QUAINT OAK BANCORP INC - FORM 10-K - EX-13.0 - ANNUAL REPORT TO SHAREHOLDERS

Attached files

file	filename
EX-32.0 - SECTION 1350 CERTIFICATION - QUAINT OAK BANCORP INC	exh320.htm
EX-31.2 - CERTIFICATION OF CHIEF FINANCIAL OFFICER - QUAINT OAK BANCORP INC	exh312.htm
EX-31.1 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER - QUAINT OAK BANCORP INC	exh311.htm
EX-23.1 - CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM - QUAINT OAK BANCORP INC	exh231.htm
EX-21.0 - SUBSIDIARIES OF REGISTRANT - QUAINT OAK BANCORP INC	exh210.htm
10-K - FORM 10-K - QUAINT OAK BANCORP INC	form10k.htm

EXHIBIT 13.0

Quaint Oak Bancorp, Inc.

PRESIDENT'S LETTER TO SHAREHOLDERS

To our Valued Shareholders:

On behalf of the Board of Directors, Senior Management and Employees of the Quaint Oak Family of Companies, I am pleased to present our 2017 Annual Report to Shareholders.

We closed out 2017 with several noteworthy achievements by Quaint Oak Bank and our Family of Companies. Despite unusually low loan production levels in the first quarter of 2017, we were subsequently able to regain more normal production levels ending the year with an approximate 15% growth in outstanding loan balances year over year. We began 2018 with the highest pipeline of loan requests in the Bank's history. Increased loan production supported our overall asset growth of approximately 11% for the year ended December 31, 2017. We continued our deposit products initiatives and increased non-interest bearing checking accounts by 36% at December 31, 2017 compared to year-end 2016.

Although our earnings were negatively impacted in the fourth quarter of 2017 with the implementation of the Tax Cuts and Jobs Act in the amount of an additional $297,000 of tax expense, or $0.15 per diluted share, we anticipate benefitting in the coming year with the reduction of our marginal tax rate from 35% to 21%.

For 2017, our mortgage banking subsidiary was again named one of the Fastest Growing Companies in the Greater Lehigh Valley for the second consecutive year by Lehigh Valley Business. The mortgage company originated over 35% more loans for sale during 2017 than the previous year.

In addition to these financial highlights, during 2017 our real estate subsidiary expanded with the acquisition of another independent real estate office in the Lehigh Valley. New management at the real estate company is now positioned to drive the success of the more than thirty-member team forward into 2018. All of the staff members of our title abstract company achieved the status of Pennsylvania licensed title agents, an industry standard in professionalism of which we are especially proud. Furthermore, our insurance agency subsidiary moved to new quarters in the New Britain Square Shopping Center providing it with a more visible and professional-looking location. In addition to the personal insurance lines of auto, home and term life coverages, we expanded our commercial lines to complement those consumer lines of coverage offered.

We continue to invest in our future through operational upgrades and other improvements to our services. We are pleased to have completed the scheduled core upgrades and operational customer enhancement projects that we had planned for the 2017 year. We entered the new year with established building blocks to better position us now to begin an aggressive 2018 business plan. As in the past, we hope to continue the expansion of our companies through both acquisition opportunities that may present themselves and also improving the incremental growth that we have been experiencing in recent periods.

I am pleased that our stockholders have benefited from our strategy having received a dividend increase over the previous year supported by the increase in stockholder equity of approximately $1.4 million in 2017. As always, in conjunction with having maintained a strong repurchase plan that has repurchased over 36% of our original shares issued in our initial public offering, our continued business strategy includes long term profitability and payment of dividends reflecting our strong commitment to shareholder value.

Robert T. Strong

President and Chief Executive Officer

Quaint Oak Family of Companies

Quaint Oak Bancorp, Inc.

Quaint Oak Bank

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

Serving the Delaware Valley and the Lehigh Valley Markets

Quaint Oak Bancorp, Inc.

TABLE OF CONTENTS

	Page
Selected Consolidated Financial and Other Data	1
Management's Discussion and Analysis of Financial Condition and Results of Operations	2
Reports of Independent Registered Public Accounting Firm	15
Consolidated Balance Sheets	16
Consolidated Statements of Income	17
Consolidated Statements of Comprehensive Income	18
Consolidated Statements of Stockholders' Equity	19
Consolidated Statements of Cash Flows	20
Notes to Consolidated Financial Statements	21
Directors and Executive Officers	58
Banking Locations	58
Transfer Agent/Registrar	58
Investor Relations Contact	58

Quaint Oak Bancorp, Inc.

SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA

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

	At or For the Years Ended December 31,
	2017			2016
	(Dollars in Thousands)
Selected Financial and Other Data:
Total assets	$	239,596		$	216,163
Cash and cash equivalents		7,910			9,300
Investment in interest-earning time deposits		4,879			6,098
Investment securities available for sale at fair value (cost-2017 $7,931; 2016 $9,612)		7,912			9,555
Loans held for sale		7,006			4,712
Loans receivable, net		201,667			176,807
Federal Home Loan Bank stock, at cost		1,234			713
Premises and equipment, net		1,988			1,730
Deposits		186,221			177,007
Federal Home Loan Bank borrowings		28,000			15,500
Stockholders' Equity		22,185			20,790


Selected Operating Data:
Total interest income	$	10,588		$	9,183
Total interest expense		3,002			2,565
Net interest income		7,586			6,618
Provision for loan losses		284			292
Net interest income after provision for loan losses		7,302			6,326
Total non-interest income		3,442			2,603
Total non-interest expense		8,072			6,695
Income before income taxes		2,672			2,234
Income taxes		1,205			736
Net income	$	1,467		$	1,498

Selected Operating Ratios(1):
Average yield on interest-earning assets		4.88	%		4.82	%
Average rate on interest-bearing liabilities		1.54			1.47
Average interest rate spread(2)		3.34			3.35
Net interest margin(2)		3.50			3.48
Average interest-earning assets to average interest-bearing liabilities		111.44			109.30
Net interest income after provision for loan losses to non-interest expense		90.46			94.49
Total non-interest expense to average assets		3.58			3.36
Efficiency ratio(3)		73.20			72.60
Return on average assets		0.65			0.75
Return on average equity		6.77			7.56
Average equity to average assets		9.60			9.94

Asset Quality Ratios(4):
Non-performing loans as a percent of loans receivable, net(5)		1.52	%		1.06	%
Non-performing assets as a percent of total assets(5)		1.28			1.07
Non-performing assets and troubled debt restructurings as a percent of total assets		1.58			1.41
Allowance for loan losses as a percent of non-performing loans		59.02			85.74
Allowance for loan losses as a percent of total loans receivable		0.89			0.90
Net charge-offs to average loans receivable		0.04			0.00

Capital Ratios(4):
Tier 1 leverage ratio		8.54	%		8.94	%
Common Tier 1 capital ratio		11.26			12.14
Tier 1 risk-based capital ratio		11.26			12.14
Total risk-based capital ratio		12.31			13.20

___________________

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

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

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

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

(5)	Non-performing assets consist of non-performing loans and other real estate owned at December 31, 2017 and 2016. Non-performing loans consist of non-accruing loans plus accruing loans 90 days or more past due.

Quaint Oak Bancorp, Inc.

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

General

Quaint Oak Bancorp, Inc. (the "Company") was formed in connection with Quaint Oak Bank's (the "Bank") conversion to a stock savings bank completed on July 3, 2007. The Company's results of operations are dependent primarily on the results of Quaint Oak Bank, a wholly owned subsidiary of the Company, along with the Bank's wholly owned subsidiaries. At December 31, 2017, the Bank has five wholly-owned subsidiaries, Quaint Oak Mortgage, LLC, Quaint Oak Real Estate, LLC, Quaint Oak Abstract, LLC, QOB Properties, LLC, and Quaint Oak Insurance Agency, LLC, each a Pennsylvania limited liability company. The mortgage, real estate and abstract companies offer mortgage banking, real estate sales and title abstract services, respectively, in the Lehigh Valley region of Pennsylvania, and began operation in July 2009. 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.

Quaint Oak Bank's profitability depends, to a large extent, on net interest income, which is the difference between the income earned on its loan and investment portfolios and the cost of funds, consisting of the interest paid on deposits and borrowings. Results of operations are also affected by provisions for loan losses, fee income and other non-interest income and non-interest expense. Non-interest expense principally consists of compensation, directors' fees and expenses, office occupancy and equipment expense, data processing expense, professional fees, advertising expense, FDIC deposit insurance assessment, and other expenses.

Quaint Oak Bank's business consists primarily of originating residential, multi-family and commercial real estate loans secured by property and to a lesser extent commercial business loans, in its market area. At December 31, 2017, commercial real estate loans comprise the largest percentage of Quaint Oak Bank's loan portfolio, before net items, at 45.1%. Quaint Oak Bank's loans are primarily funded by certificates of deposit, which typically have a higher interest rate than passbook, savings and money market accounts. At December 31, 2017, certificates of deposit amounted to 60.5% of total assets compared to 63.4% of total assets at December 31, 2016. In conjunction with the expansion of our commercial lending activities, we began offering a business checking account, along with a consumer checking account product in December 2014. At December 31, 2017, non-interest bearing checking accounts amounted to 4.3% of total deposits compared to 3.3% of total deposits at December 31, 2016. Management anticipates that certificates of deposit will continue to be a primary source of funding for Quaint Oak Bank's assets.

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

Forward-Looking Statements Are Subject to Change

We make certain statements in this document as to what we expenct may happen in the future. These statements usually contain the words "believe," "estimate," "project," "expect," "anticipate," "intend" or similar expressions. Because these statements look to the future, they are based on our current expectations and beliefs. Actual results or events may differ materially from those reflected in the forward-looking statements. You should be aware that our current expectations and beliefs as to future events are subject to change at any time, and we can give you no assurances that the future events will actually occur.

Critical Accounting Policies

In reviewing and understanding financial information for the Company, you are encouraged to read and understand the significant accounting policies used in preparing our financial statements. These policies are described in Note 2 of the notes to our financial statements. The accounting and financial reporting policies of the Company conform to accounting principles generally accepted in the United States of America and to general practices within the banking industry. Accordingly, the consolidated financial statements require certain estimates, judgments, and assumptions, which are believed to be reasonable, based upon the information available. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the periods presented. The following accounting policies comprise those that management believes are the most critical to aid in fully understanding and evaluating our reported financial results. These policies require numerous estimates or economic assumptions that may prove inaccurate or may be subject to variations which may significantly affect our reported results and financial condition for the period or in future periods.

Quaint Oak Bancorp, Inc.

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

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

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

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

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

Quaint Oak Bancorp, Inc.

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

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

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

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

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

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

Quaint Oak Bancorp, Inc.

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

Comparison of Financial Condition at December 31, 2017 and December 31, 2016

General. The Company's total assets at December 31, 2017 were $239.6 million, an increase of $23.4 million, or 10.8%, from $216.2 million at December 31, 2016. This growth in total assets was primarily due to a $24.9 million, or 14.1%, increase in loans receivable, net, a $2.3 million, or 48.7%, increase in loans held for sale, and a $521,000, or 73.1%, increase in Federal Home Loan Bank stock. These increases were partially offset by a $1.6 million, or 17.2%, decrease in investment securities available for sale, a $1.4 million, or 14.9%, decrease in cash and cash equivalents, and a $1.2 million, or 20.0%, decrease in investment in interest-earning time deposits.

Cash and Cash Equivalents. Cash and cash equivalents decreased $1.4 million, or 14.9%, from $9.3 million at December 31, 2016 to $7.9 million at December 31, 2017 as excess liquidity was used to fund loans.

Investment in Interest-Earning Time Deposits. Investment in interest-earning time deposits decreased $1.2, million or 20.0%, from $6.1 million at December 31, 2016 to $4.9 million at December 31, 2017 primarily due to the maturity and redemption of time deposits. The proceeds were used primarily to fund loans.

Investment Securities Available for Sale. Investment securities available for sale decreased $1.6 million, or 17.2%, from $9.6 million at December 31, 2016 to $7.9 million at December 31, 2017 due primarily to the principal repayments on these securities during the year ended December 31, 2017.

Loans Held for Sale. Loans held for sale increased $2.3 million, or 48.7%, from $4.7 million at December 31, 2016 to $7.0 million at December 31, 2017 as the Bank's mortgage banking subsidiary, Quaint Oak Mortgage, LLC, originated $87.0 million of one-to-four family residential loans during the year ended December 31, 2017 and sold $85.7 million of loans in the secondary market during this same period. In addition, the Bank originated $963,000 of commercial business loans held for sale during the year ended December 31, 2017. None of these loans were sold during the year ended December 31, 2017.

Loans Receivable, Net. Loans receivable, net, increased $24.9 million, or 14.1%, to $201.7 million at December 31, 2017 from $176.8 million December 31, 2016. This increase was funded primarily from Federal Home Loan Bank borrowings and deposits. Increases within the portfolio occurred in commercial real estate loans which increased $14.5 million, or 18.7%, multi-family residential loans which increased $7.1 million, or 48.3%, commercial business loans which increased $2.7 million, or 28.6%, home equity loans which increased $354,000, or 7.4%, one-to-four family residential owner occupied loans which increased $292,000, or 5.4%, construction loans which increases $277,000, or 1.8%, and other consumer loans which increased $112,000, or 430.8%. These increases were partially offset by a $60,000, or 0.1%, decrease in one-to-four family residential non-owner occupied loans. The Company continues its strategy of diversifying its loan portfolio with higher yielding and shorter-term loan products and selling substantially all of its newly originated one-to-four family owner-occupied loans into the secondary market.

Federal Home Loan Bank Stock. Federal Home Loan Bank stock increased $521,000, or 73.1%, from $713,000 at December 31, 2016 to $1.2 million at December 31, 2017 as the Bank increased its level of FHLB borrowings.

Bank-Owned Life Insurance. The Company purchased $3.5 million in bank-owned life insurance (BOLI) as a mechanism for funding various employee benefit costs. The Company is the beneficiary of these policies that insure the lives of certain officers of its subsidiaries. The cash surrender value of the insurance policies amounted to $3.8 million and $3.7 million at December 31, 2017 and 2016, respectively.

Quaint Oak Bancorp, Inc.

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

Premises and Equipment, Net. Premises and equipment, net, increased $258,000, or 14.9%, to $2.0 million at December 31, 2017 from $1.7 million at December 31, 2016. The increase was primarily due to the relocation of Quaint Oak Insurance Agency, LLC to a new location in Chalfont, Pennsylvania and the renovation of Quaint Oak Real Estate, LLC's offices in Allentown, PA.

