UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C.  20549





FORM
10-Q


(Mark
One)





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





For the
quarterly period ended June
30,
2008





OR





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





For the
transition period from ____________ to _______________





Commission
File Number:000-52694





QUAINT
OAK BANCORP, INC.


(Exact
name of small business issuer as specified in its charter)





Pennsylvania
            
            35-2293957(State
      or other jurisdiction of incorporation or organization)
            
            (IRS
      Employer Identification No.)





607 Lakeside Drive, Southampton,
Pennsylvania 18966


(Address
of principal executive offices)





(215) 364-4059


(Issuer’s
telephone number)












Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
past 12 months (or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing requirements for the
past 90 days.   Yes TNo £





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.  See the definitions of "large accelerated filer,"
"accelerated filer" and "smaller reporting company" in Rule 12b-2 of the
Exchange Act. (Check one):


Large
      accelerated filer £
            
            Accelerated
      filer                  
      £Non-accelerated
      filer   £
            
            Smaller
      reporting company T(Do
      not check if smaller reporting
company)





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).   Yes £No T





Indicate
the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date:  As of July 31, 2008,
1,388,625 shares of common stock were issued and outstanding.












INDEX





PagePART
      I
            -
            FINANCIAL
      INFORMATIONItem
      1:
            
            Financial Statements:Consolidated Balance Sheets as of June 30, 2008 and December
      31, 2007 (Unaudited)
            
            1Consolidated Statements of Income for the Three Months and Six
      Months Ended June 30, 2008 and 2007 (Unaudited)
            
            2Consolidated Statement of Stockholders’ Equity for the Six
      Months Ended June 30, 2008 (Unaudited)
            
            3Consolidated Statements of Cash Flows for the Six Months Ended
      June 30, 2008 and 2007 (Unaudited)
            
            4Notes to the Unaudited Consolidated Financial
      Statements
            
            5Item
      2:
            
            Management’s Discussion and Analysis of Financial Condition and
      Results of Operations
            
            17Item
      3:
            
            Quantitative and Qualitative Disclosures About Market
      Risk
            
            25Item
      4T:
            
            Controls and Procedures
            
            25PART
      II
            -
            OTHER
      INFORMATIONItem
      1:
            
            Legal Proceedings
            
            26Item
      1A:
            
            Risk Factors
            
            26Item
      2:
            
            Unregistered Sales of Equity Securities and Use of
      Proceeds
            
            26Item
      3:
            
            Defaults upon Senior Securities
            
            27Item
      4:
            
            Submission of Matters to a Vote of Security
      Holders
            
            27Item
      5:
            
            Other information
            
            27Item
      6:
            
            Exhibits
            
            28SIGNATURES




Index





PART
I





ITEM1. CONSOLIDATED FINANCIAL STATEMENTS


QuaintOak Bancorp, Inc.


Consolidated
Balance Sheets (Unaudited)





At
      June 30,
            
            
            At
      December 31,2008
            
            
            2007ASSETS
            
            (In
      thousands, except share data)Due
      from banks, non-interest-bearing
            
            $
            646
            
            
            $
            1,220Due
      from banks, interest-bearing
            
            
            3,273
            
            
            
            3,767Cash
      and cash equivalents
            
            
            3,919
            
            
            
            4,987Investment
      in interest-earning time deposits
            
            
            2,084
            
            
            
            1,835Investment
      securities available for sale
            
            
            1,393
            
            
            
            2,001Investment
      securities held to maturity (fair value-2008 $7,044; 2007 $2,265
      )
            
            
            7,118
            
            
            
            2,253Investment
      in Federal Home Loan Bank stock, at cost
            
            
            446
            
            
            
            237Loans
      receivable, net of allowance for loan losses 2008 $713; 2007
      $667
            
            
            62,717
            
            
            
            61,656Premises
      and equipment, net
            
            
            80
            
            
            
            59Accrued
      interest receivable and other assets
            
            
            614
            
            
            
            517Total
      Assets
            
            $
            78,371
            
            
            $
            73,545LIABILITIES
      AND STOCKHOLDERS' EQUITYLIABILITIESDeposits,
      interest-bearing
            
            $
            55,992
            
            
            $
            55,261Federal
      Home Loan Bank advances
            
            
            4,250
            
            
            
            -Advances
      from borrowers for taxes and insurance
            
            
            675
            
            
            
            600Accrued
      interest payable and other liabilities
            
            
            158
            
            
            
            127Total
      Liabilities
            
            
            61,075
            
            
            
            55,988STOCKHOLDERS'
      EQUITYPreferred
      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; 1,388,625 issued and
      outstanding at June 30, 2008 and December 31, 2007
            
            
            14
            
            
            
            14Additional
      paid-in capital
            
            
            13,352
            
            
            
            13,337Unallocated
      common stock held by:Employee
      Stock  Ownership Plan (ESOP)
            
            
            (986
            )
            
            
            (1,021
            )Recognition
      & Retention Plan Trust (RRP)
            
            
            (520
            )
            
            
            -Retained
      earnings
            
            
            5,436
            
            
            
            5,227Total
      Stockholders' Equity
            
            
            17,296
            
            
            
            17,557Total
      Liabilities and Stockholders’ Equity
            
            $
            78,371
            
            
            $
            73,545




See
accompanying notes to consolidated financial
statements.


1
 Index





QuaintOak Bancorp, Inc.


Consolidated
Statements of Income (Unaudited)





For
      the Three
              Months
      Ended
            
            
            For
      the Six
              Months
      EndedJune
      30,
            
            
            June
      30,2008
            
            
            2007
            
            
            2008
            
            
            2007Interest
      Income
            
            (In
      thousands, except for share data)Loans
      receivable, including fees
            
            $
            1,123
            
            
            $
            934
            
            
            $
            2,172
            
            
            $
            1,876Short-term
      investments and investment securities
            
            
            136
            
            
            
            67
            
            
            
            264
            
            
            
            143Dividends
            
            
            2
            
            
            
            4
            
            
            
            5
            
            
            
            7Total
      Interest Income
            
            
            1,261
            
            
            
            1,005
            
            
            
            2,441
            
            
            
            2,026Interest
      ExpenseDeposits
            
            
            579
            
            
            
            597
            
            
            
            1,191
            
            
            
            1,181Federal
      Home Loan Bank Borrowings
            
            
            31
            
            
            
            -
            
            
            
            31
            
            
            
            -Total
      Interest Expense
            
            
            610
            
            
            
            597
            
            
            
            1,222
            
            
            
            1,181Net
      Interest Income
            
            
            651
            
            
            
            408
            
            
            
            1,219
            
            
            
            845Provision
      for Loan Losses
            
            
            29
            
            
            
            28
            
            
            
            66
            
            
            
            18Net
      Interest Income after Provision for Loan Losses
            
            
            622
            
            
            
            380
            
            
            
            1,153
            
            
            
            827Non-Interest
      IncomeFees
      and services charges
            
            
            19
            
            
            
            9
            
            
            
            30
            
            
            
            17Investment
      securities losses
            
            
            (20
            )
            
            
            -
            
            
            
            (20
            )
            
            
            -Total
      Non-Interest Income (Losses)
            
            
            (1
            )
            
            
            9
            
            
            
            10
            
            
            
            17Non-Interest
      ExpenseSalaries
      and employee benefits
            
            
            219
            
            
            
            176
            
            
            
            401
            
            
            
            333Directors'
      fees and expenses
            
            
            47
            
            
            
            42
            
            
            
            103
            
            
            
            80Occupancy
      and equipment
            
            
            24
            
            
            
            20
            
            
            
            47
            
            
            
            39Professional
      fees
            
            
            41
            
            
            
            18
            
            
            
            110
            
            
            
            43Regulatory
            
            
            16
            
            
            
            5
            
            
            
            33
            
            
            
            10Other
            
            
            34
            
            
            
            29
            
            
            
            69
            
            
            
            58Total
      Non-Interest Expense
            
            
            381
            
            
            
            290
            
            
            
            763
            
            
            
            563Income
      before Income Taxes
            
            
            240
            
            
            
            99
            
            
            
            400
            
            
            
            281Income
      Taxes
            
            
            93
            
            
            
            38
            
            
            
            156
            
            
            
            109Net
      Income
            
            $
            147
            
            
            $
            61
            
            
            $
            244
            
            
            $
            172Earnings
      per share - basic
            
            $
            0.12
            
            
            NA
            
            
            $
            0.19
            
            
            NAAverage
      shares outstanding - basic
            
            
            1,260,768
            
            
            NA
            
            
            
            1,270,556
            
            
            NAEarnings
      per share - diluted
            
            $
            0.12
            
            
            NA
            
            
            $
            0.19
            
            
            NAAverage
      shares outstanding - diluted
            
            
            1,262,678
            
            
            NA
            
            
            
            1,272,466
            
            
            NA




See accompanying notes to
consolidated financial statements.


2
 Index





QuaintOak Bancorp, Inc.


