QUAINT OAK BANCORP INC - Quarter Report: 2021 September (Form 10-Q)

qnto20210930_10q.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended

September 30, 2021

☐	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)		(Zip Code)

(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. ☒ 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). ☒ 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	☒	Smaller reporting company	☒
		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 ☒ No

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: As of November 10, 2021, 2,005,207 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 September 30, 2021 and December 31, 2020 (Unaudited)	1

	Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2021 and 2020 (Unaudited)	2

	Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2021 and 2020 (Unaudited)	4

	Consolidated Statements of Stockholders’ Equity for the Three and Nine Months Ended September 30, 2021 and 2020 (Unaudited)	5

	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2021 and 2020 (Unaudited)	7

	Notes to the Unaudited Consolidated Financial Statements	9

Item 2 -	Management’s Discussion and Analysis of Financial Condition and Results of Operations	35

Item 3 -	Quantitative and Qualitative Disclosures About Market Risk	48

Item 4 -	Controls and Procedures	48

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 September 30,			At December 31,
	2021			2020
	(In thousands, except share data)
Assets
Due from banks, non-interest-bearing	$	2,028		$	205
Due from banks, interest-bearing		12,288			33,708
Cash and cash equivalents		14,316			33,913
Investment in interest-earning time deposits		7,892			9,463
Investment securities available for sale		4,312			10,725
Loans held for sale		106,828			53,191
Loans receivable, net of allowance for loan losses (2021 $4,303; 2020 $3,061)		381,690			359,122
Accrued interest receivable		3,338			3,054
Investment in Federal Home Loan Bank stock, at cost		2,018			1,665
Bank-owned life insurance		4,115			4,054
Premises and equipment, net		2,549			2,341
Goodwill		3,107			515
Other intangible, net of accumulated amortization		235			271
Other real estate owned, net		489			286
Prepaid expenses and other assets		4,977			5,475
Total Assets	$	535,866		$	484,075
Liabilities and Stockholders’ Equity
Liabilities
Deposits:
Non-interest bearing	$	73,555		$	54,202
Interest-bearing		361,952			300,643
Total deposits		435,507			354,845
Federal Home Loan Bank short-term borrowings		21,000			10,000
Federal Home Loan Bank long-term borrowings		24,193			28,193
Federal Reserve Bank long-term borrowings		4,964			48,134
Subordinated debt		7,924			7,899
Other short-term borrowings		933			-
Accrued interest payable		384			362
Advances from borrowers for taxes and insurance		2,063			2,486
Accrued expenses and other liabilities		3,875			3,428
Total Liabilities		500,843			455,347
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; 2,005,095 and 1,986,528 outstanding at September 30, 2021 and December 31, 2020, respectively		28			28
Additional paid-in capital		15,561			15,282
Treasury stock, at cost: 772,155 and 790,722 shares at September 30, 2021 and December 31, 2020, respectively		(5,016	)		(5,114	)
Unallocated common stock held by Employee Stock Ownership Plan (ESOP)		-			(51	)
Accumulated other comprehensive income		34			118
Retained earnings		22,168			18,465
Total Quaint Oak Bancorp, Inc. Stockholders' Equity		32,775			28,728
Noncontrolling Interest		2,248			-
Total Stockholders' Equity	$	35,023		$	28,728
Total Liabilities and Stockholders’ Equity	$	535,866		$	484,075

See accompanying notes to the unaudited consolidated financial statements.

Quaint Oak Bancorp, Inc.

Consolidated Statements of Income (Unaudited)

	For the Three Months Ended					For the Nine Months Ended
	September 30,					September 30,
	2021		2020			2021		2020
	(In thousands, except for share data)
Interest Income
Interest on loans, including fees	$	5,944	$	4,060		$	16,422	$	11,423
Interest and dividends on time deposits, investment securities, interest-bearing deposits with others, and Federal Home Loan Bank stock		73		163			327		504
Total Interest Income		6,017		4,223			16,749		11,927

Interest Expense
Interest on deposits		702		1,032			2,370		3,222
Interest on Federal Home Loan Bank short-term borrowings		8		-			14		31
Interest on Federal Home Loan Bank long-term borrowings		124		152			392		452
Interest on Federal Reserve Bank long-term borrowings		8		43			77		66
Interest on subordinated debt		130		130			390		390
Interest on other short-term borrowings		31		-			127		-
Total Interest Expense		1,003		1,357			3,370		4,161
Net Interest Income		5,014		2,866			13,379		7,766
Provision for Loan Losses		557		201			1,259		621
Net Interest Income after Provision for Loan Losses		4,457		2,665			12,120		7,145

Non-Interest Income
Mortgage banking, equipment lending and title abstract fees		604		400			1,657		1,045
Real estate sales commissions, net		79		68			143		131
Insurance commissions		133		130			373		347
Other fees and services charges		38		144			211		178
Loan servicing income		475		-			1,026		-
Income from bank-owned life insurance		21		20			61		59
Net gain on loans held for sale		1,866		1,209			4,416		2,816
Net (loss) on sales of other real estate owned		-		(110	)		-		(92	)
Gain on the sale of SBA loans		369		19			636		71
Gain on the sale of investment securities available for sale		-		-			362		-
Total Non-Interest Income		3,585		1,880			8,885		4,555

Non-Interest Expense
Salaries and employee benefits		4,100		2,145			10,939		5,908
Directors' fees and expenses		58		61			186		175
Occupancy and equipment		379		251			1,143		673
Data processing		234		177			641		474
Professional fees		107		112			488		339
FDIC deposit insurance assessment		97		38			221		85
Other real estate owned expenses		2		11			14		34
Advertising		110		75			337		224
Amortization of other intangible		12		12			36		37
Other		326		259			974		714
Total Non-Interest Expense		5,425		3,141			14,979		8,663

See accompanying notes to the unaudited consolidated financial statements.

Quaint Oak Bancorp, Inc.

Consolidated Statements of Income (Unaudited)

	For the Three Months Ended				For the Nine Months Ended
	September 30,				September 30,
	2021		2020		2021		2020
	(In thousands, except for share data)
Income before Income Taxes	$	2,617	$	1,404	$	6,026	$	3,037
Income Taxes		702		396		1,693		866
Net Income	$	1,915	$	1,008	$	4,333	$	2,171
Net Income Attributable to Noncontrolling Interest	$	133	$	-	$	12	$	-
Net Income Attributable to Quaint Oak Bancorp, Inc.	$	1,782	$	1,008	$	4,321	$	2,171

Earnings per share - basic	$	0.89	$	0.51	$	2.17	$	1.10
Average shares outstanding - basic		2,002,816		1,982,697		1,991,336		1,975,111
Earnings per share - diluted	$	0.85	$	0.50	$	2.07	$	1.08
Average shares outstanding - diluted		2,100,026		2,010,815		2,085,286		2,010,648

See accompanying notes to the unaudited consolidated financial statements.

Quaint Oak Bancorp, Inc.

Consolidated Statements of Comprehensive Income (Unaudited)

	For the Three Months Ended					For the Nine Months Ended
	September 30,					September 30,
	2021		2020			2021			2020
	(In thousands)
Net Income	$	1,915	$	1,008		$	4,333		$	2,171

Other Comprehensive Income (Loss):
Unrealized gains on investment securities available-for-sale		-		102			257			85
Income tax effect		-		(21	)		(55	)		(18	)
Reclassification adjustment for gain on sale of investment securities included in net income		-		-			(362	)		-
Income tax effect		-		-			76			-
Other comprehensive income (loss)		-		81			(84	)		67

Total Comprehensive Income	$	1,915	$	1,089		$	4,249		$	2,238
Comprehensive Loss Attributable to Noncontrolling Interest	$	133	$	-		$	12		$	-

Comprehensive Income Attributable to Quaint Oak Bancorp, Inc.	$	1,782	$	1,089		$	4,237		$	2,238

See accompanying notes to the unaudited consolidated financial statements.

Quaint Oak Bancorp, Inc.

Consolidated Statements of Stockholders’ Equity (Unaudited)

For the Three Months Ended September 30, 2021
										Unallocated
	Common Stock									Common			Accumulated
	Number of Shares Outstanding		Amount		Additional Paid-in Capital		Treasury Stock			Stock Held by Benefit Plans			Other Comprehensive Income		Retained Earnings			Noncontrolling Interest		Total Stockholders’ Equity
			(In thousands, except share data)
BALANCE – JUNE 30, 2021		2,004,015	$	28	$	15,457	$	(5,022	)	$	(17	)	$	34	$	20,606		$	2,115	$	33,201

Common stock allocated by ESOP (3,607 shares)						48					17										65

Reissuance of treasury stock under 401(k) Plan		1,080				14		6													20

Stock based compensation expense						42															42

Net gain attributable to noncontrolling interest																			133		133

Cash dividends declared ($0.11 per share)																(220	)				(220	)

Net income attributable to Quaint Oak Bancorp, Inc.																1,782					1,782

Other comprehensive income, net														-							-

BALANCE – SEPTEMBER 30, 2021		2,005,095	$	28	$	15,561	$	(5,016	)	$	-		$	34	$	22,168		$	2,248	$	35,023

For the Three Months Ended September 30, 2020
	Common Stock										Unallocated Common			Accumulated
	Number of Shares Outstanding			Amount		Additional Paid-in Capital		Treasury Stock			Stock Held by Benefit Plans			Other Comprehensive Income (Loss)		Retained Earnings			Total Stockholders’ Equity
	(In thousands, except share data)
BALANCE – JUNE 30, 2020		2,001,614		$	28	$	15,123	$	(4,903	)	$	(84	)	$	6	$	16,743		$	26,913

Common stock allocated by ESOP (3,607 shares)							23					17								40

Treasury stock purchase		(6,231	)						(69	)										(69	)

Reissuance of treasury stock under 401(k) Plan		1,921					9		12											21

Stock based compensation expense							43													43

Cash dividends declared ($0.09 per share)																	(180	)		(180	)

Net income																	1,008			1,008

Other comprehensive income, net															81					81

BALANCE – SEPTEMBER 30, 2020		1,997,304		$	28	$	15,198	$	(4,960	)	$	(67	)	$	87	$	17,571		$	27,857

See accompanying notes to the unaudited consolidated financial statements.

Quaint Oak Bancorp, Inc.

Consolidated Statements of Stockholders’ Equity (Unaudited)

For the Nine Months Ended September 30, 2021
	Common Stock											Unallocated Common			Accumulated
	Number of Shares Outstanding			Amount		Additional Paid-in Capital			Treasury Stock			Stock Held by Benefit Plans			Other Comprehensive Income			Retained Earnings			Noncontrolling Interest		Total Stockholders’ Equity
				(In thousands, except share data)
BALANCE – DECEMBER 31, 2020		1,986,528		$	28	$	15,282		$	(5,114	)	$	(51	)	$	118		$	18,465		$	-	$	28,728

Common stock allocated by ESOP (10,821 shares)							136						51											187

Treasury stock purchase		(1,398	)							(25	)													(25	)

Reissuance of treasury stock under 401(k) Plan		3,044					35			18														53

Reissuance of treasury stock under stock incentive plan		9,421					(58	)		58														-

Reissuance of treasury stock for exercised stock options		7,500					40			47														87

Stock based compensation expense							126																	126

Noncontrolling interest initial contribution																						2,236		2,236

Net gain attributable to noncontrolling interest																						12		12

Cash dividends declared ($0.31 per share)																			(618	)				(618	)

Net income attributable to Quaint Oak Bancorp, Inc.																			4,321					4,321

Other comprehensive loss, net																(84	)							(84	)

BALANCE – SEPTEMBER 30, 2021		2,005,095		$	28	$	15,561		$	(5,016	)	$	-		$	34		$	22,168		$	2,248	$	35,023

For the Nine Months Ended September 30, 2020
	Common Stock											Unallocated Common			Accumulated
	Number of Shares Outstanding			Amount		Additional Paid-in Capital			Treasury Stock			Stock Held by Benefit Plans			Other Comprehensive Income		Retained Earnings			Total Stockholders’ 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 (10,821 shares)							78						51								129

Treasury stock purchase		(15,761	)							(181	)										(181	)

Reissuance of treasury stock under 401(k) Plan		6,287					31			38											69

Reissuance of treasury stock under stock incentive plan		9,421					(57	)		57											-

Reissuance of treasury stock for exercised stock options		12,500					26			76											102

Stock based compensation expense							130														130

Cash dividends declared ($0.27 per share)																		(537	)		(537	)

Net income																		2,171			2,171

Other comprehensive income, net																67					67

BALANCE – SEPTEMBER 30, 2020		1,997,304		$	28	$	15,198		$	(4,960	)	$	(67	)	$	87	$	17,571		$	27,857

See accompanying notes to the unaudited consolidated financial statements.

