QUAINT OAK BANCORP INC - Quarter Report: 2020 March (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 March 31, 2020

[ ]	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from

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 May 8, 2020, 1,995,067 shares of the Registrant’s common stock were issued and outstanding.

INDEX

PART I - FINANCIAL INFORMATION	Page

Item 1 - Financial Statements

Consolidated Balance Sheets as of March 31, 2020 and December 31, 2019 (Unaudited)	1

Consolidated Statements of Income for the Three Months Ended March 31, 2020 and 2019 (Unaudited)	2

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

Consolidated Statement of Stockholders’ Equity for the Three Months Ended March 31, 2020 and 2019 (Unaudited)	4

Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2020 and 2019 (Unaudited)	5

Notes to Unaudited Consolidated Financial Statements	6

Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations	36

Item 3 - Quantitative and Qualitative Disclosures About Market Risk	47

Item 4 - Controls and Procedures	47

PART II - OTHER INFORMATION

Item 1 - Legal Proceedings	48

Item 1A - Risk Factors	48

Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds	49

Item 3 - Defaults Upon Senior Securities	50

Item 4 - Mine Safety Disclosures	50

Item 5 - Other Information	50

Item 6 - Exhibits	50

SIGNATURES

ITEM 1. FINANCIAL STATEMENTS

Quaint Oak Bancorp, Inc.

Consolidated Balance Sheets (Unaudited)

	At March 31,			At December 31,
	2020			2019
	(In thousands, except share data)
Assets
Due from banks, non-interest-bearing	$	328		$	541
Due from banks, interest-bearing		14,615			14,014
Cash and cash equivalents		14,943			14,555
Investment in interest-earning time deposits		9,922			10,172
Investment securities available for sale		7,332			7,623
Loans held for sale		10,923			8,928
Loans receivable, net of allowance for loan losses (2020 $2,346; 2019 $2,231)		251,088			246,692
Accrued interest receivable		1,528			1,349
Investment in Federal Home Loan Bank stock, at cost		1,340			1,580
Bank-owned life insurance		3,993			3,974
Premises and equipment, net		2,309			2,226
Goodwill		515			515
Other intangible, net of accumulated amortization		307			319
Other real estate owned, net		1,931			1,824
Prepaid expenses and other assets		3,315			2,783
Total Assets	$	309,446		$	302,540

Liabilities and Stockholders’ Equity
Liabilities
Deposits:
Non-interest bearing	$	17,619		$	15,775
Interest-bearing		222,735			211,683
Total deposits		240,354			227,458
Federal Home Loan Bank short-term borrowings		-			10,000
Federal Home Loan Bank long-term borrowings		30,193			26,271
Subordinated debt		7,873			7,865
Accrued interest payable		313			314
Advances from borrowers for taxes and insurance		1,908			2,780
Accrued expenses and other liabilities		2,576			1,945
Total Liabilities		283,217			276,633

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; 1,986,836 and 1,984,857 outstanding at March 31, 2020 and December 31, 2019, respectively		28			28
Additional paid-in capital		15,088			14,990
Treasury stock, at cost: 790,414 and 792,393 shares at March 31, 2020 and December 31, 2019, respectively		(4,973	)		(4,950	)
Unallocated common stock held by:
Employee Stock Ownership Plan (ESOP)		(101	)		(118	)
Accumulated other comprehensive (loss) income		(4	)		20
Retained earnings		16,191			15,937
Total Stockholders’ Equity		26,229			25,907
Total Liabilities and Stockholders’ Equity	$	309,446		$	302,540

See accompanying notes to the unaudited consolidated financial statements.

Quaint Oak Bancorp, Inc.

Consolidated Statements of Income (Unaudited)

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

See accompanying notes to the unaudited consolidated financial statements.

Quaint Oak Bancorp, Inc.

Consolidated Statements of Comprehensive Income (Unaudited)

	For the Three Months Ended
	March 31,
	2020			2019
	(In Thousands)

Net Income	$	432		$	413

Other Comprehensive (Loss) Income:
Unrealized (losses) gains on investment securities available for sale		(29	)		2
Income tax effect		5			(1	)
Net other comprehensive (loss) income		(24	)		1

Total Comprehensive Income	$	408		$	414

See accompanying notes to the unaudited consolidated financial statements.

Quaint Oak Bancorp, Inc.

Consolidated Statements of Stockholders’ Equity (Unaudited)

For the Three Months Ended March 31, 2020

											Unallocated
	Common Stock										Common			Accumulated
	Number					Additional					Stock Held			Other						Total
	of					Paid-In		Treasury			by Benefit			Comprehensive			Retained			Stockholders’
	Shares			Amount		Capital		Stock			Plans			Income (Loss)			Earnings			Equity
	(In thousands, except share data)
BALANCE –DECEMBER 31, 2019		1,984,857		$	28	$	14,990	$	(4,950	)	$	(118	)	$	20		$	15,937		$	25,907

Common stock allocated by ESOP (3,607 shares)							35					17									52

Treasury stock purchase		(5,372	)						(67	)											(67	)

Reissuance of treasury stock under 401(k) Plan		851					7		5												12

Reissuance of treasury stock for exercised stock options		6,500					13		39												52

Stock based compensation expense							43														43

Cash dividends declared ($0.09 per share)																		(178	)		(178	)

Net income																		432			432

Other comprehensive (loss), net															(24	)					(24	)

BALANCE – March 31, 2020		1,986,836		$	28	$	15,088	$	(4,973	)	$	(101	)	$	(4	)	$	16,191		$	26,229

For the Three Months Ended March 31, 2019

											Unallocated
	Common Stock										Common			Accumulated
	Number					Additional					Stock Held			Other						Total
	of					Paid-In		Treasury			by Benefit			Comprehensive			Retained			Stockholders’
	Shares			Amount		Capital		Stock			Plans			Income (Loss)			Earnings			Equity
	(In thousands, except share data)
BALANCE –DECEMBER 31, 2018		1,975,947		$	28	$	14,683	$	(4,824	)	$	(185	)	$	(2	)	$	14,136		$	23,836

Common stock allocated by ESOP (3,607 shares)							28					17									45

Treasury stock purchase		(9,326	)						(115	)											(115	)

Reissuance of treasury stock under 401(k) Plan		970					6		6												12

Reissuance of treasury stock for exercised stock options		13,500					30		79												109

Stock based compensation expense							43														43

Cash dividends declared ($0.07 per share)																		(138	)		(138	)

Net income																		413			413

Other comprehensive income, net															1						1

BALANCE – March 31, 2019		1,981,091		$	28	$	14,790	$	(4,854	)	$	(168	)	$	(1	)	$	14,411		$	24,206

See accompanying notes to the unaudited consolidated financial statements.

