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 September
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 registrant 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(Registrant’s
      telephone number)





(Former
      name, former address and former fiscal year, if changed since last
      report)





Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.   Yes  T  No  £





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 October 31, 2008,
1,377,625 shares of common stock were issued and outstanding.













INDEX








PagePART
      I
                                                                                          -
                                                                                          FINANCIAL
      INFORMATIONItem
      1:
                                                                                          
                                                                                          Financial Statements:Consolidated Balance Sheets as of September 30, 2008 and
      December 31, 2007 (Unaudited)
                                                                                          1Consolidated Statements of Income for the Three Months and Nine
      Months Ended September 30, 2008 and 2007 (Unaudited)
                                                                                          2Consolidated Statement of Stockholders’ Equity for the Nine
      Months Ended September 30, 2008 (Unaudited)
                                                                                          3Consolidated Statements of Cash Flows for the Nine Months Ended
      September 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
                                                                                          16Item
      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
                                                                                          26Item
      4:
                                                                                          
                                                                                          Submission of Matters to a Vote of Security
      Holders
                                                                                          26Item
      5:
                                                                                          
                                                                                          Other information
                                                                                          27Item
      6:
                                                                                          
                                                                                          Exhibits
                                                                                          27SIGNATURES





Index





PART
I





ITEM 1. CONSOLIDATEDFINANCIAL STATEMENTS


Quaint Oak Bancorp, Inc.


Consolidated
Balance Sheets (Unaudited)





At September 30, 2008
                      
                      
                      At December 31, 2007ASSETS
                      
                      (In
      thousands, except share data)Due
      from banks, non-interest-bearing
                      
                      $
                      606
                      
                      
                      $
                      1,220Due
      from banks, interest-bearing
                      
                      
                      983
                      
                      
                      
                      3,767Cash
      and cash equivalents
                      
                      
                      1,589
                      
                      
                      
                      4,987Investment
      in interest-earning time deposits
                      
                      
                      2,591
                      
                      
                      
                      1,835Investment
      securities available for sale
                      
                      
                      1,350
                      
                      
                      
                      2,001Investment
      securities held to maturity (fair value-2008 $2,248; 2007 $2,265
      )
                      
                      
                      2,250
                      
                      
                      
                      2,253Mortgage-backed
      securities held to maturity (fair value- 2008 $10,133)
                      
                      
                      10,145
                      
                      
                      
                      -Loans
      receivable, net of allowance for loan losses 2008 $744; 2007
      $667
                      
                      
                      65,486
                      
                      
                      
                      61,656Accrued
      interest receivable
                      
                      
                      395
                      
                      
                      
                      293Investment
      in Federal Home Loan Bank stock, at cost
                      
                      
                      664
                      
                      
                      
                      237Premises
      and equipment, net
                      
                      
                      72
                      
                      
                      
                      59Prepaid
      expenses and other assets
                      
                      
                      274
                      
                      
                      
                      224Total
      Assets
                      
                      $
                      84,816
                      
                      
                      $
                      73,545LIABILITIES
      AND STOCKHOLDERS' EQUITYLIABILITIESDeposits,
      interest-bearing
                      
                      $
                      57,398
                      
                      
                      $
                      55,261Federal
      Home Loan Bank advances
                      
                      
                      9,450
                      
                      
                      
                      -Accrued
      interest payable
                      
                      
                      136
                      
                      
                      
                      113Advances
      from borrowers for taxes and insurance
                      
                      
                      443
                      
                      
                      
                      600Accrued
      expenses and other liabilities
                      
                      
                      51
                      
                      
                      
                      14Total
      Liabilities
                      
                      
                      67,478
                      
                      
                      
                      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 sharesauthorized; 1,388,625 issued and
      1,378,625 and 1,388,625 outstanding at September 30, 2008 and December 31,
      2007, respectively
                      
                      
                      14
                      
                      
                      
                      14Additional
      paid-in capital
                      
                      
                      13,381
                      
                      
                      
                      13,337Treasury
      stock, at cost, 10,000 shares
                      
                      
                      (93
                      )
                      
                      
                      -Unallocated
      common stock held by:Employee
      Stock Ownership Plan (ESOP)
                      
                      
                      (969
                      )
                      
                      
                      (1,021
                      )Recognition
      & Retention Plan Trust (RRP)
                      
                      
                      (520
                      )
                      
                      
                      -Retained
      earnings
                      
                      
                      5,525
                      
                      
                      
                      5,227Total
      Stockholders' Equity
                      
                      
                      17,338
                      
                      
                      
                      17,557Total
      Liabilities and Stockholders’ Equity
                      
                      $
                      84,816
                      
                      
                      $
                      73,545


See
accompanying notes to consolidated financial statements.





1
 Index





Quaint OakBancorp, Inc.


Consolidated
Statements of Income (Unaudited)





For
      the Three Months Ended September 30,
                
                
                For
      the Nine Months Ended September 30,2008
                
                
                2007
                
                
                2008
                
                
                2007Interest
      Income
                
                (In
      thousands, except for share data)Loans
      receivable, including fees
                
                $
                1,089
                
                
                $
                999
                
                
                $
                3,261
                
                
                $
                2,875Short-term
      investments, investments and mortgage-backed securities
                
                
                156
                
                
                
                192
                
                
                
                420
                
                
                
                335Dividends
                
                
                4
                
                
                
                4
                
                
                
                9
                
                
                
                11Total
      Interest Income
                
                
                1,249
                
                
                
                1,195
                
                
                
                3,690
                
                
                
                3,221Interest
      ExpenseDeposits
                
                
                547
                
                
                
                586
                
                
                
                1,738
                
                
                
                1,767Federal
      Home Loan Bank advances
                
                
                59
                
                
                
                -
                
                
                
                90
                
                
                
                -Total
      Interest Expense
                
                
                606
                
                
                
                586
                
                
                
                1,828
                
                
                
                1,767Net
      Interest Income
                
                
                643
                
                
                
                609
                
                
                
                1,862
                
                
                
                1,454Provision
      for Loan Losses
                
                
                31
                
                
                
                14
                
                
                
                97
                
                
                
                32Net
      Interest Income after Provision for Loan Losses
                
                
                612
                
                
                
                595
                
                
                
                1,765
                
                
                
                1,422Non-Interest
      IncomeFees
      and services charges
                
                
                6
                
                
                
                9
                
                
                
                36
                
                
                
                26Investment
      securities losses
                
                
                (2
                )
                
                
                -
                
                
                