Quaint Oak Bancorp, Inc.

Consolidated Statements of Cash Flows (Unaudited)

	For the Nine Months
	Ended September 30,
	2021			2020
	(In Thousands)
Cash Flows from Operating Activities
Net income	$	4,333		$	2,171
Adjustments to reconcile net income to net cash used in operating activities:
Provision for loan losses		1,259			621
Depreciation of premises and equipment		228			175
Amortization of operating right-of-use assets		122			109
Amortization of subordinated debt issuance costs		25			25
Amortization of other intangible		36			37
Net amortization of securities premiums		6			7
Accretion of deferred loan fees and costs, net		(3,482	)		(884	)
Stock-based compensation expense		313			259
Gain on the sale of investment securities available for sale		(362	)		-
Net realized loss on the sale of foreclosed real estate		-			92
Net gain on loans held for sale		(4,416	)		(2,816	)
Loans held for sale-originations		(276,705	)		(135,652	)
Loans held for sale-proceeds		238,398			116,410
Gain on the sale of SBA loans		(636	)		(71	)
Increase in the cash surrender value of bank-owned life insurance		(61	)		(59	)
Changes in assets and liabilities which provided (used) cash:
Accrued interest receivable		(284	)		(1,438	)
Prepaid expenses and other assets		1,093			(971	)
Accrued interest payable		(52	)		140
Accrued expenses and other liabilities		(224	)		669
Net Cash Used in Operating Activities		(40,409	)		(21,176	)
Cash Flows from Investing Activities
Purchase of interest-earning time deposits		(2,141	)		(1,317	)
Redemption of interest-earning time deposits		3,712			2,026
Purchase of investment securities available for sale		-			(4,007	)
Principal repayments on investment securities available for sale		801			759
Proceeds from the sale of investment securities available for sale		5,862			-
Net increase in loans receivable		(21,335	)		(98,034	)
Purchase of Federal Home Loan Bank stock		(913	)		(168	)
Redemption of Federal Home Loan Bank stock		560			283
Proceeds from the sale of foreclosed real estate		-			1,611
Acquisition, net of cash acquired		1,259			-
Capitalized expenditures on other real estate owned		(203	)		(268	)
Purchase of premises and equipment		(400	)		(281	)
Net Cash Used in Investing Activities		(12,798	)		(99,396	)
Cash Flows from Financing Activities
Net increase in demand deposits, money markets, and savings accounts		111,258			55,594
Net (decrease) increase in certificate accounts		(30,596	)		15,991
Decrease in advances from borrowers for taxes and insurance		(423	)		(993	)
Repayments of Federal Home Loan Bank short-term borrowings		(10,000	)		(10,000	)
Proceeds from Federal Home Loan Bank short-term borrowings		21,000			4,000
Repayments of Federal Home Loan Bank long-term borrowings		(4,000	)		(1,000	)
Proceeds from Federal Home Loan Bank long-term borrowings		-			3,922
Repayments of Federal Reserve Bank long-term borrowings		(43,170	)		(3,310	)
Proceeds from Federal Reserve Bank long-term borrowings		-			52,144
Repayments of other short-term borrowings		(9,956	)		-
Dividends paid		(618	)		(537	)
Purchase of treasury stock		(25	)		(181	)
Proceeds from the reissuance of treasury stock		53			69
Proceeds from the exercise of stock options		87			102
Net Cash Provided by Financing Activities		33,610			115,801
Net Decrease in Cash and Cash Equivalents		(19,597	)		(4,771	)
Cash and Cash Equivalents – Beginning of Year		33,913			14,555
Cash and Cash Equivalents – End of Year	$	14,316		$	9,784

See accompanying notes to the unaudited consolidated financial statements.

Quaint Oak Bancorp, Inc.

Consolidated Statements of Cash Flows (Unaudited)

	For the Nine Months
	Ended September 30,
	2021		2020
	(In Thousands)
Supplementary Disclosure of Cash Flow and Non-Cash Information:
Cash payments for interest	$	3,348	$	4,022
Cash payments for income taxes	$	2,405	$	260
Initial recognition of operating lease right-of use assets	$	670	$	632
Initial recognition of operating lease obligations	$	670	$	632


Acquisition of controlling interest in Oakmont Capital Holdings, LLC
Non-cash assets acquired:
Loans held for sale	$	10,914
Premises and equipment		37
Goodwill		2,592
Other assets		24
Total non-cash assets acquired		13,567
Liabilities assumed:
Other short-term borrowings		12,515
Accrued interest payable		74
Total liabilities assumed		12,589
Net non-cash assets acquired	$	978
Cash and cash equivalents acquired	$	4,259

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 September 30, 2021, the Bank has five wholly-owned subsidiaries, Quaint Oak Mortgage, LLC, Quaint Oak Real Estate, LLC, Quaint Oak Abstract, LLC, QOB Properties, LLC, and Quaint Oak Insurance Agency, LLC, each a Pennsylvania limited liability company. The mortgage company offers mortgage banking in the Lehigh Valley, Delaware Valley and Philadelphia County regions of Pennsylvania. The real estate and abstract companies offer real estate sales and title abstract services, respectively, primarily in the Lehigh Valley region of Pennsylvania. These companies began operation in July 2009. In February, 2019, Quaint Oak Mortgage opened a mortgage banking office in Philadelphia, Pennsylvania. QOB Properties, LLC began operations in July 2012 and holds Bank properties acquired through a foreclosure proceeding or acceptance of a deed in lieu of foreclosure. Quaint Oak Insurance Agency, LLC began operations in August 2016 and provides a broad range of personal and commercial insurance coverage solutions. In February 2020, Quaint Oak Bank opened a full-service retail banking office in Philadelphia, Pennsylvania. As of January 4, 2021, the Bank holds a majority equity position in Oakmont Capital Holdings, LLC, a multi-state equipment finance company based in West Chester, Pennsylvania with a second significant facility located in Albany, Minnesota. 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, 2020 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 2020 Annual Report on Form 10-K. The results of operations for the nine months ended September 30, 2021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2021.

Quaint Oak Bancorp, Inc.

Notes to Unaudited Consolidated Financial Statements

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

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.

Critical Accounting Policies. The Company’s critical accounting policies involving significant judgments and assumptions used in the preparation of the consolidated financial statements as of September 30, 2021 have remained unchanged from the disclosures presented in our Annual Report on Form 10-K, except for the following:

Goodwill and 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 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. Also included in intangible assets is $2.6 million recognized as part of the acquisition of Oakmont Capital Holdings, LLC.

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.

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.

Quaint Oak Bancorp, Inc.

Notes to Unaudited Consolidated Financial Statements

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

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

In 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.

Quaint Oak Bancorp, Inc.

Notes to Unaudited Consolidated Financial Statements

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

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 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.

In October 2020, the FASB issued ASU 2020-08, Codification Improvements to Subtopic 310-20, Receivables – Nonrefundable Fees and Other Costs, which clarifies that, for each reporting period, an entity should reevaluate whether a callable debt security is within the scope of ASC 310-20-35-33. For public business entities, ASU 2020-08 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Early application is not permitted. For all other entities, ASU 2020-08 is effective for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 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.

Quaint Oak Bancorp, Inc.

Notes to Unaudited Consolidated Financial Statements

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

In January 2021, the FASB issued ASU 2021-01, Reference Rate Reform (Topic 848), which provides optional temporary guidance for entities transitioning away from the London Interbank Offered Rate (LIBOR) and other interbank offered rates (IBORs) to new references rates so that derivatives affected by the discounting transition are explicitly eligible for certain optional expedients and exceptions within Topic 848. ASU 2021-01 clarifies that the derivatives affected by the discounting transition are explicitly eligible for certain optional expedients and exceptions in Topic 848. ASU 2021-01 is effective immediately for all entities. Entities may elect to apply the amendments on a full retrospective basis as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or on a prospective basis to new modifications from any date within an interim period that includes or is subsequent to the date of the issuance of a final update, up to the date that financial statements are available to be issued. The amendments in this update do not apply to contract modifications made, as well as new hedging relationships entered into, after December 31, 2022, and to existing hedging relationships evaluated for effectiveness for periods after December 31, 2022, except for certain hedging relationships existing as of December 31, 2022, that apply certain optional expedients in which the accounting effects are recorded through the end of the hedging relationship. 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 2020 consolidated financial statements have been reclassified to conform to the presentation in the 2021 consolidated financial statements. Such reclassifications did not have a material impact on the presentation of the overall financial statements. The reclassifications had no effect on net income or stockholders’ equity.

Note 2 – Earnings Per Share

Earnings per share (“EPS”) consists of two separate components, basic EPS and diluted EPS. Basic EPS is computed based on the weighted average number of shares of common stock outstanding for each period presented. Diluted EPS is calculated based on the weighted average number of shares of common stock outstanding plus dilutive common stock equivalents (“CSEs”). CSEs consist of shares that are assumed to have been purchased with the proceeds from the exercise of stock options, as well as unvested restricted stock awards. Common stock equivalents which are considered antidilutive are not included for the purposes of this calculation. For the three and nine months ended September 30, 2021 and 2020, all outstanding stock options granted under the 2008 Stock Option Plan, the 2013 Stock Incentive Plan and the 2018 Stock Incentive Plan representing shares were 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 September 30,				For the Nine Months Ended September 30,
	2021		2020		2021		2020
Net Income Attributable to Quaint Oak Bancorp, Inc.	$	1,782,000	$	1,008,000	$	4,321,000	$	2,171,000

Weighted average shares outstanding – basic		2,002,816		1,982,697		1,991,336		1,975,111
Effect of dilutive common stock equivalents		97,211		28,118		93,950		35,537
Adjusted weighted average shares outstanding – diluted		2,100,026		2,010,815		2,085,286		2,010,648

Basic earnings per share	$	0.89	$	0.51	$	2.17	$	1.10
Diluted earnings per share	$	0.85	$	0.50	$	2.07	$	1.08

Quaint Oak Bancorp, Inc.

Notes to Unaudited Consolidated Financial Statements

Note 3 – Accumulated Other Comprehensive Income (Loss)

The following table presents the changes in accumulated other comprehensive income (loss) by component, net of tax, for the three and nine months ended September 30, 2021 and 2020 (in thousands):

	Unrealized Gains (Losses) on Investment Securities Available for Sale (1)
	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2021		2020		2021			2020
Balance at the beginning of the period	$	34	$	6	$	118		$	20
Other comprehensive income (loss) before classifications		-		81		202			67
Amount reclassified from accumulated other comprehensive income (loss)		-		-		(286	)		-
Total other comprehensive income (loss)		-		81		(84	)		67
Balance at the end of the period	$	34	$	87	$	34		$	87

_________________

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

The following table presents significant amounts reclassified out of each component of accumulated other comprehensive loss for the three months and the nine months ended September 30, 2021 and 2020 (in thousands):

Details About Other Comprehensive Loss	Amount Reclassified from Accumulated Other Comprehensive Loss (1)									Affected Line Item in the Statement of Income
	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2021		2020		2021			2020
Unrealized losses on investment securities available for sale	$	-	$	-	$	362		$	-	Gain on sales of investment securities available for sale
		-		-		(76	)		-	Income taxes
	$	-	$	-	$	286		$	-

(1)	Amounts in parentheses indicate debits to net income.