Consolidated
Statements of Stockholders' Equity (Unaudited)






Six Months Ended June 30,
2008




Common
      Stock(In
      thousands, except share data)
              
              Number
      of Shares
              
              
              Amount
              
              
              Additional
      Paid-in Capital
              
              
              Unallocated
      Common Stock Held by ESOP
              
              
              Unallocated
      Common Stock Held by RRP
              
              
              Retained
      Earnings
              
              
              Total
      Stockholders’ EquityBALANCE
      – DECEMBER 31, 2007
              
              
              1,388,625
              
              
              $
              14
              
              
              $
              13,337
              
              
              $
              (1,021
              )
              
              $
              -
              
              
              $
              5,227
              
              
              $
              17,557Common
      stock allocated by ESOP
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              35
              
              
              
              
              
              
              
              
              
              
              
              35Common
      stock acquired for Recognition and Retention Plan Trust
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (520
              )
              
              
              
              
              
              
              (520
              )Stock
      based compensation expense
              
              
              
              
              
              
              
              
              
              
              15
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              15Cash
      dividends declared ($0.025 per share)
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (35
              )
              
              
              (35
              )Net
      income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              244
              
              
              
              244BALANCE
      – June 30, 2008
              
              
              1,388,625
              
              
              $
              14
              
              
              $
              13,352
              
              
              $
              (986
              )
              
              $
              (520
              )
              
              $
              5,436
              
              
              $
              17,296




See accompanying notes to
consolidated financial statements.





3
 Index





QuaintOak Bancorp, Inc.


Consolidated
Statements of Cash Flows (Unaudited)





For
      the Six Months EndedJune 30,2008
            
            
            2007Cash
      Flows from Operating Activities
            
            (In
      Thousands)Net
      income
            
            $
            244
            
            
            $
            172Adjustments
      to reconcile net income to net cash provided by operating
      activities:Provision
      for loan losses
            
            
            66
            
            
            
            18Depreciation
      expense
            
            
            13
            
            
            
            7Net
      amortization of securities premiums
            
            
            1
            
            
            
            -Amortization
      of deferred loan fees and costs
            
            
            (7
            )
            
            
            (10
            )Deferred
      income taxes
            
            
            (24
            )
            
            
            -Stock-based
      compensation expense
            
            
            50
            
            
            
            -Loss
      on investment securities
            
            
            20
            
            
            
            -Gain
      on the sale of other real estate owned
            
            
            (1
            )
            
            
            -Increase
      in accrued interest receivable and other assets
            
            
            (73
            )
            
            
            (336
            )Increase
      (decrease) in accrued interest payable and other
    liabilities
            
            
            31
            
            
            
            (19
            )Net
      Cash Provided by (Used in) Operating Activities
            
            
            320
            
            
            
            (168
            )Cash
      Flows from Investing ActivitiesNet
      (increase) decrease in investment in interest-earning time
      deposits
            
            
            (249
            )
            
            
            140Purchase
      of investment securities available for sale
            
            
            (509
            )
            
            
            -Purchase
      of investment securities held to maturity
            
            
            (4,903
            )
            
            
            -Proceeds
      from the sale or redemption of investment securities available for
      sale
            
            
            1,097
            
            
            
            -Principal
      payments on investment securities held to maturity
            
            
            37
            
            
            
            -Purchase
      of property and equipment
            
            
            (34
            )
            
            
            (4
            )Net
      (increase) decrease in Federal Home Loan Bank stock
            
            
            (209
            )
            
            
            10Proceeds
      from the sale of other real estate owned
            
            
            82
            
            
            
            -Net
      increase in loans receivable
            
            
            (1,201
            )
            
            
            (1,685
            )Net
      Cash Used in Investing Activities
            
            
            (5,889
            )
            
            
            (1,539
            )Cash
      Flows from Financing ActivitiesNet
      increase (decrease) in deposits
            
            
            731
            
            
            
            (500
            )Increase
      in Federal Home Loan Bank advances
            
            
            4,250
            
            
            
            -Dividends
      paid
            
            
            (35
            )
            
            
            -Purchase
      of common shares for Recognition and Retention Plan Trust
            
            
            (520
            )
            
            
            -Increase
      in advances from borrowers for taxes and insurance
            
            
            75
            
            
            
            36Net
      Cash Provided by (Used in) Financing Activities
            
            
            4,501
            
            
            
            (464
            )Net Decrease
      in Cash and Cash Equivalents
            
            
            (1,068
            )
            
            
            (2,171
            )Cash
      and Cash Equivalents – Beginning of Period
            
            
            4,987
            
            
            
            4,197Cash
      and Cash Equivalents – End of Period
            
            $
            3,919
            
            
            $
            2,026Supplementary
      Disclosure of Cash Flow and Non-Cash Information:Cash
      payments for interest
            
            $
            1,217
            
            
            $
            1,176Cash
      payments for taxes
            
            $
            191
            
            
            $
            197Transfer
      of loan to other real estate owned
            
            $
            81
            
            
            
            -




See accompanying notes to
consolidated financial statements.


4
 Index





QuaintOak Bancorp, Inc.


Notes
to Unaudited Consolidated Financial Statements







Note
1 – Financial Statement Presentation and Significant Accounting
Policies




Basis of
Presentation of Financial Presentation. On
July 3, 2007, Quaint Oak Savings Bank completed its conversion from a
Pennsylvania chartered mutual savings bank to a Pennsylvania chartered stock
savings bank and changed its name to Quaint Oak Bank (“Bank”).  In
connection with the conversion, Quaint Oak Bank formed Quaint Oak Bancorp, Inc.,
a Pennsylvania chartered corporation (the "Company" or "Quaint Oak Bancorp"),
which offered and sold 1,388,625 shares of its common stock at a price of $10.00
per share to eligible depositors of the Bank.  Upon completion of the
conversion and the offering, all of Quaint Oak Bank's common stock is owned by
Quaint Oak Bancorp, and all of Quaint Oak Bancorp's common stock is, in turn,
owned by the public.  The Company sold 1,388,625 shares of its common
stock, raising $13,886,250 of gross proceeds.  Costs incurred in
connection with the conversion and offering totaled $535,000 and were recorded
as a reduction of the proceeds from the offering.  The Company
invested approximately $7.1 million or 53.0% of the net proceeds in Quaint Oak
Bank.  All remaining proceeds were retained by Quaint Oak Bancorp for
future capital needs.  The consolidated financial statements include
the accounts of the Company and its wholly owned subsidiary, Quaint Oak
Bank.  All significant intercompany balances and transactions have
been eliminated.




Prior to
the conversion, Quaint Oak Savings Bank operated under a state bank charter as a
mutual savings bank.  Upon completion of the conversion and the
offering, the Bank changed its name to Quaint Oak Bank and began to operate as a
stock savings bank.  The Bank is subject to regulation of the
Pennsylvania Department of Banking 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 Office of Thrift Supervision.  The market area served
by the Bank is principally Bucks County, Pennsylvania.  The principal
deposit products offered by the Bank are certificates of deposit, passbook
savings accounts, statement savings accounts and e-savings
accounts.  Loan products offered are fixed and adjustable rate
residential and commercial mortgages, home equity loans, and lines of
credit.




The
accompanying consolidated financial statements have been prepared in conformity
with accounting principles generally accepted in the United State of
America (GAAP) for interim information and with the instructions to Form 10-Q,
as applicable to a smaller reporting company.  Accordingly, they do
not include all the information and footnotes required by GAAP for complete
financial statements.




The
foregoing consolidated financial statements are unaudited; but in the opinion of
management include all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation thereof.  The balances
as of December 31, 2007 have been derived from the audited financial
statements.  These financial statements should be read in conjunction
with the financial statements and notes thereto included in Quaint Oak Bancorp’s
2007 Annual Report on Form 10-K.  The results of operations for
the three months and six months ended June 30, 2008 are not necessarily
indicative of the results that may be expected for the year ending December 31,
2008.





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




5
 Index





Quaint
Oak Bancorp, Inc.


Notes
to Unaudited Consolidated Financial Statements (Continued)





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




Share-Based
Compensation.The Company accounts for its share-based compensation
awards in accordance with Statement of Financial Accounting Standards (“SFAS”)
No. 123R (revised 2004) Share-Based
Payment.  This statement requires an entity to recognize the
cost of employee services received in share-based payment transactions and
measures the cost on the grant-date fair value of the award.  That
cost will be recognized over the period during which an employee is required to
provide service in exchange for the award.




At June
30, 2008, the Company has two share-based plans, the 2008 Recognition and
Retention Plan (“RRP”) and the 2008 Stock Option Plan.  Shares were
awarded under both plans in May 2008.  These plans are more fully
described in Note 7.




The
Company also has an employee stock ownership plan (“ESOP”).  This plan
is more fully described in Note 7.  Shares held under the ESOP are
accounted for in accordance with AICPA Statement of Position (“SOP”) 93-6, Employers’ Accounting for Employee
Stock Ownership Plans.  As ESOP shares are committed to be
released and allocated among participants, the Company recognizes compensation
expense equal to the average market price of the shares over the period
earned.




Comprehensive
Income (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 equity section of the
balance sheet, such items, along with net income, are components of
comprehensive income.





The
components of comprehensive income for the three and six months ended June 30,
2008 are as follows (in thousands):





Three
      Months
                Ended
      June 30,
                2008
            
            
            Six
      Months
                Ended
      June 30,
                2008Net
      income
            
            $
            147
            
            
            $
            244Other
      Comprehensive Income (Loss)Net
      unrealized loss on securities available for sale
            
            
            (14
            )
            
            
            (20
            )Reclassification
      adjustment for loss on securities available for sale included in net
      income
            
            
            20
            
            
            
            206
            
            
            
            -Tax
      effect
            
            
            (3
            )Total
      Other Comprehensive Income
            
            
            3
            
            
            
            -Total
      Comprehensive Income
            
            $
            150
            
            
            $
            244





For the
three and six months ended June 30, 2007, the Company had no unrealized holding
gains and losses on available for sale securities or other items of other
comprehensive income.




Earnings per
Share.Amounts reported in earnings per share reflect earnings
available to common stockholders’ for the period divided by the weighted average
number of shares of common stock outstanding during the period, exclusive of
unearned ESOP shares and unvested restricted stock (RRP)
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.  For the
three and six months





6
 Index





Quaint
Oak Bancorp, Inc.