Quaint Oak Bancorp, Inc.

Consolidated Statements of Cash Flows (Unaudited)

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

See accompanying notes to the unaudited consolidated financial statements.

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

The Bank is subject to regulation by the Pennsylvania Department of Banking and Securities and the Federal Deposit Insurance Corporation. Pursuant to the Bank’s election under Section 10(l) of the Home Owners’ Loan Act, the Company is a savings and loan holding company regulated by the Board of Governors of the Federal Reserve System. The market area served by the Bank is principally Bucks, Montgomery and Philadelphia Counties and the Lehigh Valley area in Pennsylvania. The Bank has three banking locations: the main office location in Southampton, Pennsylvania and regional banking offices in the Lehigh Valley and Philadelphia. The Bank also has a mortgage office in Philadelphia and an insurance agency office in New Britain Township, Pennsylvania. The principal deposit products offered by the Bank are certificates of deposit, money market accounts, non-interest bearing checking accounts for businesses and consumers, and savings accounts. 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, 2019 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 2019 Annual Report on Form 10-K. The results of operations for the three months ended March 31, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020.

Use of Estimates in the Preparation of Financial Statements. The preparation of the financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates. The Company’s most significant estimates are the determination of the allowance for loan losses and the valuation of deferred tax assets.

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.

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.

Quaint Oak Bancorp, Inc.

Notes to Unaudited Consolidated Financial Statements

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

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

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

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

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

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

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 March 31, 2020 the Company had four properties in other real estate owned (OREO) totaling $1.9 million. The balance of this OREO property amounted to $1.8 million at December 31, 2019.

Share-Based Compensation. Compensation expense for share-based compensation awards is based on the grant date fair value of the award. Compensation expense for stock options is based on a Black-Scholes model to estimate the fair value. The cost is recognized over the period during which an employee is required to provide service in exchange for the award.

At March 31, 2020, the Company has outstanding equity awards under two share-based plans: the 2013 Stock Incentive Plan and the 2018 Stock Incentive Plan. Awards under these plans were made in May 2013 and 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.

Quaint Oak Bancorp, Inc.

Notes to Unaudited Consolidated Financial Statements

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

The Company’s primary sources of revenue are derived from interest and dividends earned on loans and investment securities, gains on the sale of loans, income from bank-owned life insurance, and other financial instruments that are not within the scope of Topic 606. The main types of non-interest income within the scope of the standard are as follows:

Service Charges on Deposits: The Bank has contracts with its commercial checking deposit customers where fees are charged if the account balance falls below predetermined levels defined as compensating balances. These agreements can be cancelled at any time by either the Bank or the deposit customer. Revenue from these transactions is recognized on a monthly basis as the Bank has an unconditional right to the fee consideration. The Bank also has transaction fees related to specific transactions or activities resulting from customer request or activity that include overdraft fees, wire fees, and other transaction fees. All of these fees are attributable to specific performance obligations of the Bank where the revenue is recognized at a defined point in time, completion of the requested service/transaction.

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

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

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

Recently Adopted Accounting Pronouncements. 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.

Quaint Oak Bancorp, Inc.

Notes to Unaudited Consolidated Financial Statements

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

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

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

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.

Quaint Oak Bancorp, Inc.

Notes to Unaudited Consolidated Financial Statements

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

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.

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

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

Quaint Oak Bancorp, Inc.

Notes to Unaudited Consolidated Financial Statements

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

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

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

Reclassifications. Certain items in the 2019 consolidated financial statements have been reclassified to conform to the presentation in the 2020 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.

Quaint Oak Bancorp, Inc.

Notes to Unaudited Consolidated Financial Statements

Note 2 – Earnings Per Share

Earnings per share (“EPS”) consists of two separate components, basic EPS and diluted EPS. Basic EPS is computed based on the weighted average number of shares of common stock outstanding for each period presented. Diluted EPS is calculated based on the weighted average number of shares of common stock outstanding plus dilutive common stock equivalents (“CSEs”). CSEs consist of shares that are assumed to have been purchased with the proceeds from the exercise of stock options, as well as unvested restricted stock (RRP) shares. Common stock equivalents which are considered antidilutive are not included for the purposes of this calculation. For the three months ended March 31, 2020 and 2019, all unvested restricted stock program awards and outstanding stock options under the 2008 Stock Option Plan and the 2013 Stock Incentive Plan representing shares were dilutive. For the three months ended March 31, 2020, all outstanding stock options awarded in 2018 under the 2013 and 2018 Stock Incentive Plans representing shares were dilutive. For the three months ended March 31, 2019, all outstanding stock options awarded in 2018 under the 2013 and 2018 Stock Incentive Plans representing shares were anti-dilutive.

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

	For the Three Months Ended March 31,
	2020		2019
Net Income	$	432,000	$	413,000

Weighted average shares outstanding – basic		1,964,132		1,940,363
Effect of dilutive common stock equivalents		67,362		51,416
Adjusted weighted average shares outstanding – diluted		2,031,494		1,991,779

Basic earnings per share	$	0.22	$	0.21
Diluted earnings per share	$	0.21	$	0.21

Note 3 – Accumulated Other Comprehensive Income (Loss)

The following table presents the changes in accumulated other comprehensive income (loss) by component, net of tax, for the three months ended March 31, 2020 and 2019 (in thousands):

	Unrealized Gains (Losses) on Investment Securities Available for Sale (1)
	For the Three Months Ended March 31,
	2020			2019
Balance at the beginning of the period	$	20		$	(2	)
Other comprehensive (loss) income before classifications		(24	)		1
Amount reclassified from accumulated other comprehensive income		-			-
Total other comprehensive (loss) income		(24	)		1
Balance at the end of the period	$	(4	)	$	(1	)

_________________

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

Quaint Oak Bancorp, Inc.