Note 4 – Investment in Interest-Earning Time Deposits

The investment in interest-earning time deposits as of September 30, 2021 and December 31, 2020, by contractual maturity, are shown below (in thousands):

	September 30, 2021		December 31, 2020
Due in one year or less	$	4,781	$	4,006
Due after one year through five years		3,111		5,457
Total	$	7,892	$	9,463

Quaint Oak Bancorp, Inc.

Notes to Unaudited Consolidated Financial Statements

Note 5 – Investment Securities Available for Sale

The amortized cost, gross unrealized gains and losses, and fair value of investment securities available for sale at September 30, 2021 and December 31, 2020 are summarized below (in thousands):

	September 30, 2021
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized (Losses)		Fair Value
Available for Sale:
Mortgage-backed securities:
Government National Mortgage Association securities	$	4,123	$	36	$	-	$	4,159
Federal National Mortgage Association securities		146		7		-		153
Total mortgage-backed securities		4,269		43		-		4,312

Total available-for-sale-securities	$	4,269	$	43	$	-	$	4,312

	December 31, 2020
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized (Losses)			Fair Value
Available for Sale:
Mortgage-backed securities:
Government National Mortgage Association securities	$	4,887	$	27	$	(1	)	$	4,913
Federal National Mortgage Association securities		183		6		-			189
Total mortgage-backed securities		5,070		33		(1	)		5,102
Debt securities:
Corporate notes		5,506		117		-			5,623
Total available-for-sale-securities	$	10,576	$	150	$	(1	)	$	10,725

The amortized cost and fair value of mortgage-backed securities at September 30, 2021, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties (in thousands):

	Available for Sale
	Amortized Cost		Fair Value
Due after five years through ten years	$	-	$	-
Due after ten years	$	4,269	$	4,312
Total	$	4,269	$	4,312

The following tables show the Company’s gross unrealized losses and fair value, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position at December 31, 2020 (in thousands):

	December 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		1	$	681	$	(1	)	$	-	$	-	$	681	$	(1	)

At September 30, 2021, there were no securities in an unrealized loss position. There were no impairment charges recognized during the three or nine months ended September 30, 2021 or 2020.

Quaint Oak Bancorp, Inc.

Notes to Unaudited Consolidated Financial Statements

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

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

	September 30, 2021			December 31, 2020
Real estate loans:
One-to-four family residential:
Owner occupied	$	10,178		$	7,528
Non-owner occupied		42,120			38,884
Total one-to-four family residential		52,298			46,412
Multi-family (five or more) residential		24,420			24,043
Commercial real estate		156,684			131,820
Construction		13,535			4,775
Home equity		4,214			3,788
Total real estate loans		251,151			210,838

Commercial business⁽¹⁾		138,680			154,387
Other consumer		13			17
Total Loans		389,844			365,242

Deferred loan fees and costs		(3,851	)		(3,059	)
Allowance for loan losses		(4,303	)		(3,061	)
Net Loans	$	381,690		$	359,122

______________

(1) Includes $75.5 million and $93.3 million of PPP loans at September 30, 2021 and December 31, 2020, respectively.

The following tables present the classes of the loan portfolio summarized by the aggregate pass rating and the classified ratings of special mention, substandard and doubtful within the Company’s internal risk rating system as of September 30, 2021 and December 31, 2020 (in thousands):

	September 30, 2021
	Pass		Special Mention		Substandard		Doubtful		Total
One-to-four family residential owner occupied	$	9,763	$	415	$	-	$	-	$	10,178
One-to-four family residential non-owner occupied		42,111		-		9		-		42,120
Multi-family residential		24,420		-		-		-		24,420
Commercial real estate		155,284		1,400		-		-		156,684
Construction		13,535		-		-		-		13,535
Home equity		4,214		-		-		-		4,214
Commercial business		134,883		3,797		-		-		138,680
Other consumer		13		-		-		-		13
Total	$	384,223	$	5,612	$	9	$	-	$	389,844

	December 31, 2020
	Pass		Special Mention		Substandard		Doubtful		Total
One-to-four family residential owner occupied	$	6,942	$	415	$	171	$	-	$	7,528
One-to-four family residential non-owner occupied		38,567		-		317		-		38,884
Multi-family residential		24,043		-		-		-		24,043
Commercial real estate		129,236		2,292		292		-		131,820
Construction		4,775		-		-		-		4,775
Home equity		3,788		-		-		-		3,788
Commercial business		154,387		-		-		-		154,387
Other consumer		17		-		-		-		17
Total	$	361,755	$	2,707	$	780	$	-	$	365,242

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 September 30, 2021 as well as the average recorded investment and related interest income for the period then ended (in thousands):

	September 30, 2021
	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	$	-	$	-	$	-	$	85	$	-
One-to-four family residential non-owner occupied		9		9		-		9		1
Multi-family residential		-		-		-		-		-
Commercial real estate		131		131		-		131		9
Construction		-		-		-		-		-
Home equity		-		-		-		-		-
Commercial business		-		-		-		23		-
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		-		-		-		-		-
Construction		-		-		-		-		-
Home equity		-		-		-		-		-
Commercial business		-		-		-		-		-
Other consumer		-		-		-		-		-

Total:
One-to-four family residential owner occupied	$	-	$	-	$	-	$	85	$	-
One-to-four family residential non-owner occupied		9		9		-		9		1
Multi-family residential		-		-		-		-		-
Commercial real estate		131		131		-		131		9
Construction		-		-		-		-		-
Home equity		-		-		-		-		-
Commercial business		-		-		-		23		-
Other consumer		-		-		-		-		-
Total	$	140	$	140	$	-	$	248	$	10

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, 2020 as well as the average recorded investment and related interest income for the year then ended (in thousands):

	December 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	$	171	$	178	$	-	$	171	$	1
One-to-four family residential non-owner occupied		19		19		-		19		3
Multi-family residential		-		-		-		-		-
Commercial real estate		131		131		-		131		1
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		-		-		-		-		-
Construction		-		-		-		-		-
Home equity		-		-		-		-		-
Commercial business		-		-		-		-		-
Other consumer		-		-		-		-		-

Total:
One-to-four family residential owner occupied	$	171	$	178	$	-	$	171	$	1
One-to-four family residential non-owner occupied		19		19		-		19		3
Multi-family residential		-		-		-		-		-
Commercial real estate		131		131		-		131		1
Construction		-		-		-		-		-
Home equity		-		-		-		-		-
Commercial business		-		-		-		-		-
Other consumer		-		-		-		-		-
Total	$	321	$	328	$	-	$	321	$	5

The loan portfolio also includes certain loans that have been modified in a troubled debt restructuring, where economic concessions have been granted to borrowers who have experienced or are expected to experience financial difficulties. These concessions typically result from loss mitigation activities and could include reductions in the interest rate, payment extensions, forbearance, or other actions. At September 30, 2021, the Company had two loans totaling $140,000 that were identified as troubled debt restructurings. One of these loans was performing in accordance with its modified terms and one was on non-accrual as of September 30, 2021. During the period ended September 30, 2021, no new loans were identified as TDRs. At December 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 on non-accrual as of December 31, 2020. 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 September 30, 2021 and December 31, 2020 (dollar amounts in thousands):

	September 30, 2021
	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		9		9		-		-
Multi-family residential		-		-		-		-		-
Commercial real estate		1		131		-		131		-
Construction		-		-		-		-		-
Home equity		-		-		-		-		-
Commercial business		-		-		-		-		-
Other consumer		-		-		-		-		-
Total		2	$	140	$	9	$	131	$	-

	December 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		-
Construction		-		-		-		-		-
Home equity		-		-		-		-		-
Commercial business		-		-		-		-		-
Other consumer		-		-		-		-		-
Total		2	$	150	$	19	$	131	$	-

The contractual aging of the TDRs in the table above as of September 30, 2021 and December 31, 2020 is as follows (in thousands):

	September 30, 2021
	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		-		-		-		9		9
Multi-family residential		-		-		-		-		-
Commercial real estate		131		-		-		-		131
Construction		-		-		-		-		-
Home equity		-		-		-		-		-
Commercial business		-		-		-		-		-
Other consumer		-		-		-		-		-
Total	$	131	$	-	$	-	$	9	$	140

Quaint Oak Bancorp, Inc.

Notes to Unaudited Consolidated Financial Statements

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

	December 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

Any reserve for an impaired TDR loan is based upon the present value of the future expected cash flows discounted at the loan’s original effective rate or upon the fair value of the collateral less costs to sell, if the loan is deemed collateral dependent. At September 30, 2021 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.

Quaint Oak Bancorp, Inc.

Notes to Unaudited Consolidated Financial Statements

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

Following is a summary, by loan portfolio class, of changes in the allowance for loan losses for the three and nine months ended September 30, 2021 and recorded investment in loans receivable as of September 30, 2021 (in thousands):

	September 30, 2021
	1-4 Family Residential Owner Occupied			1-4 Family Residential Non-Owner Occupied		Multi-Family Residential		Commercial Real Estate		Construction			Home Equity			Commercial Business and Other Consumer			Unallocated			Total
For the Three Months Ended September 30, 2021
Allowance for loan losses:
Beginning balance	$	72		$	356	$	242	$	1,617	$	163		$	26		$	970		$	300		$	3,746
Charge-offs		-			-		-		-		-			-			-			-			-
Recoveries		-			-		-		-		-			-			-			-			-
Provision		-			22		5		407		(28	)		(4	)		205			(50	)		557
Ending balance	$	72		$	378	$	247	$	2,024	$	135		$	22		$	1,175		$	250		$	4,303

For the Nine Months Ended September 30, 2021
Allowance for loan losses:
Beginning balance	$	88		$	362	$	229	$	1,287	$	62		$	20		$	763		$	250		$	3,061
Charge-offs		-			-		-		-		-			-			(17	)		-			(17	)
Recoveries		-			-		-		-		-			-			-			-			-
Provision		(16	)		16		18		737		73			2			429			-			1,259
Ending balance	$	72		$	378	$	247	$	2,024	$	135		$	22		$	1,175		$	250		$	4,303

Ending balance evaluated for impairment:
Individually	$	-		$	-	$	-	$	-	$	-		$	-		$	-		$	-		$	-
Collectively	$	72		$	378	$	247	$	2,024	$	135		$	22		$	1,175		$	250		$	4,303

*Loans receivable:*
Ending balance:	$	10,178		$	42,120	$	24,420	$	156,684	$	13,535		$	4,214		$	138,693					$	389,844

Ending balance evaluated for impairment:
Individually	$	-		$	9	$	-	$	131	$	-		$	-		$	-					$	140
Collectively	$	10,178		$	42,111	$	24,420	$	156,553	$	13,535		$	4,214		$	138,693					$	389,704

The Bank allocated increased allowance for loan loss provisions to the commercial real estate loan portfolio class for the three and nine months ended September 30, 2021, due primarily to changes in quantitative factors in this portfolio class. The Bank allocated increased allowance for loan loss provisions to the commercial business loan portfolio class for the three and nine months ended September 30, 2021, due primarily to changes in qualitative and quantitative factors in this portfolio class. The Bank allocated increased allowance for loan loss provisions to the construction loan portfolio class for the nine months ended September 30, 2021, due primarily to changes in quantitative factors in this portfolio class. In general, the primary driver of the increase in qualitative factors was the economic trends factor associated with the COVID-19 pandemic.

Quaint Oak Bancorp, Inc.