Goodwill and Other Intangible, Net. The increase in intangible assets, net of accumulated amortization, is related to the acquisition by Quaint Oak Insurance Agency of the renewal rights to a book of business on August 1, 2016 at a total cost of $1.0 million. Based on a valuation, $515,000 of the purchase price was determined to be goodwill and $485,000 was determined to be related to the renewal rights to the book of business and deemed to be an other intangible asset. This other intangible asset is being amortized over a ten year period based upon the annual retention rate of the book of business. The balance of other intangible asset at December 31, 2017 was $416,000, net of accumulated amortization of $69,000.

Other Real Estate Owned, Net. There was no other real estate owned at December 31, 2017. This compares to three properties totaling $435,000 at December 31, 2016. During the year ended December 31, 2017, $22,000 of capital improvements were made to the properties, one of the properties incurred a write-down totaling $48,000, and the three properties with a total carrying value of $409,000 were sold. A loss totaling $20,000 was realized on the transactions.

Deposits. Total deposits increased $9.2 million, or 5.2%, to $186.2 million at December 31, 2017 from $177.0 million at December 31, 2016. This increase in deposits was primarily attributable to increases of $8.0 million, or 5.8%, in certificates of deposit, $2.1 million, or 36.0%, in non-interest bearing checking accounts, and $569,000, or 31.9%, in savings accounts, partially offset by a $726,000, or 61.1%, decrease in passbook accounts and a $703,000, or 2.3%, decrease in money market accounts.

Federal Home Loan Bank Borrowings. Total Federal Home Loan Bank borrowings increased $12.5 million, or 80.6%, from $15.5 million at December 31, 2016 to $28.0 million at December 31, 2017. During the year ended December 31, 2017, the Company borrowed $7.0 million of short-term and $12.0 million of long-term fixed rate borrowings primarily to fund loan growth. During the same time period, the Company repaid $4.0 million of short-term and $2.5 million of long-term fixed rate borrowings.

Stockholders' Equity. Total stockholders' equity increased $1.4 million, or 6.7%, to $22.2 million at December 31, 2017 from $20.8 million at December 31, 2016. Contributing to the increase was net income for the year ended December 31, 2017 of $1.5 million, the reissuance of treasury stock for exercised stock options of $206,000, common stock earned by participants in the employee stock ownership plan of $185,000, amortization of stock awards and options under our stock compensation plans of $129,000, the reissuance of treasury stock under the Bank's 401(k) Plan of $94,000, and other comprehensive income of $25,000. These increases were partially offset by dividends paid of $364,000 and by the purchase of treasury stock of $347,000.

Comparison of Operating Results for the Years Ended December 31, 2017 and 2016

General. Net income amounted to $1.47 million for the year ended December 31, 2017 compared to $1.50 million for the year ended December 31, 2016. The $31,000, or 2.1%, decrease was primarily the result of increases in non-interest expense of $1.4 million and the provision for income taxes of $469,000, partially offset by increases in net interest income of $968,000 and non-interest income of $839,000, and a decrease in the provision for loan losses of $8,000.

Net Interest Income. Net interest income increased $968,000, or 14.6%, to $7.6 million for the year ended December 31, 2017 from $6.6 million for the year ended December 31, 2016. The increase in net interest income was driven by a $1.4 million, or 15.3%, increase in interest income, partially offset by a $437,000, or 17.0%, increase in interest expense.

Quaint Oak Bancorp, Inc.

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

Interest Income. Interest income increased $1.4 million, or 15.3%, to $10.6 million for the year ended December 31, 2017 from $9.2 million for the year ended December 31, 2016. The increase in interest income was primarily due to a $33.6 million increase in average loans receivable, net, including loans held for sale, which increased from an average balance of $159.6 million for the year ended December 31, 2016 to an average balance of $193.2 million for the year ended December 31, 2017, and had the effect of increasing interest income $1.9 million. Partially offsetting this increase was a 25 basis point decline in the average yield on loans receivable, net, including loans held for sale, from 5.55% for the year ended December 31, 2016 to 5.30% for the year ended December 31, 2017, which had the effect of decreasing interest income by $486,000.

Interest Expense. Interest expense increased $437,000 or 17.0%, to $3.0 million for the year ended December 31, 2017 compared to $2.6 million for the year ended December 31, 2016. The increase in interest expense was primarily attributable to a $20.5 million increase in average interest-bearing liabilities, which increased from an average balance of $174.1 million for the year ended December 31, 2016 to an average balance of $194.6 million for the year ended December 31, 2017, and had the effect of increasing interest expense $315,000. This increase in average interest-bearing liabilities was primarily attributable to a $7.7 million increase in average Federal Home Loan Bank borrowings which increased from $13.2 million for the year ended December 31, 2016 to an average balance of $20.9 million for the year ended December 31, 2017, and had the effect of increasing interest expense $109,000, and a $10.5 million increase in average certificate of deposit accounts which increased from an average balance of $128.6 million for the year ended December 31, 2016 to an average balance of $139.1 million for the year ended December 31, 2017, and had the effect of increasing interest expense $179,000. Also contributing to this increase was a seven basis point increase in the average rate on interest-bearing liabilities, from 1.47% for the year ended December 31, 2016 to 1.54% for the year ended December 31, 2017, which had the effect of increasing interest expense by $122,000. This increase in rate was primarily attributable to a 52 basis point increase in rate on average Federal Home Loan Bank borrowings, which increased from 1.01% for the year ended December 31, 2016 to 1.53% for the year ended December 31, 2017, which had the effect of increasing interest expense by $79,000, and a three basis point increase in rate on average certificate of deposit accounts, which increased from 1.71% for the year ended December 31, 2016 to 1.74% for the year ended December 31, 2017, and had the effect of increasing interest expense by $44,000.

Quaint Oak Bancorp, Inc.

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

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

	Year Ended December 31,
	2017							2016
	Average Balance		Interest		Average Yield/ Rate			Average Balance		Interest		Average Yield/ Rate
	(Dollars in thousands)
Interest-earning assets:
Due from banks, interest-bearing	$	8,461	$	95		1.12	%	$	16,912	$	88		0.52	%
Investment in interest-earning time deposits		5,416		90		1.66			6,117		108		1.77
Investment securities available for sale		8,878		134		1.51			7,044		101		1.43
Loans receivable, net (1) (2) (3)		193,158		10,231		5.30			159,641		8,857		5.55
Investment in FHLB stock		948		38		4.01			623		29		4.65
Total interest-earning assets		216,861		10,588		4.88	%		190,337		9,183		4.82	%
Non-interest-earning assets		8,828							9,008
Total assets	$	225,689						$	199,345
Interest-bearing liabilities:
Passbook accounts	$	694	$	1		0.14	%	$	1,241	$	1		0.08	%
Savings accounts		1,584		3		0.19			2,368		5		0.21
Money market accounts		32,255		258		0.80			28,669		230		0.80
Certificate of deposit accounts		139,126		2,419		1.74			128,626		2,196		1.71
Total deposits		173,659		2,681		1.54			160,904		2,432		1.51
FHLB short-term borrowings		8,654		101		1.17			5,692		31		0.54
FHLB long-term borrowings		12,278		220		1.79			7,540		102		1.35
Total interest-bearing liabilities		194,591		3,002		1.54	%		174,136		2,565		1.47	%
Non-interest-bearing liabilities		9,422							5,384
Total liabilities		204,013							179,520
Stockholders' Equity		21,676							19,825
Total liabilities and Stockholders' Equity	$	225,689						$	199,345
Net interest-earning assets	$	22,270						$	16,201
Net interest income; average interest rate spread			$	7,586		3.34	%			$	6,618		3.35	%
Net interest margin (4)						3.50	%						3.48	%
Average interest-earning assets to average interest-bearing liabilities						111.44	%						109.30	%

_______________________

(1)	Includes loans held for sale.

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

(3)

Includes tax free municipal leases with an aggregate average balance of $68,000 and an average yield of 4.03% for the year-ended December 31, 2017 and an aggregate average balance of $115,000 and an average yield of 4.02% for the year-ended December 31, 2016. The tax-exempt income from such loans has not been calculated on a tax equivalent basis.

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

Quaint Oak Bancorp, Inc.

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

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

	2017 vs. 2016												2016 vs. 2015
	Increase (Decrease) Due to									Total Increase (Decrease)			Increase (Decrease) Due to									Total Increase (Decrease)
	Rate			Volume			Rate/ Volume			Total Increase (Decrease)			Rate			Volume			Rate/ Volume			Total Increase (Decrease)
	(In Thousands)
Interest income:
Due from banks, interest-bearing	$	102		$	(44	)	$	(51	)	$	7		$	28		$	16		$	17		$	61
Investment in interest-earning time deposits		(6	)		(13	)		1			(18	)		13			(3	)		--			10
Investment securities available for sale		6			26			1			33			(19	)		152			(72	)		61
Loans receivable, net (1) (2)		(402	)		1,860			(84	)		1,374			(382	)		1,069			(49	)		638
Investment in FHLB stock		(4	)		15			(2	)		9			(12	)		2			(1	)		(11	)
Total interest-earning assets		(304	)		1,844			(135	)		1,405			(372	)		1,236			(105	)		759
Interest expense:
Passbook accounts		--			--			--			--			--			(1	)		--			(1	)
Savings accounts		--			(2	)		--			(2	)		(2	)		(3	)		--			(5	)
Money market accounts		(1	)		29			--			28			6			44			2			52
Certificate of deposit accounts		40			179			4			223			4			394			1			399
Total deposits		39			206			4			249			8			434			3			445
FHLB short-term borrowings		52			7			11			70			13			(5	)		(2	)		6
FHLB long-term borrowings		8			102			8			118			(1	)		24			--			23
Total interest-bearing liabilities		99			315			23			437			20			453			1			474
Increase (decrease) in net interest income	$	(403	)	$	1,529		$	(158	)	$	968		$	(392	)	$	783		$	(106	)	$	285

_______________________

(1)	Includes loans held for sale.

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

Provision for Loan Losses. The Company decreased its provision for loan losses by $8,000, or 2.7%, from $292,000 for the year ended December 31, 2016 to $284,000 for the year ended December 31, 2017, based on an evaluation of the allowance relative to such factors as volume of the loan portfolio, concentrations of credit risk, prevailing economic conditions, prior loan loss experience and amount of non-performing loans at December 31, 2017.

Non-performing loans amounted to $3.1 million, or 1.52%, of net loans receivable at December 31, 2017, consisting of eleven loans, three of which are on non-accrual status and eight of which are 90 days or more past due and accruing interest. Comparably, non-performing loans amounted to $1.9 million, or 1.06%, of net loans receivable at December 31, 2016, consisting of fourteen loans, seven of which were on non-accrual status and seven of which were 90 days or more past due and accruing interest. The non-performing loans at December 31, 2017 include four one-to-four family non-owner occupied residential loans, three one-to-four family owner occupied residential loans, two commercial real estate loans, and two construction loans, and all are generally well-collateralized or adequately reserved for. During the quarter ended December 31, 2017, no loans were placed on non-accrual status and two loans previously on non-accrual status were paid-off. The allowance for loan losses as a percent of total loans receivable was 0.89% at December 31, 2017, and 0.90% at December 31, 2016.

Quaint Oak Bancorp, Inc.

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

There was no other real estate owned at December 31, 2017. This compares to three properties totaling $435,000 at December 31, 2016. During the quarter ended December 31, 2017, the Company sold one property with a carrying value of $185,000 and a loss of $6,000 was realized on the transaction. Non-performing assets amounted to $3.1 million, or 1.28%, of total assets at December 31, 2017 compared to $2.3 million, or 1.07%, of total assets at December 31, 2016.

Non-Interest Income. Non-interest income increased $839,000, or 32.2%, from $2.6 million for the year ended December 31, 2016 to $3.4 million for the year ended December 31, 2017. The increase was primarily attributable to a $458,000, or 28.0%, increase in net gain on the sales of residential mortgage loans, a $207,000, or 113.7%, increase in insurance commissions earned by Quaint Oak Insurance Agency which began operations on August 1, 2016, a $125,000, or 64.8%, decrease in loss on sales and write-downs on other real estate owned, a $93,000, or 14.6%, increase in mortgage banking and title abstract fees, and a $52,000, or 110.6%, increase in other non-interest income. These increases were partially offset by a $60,000, or 55.6%, decrease in the gain on sale of SBA loans, a $32,000, or 33.3%, decrease in other fees and service charges, and a $4,000, or 4.4%, decrease in income from bank-owned life insurance.

Non-Interest Expense. Non-interest expense increased $1.4 million, or 20.6%, from $6.7 million for the year ended December 31, 2016 to $8.1 million for the year ended December 31, 2017. Salaries and employee benefits expense accounted for $966,000 of the change as this expense increased 21.4%, from $4.5 million for the year ended December 31, 2016 to $5.5 million for the year ended December 31, 2017 primarily as a result of increased staff related to the continued expansion of the Company's mortgage banking and lending operations, the launch of Quaint Oak Insurance Agency on August 1, 2016, and the expansion of our real estate subsidiary. Other expense accounted for $143,000 of the change as this expense increased 26.3%, from $544,000 for the year ended December 31, 2016 to $687,000 for the year ended December 31, 2017 due primarily to an increase in recruiting fees associated with commercial loan officers and credit analysts. Data processing costs accounted for $140,000 of the change as this expense increased 73.3%, from $191,000 for the year-ended December 31, 2016 to $331,000 for the year ended December 31, 2017, due primarily to recurring costs associated with the Bank's checking account products. Advertising expense accounted for $82,000 of the change as this expense increased 72.6%, from $113,000 for the year ended December 31, 2016 to $195,000 for the year ended December 31, 2017, as the Company continued to focus on increasing brand awareness and market the products and services of the Bank and the Bank's subsidiary companies. FDIC deposit insurance assessment accounted for $35,000 of the change as this expense increased 25.2%, from $139,000 for the year ended December 31, 2016 to $174,000 for the year ended December 31, 2017. The increase in FDIC deposit insurance assessment was primarily attributable to the year-over-year growth in the average assets of the Bank. Occupancy and equipment expense accounted for $21,000 of the change as this expense increased 3.8%, from $552,000 for the year ended December 31, 2016 to $573,000 for the year ended December 31, 2017. The increase in occupancy and equipment expense was primarily attributable to charges related to the relocation of Quaint Oak Insurance Agency, LLC to a new location in Chalfont, Pennsylvania and the renovation Quaint Oak Real Estate, LLC's offices in Allentown, Pennsylvania. Directors' fees and expenses accounted for $1,000 of the change as this expense increased 0.5% from $203,000 for the year ended December 31, 2016 to $204,000 for the year ended December 31, 2017. Partially offsetting these increases was a decrease in other real estate owned expense which declined $29,000, or 67.4%, from $43,000 for the year ended December 31, 2016 to $14,000 for the year ended December 31, 2017, as there were fewer other real estate owned properties held by the Company during the year ended December 31, 2017 compared to 2016. Also offsetting these increases was a decrease in professional fees which declined $11,000, or 2.9%, from $378,000 for the year ended December 31, 2016 to $367,000 for the year ended December 31, 2017. The decrease in professional fees was primarily attributable to legal fees related to collections.