Notes to Unaudited Consolidated Financial Statements

Note 4 – Investment in Interest-Earning Time Deposits

The investment in interest-earning time deposits as of March 31, 2020 and December 31, 2019, by contractual maturity, are shown below (in thousands):

	March 31, 2020		December 31, 2019
Due in one year or less	$	2,776	$	2,026
Due after one year through five years		7,146		8,146
Total	$	9,922	$	10,172

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 March 31, 2020 and December 31, 2019 are summarized below (in thousands):

	March 31, 2020
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized (Losses)			Fair Value
Available for Sale:
Mortgage-backed securities:
Governmental National Mortgage Association securities	$	5,587	$	4	$	(51	)	$	5,540
Federal National Mortgage Association securities		250		-		(2	)		248
Total mortgage-backed securities		5,837		4		(53	)		5,788
Debt securities:
Corporate notes		1,500		44		-			1,544
Total available-for-sale-securities	$	7,337	$	48	$	(53	)	$	7,332

	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

Quaint Oak Bancorp, Inc.

Notes to Unaudited Consolidated Financial Statements

Note 5 – Investment Securities Available for Sale (Continued)

The amortized cost and fair value of debt securities at March 31, 2020, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties (in thousands):

	Available for Sale
	Amortized Cost		Fair Value
Due after one year through five years	$	1,500	$	1,544
Due after ten years		5,837		5,788
Total	$	7,337	$	7,332

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 March 31, 2020 and December 31, 2019 (in thousands):

	March 31, 2020
			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		8	$	4,496	$	(51	)	$	-	$	-	$	4,496	$	(51	)
Federal National Mortgage Association securities		1		248		(2	)		-		-		248		(2	)
Total		9	$	4,744	$	(53	)	$	-	$	-	$	4,744	$	(53	)

	March 31, 2019
			Less than Twelve Months					Twelve Months or Greater				Total
	Number of Securities		Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses
Government National Mortgage Association securities		4	$	2,295	$	(1	)	$	-	$	-	$	2,295	$	(1	)

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

Quaint Oak Bancorp, Inc.

Notes to Unaudited Consolidated Financial Statements

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

The composition of net loans receivable is as follows:

	March 31, 2020			December 31, 2019
Real estate loans:
One-to-four family residential:
Owner occupied	$	6,446		$	6,298
Non-owner occupied		39,427			39,897
Total one-to-four family residential		45,873			46,195
Multi-family (five or more) residential		24,061			22,233
Commercial real estate		123,902			119,323
Construction		9,327			12,523
Home equity		4,247			3,726
Total real estate loans		207,410			204,000

Commercial business		46,797			45,745
Other consumer		16			22
Total Loans		254,223			249,767

Deferred loan fees and costs		(789	)		(844	)
Allowance for loan losses		(2,346	)		(2,231	)
Net Loans	$	251,088		$	246,692

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

	March 31, 2020
	Pass		Special Mention		Substandard		Doubtful		Total
One-to-four family residential owner occupied	$	6,274	$	-	$	172	$	-	$	6,446
One-to-four family residential non-owner occupied		39,110		-		317		-		39,427
Multi-family residential		24,061		-		-		-		24,061
Commercial real estate		123,102		508		292		-		123,902
Construction		9,327		-		-		-		9,327
Home equity		4,247		-		-		-		4,247
Commercial business		46,797		-		-		-		46,797
Other consumer		16		-		-		-		16
Total	$	252,934	$	508	$	781	$	-	$	254,223

	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 Unaudited Consolidated Financial Statements

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

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

	March 31, 2020
	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		-		19		1
Multi-family residential		-		-		-		-		-
Commercial real estate		-		-		-		-		-
Construction		-		-		-		-		-
Home equity		-		-		-		-		-
Commercial business		-		-		-		-		-
Other consumer		-		-		-		-		-
								-
With an allowance recorded:
One-to-four family residential owner occupied	$	-	$	-	$	-	$	-	$	-
One-to-four family residential non-owner occupied		-		-		-		-		-
Multi-family residential		-		-		-		-		-
Commercial real estate		131		131		3		131		3
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		-		19		1
Multi-family residential		-		-		-		-		-
Commercial real estate		131		131		3		131		3
Construction		-		-		-		-		-
Home equity		-		-		-		-		-
Commercial business		-		-		-		-		-
Other consumer		-		-		-		-		-
Total	$	322	$	328	$	3	$	328	$	4

Quaint Oak Bancorp, Inc.

Notes to Unaudited Consolidated Financial Statements

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

The following table presents impaired loans by class, segregated by those for which a specific allowance was required and those for which a specific allowance was not necessary as of December 31, 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

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 March 31, 2020, the Company had two loans totaling $150,000 that were identified as troubled debt restructurings. One of these loans was performing in accordance with its modified terms and one was over 90 days delinquent but still accruing interest. During the three months ended March 31, 2020, no new loans were identified as TDRs. At December 31, 2019, the Company had two loans totaling $151,000 that were identified as troubled debt restructurings. If a TDR is placed on non-accrual it is not reverted back to accruing status until the borrower makes timely payments as contracted for at least six months and future collection under the revised terms is probable.

Quaint Oak Bancorp, Inc.

Notes to Unaudited Consolidated Financial Statements

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

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

	March 31, 2020
	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		131		-		131		3
Construction		-		-		-		-		-
Home equity		-		-		-		-		-
Commercial business		-		-		-		-		-
Other consumer		-		-		-		-		-
Total		2	$	150	$	-	$	150	$	3

	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		3
Construction		-		-		-		-		-
Home equity		-		-		-		-		-
Commercial business		-		-		-		-		-
Other consumer		-		-		-		-		-
Total		2	$	151	$	-	$	151	$	3

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

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

Quaint Oak Bancorp, Inc.