Notes to Unaudited Consolidated Financial Statements

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

Following is a summary, by loan portfolio class, of changes in the allowance for loan losses for the three and nine months ended September 30, 2020 and recorded investment in loans receivable as of September 30, 2020 (in thousands):

	September 30, 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
For the Three Months Ended September 30, 2020
Allowance for loan losses:
Beginning balance	$	43		$	399	$	204	$	1,229	$	114		$	25	$	537		$	100	$	2,651
Charge-offs		-			-		-		-		-			-		-			-		-
Recoveries		-			-		-		-		-			-		-			-		-
Provision		4			9		47		93		(1	)		2		(53	)		100		201
Ending balance	$	47		$	408	$	251	$	1,322	$	113		$	27	$	484		$	200	$	2,852

For the Nine Months Ended September 30, 2020
Allowance for loan losses:
Beginning balance	$	52		$	351	$	145	$	854	$	250		$	19	$	500		$	60	$	2,231
Charge-offs		-			-		-		-		-			-		-			-		-
Recoveries		-			-		-		-		-			-		-			-		-
Provision		(5	)		57		106		468		(137	)		8		(16	)		140		621
Ending balance	$	47		$	408	$	251	$	1,322	$	113		$	27	$	484		$	200	$	2,852

Ending balance evaluated for impairment:
Individually	$	-		$	-	$	-	$	-	$	-		$	-	$	-		$	-	$	3
Collectively	$	47		$	408	$	251	$	1,322	$	113		$	27	$	484		$	200	$	2,852

The Bank allocated increased allowance for loan loss provisions to the commercial real estate loan portfolio class for the three and nine months ended September 30, 2020, due primarily to changes in volume and qualitative factors in this portfolio class. The Bank allocated increased allowance for loan loss provisions to the multi-family loan portfolio class for the three and nine months ended September 30, 2020, due primarily to changes in qualitative factors in this portfolio class. The Bank allocated decreased allowance for loan loss provisions to the commercial business loan portfolio class for the three months ended September 30, 2020, due primarily to changes in qualitative factors in this portfolio class. The Bank allocated decreased allowance for loan loss provisions to the construction loan class for the nine months ended September 30, 2020, due primarily to a decrease in balances and qualitative factors 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 nine months ended September 30, 2020, due primarily to changes in qualitative factors in this portfolio class. In general, the primary driver of the increase in qualitative factors was the economic trends factor associated with the COVID-19 pandemic. In this regard, the Bank increased the unallocated component of the allowance for the three and nine months ended September 30, 2020 to cover uncertainties that could affect management’s estimate of probable losses primarily associated with the COVID-19 pandemic.

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, 2020 (in thousands):

	December 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		36		11		84		433		(188	)		1		263		190		830
Ending balance	$	88	$	362	$	229	$	1,287	$	62		$	20	$	763	$	250	$	3,061
Ending balance evaluated for impairment:
Individually	$	-	$	-	$	-	$	-	$	-		$	-	$	-	$	-	$	-
Collectively	$	88	$	362	$	229	$	1,287	$	62		$	20		763	$	250	$	3,061
Loans receivable:
Ending balance	$	7,528	$	38,884	$	24,043	$	131,820	$	4,775		$	3,788	$	154,404			$	365,242
Ending balance evaluated for impairment:
Individually	$	171	$	19	$	-	$	131	$	-		$	-	$	-			$	321
Collectively	$	7,357	$	38,865	$	24,043	$	131,689	$	4,775		$	3,788	$	154,404			$	364,921

The Bank allocated increased allowance for loan loss provisions to the commercial real estate loan portfolio class for the year ended December 31, 2020, due primarily to changes in volume and qualitative factors in this portfolio class. The Bank allocated increased allowance for loan loss provisions to the commercial business loan portfolio class for the year ended December 31, 2020, due primarily to changes in qualitative and quantitative factors in this portfolio class. The Bank allocated increased allowance for loan loss provisions to the multi-family loan portfolio class for the year ended December 31, 2020, 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 year ended December 31, 2020, due primarily to changes in quantitative and qualitative factors in this portfolio class. In general, the primary driver of the increase in qualitative factors was the economic trends factor associated with the COVID-19 pandemic. In this regard, the Bank increased the unallocated component of the allowance for the year ended December 31, 2020 to cover uncertainties that could affect management’s estimate of probable losses primarily associated with the COVID-19 pandemic.

The following table presents non-accrual loans by classes of the loan portfolio as of September 30, 2021 and December 31, 2020 (in thousands):

	September 30, 2021		December 31, 2020
One-to-four family residential owner occupied	$	-	$	171
One-to-four family residential non-owner occupied		9		19
Multi-family residential		-		-
Commercial real estate		-		-
Construction		-		-
Home equity		-		-
Commercial business		-		-
Other consumer		-		-
Total	$	9	$	190

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 $1.7 million and $643,000 at September 30, 2021 and December 31, 2020, respectively. For the delinquent loans in our portfolio, we have considered our ability to collect the past due interest, as well as the principal balance of the loan, in order to determine whether specific loans should be placed on non-accrual status. In cases where our evaluations have determined that the principal and interest balances are collectible, we have continued to accrue interest.

For the three and nine months ended September 30, 2021 and 2020 there was no interest income recognized on non-accrual loans on a cash basis. There was no interest income foregone on non-accrual loans for the three months ended September 30, 2021 and $1,000 for the nine months ended September 30, 2021. Interest income foregone on non-accrual loans was approximately $3,000 and $5,000 for the three and nine months ended September 30, 2020, respectively.

The performance and credit quality of the loan portfolio is also monitored by analyzing the age of the loans receivable as determined by the length of time a recorded payment is past due. The following tables present the classes of the loan portfolio summarized by the past due status as of September 30, 2021 and December 31, 2020 (in thousands):

	September 30, 2021
	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	$	525	$	-	$	525	$	9,653	$	10,178	$	-
One-to-four family residential non-owner occupied		70		9		79		42,041		42,120		-
Multi-family residential		189		1,723		1,912		22,508		24,420		1,723
Commercial real estate		418		-		418		156,266		156,684		-
Construction		1,894		-		1,894		11,641		13,535		-
Home equity		-		-		-		4,214		4,214		-
Commercial business		756		-		756		137,924		138,680		-
Other consumer		-		-		-		13		13		-
Total	$	3,852	$	1,732	$	5,584	$	384,260	$	389,844	$	1,723

	December 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	$	822	$	171	$	993	$	6,535	$	7,528	$	-
One-to-four family residential non-owner occupied		189		66		255		38,629		38,884		66
Multi-family residential		1,947		-		1,947		22,096		24,043		-
Commercial real estate		569		387		956		130,864		131,820		387
Construction		1,783		-		1,783		2,992		4,775		-
Home equity		-		-		-		3,788		3,788		-
Commercial business		574		-		574		153,813		154,387		-
Other consumer		-		-		-		17		17		-
Total	$	5,884	$	624	$	6,508	$	358,734	$	365,242	$	453

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 September 30, 2021 was $283,000, which is net of accumulated amortization of $202,000. Amortization expense for the three months ended September 30, 2021 and 2020 amounted to approximately $12,000, respectively and for the nine months ended September 30, 2021 and 2020 amounted to $36,000 and $37,000, respectively.

On January 4, 2021 Quaint Oak Bank acquired a 51% controlling interest in Oakmont Capital Holdings, LLC, a multi-state equipment finance company. Based on an independent valuation of the assets and liabilities acquired it was determined that $2.6 million in goodwill be recognized as part of the transaction.

Note 8 – Deposits

Deposits consist of the following classifications (in thousands):

	September 30, 2021		December 31, 2020
Non-interest bearing checking accounts	$	73,555	$	54,202
Passbook accounts		14		8
Savings accounts		1,804		1,570
Money market accounts		191,303		99,638
Certificates of deposit		168,831		199,427
Total deposits	$	435,507	$	354,845

Note 9 – Borrowings

Federal Home Loan Bank advances consist of the following at September 30, 2021 and December 31, 2020 (in thousands):

	September 30, 2021					December 31, 2020
	Amount		Weighted Interest Rate			Amount		Weighted Interest Rate
Short-term borrowings	$	21,000		0.29	%	$	10,000		0.41	%

Fixed rate borrowings maturing:
2021		1,000		2.21			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			6,167		2.05
2025		2,855		1.25			2,855		1.25
Total FHLB long-term debt	$	24,193		2.01	%	$	28,193		2.03	%

Quaint Oak Bancorp, Inc.

Notes to Unaudited Consolidated Financial Statements

Note 9 – Borrowings (Continued)

Federal Reserve Bank long-term borrowings decreased $43.2 million, or 89.7%, to $5.0 million at September 30, 2021 from $48.1 million at December 31, 2020 as the Company paid off PPP loans pledged as collateral under the FRB’s Paycheck Protection Program Liquidity Facility (PPPLF). The Company did not utilize the FRB’s PPPLF to fund second round PPP loans. Under the PPPLF the Company pledged certain PPP loans as collateral and borrowed from the Federal Reserve at a rate of 0.35% that is fixed for two years.

Other short-term borrowings of $933,000 represents outstanding balances on two lines of credit that Oakmont Capital Holdings, LLC has with a credit union which are used to fund equipment loans. Borrowing capacity on the two lines of credit total $11.0 million at September 30, 2021.

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. The final quarterly payment on the 2007 loan was made on September 30, 2021.

Shares of the Company’s common stock purchased by the ESOP are held in a suspense account and reported as unallocated common stock held by the ESOP in stockholders’ equity until released for allocation to participants. As the debt is repaid, shares are released from collateral and are allocated to each eligible participant based on the ratio of each such participant’s base compensation to the total base compensation of eligible plan participants. As the unearned shares are committed to be released and allocated among participants, the Company recognizes compensation expense equal to the average market value of the shares, and the shares become outstanding for earnings per share computations. During the three and nine months ended September 30, 2021, the Company recognized $65,000 and $187,000 of ESOP expense, respectively. During the three and nine months ended September 30, 2020, the Company recognized $40,000 and $129,000 of ESOP expense, respectively.

Stock Incentive Plans – Share Awards

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

As of September 30, 2021 a total of 18,845 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 1,200 share awards under the 2013 Stock Incentive Plan. The 2013 and 2018 Stock Incentive Plan share awards have vesting periods of five years.

Quaint Oak Bancorp, Inc.

Notes to Unaudited Consolidated Financial Statements

Note 10 – Stock Compensation Plans (Continued)

Stock Incentive Plans – Share Awards (Continued)

A summary of the status of the share awards under the 2013 and 2018 Stock Incentive Plans as of September 30, 2021 and 2020 and changes during the nine months ended September 30, 2021 and 2020 is as follows:

	September 30, 2021					September 30, 2020
	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		28,266		$	13.30		38,887		$	13.30
Granted		-			-		-			-
Vested		(9,421	)		13.30		(9,421	)		13.30
Forfeited		-			-		(1,200	)		13.30
Unvested at the end of the period		18,845		$	13.30		28,266		$	13.30

Compensation expense on the restricted stock awards is recognized ratably over the five year vesting period in an amount which is equal to the fair value of the common stock at the date of grant. During the three months ended September 30, 2021 and 2020, the Company recognized approximately $31,000 and $32,000 of compensation expense, respectively. A tax benefit of approximately $7,000 was recognized during both the three months ended September 30, 2021 and 2020. During the nine months ended September 30, 2021 and 2020, the Company recognized approximately $93,000 and $97,000 of compensation expense, respectively. A tax benefit of approximately $20,000 was recognized during the nine months ended September 30, 2021 and 2020. As of September 30, 2021, approximately $214,000 in additional compensation expense will be recognized over the remaining service period of approximately 1.6 years.

