10-Q 1 form10q.htm FORM 10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
 
 _______________________________
 
FORM 10-Q
(Mark One)
[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2019
OR
[   ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from
 
to
   
 
Commission file number: 000-52694
 
QUAINT OAK BANCORP, INC.
(Exact Name of Registrant as Specified in Its Charter)
 
Pennsylvania

35-2293957
(State or Other Jurisdiction of Incorporation or Organization)

(I.R.S. Employer Identification No.)
 
 
 
501 Knowles Avenue, Southampton, Pennsylvania  18966
(Address of Principal Executive Offices)
 
(215) 364-4059
(Registrant’s Telephone Number, Including Area Code)
 
Not applicable
(Former name, former address and former fiscal year, if changed since last report)

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

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

Emerging growth company [  ]

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

 
INDEX


  Page
PART I - FINANCIAL INFORMATION

 
Item 1 -                Financial Statements

 
Consolidated Balance Sheets as of September 30, 2019 and December 31, 2018 (Unaudited)
1


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

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

1

Quaint Oak Bancorp, Inc.
Consolidated Statement of Income (Unaudited)


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

See accompanying notes to the unaudited consolidated financial statements.
2

Quaint Oak Bancorp, Inc.
Consolidated Statement of Comprehensive Income (Unaudited)


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

















See accompanying notes to the unaudited consolidated financial statements.
3

Quaint Oak Bancorp, Inc.
Consolidated Statement of Stockholders’ Equity (Unaudited)


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

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





See accompanying notes to the unaudited consolidated financial statements.

4

Quaint Oak Bancorp, Inc.
Consolidated Statement of Stockholders’ Equity (Unaudited)

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


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



See accompanying notes to the unaudited consolidated financial statements.
5

Quaint Oak Bancorp, Inc.
Consolidated Statement of Cash Flows (Unaudited)


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



See accompanying notes to the unaudited consolidated financial statements.
6

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

Note 1 – Financial Statement Presentation and Significant Accounting Policies
Basis of Financial Presentation.   The consolidated financial statements include the accounts of Quaint Oak Bancorp, Inc., a Pennsylvania chartered corporation (the “Company” or “Quaint Oak Bancorp”) and its wholly owned subsidiary, Quaint Oak Bank, a Pennsylvania chartered stock savings bank, along with its wholly owned subsidiaries.  At September 30, 2019, the Bank has five wholly-owned subsidiaries, Quaint Oak Mortgage, LLC, Quaint Oak Real Estate, LLC, Quaint Oak Abstract, LLC, QOB Properties, LLC, and Quaint Oak Insurance Agency, LLC, each a Pennsylvania limited liability company.  The mortgage company offers mortgage banking in the Lehigh Valley, Delaware Valley and Philadelphia County region of Pennsylvania.  The real estate and abstract companies offer real estate sales and title abstract services, respectively, primarily in the Lehigh Valley region of Pennsylvania.  These companies began operation in July 2009.  In February, 2019, Quaint Oak Mortgage opened a mortgage banking office in Philadelphia, Pennsylvania.  QOB Properties, LLC began operations in July 2012 and holds Bank properties acquired through a foreclosure proceeding or acceptance of a deed in lieu of foreclosure.  Quaint Oak Insurance Agency, LLC began operations in August 2016 and provides a broad range of personal and commercial insurance coverage solutions. All significant intercompany balances and transactions have been eliminated.
The Bank is subject to regulation by the Pennsylvania Department of Banking and Securities and the Federal Deposit Insurance Corporation.  Pursuant to the Bank’s election under Section 10(l) of the Home Owners’ Loan Act, the Company is a savings and loan holding company regulated by the Board of Governors of the Federal Reserve System.  The market area served by the Bank is principally Bucks, Montgomery and Philadelphia Counties in Pennsylvania and the Lehigh Valley area in Pennsylvania.  The Bank has two banking locations: the main office location in Southampton, Pennsylvania and a regional banking office in the Lehigh Valley area of Pennsylvania. The principal deposit products offered by the Bank are certificates of deposit, money market accounts, non-interest bearing checking accounts for businesses and consumers, and savings accounts.  In May 2019, the Bank opened a commercial loan office in Philadelphia.  In October 2019, the Bank received regulatory approval to open a regional banking office in the Northern Liberties section of Philadelphia.  The Bank anticipates a January 2020 opening.  The principal loan products offered by the Bank are fixed and adjustable rate residential and commercial mortgages, construction loans, commercial business loans, home equity loans, and lines of credit.
The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (US GAAP) for interim information and with the instructions to Form 10-Q, as applicable to a smaller reporting company.  Accordingly, they do not include all the information and footnotes required by US GAAP for complete financial statements.
The foregoing consolidated financial statements are unaudited; but in the opinion of management include all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation thereof.  The balances as of December 31, 2018 have been derived from the audited financial statements.  These financial statements should be read in conjunction with the financial statements and notes thereto included in Quaint Oak Bancorp’s 2018 Annual Report on Form 10-K.  The results of operations for the three and nine months ended September 30, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019.
Use of Estimates in the Preparation of Financial Statements. The preparation of the financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period.  Actual results could differ from those estimates.  The Company’s most significant estimates are the determination of the allowance for loan losses and the valuation of deferred tax assets.