Notes to Unaudited Consolidated Financial Statements

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

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

Any reserve for an impaired TDR loan is based upon the present value of the future expected cash flows discounted at the loan’s original effective rate or upon the fair value of the collateral less costs to sell, if the loan is deemed collateral dependent. At March 31, 2020 there were no commitments to lend additional funds to debtors whose loan terms have been modified as TDRs.

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

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

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

Quaint Oak Bancorp, Inc.

Notes to Unaudited Consolidated Financial Statements

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

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

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

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

The Bank allocated increased allowance for loan loss provisions to the commercial business portfolio class for the three months ended March 31, 2019, due primarily to increased balances in this portfolio class. The Bank allocated increased allowance for loan loss provisions to the 1-4 family non-owner occupied loan portfolio class for the three months ended March 31, 2019, due primarily to changes in qualitative factors in this portfolio class. The Bank allocated decreased allowance for loan loss provisions to the construction loan portfolio class for the three months ended March 31, 2019, due primarily to a decrease in balances and delinquencies in this portfolio class. The Bank allocated decreased allowance for loan loss provisions to the commercial real estate loan portfolio class for the three months ended March 31, 2019, due primarily to a decrease in delinquencies in this portfolio class.

Quaint Oak Bancorp, Inc.

Notes to Unaudited Consolidated Financial Statements

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

Following is a summary, by loan portfolio class, of changes in the allowance for loan losses for the year ended December 31, 2019 and recorded investment in loans receivable based on impairment evaluation as of 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

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.

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

	March 31, 2020		December 31, 2019
One-to-four family residential owner occupied	$	172	$	172
One-to-four family residential non-owner occupied		-		-
Multi-family residential		-		-
Commercial real estate		-		-
Construction		-		-
Home equity		-		-
Commercial business		-		-
Other consumer		-		-
Total	$	172	$	172

Quaint Oak Bancorp, Inc.

Notes to Unaudited Consolidated Financial Statements

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

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

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

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

	March 31, 2020
	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	$	547	$	172	$	719	$	5,727	$	6,446	$	-
One-to-four family residential non-owner occupied		719		66		785		38,642		39,427		66
Multi-family residential		32		-		32		24,029		24,061		-
Commercial real estate		1,072		292		1,364		122,538		123,902		292
Construction		-		330		330		8,997		9,327		330
Home equity		97		-		97		4,150		4,247		-
Commercial business		181		-		181		46,616		46,797		-
Other consumer		-		-		-		16		16		-
Total	$	2,648	$	860	$	3,508	$	250,715	$	254,223	$	688

	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 or More Past Due 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 Unaudited Consolidated Financial Statements

Note 7 – Goodwill and Other Intangible, Net

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

Note 8 – Deposits

Deposits consist of the following classifications (in thousands):

	March 31, 2020		December 31, 2019
Non-interest bearing checking accounts	$	17,619	$	15,775
Passbook accounts		6		5
Savings accounts		1,890		1,722
Money market accounts		27,993		25,504
Certificates of deposit		192,846		184,452
Total deposits	$	240,354	$	227,458

Note 9 – Borrowings

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

	March 31, 2020					December 31, 2019
	Amount		Weighted Weighted Rate			Amount		Weighted Interest Rate
Short-term borrowings	$	-		-	%	$	10,000		1.81	%

Fixed rate borrowings maturing:
2020		2,000		2.00			2,000		2.00
2021		5,000		2.20			5,000		2.20
2022		7,171		2.10			7,171		2.10
2023		7,000		2.16			7,000		2.16
2024		6,167		2.05			5,100		2.28
2025		2,855		1.25			-		-
Total FHLB long-term debt	$	30,193		2.03	%	$	26,271		2.16	%

Quaint Oak Bancorp, Inc.

Notes to Unaudited Consolidated Financial Statements

Note 10 – Stock Compensation Plans

Employee Stock Ownership Plan

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

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

Recognition & Retention and Stock Incentive Plans

In May 2013, the shareholders of Quaint Oak Bancorp approved the adoption of the 2013 Stock Incentive Plan (the “2013 Stock Incentive Plan”). The 2013 Stock Incentive Plan approved by shareholders in May 2013 covered a total of 195,000 shares, of which 48,750, or 25%, may be restricted stock awards, for a balance of 146,250 stock options assuming all the restricted shares are awarded. In May 2018, the shareholders of Quaint Oak Bancorp approved the adoption of the 2018 Stock Incentive Plan (the “2018 Stock Incentive Plan”). The 2018 Stock Incentive Plan approved by shareholders in May 2018 covered a total of 155,000 shares, of which 38,750, or 25%, may be restricted stock awards, for a balance of 116,250 stock options assuming all the restricted shares are awarded.

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

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

	March 31, 2020				March 31, 2019
	Number of Shares		Weighted Average Grant Date Fair Value		Number of Shares		Weighted Average Grant Date Fair Value
Unvested at the beginning of the period		38,887	$	13.30		48,608	$	13.30
Granted		-		-		-		-
Vested		-		-		-		-
Forfeited		-		-		-		-
Unvested at the end of the period		38,887	$	13.30		48,608	$	13.30

Quaint Oak Bancorp, Inc.

Notes to Unaudited Consolidated Financial Statements

Note 10 – Stock Compensation Plans (Continued)

Recognition & Retention and Stock Incentive Plans (Continued)

Compensation expense on the restricted stock awards is recognized ratably over the five year vesting period in an amount which is equal to the fair value of the common stock at the date of grant. During both the three months ended March 31, 2020 and 2019, the Company recognized approximately $32,000 of compensation expense. A tax benefit of approximately $7,000 was recognized during the three months ended March 31, 2020 and 2019, respectively. As of March 31, 2020, approximately $405,000 in additional compensation expense will be recognized over the remaining service period of approximately 3.1 years.

Stock Option and Stock Incentive Plans

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

All incentive stock options issued under the Option Plan and the 2013 and 2018 Stock Incentive Plans are intended to comply with the requirements of Section 422 of the Internal Revenue Code. Options will become vested and exercisable over a five year period and are generally exercisable for a period of ten years after the grant date.

