.

Bank holding companies are generally subject to statutory capital requirements, which were implemented by certain of the new capital regulations described above that became effective on January 1, 2015. However, the Small Banking Holding Company Policy Statement exempts certain small bank holding companies like the Company from those requirements provided that they meet certain conditions.

On December 27, 2018, Quaint Oak Bancorp, Inc. issued $8.0 million in subordinated notes (see Note 12) and infused $6.5 million to the Bank as Tier 1 capital. As of December 31, 2019 the Bank was well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since December 31, 2019 that management believes have changed the Bank’s category. The Company’s ratios do not differ significantly from the Bank’s ratios presented below.

Quaint Oak Bancorp, Inc.

Notes to Consolidated Financial Statements (Continued)

Note 18 - Regulatory Matters (Continued)

The Bank’s actual capital amounts and ratios at December 31, 2019 and 2018 and the minimum amounts and ratios required for capital adequacy purposes and to be well capitalized under the prompt corrective action provisions are as follows (dollars in thousands):

Actual

For Capital Adequacy

Purposes

To be Well Capitalized

Under Prompt

Corrective Action

Provisions

Amount

Ratio

Amount

Ratio

Amount

Ratio

As of December 31, 2019:

Total capital (to risk-weighted assets)

$33,087

14.41

≥ $18,373

≥8.00

≥ $22,966

≥10.00

Tier 1 capital (to risk-weighted assets)

30,829

13.42

≥ 13,780

≥6.00

≥ 18,373

≥ 8.00

Common Equity Tier 1 capital (to risk-weighted assets)

30,829

13.42

≥ 10,335

≥4.50

≥ 14,928

≥ 6.50

Tier 1 capital (to average assets)

30,829

10.35

≥ 11,915

≥4.00

≥ 14,894

≥ 5.00

Actual

For Capital Adequacy

Purposes

To be Well Capitalized

Under Prompt

Corrective Action

Provisions

Amount

Ratio

Amount

Ratio

Amount

Ratio

As of December 31, 2019:

Total capital (to risk-weighted assets)

$29,778

15.49

≥$15,378

≥8.00

≥ $19,233

≥10.00

Tier 1 capital (to risk-weighted assets)

27,786

14.45

≥ 11,534

≥6.00

≥ 15,378

≥ 8.00

Common Equity Tier 1 capital (to risk-weighted assets)

27,786

14.45

≥ 8,650

≥4.50

≥ 12,495

≥ 6.50

Tier 1 capital (to average assets)

27,786

10.92

≥ 10,175

≥4.00

≥ 12,718

≥ 5.00

Under the Dodd-Frank Wall Street Reform and Consumer Protection Act the Board of Governors of the Federal Reserve System as the primary regulator for the Company is authorized to extend leverage capital requirements and risk based capital requirements applicable to depository institutions and bank holding companies to thrift holding companies. Legislation adopted in late 2014 generally exempts small savings and loan holding companies like Quaint Oak Bancorp from these capital requirements if certain conditions are met.

Banking regulations place certain restrictions on dividends paid by the Bank to the Company. The Company is dependent upon dividends from the Bank to provide funds for the payment of dividends to the Company’s shareholders, interest payments on the subordinated debt and other general corporate purposes. The Bank’s ability to pay cash dividends directly or indirectly to the Company is governed by federal law, regulations and related guidance. These include the requirement that the Bank must receive approval to declare a dividend if the total amount of all dividends, including the proposed dividend, declared by the Bank in any current year exceeds the total of the Bank’s net income for the current year to date, combined with its retained net income for the previous two years. The term “retained net income” as defined by federal regulations means the Bank’s net income for a specified period less the total amount of all dividends declared in that period.

Quaint Oak Bancorp, Inc.