Notes
to Unaudited Consolidated Financial Statements (Continued)





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




ended
June 30, 2008, all outstanding stock options (101,311 shares) were
antidilutive.  Because the initial public offering was completed on
July 3, 2007, per share results for the six months ended June 30, 2007 would not
be meaningful.





Cash and Cash
Equivalents.Cash and cash
equivalents include non-interest and interest-earning demand deposits and money
market accounts with various commercial financial institutions, all of which
mature within ninety days.




Recent Accounting
Pronouncements.In
September 2006, the FASB issued Statement No. 157, “Fair Value Measurements,”
which defines fair value, establishes a framework for measuring fair value under
GAAP, and expands disclosures about fair value measurements.  The new
guidance is effective for financial statements issued for fiscal years beginning
after November 15, 2007, and for interim periods within those fiscal
years.  FASB Statement No. 157 became effective for the Company on
January 1, 2008.  See Note 6 to the unaudited consolidated financial
statements for fair value measurement disclosures.




In
February 2008, the FASB issued FASB Staff Position (FSP) FAS 157-2, “Effective
Date of FASB Statement No. 157,” that would permit a one-year deferral in
applying the measurement provisions of Statement No. 157 to non-financial assets
and non-financial liabilities (non-financial items) that are not recognized or
disclosed at fair value in an entity’s financial statements on a recurring basis
(at least annually). Therefore, if the change in fair value of a non-financial
item is not required to be recognized or disclosed in the financial statements
on an annual basis or more frequently, the effective date of application of
Statement 157 to that item is deferred until fiscal years beginning after
November 15, 2008 and interim periods within those fiscal years. This
deferral does not apply, however, to an entity that applied Statement 157 in
interim or annual financial statements before FSP FAS 157-2 is effective. The
adoption of FSP FAS 157-2 did not have a significant impact on the
Company.




In
February 2007, the FASB issued Statement No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities-Including an amendment of FASB
Statement No. 115”.  Statement No. 159 permits entities to choose to
measure many financial instruments and certain other items at fair
value.  Unrealized gains and losses on items for which the fair value
option has been elected will be recognized in earnings at each subsequent
reporting date.  Statement No. 159 is effective for the Company
January 1, 2008.  The Company adopted FASB Statement No. 159 as of
January 1, 2008, and has elected not to measure any assets or liabilities at
fair value under the provisions of this statement.  The adoption of
this statement did not have any effect on the Company’s consolidated financial
position or results of operations.




In June
2007, the Emerging Issues Task Force (EITF) reached a consensus on Issue
No. 06-11, “Accounting for Income Tax Benefits of Dividends on Share-Based
Payment Awards” (“EITF 06-11”). EITF 06-11 states that an entity should
recognize a realized tax benefit associated with dividends on nonvested equity
shares, nonvested equity share units and outstanding equity share options
charged to retained earnings as an increase in additional paid in
capital. The amount recognized in additional paid in capital should be
included in the pool of excess tax benefits available to absorb potential future
tax deficiencies on share-based payment awards. EITF 06-11 should be
applied prospectively to income tax benefits of dividends on equity-classified
share-based payment awards that are declared in fiscal years beginning after
December 15, 2007. The Company expects that EITF 06-11 will not have
an impact on its consolidated financial statements.




7
 Index





Quaint
Oak Bancorp, Inc.


Notes
to Unaudited Consolidated Financial Statements (Continued)







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




Recent Accounting
Pronouncements (Continued)




In
December 2007, the FASB issued Statement No. 141(R) “Business
Combinations”.  This Statement establishes principles and requirements
for how the acquirer of a business recognizes and measures in its financial
statements the identifiable assets acquired, the liabilities assumed, and any
noncontrolling interest in the acquiree.  The Statement also provides
guidance for recognizing and measuring the goodwill acquired in the business
combination and determines what information to disclose to enable users of the
financial statements to evaluate the nature and financial effects of the
business combination.  The guidance will become effective as of the
beginning of a company’s fiscal year beginning after December 15,
2008.  This new pronouncement will impact the Company is accounting
for business combinations beginning January 1, 2009.




In
March 2008, the FASB issued Statement No 161, “Disclosures about Derivative
Instruments and Hedging Activities-and amendment of FASB Statement No. 133”
(Statement 161).  Statement No. 161 requires entities that utilize
derivative instruments to provide qualitative disclosures about their objectives
and strategies for using such instruments, as well as any details of
credit-risk-related contingent features contains within
derivatives.  Statement 161 also requires entities to disclose
additional information about the amounts and location of derivatives located
within the financial statements, how the provisions of SFAS 133 has been
applied, and the impact that hedges have on an equity’s financial position,
financial performance, and cash flows.  Statement 161 is effective for
fiscal years and interim periods beginning after November 15, 2008, with earlier
application encouraged.  The Company is currently evaluating the
potential impact the new pronouncement will have on its consolidated financial
statements.





In May
2008, the FASB issued SFAS 162, “The Hierarchy of Generally Accepted Accounting
Principal.”  This Statement identifies the sources of accounting
principles and the framework for electing the principles used in the preparation
of financial statements.  This Statement is effective 60 days
following the SEC’s approval of the Public Company Accounting Oversight Board
amendments to AU Section 411, “The Meaning of Present Fairly in Conformity with
Generally Accepted Accounting Principles.”  The Company is currently
evaluating the potential impact the new pronouncement will have on its financial
statements.





In June
2008, the FASB issued Staff Position (FSB) EITF 03-6-1, “Determining Whether
Instruments Granted in Share-Based Payment Transactions Are Participating
Securities.”  This FSB clarifies all outstanding unvested share-based
payment awards that contain rights to nonforfeitable dividends participating
securities in undistributed earnings with common shareholders.  Awards
of this nature are considered participating securities and the two-class method
of computing basic and diluted earnings per share must be
applied.  This FSP is effective for fiscal years beginning after
December 15, 2008.  Company is currently evaluating the potential
impact the new pronouncement will have on its financial statements.




Reclassifications.Certain
items in the 2007 consolidated financial statements have been reclassified to
conform to the presentation in the 2008 financial statements.  Such
reclassifications did not have a material impact on the overall financial
statements.




8
 Index





Quaint
Oak Bancorp, Inc.


Notes
to Unaudited Consolidated Financial Statements (Continued)




Note
2 – Investment Securities




The
amortized cost and fair value of investments securities available for sale and
held to maturity at June 30, 2008 and December 31, 2007 are summarized
below (in thousands):




June
      30, 2008Amortized
      Cost
            
            
            Gross
      Unrealized Gains
            
            
            Gross
      Unrealized Losses
            
            
            Estimated
      Fair ValueAvailable
      for Sale:Mortgage
      securities portfolio mutual fund
            
            $
            43
            
            
            $
            -
            
            
            $
            -
            
            
            $
            43Auction
      market securities
            
            
            1,350
            
            
            
            -
            
            
            
            -
            
            
            
            1,350$
            1,393
            
            
            $
            -
            
            
            $
            -
            
            
            $
            1,393Held
      to Maturity:U.S.
      Government agency securities
            
            $
            2,251
            
            
            $
            10
            
            
            $
            -
            
            
            $
            2,261Mortgage-backed
      securities
            
            
            4,867
            
            
            
            -
            
            
            
            (84
            )
            
            
            4,783$
            7,118
            
            
            $
            10
            
            
            $
            (84
            )
            
            $
            7,044







December
      31, 2007Amortized
      Cost
            
            
            Gross
      Unrealized Gains
            
            
            Gross
      Unrealized Losses
            
            
            Estimated
      Fair ValueAvailable
      for Sale:Mortgage
      securities portfolio mutual fund
            
            $
            501
            
            
            $
            -
            
            
            $
            -
            
            
            $
            501Auction
      market securities
            
            
            1,500
            
            
            
            -
            
            
            
            -
            
            
            
            1,500$
            2,001
            
            
            $
            -
            
            
            $
            -
            
            
            $
            2,001Held
      to Maturity:U.S.
      Government agency securities
            
            $
            2,253
            
            
            $
            12
            
            
            $
            -
            
            
            $
            2,265







The $1.4
million of auction market securities at June 30, 2008 is comprised of four
securities.  In February and March of 2008, each of the four auction
market securities failed to settle at auction and became illiquid.  In
June however, two of these securities were partially redeemed for a total of
$650,000.  Liquidity of the remaining investments is subject to either
a successful auction process, redemption of the investment, or sale of the
security in a secondary market.  In the past, an auction process has
generally allowed investors to obtain immediate liquidity if so desired by
selling the securities at their face amounts.  However, as has been
recently reported in the financial press, the current disruptions in the credit
markets have adversely affected the auction market for these types of
securities.  An auction fails when there is insufficient demand for
these securities.  However, this does not represent a default by the
issuer of the auction market security.  Upon an auction failure, the
interest rate does not reset at a market rate but instead resets based on a
predetermined formula contained in the security.  The outstanding
auction market securities at June 30, 2008 had an average weighted rate of
2.56%.





All of
these securities carry an AAA rating and continue to earn interest at the
contractual maximum rate with the exception of a Penn Higher Education security
held by the Company at June 30, 2008.  This security
is secured by student loans, which loans are generally guaranteed by the U.S.
Government under the Federal Family Education Loan Program
(FFELP).  The interest rate for this security reset to zero at the
April 15, 2008 auction date based on a clause in the prospectus that cannot
allow a yield higher than





9
 Index





Quaint
Oak Bancorp, Inc.