As of March 31, 2020, a total of 249,836 grants of stock options were outstanding under the Option Plan and 2013 and 2018 Stock Incentive Plans and 37,250 stock options were available for future grant under the 2018 Stock Incentive Plan and none under the 2013 Stock Incentive Plan or Option Plan. Options will become vested and exercisable over a five year period and are generally exercisable for a period of ten years after the grant date.

Quaint Oak Bancorp, Inc.

Notes to Unaudited Consolidated Financial Statements

Note 10 – Stock Compensation Plans (Continued)

Stock Option and Stock Incentive Plans (Continued)

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

	2020							2019
	Number of Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (in years)		Number of Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (in years)
Outstanding at the beginning of the year		256,336		$	10.87		6.0		279,836		$	10.64		6.8
Granted		-			-		-		-			-		-
Exercised		(6,500	)		8.10		-		(13,500	)		8.10		-
Forfeited		-			-		-		-			-		-
Outstanding at end of period		249,836		$	10.94		5.9		266,336		$	10.77		6.9
Exercisable at end of period		140,527		$	9.11		4.4		129,700		$	8.10		4.1

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

Expected dividend yield	2.11	%
Risk-free interest rate	2.96	%
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.

During both the three months ended March 31, 2020 and 2019, approximately $11,000 in compensation expense on stock options was recognized. A tax benefit of approximately $1,000, was recognized during each of these periods. As of March 31, 2020, approximately $138,000 in additional compensation expense will be recognized over the remaining service period of approximately 3.1 years.

Quaint Oak Bancorp, Inc.

Notes to Unaudited Consolidated Financial Statements

Note 11 – Fair Value Measurements and Fair Values of Financial Instruments

Fair value estimates are based on quoted market prices, if available, quoted market prices of similar assets or liabilities, or the present value of expected future cash flows and other valuation techniques. These valuations are significantly affected by discount rates, cash flow assumptions, and risk assumptions used. Therefore, fair values estimates may not be substantiated by comparison to independent markets and are not intended to reflect the proceeds that may be realizable in an immediate settlement of the instruments.

Fair value is determined at one point in time and is not representative of future value. These amounts do not reflect the total value of a going concern organization. Management does not have the intention to dispose of a significant portion of its assets and liabilities and therefore, the unrealized gains or losses should not be interpreted as a forecast of future earnings and cash flows.

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

Level I:

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

Level II:

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

Level III:

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

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

The methods of determining the fair value of assets and liabilities presented in this note are consistent with our methodologies disclosed in Note 19 of the Company’s 2019 Form 10-K, as the fair value of loans, excluding previously presented impaired loans measured at fair value on a non-recurring basis, is estimated using discounted cash flow analyses. The discount rates used to determine fair value use interest rate spreads that reflect factors such as liquidity, credit and non-performance risk. Loans are considered a Level 3 classification.

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

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

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

Quaint Oak Bancorp, Inc.

Notes to Unaudited Consolidated Financial Statements

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

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

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

The table below sets forth the financial assets and liabilities that were accounted for on a recurring and nonrecurring basis by level within the fair value hierarchy as of March 31, 2020 (in thousands):

	March 31, 2020
	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	$	5,540	$	-	$	5,540	$	-
Federal National Mortgage Association mortgage-backed securities		248		-		248		-
Corporate notes		1,544		-		1,544		-
Total investment securities available for sale	$	7,332	$	-	$	7,332	$	-
Total recurring fair value measurements	$	7,332	$	-	$	7,332	$	-

Nonrecurring fair value measurements
Impaired loans	$	319	$	-	$	--	$	319
Other Real Estate Owned		1,931		-		--		1,931
Total nonrecurring fair value measurements	$	2,250	$	-	$	--	$	2,250

Quaint Oak Bancorp, Inc.

Notes to Unaudited Consolidated Financial Statements

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

The table below sets forth the financial assets and liabilities that were accounted for on a recurring and nonrecurring basis by level within the fair value hierarchy as of 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

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

	March 31, 2020
	Quantitative Information About Level 3 Fair Value Measurements
	Total Fair Value		Valuation Techniques	Unobservable Input	Range (Weighted Average)
Impaired loans	$	319	Appraisal of collateral (1)	Appraisal adjustments (2)		0%-2% (1	%)

Other real estate owned	$	1,931	Appraisal of collateral (1)	Appraisal adjustments (2)		0%-12% (12	%)

Quaint Oak Bancorp, Inc.

Notes to Unaudited Consolidated Financial Statements

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

	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	%)

________________

(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 March 31, 2020 and December 31, 2019 (in thousands):

					Fair Value Measurements at
					March 31, 2020
	Carrying Amount		Fair Value Estimate		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Unobservable Inputs (Level 3)
Financial Assets
Investment in interest-earning time deposits	$	9,922	$	10,207	$	-	$	-	$	10,207
Loans held for sale		10,923		11,301		-		11,301		-
Loans receivable, net		251,088		255,181		-		-		255,181

Financial Liabilities
Deposits		240,354		244,766		47,508		-		197,258
FHLB long-term borrowings		30,193		30,276		-		-		30,276
Subordinated debt		7,873		8,071		-		-		8,071

					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 Unaudited Consolidated Financial Statements

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

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

Note 12 – Operating Segments

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

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

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

Quaint Oak Bancorp, Inc.