Stock Option and Stock Incentive Plans – Stock Options

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. As described above under “Stock Incentive Plans – Share Awards”, the 2013 Stock Incentive Plan approved by shareholders in May 2013 covered a total of 195,000 shares, of which 146,250 may be stock options assuming all the restricted shares are awarded. The 2018 Stock Incentive Plan approved by shareholders in May 2018 covered a total of 155,000 shares, of which 116,250 may be 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 September 30, 2021, a total of 233,136 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, 3,200 stock options under the 2013 Stock Incentive Plan and none under the Option Plan. Options will become vested and exercisable over a five year period and are generally exercisable for a period of ten years after the grant date.

Quaint Oak Bancorp, Inc.

Notes to Unaudited Consolidated Financial Statements

Note 10 – Stock Compensation Plans (Continued)

Stock Option and Stock Incentive Plans – Stock Options (Continued)

A summary of option activity under the Company’s Option Plan and 2013 and 2018 Stock Incentive Plans as of September 30, 2021 and 2020 and changes during the nine months ended September 30, 2021 and 2020 is as follows:

	2021							2020
	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 period		240,636		$	10.98		5.2		256,336		$	10.87		6.0
Granted		-			-		-		-			-		-
Exercised		(7,500	)		11.57		-		(12,500	)		8.10		-
Forfeited		-					-		(3,200	)		8.10		-
Outstanding at end of period		233,136		$	10.96		4.5		240,636		$	10.94		5.5
Exercisable at end of period		180,081		$	10.28		5.6		161,054		$	9.84		5.0

During both the three months ended September 30, 2021 and 2020, 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. During both the nine months ended September 30, 2021 and 2020, approximately $33,000 of compensation expense on stock options was recognized. A tax benefit of approximately $2,000, was recognized during each of these periods. As of September 30, 2021, approximately $72,000 in additional compensation expense will be recognized over the remaining service period of approximately 1.6 years.

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

Fair value estimates are based on quoted market prices, if available, quoted market prices of similar assets or liabilities, or the present value of expected future cash flows and other valuation techniques. These valuations are significantly affected by discount rates, cash flow assumptions, and risk assumptions used. Therefore, fair 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.

Quaint Oak Bancorp, Inc.

Notes to Unaudited Consolidated Financial Statements

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

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 2020 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 using matrix pricing (Level 2), which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted market prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted prices.

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

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

Quaint Oak Bancorp, Inc.

Notes to Unaudited Consolidated Financial Statements

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

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

The table below sets forth the financial assets and liabilities that were accounted for on a recurring and nonrecurring basis by level within the fair value hierarchy as of September 30, 2021 (in thousands):

	September 30, 2021
	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:
Government National Mortgage Association mortgage-backed securities	$	4,159	$	-	$	4,159	$	-
Federal National Mortgage Association mortgage- backed securities		153		-		153		-
Total investment securities available for sale	$	4,312	$	-	$	4,312	$	-
Total recurring fair value measurements	$	4,312	$	-	$	4,312	$	-

Nonrecurring fair value measurements
Impaired loans	$	140	$	-	$	-	$	140
Other Real Estate Owned		489		-		-		489
Total nonrecurring fair value measurements	$	629	$	-	$	-	$	629

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, 2020 (in thousands):

	December 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
Government National Mortgage Association mortgage-backed securities	$	4,913	$	-	$	4,913	$	-
Federal National Mortgage Association mortgage- backed securities		189		-		189		-
Corporate notes		5,623		-		5,623		-
Total investment securities available for sale	$	10,725	$	-	$	10,725	$	-
Total recurring fair value measurements	$	10,725	$	-	$	10,725	$	-

Nonrecurring fair value measurements
Impaired loans	$	321	$	-	$	-	$	321
Other Real Estate Owned		286		-		-		286
Total nonrecurring fair value measurements	$	607	$	-	$	-	$	607

Quaint Oak Bancorp, Inc.

Notes to Unaudited Consolidated Financial Statements

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

The following table presents additional quantitative information about assets measured at fair value on a nonrecurring basis and for which the Company has used Level 3 inputs to determine fair value as of September 30, 2021 and December 31, 2020 (in thousands):

	September 30, 2021
	Quantitative Information About Level 3 Fair Value Measurements
	Total Fair Value		Valuation Techniques	Unobservable Input	Range (Weighted Average)
Impaired loans	$	140	Appraisal of collateral (1)	Appraisal adjustments (2)			8%		(8%)

Other real estate owned	$	489	Appraisal of collateral (1)	Appraisal adjustments (2)		0%	-	12%	(12%)


	December 31, 2020
	Quantitative Information About Level 3 Fair Value Measurements
	Total Fair Value		Valuation Techniques	Unobservable Input	Range (Weighted Average)
Impaired loans	$	321	Appraisal of collateral (1)	Appraisal adjustments (2)			8%		(8%)

Other real estate owned	$	286	Appraisal of collateral (1)	Appraisal adjustments (2)		0%	-	12%	(12%)

________________

(1)

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

(2)

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

The estimated fair values of the Company’s financial instruments that are not required to be measured or reported at fair value were as follows at September 30, 2021 and December 31, 2020 (in thousands):

					Fair Value Measurements at
					September 30, 2021
	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	$	7,892	$	8,093	$	-	$	-	$	8,093
Loans held for sale		106,828		109,562		-		109,562		-
Loans receivable, net		381,690		387,549		-		-		387,549

Financial Liabilities
Deposits		435,507		437,660		266,676		-		170,984
FHLB long-term borrowings		24,193		24,247		-		-		24,247
FRB long-term borrowings		4,964		4,962		-		-		4,962
Subordinated debt		7,924		8,393		-		-		8,393

Quaint Oak Bancorp, Inc.

Notes to Unaudited Consolidated Financial Statements

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

					Fair Value Measurements at
					December 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	$	9,463	$	9,842	$	-	$	-	$	9,842
Loans held for sale		53,191		62,396		-		62,396		-
Loans receivable, net		356,122		363,527		-		-		363,527

Financial Liabilities
Deposits		354,845		358,112		155,417		-		202,695
FHLB long-term borrowings		28,193		28,284		-		-		28,284
FRB long-term borrowings		48,134		48,126		-		-		48,126
Subordinated debt		7,899		8,283		-		-		8,283

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, Quaint Oak Insurance Agency, LLC and Oakmont Capital Holdings, 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 presents summary financial information for the reportable segments (in thousands):

	As of or for the Three Months Ended September 30,
	2021							2020
	Quaint Oak Bank(1)		Quaint Oak Mortgage			Consolidated		Quaint Oak Bank(1)			Quaint Oak Mortgage			Consolidated
Net Interest Income (Loss)	$	5,055	$	(41	)	$	5,014	$	2,948		$	(82	)	$	2,866
Provision for Loan Losses		557		-			557		201			-			201
Net Interest Income after Provision for Loan Losses		4,498		(41	)		4,457		2,747			(82	)		2,665

Non-Interest Income
Mortgage banking, equipment lending and title abstract fees		555		49			604		250			150			400
Real estate sales commissions, net		79		-			79		68			-			68
Insurance commissions		133		-			133		130			-			130
Other fees and services charges		38		-			38		144			-			144
Loan servicing income		475		-			475		-			-			-
Income from bank-owned life insurance		21		-			21		20			-			20
Net gain on loans held for sale		960		906			1,866		-			1,209			1,209
Gain on sale of investment securities available for sale		-		-			-		-			-			-
Net gain on sale of other real estate owned		-		-			-		(110	)		-			(110	)
Gain on the sale of SBA loans		369		-			369		19			-			19
Total Non-Interest Income		2,630		955			3,585		521			1,359			1,880

Non-Interest Expense
Salaries and employee benefits		3,549		551			4,100		1,761			384			2,145
Directors’ fees and expenses		58		-			58		61			-			61
Occupancy and equipment		309		70			379		175			76			251
Data processing		158		76			234		119			58			177
Professional fees		90		17			107		95			17			112
FDIC deposit insurance assessment		97		-			97		38			-			38
Other real estate owned expenses		2		-			2		11			-			11
Advertising		96		14			110		61			14			75
Amortization of other intangible		12		-			12		12			-			12
Other		304		22			326		248			11			259
Total Non-Interest Expense		4,675		750			5,425		2,581			560			3,141

Pretax Segment Profit	$	2,453	$	164		$	2,617	$	687		$	717		$	1,404

Segment Assets	$	496,120	$	39,746		$	535,866	$	382,939		$	39,364		$	422,303

(1)	Includes Quaint Oak Bancorp, Inc. and the Bank’s subsidiaries, Quaint Oak Real Estate, Quaint Oak Abstract, Quaint Oak Insurance Agency, QOB Properties, and Oakmont Capital Holdings, LLC.

Quaint Oak Bancorp, Inc.

Notes to Unaudited Consolidated Financial Statements

Note 12 – Operating Segments (Continued)

	As of or for the Nine Months Ended September 30,
	2021							2020
	Quaint Oak Bank(1)		Quaint Oak Mortgage			Consolidated		Quaint Oak Bank(1)			Quaint Oak Mortgage			Consolidated
Net Interest Income (Loss)	$	13,596	$	(217	)	$	13,379	$	7,935		$	(169	)	$	7,766
Provision for Loan Losses		1,259		-			1,259		621			-			621
Net Interest Income after Provision for Loan Losses		12,337		(217	)		12,120		7,314			(169	)		7,145

Non-Interest Income
Mortgage banking, equipment lending and title abstract fees		1,393		264			1,657		602			443			1,045
Real estate sales commissions, net		143		-			143		131			-			131
Insurance commissions		373		-			373		347			-			347
Other fees and services charges		211		-			211		178			-			178
Loan servicing income		1,026		-			1,026		-			-			-
Income from bank-owned life insurance		61		-			61		59			-			59
Net gain on loans held for sale		2,005		2,411			4,416		-			2,816			2,816
Gain on sale of investment securities available for sale		362		-			362		-			-			-
Net gain on sale of other real estate owned		-		-			-		(92	)		-			(92	)
Gain on the sale of SBA loans		636		-			636		71			-			71
Total Non-Interest Income		6,210		2,675			8,885		1,296			3,259			4,555

Non-Interest Expense
Salaries and employee benefits		9,412		1,527			10,939		4,894			1,014			5,908
Directors’ fees and expenses		186		-			186		175			-			175
Occupancy and equipment		919		224			1,143		461			212			673
Data processing		415		226			641		345			129			474
Professional fees		436		52			488		287			52			339
FDIC deposit insurance assessment		221		-			221		85			-			85
Other real estate owned expenses		14		-			14		34			-			34
Advertising		296		41			337		183			41			224
Amortization of other intangible		36		-			36		37			-			37
Other		907		67			974		672			42			714
Total Non-Interest Expense		12,842		2,137			14,979		7,173			1,490			8,663

Pretax Segment Profit	$	5,705	$	321		$	6,026	$	1,437		$	1,600		$	3,037

Segment Assets	$	496,120	$	39,746		$	535,866	$	382,939		$	39,364		$	422,303

(1)	Includes Quaint Oak Bancorp, Inc. and the Bank’s subsidiaries, Quaint Oak Real Estate, Quaint Oak Abstract, Quaint Oak Insurance Agency, QOB Properties, and Oakmont Capital Holdings, LLC.