                (22
                )
                
                
                -Total
      Non-Interest Income, net
                
                
                4
                
                
                
                9
                
                
                
                14
                
                
                
                26Non-Interest
      ExpenseSalaries
      and employee benefits
                
                
                235
                
                
                
                174
                
                
                
                636
                
                
                
                507Directors'
      fees and expenses
                
                
                45
                
                
                
                44
                
                
                
                148
                
                
                
                124Occupancy
      and equipment
                
                
                25
                
                
                
                19
                
                
                
                72
                
                
                
                58Professional
      fees
                
                
                57
                
                
                
                26
                
                
                
                167
                
                
                
                69Regulatory
                
                
                18
                
                
                
                16
                
                
                
                51
                
                
                
                26Other
                
                
                21
                
                
                
                28
                
                
                
                90
                
                
                
                86Total
      Non-Interest Expense
                
                
                401
                
                
                
                307
                
                
                
                1,164
                
                
                
                870Income
      before Income Taxes
                
                
                215
                
                
                
                297
                
                
                
                615
                
                
                
                578Income
      Taxes
                
                
                92
                
                
                
                115
                
                
                
                248
                
                
                
                224Net
      Income
                
                $
                123
                
                
                $
                182
                
                
                $
                367
                
                
                $
                354Earnings
      per share - basic
                
                $
                0.10
                
                
                $
                0.14
                
                
                $
                0.29
                
                
                NAAverage
      shares outstanding - basic
                
                
                1,226,199
                
                
                
                1,344,018
                
                
                
                1,255,655
                
                
                NAEarnings
      per share - diluted
                
                $
                0.10
                
                
                NA
                
                
                $
                0.29
                
                
                NAAverage
      shares outstanding - diluted
                
                
                1,229,151
                
                
                NA
                
                
                
                1,258,257
                
                
                NA


See
accompanying notes to consolidated financial statements.





2
 Index





Quaint Oak Bancorp, Inc.


Consolidated
Statements of Stockholders' Equity (Unaudited)





Nine Months Ended September
30, 2008





Common Stock(In
      thousands, except share data)
                                                                        
                                                                        Number of Shares
                                                                        
                                                                        
                                                                        Amount
                                                                        
                                                                        
                                                                        Additional Paid-in Capital
                                                                        
                                                                        
                                                                        Treasury Stock
                                                                        
                                                                        
                                                                        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
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        (1
                                                                        )
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        52
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        51Treasury
      stock purchased (10,000 shares)
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        (93
                                                                        )
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        (93
                                                                        )Common
      stock acquired for Recognition and Retention Plan Trust
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        (520
                                                                        )
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        (520
                                                                        )Stock
      based compensation expense
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        45
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        45Cash
      dividends declared ($0.05 per share)
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        (69
                                                                        )
                                                                        
                                                                        
                                                                        (69
                                                                        )Net
      income
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        367
                                                                        
                                                                        
                                                                        
                                                                        367BALANCE
      – September 30, 2008
                                                                        
                                                                        
                                                                        1,388,625
                                                                        
                                                                        
                                                                        $
                                                                        14
                                                                        
                                                                        
                                                                        $
                                                                        13,381
                                                                        
                                                                        
                                                                        $
                                                                        (93
                                                                        )
                                                                        
                                                                        $
                                                                        (969
                                                                        )
                                                                        
                                                                        $
                                                                        (520
                                                                        )
                                                                        
                                                                        $
                                                                        5,525
                                                                        
                                                                        
                                                                        $
                                                                        17,338





See
accompanying notes to consolidated financial statements.





3
 Index





Quaint Oak Bancorp, Inc.


Consolidated
Statements of Cash Flows (Unaudited)





For the Nine Months EndedSeptember 30,2008
                
                
                2007Cash
      Flows from Operating Activities
                
                (In
      Thousands)Net
      income
                
                $
                367
                
                
                $
                354Adjustments
      to reconcile net income to net cash provided by operating
      activities:Provision
      for loan losses
                
                
                97
                
                
                
                32Depreciation
      expense
                
                
                21
                
                
                
                11Amortization
      of deferred loan fees and costs
                
                
                (9
                )
                
                
                7Deferred
      income taxes
                
                
                (36
                )
                
                
                -Stock-based
      compensation expense
                
                
                96
                
                
                
                -Loss
      on investment securities
                
                
                22
                
                
                
                -Gain
      on the sale of other real estate owned
                
                
                (1
                )
                
                
                -Changes
      in assets and liabilities which provided (used) cash:Accrued
      interest receivable
                
                
                (102
                )
                
                
                (54
                )Prepaid
      expenses and other assets
                
                
                (14
                )
                
                
                (12
                )Accrued
      interest payable
                
                
                23
                
                
                
                11Accrued
      expenses and other liabilities
                
                
                37
                
                
                
                146Net
      Cash Provided by Operating Activities
                
                
                501
                
                
                
                495Cash
      Flows from Investing ActivitiesNet
      increase in investment in interest-earning time deposits
                
                
                (756
                )
                
                
                (105
                )Purchase
      of investment securities available for sale
                
                
                (509
                )
                
                
                -Purchase
      of investment securities held to maturity
                
                
                (1,000
                )
                
                
                (1,004
                )Purchase
      of mortgage-backed securities held to maturity
                
                
                (10,333
                )
                
                
                -Proceeds
      from the sale or redemption of investment securities available for
      sale
                
                
                1,138
                
                
                
                -Proceeds
      from calls of investment securities held to maturity
                
                
                1,000
                
                
                
                -Principal
      payments on mortgage-backed securities
                
                
                191
                
                
                
                -Net
      increase in loans receivable
                
                
                (3,999
                )
                
                
                (2,075
                )Net
      (increase) decrease in Federal Home Loan Bank stock
                
                
                (427
                )
                
                
                31Proceeds
      from the sale of other real estate owned
                
                
                82
                
                
                
                -Purchase
      of property and equipment
                
                
                (34
                )
                
                
                (17
                )Net
      Cash Used in Investing Activities
                
                
                (14,647
                )
                
                
                (3,170
                )Cash
      Flows from Financing ActivitiesNet
      increase (decrease) in deposits
                
                
                2,137
                
                
                
                (1,432
                )Increase
      in Federal Home Loan Bank advances
                
                
                9,450
                
                
                
                -Proceeds
      from issuance of common stock, net
                
                
                -
                
                
                
                13,351Dividends
      paid
                
                
                (69
                )
                
                
                -Purchase
      of treasury stock
                
                
                (93
                )
                