7

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

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


8

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

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

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

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

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

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


9

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

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

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

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

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

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

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


10

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

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

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

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

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

11

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

Note 1 – Financial Statement Presentation and Significant Accounting Policies (Continued)
The Company’s primary sources of revenue are derived from interest and dividends earned on loans and investment securities, gains on the sale of loans, income from bank-owned life insurance, and other financial instruments that are not within the scope of Topic 606.  The main types of non-interest income within the scope of the standard are as follows:
Service Charges on Deposits. The Bank has contracts with its commercial checking deposit customers where fees are charged if the account balance falls below predetermined levels defined as compensating balances. These agreements can be cancelled at any time by either the Bank or the deposit customer. Revenue from these transactions is recognized on a monthly basis as the Bank has an unconditional right to the fee consideration. The Bank also has transaction fees related to specific transactions or activities resulting from customer request or activity that include overdraft fees, wire fees, and other transaction fees. All of these fees are attributable to specific performance obligations of the Bank where the revenue is recognized at a defined point in time, completion of the requested service/transaction.
Insurance Commissions.  Insurance income generally consists of commissions from the sale of insurance policies and performance-based commissions from insurance companies.  The Bank recognizes commission income from the sale of insurance policies when it acts as an agent between the insurance carrier and policyholder, arranging for the insurance carrier to provide policies to policyholders, and acts on behalf of the insurance carrier by providing customer service to the policyholder during the policy period. Commission income is recognized over time, using the output method of time elapsed, which corresponds with the underlying insurance policy period, for which the Bank is obligated to perform under contract with the insurance carrier. Commission income is variable, as it is comprised of a certain percentage of the underlying policy premium. The Bank estimates the variable consideration based upon the “most likely amount” method, and does not expect or anticipate a significant reversal of revenue in future periods, based upon historical experience.  Payment is due from the insurance carrier for commission income once the insurance policy has been sold. The Bank has elected to apply a practical expedient related to capitalizable costs, which are the commissions paid to insurance producers, and will expense these commissions paid to insurance producers as incurred, as these costs are related to the commission income and would have been amortized within one year or less if they had been capitalized, the same period over which the commission income was earned. Performance-based commissions from insurance companies are recognized at a point in time, when received, and no contingencies remain.

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

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


12

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

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

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

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


13

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

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

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

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

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

Note 2 – Earnings Per Share

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

14

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

Note 2 – Earnings Per Share (Continued)

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

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


Note 3 – Accumulated Other Comprehensive Income (Loss)

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

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

Note 4 – Investment in Interest-Earning Time Deposits
The investment in interest-earning time deposits as of September 30, 2019 and December 31, 2018, by contractual maturity, are shown below (in thousands):

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


15

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

Note 5 – Investment Securities Available for Sale
The amortized cost, gross unrealized gains and losses, and fair value of investment securities available for sale at September 30, 2019 and December 31, 2018 are summarized below (in thousands): 

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


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

The amortized cost and fair value of debt securities at September 30, 2019, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties (in thousands):
   
Available for Sale
 
   
Amortized Cost
   
Fair Value
 
Due after one year through five years
 
$
360
   
$
360
 
Due after five years through ten years
   
1,500
     
1,508
 
Due after ten years
   
7,422
     
7,446
 
Total
 
$
9,282
   
$
9,314
 


16

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

Note 5 – Investment Securities Available for Sale (Continued)
The following tables show the Company’s gross unrealized losses and fair value, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position at September 30, 2019  and December 31, 2018 (in thousands):

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