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 September 30, 2021, the Bank has five wholly-owned subsidiaries, Quaint Oak Mortgage, LLC, Quaint Oak Real Estate, LLC, Quaint Oak Abstract, LLC, QOB Properties, LLC, and Quaint Oak Insurance Agency, LLC, each a Pennsylvania limited liability company. The mortgage company offers mortgage banking in the Lehigh Valley, Delaware Valley and Philadelphia County regions of Pennsylvania. The real estate and abstract companies offer real estate sales and title abstract services, respectively, in the Lehigh Valley region of Pennsylvania. These companies began operation in July 2009. In February 2019, Quaint Oak Mortgage opened a mortgage banking office in Philadelphia, Pennsylvania. QOB Properties, LLC began operations in July 2012 and holds Bank properties acquired through a foreclosure proceeding or acceptance of a deed in lieu of foreclosure. Quaint Oak Insurance Agency, LLC, located in Chalfont, Pennsylvania, began operations in August 2016 and provides a broad range of personal and commercial insurance coverage solutions. In February 2020, Quaint Oak Bank opened a full-service retail banking office in Philadelphia, Pennsylvania. As of January 4, 2021, the Bank holds a majority equity position in Oakmont Capital Holdings, LLC, a multi-state equipment finance company based in West Chester, Pennsylvania with a second significant facility located in Albany, Minnesota. All significant intercompany balances and transactions have been eliminated.

In October 2021, the Company formed Oakmont Commercial, LLC, a wholly-owned subsidiary of Quaint Oak Bank. This subsidiary will be based in Southampton, Pennsylvania and will operate as a multi-state specialty commercial real estate financing company.

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 September 30, 2021. 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. Since March 2020, the Company has continued to work diligently to help support its existing and new customers through the SBA Paycheck Protection Program (“PPP”), loan modifications, loan deferrals and fee waivers. On December 27, 2020, the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (the “Economic Aid Act”) became law. The Economic Aid Act opened a new PPP loan period for first loans and implemented a second loan draw for certain PPP borrowers, each through May 31, 2021. Under the first round the Company funded 854 PPP loans totaling $95.1 million. As of September 30, 2021, 831 of these first round PPP loans totaling $88.9 million were forgiven under the SBA forgiveness program. Under the second round of PPP the Company funded 985 PPP loans totaling $88.4 million as of September 30, 2021. As of September 30, 2021, 304 of the second round PPP loans totaling $18.6 million have been forgiven under the SBA forgiveness program. For the three and nine months ended September 30, 2021, the Company recognized approximately $1.1 million and $3.0 million of deferred loan fees amortization related to PPP loans, respectively.

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 is 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 December 31, 2020, the Bank used the FRB program to fund $52.1 million of PPP loans. Through September 30, 2021, the Bank paid off approximately $43.2 million of PPP loans pledged as collateral under the PPPLF program. Through September 30, 2021 the Bank has not used the PPPLF program to fund any round two 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 January 1, 2022 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 September 30, 2021, the Bank modified 231 loans with principal balances totaling $90.6 million representing approximately 23.5% of our September 30, 2021 loan balances. A majority of deferrals are two-month payment deferrals of principal and interest, with payments after deferral increased to collect amounts deferred. In some cases, certain loans were granted additional deferrals.

Details with respect to total loan payment modifications made through September 30, 2021 are as follows:

	Number of COVID-19 Deferments		Balance (in thousands)		Percent of Total Loans at September 30, 2021
One-to-four family residential owner occupied		5	$	2,070		20.3	%
One-to-four family residential non-owner occupied		50		8,566		20.3
Multi-family residential		12		9,042		37.0
Commercial real estate		97		55,274		35.3
Construction		1		702		5.2
Home equity		4		254		6.0
Commercial business		62		14,685		10.6
Total		231	$	90,593		23.7	%

Of the 231 loans granted loan payment deferrals through September 30, 2021, five loans are still on deferral as of September 30, 2021.

Details with respect to loan payment deferrals still on deferral as of September 30, 2021 are as follows:

	As of September 30, 2021
	Number of COVID-19 Deferments		Balance (in thousands)		Percent of Total Loans at September 30, 2021
One-to-four family residential owner occupied		1	$	415		0.1	%
Commercial real estate		1		1,908		0.5
Commercial business		3		3,887		1.0
Total		5	$	6,210		1.6	%

It is too early to determine if current active modified loans will perform in accordance with their modified terms.

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. Critical 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.

Our critical accounting policies involving significant judgments and assumptions used in the preparation of the consolidated financial statements as of September 30, 2021 have remained unchanged from the disclosures presented in our Annual Report on Form 10-K, except for Goodwill and Intangible Assets which is described in Note 1 of the notes to our financial statements.

Comparison of Financial Condition at September 30, 2021 and December 31, 2020

General. The Company’s total assets at September 30, 2021 were $535.9 million, an increase of $51.8 million, or 10.7%, from $484.1 million at December 31, 2020. This growth in total assets was primarily due to a $53.6 million, or 100.8%, increase in loans held for sale, and a $22.6 million, or 6.3%, increase in loans receivable, net. These increases were partially offset by a $19.6 million, or 57.8%, decrease in cash and cash equivalents and a $6.4 million, or 59.8%, decrease in investment securities available for sale at fair value. The largest increases within the loan portfolio occurred in commercial real estate which increased $24.9 million, or 18.9%, construction loans which increased $8.8 million, or 183.5%, one-to-four family non-owner occupied loans which increased $3.2 million, or 8.3%, and one-to-four family owner occupied loans which increased $2.7 million, or 35.2%. The increases within the loan portfolio were partially offset by commercial business loans which decreased $15.7 million, or 10.2%.

Cash and Cash Equivalents. Cash and cash equivalents decreased $19.6 million, or 57.8%, from $33.9 million at December 31, 2020 to $14.3 million at September 30, 2021, as excess liquidity was used primarily to fund loans.

Investment in Interest-Earning Time Deposits. Investment in interest-earning time deposits decreased $1.6 million, or 16.6%, from $9.5 million at December 31, 2020 to $7.9 million at September 30, 2021 as seven interest-earning time deposits matured and were not renewed during the nine months ended September 30, 2021.

Investment Securities Available for Sale. Investment securities available for sale decreased $6.4 million, or 59.8%, from $10.7 million at December 31, 2020 to $4.3 million at September 30, 2021, as the Company sold four corporate notes totaling $5.5 million and realized $362,000 of gains on the transactions.

Loans Held for Sale. Loans held for sale increased $53.6 million, or 100.8%, from $53.2 million at December 31, 2020 to $106.8 million at September 30, 2021 as the Bank’s mortgage banking subsidiary, Quaint Oak Mortgage, LLC, originated $162.0 million of one-to-four family residential loans during the nine months ended September 30, 2021 and sold $184.4 million of loans in the secondary market during this same period. Additionally, the Bank reclassified $17.4 million of equipment loans from loans receivable, net, to loans held for sale, received $9.8 million of loans held for sale from the formation of Oakmont Capital Holdings LLC, and originated $98.4 million in equipment loans held for sale during the nine months ended September 30, 2021. During the nine months ended September 30, 2021 the Company sold $49.6 million of equipment loans.

Loans Receivable, Net. Loans receivable, net, increased $22.6 million, or 6.3%, to $381.7 million at September 30, 2021 from $359.1 million December 31, 2020. This increase was funded primarily from deposits. Increases within the portfolio occurred in commercial real estate loans which increased $24.9 million, or 18.9%, construction loans which increased $8.8 million, or 183.5%, one-to-four family residential non-owner occupied loans which increased $3.2 million, or 8.3%, one-to-four family residential owner occupied loans which increased $2.7 million, or 35.2%, home equity loans which increased $426,000, or 11.2%, and multi-family residential loans which increased $377,000, or 1.6%. These increases were partially offset by commercial business loans which decreased $15.7 million, or 10.2%, and other consumer loans which decreased $4,000, or 23.5%. 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 $489,000 at September 30, 2021 consisting of one property that is collateral for a non-performing construction loan. During the nine months ended September 30, 2021, the Company made $203,000 of capital improvements to the property. Non-performing assets amounted to $2.2 million, or 0.41% of total assets at September 30, 2021 compared to $929,000, or 0.19% of total assets at December 31, 2020.

Deposits. Total deposits increased $80.7 million, or 22.7%, to $435.5 million at September 30, 2021 from $354.8 million at December 31, 2020. This increase in deposits was primarily attributable to increases of $91.7 million, or 92.0%, in money market accounts, and $19.4 million, or 35.7%, in non-interest bearing checking accounts. The increase in deposits was partially offset by a $30.6 million, or 15.3%, decrease in certificates of deposit. The increase in non-interest bearing checking accounts was primarily due to the checking accounts opened by PPP loan customers.

Borrowings. Total Federal Home Loan Bank (FHLB) borrowings increased $7.0 million, or 18.3%, to $45.2 million at September 30, 2021 from $38.2 million at December 31, 2020. During the nine months ended September 30, 2021, the Company used excess liquidity to pay down $10.0 million of FHLB short-term and $4.0 million of FHLB long-term borrowings. During the second and third quarters of 2021, the Company borrowed $10.0 million and $11.0 million, respectively, of short-term FHLB advances to provide additional liquidity in anticipation of loan funding needs. Federal Reserve Bank (FRB) long-term borrowings decreased $43.2 million, or 89.7%, to $5.0 million at September 30, 2021 from $48.1 million at December 31, 2020 as the Company paid off PPP loans pledged as collateral under the FRB’s Paycheck Protection Program Liquidity Facility (PPPLF). The Company did not utilize the FRB’s PPPLF to fund second round PPP loans. Other short-term borrowings increased to $933,000 at September 30, 2021 from none at December 31, 2020, representing outstanding balances on two lines of credit that Oakmont Capital Holdings, LLC has with a credit union which are used to fund equipment loans.

Stockholders’ Equity. Total stockholders’ equity increased $6.3 million, or 21.9%, to $35.0 million at September 30, 2021 from $28.7 million at December 31, 2020. Contributing to the increase was noncontrolling interest of $2.2 million, net income attributable to Quaint Oak Bancorp, Inc. for the nine months ended September 30, 2021 of $4.3 million, common stock earned by participants in the employee stock ownership plan of $187,000, amortization of stock awards and options under our stock compensation plans of $126,000, the reissuance of treasury stock for exercised stock options of $87,000, and the reissuance of treasury stock under the Bank’s 401(k) Plan of $53,000 and net gain attributable to noncontrolling interest of $12,000. These increases were partially offset by dividends paid of $618,000, other comprehensive loss, net of $84,000, and the purchase of treasury stock of $25,000.

Comparison of Operating Results for the Three Months Ended September 30, 2021 and 2020

General. Net income amounted to $1.8 million for the three months ended September 30, 2021, an increase of $774,000, or 76.8%, compared to net income of $1.0 million for the three months ended September 30, 2020. The increase in net income on a comparative quarterly basis was primarily the result of an increase in net interest income of $2.1 million and an increase in non-interest income of $1.7 million, partially offset by an increase in non-interest expense of $2.3 million, an increase in the provision for income taxes of $306,000, and an increase in the provision for loan losses of $356,000.

Net Interest Income. Net interest income increased $2.1 million, or 74.9%, to $5.0 million for the three months ended September 30, 2021 from $2.9 million for the three months ended September 30, 2020. The increase was driven by a $1.8 million, or 42.5%, increase in interest income and a $354,000, or 26.1%, decrease in interest expense.

Interest Income. The $2.1 million or 74.9% increase in net interest income for the three months ended September 30, 2021 over the comparable period in 2020 was driven by a $1.8 million, or 42.5%, increase in interest income. The increase in interest income was primarily due to a $128.0 million increase in average loans receivable, net, including loans held for sale, which increased from an average balance of $360.5 million for the three months ended September 30, 2020 to an average balance of $488.5 million for the three months ended September 30, 2021, and had the effect of increasing interest income $1.4 million. Also contributing to the increase in interest income was a 36 basis point increase in the yield on average loans receivable, net, including loans held for sale, which increased from 4.51% for the three months ended September 30, 2020 to 4.87% for the three months ended September 30, 2021, and had the effect of increasing interest income $442,000. The increase in yield was primarily due to the increase in amortization of deferred loan fees related to forgiven PPP loans.