Notes to Consolidated Financial Statements (Continued)

Note 18 - Regulatory Matters (Continued)

The Bank may not pay dividends to the Company if, after paying those dividends, it would fail to meet the required minimum levels under risk-based capital guidelines or if the bank regulators have notified the Bank that it is in need of more than normal supervision. Under the Federal Deposit Insurance Act, an insured depository institution such as the Bank is prohibited from making capital distributions, including the payment of dividends, if, after making such distribution, the institution would become “undercapitalized” (as such term is used in the Federal Deposit Insurance Act). Payment of dividends by the Bank also may be restricted at any time at the discretion of the appropriate regulator if it deems the payment to constitute an unsafe and unsound banking practice.

In 2019, the Bank did not pay cash dividends to the Company. In 2018, the Bank paid a total of $750,000 in cash dividends to the Company. At December 31, 2019, the Bank’s retained net income for the years ended December 31, 2019 and 2018 less the dividends declared and paid during those periods, totaled $4.3 million.

Note 19 – 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.

The methods of determining the fair value of assets and liabilities presented in this note are consistent with our methodologies disclosed in Note 18 of the Company’s 2018 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:

Quaint Oak Bancorp, Inc.

Notes to Consolidated Financial Statements (Continued)

Note 19 – Fair Value Measurements and Fair Values of Financial Instruments (Continued)

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

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

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

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

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, 2019 (in thousands):

	December 31, 2019
	Fair Value Measurements Using:
	Total Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Unobservable Inputs (Level 3)
Recurring fair value measurements:
Investment securities available for sale
Governmental National Mortgage Association mortgage-backed securities	$	5,853	$	--	$	5,853	$	--
Federal National Mortgage Association mortgage-backed securities		260		--		260		--
Corporate notes		1,510		--		1,510		--
Total investment securities available for sale	$	7,623	$	--	$	7,623	$	--
Total recurring fair value measurements	$	7,623	$	--	$	7,623	$	--

Nonrecurring fair value measurements
Impaired loans	$	319	$	--	$	--	$	319
Other Real Estate Owned		1,824		--		--		1,824
Total nonrecurring fair value measurements	$	2,143	$	--	$	--	$	2,143

Quaint Oak Bancorp, Inc.

Notes to Consolidated Financial Statements (Continued)

Note 19 – Fair Value Measurements and Fair Values of Financial Instruments (Continued)

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

Nonrecurring fair value measurements
Impaired loans	$	593	$	--	$	--	$	593
Other Real Estate Owned		1,650	$	--	$	--		1,650
Total nonrecurring fair value measurements	$	2,243	$	--	$	--	$	2,243

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

	December 31, 2019
	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%-3% (1	%)

Other real estate owned	$	1,824	Appraisal of collateral (1)	Appraisal adjustments (2)		0%-12% (12	%)

Quaint Oak Bancorp, Inc.

Notes to Consolidated Financial Statements (Continued)

Note 19 – Fair Value Measurements and Fair Values of Financial Instruments (Continued)

	December 31, 2018
	Quantitative Information About Level 3 Fair Value Measurements
	Total Fair Value		Valuation Techniques	Unobservable Input	Range (Weighted Average)
Impaired loans	$	648	Appraisal of collateral (1)	Appraisal adjustments (2)		0%-73% (8	%)

Other real estate owned	$	1,650	Appraisal of collateral (1)	Appraisal adjustments (2)		0%-12% (12	%)

_______________

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

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

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

					Fair Value Measurements at
					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)
Financial Assets
Investment in interest-earning time deposits	$	10,172	$	10,536	$	--	$	--	$	10,536
Loans held for sale		8,928		9,205		--		9,205		--
Loans receivable, net		246,692		250,550		--		--		250,550

Financial Liabilities
Deposits		227,458		230,521		43,006		--		187,515
FHLB long-term borrowings		26,271		26,292		--		--		26,292
Subordinated debt		7,865		8,146		--		--		8,146

Quaint Oak Bancorp, Inc.