                
                -Purchase
      of common shares for ESOP
                
                
                -
                
                
                
                (514
                )Purchase
      of common shares for Recognition and Retention Plan Trust
                
                
                (520
                )
                
                
                -Decrease
      in advances from borrowers for taxes and insurance
                
                
                (157
                )
                
                
                (242
                )Net
      Cash Provided by Financing Activities
                
                
                10,748
                
                
                
                11,163Net
      Increase (Decrease) in Cash and Cash Equivalents
                
                
                (3,398
                )
                
                
                8,488Cash
      and Cash Equivalents – Beginning of Period
                
                
                4,987
                
                
                
                4,197Cash
      and Cash Equivalents – End of Period
                
                $
                1,589
                
                
                $
                12,685Supplementary
      Disclosure of Cash Flow and Non-Cash Information:Cash
      payments for interest
                
                $
                1,805
                
                
                $
                1,756Cash
      payments for taxes
                
                $
                315
                
                
                $
                296Transfer
      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, construction loans, home equity loans,
auto loans, and lines of credit.





The
accompanying consolidated financial statements have been prepared in conformity
with accounting principles generally accepted in the United States of America
(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 nine months ended September 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
September 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 8.





The
Company also has an employee stock ownership plan (“ESOP”).  This plan
is more fully described in Note 8.  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 nine months ended September
30, 2008 are as follows (in thousands):





Three Months Ended September 30,
      2008
                  
                  
                  Nine Months Ended September 30,
      2008Net
      income
                  
                  $
                  123
                  
                  
                  $
                  367Other
      Comprehensive Income (Loss)Net
      unrealized loss on securities available for sale
                  
                  
                  -
                  
                  
                  
                  (22
                  )Reclassification
      adjustment for loss on securities available for sale included in net
      income
                  
                  
                  -
                  
                  
                  
                  22-
                  
                  
                  
                  -Tax
      effect
                  
                  
                  -
                  
                  
                  
                  -Total
      Other Comprehensive Income
                  
                  
                  -
                  
                  
                  
                  -Total
      Comprehensive Income
                  
                  $
                  123
                  
                  
                  $
                  367





For the
three and nine months ended September 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, unvested restricted stock (RRP) shares and treasury
shares.  Stock options and unvested restricted stock are regarded as
potential common stock and are considered in the diluted earnings per share
calculations to the extent they would have a dilutive effect if converted to
common stock, computed using the “treasury stock” method.  For the
three and nine months ended September 30, 2008, all outstanding stock options
(108,311 shares) were antidilutive.  Because the initial public
offering was completed on July 3, 2007, per share results for the nine months
ended September 30, 2007 would not be meaningful.





6
 Index





Quaint
Oak Bancorp, Inc.


Notes
to Unaudited Consolidated Financial Statements (Continued)





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





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 7 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
October 2008, the FASB issued FSP SFAS No. 157-3,“Determining the Fair Value
of a Financial Asset When The Market for That Asset Is Not
Active”  (FSP 157-3), to clarify the application of the provisions of
SFAS 157 in an inactive market and how an entity would determine fair value in
an inactive market.  FSP 157-3 is effective immediately and applies to
our September 30, 2008 financial statements.  The application of the
provisions of FSP 157-3 did not materially affect our results of operations or
financial condition as of and for the periods ended September 30,
2008.





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
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.





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)





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 in its accounting for any 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 contained 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
Principles.”  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 (FSP) EITF 03-6-1, “Determining Whether
Instruments Granted in Share-Based Payment Transactions Are Participating
Securities.”  This FSP 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.  The Company is currently evaluating the potential
impact the new pronouncement will have on its financial statements.





In
September 2008, the FASB issued FSP 133-1 and FIN 45-4, “Disclosures about
Credit Derivatives and Certain Guarantees: An Amendment of FASB Statement No.
133 and FASB Interpretation No. 45; and Clarification of the Effective Date of
FASB Statement No. 161” (FSP 133-1 and FIN 45-4).  FSP 133-1 and FIN
45-4 amends and enhances disclosure requirements for sellers of credit
derivatives and financial guarantees.  It also clarifies that the
disclosure requirements of SFAS No. 161 are effective for quarterly periods
beginning after November 15, 2008, and fiscal years that include those
periods.  FSP 133-1 and FIN 45-4 is effective for reporting periods
(annual or interim) ending after November 15, 2008.  The implementation
of this standard will not have a material impact on our consolidated financial
position and results of operations.





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 investment securities available for sale and
held to maturity at September 30, 2008 and December 31, 2007 are summarized
below (in thousands):








September 30, 2008Amortized Cost
                    
                    
                    Gross Unrealized Gains
                    
                    
                    Gross Unrealized Losses
                    
                    
                    Estimated Fair ValueAvailable
      for Sale:Auction
      rate securities
                    
                    $
                    1,350
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    1,350Held
      to Maturity:U.S.
      Government agency securities
                    
                    $
                    2,250
                    
                    
                    $
                    -
                    
                    
                    $
                    (2
                    )
                    
                    $
                    2,248








December 31, 2007Amortized Cost
                    
                    
                    Gross Unrealized Gains
                    
                    
                    Gross Unrealized Losses
                    
                    
                    Estimated Fair ValueAvailable
      for Sale:Mortgage
      securities portfolio mutual fund
                    
                    $
                    501
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    501Auction
      rate 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 rate securities at September 30, 2008 are comprised of four
securities.  In early October 2008, each of the four auction rate
securities were redeemed in full at par value which equaled the amortized cost
and fair value at September 30, 2008.








Note
3 – Mortgage-backed Securities





The
amortized cost and fair value of mortgage-backed securities held to maturity at
September 30, 2008 are summarized below (in thousands):








September 30,
      2008Amortized
      Cost
                      
                      
                      Gross
      Unrealized Gains
                      
                      
                      Gross
      Unrealized Losses
                      
                      
                      Estimated
      Fair ValueHeld
      to Maturity:FNMA
      pass-through certificates
                      
                      $
                      5,210
                      
                      
                      $
                      -
                      
                      
                      $
                      (12
                      )
                      
                      $
                      5,198FHLMC
      pass-through certificates
                      
                      
                      4,935
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      4,935$
                      10,145
                      
                      
                      $
                      -
                      
                      
                      $
                      (12
                      )
                      
                      $
                      10,133








There
were no mortgage-backed securities as of December 31, 2007.





9
 Index





Quaint
Oak Bancorp, Inc.