Provision for Income Tax. The $469,000 increase in the provision for income taxes for the year ended December 31, 2017 over the year ended December 31, 2016 was primarily due to the $297,000 re-measurement charge of the Company's net deferred tax asset as a result of the Tax Cuts and Jobs Act signed into law on December 22, 2017.

Quaint Oak Bancorp, Inc.

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

Exposure to Changes in Interest Rates

The Company's ability to maintain net interest income depends upon its ability to earn a higher yield on assets than the rates it pays on deposits and borrowings. The Company's interest-earning assets consist primarily of loans collateralized by real estate which have longer maturities than our liabilities, consisting primarily of certificates of deposit, money market accounts and to a lesser extent borrowings. Consequently, the Company's ability to maintain a positive spread between the interest earned on assets and the interest paid on deposits and borrowings can be adversely affected when market rates of interest rise. At December 31, 2017 and 2016, certificates of deposit amounted to $145.0 million and $137.1 million, respectively, or 60.5% and 63.4%, respectively, of total assets at such dates.

Gap Analysis. The matching of assets and liabilities may be analyzed by examining the extent to which such assets and liabilities are "interest rate sensitive" and by monitoring a bank's interest rate sensitivity "gap." An asset and liability is said to be interest rate sensitive within a specific time period if it will mature or reprice within that time period. The interest rate sensitivity gap is defined as the difference between the amount of interest-earning assets maturing or repricing within a specific time period and the amount of interest-bearing liabilities maturing or repricing within that same time period. A gap is considered positive when the amount of interest rate sensitive assets exceeds the amount of interest rate sensitive liabilities. A gap is considered negative when the amount of interest rate sensitive liabilities exceeds the amount of interest rate sensitive assets. During a period of rising interest rates, a negative gap would tend to adversely affect net interest income while a positive gap would tend to result in an increase in net interest income. Conversely, during a period of falling interest rates, a negative gap would tend to result in an increase in net interest income while a positive gap would tend to affect adversely net interest income. Our current interest rate risk management policy provides that our one-year interest rate gap as a percentage of total assets should not exceed positive or negative 20%. This policy was adopted by our management and Board of Directors based upon their judgment that it established an appropriate benchmark for the level of interest-rate risk, expressed in terms of the one-year gap, for the Company. If our one-year gap position approaches or exceeds the 20% policy limit, management will obtain simulation results in order to determine what steps might appropriately be taken, in order to maintain our one-year gap in accordance with the policy. Alternatively, depending on the then-current economic scenario, we could determine to make an exception to our policy or we could determine to revise our policy. Our one-year cumulative gap was a positive 15.6% at December 31, 2017, compared to 12.2% at December 31, 2016.

The following table sets forth the amounts of our interest-earning assets and interest-bearing liabilities outstanding at December 31, 2017, which we expect, based upon certain assumptions, to reprice or mature in each of the future time periods shown. Except as stated below, the amount of assets and liabilities shown which reprice or mature during a particular period were determined in accordance with the earlier of term to repricing or the contractual maturity of the asset or liability. The table sets forth an approximation of the projected repricing of assets and liabilities at December 31, 2017, on the basis of contractual maturities, anticipated prepayments, and scheduled rate adjustments within a three-month period and subsequent selected time intervals. The loan amounts in the table reflect principal balances expected to be redeployed and/or repriced as a result of contractual amortization and anticipated prepayments of adjustable-rate loans and fixed-rate loans, and as a result of contractual rate adjustments on adjustable-rate loans. The Company's annual historical prepayment rates are applied to loans. Money market, savings and passbook accounts are assumed to have annual rates of withdrawal, or "decay rates," of 40%, 40%, and 20%, respectively.

Quaint Oak Bancorp, Inc.

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

	3 Months or Less			More than 3 Months to 1 Year			More than 1 Year to 3 Years			More than 3 Years to 5 Years			More than 5 Years			Total Amount
	(Dollars In Thousands)
Interest-earning assets (1):
Due from banks, interest-bearing	$	7,846		$	--		$	--		$	--		$	--		$	7,846
Investment in interest-earning time deposits		--			761			1,863			2,255			--			4,879
Investment securities available for sale		5,072			1,327			1,205			308			--			7,912
Loans held for sale		7,006			--			--			--			--			7,006
Loans receivable (2)		38,380			46,087			56,455			23,710			39,684			204,316
Investment in Federal Home Loan Bank stock		--			--			--			--			1,234			1,234
Total interest-earning assets	$	58,304		$	48,175		$	59,523		$	26,273		$	40,918		$	233,193

Interest-bearing liabilities:
Passbook accounts	$	46		$	46		$	278		$	46		$	47		$	463
Savings accounts		471			471			941			235			235			2,353
Money market accounts		6,082			6,082			12,164			3,041			3,042			30,411
Certificate accounts		11,241			31,654			65,704			36,439			--			145,038
FHLB borrowings		10,000			3,000			5,000			6,000			4,000			28,000
Total interest-bearing liabilities	$	27,840		$	41,253		$	84,087		$	45,761		$	7,324		$	206,265

Interest-earning assets less interest-bearing liabilities	$	30,464		$	6,922		$	(24,564	)	$	(19,488	)	$	33,594

Cumulative interest-rate sensitivity gap (3)	$	30,464		$	37,386		$	12,822		$	(6,666	)	$	26,928

Cumulative interest-rate gap as a percentage of total assets at December 31, 2017		12.7	%		15.6	%		5.4	%		(2.8	)%		11.2	%

Cumulative interest-earning assets as a percentage of cumulative interest-bearing liabilities at December 31, 2017		209.4	%		154.1	%		108.4	%		96.6	%		113.1	%

_____________________

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

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

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

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

Liquidity and Capital Resources

The Company's primary sources of funds are deposits, amortization and prepayment of loans and to a lesser extent, loan sales and other funds provided from operations. While scheduled principal and interest payments on loans are a relatively predictable source of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions and competition. The Company sets the interest rates on its deposits to maintain a desired level of total deposits. In addition, the Company invests excess funds in short-term interest-earning assets that provide additional liquidity. At December 31, 2017, the Company's cash and cash equivalents amounted to $7.9 million. At such date, the Company also had $761,000 invested in interest-earning time deposits maturing in one year or less.

Quaint Oak Bancorp, Inc.

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

The Company uses its liquidity to fund existing and future loan commitments, to fund deposit outflows, to invest in other interest-earning assets, and to meet operating expenses. At December 31, 2017, Quaint Oak Bank had outstanding commitments to originate loans of $15.9 million and commitments under unused lines of credit of $19.2 million.

At December 31, 2017, certificates of deposit scheduled to mature in less than one year totaled $42.9 million. Based on prior experience, management believes that a significant portion of such deposits will remain with us, although there can be no assurance that this will be the case.

In addition to cash flow from loan payments and prepayments and deposits, the Company has significant borrowing capacity available to fund liquidity needs. If the Company requires funds beyond its ability to generate them internally, borrowing agreements exist with the Federal Home Loan Bank of Pittsburgh (FHLB), which provide an additional source of funds. As of December 31, 2017, we had $28.0 million of borrowings from the FHLB and had $115.6 million in borrowing capacity. Under terms of the collateral agreement with the FHLB of Pittsburgh, we pledge residential mortgage loans as well as Quaint Oak Bank's FHLB stock as collateral for such advances. In addition, as of December 31, 2017 Quaint Oak Bank had $535,000 in borrowing capacity with the Federal Reserve Bank of Philadelphia. There were no borrowings under this facility at December 31, 2017.

Our stockholders' equity amounted to $22.2 million at December 31, 2017, an increase of $1.4 million, or 6.7% from $20.8 million at December 31, 2016. Contributing to the increase was net income for the year ended December 31, 2017 of $1.5 million, the reissuance of treasury stock for exercised stock options of $206,000, common stock earned by participants in the employee stock ownership plan of $185,000, amortization of stock awards and options under our stock compensation plans of $129,000, the reissuance of treasury stock under the Bank's 401(k) Plan of $94,000, and other comprehensive income of $25,000. These increases were partially offset by dividends paid of $364,000 and by the purchase of treasury stock of $347,000. For further discussion of the stock compensation plans, see Note 13 in the Notes to Consolidated Financial Statements contained elsewhere herein.

Quaint Oak Bank is required to maintain regulatory capital sufficient to meet tier 1 leverage, common equity tier 1 capital, tier 1 risk-based and total risk-based capital ratios of at least 4.00%, 4.50%, 6.00%, and 8.00%, respectively. At December 31, 2017, Quaint Oak Bank exceeded each of its capital requirements with ratios of 8.54%, 11.26%, 11.26% and 12.31%, respectively. As a small savings and loan holding company, the Company is not currently subject to any regulatory capital requirements. For further discussion of the Bank's regulatory capital requirements, see Note 16 in the Notes to Consolidated Financial Statements contained elsewhere herein.

Off-Balance Sheet Arrangements

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

Commitments. At December 31, 2017, we had unfunded commitments under lines of credit of $19.2 million and $15.9 million of commitments to originate loans. We had no commitments to advance additional amounts pursuant to outstanding lines of credit or undisbursed construction loans.

Quaint Oak Bancorp, Inc.

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

Contractual Cash Obligations

The following table summarizes our contractual cash obligations at December 31, 2017. The balances in the table do not reflect interest due on these obligations.

			Payments Due By Period
	Total		To 1 Year		1-3 Years		4-5 Years		After 5 Years
	(In Thousands)
Operating leases	$	675	$	132	$	227	$	141	$	175
Certificates of deposit		145,038		42,895		65,704		36,439		--
FHLB borrowings		28,000		13,000		5,000		6,000		4,000
Total contractual obligations	$	173,713	$	56,027	$	70,931	$	42,580	$	4,175

Impact of Inflation and Changing Prices

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

Quaint Oak Bancorp, Inc.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Quaint Oak Bancorp, Inc. and subsidiary (the "Company") as of December 31, 2017 and 2016; the related consolidated statements of income, comprehensive income, changes in stockholders' equity, and cash flows for the years then ended; and the related notes to the consolidated financial statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

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

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

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

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

Cranberry Township, Pennsylvania

March 29, 2018

Quaint Oak Bancorp, Inc.

Consolidated Balance Sheets

		At December 31,			At December 31,
		2017			2016
		(In thousands, except share data)
Assets
Due from banks, non-interest-bearing		$	64		$	399
Due from banks, interest-bearing			7,846			8,901
Cash and cash equivalents			7,910			9,300
Investment in interest-earning time deposits			4,879			6,098
Investment securities available for sale			7,912			9,555
Loans held for sale			7,006			4,712
Loans receivable, net of allowance for loan losses
	(2017 $1,812; 2016 $1,605)		201,667			176,807
Accrued interest receivable			1,021			862
Investment in Federal Home Loan Bank stock, at cost			1,234			713
Bank-owned life insurance			3,814			3,728
Premises and equipment, net			1,988			1,730
Goodwill			515			515
Other intangible, net of accumulated amortization			416			465
Other real estate owned, net			--			435
Prepaid expenses and other assets			1,234			1,243
Total Assets		$	239,596		$	216,163

Liabilities and Stockholders' Equity
Liabilities
Deposits:
Non-interest bearing		$	7,956		$	5,852
Interest-bearing			178,265			171,155
Total deposits			186,221			177,007
Federal Home Loan Bank short-term borrowings			10,000			7,000
Federal Home Loan Bank long-term borrowings			18,000			8,500
Accrued interest payable			167			142
Advances from borrowers for taxes and insurance			2,423			2,210
Accrued expenses and other liabilities			600			514
Total Liabilities			217,411			195,373

Stockholders' Equity
Preferred stock – $0.01 par value, 1,000,000 shares authorized; none issued or outstanding			--			--
Common stock – $0.01 par value; 9,000,000 shares
authorized; 2,777,250 issued; 1,920,024 and 1,891,150 outstanding at December 31, 2017 and 2016, respectively			28			28
Additional paid-in capital			14,481			14,240
Treasury stock, at cost: 2017 857,226 shares; 2016 886,100 shares			(4,675	)		(4,611	)
Unallocated common stock held by:
Employee Stock Ownership Plan (ESOP)			(253	)		(320	)
Recognition & Retention Plan Trust (RRP)			(24	)		(47	)
Accumulated other comprehensive loss			(15	)		(38	)
Retained earnings			12,643			11,538
Total Stockholders' Equity			22,185			20,790
Total Liabilities and Stockholders' Equity		$	239,596		$	216,163

See accompanying notes to consolidated financial statements.

Quaint Oak Bancorp, Inc.

Consolidated Statements of Income

	Years Ended December 31,
	2017		2016
	(In thousands, except share
	and per share data)
Interest Income
Interest on loans	$	10,231	$	8,857
Interest and dividends on time deposits and investment securities		357		326
Total Interest Income		10,588		9,183

Interest Expense
Interest on deposits	2,681	2,432
Interest on Federal Home Loan Bank borrowings	321	133
Total Interest Expense	3,002	2,565

Net Interest Income	7,586			6,618

Provision for Loan Losses	284			292

Net Interest Income after Provision for Loan Losses	7,302			6,329

Non-Interest Income
Mortgage banking and title abstract fees		730			637
Other fees and services charges		64			96
Insurance commissions		389			182
Income from bank-owned life insurance		86			90
Net gain on the sale of residential mortgage loans		2,094			1,636
Gain on the sale of SBA loans		48			108
Loss on sales and write-downs of other real estate owned		(68	)		(193	)
Other		99			47
Total Non-Interest Income, net		3,442			2,603

Non-Interest Expense
Salaries and employee benefits	5,478	4,512
Directors' fees and expenses	204	203
Occupancy and equipment	573	552
Data processing	331	191
Professional fees	367	378
FDIC deposit insurance assessment	174	139
Other real estate owned expenses	14	43
Advertising	195	113
Amortization of other intangible	49	20
Other	687	544
Total Non-Interest Expense	8,072	6,695

Income before Income Taxes		2,672		2,234
Income Taxes		1,205		736
Net Income	$	1,467	$	1,498

Earnings per share – basic	$	0.79	$	0.84
Average shares outstanding - basic		1,857,457		1,781,410
Earnings per share - diluted	$	0.74	$	0.77
Average shares outstanding - diluted		1,994,832		1,935,903

See accompanying notes to consolidated financial statements.