Notes to Consolidated Financial Statements (Continued)

Note 19 – Fair Value Measurements and Fair Values of Financial Instruments (Continued)

					Fair Value Measurements at
					December 31, 2018
	Carrying Amount		Fair Value Estimate		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Unobservable Inputs (Level 3)
Financial Assets
Investment in interest-earning time deposits	$	4,927	$	4,927	$	--	$	--	$	4,927
Loans held for sale		5,103		5,254		--		5,254		--
Loans receivable, net		216,898		214,351		--		--		214,351

Financial Liabilities
Deposits		211,911		212,320		45,695		--		166,625
FHLB long-term borrowings		15,000		14,973		--		--		14,973
Subordinated debt		7,831		7,831		--		--		7,831

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.

Quaint Oak Bancorp, Inc.

Notes to Consolidated Financial Statements (Continued)

Note 20 – 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.

Quaint Oak Bancorp, Inc.

Notes to Consolidated Financial Statements (Continued)

Note 20 – Operating Segments (Continued)

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

	As of or for the Year Ended December 31,
	2019									2018
	Quaint Oak Bank(1)			Quaint Oak Mortgage			Consolidated			Quaint Oak Bank(1)		Quaint Oak Mortgage			Consolidated
Net Interest Income	$	8,845		$	(160	)	$	8,685		$	8,360	$	(55	)	$	8,305
Provision for Loan Losses		303			--			303			415		--			415
Net Interest Income after Provision for Loan Losses		8,542			(160	)		8,382			7,945		(55	)		7,890

Non-Interest Income
Mortgage banking and title abstract fees		649			503			1,152			518		308			826
Real estate sales commissions, net		180			--			180			192		--			192
Insurance commissions		419			--			419			430		--			430
Other fees and services charges		68			--			68			131		--			131
Income from bank-owned life insurance		80			--			80			80		--			80
Net gain on loans held for sale		1			3,013			3,014			5		2,115			2,120
Gain on the sale of SBA loans		265			--			265			105		--			105
Loss on sale of investment securities available for sale		(4	)		--			(4	)		--		--			--
(Loss) gain on sales and write-downs of other real estate owned		(221	)		--			(221	)		63		--			63
Total Non-Interest Income		1,437			3,516			4,953			1,524		2,423			3,947

Non-Interest Expense
Salaries and employee benefits		5,768			1,179			6,947			5,237		1,170			6,407
Directors’ fees and expenses		223			--			223			208		--			208
Occupancy and equipment		478			214			692			441		160			601
Data processing		366			142			508			279		119			398
Professional fees		357			59			416			329		36			365
FDIC deposit insurance assessment		15			--			15			186		--			186
Other real estate owned expenses		22			--			22			20		--			20
Advertising		140			55			195			183		34			217
Amortization of other intangible		49			--			49			48		--			48
Other		780			61			841			657		59			716
Total Non-Interest Expense		8,198			1,710			9,908			7,588		1,578			9,166

Pretax Segment Profit	$	1,781		$	1,646		$	3,427		$	1,881	$	790		$	2,671

Segment Assets	$	286,986		$	15,554		$	302,540		$	261,490	$	9,914		$	271,404

(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.

Quaint Oak Bancorp, Inc.

Notes to Consolidated Financial Statements (Continued)

Note 21 – Subsequent Events

Subsequent events are events or transactions that occur after the balance sheet date but before financial statements are issued. Recognized subsequent events are events or transactions that provide additional evidence about conditions that existed at the date of the balance sheet, including estimates inherent in the process of preparing financial statements. Nonrecognized subsequent events are events that provide evidence about conditions that did not exist at the date of the balance sheet but arose after that date. Management has reviewed all events occurring through the date the financial statements were available to be issued and determined the following subsequent events required disclosure:

The 2019 novel coronavirus (or "COVID-19" ) has adversely affected, and may continue to adversely affect economic activity globally, nationally and locally. Following the COVID-19 outbreak in December 2019 and January 2020, market interest rates have declined significantly, with the I0-year Treasury bond falling below 1.00% on March 3, 2020 for the first time. Such events also may adversely affect business and consumer confidence, generally, and the Company and its customers, and their respective suppliers, vendors and processors may be adversely affected. On March 3, 2020, the Federal Open Market Committee reduced the target federal funds rate by 50 basis points to 1.00% to 1.25%. This rate was further reduced to 0% to 0.25% on March 16, 2020. These reductions in interest rates and other effects of the COVID-19 outbreak may adversely affect the Company's financial condition and results of operations.