Notes
to Unaudited Consolidated Financial Statements (Continued)





Note
4 - Loan Receivable, Net and Allowance for Loan Losses





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








September 30, 2008
                  
                  
                  December 31, 2007Real
      estate loans:One-to
      four-family residential:Owner
      occupied
                  
                  $
                  16,284
                  
                  
                  $
                  17,248Non-owner
      occupied
                  
                  
                  18,849
                  
                  
                  
                  15,757Total
      one-to-four family residential
                  
                  
                  35,133
                  
                  
                  
                  33,005Multi-family
      residential
                  
                  
                  3,704
                  
                  
                  
                  4,385Commercial
      real estate
                  
                  
                  19,178
                  
                  
                  
                  17,481Construction
                  
                  
                  2,593
                  
                  
                  
                  1,677Commercial
      lines of  credit
                  
                  
                  1,123
                  
                  
                  
                  1,206Home
      equity loans
                  
                  
                  4,330
                  
                  
                  
                  4,431Total
      real estate loans
                  
                  
                  66,061
                  
                  
                  
                  62,185Auto
      loans
                  
                  
                  83
                  
                  
                  
                  -Loans
      secured by deposits
                  
                  
                  14
                  
                  
                  
                  36Total
      loans
                  
                  
                  66,158
                  
                  
                  
                  62,221Deferred
      loan fees and costs
                  
                  
                  72
                  
                  
                  
                  102Allowance
      for loan losses
                  
                  
                  (744
                  )
                  
                  
                  (667
                  )Net
      loans
                  
                  $
                  65,486
                  
                  
                  $
                  61,656








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








September 30, 2008
                  
                  
                  September 30, 2007Balance,
      beginning of the year
                  
                  $
                  667
                  
                  
                  $
                  575Provision
      for loan losses
                  
                  
                  97
                  
                  
                  
                  32Charge-offs
                  
                  
                  (20
                  )
                  
                  
                  (1
                  )Recoveries
                  
                  
                  -
                  
                  
                  
                  -(Charge-offs)/recoveries,
      net
                  
                  
                  (20
                  )
                  
                  
                  (1
                  )Balance,
      end of period
                  
                  $
                  744
                  
                  
                  $
                  606





10
 Index





Quaint
Oak Bancorp, Inc.


Notes
to Unaudited Consolidated Financial Statements (Continued)





Note
5 – Deposits





Deposits
consist of the following classifications (in thousands):








September 30, 2008
                  
                  
                  December 31, 2007Passbook
      savings accounts
                  
                  $
                  3,520
                  
                  
                  $
                  3,659Statement
      and e-savings accounts
                  
                  
                  5,391
                  
                  
                  
                  5,630Certificates
      of deposit
                  
                  
                  48,487
                  
                  
                  
                  45,972Total
      deposits
                  
                  $
                  57,398
                  
                  
                  $
                  55,261









Note
6 – Federal Home Loan Bank Advances





Federal
Home Loan Bank advances consist of the following at September 30, 2008 (in
thousands):








Maturity Period
                  
                  Amount
                  
                  
                  Weighted Interest Rate1
      to 12 months
                  
                  $
                  2,600
                  
                  
                  
                  2.73
                  %13
      to 24 months
                  
                  
                  1,250
                  
                  
                  
                  3.38
                  %25
      to 36 months
                  
                  
                  1,800
                  
                  
                  
                  3.66
                  %37
      to 48 months
                  
                  
                  1,800
                  
                  
                  
                  3.98
                  %49
      to 60 months
                  
                  
                  2,000
                  
                  
                  
                  4.19
                  %Total
                  
                  $
                  9,450
                  
                  
                  
                  3.54
                  %








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





Note
7 – 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.





In
October 2008, the FASB issued FSP SFAS No. 157-3,“Determining the Fair Value
of a Financial Asset When The Market for That Asset Is Not
Active”  (FSP 157-3), to clarify the application of the provisions of
SFAS 157 in an inactive market and how an entity would determine fair value in
an inactive market.  FSP 157-3 is effective immediately and applies to
our September 30, 2008 financial statements.  The application of the
provisions of FSP 157-3 did not materially affect our results of operations or
financial condition as of and for the periods ended September 30,
2008.





11
 Index





Quaint
Oak Bancorp, Inc.


Notes
to Unaudited Consolidated Financial Statements (Continued)





Note
7 – Fair Value (Continued)





SFAS 157
establishes a fair value hierarchy about assumptions used to measure fair values
and clarifies assumptions about risk and the effect of a restriction on the sale
or use of an asset.  The hierarchy gives the highest priority to
unadjusted quoted prices in active markets for identical assets or liabilities
(Level 1 measurements) and the lowest priority to unobservable inputs (Level 3
measurements).  The three levels of fair value hierarchy under SFAS
157 are as follows:





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 exists 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 September 30,
2008, the Company did not have any assets that were measured at fair value on a
recurring basis that used Level 3 measurements.





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 September 30, 2008,
Level 2 securities include auction rate 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.





12
 Index





Quaint
Oak Bancorp, Inc.


Notes
to Unaudited Consolidated Financial Statements (Continued)





Note
7 – Fair Value (Continued)





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





Fair Value Measurements at September 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
                            
                            $
                            1,350
                            
                            
                            $
                            -
                            
                            
                            $
                            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 September 30, 2008:





Fair Value Measurements at September 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 September 30, 2008 and June 30, 2008 totaled
$400,000 net of a valuation allowance of $100,000.  Such loans did not
require an additional provision for loan losses for the quarter ended September
30, 2008.  There were no new impaired loans for the quarter ended
September 30, 2008.








Note
8 – 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 in the open market at an average price
of $9.35 for a total of $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





13
 Index





Quaint
Oak Bancorp, Inc.


Notes
to Unaudited Consolidated Financial Statements (Continued)





Note
8 – Stock Compensation Plans (Continued)





Employee Stock Ownership
Plan (Continued)





price of
the shares, and the shares become outstanding for earnings per share
computations.  During the three and nine month periods ended September
30, 2008, the Company recognized $17,000 and $51,000 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
September 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 September 30, 2008 is a
follows:





Number of Shares
                  
                  
                  Weighted Average Grant Date Fair
      ValueUnvested
      at December 31, 2007
                  
                  
                  --
                  
                  
                  $
                  --Granted
      May 14, 2008
                  
                  
                  43,324
                  
                  
                  
                  9.05Vested
                  
                  
                  --
                  
                  
                  
                  --Forfeited
                  
                  
                  --
                  
                  
                  
                  --Unvested
      at September 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 is equal to the fair value of the common stock at the date of
grant.  During the three and nine months ended September 30, 2008,
$19,000 and $29,000 in compensation expense, respectively was
recognized.  A tax benefit of approximately $7,000 and $10,000,
respectively, was recognized during each of these periods.  As of
September 30, 2008, approximately $363,000 in additional compensation expense
will be recognized over the remaining service period of approximately 4.7
years.