Quaint Oak Bancorp, Inc.

Consolidated Statements of Comprehensive Income

	Years Ended December 31,
	2017			2016
	(In Thousands)

Net Income	$	1,467		$	1,498

Other Comprehensive Income (Loss):
Unrealized gains (losses) on investment securities available for sale		38			(39	)
Income tax effect		(13	)		13
Net other comprehensive income (loss)		25			(26	)

Total Comprehensive Income	$	1,492		$	1,472

See accompanying notes to consolidated financial statements.

Quaint Oak Bancorp, Inc.

Consolidated Statements of Stockholders' Equity


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

BALANCE – DECEMBER 31, 2015		1,841,475		$	28	$	14,013		$	(4,859	)	$	(457	)	$	(12	)	$	10,323		$	19,036

Common stock allocated by ESOP							104						67									171

Treasury stock purchased		(1,435	)							(17	)											(17	)

Reissuance of treasury stock under 401(k) Plan		7,796					52			40												92

Reissuance of treasury stock under Stock Incentive Plan		5,396					(28	)		28												--

Reissuance of treasury stock for exercised stock options		37,918					(7	)		197												190

Stock based compensation expense							129															129

Release of 4,864 vested RRP shares							(23	)					23									--

Cash dividends declared ($0.158 per share)																			(283	)		(283	)

Net income																			1,498			1,498

Other comprehensive loss, net																(26	)					(26	)

BALANCE – DECEMBER 31, 2016		1,891,150		$	28	$	14,240		$	(4,611	)	$	(367	)	$	(38	)	$	11,538		$	20,790

Common stock allocated by ESOP							118						67									185

Treasury stock purchased		(29,393	)							(347	)											(347	)

Reissuance of treasury stock under 401(k) Plan		7,336					56			38												94

Reissuance of treasury stock under Stock Incentive Plan		5,397					(28	)		28												--

Reissuance of treasury stock for exercised stock options		45,534					(11	)		217												206

Stock based compensation expense							129															129

Release of 4,864 vested RRP shares							(23	)					23									--

Cash dividends declared ($0.19 per share)																			(364	)		(364	)

Net income																			1,467			1,467

Reclassification of certain income tax effects from accumulated other comprehensive income																(2	)		2			--

Other comprehensive income, net																25						25

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

See accompanying notes to consolidated financial statements.

Quaint Oak Bancorp, Inc.

Consolidated Statements of Cash Flows
	Years Ended
	December 31,
	2017			2016
	(In Thousands)
Cash Flows from Operating Activities
Net income	$	1,467		$	1,498
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Provision for loan losses		284			292
Depreciation expense		192			184
Amortization of other intangible		49			20
Net amortization of securities premiums		19			19
Accretion of deferred loan fees and costs, net		(333	)		(324	)
Deferred income taxes		232			(185	)
Stock-based compensation expense		314			300
Net gain on the sale of residential mortgage loans		(2,094	)		(1,636	)
Gain on the sale of SBA loans		(48	)		(108	)
Net loss on sale and write-downs of other real estate owned		68			193
Increase in the cash surrender value of bank-owned life insurance		(86	)		(90	)
Changes in assets and liabilities which provided (used) cash:
Loans held for sale-originations		(87,963	)		(64,262	)
Loans held for sale-proceeds		87,763			66,250
Accrued interest receivable		(159	)		121
Prepaid expenses and other assets		(236	)		(76	)
Accrued interest payable		25			19
Accrued expenses and other liabilities		86			93
Net Cash Provided by (Used in) Operating Activities		(420	)		2,308
Cash Flows from Investing Activities
Net decrease in investment in interest-earning time deposits		1,219			38
Purchase of investment securities available for sale		--			(7,833	)
Principal repayments on investment securities available for sale		1,662			1,225
Net increase in loans receivable		(24,763	)		(33,362	)
Net increase in investment in Federal Home Loan Bank stock		(521	)		(95	)
Proceeds from the sale of other real estate owned		389			1,076
Capitalized expenditures on other real estate owned		(22	)		(294	)
Purchase of premises and equipment		(450	)		(80	)
Purchase of insurance agency		--			(1,000	)
Net Cash Used in Investing Activities		(22,486	)		(40,325	)
Cash Flows from Financing Activities
Net increase in demand deposits and savings accounts		1,244			6,501
Net increase in certificate accounts		7,970			21,277
Proceeds from Federal Home Loan Bank short-term borrowings		7,000			2,000
Repayment of Federal Home Loan Bank short-term borrowings		(4,000	)		(1,000	)
Proceeds from Federal Home Loan Bank long-term borrowings		12,000			2,000
Repayment of Federal Home Loan Bank long-term borrowings		(2,500	)		(1,000	)
Dividends paid		(364	)		(283	)
Purchase of treasury stock		(347	)		(17	)
Proceeds from the reissuance of treasury stock		94			92
Proceeds from the exercise of stock options		206			190
Increase in advances from borrowers for taxes and insurance		213			351
Net Cash Provided by Financing Activities		21,516			30,111
Net Decrease in Cash and Cash Equivalents		(1,390	)		(7,906	)
Cash and Cash Equivalents – Beginning of Year		9,300			17,206
Cash and Cash Equivalents – End of Year	$	7,910		$	9,300
Supplementary Disclosure of Cash Flow and Non-Cash Information:
Cash payments for interest	$	2,977		$	2,546
Cash payments for income taxes	$	1,139		$	794

See accompanying notes to consolidated financial statements.

Quaint Oak Bancorp, Inc.

Notes to Consolidated Financial Statements

Note 1 - Nature of Operations

The consolidated financial statements include the accounts of Quaint Oak Bancorp, Inc., a Pennsylvania chartered corporation (the "Company" or "Quaint Oak Bancorp") and its wholly owned subsidiary, Quaint Oak Bank, a Pennsylvania chartered stock savings bank, along with its wholly owned subsidiaries. At December 31, 2017, the Bank has five wholly-owned subsidiaries, Quaint Oak Mortgage, LLC, Quaint Oak Real Estate, LLC, Quaint Oak Abstract, LLC, QOB Properties, LLC, and Quaint Oak Insurance Agency, LLC, each a Pennsylvania limited liability company. The mortgage, real estate and abstract companies offer mortgage banking, real estate sales and title abstract services, respectively, in the Lehigh Valley region of Pennsylvania, and began operation in July 2009. 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 by acquiring the renewal rights to a book of business produced and serviced by an independent insurance agency located in New Britain, Pennsylvania, that provides a broad range of personal and commercial insurance coverage solutions. 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 County, Pennsylvania and to a lesser extent, Montgomery and Philadelphia Counties in Pennsylvania. The Bank has two locations: the main office location in Southampton, Pennsylvania and a regional banking office in the Lehigh Valley area of Pennsylvania. The principal deposit products offered by the Bank are certificates of deposit, money market accounts, non-interest bearing checking accounts for businesses and consumers, and savings accounts. The principal loan products offered by the Bank are fixed and adjustable rate residential and commercial mortgages, construction loans, home equity loans, lines of credit, and commercial business loans.

Note 2 - Summary of Significant Accounting Policies

Use of Estimates

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

Significant Group Concentrations of Credit Risk

The Bank has a significant concentration of loans in Philadelphia County, Pennsylvania. The concentration of credit by type of loan is set forth in Note 7. Although the Bank has a diversified loan portfolio, its debtors' ability to honor their contracts is influenced by the region's economy. During the year ended December 31, 2017, one investor purchased a total of 48% of all loans sold by the Bank from its mortgage loans held for sale, and the sales to this investor accounted for approximately 45% of the gain on loans sold during the year.

Cash and Cash Equivalents

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

Quaint Oak Bancorp, Inc.

Notes to Consolidated Financial Statements (Continued)

Note 2 - Summary of Significant Accounting Policies (Continued)

Investment Securities

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

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

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

The Company follows the accounting guidance related to recognition and presentation of other-than-temporary impairment. This accounting guidance specifies that (a) if a company does not have the intent to sell a debt security prior to recovery and (b) it is more likely than not that it will not have to sell the debt security prior to recovery, the security would not be considered other-than-temporarily impaired unless there is a credit loss. When an entity does not intend to sell the security, and it is more likely than not the entity will not have to sell the security before recovery of its cost basis, it will recognize the credit component of an other-than-temporary impairment of a debt security in earnings and the remaining portion in other comprehensive income. For held-to-maturity debt securities, the amount of an other-than-temporary impairment recorded in other comprehensive income for the noncredit portion of a previous other-than-temporary impairment should be amortized prospectively over the remaining life of the security on the basis of the timing of future estimated cash flows of the security. The Company recognized no other-than-temporary impairment charges during the years ended December 31, 2017 and 2016.

Federal Home Loan Bank Stock

Federal law requires a member institution of the Federal Home Loan Bank (FHLB) system to hold restricted stock of its district Federal Home Loan Bank according to a predetermined formula. FHLB stock is carried at cost and evaluated for impairment. When evaluating FHLB stock for impairment, its value is determined based on the ultimate recoverability of the par value of the stock. We evaluate our holdings of FHLB stock for impairment each reporting period. No impairment charges were recognized on FHLB stock during the years ended December 31, 2017 and 2016.

Loans Receivable

Loans receivable that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are stated at their outstanding unpaid principal balances, net of an allowance for loan losses and any deferred fees. Interest income is accrued on the unpaid principal balance. Loan origination fees and costs are deferred and recognized as an adjustment of the yield (interest income) of the related loans. The Bank is generally amortizing these amounts over the contractual life of the loan.

Quaint Oak Bancorp, Inc.

Notes to Consolidated Financial Statements (Continued)

Note 2 - Summary of Significant Accounting Policies (Continued)

Loans Receivable (Continued)

The loans receivable portfolio is segmented into residential loans, commercial real estate loans, construction loans, commercial business, and consumer loans. The residential loan segment has two classes: one-to-four family residential owner occupied loans and one-to-four family residential non-owner occupied loans. The commercial real estate loan segment consists of the following classes: multi-family (five or more) residential, commercial real estate and commercial lines of credit. Construction loans are generally granted for the purpose of building a single residential home. Commercial business loans are loans to businesses primarily for purchase of business essential equipment. Business essential equipment is equipment necessary for a business to support or assist with the day-to-day operation or profitability of the business. The consumer loan segment consists of the following classes: home equity loans and other consumer loans. Included in the home equity class are home equity loans and home equity lines of credit. Included in the other consumer are loans secured by saving accounts.

The accrual of interest is generally discontinued when principal or interest has become 90 days past due unless the loan is in the process of collection and is either guaranteed or well secured. When a loan is placed on nonaccrual status, unpaid interest credited to income in the current year is reversed and unpaid interest accrued in prior years is charged against the allowance for loan losses. Interest received on nonaccrual loans generally is either applied against principal or reported as interest income, according to management's judgment as to the collectability of principal. Generally, loans are restored to accrual status when the obligation is brought current, has performed in accordance with the contractual terms for a reasonable period of time and the ultimate collectability of the total contractual principal and interest is no longer in doubt.

Allowance for Loan Losses

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

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

Quaint Oak Bancorp, Inc.

Notes to Consolidated Financial Statements (Continued)

Note 2 - Summary of Significant Accounting Policies (Continued)

Allowance for Loan Losses (Continued)

Quaint Oak Bancorp, Inc.

Notes to Consolidated Financial Statements (Continued)

Note 2 - Summary of Significant Accounting Policies (Continued)

Allowance for Loan Losses (Continued)

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

Loans Held for Sale

Loans originated by the Bank's mortgage banking subsidiary, Quaint Oak Mortgage, LLC, are intended for sale in the secondary market and are carried at the lower of cost or fair value. Gains and losses on loan sales (sales proceeds minus carrying value) are recorded in noninterest income, and direct loan origination costs and fees are deferred at origination of the loan and are recognized in noninterest income upon sale of the loan.

Bank Owned Life Insurance ("BOLl")

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

Premises and Equipment

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

Intangible Assets

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

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

Quaint Oak Bancorp, Inc.

Notes to Consolidated Financial Statements (Continued)

Note 2 - Summary of Significant Accounting Policies (Continued)

Other Real Estate Owned

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

The Company has no other real estate owned as of December 31, 2017. At December 31, 2016 the Company had three properties totaling $435,000.

Advertising Costs

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

Transfers of Financial Assets

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

Income Taxes

Deferred income taxes are provided on the liability method whereby deferred tax assets are recognized for deductible temporary differences and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax basis. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. On December 22, 2017, the Tax Cuts and Jobs Act ("TCJA") was signed into law. The TCJA makes broad and complex changes to the U.S. tax code that affected our income tax rate in 2017. The TCJA reduces the U.S. federal corporate income tax rate from 34% to 21%. As a result, the Company was required to re-measure, through income tax expense, the deferred tax assets and liabilities using the enacted rate at which they are expected to be recovered or settled.

The Company follows guidance related to accounting for uncertainty in income taxes, which sets out a consistent framework to determine the appropriate level of tax reserves to maintain for uncertain tax positions. A tax position is recognized as a benefit only if it is more likely than not that the tax position would be sustained in a tax examination, with a tax examination presumed to occur. The amount recognized is the largest amount of tax benefit that has more than 50 percent likelihood of being realized upon examination. For tax positions not meeting the more likely than not test, no tax benefit is recorded. The Company had no material uncertain tax positions or accrued interest and penalties as of December 31, 2017 and 2016. The Company's policy is to account for interest as a component of interest expense and penalties as components of other expense. The Company is no longer subject to examination by taxing authorities for the years before January 1, 2013.

Quaint Oak Bancorp, Inc.