Quaint Oak Bancorp, Inc.

Notes to Consolidated Financial Statements (Continued)

Note 22 – Quaint Oak Bancorp, Inc. (Parent Company Only)

Condensed financial statements of Quaint Oak Bancorp, Inc. are as follows (in thousands):

Balance Sheets

	December 31,
	2019		2018
Assets
Cash and cash equivalents	$	669	$	1,596
Investment in Quaint Oak Bank		31,512		28,454
Premises and equipment, net		1,559		1,588
Other assets		32		29
Total Assets	$	33,772	$	31,667

Liabilities and Stockholders’ Equity
Subordinated debt	$	7,865	$	7,831
Stockholders’ equity		25,907		23,836
Total Liabilities and Stockholders’ Equity	$	33,772	$	31,667

Statements of Income

	For the Year Ended December 31,
	2019			2018
Income
Dividends from subsidiary	$	--		$	750
Interest income		20			--
Rental income		199			151
Total Income		219			901

Expenses
Occupancy and equipment expense		120			116
Interest on subordinated debt		519			7
Other expenses		161			116
Total Expenses		800			239

Net (Loss) Income Before Income Taxes		(581	)		662
Equity in Undistributed Net Income of Subsidiary		2,936			1,324
Income Tax Benefit		122			18
Net Income	$	2,477		$	2,004

Comprehensive Income	$	2,499		$	2,017

Quaint Oak Bancorp, Inc.

Notes to Consolidated Financial Statements (Continued)

Note 22 – Quaint Oak Bancorp, Inc. (Parent Company Only) (Continued)

Statements of Cash Flows

	For the Year Ended December 31,
	2019			2018

Operating Activities
Net income	$	2,477		$	2,004
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Undistributed net income in subsidiary		(2,936	)		(1,324	)
Depreciation expense		53			44
Amortization of subordinated debt issuance costs		34			--
Stock-based compensation expense		359			340
Increase in other assets		(2	)		(84	)
Decrease in other liabilities		--			(11	)
Net cash provided by operating activities		(15	)		969

Investing Activities
Investment in subsidiary		--			(6,500	)
Purchase of property and equipment		(125	)		(209	)
Net cash used in investing activities		(125	)		(6,709	)

Financing Activities
Net proceeds from the issuance of subordinated debt		--			7,831
Dividends paid		(676	)		(511	)
Purchase of treasury stock		(339	)		(793	)
Proceeds from the reissuance of treasury stock		38			64
Proceeds from the exercise of stock options		190			534
Net cash (used in) provided by financing activities		(787	)		7,125

Net (Decrease) Increase in Cash and Cash Equivalents		(927	)		1,385
Cash and Cash Equivalents-Beginning of Year		1,596			211
Cash and Cash Equivalents-End of Year	$	669		$	1,596

(Mark One)
☒ Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended: December 31, 2019
or
☐ Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from ______ to ______

Commission File Number: 000-52694

Pennsylvania		35-2293957
(State or Other Jurisdiction of		(I.R.S. Employer
Incorporation or Organization)		Identification Number)

501 Knowles Avenue, Southampton, Pennsylvania		18966
(Address of Principal Executive Offices)		(Zip Code)

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☒	Smaller reporting company	☒
		Emerging growth company	☐

	Year Ended December 31,
	2019			2018			2017
	(In Thousands)
Loan originations:
One-to-four family residential owner occupied (1)	$	132,983		$	94,448		$	82,889
One-to-four family residential non-owner occupied (2)		4,787			8,739			11,911
Multi-family residential		--			3,125			6,614
Commercial real estate		31,433			24,464			20,980
Construction		7,445			6,886			10,240
Home equity		1,263			739			1,479
Commercial business (3)		30,948			17,675			6,857
Other consumer		20			--			129
Total loan originations		208,879			156,076			141,099
Loans sold		(131,485	)		(102,327	)		(85,669	)
Loan principal repayments		(45,532	)		(38,697	)		(27,924	)
Total loans sold and principal repayments		(175,017	)		(141,024	)		(113,593	)
Decreases due to other items, net (4)		(243	)		(1,724	)		(352	)
Net increase in loan portfolio	$	33,619		$	13,328		$	27,154