Notes to Unaudited Consolidated Financial Statements

Note 12 – Operating Segments (Continued)

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

	As of or for the Three Months Ended March 31,
	2020							2019
	Quaint Oak Bank(1)		Quaint Oak Mortgage			Consolidated		Quaint Oak Bank(1)		Quaint Oak Mortgage			Consolidated
Net Interest Income	$	2,290	$	(47	)	$	2,243	$	2,156	$	(19	)	$	2,137
Provision for Loan Losses		115		-			115		85		-			85
Net Interest Income after Provision for Loan Losses		2,175		(47	)		2,128		2,071		(19	)		2,052

Non-Interest Income
Mortgage banking and title abstract fees		144		150			294		85		60			145
Real estate sales commissions, net		33		-			33		18		-			18
Insurance commissions		97		-			97		92		-			92
Other fees and services charges		83		-			83		28		-			28
Income from bank-owned life insurance		19		-			19		20		-			20
Net gain on loans held for sale		-		781			781		-		433			433
Gain on the sale of SBA loans		-		-			-		106		-			106
Total Non-Interest Income		376		931			1,307		349		493			842

Non-Interest Expense
Salaries and employee benefits		1,667		311			1,978		1,322		304			1,626
Directors’ fees and expenses		61		-			61		57		-			57
Occupancy and equipment		135		70			205		111		49			160
Data processing		108		29			137		80		22			102
Professional fees		97		17			114		69		13			82
FDIC deposit insurance assessment		21		-			21		28		-			28
Other real estate owned expenses		14		-			14		7		-			7
Advertising		61		14			75		61		10			71
Amortization of other intangible		12		-			12		12		-			12
Other		196		14			210		148		14			162
Total Non-Interest Expense		2,372		455			2,827		1,895		412			2,307

Pretax Segment Profit	$	179	$	429		$	608	$	525	$	62		$	587

Segment Assets	$	291,392	$	18,054		$	309,446	$	272,241	$	9,678		$	281,919

___________________

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

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

Forward-Looking Statements Are Subject to Change

This Quarterly 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.

General

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

At March 31, 2020, the Bank has five wholly-owned subsidiaries, Quaint Oak Mortgage, LLC, Quaint Oak Real Estate, LLC, Quaint Oak Abstract, LLC, QOB Properties, LLC, and Quaint Oak Insurance Agency, LLC, each a Pennsylvania limited liability company. The mortgage, real estate and abstract companies offer mortgage banking, real estate sales and title abstract services, respectively, in the Lehigh Valley region of Pennsylvania, and began operation in July 2009. 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.

COVID-19

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

• Moved more than 92% of its employees to remote work-from-home status.

• Waived fees on deposit accounts and cash management services.

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

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

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

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

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

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

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

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

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

Details with respect to actual loan modifications are as follows:

	Number of Covid-19 Deferments 04/30/2020		Balance (in thousands)		Percent of Total Loans at March 31, 2020
One-to-four family residential owner occupied		7	$	3,149	48.8	%
One-to-four family residential non-owner occupied		47		7,434	18.9
Multi-family residential		10		8,074	33.6
Commercial real estate		88		49.987	40.3
Construction		2		811	8.7
Home equity		1		47	1.1
Commercial business		48		12,177	26.0
Other consumer		-		-	-
Total		203	$	81,679	32.1	%

Critical Accounting Policies

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

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

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

Comparison of Financial Condition at March 31, 2020 and December 31, 2019

General. The Company’s total assets at March 31, 2020 were $309.4 million, an increase of $6.9 million, or 2.3%, from $302.5 million at December 31, 2019. This growth in total assets was primarily due to a $4.4 million, or 1.8%, increase, in loans receivable, net, and a $2.0 million, or 22.3%, increase in loans held for sale.

Cash and Cash Equivalents. Cash and cash equivalents increased $388,000, or 2.7%, from $14.6 million at December 31, 2019 to $14.9 million at March 31, 2020 with the expectation that excess liquidity will be used to fund loans.

Investment in Interest-Earning Time Deposits. Investment in interest-earning time deposits decreased $250,000, or 2.5%, from $10.2 million at December 31, 2019 to $9.9 million at March 31, 2020 as one interest-earning time deposit matured during the three months ended March 31, 2020.

Investment Securities Available for Sale. Investment securities available for sale decreased $291,000, or 3.8%, from $7.6 million at December 31, 2019 to $7.3 million at March 31, 2020, due primarily to the principal repayments on these securities during the three months ended March 31, 2020.

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

Loans Receivable, Net. Loans receivable, net, increased $4.4 million, or 1.8%, to $251.1 million at March 31, 2020 from $246.7 million December 31, 2019. This increase was funded primarily from deposits. Increases within the portfolio occurred in commercial real estate loans which increased $4.6 million, or 3.8%, multi-family residential loans which increased $1.8 million, or 8.2%, commercial business loans which increased $1.1 million, or 2.3%, home equity loans which increased $521,000, or 14.0%, and one-to-four family residential owner occupied loans which increased $148,000, or 2.3%. These increases were partially offset by decreases of $3.2 million, or 25.5%, in construction loans, $470,000, or 1.2%, in one-to-four family residential non-owner occupied loans, and $6,000, or 27.3%, in other consumer loans. The Company continues its strategy of diversifying its loan portfolio with higher yielding and shorter-term loan products and selling substantially all of its newly originated one-to-four family owner-occupied loans into the secondary market.

Other Real Estate Owned. Other real estate owned (OREO) amounted to $1.9 million at March 31, 2020, consisting of four properties that were collateral for a non-performing construction loan. During the quarter ended March 31, 2020, the Company made $107,000 of capital improvements to the properties. The balance of these OREO properties amounted to $1.8 million at December 31, 2019. Non-performing assets amounted to $2.8 million, or 0.90% of total assets at March 31, 2020 compared to $2.2 million, or 0.72% of total assets at December 31, 2019.

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

Deposits. Total deposits increased $12.9 million, or 5.7%, to $240.4 million at March 31, 2020 from $227.5 million at December 31, 2019. This increase in deposits was primarily attributable to increases of $8.4 million, or 4.6%, in certificates of deposit, $2.5 million, or 9.8%, in money market accounts, $1.8 million, or 11.7%, in non-interest bearing checking accounts, $168,000, 9.8%, in savings accounts, and $1,000, or 20%, in passbook accounts.

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

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

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

Net Interest Income. Net interest income increased $106,000, or 5.0%, to $2.2 million for the three months ended March 31, 2020 from $2.1 million for the three months ended March 31, 2019. The increase was driven by a $269,000 or 7.9%, increase in interest income, partially offset by a $163,000 or 12.9%, increase in interest expense.