Notes to Consolidated Financial Statements (Continued)

Note 2 - Summary of Significant Accounting Policies (Continued)

Comprehensive Income (Loss)

Accounting principles generally accepted in the United States of America require that recognized revenue, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available for sale securities, are reported as a separate component of the stockholders' equity section of the balance sheet, such items, along with net income, are components of comprehensive income (loss).

Treasury Stock and Unallocated Common Stock

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

Share-Based Compensation

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

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

At December 31, 2017, the Company has three share-based plans: the 2008 Recognition and Retention Plan ("RRP"), the 2008 Stock Option Plan, and the 2013 Stock Incentive Plan. Awards under these plans were made in May 2008 and 2013. These plans are more fully described in Note 13.

The Company also has an employee stock ownership plan ("ESOP"). This plan is more fully described in Note 13. As ESOP shares are committed to be released and allocated among participants, the Company recognizes compensation expense equal to the average market price of the shares over the period earned.

Earnings Per Share

Amounts reported in earnings per share reflect earnings available to common stockholders for the period divided by the weighted average number of shares of common stock outstanding during the period, exclusive of unearned ESOP shares, unvested restricted stock (RRP) shares and treasury shares. Stock options and unvested restricted stock are regarded as potential common stock and are considered in the diluted earnings per share calculations to the extent they would have a dilutive effect if converted to common stock, computed using the "treasury stock" method.

Off-Balance Sheet Financial Instruments

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

Quaint Oak Bancorp, Inc.

Notes to Consolidated Financial Statements (Continued)

Note 2 - Summary of Significant Accounting Policies (Continued)

Reclassifications

Certain items in the 2016 consolidated financial statements have been reclassified to conform to the presentation in the 2017 consolidated financial statements. Such reclassifications did not have a material impact on the overall consolidated financial statements.

Change in Accounting Principal

On February 14, 2018, the Financial Accounting Standards Board finalized ASU 2018-02 – Income Statement-Reporting Comprehensive Income (Topic 220). This accounting standard allows companies to reclassify the "stranded" tax effect in accumulated other comprehensive income that resulted from the U.S. federal government enacted tax bill, H.R.1, an act to provide reconciliation pursuant to Titles II and V of the concurrent resolution on the Budget for Fiscal Year 2018 (Tax Cuts and Jobs Act), which requires deferred tax liabilities and assets to be adjusted for the effect of a change in tax laws.

The Company has elected to early adopt this accounting standard, which provides a benefit to the financial statements by more accurately aligning the impacts of the items carried in accumulated other comprehensive income with the associated tax effect. The adoption was applied on a modified retrospective and resulted in a one-time cumulative effect adjustment of $2,000 between retained earnings and accumulated other comprehensive income on the Consolidated Balance Sheets as of the beginning of the current period. The adjustment had no impact on net income or any prior periods presented.

Recent Accounting Pronouncements

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (a new revenue recognition standard). The Update's core principle is that a company will recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, this Update specifies the accounting for certain costs to obtain or fulfill a contract with a customer and expands disclosure requirements for revenue recognition. This Update is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Because the guidance does not apply to revenue associated with financial instruments, including loans and securities, we do not expect the new standard, or any of the amendments, to result in a material change from our current accounting for revenue because the majority of the Company's financial instruments are not within the scope of Topic 606. However, we do expect that the standard will result in new disclosure requirements, which are currently being evaluated.

In January 2016, the FASB issued ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. This Update applies to all entities that hold financial assets or owe financial liabilities and is intended to provide more useful information on the recognition, measurement, presentation, and disclosure of financial instruments. Among other things, this Update (a) requires equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income; (b) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment; (c) eliminates the requirement to disclose the fair value of financial instruments measured at amortized cost for entities that are not public business entities; (d) eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; (e) requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; (f) requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements; and (g) clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity's other deferred tax assets. ASU 2016-01 will be effective for the Company on January 1, 2018 and will not have a significant impact on our financial statements.

Quaint Oak Bancorp, Inc.

Notes to Consolidated Financial Statements (Continued)

Note 2 - Summary of Significant Accounting Policies (Continued)

Recent Accounting Pronouncements (Continued)

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The standard requires lessees to recognize the assets and liabilities that arise from leases on the balance sheet. A lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. A short-term lease is defined as one in which (a) the lease term is 12 months or less and (b) there is not an option to purchase the underlying asset that the lessee is reasonably certain to exercise. For short-term leases, lessees may elect to recognize lease payments over the lease term on a straight-line basis. For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2018, and interim periods within those years. The amendments should be applied at the beginning of the earliest period presented using a modified retrospective approach with earlier application permitted as of the beginning of an interim or annual reporting period. The Company is currently assessing the practical expedients it may elect at adoption, but does not anticipate the amendments will have a significant impact to the financial statements. Based on the Company's preliminary analysis of its current portfolio, the impact to the Company's balance sheet is estimated to result in less than a 1% increase in assets and liabilities. The Company also anticipates additional disclosures to be provided at adoption.

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. 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 Consolidated Financial Statements (Continued)

Note 2 - Summary of Significant Accounting Policies (Continued)

Recent Accounting Pronouncements (Continued)

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, which addresses eight specific cash flow issues with the objective of reducing diversity in practice. Among these include recognizing cash payments for debt prepayment or debt extinguishment as cash outflows for financing activities; cash proceeds received from the settlement of insurance claims should be classified on the basis of the related insurance coverage; and cash proceeds received from the settlement of bank-owned life insurance policies should be classified as cash inflows from investing activities while the cash payments for premiums on bank-owned policies may be classified as cash outflows for investing activities, operating activities, or a combination of investing and operating activities. The amendments in this Update are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. An entity that elects early adoption must adopt all of the amendments in the same period. The amendments in this Update should be applied using a retrospective transition method to each period presented. If it is impracticable to apply the amendments retrospectively for some of the issues, the amendments for those issues would be applied prospectively as of the earliest date practicable. The Company is currently evaluating the impact the adoption of the standard will have on the Company's statement of cash flows.

In December 2016, the FASB issued ASU 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customer. This Update, among others things, clarifies that guarantee fees within the scope of Topic 460, Guarantees, (other than product or service warranties) are not within the scope of Topic 606. The effective date and transition requirements for ASU 2016-20 are the same as the effective date and transition requirements for the new revenue recognition guidance. ASU 2016-20 will be effective for the Company on January 1, 2018 and will not have a significant impact on our financial statements.

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

In March 2017, the FASB issued ASU 2017-08, Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20). The amendments in this Update shorten the amortization period for certain callable debt securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. 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, 2018. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. An entity should apply the amendments in this Update on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. Additionally, in the period of adoption, an entity should provide disclosures about a change in accounting principle. This Update is not expected to have a significant impact on the Company's financial statements.

Quaint Oak Bancorp, Inc.

Notes to Consolidated Financial Statements (Continued)

Note 2 - Summary of Significant Accounting Policies (Continued)

Recent Accounting Pronouncements (Continued)

In May 2017, the FASB issued ASU 2017-09, Compensation – Stock Compensation (Topic 718), which affects any entity that changes the terms or conditions of a share-based payment award. This Update amends the definition of modification by qualifying that modification accounting does not apply to changes to outstanding share-based payment awards that do not affect the total fair value, vesting requirements, or equity/liability classification of the awards. The amendments in this Update are effective for all entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted, including adoption in any interim period, for (1) public business entities for reporting periods for which financial statements have not yet been issued and (2) all other entities for reporting periods for which financial statements have not yet been made available for issuance. The amendments in this Update should be applied prospectively to an award modified on or after the adoption date. This Update is not expected to have a significant impact on the Company's financial statements.

In January 2018, the FASB issued ASU 2018-01, Leases (Topic 842), which provides an optional transition practical expedient to not evaluate under Topic 842 existing or expired land easements that were not previously accounted for as leases under the current lease guidance in Topic 840. An entity that elects this practical expedient should evaluate new or modified land easements under Topic 842 beginning at the date the entity adopts Topic 842; otherwise, an entity should evaluate all existing or expired land easements in connection with the adoption of the new lease requirements in Topic 842 to assess whether they meet the definition of a lease. The effective date and transition requirements for the amendments are the same as the effective date and transition requirements in ASU 2016-02. This Update is not expected to have a significant impact on the Company's financial statements.

In February 2018, the FASB issued ASU 2018-02, Income Statement – Reporting Comprehensive Income (Topic 220). On December 22, 2017, the U.S. federal government enacted a tax bill, H.R.1, An Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018 (Tax Cuts and Jobs Act), which requires deferred tax liabilities and assets to be adjusted for the effect of a change in tax laws. The amendments in this Update allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. The amendments in this Update are effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption of the amendments in this Update is permitted, including adoption in any interim period, (1) for public business entities for reporting periods for which financial statements have not yet been issued and (2) for all other entities for reporting periods for which financial statements have not yet been made available for issuance. The amendments in this Update should be applied either in the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act is recognized. The Company adopted this standard as of December 31, 2017, which is more fully discussed in Note 1 under Change in Accounting Principal. The adjustment had no impact on net income or any prior periods presented.

Note 3 – Earnings Per Share

Earnings per share ("EPS") consists of two separate components, basic EPS and diluted EPS. Basic EPS is computed based on the weighted average number of shares of common stock outstanding for each period presented. Diluted EPS is calculated based on the weighted average number of shares of common stock outstanding plus dilutive common stock equivalents ("CSEs"). CSEs consist of shares that are assumed to have been purchased with the proceeds from the exercise of stock options, as well as unvested restricted stock (RRP) shares. Common stock equivalents which are considered antidilutive are not included for the purposes of this calculation. For the years ended December 31, 2017 and 2016, all unvested restricted stock program awards and outstanding stock options representing shares were dilutive.

Quaint Oak Bancorp, Inc.

Notes to Consolidated Financial Statements (Continued)

Note 3 – Earnings Per Share (Continued)

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

	For the Year Ended December 31,
	2017		2016
Net Income	$	1,467,000	$	1,498,000

Weighted average shares outstanding – basic		1,857,457		1,781,410
Effect of dilutive common stock equivalents		137,375		154,493
Adjusted weighted average shares outstanding – diluted		1,994,832		1,935,903

Basic earnings per share	$	0.79	$	0.84
Diluted earnings per share	$	0.74	$	0.77

Note 4 – Accumulated Other Comprehensive Loss

The following table presents the changes in accumulated other comprehensive loss by component, net of tax, for the years ended December 31, 2017 and 2016 (in thousands):

	Unrealized Losses on Investment Securities Available for Sale (1)
	2017			2016
Balance beginning of the year	$	(38	)	$	(12	)

Other comprehensive income (loss) before reclassifications		25			(26	)
Amount reclassified from accumulated other comprehensive loss		--			--
Total other comprehensive income (loss)		25			(26	)

Reclassification of certain income tax effects from accumulated other comprehensive income		(2	)		--
Balance end of the year	$	(15	)	$	(38	)

________________________

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

Note 5 – Investment in Interest-Earning Time Deposits

The investment in interest-earning time deposits as of December 31, 2017 and 2016, by contractual maturity, is shown below (in thousands):

	2017		2016
Due in one year or less	$	761	$	2,849
Due after one year through five years		4,118		3,249
Total	$	4,879	$	6,098

Quaint Oak Bancorp, Inc.

Notes to Consolidated Financial Statements (Continued)

Note 6 – Investment Securities Available for Sale

The amortized cost, gross unrealized gains and losses, and fair value of investment securities available for sale at December 31, 2017 and 2016 are summarized below (in thousands):

	December 31, 2017
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized (Losses)			Fair Value
Available for Sale:
Mortgage-backed securities:
Governmental National Mortgage Association securities	$	5,624	$	19	$	--		$	5,643
Federal Home Loan Mortgage Corporation securities		1,377		--		(35	)		1,342
Federal National Mortgage Association securities		570		--		--			570
Total mortgage-backed securities		7,571		19		(35	)		7,555
Debt securities:
U.S. government agency		360		--		(3	)		357
Total available-for-sale-securities	$	7,931	$	19	$	(38	)	$	7,912

	December 31, 2016
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized (Losses)			Fair Value
Available for Sale:
Mortgage-backed securities:
Governmental National Mortgage Association securities	$	6,608	$	1	$	(19	)	$	6,590
Federal Home Loan Mortgage Corporation securities		1,892		--		(21	)		1,871
Federal National Mortgage Association securities		752		--		(12	)		740
Total mortgage-backed securities		9,252		1		(52	)		9,201
Debt securities:
U.S. government agency		360		--		(6	)		354
Total available-for-sale-securities	$	9,612	$	1	$	(58	)	$	9,555

The amortized cost and fair value of debt securities at December 31, 2017, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties (in thousands):

	Available for Sale
	Amortized Cost		Fair Value
Due after one year through five years	$	360	$	357
Due after ten years		7,571		7,555
Total	$	7,931	$	7,912

Quaint Oak Bancorp, Inc.

Notes to Consolidated Financial Statements (Continued)

Note 6 – Investment Securities Available for Sale (Continued)

The following tables show the Company's gross unrealized losses and fair value, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position at December 31, 2017 and 2016 (in thousands):

	December 31, 2017
			Less than Twelve Months				Twelve Months or Greater					Total
	Number of Securities		Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses
Federal Home Loan Mortgage Corporation mortgage-backed securities		2	$	--	$	--	$	1,342	$	(35	)	$	1,342	$	(35	)
Debt securities, U.S. government agency		1		--		--		357		(3	)		357		(3	)
Total		3	$	--	$	--	$	1,699	$	(38	)	$	1,699	$	(38	)

	December 31, 2016
			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
Governmental National Mortgage Association mortgage-backed securities		8	$	5,874	$	(19	)	$	--	$	--	$	5,874	$	(19	)
Federal Home Loan Mortgage Corporation mortgage-backed securities		2		1,871		(21	)		--		--		1,871		(21	)
Federal National Mortgage Association mortgage-backed securities		1		740		(12	)		--		--		740		(12	)
Debt securities, U.S. government agency		1		354		(6	)		--		--		354		(6	)
Total		12	$	8,839	$	(58	)	$	--	$	--	$	8,839	$	(58	)

At December 31, 2017, there were three securities in an unrealized loss position that at such date had an aggregate depreciation of 2.21% from the Company's amortized cost basis. Management believes that the estimated fair value of the securities disclosed above is primarily dependent on the movement of market interest rates. Management evaluated the length of time and the extent to which the fair value has been less than cost and the financial condition and near term prospects of the issuer, including any specific events which may influence the operations of the issuer. The Company has the ability and intent to hold the securities until the anticipated recovery of fair value occurs. Management does not believe any individual unrealized loss as of December 31, 2017 represents an other-than-temporary impairment. There were no impairment charges recognized during the year ended December 31, 2017 or 2016.