Interest Expense. The $354,000, or 26.1%, decrease in interest expense was primarily attributable to an 82 basis point decrease in rate on average certificate of deposit accounts, which decreased from 1.86% for the three months ended September 30, 2020 to 1.04% for the three months ended September 30, 2021, and had the effect of decreasing interest expense by $344,000. Interest expense on deposits continues to be actively managed to lower our cost of funds. This decrease was also partially attributable to a $29.8 million decrease in average certificate of deposit accounts which decreased from an average balance of $198.0 million for the three months ended September 30, 2020 to an average balance of $168.2 million for the three months ended September 30, 2021, and had the effect of decreasing interest expense $138,000. This decrease in interest expense was partially offset by a $139.8 million increase in average money market accounts which increased from an average balance of $52.7 million for the three months ended September 30, 2020 to an average balance of $192.5 million for the three months ended September 30, 2021, and had the effect of increasing interest expense by $294,000. This increase in money market interest expense was partially offset by a 29 basis point decrease in the rate on average money market accounts, which decreased from 0.84% for the three months ended September 30, 2020 to 0.55% for the three months ended September 30, 2021, and had the effect of decreasing interest expense by $142,000. The average interest rate spread increased from 2.58% for the three months ended September 30, 2020 to 3.62% for the three months ended September 30, 2021 while the net interest margin increased from 2.84% for the three months ended September 30, 2020 to 3.82% for the three months ended September 30, 2021.

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

	Three Months Ended September 30,
	2021							2020
	Average Balance		Interest		Average Yield/ Rate			Average Balance		Interest		Average Yield/ Rate
	(Dollars in thousands)
Interest-earning assets:
Due from banks, interest-bearing	$	23,162	$	5		0.09	%	$	21,931	$	4		0.07	%
Investment in interest-earning time deposits		7,917		46		2.32			9,599		61		2.54
Investment securities available for sale		4,487		7		0.62			10,826		78		2.88
Loans receivable, net (1) (2)		488,518		5,944		4.87			360,473		4,060		4.51
Investment in FHLB stock		1,648		15		3.64			1,322		20		6.05
Total interest-earning assets		525,732		6,017		4.58	%		404,151		4,223		4.18	%
Non-interest-earning assets		15,013							14,089
Total assets	$	540,745						$	418,240
Interest-bearing liabilities:
Passbook accounts	$	14	$	-		*	%	$	7	$	-		*	%
Savings accounts		1,766		1		0.23			2,035		1		0.20
Money market accounts		192,515		263		0.55			52,697		111		0.84
Certificate of deposit accounts		168,204		438		1.04			197,985		920		1.86
Total deposits		362,499		702		0.77			252,724		1,032		1.63
FHLB short-term borrowings		13,163		8		0.24			87		-		*
FHLB long-term borrowings		24,193		124		2.05			29,193		152		2.07
FRB long-term borrowings		8,976		8		0.36			48,881		43		0.35
Subordinated debt		7,919		130		6.57			7,885		130		6.59
Other short-term borrowings		1,071		31		11.58			-		-		-
Total interest-bearing liabilities		417,821		1,003		0.96	%		338,770		1,357		1.60	%
Non-interest-bearing liabilities		94,725							52,536
Total liabilities		512,546							391,306
Stockholders’ Equity		28,199							26,934
Total liabilities and Stockholders’ Equity	$	540,745						$	418,240
Net interest-earning assets	$	107,911						$	65,381
Net interest income; average interest rate spread			$	5,014		3.62	%			$	2,866		2.58	%
Net interest margin (3)						3.81	%						2.84	%
Average interest-earning assets to average interest-bearing liabilities						125.83	%						119.30	%

________________________

*	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 $356,000, or 177.1%, to $557,000 for the three months ended September 30, 2021 from $201,000 for the three months ended September 30, 2020. The increase in the provision for loan losses for the three months ended September 30, 2021 over the three months ended September 30, 2020 was based on an evaluation of the allowance relative to such factors as volume of the loan portfolio, concentrations of credit risk, prevailing economic conditions, which includes the impact of the COVID-19 pandemic, prior loan loss experience and amount of non-performing loans at September 30, 2021.

Non-performing loans amounted to $1.7 million, or 0.45%, of net loans receivable at September 30, 2021, one loan of which was on non-accrual status and one loan was 90 days or more past due and accruing interest. Comparably, non-performing loans amounted to $643,000 or 0.18% of net loans receivable at December 31, 2020, consisting of five loans, two loans of which were on non-accrual status and three loans were 90 days or more past due and accruing interest. The non-performing loans at September 30, 2021 include one one-to-four family residential non-owner occupied and one multi-family residential loan, and both are generally well-collateralized or adequately reserved for. The allowance for loan losses as a percent of total loans receivable, net was 1.13% at September 30, 2021 and 0.85% at December 31, 2020. Excluding PPP loans, which are 100% guaranteed by the SBA, the allowance for loan losses to total loans was 1.41% at September 30, 2021.

Non-Interest Income. Non-interest income increased $1.7 million, or 90.7%, from $1.9 million for the three months ended September 30, 2020 to $3.6 million for the three months ended September 30, 2021. The increase was primarily attributable to a $657,000, or 54.3%, increase in net gain on loans held for sale, $475,000 in loan servicing income compared to none in the same prior year period, a $350,000 increase in gain on sales from SBA loans, a $204,000, or 51.0%, increase in mortgage banking, equipment lending, and title abstract fees, a $110,000 increase in net gains on sale and write-downs of other real estate owned, an $11,000, or 16.2%, increase in real estate sales commissions, net and a $3,000, or 2.3%, increase in insurance commissions. The increases in net gain on loans held for sale, loan servicing income, and mortgage banking, equipment lending, and title abstract fees were primarily attributable to Oakmont’s results for the three months ended September 30, 2021. These increases were partially offset by a $106,000, or 73.6%, decrease in other fees and service charges.

Non-Interest Expense. Total non-interest expense increased $2.3 million, or 72.7%, from $3.1 million for the three months ended September 30, 2020 to $5.4 million for the three months ended September 30, 2021, primarily due to a $2.0 million, or 91.1%, increase in salaries and employee benefits expense, a $128,000, or 51.0%, increase in occupancy and equipment expense, a $67,000, or 25.9%, increase in other expense, a $59,000, or 155.3%, increase in FDIC deposit insurance assessment, a $57,000, or 32.2%, increase in data processing expense, and a $35,000, or 46.7%, increase in advertising expense. The increase in salaries and employee benefits is primarily due to generally expanding and improving the level of staff at the Bank and its subsidiary companies, including Oakmont. Oakmont’s results for the three months ended September 30, 2021 also contributed to the increases in occupancy and equipment expense, professional fees, and advertising expense. The increase in non-interest expense was partially offset by a $9,000, or 81.8%, decrease in other real estate owned expense, a $5,000, or 4.5%, decrease in professional fees and a $3,000, or 4.9%, decrease in Directors’ fees and expenses.

Provision for Income Tax. The provision for income tax increased $306,000, or 77.3%, from $396,000 for the three months ended September 30, 2020 to $702,000 for the three months ended September 30, 2021 due primarily to the increase in pre-tax income.

Comparison of Operating Results for the Nine Months Ended September 30, 2021 and 2020

General. Net income amounted to $4.3 million for the nine months ended September 30, 2021, an increase of $2.2 million, or 99.0%, compared to net income of $2.2 million for the nine months ended September 30, 2020. The increase in net income on a comparative nine-month basis was primarily the result of an increase in net interest income of $5.6 million and an increase in non-interest income of $4.3 million, partially offset by an increase in non-interest expense of $6.3 million, an increase in the provision for income taxes of $827,000, and an increase in the provision for loan losses of $638,000.

Net Interest Income. Net interest income increased $5.6 million, or 72.3%, to $13.4 million for the nine months ended September 30, 2021 from $7.8 million for the nine months ended September 30, 2020. The increase was driven by a $4.8 million, or 40.4%, increase in interest income and a $791,000, or 19.0%, decrease in interest expense.

Interest Income. The $5.6 million or 72.3% increase in net interest income for the nine months ended September 30, 2021 over the comparable period in 2020 was driven by a $4.8 million, or 40.4%, increase in interest income. The increase in interest income was primarily due to a $167.8 million increase in average loans receivable, net, including loans held for sale, which increased from an average balance of $311.1 million for the nine months ended September 30, 2020 to an average balance of $478.9 million for the nine months ended September 30, 2021, and had the effect of increasing interest income $6.2 million. This increase in interest income was partially offset by a 33 basis point decrease in the yield on average loans receivable, net, including loans held for sale, which decreased from 4.90% for the nine months ended September 30, 2020 to 4.57% for the nine months ended September 30, 2021, and had the effect of decreasing interest income $1.2 million. The decline in loan yield is primarily the result of lower yielding PPP loans funded from the second quarter of 2020 through the second quarter of 2021 and the impact of the Federal Reserve’s 150 basis point rate cuts in March 2020, partially offset by the increase in the amortization of deferred loan fees related to forgiven PPP loans.

Interest Expense. The $791,000, or 19.0%, decrease in interest expense was primarily attributable to a 90 basis point decrease in rate on average certificate of deposit accounts, which decreased from 2.07% for the nine months ended September 30, 2020 to 1.17% for the nine months ended September 30, 2021, and had the effect of decreasing interest expense by $1.2 million. Interest expense on deposits continues to be actively managed to lower our cost of funds. Also contributing to this decrease was a $13.1 million decrease in average certificate of deposit accounts which decreased from an average balance of $192.7 million for the nine months ended September 30, 2020 to an average balance of $179.6 million for the nine months ended September 30, 2021, and had the effect of decreasing interest expense $204,000. This decrease in interest expense was partially offset by a $129.1 million increase in average money market accounts which increased from an average balance of $37.7 million for the nine months ended September 30, 2020 to an average balance of $166.8 million for the nine months ended September 30, 2021, and had the effect of increasing interest expense by $793,000. This increase in money market interest expense was partially offset by a 19 basis point decrease in the rate on average money market accounts, which decreased from 0.82% for the nine months ended September 30, 2020 to 0.63% for the nine months ended September 30, 2021, and had the effect of decreasing interest expense by $234,000. The decrease in interest expense was also partially offset by an increase in average other borrowings of $4.0 million which had the effect of increasing interest expense by $127,000. The average interest rate spread increased from 2.68% for the nine months ended September 30, 2020 to 3.20% for the nine months ended September 30, 2021, while the net interest margin increased from 2.97% for the nine months ended September 30, 2020 to 3.41% for the nine months ended September 30, 2021.

	Nine Months Ended September 30,
	2021							2020
	Average Balance		Interest		Average Yield/ Rate			Average Balance		Interest		Average Yield/ Rate
	(Dollars in thousands)
Interest-earning assets:
Due from banks, interest-bearing	$	27,624	$	23		0.11	%	$	17,804	$	70		0.52	%
Investment in interest-earning time deposits		8,154		155		2.53			9,859		185		2.50
Investment securities available for sale		6,553		92		1.87			8,877		180		2.70
Loans receivable, net (1) (2)		478,864		16,422		4.57			311,097		11,423		4.90
Investment in FHLB stock		1,483		57		5.12			1,361		69		6.76
Total interest-earning assets		522,678		16,749		4.27	%		348,998		11,927		4.56	%
Non-interest-earning assets		15,232							14,212
Total assets	$	537,910						$	363,210
Interest-bearing liabilities:
Passbook accounts	$	11	$	-		*	%	$	6	$	-		*	%
Savings accounts		1,605		2		0.17			1,920		3		0.21
Money market accounts		166,791		791		0.63			37,713		232		0.82
Certificate of deposit accounts		179,589		1,577		1.17			192,735		2,987		2.07
Total deposits		347,996		2,370		0.91			232,374		3,222		1.85
FHLB short-term borrowings		5,462		14		0.34			1,343		31		3.08
FHLB long-term borrowings		26,255		392		1.99			28,918		452		2.08
FRB long-term borrowings		29,733		77		0.35			24,454		66		0.36
Subordinated debt		7,910		390		6.57			7,876		390		6.60
Other short-term borrowings		4,022		127		4.21			-		-		-
Total interest-bearing liabilities		421,378		3,370		1.07	%		294,965		4,161		1.88	%
Non-interest-bearing liabilities		89,534							41,808
Total liabilities		510,912							336,773
Stockholders’ Equity		26,998							26,437
Total liabilities and Stockholders’ Equity	$	537,910						$	363,210
Net interest-earning assets	$	101,300						$	54,033
Net interest income; average interest rate spread			$	13,379		3.20	%			$	7,766		2.68	%
Net interest margin (3)						3.41	%						2.97	%
Average interest-earning assets to average interest-bearing liabilities						124.04	%						118.32	%

________________________

*	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 $638,000, or 102.7%, to $1.3 million for the nine months ended September 30, 2021 from $621,000 for the nine months ended September 30, 2020. The increase in the provision for loan losses for the nine months ended September 30, 2021 over the nine months ended September 30, 2020 was based on an evaluation of the allowance relative to such factors as volume of the loan portfolio, concentrations of credit risk, prevailing economic conditions, which includes the impact of the COVID-19 pandemic, prior loan loss experience and amount of non-performing loans at September 30, 2021.