Notes
to Unaudited Consolidated Financial Statements (Continued)




Note
2 – Investment Securities (Continued)




4.0% over
any three month period.  The interest rates for the two months prior
to April 15, 2008 were 10.63% and 3.53%.  Subsequent to June 30, 2008,
the interest rate for this security reset from zero to 1.54%.





We cannot
predict whether future auctions related to these securities will be
successful.  As a result, the Company has assessed each failed auction
and believes that none of the underlying issuers of its auction market
securities are presently at risk for default or that such securities are
impaired.  If the issuers are unable to successfully close future
auctions and their credit rating deteriorate, the Company will consider whether
any future lack of liquidity in these securities has resulted in an other than
temporary impairment of our auction market securities subsequent to June 30,
2008.





In early
August 2008, the broker of the $1.4 million of auction rate securities
established a plan to buy back these securities from the Bank at par over a
period of one year, beginning January 15, 2009 and ending January 15,
2010.





Note
3 - Loan Receivable, net and Allowance for Loan Losses





Loans
receivable, net consist of the following (in thousands):





June
      30,
                2008
            
            
            December
      31,
                2007Real
      estate loans:One-to
      four-family residential:Owner
      occupied
            
            $
            16,083
            
            
            $
            17,248Non-owner
      occupied
            
            
            17,457
            
            
            
            15,757Total
      one-to-four family residential
            
            
            33,540
            
            
            
            33,005Multi-family
      residential
            
            
            3,801
            
            
            
            4,385Commercial
      real estate
            
            
            18,342
            
            
            
            17,481Construction
            
            
            2,624
            
            
            
            1,677Commercial
      lines of  credit
            
            
            880
            
            
            
            1,206Home
      equity loans
            
            
            4,109
            
            
            
            4,431Total
      real estate loans
            
            
            63,296
            
            
            
            62,185Auto
      loans
            
            
            35
            
            
            
            -Loans
      secured by deposits
            
            
            16
            
            
            
            36Total
      loans
            
            
            63,347
            
            
            
            62,221Deferred
      loan fees and costs
            
            
            83
            
            
            
            102Allowance
      for loan losses
            
            
            (713
            )
            
            
            (667
            )Net
      loans
            
            $
            62,717
            
            
            $
            61,656





10
 Index





Quaint
Oak Bancorp, Inc.


Notes
to Unaudited Consolidated Financial Statements (Continued)





Note
3 - Loan Receivable, net and Allowance for Loan Losses (Continued)





Following
is a summary of changes in the allowance for loan losses for the six months
ended June 30, 2008 and 2007 (in thousands):





June
      30,
                2008
            
            
            June
      30,
                2007Balance,
      beginning of the year
            
            $
            667
            
            
            $
            575Provision
      (credits) for loan losses
            
            
            66
            
            
            
            18Charge-offs
            
            
            (20
            )
            
            
            (1
            )Recoveries
            
            
            -
            
            
            
            -(Charge-offs)/recoveries,
      net
            
            
            (20
            )
            
            
            (1
            )Balance,
      end of period
            
            $
            713
            
            
            $
            592








Note
4 – Deposits





Deposits
consist of the following classifications (in thousands):





June
      30,
                2008
            
            
            December
      31,
                2007Passbooks
            
            $
            3,452
            
            
            $
            3,659Statement
      and e-savings accounts
            
            
            5,663
            
            
            
            5,630Certificates
      of deposit
            
            
            46,877
            
            
            
            45,972Total
      deposits
            
            $
            55,992
            
            
            $
            55,261








Note
5 – Federal Home Loan Bank Advances





Federal
Home Loan Bank advances consist of the following (in thousands):





Maturity
      Period
            
            Amount
            
            
            Weighted
              Interest
              Rate1
      to 12 months
            
            $
            750
            
            
            
            3.04
            %13
      to 24 months
            
            
            500
            
            
            
            3.24
            %25
      to 36 months
            
            
            1,000
            
            
            
            3.54
            %37
      to 48 months
            
            
            1,000
            
            
            
            3.85
            %49
      to 60 months
            
            
            1,000
            
            
            
            4.05
            %Total
            
            $
            4,250
            
            
            
            3.61
            %








There
were no Federal Home Loan advances at December 31, 2007.





11
 Index





Quaint
Oak Bancorp, Inc.


Notes
to Unaudited Consolidated Financial Statements (Continued)





Note
6 – Fair Value





In
September 2006, the FASB issued Statement No. 157, “Fair Value Measurements”
(“SFAS 157”), which defines fair value, establishes a framework for measuring
fair value under generally accepted accounting principles, and expands
disclosures about fair value measurements.  SFAS 157 applies to other
accounting pronouncements that require or permit fair value
measurements.  The new guidance is effective for financial statements
beginning after November 15, 2007 and for interim periods within those fiscal
years.





The
primary effect SFAS 157 on the Company was to expand the required disclosures
pertaining to the methods used to determine fair values.





The
Company uses fair value measurements to record fair value adjustments to certain
assets to determine fair value disclosures.  Investment securities
available for sale are recorded at fair value on a recurring
basis.  Additionally, from time to time, the Company may be required
to record fair value adjustments to other assets on a non-recurring basis, such
as impaired loans, real estate owned or other assets.  These
nonrecurring fair value adjustments typically involve application of
lower-of-cost-or-market accounting or write down of individual
assets.





Under
SFAS 157, the Company groups its assets at fair value in three levels, based on
the markets in which the assets are traded and the reliability of the
assumptions used to determine fair value.  These levels
are:





Level 1 –
Valuation is based upon quoted prices for identical instruments traded in
active


markets.





Level 2 –
Valuation is based upon quoted prices for similar instruments in active markets,
quoted prices for identical or similar instruments in markets that are not
active, and model-based valuation techniques for which all significant
assumptions are observable in the market.





Level 3 –
Valuation is generated from model-based techniques that use significant
assumptions not observable in the market.  These unobservable
assumptions reflect the Company’s own estimates of assumptions that market
participants would use in pricing the asset.





Under
SFAS No. 157, the Company bases its fair values on the price that would be
received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date.  It
is our policy to maximize the use of observable inputs and minimize the use of
unobservable inputs when developing fair value measurements, in accordance with
the fair value hierarchy in SFAS No. 157.





Fair
value measurements for assets where there exits limited or no observable market
data and, therefore, are based primarily upon the Company’s or other third-party
estimates, are often calculated based on the characteristics of the asset, the
economic and competitive environment and other such
factors.  Therefore, results cannot be determined with precision and
may not be realized in an actual sale or immediate settlement of the
asset.  Additionally, there may be inherent weaknesses in any
calculation technique, and changes in the underlying assumptions used, including
discount rates and estimates of future cash flows, that could significantly
affect the results of current or future valuations.  At June 30, 2008,
the Company did not have any assets that were measured at fair value on a
recurring basis that used Level 3 measurements.





12
 Index





Quaint
Oak Bancorp, Inc.


Notes
to Unaudited Consolidated Financial Statements (Continued)





Note
6 – Fair Value (Continued)





The
following is a description of valuation methodologies used for assets recorded
at fair value.





Investment securities available for
sale – Investment securities available for sale are recorded at fair
value on a recurring basis.  When available, we use quoted market
price to measure fair value.  If market prices are not available, fair
value measurements are typically obtained through third party data service
providers or dealer market participants.  As of June 30, 2008, Level 1
securities include mutual funds and Level 2 securities include auction market
securities.





Impaired loans – Impaired
loans are accounted for under SFAS 114, “Accounting by Creditors for Impairment
of a Loan,” in which the Company has measured impairment generally based on the
fair value of the loan’s collateral.  Fair value is generally
determined based upon independent third party appraisals of the properties, or
discounted cash flows based upon the expected proceeds.  These assets
are included as Level 3 fair values, based upon the lowest level of input that
is significant to the fair value


measurements.  The
fair value consists of the loan balance less its valuation allowance as
determined under SFAS 114.





The table
below presents balances of assets measured at fair value on a recurring
basis:





Fair
      Value Measurements at June 30, 2008 UsingCarrying
      Value
            
            
            Quoted
      Prices in Active Markets for Identical Assets
                (Level
      1)
            
            
            Significant
      Other Observable Inputs
                (Level
      2)
            
            
            Significant
      Other Observable Inputs
                (Level
      3)(In
      Thousands)Investment
      securities available for sale
            
            $
            1,393
            
            
            $
            43
            
            
            $
            1,350
            
            
            $
            -





For
assets measured at fair value on a nonrecurring basis in 2008 that were still
held at the end of the period, the following table provides the level of
valuation assumptions used to determine each adjustment in the carrying value of
the related individual assets or portfolio at June 30, 2008:





Fair
      Value Measurements at June 30, 2008 UsingCarrying
      Value
            
            
            Quoted
      Prices in Active Markets for Identical Assets
                (Level
      1)
            
            
            Significant
      Other Observable Inputs
                (Level
      2)
            
            
            Significant
      Other Observable Inputs
                (Level
      3)(In
      Thousands)Impaired
      loans
            
            $
            400
            
            
            $
            -
            
            
            $
            -
            
            
            $
            400





Impaired
loans measured at fair value at June 30, 2008 totaled $400,000 net of a
valuation allowance of $100,000.  Such loans required an additional
provision for loan losses of $27,000 for the quarter ended June 30,
2008.  There were no new impaired loans for the quarter ended June 30,
2008.





The
decrease in real estate owned during the quarter ended June 30, 2008 was due to
the sale of the one property and a gain on the sale of $1,000 was
recognized.





13
 Index





Quaint
Oak Bancorp, Inc.