Quaint Oak Bancorp, Inc.

Notes to Consolidated Financial Statements (Continued)

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

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

	December 31, 2017			December 31, 2016
Real estate loans:
One-to-four family residential:
Owner occupied	$	5,681		$	5,389
Non-owner occupied		51,833			51,893
Total one-to-four family residential		57,514			57,282
Multi-family (five or more) residential		21,715			14,641
Commercial real estate		92,234			77,730
Construction		15,632			15,355
Home equity		5,129			4,775
Total real estate loans		192,224			169,783

Commercial business		11,954			9,295
Other consumer		138			26
Total Loans		204,316			179,104

Deferred loan fees and costs		(837	)		(692	)
Allowance for loan losses		(1,812	)		(1,605	)
Net Loans	$	201,667		$	176,807

The following tables present the classes of the loan portfolio summarized by the aggregate pass rating and the classified ratings of special mention, substandard and doubtful within the Company's internal risk rating system as of December 31, 2017 and 2016 (in thousands):

	December 31, 2017
	Pass		Special Mention		Substandard		Doubtful		Total
One-to-four family residential owner occupied	$	5,258	$	423	$	--	$	--	$	5,681
One-to-four family residential non-owner occupied		51,372		29		432		--		51,833
Multi-family residential		21,715		--		--		--		21,715
Commercial real estate		91,549		399		286		--		92,234
Construction		13,562		--		2,070		--		15,632
Home equity		5,129		--		--		--		5,129
Commercial business		11,419		535		--		--		11,954
Other consumer		138		--		--		--		138
Total	$	200,142	$	1,386	$	2,788	$	--	$	204,316

Quaint Oak Bancorp, Inc.

Notes to Consolidated Financial Statements (Continued)

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

	December 31, 2016
	Pass		Special Mention		Substandard		Doubtful		Total
One-to-four family residential owner occupied	$	5,389	$	--	$	--	$	--	$	5,389
One-to-four family residential non-owner occupied		50,864		122		907		--		51,893
Multi-family residential		14,641		--		--		--		14,641
Commercial real estate		76,281		117		1,332		--		77,730
Construction		13,355		--		2,000		--		15,355
Home equity		4,775		--		--		--		4,775
Commercial business		9,295		--		--		--		9,295
Other consumer		26		--		--		--		26
Total	$	174,626	$	239	$	4,239	$	--	$	179,104

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, 2017 as well as the average recorded investment and related interest income for the year then ended (in thousands):

	December 31, 2017
	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	$	--	$	--	$	--	$	--	$	--
One-to-four family residential non-owner occupied		442		442		--		937		24
Multi-family residential		--		--		--		--		--
Commercial real estate		--		--		--		398		38
Construction		2,069		2,069		--		2,064		58
Home equity		45		45		--		47		5
Commercial business		--		--		--		--		--
Other consumer		--		--		--		--		--

With an allowance recorded:
One-to-four family residential owner occupied	$	--	$	--	$	--	$	--	$	--
One-to-four family residential non-owner occupied		214		214		70		214		5
Multi-family residential		--		--		--		--		--
Commercial real estate		133		133		1		395		9
Construction		--		--		--		--		--
Home equity		--		--		--		--		--
Commercial business		--		--		--		--		--
Other consumer		--		--		--		--		--

Total:
One-to-four family residential owner occupied	$	--	$	--	$	--	$	--	$	--
One-to-four family residential non-owner occupied		656		656		70		1,151		29
Multi-family residential		--		--		--		--		--
Commercial real estate		133		133		1		793		47
Construction		2,069		2,069		--		2,064		58
Home equity		45		45		--		47		5
Commercial business		--		--		--		--		--
Other consumer		--		--		--		--		--
Total	$	2,903	$	2,903	$	71	$	4,055	$	139

Quaint Oak Bancorp, Inc.

Notes to Consolidated Financial Statements (Continued)

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

The following table presents impaired loans by class, segregated by those for which a specific allowance was required and those for which a specific allowance was not necessary as of December 31, 2016 as well as the average recorded investment and related interest income for the year then ended (in thousands):

	December 31, 2016
	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	$	--	$	--	$	--	$	--	$	--
One-to-four family residential non-owner occupied		925		925		--		1,208		56
Multi-family residential		--		--		--		--		--
Commercial real estate		660		660		--		660		7
Construction		--		--		--		--		--
Home equity		49		49		--		82		6
Commercial business		--		--		--		--		--
Other consumer		--		--		--		--		--

With an allowance recorded:
One-to-four family residential owner occupied	$	--	$	--	$	--	$	--	$	--
One-to-four family residential non-owner occupied		167		167		28		169		8
Multi-family residential		--		--		--		--		--
Commercial real estate		133		133		11		133		9
Construction		--		--		--		--		--
Home equity		--		--		--		--		--
Commercial business		--		--		--		--		--
Other consumer		--		--		--		--		--

Total:
One-to-four family residential owner occupied	$	--	$	--	$	--	$	--	$	--
One-to-four family residential non-owner occupied		1,092		1,092		28		1,377		64
Multi-family residential		--		--		--		--		--
Commercial real estate		793		793		11		793		16
Construction		--		--		--		--		--
Home equity		49		49		--		82		6
Commercial business		--		--		--		--		--
Other consumer		--		--		--		--		--
Total	$	1,934	$	1,934	$	39	$	2,252	$	86

The loan portfolio also includes certain loans that have been modified in a troubled debt restructuring, where economic concessions have been granted to borrowers who have experienced or are expected to experience financial difficulties. These concessions typically result from loss mitigation activities and could include reductions in the interest rate, payment extensions, forbearance, or other actions. At December 31, 2017, the Company had eight loans totaling $714,000 that were identified as troubled debt restructurings. All eight of these loans were performing in accordance with their modified terms. At December 31, 2016, the Company had eight loans totaling $733,000 that were identified as troubled debt restructurings. All eight of these loans were performing in accordance with their modified terms at December 31, 2016. 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. During the year ended December 31, 2017, no new loans were identified as TDRs.

Quaint Oak Bancorp, Inc.

Notes to Consolidated Financial Statements (Continued)

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

The following tables present the Company's TDR loans as of December 31, 2017 and 2016 (dollar amounts in thousands):

	December 31, 2017
	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		5		536		--		536		25
Multi-family residential		--		--		--		--		--
Commercial real estate		1		133		--		133		1
Construction		--		--		--		--		--
Home equity		2		45		--		45		--
Commercial business		--		--		--		--		--
Other consumer		--		--		--		--		--
Total		8	$	714	$	--	$	714	$	26

	December 31, 2016
	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		5		551		--		551		28
Multi-family residential		--		--		--		--		--
Commercial real estate		1		133		--		133		11
Construction		--		--		--		--		--
Home equity		2		49		--		49		--
Commercial business		--		--		--		--		--
Other consumer		--		--		--		--		--
Total		8	$	733	$	--	$	733	$	39

The contractual aging of the TDRs in the tables above as of December 31, 2017 and 2016 is as follows (in thousands):

	December 31, 2017
	Accruing Past Due Less than 30 Days		Past Due 30-89 Days		Greater than 90 Days		Non- Accrual		Total
One-to-four family residential owner occupied	$	--	$	--	$	--	$	--	$	--
One-to-four family residential non-owner occupied		536		--		--		--		536
Multi-family residential		--		--		--		--		--
Commercial real estate		133		--		--		--		133
Construction		--		--		--		--		--
Home equity		45		--		--		--		45
Commercial business		--		--		--		--		--
Other consumer		--		--		--		--		--
Total	$	714	$	--	$	--	$	--	$	714

Quaint Oak Bancorp, Inc.

Notes to Consolidated Financial Statements (Continued)

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

	December 31, 2016
	Accruing Past Due Less than 30 Days		Past Due 30-89 Days		Greater than 90 Days		Non- Accrual		Total
One-to-four family residential owner occupied	$	--	$	--	$	--	$	--	$	--
One-to-four family residential non-owner occupied		551		--		--		--		551
Multi-family residential		--		--		--		--		--
Commercial real estate		133		--		--		--		133
Construction		--		--		--		--		--
Home equity		49		--		--		--		49
Commercial business		--		--		--		--		--
Other consumer		--		--		--		--		--
Total	$	733	$	--	$	--	$	--	$	733

Any reserve for an impaired TDR loan is based upon the present value of the future expected cash flows discounted at the loan's original effective rate or upon the fair value of the collateral less costs to sell, if the loan is deemed collateral dependent. At December 31, 2017 there were no commitments to lend additional funds to debtors whose loan terms have been modified as TDRs.

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

Following is a summary, by loan portfolio class, of changes in the allowance for loan losses for the year ended December 31, 2017 and recorded investment in loans receivable based on impairment evaluation as of December 31, 2017 (in thousands):

	December 31, 2017
	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	$	41	$	503		$	103	$	616		$	138		$	37		$	87	$	80	$	1,605
Charge-offs		--		(56	)		--		(24	)		--			--			--		--		(80	)
Recoveries		--		--			--		3			--			--			--		--		3
Provision		7		93			49		92			(2	)		(10	)		53		2		284
Ending balance	$	48	$	540		$	152	$	687		$	136		$	27		$	140	$	82	$	1,812
Ending balance evaluated
for impairment
Individually	$	--	$	70		$	--	$	1		$	--		$	--		$	--	$	--	$	71
Collectively	$	48	$	470		$	152	$	686		$	136		$	27		$	140	$	82	$	1,741
Loans receivable:
Ending balance	$	5,681	$	51,833		$	21,715	$	92,234		$	15,632		$	5,129		$	12,092	$	--	$	204,316
Ending balance evaluated
for impairment
Individually	$	--	$	656		$	--	$	133		$	2,069		$	45		$	--	$	--	$	2,903
Collectively	$	5,681	$	51,177		$	21,715	$	92,101		$	13,563		$	5,084		$	12,092	$	--	$	201,413

Quaint Oak Bancorp, Inc.

Notes to Consolidated Financial Statements (Continued)

Note 7 - 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, 2016 and recorded investment in loans receivable based on impairment evaluation as of December 31, 2016 (in thousands):

	December 31, 2016
	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	$	55		$	486	$	81	$	389	$	153		$	50		$	18	$	81		$	1,313
Charge-offs		--			--		--		--		--			--			--		--			--
Recoveries		--			--		--		--		--			--			--		--			--
Provision		(14	)		17		22		227		(15	)		(13	)		69		(1	)		292
Ending balance	$	41		$	503	$	103	$	616	$	138		$	37		$	87	$	80		$	1,605
Ending balance evaluated
for impairment
Individually	$	--		$	28	$	--	$	11	$	--		$	--		$	--	$	--		$	39
Collectively	$	41		$	475	$	103	$	605	$	138		$	37		$	87	$	80		$	1,566
Loans receivable:
Ending balance	$	5,389		$	51,893	$	14,641	$	77,730	$	15,355		$	4,775		$	9,321	$	--		$	179,104
Ending balance evaluated
for impairment
Individually	$	--		$	1,092	$	--	$	793	$	--		$	49		$	--	$	--		$	1,934
Collectively	$	5,389		$	50,801	$	14,641	$	76,937	$	15,355		$	4,726		$	9,321	$	--		$	177,170

The Bank allocated increased allowance for loan loss provisions to the commercial real estate, commercial business, and multi-family portfolio classes for the year ended December 31, 2016, due primarily to increased balances in these portfolio classes. The Bank allocated increased allowance for loan loss provisions to the 1-4 family residential non-owner occupied portfolio class for the year ended December 31, 2016, due primarily to increased specific reserves in this portfolio class. The Bank allocated decreased allowance for loan loss provisions to the construction, home equity, and one-to-four family owner occupied classes for the year ended December 31, 2016 due decreased balances or changes to qualitative factors in these portfolio classes.

Quaint Oak Bancorp, Inc.

Notes to Consolidated Financial Statements (Continued)

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

The following table presents non-accrual loans by classes of the loan portfolio as of December 31, 2017 and 2016 (in thousands):

	December 31, 2017		December 31, 2016
One-to-four family residential owner occupied	$	--	$	--
One-to-four family residential non-owner occupied		120		541
Multi-family residential		--		--
Commercial real estate		--		660
Construction		2,069		--
Home equity		--		--
Commercial business		--		--
Other consumer		--		--
Total	$	2,189	$	1,201

Non-performing loans, which consist of non-accruing loans plus accruing loans 90 days or more past due, amounted to $3.1 million and $1.9 million at December 31, 2017 and 2016, respectively. For the delinquent loans in our portfolio, we have considered our ability to collect the past due interest, as well as the principal balance of the loan, in order to determine whether specific loans should be placed on non-accrual status. In cases where our evaluations have determined that the principal and interest balances are collectible, we have continued to accrue interest.

For the years ended December 31, 2017 and 2016 there was no interest income recognized on non-accrual loans on a cash basis. Interest income foregone on non-accrual loans was approximately $119,000 and $115,000 for the years ended December 31, 2017 and 2016, respectively.

The performance and credit quality of the loan portfolio are also monitored by analyzing the age of the loans receivable as determined by the length of time a recorded payment is past due. The following tables present the classes of the loan portfolio summarized by the past due status as of December 31, 2017 and 2016 (in thousands):

	December 31, 2017
	30-89 Days Past Due		90 Days or More Past Due		Total Past Due		Current		Total Loans Receivable		Loans Receivable > 90 Days and Accruing

One-to-four family residential owner occupied	$	670	$	423	$	1,093	$	4,588	$	5,681	$	423
One-to-four family residential non-owner occupied		969		337		1,306		50,527		51,833		217
Multi-family residential		313		--		313		21,402		21,715		--
Commercial real estate		505		241		746		91,488		92,234		241
Construction		407		2,069		2,476		13,156		15,632		--
Home equity		51		--		51		5,078		5,129		--
Commercial business		--		--		--		11,954		11,954		--
Other consumer		--		--		--		138		138		--
Total	$	2,915	$	3,070	$	5,985	$	198,331	$	204,316	$	881

Quaint Oak Bancorp, Inc.