Stock
Options





In May
2008, the shareholders of Quaint Oak Bancorp approved the adoption of the 2008
Stock Option 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.





14
 Index





Quaint
Oak Bancorp, Inc.


Notes
to Unaudited Consolidated Financial Statements (Continued)





Note
8 – Stock Compensation Plans (Continued)





Stock Options
(Continued)





A summary
of the status of the Company’s stock options under the 2008 Option Plan as of
September 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 September 30, 2008
                  
                  
                  108,311
                  
                  
                  $
                  10.00
                  
                  
                  
                  9.6
                  
                  
                  $
                  --Exercisable
                  
                  
                  -








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.





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 September 30, 2008 as all of
the outstanding options were at exercise prices greater than the quarter-end
stock price.





During
the three and nine months ended September 30, 2008, approximately $11,000 and
$16,000, respectively, was recognized in compensation expense for the 2008
Option Plan.  A tax benefit of approximately $2,000 and $3,000,
respectively, was recognized during each of these periods.  At
September 30, 2008, approximately $193,000 in additional compensation expense
for awarded options remained unrecognized.  This expense will be
recognized over approximately 4.7 years.




15
 Index




ITEM 2. 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.





16
 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 September 30, 2008 and December 31, 2007





Total Assets. The Company’s
total assets at September 30, 2008 were $84.8 million, an increase of $11.3
million, or 15.3%, from $73.5 million at December 31, 2007.  This
increase was primarily due to an increase in mortgage-backed securities of $10.1
million, growth in loans receivable, net of the allowance for loan losses of
$3.8 million and an increase in investment in interest earning time deposits of
$756,000, offset by a decline in cash and cash equivalents of $3.4 million and a
decrease in investment securities of $654,000.  Asset growth during
the nine month period ended September 30, 2008 was primarily funded by an
increase in Federal Home Loan Bank advances of $9.5 million from none at
December 31, 2007 and a $2.1 million increase in deposits.





Cash and Cash Equivalents.Cash and cash equivalents decreased $3.4 million, or 68.1%, from $5.0
million at December 31, 2007 to $1.6 million at September 30, 2008 as these
funds were used primarily to fund loan and investment growth and to repurchase
the Company’s common stock for the Company’s Recognition and Retention Plan in
the amount of $520,000.





Investment
Securities.Available for sale investment securities decreased
$651,000, or 32.5% from $2.0 million at December 31, 2007 to $1.4 million at
September 30, 2008 as purchases of $500,000 of auction rate securities and
$9,000 of equity securities during the nine month period ended September 30,
2008, were offset by the redemption of $650,000 of auction rate securities and
the sale of $510,000 of equity securities at a loss of
$22,000.  During this same period, mortgage-backed securities held to
maturity increased to $10.1 million from none at December 31, 2007 as the
Company invested funds borrowed from the Federal Home Loan Bank into these
securities.





17
 Index





Loans Receivable, Net. Loans
receivable, net, increased $3.8 million, or 6.2%, to $65.5 million at September
30, 2008 from $61.7 million at December 31, 2007.  This increase was
funded primarily by the increase in deposits and decrease in cash and cash
equivalents.  Increases within the portfolio occurred in the
residential mortgage one-to-four family non-owner occupied category, which grew
$3.1 million or 19.6%, commercial real estate loans which increased $1.7 million
or 9.7%, and construction loans which grew $916,000 or 54.6% as the Company
continues its strategy of diversifying its loan portfolio with higher yielding
and shorter-term loan products.  These increases were partially offset
by decreases of $964,000 or 5.6% in residential mortgage one-to-four family
owner occupied loans, $681,000 or 15.5% in multi-family residential loans,
$101,000 or 2.3% in home equity loans, and $83,000 or 6.9% in commercial lines
of credit.  Decreases in these loan categories are attributable to
normal amortization and pay-offs.





Deposits. Total
interest-bearing deposits increased $2.1 million, or 3.9%, to $57.4 million at
September 30, 2008 compared to $55.3 million at December 31,
2007.  This increase was attributable to a $2.5 million growth in
certificates of deposit and $120,000 increase in our new e-savings accounts,
offset by decreases of $359,000 in statement savings accounts and $139,000 in
passbook savings accounts.





Federal Home Loan Bank
Advances. Federal Home Loan Bank advances increased to $9.5 million at
September 30, 2008 from none at December 31, 2007 as the Company invested the
funds borrowed into mortgage-backed securities.





Stockholders’
Equity.  Total stockholders’ equity decreased $219,000, or
1.2%, to $17.3 million at September 30, 2008.  This decrease from
December 31, 2007 was 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) for an aggregate purchase price of $520,000, the purchase of
10,000 shares of the Company’s common stock in the open-market as part of the
Company’s stock repurchase program for an aggregate purchase price of $93,000
and dividends paid of $69,000, offset by net income for the nine months ended
September 30, 2008 of $367,000, a decrease in unallocated shares held by the
ESOP of $51,000 and $45,000 of compensation expense related to stock
compensation plans.








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





Net Income.Net
income amounted to $123,000 for the three months ended September 30, 2008, a
decrease of $59,000, or 32.4% compared to net income of $182,000 for the same
period in 2007.  The decrease in net income on a quarter over quarter
basis was primarily the result of increases in non-interest expense of $94,000
and the provision for loan losses of $17,000, and a $5,000 decline in
non-interest income, which were offset by an increase in net interest income of
$34,000 and decrease in income tax expense of $23,000.  The increase
in non-interest expense was primarily due to a $61,000 increase in salaries and
employee benefits and $31,000 increase in professional fees for the three months
ended September 30, 2008 compared to the same period in 2007.





Net Interest
Income.  Net interest income increased $34,000, or 5.6%, to
$643,000 for the three months ended September 30, 2008 from $609,000 for the
comparable period in 2007.  The increase was driven by an increase in
interest income of $54,000, or 4.5%, which was primarily attributable to an
increase in average interest-earning assets of $7.4 million.  The
increase in interest income was offset by an increase of $20,000, or 3.4%, in
interest expense driven by an $8.7 million increase in average interest-bearing
liabilities.