Notes
to Unaudited Consolidated Financial Statements (Continued)





Note
7 – Stock Compensation Plans





Employee Stock Ownership
Plan





The
Company adopted an Employee Stock Ownership Plan (ESOP) during fiscal 2007 for
the benefit of employees who meet the eligibility requirements.Using proceeds from a
loan from the Company,the ESOP purchased 8%,
or 111,090 shares of the Company’s common stock issued in the public offering
completed July 3, 2007 in the open market at an average price of $9.35 totaling
$1.0 million.  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 equal to the Prime
Rate as


published
in the Wall Street Journal, 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 the Consolidated
Balance Sheet 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 price of the shares, and the shares become outstanding for
earnings per share computations.  During the three and six month
periods ended June 30, 2008, the Company recognized $17,000 and $35,000 of ESOP
expense, respectively.





Recognition and Retention
Plan





In May
2008, the shareholders of Quaint Oak Bancorp approved the adoption of the 2008
Recognition and Retention Plan (the “2008 RRP”) and Trust
Agreement.  In order to fund the 2008 RRP, the 2008 Recognition and
Retention Plan Trust (the “2008 Trust”) acquired 55,545 shares of the Company’s
stock in the open market at an average price of $9.36 totaling $520,000 as of
June 30, 2008.  Pursuant to the 2008 RRP, 43,324 shares acquired by
the 2008 Trust were granted to certain officers, employees and directors of the
Company in May 2008 with 12,221 shares remaining available for future
grant.  The 2008 RRP shares generally vest at a rate of 20% per year
over five years.





A summary
of the status of the shares under the 2008 RRP as of June 30, 2008 is a
follows:





Number
      of
              Shares
            
            
            Weighted
              Average
      Grant Date Fair ValueOutstanding
      at December 31, 2007
            
            
            --
            
            
            $
            --Granted
      May 14, 2008
            
            
            43,324
            
            
            
            9.05Vested
            
            
            --
            
            
            
            --Forfeited
            
            
            --
            
            
            
            --Outstanding
      at June 30, 2008
            
            
            43,324
            
            
            $
            9.05





The
weighted average grant date fair value is the last sale price as quoted on the
OTC Bulletin Board on May 14, 2008.  Compensation expense on the 2008
RRP shares granted is recognized ratably over the five year vesting period in an
amount which totals the market price of the common stock at the date of
grant.  During the three month period ended June 30, 2008,
approximately 1,000 shares were amortized to expense, based on the proportional
vesting of the awarded shares, resulting in the recognition of





14
 Index





Quaint
Oak Bancorp, Inc.


Notes
to Unaudited Consolidated Financial Statements (Continued)





Note
7 – Stock Compensation Plans (Continued)





Recognition and Retention
Plan (Continued)





approximately
$10,000 in compensation expense.  A tax benefit of approximately
$3,000 was recognized during this period.  As of June 30, 2008,
approximately $382,000 in additional compensation expense will be recognized
over the remaining service period of approximately 4.9 years.





Stock
Options





In May
2008, the shareholders of Quaint Oak Bancorp approved the adoption of the 2008
Stock Options Plan (the “2008 Option Plan”).  The 2008 Option Plan
authorizes the grant of stock options to officers, employees and directors of
the Company to acquire 138,863 shares of common stock with an exercise price no
less than the fair market value on the date of the grant.  The
Compensation Committee determined to grant the stock options in May 2008 at an
exercise price equal to $10.00 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 2008 Option Plan are intended to comply with the
requirements of Section 422 of the Internal Revenue.  Options will
generally become vested and exercisable at the rate of 20% per year over five
years and are generally exercisable for a period of ten years after the grant
date.  Pursuant to the 2008 Option Plan, 108,311 stock options were
granted to certain officers, employees and directors of the Company in May 2008
with 30,552 stock options remaining available for future grant.





A summary
of the status of the Company’s stock options under the 2008 Option Plan as of
June 30, 2008 is a follows:





Number
      of
              Shares
            
            
            Weighted
              Average
      Exercise Price
            
            
            Weighted
              Average
      Remaining Contractual Life (in years)
            
            
            Aggregate
              Intrinsic
      ValueOutstanding
      December 31, 2007
            
            
            --
            
            
            $
            --Granted
      May 14, 2008
            
            
            108,311
            
            
            
            10.00Vested
            
            
            --
            
            
            
            --Forfeited
            
            
            --
            
            
            
            --Outstanding
      at June 30, 2008
            
            
            101,311
            
            
            $
            10.00
            
            
            9.9
            
            
            $--





The
estimated fair value of the options granted in May 2008 was $2.01 per
share.The fair
value was estimated on the date of grant in accordance with SFAS No. 123R using
the Black-Scholes option pricing model with the following
assumptions:





Expected
      dividend yield
            
            1.10%Risk-free
      interest rate
            
            3.5%Expected
      life of options
            
            7.5
      yearsExpected
      stock-price volatility
            
            19.45%





The
dividend yield was calculated on the dividend amount and stock price existing at
the grant date.  The risk free interest rate used was based on the
rates of United States Treasury securities with maturities equal to the expected
lives of the options.  Although the contractual term of the options
granted is ten years, the expected term of the options is less.  As
the Company has no history of granting stock option awards, management estimated
the expected term of the stock options to be the average of the vesting period
and the contractual term.  The expected stock-price volatility was
estimated by considering the Company’s own stock volatility for the period since
July 5, 2007, the initial trading date.  The actual future volatility
may differ from our historical volatility.





15
 Index





Quaint
Oak Bancorp, Inc.


Notes
to Unaudited Consolidated Financial Statements (Continued)





Note
7 – Stock Compensation Plans (Continued)





Stock Options
(Continued)





The
aggregate intrinsic value for outstanding stock options is calculated based on
the difference between the exercise price of the underlying awards and the
market price of our common stock as of the reporting date.  There was
no intrinsic value of the options outstanding as of June 30, 2008 as all of the
outstanding options were at exercise prices greater than the quarter-end stock
price.





During
the three months ended June 30, 2008, approximately $5,000 was recognized in
compensation expense for the 2008 Option Plan.  A tax benefit of
approximately $1,000 was recognized during this period.  At June 30,
2008, approximately $204,000 in additional compensation expense for awarded
options remained unrecognized.  This expense will be recognized over
approximately 4.9 years.





16
 Index





ITEM2.
            MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS





Forward-Looking
Statements





We make
certain statements in this document as to what we expect 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.





General





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





Critical
Accounting Policies





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





Allowance for Loan
Losses.  The allowance for loan losses is established through a
provision for loan losses charged to expense. Loans are charged against the
allowance for loan losses when management believes that the collectibility of
the principal is unlikely. Subsequent recoveries are added to the allowance. The
allowance is an amount that management believes will cover known and inherent
losses in the loan portfolio, based on evaluations of the collectibility of
loans. The evaluations take into consideration such factors as changes in the
types and amount of loans in the loan portfolio, historical loss experience,
adverse situations that may affect the borrower's ability to repay, estimated
value of any underlying collateral, estimated losses relating to specifically
identified loans, and current economic conditions. This evaluation is inherently
subjective as it requires material estimates including, among others, exposure
at default, the amount and timing of expected future cash flows on impaired
loans, value of collateral, estimated losses on our commercial and residential
loan portfolios and general amounts for historical loss
experience.  All of these estimates may be susceptible to significant
change.





17
 Index





While
management uses the best information available to make loan loss allowance
evaluations, adjustments to the allowance may be necessary based on changes in
economic and other conditions or changes in accounting guidance. Historically,
our estimates of the allowance for loan losses have not required significant
adjustments from management's initial estimates. In addition, the Pennsylvania
Department of Banking and the Federal Deposit Insurance Corporation, as an
integral part of their examination processes, periodically review our allowance
for loan losses.  The Pennsylvania Department of Banking and the
Federal Deposit Insurance Corporation may require the recognition of adjustments
to the allowance for loan losses based on their judgment of information
available to them at the time of their examinations. To the extent that actual
outcomes differ from management's estimates, additional provisions to the
allowance for loan losses may be required that would adversely impact earnings
in future periods.





Investment Securities Impairment
Valuation.  Management evaluates securities for
other-than-temporary impairment on at least a quarterly basis, and more
frequently when economic or market conditions warrant such an
evaluation.  Consideration is given to (1) the length of time and the
extent to which the fair value has been less than cost, (2) the financial
condition and near-term prospects of the issuer, and (3) the intent and ability
of the Company to retain its investment in the issuer for a period of time
sufficient to allow for any anticipated recovery in fair value.





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 gives current recognition to changes in tax
rates and laws.  The realization of our deferred tax assets
principally depends upon our achieving projected future taxable
income.  We may change our judgments regarding future profitability
due to future market conditions and other factors.  We may adjust our
deferred tax asset balances if our judgments change.








Comparison
of Financial Condition at June 30, 2008 and December 31, 2007





Total Assets. The Company’s
total assets at June 30, 2008 were $78.4 million, an increase of $4.9 million,
or 6.6%, from $73.5 million at December 31, 2007.  This increase was
primarily due to an increase in investment securities of $4.3 million and growth
in loans receivable, net of the allowance for loan losses of $1.1
million.  Asset growth during the six month period ended June 30, 2008
was primarily funded by an increase in Federal Home Loan Bank advances of $4.3
million and a $731,000 increase in deposits.





Cash and Cash Equivalents.Cash and cash equivalents decreased $1.1 million, or 21.4%, from $5.0
million at December 31, 2007 to $3.9 million at June 30, 2008 as these funds
were used primarily to repurchase the Company’s common stock for the Company’s
Recognition and Retention Plan in the amount of $520,000 and to fund
loans.