Notes to Consolidated Financial Statements (Continued)

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

	December 31, 2016
	30-89 Days Past Due		90 Days or More Past Due		Total Past Due		Current		Total Loans Receivable		Loans Receivable > 90 Days and Accruing

One-to-four family residential owner occupied	$	310	$	9	$	319	$	5,070	$	5,389	$	9
One-to-four family residential non-owner occupied		271		778		1,049		50,844		51,893		237
Multi-family residential		--		--		--		14,641		14,641		--
Commercial real estate		385		777		1,162		76,568		77,730		117
Construction		596		308		904		14,451		15,355		308
Home equity		115		--		115		4,660		4,775		--
Commercial business		43		--		43		9,252		9,295		--
Other consumer		--		--		--		26		26		--
Total	$	1,720	$	1,872	$	3,592	$	175,512	$	179,104	$	671

Note 8 - Premises and Equipment

The components of premises and equipment at December 31, 2017 and 2016 are as follows (in thousands):

	2017			2016
Land and land improvements	$	299		$	299
Buildings		1,316			1,178
Leasehold improvements		436			382
Furniture, fixtures and equipment		1,180			922
		3,231			2,781
Accumulated depreciation		(1,243	)		(1,051	)
Premises and equipment, net	$	1,988		$	1,730

Depreciation expense for the years ended December 31, 2017 and 2016 amounted to approximately $192,000 and $184,000, respectively.

The Company leases its office at 501 Knowles Avenue in Southampton, Pennsylvania as well as other office facilities and equipment. Lease expense was $151,000 and $121,000 for the years ended December 31, 2017 and 2016, respectively.

Note 9 – Goodwill and Other Intangible, Net

On August 1, 2016, Quaint Oak Insurance Agency, LLC began operations by acquiring the renewal rights to a book of business produced and serviced by an independent insurance agency located in New Britain, Pennsylvania, that provides a broad range of personal and commercial insurance coverage solutions. The Company paid $1.0 million for these rights. Based on a valuation, $515,000 of the purchase price was determined to be goodwill and $485,000 was determined to be related to the renewal rights to the book of business and deemed to be an other intangible asset. This other intangible asset is being amortized over a ten year period based upon the annual retention rate of the book of business. The balance of other intangible asset at December 31, 2017 was $416,000, net of accumulated amortization of $69,000. Amortization expense for the years ended December 31, 2017 and 2016 amounted to approximately $49,000 and $20,000, respectively.

Quaint Oak Bancorp, Inc.

Notes to Consolidated Financial Statements (Continued)

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

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

2018	$	49
2019		49
2020		49
2021		49
2022		49
Thereafter		171
Total	$	416

Note 10 - Deposits

Deposits and the weighted average interest rate at December 31, 2017 and 2016 consist of the following (in thousands):

		2017				2016
			Weighted				Weighted
			Average				Average
			Interest				Interest
		Amount	Rate			Amount	Rate
Non-interest bearing checking accounts	$	7,956	--	%	$	5,852	--	%
Passbook accounts		463	0.15			1,189	0.15
Savings accounts		2,353	0.22			1,784	0.20
Money market accounts		30,411	0.79			31,114	0.79
Certificate of deposit accounts		145,038	1.77			137,068	1.69
Total	$	186,221	1.47	%	$	177,007	1.41	%

A summary of certificates of deposit by maturity at December 31, 2017 is as follows (in thousands):

Years ending December 31:
2018	$	42,895
2019		25,863
2020		39,841
2021		27,366
2022		9,073
Total	$	145,038

The aggregate amount of certificates of deposit with a minimum denomination of $250,000 was $18.5 million and $14.5 million at December 31, 2017 and 2016, respectively.

Quaint Oak Bancorp, Inc.

Notes to Consolidated Financial Statements (Continued)

Note 11 - Borrowings

As of December 31, 2017, Quaint Oak Bank has a maximum borrowing capacity with the Federal Home Loan Bank of approximately $115.6 million. Quaint Oak Bank's Federal Home Loan Bank advances outstanding were $28.0 million and $15.5 million at December 31, 2017 and 2016, respectively. As of December 31, 2017, Quaint Oak Bank has $535,000 in borrowing capacity with the Federal Reserve Bank of Philadelphia. There were no borrowings under this facility at December 31, 2017 and 2016.

Federal Home Loan Bank short-term borrowings and the weighted interest rate consist of the following at December 31, 2017 and 2016 (dollars in thousands):

	At or For the Year Ended December 31,
	2017			2016
FHLB short-term borrowings:
Average balance outstanding	$	8,654		$	5,692
Maximum amount outstanding at any month-end during the period		11,500			7,000
Balance outstanding at end of period		10,000			7,000
Average interest rate during the period		1.17	%		0.54	%
Weighted average interest rate at end of period		1.54	%		0.74	%

Federal Home Loan Bank long-term borrowings and the weighted interest rate consist of the following at December 31, 2017 and 2016 (in thousands):

	December 31, 2017					December 31, 2016
			Weighted					Weighted
			Interest					Interest
Fixed rate borrowings maturing:	Amount		Rate			Amount		Rate
2017	$	--		-	%	$	2,500		1.15	%
2018		3,000		1.46			3,000		1.46
2019		3,000		1.86			2,000		1.95
2020		2,000		2.00			1,000		2.15
2021		3,000		2.05			--		--
2022		3,000		2.18			--		--
2023		3,000		2.33			--		--
2024		1,000		2.54			--		--
Total FHLB long-term debt	$	18,000		2.01	%	$	8,500		1.56	%

Quaint Oak Bancorp, Inc.

Notes to Consolidated Financial Statements (Continued)

Note 12 - Income Taxes

On December 22, 2017, the Tax Cuts and Jobs Act ("TCJA") was signed into law. The TCJA makes broad and complex changes to the U.S. tax code that affected our income tax rate in 2017. The TCJA reduces the U.S. federal corporate income tax rate from 34% to 21%. As a result, the Company was required to re-measure, through income tax expense, the deferred tax assets and liabilities using the enacted rate at which they are expected to be recovered or settled. The re-measurement of the net deferred tax asset resulted in additional income tax expense of $297,000 for the year-ended December 31, 2017.

The components of income tax expense for the years ended December 31, 2017 and 2016 are as follows (in thousands):

	2017			2016
Federal:
Current	$	911		$	888
Deferred		(65	)		(185	)
Change in corporate tax rate		297			--
Total federal		1,143			703
State, current		62			33
Total	$	1,205		$	736

The following table represents reconciliation between the reported income tax expense and the income tax expense which would be computed by applying the normal federal income tax rate of 34% to income before taxes for the years ended December 31, 2017 and 2016 is as follows (in thousands):

	2017			2016
Federal income tax at statutory rate	$	907		$	759
State tax, net of federal benefit		42			22
Stock compensation expense		(21	)		(21	)
Change in corporate tax rate		297			--
Other		(20	)		(24	)
Total	$	1,205		$	736

The components of the net deferred tax asset at December 31, 2017 and 2016 are as follows (in thousands):

	2017		2016
Deferred tax assets:
Allowance for loan losses	$	380	$	546
Stock-based compensation		13		25
Interest on non-accrual loans		5		6
Unrealized loss on investment securities available for sale		4		19
Deferred loan fees		176		235
Organization cost		1		2
Total deferred tax assets		579		833

Deferred tax liabilities:
Bank premises and equipment		(94	)		(103	)
Intangible		(5	)		(3	)
Total deferred tax liabilities		(99	)		(106	)

Net Deferred Tax Asset	$	480		$	727

Quaint Oak Bancorp, Inc.

Notes to Consolidated Financial Statements (Continued)

Note 12 - Income Taxes (Continued)

The net deferred tax asset at December 31, 2017 and 2016 of $480,000 and $727,000, respectively, is included in other assets. No valuation allowance was established at December 31, 2017 and 2016, in view of the Company's tax strategies and anticipated future taxable income as evidenced by the Company's earnings potential.

Note 13 – 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. The loan is secured by the unallocated shares of common stock held by the ESOP.

Shares of the Company's common stock purchased by the ESOP are held in a suspense account and reported as unallocated common stock held by the ESOP in stockholders' equity until released for allocation to participants. As the debt is repaid, shares are released from collateral and are allocated to each eligible participant based on the ratio of each such participant's base compensation to the total base compensation of eligible plan participants. As the unearned shares are committed to be released and allocated among participants, the Company recognizes compensation expense equal to the average market value of the shares, and the shares become outstanding for earnings per share computations. During the years ended December 31, 2017 and 2016, the Company recognized $185,000 and $171,000 of ESOP expense, respectively.

The following table represents the components of the ESOP shares at December 31, 2017 and 2016:

	2017		2016
Allocated shares		167,643		153,647
Unreleased shares		52,956		68,533
Total ESOP shares		220,599		222,180

Fair value of unreleased shares (in thousands)	$	688	$	822

Recognition and Retention and Stock Incentive Plans

In May 2008, the shareholders of Quaint Oak Bancorp approved the adoption of the 2008 Recognition and Retention Plan (the "RRP") and Trust Agreement. In order to fund the RRP, the 2008 Recognition and Retention Plan Trust acquired 111,090 shares of the Company's stock in the open market at an average price of $4.68 totaling $520,000. In May 2013, the shareholders of Quaint Oak Bancorp approved the adoption of the 2013 Stock Incentive Plan (the "Stock Incentive Plan"). The Stock Incentive Plan provides that no more than 48,750, or 25%, of the shares may be granted as restricted stock awards.

As of December 31, 2017, a total of 10,061 awards of restricted stock were unvested under the RRP and Stock Incentive Plan and up to 22,168 restricted stock awards were available for future grant under the Stock Incentive Plan and none under the RRP. The RRP and Stock Incentive Plan share awards have vesting periods of five years.

Quaint Oak Bancorp, Inc.

Notes to Consolidated Financial Statements (Continued)

Note 13 – Stock Compensation Plans (Continued)

Recognition and Retention and Stock Incentive Plans (Continued)

A summary of the status of the shares awarded under the RRP and Stock Incentive Plan as of December 31, 2017 and 2016 is as follows:

	2017					2016
	Number of Shares			Weighted Average Grant Date Fair Value		Number of Shares			Weighted Average Grant Date Fair Value
Unvested at the beginning of the year		20,524		$	8.10		30,784		$	8.10
Granted		--			--		--			--
Vested		(10,263	)		8.10		(10,260	)		8.10
Forfeited		(200	)		8.10		--			--
Unvested at the end of the year		10,061		$	8.10		20,524		$	8.10

Compensation expense on the restricted stock awards is recognized ratably over the five year vesting period in an amount which is equal to the fair value of the common stock at the date of grant. During each of the years ended December 31, 2017 and 2016, the Company recognized $84,000 of compensation expense. A tax benefit of approximately $29,000 was recognized during each of these periods. As of December 31, 2017, approximately $31,000 in additional compensation expense will be recognized over the remaining service period of approximately 0.4 years.

Stock Options

In May 2008, the shareholders of Quaint Oak Bancorp approved the adoption of the 2008 Stock Option Plan (the "Option Plan"). The Option Plan authorizes 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 Stock Incentive Plan approved by shareholders in May 2013 covered a total of 195,000 shares, of which 48,750 may be restricted stock awards, for a balance of 146,250 stock options assuming all the restricted shares are awarded.

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

As of December 31, 2017, a total of 265,302 grants of stock options were outstanding under the Option Plan and Stock Incentive Plan and 57,636 stock options were available for future grant under the Stock Incentive Plan and 4,152 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 Consolidated Financial Statements (Continued)

Note 13 – Stock Compensation Plans (Continued)

Stock Options (Continued)

A summary of option activity under the Company's Option Plan and Stock Incentive Plan for the years ended December 31, 2017 and 2016 is as follows:

	2017							2016
	Number of Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (in years)		Number of Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (in years)
Outstanding at the beginning of the year		316,348		$	6.49		3.8		354,266		$	6.33		4.7
Granted		--			--		--		--			--		--
Exercised		(45,534	)		5.00		--		(37,918	)		5.00		--
Forfeited		(5,512	)		6.89		--		--			--		--
Outstanding at the end of the period		265,302		$	6.74		3.2		316,348		$	6.49		3.8
Exercisable at the end of the period		235,462		$	6.57		2.9		255,708		$	6.11		3.2

At both December 31, 2017 and 2016, the aggregate intrinsic value of options outstanding was $1.7 million and options exercisable was $1.5 million. The aggregate intrinsic value of a stock option represents the total pre-tax intrinsic value (the amount by which the current market value of the underlying stock exceeds the exercise price of the option) that would have been received by the option holder had all option holders exercised their options on December 31, 2017 and December 31, 2016. This amount changes based on changes in the market value of the Company's common stock.

During each of the years ended December 31, 2017 and 2016, the Company recognized $45,000 of compensation expense. A tax benefit of approximately $11,000 was recognized during these periods. As of December 31, 2017, approximately $17,000 in additional compensation expense will be recognized over the remaining service period of approximately 0.4 years.

Note 14 - Transactions with Executive Officers and Directors

Certain directors and executive officers of the Company, their families and their affiliates are customers of the Bank. Any transactions with such parties, including loans and commitments, are in the ordinary course of business at normal terms, including interest rate and collateralization, prevailing at the time and do not represent more than normal risks of collectability. None of these individuals were indebted to the Company for loans at December 31, 2017 and 2016, respectively.

Quaint Oak Bancorp, Inc.

Notes to Consolidated Financial Statements (Continued)

Note 15 - Financial Instruments with Off-Balance Sheet Risk

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

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

A summary of the Company's financial instrument commitments at December 31, 2017 and 2016 is as follows (in thousands):

	2017		2016
Commitments to originate loans	$	15,921	$	10,228
Unfunded commitments under lines of credit		19,162		15,443

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

The Company leases its office at 501 Knowles Avenue in Southampton, Pennsylvania as well as other office facilities and equipment. The leases range in terms from one year to 10 years, some of which include renewal options as well as specific provisions relating to rent increases.

Future minimum annual rental payments required under non-cancelable operating leases are as follows (in thousands):

Year	Rental Amount
2018	$	132
2019		115
2020		112
2021		101
2022		40
Thereafter		175
	$	675

Quaint Oak Bancorp, Inc.

Notes to Consolidated Financial Statements (Continued)

Note 16 - Regulatory Matters

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

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth below) of total, Tier 1, and common equity Tier 1 capital (as defined in the regulations) to risk-weighted assets, and of Tier 1 capital to average assets. Management believes, as of December 31, 2017, that the Bank meets all capital adequacy requirements to which it is subject.

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

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

As of December 31, 2017 the Bank was well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since December 31, 2017 that management believes have changed the Bank's category. The Company's ratios do not differ significantly from the Bank's ratios presented below.