18
 Index





Interest
Income.  Interest income increased $54,000, or 4.5% for the
three months ended September 30, 2008 from $1.2 million for the three months
ended September 30, 2007.  The increase resulted primarily from a $7.4
million increase in average interest-earning assets which had the effect of
increasing interest income by $91,000.  This increase in volume was
partially offset by a $37,000 decrease in interest income resulting from a 35
basis point decrease in the overall yield on interest-earning assets to 6.32%
for the three months ended September 30, 2008 from 6.67% for the three months
ended September 30, 2007.  The growth in average interest-earnings
assets between the two periods can be attributed primarily to the increase in
average net loans receivable of $8.1 million and average mortgage-backed
securities of $7.0 million, offset by an $8.1 million decrease in average
short-term investments and investment securities.  The increase in
average net loans receivable was driven by the increase in average
interest-bearing deposits and the re-deployment of short-term investments, while
the increase in mortgage-backed securities was driven by the $6.4 million
increase in average FHLB advances.  The average yield on loans
decreased to 6.79% for the three months ended September 30, 2008 from 7.13% for
the three months ended September 30, 2007.  The decrease in yield was
the result of the current interest rate environment in which the Federal Reserve
Board’s Open Market Committee cut the federal funds rate by 275 basis points
from September 2007 to September 2008.





Interest
Expense.  Interest expense increased by $20,000, or 3.4%, to
$606,000 for the three months ended September 30, 2008 compared to the same
period in 2007.  The increase resulted primarily from an $8.7 million
increase in average interest-bearing liabilities, which had the effect of
increasing interest expense by $64,000.  This increase in volume was
partially offset by a $44,000 decrease in interest expense resulting from a 47
basis point decrease in the overall cost of interest-bearing liabilities to
3.88% for the three months ended September 30, 2008 from 4.35% for the three
months ended June 30, 2007.  The decrease in liability yields is a
result of the Company lowering its rates to reflect the current interest rate
environment mentioned previously.





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 September
      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
              
              $
              7,297
              
              
              $
              72
              
              
              
              3.95
              %
              
              $
              15,393
              
              
              $
              192
              
              
              
              4.99
              %Mortgage-backed
      securities
              
              
              7,025
              
              
              
              84
              
              
              
              4.78
              
              
              
              -
              
              
              
              -
              
              
              
              -Loans
      receivable, net (1)
              
              
              64,210
              
              
              
              1,090
              
              
              
              6.79
              
              
              
              56,062
              
              
              
              999
              
              
              
              7.13Other
      interest-earning assets
              
              
              545
              
              
              
              3
              
              
              
              2.20
              
              
              
              235
              
              
              
              4
              
              
              
              6.81Total
      interest-earning assets
              
              
              79,077
              
              
              
              1,249
              
              
              
              6.32
              %
              
              
              71,690
              
              
              
              1,195
              
              
              
              6.67
              %Non-interest-earning
      assets
              
              
              1,501
              
              
              
              
              
              
              
              
              
              
              
              971Total
      assets
              
              $
              80,578
              
              
              
              
              
              
              
              
              
              
              $
              72,661Interest-bearing
      liabilities:Passbook
      accounts
              
              $
              3,441
              
              
              
              11
              
              
              
              1.28
              %
              
              $
              4,123
              
              
              
              14
              
              
              
              1.36
              %Statement
      and e-savings accounts
              
              
              5,394
              
              
              
              31
              
              
              
              2.30
              
              
              
              6,040
              
              
              
              42
              
              
              
              2.78Certificate
      of deposit accounts
              
              
              47,108
              
              
              
              505
              
              
              
              4.29
              
              
              
              43,662
              
              
              
              530
              
              
              
              4.86Total
      deposits
              
              
              55,943
              
              
              
              547
              
              
              
              3.91
              
              
              
              53,825
              
              
              
              586
              
              
              
              4.35FHLB
      advances
              
              6,538
              
              
              
              59
              
              
              
              3.61
              
              
              
              -
              
              
              
              -
              
              
              
              -Total
      interest-bearing liabilities
              
              
              62,481
              
              
              
              606
              
              
              
              3.88
              %
              
              
              53,825
              
              
              
              586
              
              
              
              4.35
              %Non-interest-bearing
      liabilities
              
              
              731
              
              
              
              
              
              
              
              
              
              
              
              669Total
      liabilities
              
              
              63,212
              
              
              
              
              
              
              
              
              
              
              
              54,494Stockholders’
      equity
              
              
              17,366
              
              
              
              
              
              
              
              
              
              
              
              18,167Total
      liabilities and stockholders’ equity
              
              $
              80,578
              
              
              
              
              
              
              
              
              
              
              $
              72,661Net
      interest-earning assets
              
              $
              16,596
              
              
              
              
              
              
              
              
              
              
              $
              17,685Net
      interest income; average interest rate spread
              
              
              
              
              
              $
              643
              
              
              
              2.44
              %
              
              
              
              
              
              $
              609
              
              
              
              2.32
              %Net
      interest margin (2)
              
              
              
              
              
              
              
              
              
              
              3.25
              %
              
              
              
              
              
              
              
              
              
              
              3.40
              %Average
      interest-earning assets to average interest-bearing
      liabilities
              
              
              
              
              
              
              
              
              
              
              126.56
              %
              
              
              
              
              
              
              
              
              
              
              133.19
              %


_______________________





(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 $17,000, from $14,000 for the
quarter ended September 30, 2007 to $31,000 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 September 30,
2008.  Non-performing loans
amounted to $2.1 million, or 3.17% of net loans receivable at September 30,
2008, consisting of 10 loans, five of which are 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 and non-owner occupied residential,
multi-family residential and construction loans and all are generally
well-collateralized or adequately reserved for.  Management does not
anticipate any significant losses on these loans.  The allowance for
loan losses as a percent of total loans receivable was 1.12% at September 30,
2008 and 1.07% at December 31, 2007.





Non-interest
income decreased $5,000, or 55.6%, from $9,000 for the three months ended
September 30, 2007 to $4,000 for the three months ended September 30, 2008. A
$3,000 decrease in fees and service charges combined with a $2,000 loss on
investment securities accounted for the decline.