Non-Interest Income. Non-interest income increased $4.3 million, or 95.1%, from $4.6 million for the nine months ended September 30, 2020 to $8.9 million for the nine months ended September 30, 2021. The increase was primarily attributable to a $1.6 million, or 56.8%, increase in net gain on loans held for sale, $1.0 million in loan servicing income, compared to none in the same prior year period, a $612,000, or 58.6%, increase in mortgage banking, equipment lending, and title abstract fees, a $565,000, or 795.8%, increase in gain on sales from SBA loans, a $362,000 gain on sale of investment securities available for sale compared to none in the same prior year period, a $92,000 increase in net gains on sale and write-downs of other real estate owned, a $33,000, or 18.5%, increase in other fees and service charges, a $26,000, or 7.5%, increase in insurance commissions, and a $12,000, or 9.2%, increase in real estate sales commissions, net. The increases in net gain on loans held for sale, loan servicing income, and mortgage banking, equipment lending, and title abstract fees were primarily attributable to Oakmont’s results for the nine months ended September 30, 2021. The increase in other fees and service charges was primarily due to the increase in loan prepayment fees.

Non-Interest Expense. Total non-interest expense increased $6.3 million, or 72.9%, from $8.7 million for the nine months ended September 30, 2020 to $15.0 million for the nine months ended September 30, 2021, primarily due to a $5.0 million, or 85.2%, increase in salaries and employee benefits expense, a $470,000, or 69.8%, increase in occupancy and equipment expense, a $260,000, or 36.4%, increase in other expense, a $167,000, or 35.2%, increase in data processing expense, a $149,000, or 44.0%, increase in professional fees, a $136,000, or 160.0%, increase in FDIC deposit insurance assessment, a $113,000, or 50.4%, increase in advertising expense, and an $11,000, or 6.3%, increase in Directors’ fees and expenses. The increase in salaries and employee benefits is primarily due to generally expanding and improving the level of staff at the Bank and its subsidiary companies, including Oakmont. Oakmont’s results for the nine months ended September 30, 2021 also contributed to the increases in occupancy and equipment expense, professional fees, and advertising expense. The increase in non-interest expense was partially offset by a $20,000, or 58.8%, decrease in other real estate owned expense.

Provision for Income Tax. The provision for income tax increased $827,000, or 95.5%, from $866,000 for the nine months ended September 30, 2020 to $1.7 million for the nine months ended September 30, 2021 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 September 30, 2021 of $2.5 million, a $1.8 million, or 257.1%, increase from the same period in 2020. This increase in PTSP was primarily due to a $2.1 million, or 71.5%, increase in net interest income and a $2.1 million, or 404.8%, increase in non-interest income. These increases were partially offset by a $2.1 million, or 81.1%, increase in non-interest expense and a $356,000, or 177.1% increase in the provision for loan losses. The increase in non-interest income was primarily due to a $960,000 gain on the sale of equipment loans, $475,000 in loan servicing income, and a $305,000, or 122.0%, increase in equipment lending and title abstract fees. The increase in non-interest expense was primarily due to a $1.8 million, or 101.5%, increase in salaries and employee benefits expense, a $134,000, or 76.6%, increase in occupancy and equipment expense, and a $56,000, or 22.6% increase in other expenses.

Our Mortgage Banking Segment reported a pre-tax segment profit (“PTSP”) for the three months ended September 30, 2021 of $164,000, a $553,000, or 77.1%, decrease from the same period in 2020. The decrease in PTSP was primarily due to a $190,000, or 33.9%, increase in non-interest expense, and a $404,000, or 29.7%, decrease in non-interest income. The decrease in non-interest income was primarily due to a $303,000, or 25.1% decrease net gain on loans held for sale. The increase in non-interest expense was primarily due to a $167,000, 43.5%, increase in salaries and employee benefits, and an $18,000, or 31.0%, increase in data processing. The decrease in PTSP was partially offset by a $41,000, or 50.0%, increase in net-interest income.

Our Banking Segment reported a pre-tax segment profit (“PTSP”) for the nine months ended September 30, 2021 of $5.7 million, a $4.3 million, or 297.0%, increase from the same period in 2020. This increase in PTSP was primarily due to a $5.7 million, or 71.3%, increase in net interest income and a $4.9 million, or 379.2%, increase in non-interest income. These increases were partially offset by a $5.7 million, or 79.0%, increase in non-interest expense and a $638,000, or 102.7% increase in the provision for loan losses. The increase in non-interest income was primarily due to a $2.0 million gain on the sale of equipment loans, $1.0 million increase in loan servicing income, and a $791,000, or 131.4%, increase in equipment lending and title abstract fees. The increase in non-interest expense was primarily due to a $4.5 million, or 92.3%, increase in salaries and employee benefits expense, a $458,000, or 99.3% increase in occupancy and equipment expense, and a $235,000, or 35.0% increase in other expenses.

Our Mortgage Banking Segment reported a pre-tax segment profit (“PTSP”) for the nine months ended September 30, 2021 of $321,000, a $1.3 million, or 79.9%, decrease from the same period in 2020. The decrease in PTSP was primarily due to a $647,000, or 43.4%, increase in non-interest expense, a $584,000, or 17.9% decrease in non-interest income, and a $48,000, or 28.4%, decrease in net-interest income. The decrease in non-interest income was primarily due to a $405,000, or 14.4% decrease net gain on loans held for sale. The increase in non-interest expense was primarily due to a $513,000, 50.6%, increase in salaries and employee benefits, and a $97,000, or 75.2%, increase in data processing.

Liquidity and Capital Resources

The Company’s primary sources of funds are deposits, amortization and prepayment of loans and to a lesser extent, loan sales and other funds provided from operations. While scheduled principal and interest payments on loans are a relatively predictable source of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions and competition. The Company sets the interest rates on its deposits to maintain a desired level of total deposits. In addition, the Company invests excess funds in short-term interest-earning assets that provide additional liquidity. At September 30, 2021, the Company's cash and cash equivalents amounted to $14.3 million. At such date, the Company also had $4.8 million invested in interest-earning time deposits maturing in one year or less.

The Company uses its liquidity to fund existing and future loan commitments, to fund deposit outflows, to invest in other interest-earning assets and to meet operating expenses. At September 30, 2021, Quaint Oak Bank had outstanding commitments to originate loans of $40.2 million, commitments under unused lines of credit of $36.9 million, and $5.4 million under standby letters of credit.

At September 30, 2021, certificates of deposit scheduled to mature in one year or less totaled $55.2 million. Based on prior experience, management believes that a significant portion of such deposits will remain with us, although there can be no assurance that this will be the case.

In addition to cash flow from loan payments and prepayments and deposits, the Company has significant borrowing capacity available to fund liquidity needs. If the Company requires funds beyond its ability to generate them internally, borrowing agreements exist with the Federal Home Loan Bank of Pittsburgh (FHLB), which provide an additional source of funds. As of September 30, 2021, we had $45.2 million of borrowings from the FHLB and had $213.4 million in borrowing capacity. Under terms of the collateral agreement with the FHLB of Pittsburgh, we pledge residential mortgage loans as well as Quaint Oak Bank’s FHLB stock as collateral for such advances. In addition, as of September 30, 2021 Quaint Oak Bank had $925,000 in borrowing capacity with the Federal Reserve Bank of Philadelphia. There were no borrowings under this facility at September 30, 2021. The Bank also has borrowing capacity with the FRB under the PPPLF program in the amount of outstanding pledged PPP loans. Oakmont Capital Holdings, LLC has two lines of credit with a credit union which are used to fund equipment loans totaling $11.0 million at September 30, 2021. As of September 30, 2021, there were $933,000 of outstanding balances on these two lines of credit.

Total stockholders’ equity increased $6.3 million, or 21.9%, to $35.0 million at September 30, 2021 from $28.7 million at December 31, 2020. Contributing to the increase was noncontrolling interest of $2.2 million, net income attributable to Quaint Oak Bancorp, Inc. for the nine months ended September 30, 2021 of $4.3 million, common stock earned by participants in the employee stock ownership plan of $187,000, amortization of stock awards and options under our stock compensation plans of $126,000, the reissuance of treasury stock for exercised stock options of $87,000, and the reissuance of treasury stock under the Bank’s 401(k) Plan of $53,000 and net gain attributable to noncontrolling interest of $12,000. These increases were partially offset by dividends paid of $618,000, other comprehensive loss, net of $84,000, and the purchase of treasury stock of $25,000.For further discussion of the stock compensation plans, see Note 10 in the Notes to Unaudited Consolidated Financial Statements contained elsewhere herein.

Quaint Oak Bank is required to maintain regulatory capital sufficient to meet tier 1 leverage, common equity tier 1 capital, tier 1 risk-based and total risk-based capital ratios of at least 4.00%, 4.50%, 6.00%, and 8.00%, respectively. At September 30, 2021, Quaint Oak Bank exceeded each of its capital requirements with ratios of 7.32%, 10.51%, 10.51% and 11.71%, 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 September 30, 2021, we had unfunded commitments under lines of credit of $36.9 million, $40.2 million of commitments to originate loans, and $5.4 million under standby letters of credit. We had no commitments to advance additional amounts pursuant to outstanding lines of credit or undisbursed construction loans.

Impact of Inflation and Changing Prices

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not Applicable.

ITEM 4. CONTROLS AND PROCEDURES

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)) as of September 30, 2021. 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 second 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 Paycheck 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.

(c)

Purchases of Equity Securities

The Company’s repurchases of its common stock made during the quarter ended September 30, 2021 including stock-for-stock option exercises of outstanding stock options, are set forth in the table below:

Period	Total Number of Shares Purchased		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs (1)
July 1, 2021 – July 31, 2021		-	$	-		-		24,375
August 1, 2021 – August 31, 2021		-		-		-		24,375
September 1, 2021 – September 30, 2021		-		-		-		24,375
Total		-	$	-		-		24,375

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		Inline XBRL Instance Document.
101.SCH		Inline XBRL Taxonomy Extension Schema Document.
101.CAL		Inline XBRL Taxonomy Extension Calculation Linkbase Document.
101 DEF		Inline XBRL Taxonomy Extension Definitions Linkbase Document.
101.LAB		Inline XBRL Taxonomy Extension Label Linkbase Document.
101.PRE		Inline XBRL Taxonomy Extension Presentation Linkbase Document.
104		Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101).

SIGNATURES

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

Date: November 12, 2021	By:	/s/ Robert T. Strong
		Robert T. Strong President and Chief Executive Officer

Date: November 12, 2021	By:	/s/ John J. Augustine
		John J. Augustine Executive Vice President and Chief Financial Officer