Investment
Securities.Available for sale investment securities decreased
$608,000, or 30.4% from $2.0 million at December 31, 2007 to $1.4 million at
June 30, 2008 as purchases of $500,000 of auction market securities and $9,000
of equity securities during the six month period ended June 30, 2008, were
offset by the redemption of $650,000 of auction market securities and the sale
of $454,000 of equity securities at a loss of $7,000.  A $13,000
write-down of an equity security also contributed to the
decrease.  During this same period, investments held to maturity
increased 215.9% to $7.1 million from $2.3 million as the Company invested funds
borrowed from the Federal Home Loan Bank into mortgage-backed
securities.





18
 Index





Loans Receivable, Net. Loans
receivable, net, increased $1.0 million, or 1.7%, to $62.7 million at June 30,
2008 from $61.7 million at December 31, 2007.  This increase was
funded primarily by the increase in deposits.  Increases within the
portfolio occurred in the residential mortgage one-to-four family non-owner
occupied category, which grew $1.7 million or 10.8%, construction loans which
grew $947,000 or 56.5% and commercial real estate loans which increased $861,000
or 4.9%.  These increases were partially offset by decreases of $1.2
million or 6.8% in residential mortgage one-to-four family owner occupied loans,
$584,000 or 13.3% in multi-family residential loans, $326,000 or 27.0% in
commercial lines of credit, and $322,000 or 7.3% in home equity
loans.  Decreases in these loan categories are attributable to normal
amortization and pay-offs.





Deposits. Total
interest-bearing deposits increased $731,000, or 1.3%, to $56.0 million at June
30, 2008 compared to $55.3 million at December 31, 2007.  This
increase was attributable to a $905,000 growth in certificates of deposit and
$106,000 increase in our new e-savings accounts, offset by decreases of $207,000
in passbook savings accounts and $73,000 in statement savings
accounts.





Federal Home Loan Bank
Advances. Federal Home Loan Bank advances increased to $4.3 million at
June 30, 2008 from $-0- at December 31, 2007 as the Company invested the funds
borrowed into mortgage-backed securities.





Stockholders’
Equity.  Total stockholders’ equity decreased $261,000, or
1.5%, to $17.3 million at June 30, 2008 from $17.6 million at December 31,
2007.  This decrease from December 31, 2007 was primarily the result
of the purchase of 55,545 shares of the Company’s common stock in the
open-market to fund our Recognition and Retention Plan Trust (RRP) during the
quarter ended June 30, 2008, for an aggregate purchase price of $520,000, and
dividends paid of $35,000, offset by net income for the six months ended June
30, 2008 of $244,000, a decrease in unallocated shares held by the ESOP of
$35,000 and $15,000 of compensation expense related to stock compensation
plans.








Comparison
of Operating Results for the Three Months Ended June 30, 2008 and
2007





Net
Income.Net income amounted to $147,000 for the three months
ended June
30, 2008, an increase of $86,000, or 141.0% compared to net income of
$61,000 for the same period in 2007.  The increase in net income on a
quarter over quarter basis was primarily the result of the increases in net
interest income of $243,000, offset by a decrease in non-interest income of
$10,000 and increases in non-interest expense of $91,000 and income tax expense
of $55,000.





Net
Interest Income.Net interest
income increased $243,000, or 59.6%, to $651,000 for the three months ended June
30, 2008 from $408,000 for the comparable period in 2007.The
increase was primarily attributable to an increase in net average
interest-earning assets of $13.0 million and an increase in the net interest
spread from 2.46% in 2007 to 2.48% in 2008.  The increase in net
average interest earning assets was due to the $13.4 million of net proceeds
from the stock offering completed on July 3, 2007.





Interest
Income.  Interest income increased $256,000, or 25.5% for the
three months ended June 30, 2008 from $1.0 million for the three months ended
June 30, 2007.  The increase resulted primarily from a $17.9 million
increase in average interest earning assets which had the effect of increasing
interest income by $285,000.  This increase in volume was partially
offset by a $29,000 decrease in interest income resulting from a 24 basis point
decrease in the overall yield on interest earning assets to 6.53% for the three
months ended June 30, 2008 from 6.77% for the three months ended June 30,
2007.  Average short-term investments and investment securities
increased $9.8 million between the two periods along with a $7.9 million
increase in average net loans receivable. The increase in average short-term
investments and investment securities and average net loans receivable were
driven by the investment of the net proceeds received in the stock offering into
these interest earning assets and the $3.5 million increase in average FHLB
advances.  The average yields on short-term investments and investment
securities decreased 226 basis points to 3.83% for the three months ended June
30, 2008 from 6.09% for the three months ended June 30, 2007.  The
average yield on loans increased to 7.18% from 6.83% for the 2008 and 2007
periods, respectively.  Also contributing to an increase in yield on
loans was the repayment during the quarter of approximately $63,000 of
previously reversed and past due interest on two loans previously on non-accrual
status.





Interest
Expense.  Interest expense increased by $13,000, or 2.2%, to
$610,000 for the three months ended June 30, 2008 compared to the same period in
2007.  The increase resulted primarily from a $4.9 million increase in
average interest-bearing liabilities, which had the effect of increasing
interest expense by $61,000.  This increase in volume was partially
offset by a $48,000 decrease in interest expense resulting from a 26 basis point
decrease in the overall cost of interest bearing liabilities to 4.05% for the
three months ended June 30, 2008 from 4.31% for the three months ended June 30,
2007.





19
 Index





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


Three
      Months Ended June 30,2008
              
              
              2007Average
                Balance
              
              
              Interest
              
              
              Average
                Yield/
                Rate
              
              
              Average
                Balance
              
              
              Interest
              
              
              Average
                Yield/
                RateInterest-earning
      assets:
              
              (Dollars
      in thousands)Short-term
      investments and investment securities held to maturity
              
              $
              14,206
              
              
              $
              136
              
              
              
              3.83
              %
              
              $
              4,401
              
              
              $
              67
              
              
              
              6.09
              %Loans
      receivable, net (1)
              
              
              62,589
              
              
              
              1,123
              
              
              
              7.18
              
              
              
              54,697
              
              
              
              934
              
              
              
              6.83Other
      interest-earning assets
              
              
              410
              
              
              
              2
              
              
              
              1.91
              
              
              
              253
              
              
              
              4
              
              
              
              6.32Total
      interest-earning assets
              
              
              77,205
              
              
              
              1,261
              
              
              
              6.53
              %
              
              
              59,351
              
              
              
              1,005
              
              
              
              6.77
              %Non-interest-earning
      assets
              
              
              1,360
              
              
              
              
              
              
              
              
              
              
              1,696Total
      assets
              
              $
              78,565
              
              
              
              
              
              
              
              
              
              
              $
              61,047Interest-bearing
      liabilities:Passbook
      accounts
              
              $
              3,437
              
              
              
              11
              
              
              
              1.28
              %
              
              $
              4,502
              
              
              
              16
              
              
              
              1.42
              %Statement
      and e-savings accounts
              
              
              5,791
              
              
              
              34
              
              
              
              2.35
              
              
              
              6,559
              
              
              
              45
              
              
              
              2.74Certificate
      of deposit accounts
              
              
              47,604
              
              
              
              534
              
              
              
              4.49
              
              
              
              44,375
              
              
              
              536
              
              
              
              4.83Total
      deposits
              
              
              56,832
              
              
              
              579
              
              
              
              4.08
              
              
              
              55,436
              
              
              
              597
              
              
              
              4.31FHLB
      advances
              
              3,467
              
              
              31
              
              
              
              3.58
              
              
              
              -
              
              
              -
              
              
              
              -Total
      interest-bearing liabilities
              
              
              60,299
              
              
              
              610
              
              
              
              4.05
              %
              
              
              55,436
              
              
              
              597
              
              
              
              4.31
              %Non-interest-bearing
      liabilities
              
              685
              
              
              
              
              
              
              
              
              
              
              704Total
      liabilities
              
              
              60,984
              
              
              
              
              
              
              
              
              
              
              
              56,140Stockholders’
      equity
              
              
              17,581
              
              
              
              
              
              
              
              
              
              
              
              4,907Total
      liabilities and stockholders’ equity
              
              $
              78,565
              
              
              
              
              
              
              
              
              
              
              $
              61,047Net
      interest-earning assets
              
              $
              16,906
              
              
              
              
              
              
              
              
              
              
              $
              3,915Net
      interest income; average interest rate spread
              
              
              
              
              
              $
              651
              
              
              
              2.48
              %
              
              
              
              
              
              $
              408
              
              
              
              2.46
              %Net
      interest margin (2)
              
              
              
              
              
              
              
              
              
              
              3.37
              %
              
              
              
              
              
              
              
              
              
              
              2.75
              %Average
      interest-earning assets to average interest-bearing
      liabilities
              
              
              
              
              
              
              
              
              
              
              128.04
              %
              
              
              
              
              
              
              
              
              
              
              107.06
              %
 _______________________
 
 (1)
              Includes
      non-accrual loans during the respective periods.  Calculated net
      of deferred fees and discounts, loans in process and allowance for loan
      losses.
 
 (2)
              Equals
      net interest income divided by average interest-earning
      assets.
  20
 Index
  The Company increased its
provision for loan losses by $1,000, from $28,000 for the quarter ended June 30,
2007 to $29,000 for the same period in 2008, 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 June 30,
2008.Non-performing loans amounted to $1.3 million, or 2.02%
of net loans receivable at June 30, 2008, consisting of six loans, one of which
is 90 days or more past due and still accruing interest and five of which are on
non-accrual status.  The non-performing loans include commercial real
estate, one-to-four family owner occupied residential, one-to-four family
non-owner occupied residential, and multi-family residential loans and all are
generally well-collateralized or adequately reserved for.  Management
does not anticipate any significant losses on these loans.  During the
quarter ended June 30, 2008, a $20,000 home equity loan was charged off against
the allowance for loan losses and a one-to-four family owner occupied
residential loan for $8,000 was placed on non-accrual status.  Also
during the quarter, one loan for $505,000 that was previously on non-accrual
status was paid off and another loan for $547,000 was placed back on accrual
status after the receipt of approximately $63,000 of previously reversed and
past due interest.
 