Quaint Oak Bancorp, Inc.

Notes to Consolidated Financial Statements (Continued)

Note 16 - Regulatory Matters (Continued)

The Bank's actual capital amounts and ratios at December 31, 2017 and 2016 and the minimum amounts and ratios required for capital adequacy purposes and to be well capitalized under the prompt corrective action provisions are as follows (dollars in thousands):

Actual

For Capital Adequacy

Purposes

To be Well Capitalized

Under Prompt

Corrective Action

Provisions

Amount

Ratio

Amount

Ratio

Amount

Ratio

As of December 31, 2017:

Total capital (to risk-weighted assets)

21,674

12.31

≥ 14,090

≥8.00

≥ 17,613

≥10.00

Tier 1 capital (to risk-weighted assets)

19,835

11.26

≥ 10,568

≥6.00

≥ 14,090

≥ 8.00

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

19,835

11.26

≥ 7,926

≥4.50

≥ 11,449

≥ 6.50

Tier 1 capital (to average assets)

19,835

8.54

≥ 9,288

≥4.00

≥ 11,610

≥ 5.00

Actual

For Capital Adequacy

Purposes

To be Well Capitalized

Under Prompt

Corrective Action

Provisions

Amount

Ratio

Amount

Ratio

Amount

Ratio

As of December 31, 2016:

Total capital (to risk-weighted assets)

20,302

13.20

≥ 12,307

≥8.00

≥15,383

≥10.00

Tier 1 capital (to risk-weighted assets)

18,670

12.14

≥ 9,230

≥6.00

≥ 12,307

≥ 8.00

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

18,670

12.14

≥ 6,922

≥4.50

≥ 9,999

≥ 6.50

Tier 1 capital (to average assets)

18,670

8.94

≥ 8,356

≥4.00

≥ 10,445

≥ 5.00

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

Banking regulations place certain restrictions on dividends paid by the Bank to the Company. The Bank is subject to certain restrictions on the amount of dividends that it may declare without prior regulatory approval.

Quaint Oak Bancorp, Inc.

Notes to Consolidated Financial Statements (Continued)

Note 17 – Fair Value Measurements and Fair Values of Financial Instruments

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

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

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

Level I:

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

Level II:

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

Level III:

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

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

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

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

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

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

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

Quaint Oak Bancorp, Inc.

Notes to Consolidated Financial Statements (Continued)

Note 17 – Fair Value Measurements and Fair Values of Financial Instruments (Continued)

The table below sets forth the financial assets and liabilities that were accounted for on a recurring and nonrecurring basis by level within the fair value hierarchy as of December 31, 2017 (in thousands):

	December 31, 2017
	Fair Value Measurements Using:
	Total Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Unobservable Inputs (Level 3)
Recurring fair value measurements
Investment securities available for sale
Governmental National Mortgage Association mortgage-backed securities	$	5,643	$	--	$	5,643	$	--
Federal Home Loan Mortgage Corporation mortgage-backed securities		1,342		--		1,342		--
Federal National Mortgage Association mortgage-backed securities		570		--		570		--
Debt securities, U.S. government agency		357		--		357		--
Total investment securities available for sale	$	7,912	$	--	$	7,912	$	--
Total recurring fair value measurements	$	7,912	$	--	$	7,912	$	--

Nonrecurring fair value measurements
Impaired loans	$	2,832	$	--	$	--	$	2,832
Total nonrecurring fair value measurements	$	2,832	$	--	$	--	$	2,832

	December 31, 2016
	Fair Value Measurements Using:
	Total Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Unobservable Inputs (Level 3)
Recurring fair value measurements
Investment securities available for sale
Governmental National Mortgage Association mortgage-backed securities	$	6,590	$	--	$	6,590	$	--
Federal Home Loan Mortgage Corporation mortgage-backed securities		1,871		--		1,871		--
Federal National Mortgage Association mortgage-backed securities		740		--		740		--
Debt securities, U.S. government agency		354		--		354		--
Total investment securities available for sale	$	9,555	$	--	$	9,555	$	--
Total recurring fair value measurements	$	9,555	$	--	$	9,555	$	--

Nonrecurring fair value measurements
Impaired loans	$	1,895	$	--	$	--	$	1,895
Other real estate owned		435		--		--		435
Total nonrecurring fair value measurements	$	2,330	$	--	$	--	$	2,330

Quaint Oak Bancorp, Inc.

Notes to Consolidated Financial Statements (Continued)

Note 17 – 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 December 31, 2017 and 2016 (dollars in thousands):

	December 31, 2017
	Quantitative Information About Level 3 Fair Value Measurements
	Total Fair Value		Valuation Techniques	Unobservable Input	Range (Weighted Average)
Impaired loans	$	2,832	Appraisal of collateral (1)	Appraisal adjustments (2)		0%-27% (1	%)

	December 31, 2016
	Quantitative Information About Level 3 Fair Value Measurements
	Total Fair Value		Valuation Techniques	Unobservable Input	Range (Weighted Average)
Impaired loans	$	1,895	Appraisal of collateral (1)	Appraisal adjustments (2)		0%-22% (2	%)

Other real estate owned	$	435	Appraisal of collateral (1)	Appraisal adjustments (2)		0%-29% (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.

					Fair Value Measurements at
					December 31, 2017
	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
Cash and cash equivalents	$	7,910	$	7,910	$	7,910	$	--	$	--
Investment in interest-earning time deposits		4,879		4,912		--		--		4,912
Investment securities available for sale		7,912		7,912		--		7,912		--
Loans held for sale		7,006		7,232		--		7,232		--
Loans receivable, net		201,667		202,803		--		--		202,803
Accrued interest receivable		1,021		1,021		1,021		--		--
Investment in FHLB stock		1,234		1,234		1,234		--		--
Bank-owned life insurance		3,814		3,814		3,814		--		--

Financial Liabilities
Deposits		186,221		187,309		41,183		--		146,126
FHLB short-term borrowings		10,000		10,000		10,000		--		--
FHLB long-term borrowings		18,000		16,982		--		--		16,982
Accrued interest payable		167		167		167		--		--

Quaint Oak Bancorp, Inc.

Notes to Consolidated Financial Statements (Continued)

Note 17 – Fair Value Measurements and Fair Values of Financial Instruments (Continued)

The estimated fair values of the Company's financial instruments were as follows at December 31, 2017 and 2016 (in thousands):

					Fair Value Measurements at
					December 31, 2016
	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
Cash and cash equivalents	$	9,300	$	9,300	$	9,300	$	--	$	--
Investment in interest-earning time deposits		6,098		6,163		--		--		6,163
Investment securities available for sale		9,555		9,555		--		9,555		--
Loans held for sale		4,712		4,879		--		4,879		--
Loans receivable, net		176,807		177,870		--		--		177,870
Accrued interest receivable		862		862		862		--		--
Investment in FHLB stock		713		713		713		--		--
Bank-owned life insurance		3,728		3,728		3,728		--		--

Financial Liabilities
Deposits		177,007		179,050		39,939		--		139,111
FHLB short-term borrowings		7,000		7,000		7,000		--		--
FHLB long-term borrowings		8,500		8,507		--		--		8,507
Accrued interest payable		142		142		142		--		--

The following methods and assumptions were used to measure the fair value of financial instruments recorded at cost on the Company's consolidated balance sheets:

Cash and Cash Equivalents. The carrying amounts reported in the consolidated balance sheets for cash and short-term instruments approximate those assets' fair values.

Interest-Earning Time Deposits. Fair values for interest-earning time deposits are estimated using a discounted cash flow calculation that applies interest rates currently being offered in the market on certificates to a schedule of aggregated expected monthly maturities on time deposits. The Company generally purchases amounts below the insured limit, limiting the amount of credit risk on these time deposits.

Loans Held for Sale. Fair values of loans held for sale are based on commitments on hand from investors at prevailing market rates.

Loans Receivable, Net. The fair values of loans are estimated using discounted cash flow methodology. The discount rates take into account interest rates currently being offered to customers for loans with similar terms, the credit risk associated with the loan and market factors, including liquidity. The valuation of the loan portfolio reflects discounts that the Company believes are consistent with transactions occurring in the market place for both performing and distressed loan types. The carrying value that fair value is compared to is net of the allowance for loan losses and other associated premiums and discounts. Due to the significant judgment involved in evaluating credit quality, loans are classified with Level 3 of the fair value hierarchy.

Accrued Interest Receivable. The carrying amount of accrued interest receivable approximates its fair value.

Investment in Federal Home Loan Bank Stock. The carrying amount of restricted investment in Federal Home Loan Bank stock approximates fair value, and considers the limited marketability of such securities.

Bank-Owned Life Insurance. The carrying amount of the investment in bank-owned life insurance approximates its cash surrender value under the insurance policies.

Deposits. The carrying amount is considered a reasonable estimate of fair value for demand savings and money market deposit accounts. The fair value of fixed maturity certificates of deposit is estimated by a discounted cash flow method using the rates currently offered for deposits of similar maturities.

Federal Home Loan Bank Borrowings. Fair values of long-term FHLB borrowings are estimated based on rates currently available to the Company for similar terms and remaining maturities. The carrying amount of short-term FHLB borrowings approximates its fair value.

Accrued Interest Payable. The carrying amount of accrued interest payable approximates its fair value.

Off-Balance Sheet Financial Instruments. Off-balance sheet financial instruments consist of commitments to extend credit. Fair values for commitments to extend credit are estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreement and the present credit standing of the counterparties. The estimated fair value of the commitments to extend credit are insignificant and therefore are not presented in the above table.

Quaint Oak Bancorp, Inc.

Notes to Consolidated Financial Statements (Continued)

Note 18 – Quaint Oak Bancorp, Inc. (Parent Company Only)

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

Balance Sheets

	December 31,
	2017		2016
Assets
Cash and cash equivalents	$	211	$	206
Investment in Quaint Oak Bank		20,552		19,201
Premises and equipment, net		1,423		1,322
Other assets		10		77
Total Assets	$	22,196	$	20,806

Liabilities and Stockholders' Equity
Other liabilities	$	11	$	16
Stockholders' equity		22,185		20,790
Total Liabilities and Stockholders' Equity	$	22,196	$	20,806

Statements of Income

	For the Year Ended December 31,
	2017		2016
Income
Dividends from subsidiary	$	250	$	--
Rental income		149		108
Total Income		399		108

Expenses
Occupancy and equipment expense		101		96
Other expenses		96		91
Total Expenses		197		187

Net Income (Loss) Before Income Taxes		202		(79	)
Equity in Undistributed Net Income of Subsidiary		1,246		1,550
Income Tax Benefit		19		27
Net Income	$	1,467	$	1,498

Comprehensive Income	$	1,492	$	1,472

Quaint Oak Bancorp, Inc.

Notes to Consolidated Financial Statements (Continued)

Note 18 – Quaint Oak Bancorp, Inc. (Parent Company Only) (Continued)

Statements of Cash Flows

	For the Year Ended December 31,
	2017			2016

Operating Activities
Net income	$	1,467		$	1,498
Adjustments to reconcile net income to net cash provided by operating activities:
Undistributed net income in subsidiary		(1,246	)		(1,550	)
Depreciation expense		38			35
Stock-based compensation expense		314			300
Decrease (Increase) in other assets		(13	)		(92	)
(Decrease) Increase in other liabilities		(5	)		3
Net cash provided by operating activities		555			194

Investing Activities
Purchase of property and equipment		(139	)		(46	)
Net cash used in investing activities		(139	)		(46	)

Financing Activities
Dividends paid		(364	)		(283	)
Purchase of treasury stock		(347	)		(17	)
Proceeds from the reissuance of treasury stock		94			92
Proceeds from the exercise of stock options		206			190
Net cash used in financing activities		(411	)		(18	)

Net Increase in Cash and Cash Equivalents		5			130
Cash and Cash Equivalents-Beginning of Year		206			76
Cash and Cash Equivalents-End of Year	$	211		$	206

Quaint Oak Bancorp, Inc.

DIRECTORS AND EXECUTIVE OFFICERS

Directors of Quaint Oak Bancorp and Quaint Oak Bank

Robert T. Strong President and Chief Executive Officer	James J. Clarke, Ph.D. Principal of Clarke Consulting, Villanova, PA

Robert J. Phillips Chairman of the Board Partner, Phillips and Phillips Enterprises, Doylestown, PA	Andrew E. DiPiero, Jr., Esq. Attorney with Baratta, Russell & Baratta, Huntingdon Valley, PA

George M. Ager, Jr. Currently retired	Kenneth R. Gant, MBA Associate Agent, Landis Agencies, Quakertown, PA

John J. Augustine, CPA Executive Vice President & Chief Financial Officer	Director of Quaint Oak Bank Ray S. Greenberg, CFP Owner of Financial Expertise, Feasterville, PA

Executive Officers

Diane J. Colyer Senior Vice President and Corporate Secretary, Quaint Oak Bancorp, Inc. and Quaint Oak Bank	William R. Gonzalez Senior Vice President, Business Development, Quaint Oak Bank

Curt T. Schulmeister Senior Commercial Loan Officer, Quaint Oak Bank	Robert Farrer Vice President Risk and Compliance, Information Technology Security Officer and Community Reinvestment Act Officer, Quaint Oak Bank


LOCATIONS

Delaware Valley Regional Banking Office	Quaint Oak Insurance	Lehigh Valley Regional Banking Office
501 Knowles Avenue	4275 County Line Road, Suite 14	1710 Union Boulevard
Southampton, PA 18966	Chalfont, PA 18914	Allentown, PA 18109
(215) 364-4059	(215) 345-0962	(610) 351-9960

www.quaintoak.com

TRANSFER AGENT / REGISTRAR		INVESTOR RELATIONS CONTACT

Shareholders needing assistance with stock records, transfers or lost certificates, please contact Quaint Oak Bancorp, Inc.'s transfer agent, Computershare, Inc.		Shareholders, investors and analysts interested in other corporate information about Quaint Oak Bancorp, Inc. may contact:

Computershare, Inc.		Diane J. Colyer
211 Quality Circle, Suite 210		Quaint Oak Bancorp, Inc.
College Station, Texas 77845		501 Knowles Avenue
(800) 368-5948		Southampton, Pennsylvania 18966
www.computershare.com		(866) 795-4499
		dcolyer@quaintoak.com

Attached files

Stock widget

Investing forum

QUAINT OAK BANCORP INC Reports