Interest Income. Interest income increased $269,000 or 7.9%, to $3.7 million for the three months ended March 31, 2020 from $3.4 million for the three months ended March 31, 2019. The increase in interest income was primarily due to a $32.6 million increase in average loans receivable, net, including loans held for sale, which increased from an average balance of $223.2 million for the three months ended March 31, 2019 to an average balance of $255.8 million for the three months ended March 31, 2020, and had the effect of increasing interest income $458,000. This increase in interest income was partially offset by a 19 basis point decrease in the yield on average loans receivable, net, including loans held for sale, which decreased from 5.62% for the three months ended March 31, 2019 to 5.43% for the three months ended March 31, 2020, and had the effect of decreasing interest income $123,000. Also offsetting this increase was an $11.9 decrease in average cash and cash equivalents due from banks, interest bearing, which decreased from an average balance of $29.4 million for the three months ended March 31, 2019 to an average balance of $17.5 million for the three months ended March 31, 2020, and had the effect of reducing interest income $62,000. In addition, this increase was offset by a 73 basis point decrease in the yield on average cash and cash equivalents due from banks, interest bearing, which decreased from 2.10% for the three months ended March 31, 2019 to 1.37% for the three months ended March 31, 2020, and had the effect of decreasing interest income $32,000.

Interest Expense. Interest expense increased $163,000 or 12.9%, to $1.4 million for the three months ended March 31, 2020 from $1.3 million for the three months ended March 31, 2019. The increase in interest expense was primarily attributable to a $16.1 million increase in average certificate of deposit accounts which increased from an average balance of $172.4 million for the three months ended March 31, 2019 to an average balance of $188.6 million for the three months ended March 31, 2020, and had the effect of increasing interest expense $88,000. Also contributing to this increase was a seven basis point increase in rate on average certificate of deposit accounts, which increased from 2.19% for the three months ended March 31, 2019 to 2.26% for the three months ended March 31, 2020, and had the effect of increasing interest expense by $35,000. The increase in interest expense was also due to a $7.6 million increase in average Federal Home Loan Bank borrowings which increased from an average balance of $24.0 million for the three months ended March 31, 2019 to $31.6 million for the three months ended March 31, 2020, and which had the effect of increasing interest expense $34,000. The average interest rate spread decreased from 2.90% for the three months ended March 31, 2019 to 2.79% for the three months ended March 31, 2020 while the net interest margin decreased from 3.19% for the three months ended March 31, 2019 to 3.07% for the three months ended March 31, 2020.

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

	Three Months Ended March 31,
	2020							2019
	Average Balance		Interest		Average Yield/ Rate			Average Balance		Interest		Average Yield/ Rate
	(Dollars in thousands)
Interest-earning assets:
Due from banks, interest-bearing	$	17,522	$	60		1.37	%	$	29,384	$	154		2.10	%
Investment in interest-earning time deposits		10,057		63		2.51			8,015		49		2.45
Investment securities available for sale		7,540		47		2.49			6,630		42		2.53
Loans receivable, net (1) (2)		255,770		3,472		5.43			223,167		3,137		5.62
Investment in FHLB stock		1,419		29		8.17			1,086		20		7.37
Total interest-earning assets		292,308		3,671		5.02	%		268,282		3,402		5.07	%
Non-interest-earning assets		12,804							11,385
Total assets	$	305,112						$	279,667
Interest-bearing liabilities:
Passbook accounts	$	5	$	*		*	%	$	97	$	-		-	%
Savings accounts		1,805		1		0.22			1,215		1		0.33
Money market accounts		26,290		53		0.81			27,636		54		0.78
Certificate of deposit accounts		188,553		1,067		2.26			172,448		944		2.19
Total deposits		216,653		1,121		2.07			201,396		999		1.98
FHLB short-term borrowings		3,956		30		3.03			9,000		58		2.58
FHLB long-term borrowings		27,651		147		2.13			15,000		79		2.11
Subordinated debt		7,868		130		6.60			7,827		129		6.59
Total interest-bearing liabilities		256,128		1,428		2.23	%		233,223		1,265		2.17	%
Non-interest-bearing liabilities		22,920							22,491
Total liabilities		279,048							255,714
Stockholders’ Equity		26,064							23,953
Total liabilities and Stockholders’ Equity	$	305,112						$	279,667
Net interest-earning assets	$	36,180						$	35,059
Net interest income; average interest rate spread			$	2,243		2.79	%			$	2,137		2.90	%
Net interest margin (3)						3.07	%						3.19	%
Average interest-earning assets to average interest-bearing liabilities						114.13	%						115.03	%

_______________________

* Not meaningful

(1) Includes loans held for sale.

(2) Includes non-accrual loans during the respective periods. Calculated net of deferred fees and discounts, loans in process and allowance for loan losses.

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

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

Non-performing loans amounted to $860,000 or 0.34% of net loans receivable at March 31, 2020, consisting of six loans, one loan is on non-accrual status and five loans are 90 days or more past due and accruing interest. Comparably, non-performing loans amounted to $362,000 or 0.15% of net loans receivable at December 31, 2019, consisting of two loans, one loan was on non-accrual status and one loan was 90 days or more past due and accruing interest. The non-performing loans at March 31, 2020 include two one-to-four family non-owner occupied residential loans, two commercial real estate loans, one one-to-four family owner occupied residential loan, and one construction loan, and all are generally well-collateralized or adequately reserved for.

Non-Interest Income. Non-interest income increased $465,000, or 55.2%, for the three months ended March 31, 2020 over the comparable period in 2019 primarily due to a $348,000, or 80.4%, increase in net gain on loans held for sale, a $149,000, or 102.8%, increase in mortgage banking and title abstract fees, a $55,000, or 196.4%, increase in other fees and service charges, a $15,000, or 83.3%, increase in real estate sales commissions, net, and a $5,000, or 5.4%, increase in insurance commissions. The increase in other fees and service charges was driven by an increase in loan prepayment fees. These increases were partially offset by a $106,000, or 100.0%, decrease in the gain on the sale of SBA loans and a $1,000, or 5.0%, decrease in income from bank-owned life insurance.