 In
addition, during the quarter ended June 30, 2008 one commercial real estate loan
acquired as real estate owned at a value of approximately $81,000 was sold for
$110,000 resulting in a gain of $29,000.  The Company financed the
purchase of the property.  In accordance with SFAS No. 66, $1,000 was
recognized as income for the three months ended June 30, 2008 and $28,000 was
deferred and will be taken into income as payments on the loan are
received.  The Company had no troubled debt restructurings as of June 30,
2008.  The allowance for loan losses as a percent of total loans
receivable was 1.12% at June 30, 2008 and
1.07% at December 31, 2007.
 
 Non-interest
income decreased $10,000 or 111.1% from income of $9,000 for the three months
ended June 30, 2007 to a loss of $1,000 for the three months ended June 30, 2008
as a $10,000 increase in fees and service charges was offset by a $20,000 loss
on investment securities.
 
 Non-interest
expense increased $91,000 or 31.4% from $290,000 for the three months ended June
30, 2007 to $381,000 for the three months ended June 30,
2008.  Salaries and benefits expense accounted for $43,000 of the
change as this expense increased 24.4% from $176,000 for the three months ended
June 30, 2007 to $219,000 for the three months ended June 30, 2008 due to annual
salary increases and the compensation expense associated with the stock
compensation plans. In addition, professional fees accounted for $23,000 of the
change as this expense increased 127.8% from $18,000 to $41,000 quarter over
quarter due primarily to the increase in costs associated with being a publicly
held company.  Also contributing to the quarter over quarter increase
in non-interest expense were increases in directors’ fees and expenses,
occupancy and equipment expenses, regulatory, and other expenses of $5,000,
$4,000, $11,000 and $5,000, respectively.
 
 The provision for income tax increased
$55,000 from $38,000 for the three months ended June 30, 2007 to $93,000 for the
three months ended June 30, 2008 due to the increase in pre-tax
income.  The Company’s effective tax rate, including federal and state
income taxes, was 38.8% and 38.4% for the three months ended June 30, 2008 and
2007, respectively.
 
 
 Comparison
of Operating Results for the Six Months Ended June 30, 2008 and
2007
 
 Net
Income.Net income amounted to $244,000 for the six months
ended June
30, 2008, an increase of $72,000, or 41.9% compared to net income of
$172,000 for the same period in 2007. The increase was primarily the result of
the increases in net interest income of $374,000, offset by a decrease in
non-interest income of $7,000 and increases in the provision for loan losses of
$48,000, non-interest expense of $200,000 and income tax expense of
$47,000.
  21
 Index
  Net
Interest Income.Net interest
income increased $374,000, or 44.3%, to $1.2 million for the six months ended
June 30, 2008 from $845,000 for the comparable period in
2007.The increase was primarily attributable to an increase
in net average interest-earning assets of $12.7 offset, in part, by a 23 basis
point decrease in the Company’s average interest rate spread to 2.30% for the
six months ended June 30, 2008 from 2.53% for the comparable period in
2007.
 
 Interest
Income.  Interest income increased $415,000, or 20.5% for the
six months ended June 30, 2008 from $2.0 million for the six months year ended
June 30, 2007.  The increase resulted primarily from a $15.5 million
increase in average interest earning assets which had the effect of increasing
interest income by $487,000.  This increase in volume was partially
offset by a $72,000 decrease in interest income resulting from a 30 basis point
decrease in the overall yield on interest earning assets to 6.49% for the six
months ended June 30, 2008 from 6.79% for the six months ended June 30,
2007.  Average short-term investments and investment securities
increased $7.7 million between the two periods along with a $7.8 million
increase in average net loans receivable. The increase in average short-term
investments and investment securities and average net loans receivable was
driven by the investment of the net proceeds received in the stock offering into
these interest earning assets and the $3.5 million increase in average FHLB
advances.  The average yields on short-term investments and investment
securities decreased 149 basis points to 4.14% for the six months ended June 30,
2008 from 5.63% for the six months ended June 30, 2007.  The average
yield on loans increased to 6.99% from 6.90% for the 2008 and 2007 periods,
respectively.  Also contributing to an increase in yield on loans was
the repayment during the six months of approximately $63,000 of previously
reversed and past due interest on two loans previously on non-accrual
status.
 
 Interest
Expense.  Interest expense increased by $41,000, or 3.5%, to
$1.2 million for the six months ended June 30, 2008 compared to the same period
in 2007.  The increase resulted primarily from a $2.9 million increase
in average interest-bearing liabilities, which had the effect of increasing
interest expense by $87,000.  This increase in volume was partially
offset by a $46,000 decrease in interest expense resulting from a 7 basis point
decrease in the overall cost of interest bearing liabilities to 4.19% for the
six months ended June 30, 2008 from 4.26% for the six months ended June 30,
2007.
  22
 Index
  Average Balances, Net Interest
Income, and 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.
  Six
      Months Ended June 30,2008
              
              
              2007Average
                Balance
              
              
              Interest
              
              
              Average
                Yield/
                Rate
              
              
              Average
                Balance
              
              
              Interest
              
              
              Average
                Yield/
                RateInterest-earning
      assets:
              
              (Dollars
      in thousands)Short-term
      investments and investment securities held to maturity
              
              $
              12,741
              
              
              $
              264
              
              
              
              4.14
              %
              
              $
              5,078
              
              
              $
              143
              
              
              
              5.63
              %Loans
      receivable, net (1)
              
              
              62,148
              
              
              
              2,172
              
              
              
              6.99
              
              
              
              54,339
              
              
              
              1,876
              
              
              
              6.90Other
      interest-earning assets
              
              
              325
              
              
              
              5
              
              
              
              3.08
              
              
              
              253
              
              
              
              7
              
              
              
              5.53Total
      interest-earning assets
              
              
              75,214
              
              
              
              2,441
              
              
              
              6.49
              %
              
              
              59,670
              
              
              
              2,026
              
              
              
              6.79
              %Non-interest-earning
      assets
              
              
              1,442
              
              
              
              
              
              
              
              
              
              
              1,380Total
      assets
              
              $
              76,656
              
              
              
              
              
              
              
              
              
              
              $
              61,050Interest-bearing
      liabilities:Passbook
      accounts
              
              $
              3,503
              
              
              
              23
              
              
              
              1.31
              %
              
              $
              4,581
              
              
              
              32
              
              
              
              1.40
              %Statement
      and e-savings accounts
              
              
              5,637
              
              
              
              71
              
              
              
              2.52
              
              
              
              6,618
              
              
              
              91
              
              
              
              2.75Certificate
      of deposit accounts
              
              
              47,470
              
              
              
              1,097
              
              
              
              4.62
              
              
              
              44,268
              
              
              
              1,058
              
              
              
              4.78Total
      deposits
              
              
              56,610
              
              
              
              1,191
              
              
              
              4.21
              
              
              
              55,467
              
              
              
              1,181
              
              
              
              4.26FHLB
      advances
              
              
              1,733
              
              
              31
              
              
              
              3.58
              
              
              
              -
              
              
              -
              
              
              
              -Total
      interest-bearing liabilities
              
              
              58,343
              
              
              1,222
              
              
              
              4.19
              %
              
              
              55,467
              
              
              
              1,181
              
              
              
              4.26
              %Non-interest-bearing
      liabilities
              
              696
              
              
              
              
              
              
              
              
              
              
              727Total
      liabilities
              
              
              59,039
              
              
              
              
              
              
              
              
              
              
              
              56,194Stockholders’
      equity
              
              
              17,617
              
              
              
              
              
              
              
              
              
              
              
              4,856Total
      liabilities and stockholders’ equity
              
              $
              79,656
              
              
              
              
              
              
              
              
              
              
              $
              61,050Net
      interest-earning assets
              
              $
              16,871
              
              
              
              
              
              
              
              
              
              
              $
              4,203Net
      interest income; average interest rate spread
              
              
              
              
              
              $
              1,219
              
              
              
              2.30
              %
              
              
              
              
              
              $
              845
              
              
              
              2.53
              %Net
      interest margin (2)
              
              
              
              
              
              
              
              
              
              
              3.24
              %
              
              
              
              
              
              
              
              
              
              
              2.83
              %Average
      interest-earning assets to average interest-bearing
      liabilities
              
              
              
              
              
              
              
              
              
              
              128.92
              %
              
              
              
              
              
              
              
              
              
              
              107.58
              %
 _______________________


(1)
            Includes
      non-accrual loans during the respective periods.  Calculated net
      of deferred fees and discounts, loans in process and allowance for loan
      losses.





(2)
            Equals
      net interest income divided by average interest-earning
      assets.





The
Company increased its provision for loan losses by $48,000 from $18,000 for the
six months ended June 30, 2007 to $66,000 for the same period in 2008, 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 June 30,
2008.  See additional discussion under “Comparison of Operating
Results for the Three Months Ended June 30, 2008 and 2007.”





Non-interest
income decreased $7,000 or 41.1% from $17,000 for the six months ended June 30,
2007 to $10,000 for the six months ended June 30, 2008 as a $13,000 increase in
fees and service charges was offset by a $20,000 loss on investment
securities.