	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		Total
	(In Thousands)
Amounts due in:
One year or less	$	--	$	1,738	$	1,184	$	7,304	$	5,818	$	--	$	6,491	$	22,535
After one year through three years		4		7,597		5,958		19,209		--		88		5,501		38,357
After three years through five years		156		6,695		1,927		31,038		4,513		212		25,925		70,466
After five years through ten years		46		7,491		4,265		34,671		--		1,084		7,850		55,407
After ten years through 15 years		729		6,823		3,906		8,740		--		2,342		--		22,540
After 15 years		5,363		9,553		4,993		18,361		2,192		--		--		40,462
Total	$	6,298	$	39,897	$	22,233	$	119,323	$	12,523	$	3,726	$	45,767	$	249,767

		Page
PART I
Item 1.	Business	1

Item 1A.	Risk Factors	29

Item 1B.	Unresolved Staff Comments	29

Item 2.	Properties	29

Item 3.	Legal Proceedings	29

Item 4.	Mine Safety Disclosures	29
PART II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	30

Item 6.	Selected Financial Data	30

Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	30

Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	30

Item 8.	Financial Statements and Supplementary Data	31

Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	31

Item 9A	Controls and Procedures	31

Item 9B.	Other Information	31
PART III
Item 10.	Directors, Executive Officers and Corporate Governance	32

Item 11.	Executive Compensation	32

Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	32

Item 13.	Certain Relationships and Related Transactions, and Director Independence	32

Item 14.	Principal Accounting Fees and Services	33
PART IV
Item 15.	Exhibits, Financial Statement Schedules	33

Item 16.	Form 10-K Summary	34

SIGNATURES		35

	Fixed-Rate		Floating or Adjustable- Rate		Total
	(In Thousands)
One-to-four family residential owner occupied	$	537	$	5,761	$	6,298
One-to-four family residential non-owner occupied		14,681		23,478		38,159
Multi-family residential		10,338		10,711		21,049
Commercial real estate		62,455		49,564		112,019
Construction		2,916		3,789		6,705
Home equity		878		2,848		3,726
Commercial business		29,335		9,915		39,250
Other consumer		26		--		26
Total	$	121,166	$	106,066	$	227,232

	December 31, 2019
	30-89 Days Overdue					90 or More Days Overdue
	Number of Loans		Principal Balance			Number of Loans		Principal Balance
	(Dollars in Thousands)
One-to-four family residential-owner occupied		5	$	1,199			1	$	172
One-to-four family residential-non-owner occupied		12		1,069			--		--
Multi-family residential		--		--			--		--
Commercial real estate		5		986			1		190
Construction		3		1,120			--		--
Home equity		--		--			--		--
Commercial business and other consumer		2		66			--		--
Total delinquent loans		27	$	4,440			2	$	362
Delinquent loans to total net loans				1.80	%				0.15	%
Delinquent loans to total loans				1.78	%				0.14	%

Name	Parent Company	State of Incorporation

Quaint Oak Bank	Quaint Oak Bancorp, Inc.	Pennsylvania
Quaint Oak Mortgage, LLC	Quaint Oak Bank	Pennsylvania
Quaint Oak Real Estate, LLC	Quaint Oak Bank	Pennsylvania
Quaint Oak Abstract, LLC	Quaint Oak Bank	Pennsylvania
QOB Properties, LLC	Quaint Oak Bank	Pennsylvania
Quaint Oak Insurance Agency, LLC	Quaint Oak Bank	Pennsylvania

Date: March 27, 2020		/s/Robert T. Strong
		Robert T. Strong
		President and Chief Executive Officer