Non-Interest Expense. Total non-interest expense increased $520,000, or 22.5% for the three months ended March 31, 2020 over the comparable period in 2019 primarily due to a $352,000, or 21.6%, increase in salaries and employee benefits, a $48,000, or 29.6%, increase in other expense, a $45,000, or 28.1%, increase in occupancy and equipment expense, a $35,000, or 34.3%, increase in data processing expense, a $32,000, or 39.0%, increase in professional fees, a $7,000, or 100.0%, increase in other real estate owned expenses, a $4,000, or 7.0%, increase in directors’ fees and expenses, and a $4,000, or 5.6% increase in advertising expense. The increase in salaries and benefits is primarily due to expanding and improving the level of staff at the Bank and its subsidiary companies, primarily in the area of lending operations. The increase in occupancy and equipment expense was primarily attributable to the opening of our new retail banking office in Philadelphia, Pennsylvania in February 2020. These increases were partially offset by a $7,000, or 25.0%, decrease in FDIC deposit insurance assessment.

Provision for Income Tax. The provision for income tax increased $2,000, or 1.1%, from $174,000 for the three months ended March 31, 2019 to $176,000 for the three months ended March 31, 2020 due primarily to the increase in pre-tax income.

Operating

Segments

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

Our Banking Segment reported a pre-tax segment profit (“PTSP”) for the three months ended March 31, 2020 of $179,000, a $346,000, or 65.9%, decrease from the three months ended March 31, 2019. This decrease in PTSP was primarily due to a $477,000, or 25.2%, increase in non-interest expense and $30,000, or 35.3%, increase in the provision for loan losses, partially offset by a $134,000, or 6.2%, increase in net interest income and a $27,000, or 7.7%, increase in non-interest income. The increase in non-interest expense was due primarily to a $345,000, or 26.1%, increases in salaries and employees benefits expense and a $48,000, or 32.4%, increase in other expense.

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

Liquidity

and Capital Resources

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

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

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

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

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

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

Off-Balance Sheet Arrangements

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

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

Impact of Inflation and Changing Prices

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not Applicable.

ITEM 4. CONTROLS AND PROCEDURES

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)) as of March 31, 2020. Based on their evaluation of the Company’s disclosure controls and procedures, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and regulations are operating in an effective manner.

No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15(d)-15(f) under the Securities Exchange Act of 1934) occurred during the first fiscal quarter of fiscal 2020 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II

ITEM 1.

LEGAL PROCEEDINGS

The Company is not involved in any pending legal proceedings other than routine legal proceedings occurring in the ordinary course of business, which involve amounts in the aggregate believed by management to be immaterial to the financial condition and operating results of the Company.

ITEM 1A.

RISK FACTORS

The COVID-19 pandemic has adversely impacted our ability to conduct business and is expected to adversely impact our financial results and those of our customers. The ultimate impact will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic and actions taken by governmental authorities in response to the pandemic.

The COVID-19 pandemic has significantly adversely affected our operations and the way we provide banking services to businesses and individuals, most of whom are currently under government issued stay-at-home orders. As an essential business, we continue to provide banking and financial services to our customers in an environment compliant with federal and state COVID-19 guidelines. In addition, we continue to provide access to banking and financial services through online banking, ATMs and by telephone. If the COVID-19 pandemic worsens it could limit or disrupt our ability to provide banking and financial services to our customers.

In response to the stay-at-home orders, the majority of our employees currently are working remotely to enable us to continue to provide banking services to our customers. Heightened cybersecurity, information security and operational risks may result from these remote work-from-home arrangements. We also could be adversely affected if key personnel or a significant number of employees were to become unavailable due to the effects and restrictions of the COVID-19 pandemic. We also rely upon our third-party vendors to conduct business and to process, record and monitor transactions. If any of these vendors are unable to continue to provide us with these services, it could negatively impact our ability to serve our customers. Although we have business continuity plans and other safeguards in place, there is no assurance that such plans and safeguards will be effective.

There is pervasive uncertainty surrounding the future economic conditions that will emerge in the months and years following the start of the pandemic. As a result, management is confronted with a significant and unfamiliar degree of uncertainty in estimating the impact of the pandemic on credit quality, revenues and asset values. To date, the COVID-19 pandemic has resulted in declines in loan demand and loan originations, other than through government sponsored programs such as the Payroll Protection Program, deposit availability, market interest rates and negatively impacted many of our business and consumer borrower’s ability to make their loan payments. Because the length of the pandemic and the efficacy of the extraordinary measures being put in place to address its economic consequences are unknown, including recent reductions in the targeted federal funds rate, until the pandemic subsides, we expect our net interest income and net interest margin will be adversely affected. Many of our borrowers have become unemployed or may face unemployment, and certain businesses are at risk of insolvency as their revenues decline precipitously, especially in businesses related to travel, hospitality, leisure and physical personal services. Businesses may ultimately not reopen as there is a significant level of uncertainty regarding the level of economic activity that will return to our markets over time, the impact of governmental assistance, the speed of economic recovery, the resurgence of COVID-19 in subsequent seasons and changes to demographic and social norms that will take place.

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

Even after the COVID-19 pandemic subsides, the U.S. economy will likely require some time to recover from its effects, the length of which is unknown. and during which we may experience a recession. As a result, we anticipate our business may be materially and adversely affected during this recovery.

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

(a) Not applicable.

(b) Not applicable.

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

Period	Total Number of Shares Purchased		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs (1)
January 1, 2020 – January 31, 2020		-	$	-		-		39,675
February 1, 2020 – February 28, 2020		-		-		-		39,675
March 1, 2020 – March 31, 2020		5,372		12.48		5,000		34,675
Total		5,372	$	12.48		5,000		34,675

Notes to this table:

(1)

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

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4.

MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5.

OTHER INFORMATION

Not applicable.

ITEM 6.

EXHIBITS

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

SIGNATURES

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

Date: May 14, 2020	By:	/s/Robert T. Strong
		Robert T. Strong President and Chief Executive Officer


Date: May 14, 2020	By:	/s/John J. Augustine
		John J. Augustine Executive Vice President and Chief Financial Officer