20
 Index





Non-interest
expense increased $94,000, or 30.6%, from $307,000 for the three months ended
September 30, 2007 to $401,000 for the three months ended September 30,
2008.  Salaries and benefits expense accounted for $61,000 of the
change as this expense increased 35.1% from $174,000 for the three months ended
September 30, 2007 to $235,000 for the three months ended September 30, 2008 due
to annual salary increases and the compensation expense associated with the
stock compensation plans. In addition, professional fees accounted for $31,000
of the change as this expense increased 119.2% from $26,000 to $57,000 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, and regulatory expenses of $1,000, $6,000 and
$2,000, respectively, which were offset by a $7,000 decrease in other
expenses.





The
provision for income tax decreased $23,000 from $115,000 for the three months
ended September 30, 2007 to $92,000 for the three months ended September 30,
2008 due primarily to the decrease in pre-tax income.  The Company’s
effective tax rate, including federal and state income taxes, was 42.8% and
38.7% for the three months ended September 30, 2008 and 2007,
respectively.








Comparison
of Operating Results for the Nine Months Ended September 30, 2008 and
2007





Net Income.Net income amounted to
$367,000 for the nine months endedSeptember 30, 2008, an increase of $13,000,
or 3.7% compared to net income of $354,000 for the same period in 2007.The increase was primarily the result of the increase in net interest
income of $408,000, which was offset by a decrease in non-interest income of
$12,000, and increases in the provision for loan losses of $65,000, non-interest
expense of $294,000 and income tax expense of $24,000.





Net Interest
Income.  Net interest income increased $408,000, or 28.1%, to
$1.9 million for the nine months ended September 30, 2008 from $1.5 million for
the comparable period in 2007.  The increase was driven by an increase
in interest income of $469,000, or 14.6% which was primarily attributable to an
increase in average interest-earning assets of $11.4 million, as the proceeds
from the Company’s initial stock offering completed in July 2007 were invested
into loans, short-term investments and investment
securities.   The increase in interest income was offset by a
$61,000, or 3.5% increase in interest expense driven by a $4.8 million increase
in average interest-bearing liabilities.




Interest
Income.  Interest income increased $469,000, or 14.6% for the
nine months ended September 30, 2008 from $3.2 million for the nine months year
ended September 30, 2007.  The increase resulted primarily from an
$11.4 million increase in average interest-earning assets which had the effect
of increasing interest income by $476,000.  This increase in volume
was partially offset by a $7,000 decrease in interest income resulting from a 17
basis point decrease in the overall yield on interest-earning assets to 6.43%
for the nine months ended September 30, 2008 from 6.60% for the nine months
ended September 30, 2007.  The growth in average interest-earnings
assets between the two periods can be attributed primarily to the increase in
average net loans receivable of $7.9 million and average mortgage-backed
securities of $3.6 million. The increase in average net loans receivable was
driven by the net proceeds received in the stock offering and the increase in
average interest-bearing deposits, while the increase in mortgage-backed
securities was driven by the $3.3 million increase in average FHLB
advances.  The average yield on loans decreased slightly to 6.92% for
the nine months ended September 30, 2008 from 6.98% for the nine months ended
September 30, 2007.





21
 Index





Interest
Expense.  Interest expense increased by $61,000, or 3.5%, to
$1.8 million for the nine months ended September 30, 2008 compared to the same
period in 2007.  The increase resulted primarily from a $4.8 million
increase in average interest-bearing liabilities, which had the effect of
increasing interest expense by $136,000.  This increase in volume was
partially offset by a $75,000 decrease in interest expense resulting from a 21
basis point decrease in the overall cost of interest-bearing liabilities to
4.08% for the nine months ended September 30, 2008 from 4.29% for the nine
months ended September 30, 2007.





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.





Nine Months Ended September
      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
              
              $
              9,681
              
              
              $
              293
              
              
              
              4.04
              %
              
              $
              9,945
              
              
              $
              335
              
              
              
              4.49
              %Mortgage-backed
      securities
              
              
              3,591
              
              
              
              127
              
              
              
              4.72
              
              
              
              -
              
              
              
              -
              
              
              
              -Loans
      receivable, net (1)
              
              
              62,840
              
              
              
              3,261
              
              
              
              6.92
              
              
              
              54,920
              
              
              
              2,875
              
              
              
              6.98Other
      interest-earning assets
              
              
              399
              
              
              
              9
              
              
              
              3.01
              
              
              
              246
              
              
              
              11
              
              
              
              5.96Total
      interest-earning assets
              
              
              76,511
              
              
              
              3,690
              
              
              
              6.43
              %
              
              
              65,111
              
              
              
              3,221
              
              
              
              6.60
              %Non-interest-earning
      assets
              
              
              1,462
              
              
              
              
              
              
              
              
              
              
              
              726Total
      assets
              
              $
              77,973
              
              
              
              
              
              
              
              
              
              
              $
              65,837Interest-bearing
      liabilities:Passbook
      accounts
              
              $
              3,482
              
              
              
              34
              
              
              
              1.30
              %
              
              $
              4,427
              
              
              
              46
              
              
              
              1.39
              %Statement
      and e-savings accounts
              
              
              5,556
              
              
              
              102
              
              
              
              2.45
              
              
              
              6,423
              
              
              
              133
              
              
              
              2.76Certificate
      of deposit accounts
              
              
              47,348
              
              
              
              1,602
              
              
              
              4.51
              
              
              
              44,064
              
              
              
              1,588
              
              
              
              4.81Total
      deposits
              
              
              56,386
              
              
              
              1,738
              
              
              
              4.11
              
              
              
              54,914
              
              
              
              1,767
              
              
              
              4.29FHLB
      advances
              
              
              3,346
              
              
              
              90
              
              
              
              3.59
              
              
              
              -
              
              
              
              -
              
              
              
              -Total
      interest-bearing liabilities
              
              
              59,732
              
              
              
              1,828
              
              
              
              4.08
              %
              
              
              54,914
              
              
              
              1,767
              
              
              
              4.29
              %Non-interest-bearing
      liabilities
              
              
              708
              
              
              
              
              
              
              
              
              
              
              
              1,582Total
      liabilities
              
              
              60,440
              
              
              
              
              
              
              
              
              
              
              
              56,496Stockholders’
      equity
              
              
              17,533
              
              
              
              
              
              
              
              
              
              
              
              9,341Total
      liabilities and stockholders’ equity
              
              $
              77,973
              
              
              
              
              
              
              
              
              
              
              $
              65,837Net
      interest-earning assets
              
              $
              16,779
              
              
              
              
              
              
              
              
              
              
              $
              10,197Net
      interest income; average interest rate spread
              
              
              
              
              
              $
              1,862
              
              
              
              2.35
              %
              
              
              
              
              
              $
              1,454
              
              
              
              2.31
              %Net
      interest margin (2)
              
              
              
              
              
              
              
              
              
              
              3.24
              %
              
              
              
              
              
              
              
              
              
              
              2.98
              %Average
      interest-earning assets to average interest-bearing
      liabilities
              
              
              
              
              
              
              
              
              
              
              128.09
              %
              
              
              
              
              
              
              
              
              
              
              118.57
              %


_______________________





(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 $65,000 from $32,000 for the
nine months ended September 30, 2007 to $97,000 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
September 30, 2008.  See additional discussion under “Comparison of
Operating Results for the Three Months Ended September 30, 2008 and
2007.”