Non-interest
expense increased $200,000 or 35.5% from $563,000 for the six months ended June
30, 2007 to $763,000 for the six months ended June 30, 2008.  Salaries
and benefits expense accounted for $68,000 of the change as this expense
increased 20.4% from $333,000 for the six months ended June 30, 2007 to $401,000
for the six months ended June 30, 2008 due to annual salary increases and the
compensation expense associated with the stock compensation plans. In addition,
professional fees accounted for $67,000 of the change as this expense increased
155.8% from $43,000 for the six months ended June 30, 2007 to $110,000 for the
comparable period in 2008 due primarily to the increase in costs associated with
being a publicly held company.  Also contributing to the period over
period increase in non-interest expense were increases in directors’ fees and
expenses, occupancy and equipment expenses, regulatory and other expenses of
$23,000, $8,000, $23,000 and $11,000, respectively.





23
 Index





The
provision for income tax increased $47,000 from $109,000 for the six months
ended June 30, 2007 to $156,000 for the six months ended June 30, 2008 due to
the increase in pre-tax income.  The Company’s effective tax rate,
including federal and state income taxes, was 39.0% and 38.8% for the six months
ended June 30, 2008 and 2007, respectively.








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 repayments 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 June 30, 2008, the Company's cash and cash
equivalents amounted to $3.9 million.  At such date, the Company also
had $2.1 million invested in interest-earning time deposits maturing in one year
or less.





The
Company uses its liquidity to fund existing and future loan commitments, to fund
deposit outflows, to invest in other interest-earning assets and to meet
operating expenses.  At June 30, 2008, Quaint Oak Bank had outstanding
commitments to originate loans of $997,000 and commitments under unused lines of
credit of $1.5 million.





At June
30, 2008, certificates of deposit scheduled to mature in less than one year
totaled $32.3 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, which provide an additional source of funds.  At June 30,
2008, Quaint Oak Bank had $4.3 million of advances from the Federal Home Loan
Bank of Pittsburgh and had $33.8 million in borrowing capacity.





Our
stockholders’ equity amounted to $17.3 million at June 30, 2008, a decrease of
$261,000 from December 31, 2007.  This decrease was primarily the
result of the purchase of 55,545 shares of the Company’s common stock in the
open-market to fund our Recognition and Retention Plan (RRP) during the quarter
ended June 30, 2008, for an aggregate purchase price of $520,000, and dividends
paid of $35,000, offset by net income for the six months ended June 30, 2008 of
$244,000, a decrease in unallocated shares held by the ESOP of $35,000 and
$15,000 of compensation expense related to stock compensation
plans.





Quaint
Oak Bank is required to maintain regulatory capital sufficient to meet tier 1
leverage, tier 1 risk-based and total risk-based capital ratios of at least
4.00%, 4.00% and 8.00%, respectively.  At June 30, 2008, Quaint Oak
Bank exceeded each of its capital requirements with ratios of 16.90%, 22.38% and
23.65%, respectively. As a savings and loan holding company, the Company is not
subject to any regulatory capital requirements.





24
 Index





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 June 30, 2008,
we had unfunded commitments under lines of credit of $1.5 million and $997,000
of commitments to originate loans.  We had no commitments to advance
additional amounts pursuant to outstanding lines of credit or undisbursed
construction loans.








Impact
of Inflation and Changing Prices





The
consolidated financial statements and related financial data presented herein
have been prepared in accordance with accounting principles generally accepted
in the United States of America which generally require the measurement of
financial position and operating results in terms of historical dollars, without
considering changes in relative purchasing power over time due to inflation.
Unlike most industrial companies, virtually all of 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.




ITEM3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET
RISK





Not
Applicable.





ITEM4. CONTROLS AND PROCEDURES





Evaluation of Disclosures Controls
and Procedures. Under the supervision and with the
participation of our management, including our Chief Executive Officer and our
principal financial officer, we evaluated the effectiveness of the design and
operation of our disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of the end
of the period covered by this report. Based upon that evaluation, the Chief
Executive Officer and the principal financial officer have concluded that, as of
the end of the period covered by this report, our disclosure controls and
procedures are effective to ensure that information required to be disclosed in
the reports that the Company files or submits under the Securities Exchange Act
of 1934, is recorded, processed, summarized and reported within the applicable
time periods specified by the Securities and Exchange Commission’s rules and
forms.





Changes in Internal Control over
Financial Reporting.  There has been no change in the Company’s
internal control over financial reporting during the Company’s most recent
fiscal quarter that has materially affected, or is reasonably likely to
materially affect, the Company’s internal control over financial
reporting.





25
 Index





PART
II





ITEM1. LEGAL PROCEEDINGS





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





ITEM1A. RISK FACTORS





Not
applicable.





ITEM2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS





(a)
            Not
      applicable.





(b)
            Not
      applicable.





(c)
            Purchases
      of Equity Securities





The
following table represents the purchasing activity of the Recognition and
Retention Plan Trust during the second quarter of fiscal 2008:





Period
            
            Total
      Number of Shares
              Purchased
            
            
            Average
      Price Paid per Share
            
            
            Total
      Number of Shares Purchased as Part of Publicly Announced Plans or
      Programs
            
            
            Maximum
      Number of Shares that May Yet Be Purchased Under the Plans or
      ProgramsMonth
      #1 April 1, 2008 – April 30, 2008
            
            
            -
      -
            
            
            $
            -
      -
            
            
            
            -
      -
            
            
            
            55,545Month
      #2 May 1, 2008 – May 31, 2008
            
            
            47,500
            
            
            
            9.35
            
            
            
            47,500
            
            
            
            8,045Month
      #3 June 1, 2008 – June 30, 2008
            
            
            8,045
            
            
            
            9.44
            
            
            
            8,045
            
            
            
            --Total
            
            
            55,545
            
            
            $
            9.36
            
            
            
            55,545
            
            
            
            --





Notes
to this table:





(a)
            The
      Company's 2008 Recognition and Retention Plan was authorized to purchase
      up to a maximum of 55,545 shares of common stock, or 4.0% of the common
      stock sold in the initial public offering completed on July 3, 2008, as
      disclosed in the Company's prospectus dated May 14, 2007 and announced by
      press release on May 15, 2008..





(b)
            In
      May 2008, the shareholders of Quaint Oak Bancorp approved the adoption of
      the 2008 Recognition and Retention Plan and all the shares authorized to
      be purchased pursuant to the plan were purchased by June 30,
      2008.





26
 Index





ITEM3. DEFAULTS UPON SENIOR SECURITIES





Not
applicable.








ITEM4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS





On May
14, 2008, Quaint Oak Bancorp, Inc. held its Annual Meeting of Shareholders to
obtain approval of four proxy proposals submitted on behalf of the Board of
Directors.  Shareholders of record as of March 31, 2008, received
proxy materials and were considered eligible to vote on these
proposals.  The following a brief description of each proposal and the
results of the vote.





1.
The following directors were elected by a plurality of the votes cast to serve
on Quaint Oak Bancorp, Inc.’s Board of Directors:





For
            
            
            WithheldGeorge
      M. Ager
            
            1,139,400
            
            
            120,001James
      J. Clarke
            
            1,135,512
            
            
            123,889Marsh
      B. Spink
            
            1,141,512
            
            
            117,889


For
              
              
              Against
              
              
              Abstain
              
              
              Broker Non-Votes2.
      To consider and approve the adoption of the 2008 Stock Option
      Plan
              
              774,217
              
              
              228,263
              
              
              11,529
              
              
              245,3923.
      To consider and approve the adoption of the 2008 Recognition and Retention
      Plan and Trust Agreement
              
              759,994
              
              
              242,206
              
              
              11,809
              
              
              245,3924.
      To ratify the appointment of Beard Miller Company LLP as independent
      registered public accounting firm for the year ended December 31,
      2008
              
              1,223,363
              
              
              25,629
              
              
              10,409
              
              
              NA


ITEM5. OTHER INFORMATION





Not
applicable.





27
 Index





ITEM6. EXHIBITS





The
following Exhibits are filed as part of this report:





No.
            
            Description3.1
            
            Articles
      of Incorporation of Quaint Oak Bancorp, Inc. (1)3.2
            
            Bylaws
      of Quaint Oak Bancorp, Inc. (1)4.1
            
            Form
      of Stock Certificate of Quaint Oak Bancorp, Inc. (1)10.1
            
            Employment
      Agreement by and between Robert T. Strong and Quaint Oak Savings Bank, as
      amended (1)10.2
            
            2008
      Stock Option Plan (2)10.3
            
            2008
      Recognition and Retention Plan and Trust Agreement (2)31.1
            
            Rule
      13a-14(a)/15d-14(a) Certification of Chief Executive
    Officer31.2
            
            Rule
      13a-14(a)/15d-14(a) Certification of Chief Financial
    Officer32.0
            
            Certification
      Pursuant to 18 U.S.C Section 1350


__________________


(1)
            Incorporated
      by reference from the Company’s Registration Statement on Form SB-2, filed
      on March 21, 2007, as amended, and declared effective on May 14, 2007
      (File No. 333-141474).





(2)
            Incorporated
      by reference from the Company’s proxy statement on Schedule 14A, filed
      with the Securities and Exchange Commission on April 11,
    2008.





28
 Index





SIGNATURES








In
accordance with the requirements of the Exchange Act, the registrant caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.








Date:
            August 14, 2008
            
            By:
            /s/
      Robert T. StrongRobert
      T. StrongPresident
      and Chief Executive OfficerDate:
            August 14, 2008
            
            By:
            /s/
      Diane J. ColyerDiane
      J. ColyerOperations
      Officer(principal
      financial and accounting officer)







29