During
the nine months ended September 30, 2008, a $20,000 home equity loan was charged
off against the allowance for loan losses.





22
 Index





In
addition, during the nine months ended September 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 nine months ended September 30, 2008
and $28,000 was deferred and will be taken into income as payments on the loan
are received.





Non-interest
income decreased $12,000, or 46.2%, from $26,000 for the nine months ended
September 30, 2007 to $14,000 for the nine months ended September 30, 2008, as a
$10,000 increase in fees and service charges was offset by a $22,000 loss on
investment securities.





Non-interest
expense increased $294,000, or 33.8%, from $870,000 for the nine months ended
September 30, 2007 to $1.2 million for the nine months ended September 30,
2008.  Salaries and benefits expense accounted for $129,000 of the
change as this expense increased 25.4% from $507,000 for the nine months ended
September 30, 2007 to $636,000 for the nine months ended September 30, 2008 due
to annual salary increases and the compensation expense associated with the
stock compensation plans. In addition, professional fees accounted for $98,000
of the change as this expense increased 142.0% from $69,000 for the nine months
ended September 30, 2007 to $167,000 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 $24,000, $14,000,
$25,000 and $4,000, respectively.





The
provision for income tax increased $24,000 from $224,000 for the nine months
ended September 30, 2007 to $248,000 for the nine months ended September 30,
2008 due primarily to the increase in pre-tax income.  The Company’s
effective tax rate, including federal and state income taxes, was 40.3% and
38.8% for the nine months ended September 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 September 30, 2008, the Company's cash and
cash equivalents amounted to $1.6 million.  At such date, the Company
also had $2.6 million invested in interest-earning time deposits maturing in one
year or less.





The
Company uses its liquidity to fund existing and future loan commitments, to fund
deposit outflows, to invest in other interest-earning assets and to meet
operating expenses.  At September 30, 2008, Quaint Oak Bank had
outstanding commitments to originate loans of $941,000 and commitments under
unused lines of credit of $1.5 million.





At
September 30, 2008, certificates of deposit scheduled to mature in less than one
year totaled $32.2 million.  Based on prior experience, management
believes that a significant portion of such deposits will remain with us,
although there can be no assurance that this will be the case.





In
addition to cash flow from loan payments and prepayments and deposits, the
Company has significant borrowing capacity available to fund liquidity
needs.  If the Company requires funds beyond its ability to generate
them internally, borrowing agreements exist with the Federal Home Loan Bank of
Pittsburgh, which provide an additional source of funds.  At September
30, 2008, Quaint Oak Bank had $9.5 million of advances from the Federal Home
Loan Bank of Pittsburgh and had $31.5 million in borrowing
capacity.





23
 Index





Our
stockholders’ equity amounted to $17.3 million at September 30, 2008, a decrease
of $219,000 from December 31, 2007.  This decrease from December 31,
2007 was 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)
for an aggregate purchase price of $520,000, the purchase of 10,000 shares of
the Company’s common stock in the open-market as part of the Company’s stock
repurchase program for an aggregate purchase price of $93,000 and dividends paid
of $69,000, offset by net income for the nine months ended September 30, 2008 of
$367,000, a decrease in unallocated shares held by the ESOP of $51,000 and
$45,000 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 September 30, 2008, Quaint
Oak Bank exceeded each of its capital requirements with ratios of 16.51%, 20.09%
and 21.28%, respectively. As a savings and loan holding company, the Company is
not subject to any regulatory capital requirements.








Off-Balance
Sheet Arrangements





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





Commitments. At September 30,
2008, we had unfunded commitments under lines of credit of $1.5 million and
$941,000 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.





24
 Index





ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET
RISK





Not
Applicable.








ITEM 4. 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





ITEM 1. LEGALPROCEEDINGS





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





ITEM 1A. RISK FACTORS





Not
applicable.





ITEM 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS





(a)
            Not
      applicable.





(b)
            Not
      applicable.





(c)
            Purchases
      of Equity Securities





The
Company’s repurchases of its common stock made during the quarter ended
September 30, 2008 are set forth in the table below:








Period
              
              Total Number of Shares
      Purchased
              
              
              Average Price Paid per
      Share
              
              
              Total Number of Shares Purchased as Part of
      Publicly Announced Plans or Programs
              
              
              Maximum Number of Shares that May Yet Be Purchased
      Under the Plans or Programs (1)Month
      #1 July 1, 2008 – July 31, 2008
              
              
              -
      -
              
              
              $
              -
      -
              
              
              
              -
      -
              
              
              
              138,862Month
      #2 August 1, 2008 – August 31, 2008
              
              
              1,000
              
              
              
              9.39
              
              
              
              1,000
              
              
              
              137,862Month
      #3 September 1, 2008 – September 30, 2008
              
              
              9,000
              
              
              
              9.23
              
              
              
              9,000
              
              
              
              128,862Total
              
              
              10,000
              
              
              $
              9.25
              
              
              
              10,000
              
              
              
              128,862





Notes
to this table:





(1)
            On
      June 12, 2008 the Company announced by press release its first stock
      repurchase program to repurchase 138,862 shares, or 10% of its outstanding
      common stock over a two-year period. The program became effective July 5,
      2008.






ITEM 3. DEFAULTS UPON SENIOR SECURITIES





Not
applicable.






ITEM 4.SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS





Not
applicable.





26
 Index





ITEM 5. OTHERINFORMATION





Not
applicable.






ITEM 6. 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.





27
 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:
                  November 14, 2008
                  
                  By:
                  /s/ Robert
      T. StrongRobert T. StrongPresident and Chief Executive OfficerDate:
                  November 14, 2008
                  
                  By:
                  /s/ Diane
      J. ColyerDiane J. ColyerOperations Officer(principal financial and accounting
officer)