QUAINT OAK BANCORP INC

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

The estimated fair value of the options granted in* May 2023*was $3.26 per share. The fair value was estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions:

Expected dividend yield 2.89%

Risk-free interest rate 3.42%

Expected life of options 6.5 years

Expected stock-price volatility 20.35%

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 isten years, the expected term of the options is less. Management estimated the expected term of the stock options to be the average of the vesting period and the contractual term. The expected stock-price volatility was estimated by considering the Company’s own stock volatility. The actual future volatility* may*differ from our historical volatility.

At* December 31, 2023,the aggregate intrinsic value of options outstanding and options exercisable was zero. At December 31, 2022,the aggregate intrinsic value of the options outstanding was $2.1 million and options exercisable was $1.9 million. The aggregate intrinsic value of a stock option represents the total pre-tax intrinsic value (the amount by which the current market value of the underlying stock exceeds the exercise price of the option) that would have been received by the option holder had all option holders exercised their options on December 31, 2023and December 31, 2022.*This amount changes based on changes in the market value of the Company’s common stock.

During the years ended* December 31, 2023and2022,* approximately $70,000 and $44,000 in compensation expense was recognized, respectively. During the years ended* December 31, 2023and December 31, 2022,the Company recognized a tax benefit of $5,000 and $2,000, respectively. As of December 31, 2023,*approximately $352,000 in additional compensation expense will be recognized over the remaining service period of approximately 4.4 years.

Note15 - Transactions with Executive Officers and Directors

Certain directors and executive officers of the Company, their families and their affiliates are customers of the Bank. Any transactions with such parties, including loans and commitments, are in the ordinary course of business at normal terms, including interest rate and collateralization, prevailing at the time and donot represent more than normal risks of collectability. None of these individuals were indebted to the Company for loans at* December**31,* 2023 and2022, respectively.

Note16 - Financial Instruments with Off-Balance Sheet Risk

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

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

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Note16 - Financial Instruments with Off-Balance Sheet Risk (Continued)

A summary of the Company’s financial instrument commitments at* December**31,* 2023 and2022 is as follows (in thousands):

Commitments to extend credit are agreements to lend to a customer as long as there isno violation of any condition established in the contract. Since the commitments* mayexpire without being drawn upon, the total commitment amounts donot* necessarily represent future cash requirements. Commitments generally have fixed expiration dates or other termination clauses and* may*require payment of a fee. The Company evaluates each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation. Collateral held varies but includes principally residential and commercial real estate.

The ACL for off balance sheet credit exposures is recorded in other liabilities on the Consolidated Balance Sheet. This ACL represents management’s estimate of expected losses in its unfunded loan commitments and other off balance sheet credit exposures, such as letters of credit and credit recourse on sold residential mortgage loans. The allowance for credit losses specific to unfunded commitments is determined by estimating future draws and applying the expected loss rates on those draws. Future draws are based on historical averages of utilization rates (i.e., the likelihood of draws taken). The ACL for off balance sheet credit exposures is increased or decreased by charges or reductions to expense, through the provision for credit losses. The balance of off balance sheet credit exposures is $202,000 at* December 31, 2023.*

Note17 - Leases

The Company leases its office at501 Knowles Avenue in Southampton, Pennsylvania as well as other office facilities and equipment. The Company leasesfour office locations under operating leases. Several assumptions and judgments were made when applying the requirements of Topic842 to the Company’s existing lease commitments, including the allocation of consideration in the contracts between lease and nonlease components, determination of the lease term, and determination of the discount rate used in calculating the present value of the lease payments.

The Company has elected to account for the variable nonlease components, such as common area maintenance charges, utilities, real estate taxes, and insurance, separately from the lease component. Such variable nonlease components are reported in net occupancy expense on the Consolidated Statements of Income when paid. These variable nonlease components were excluded from the calculation of the present value of the remaining lease payments, therefore, they arenot included in the right-of-use assets and lease liabilities reported on the Consolidated Balance Sheets. The lease cost associated with the operating leases was $274,000 for the year ending* December**31,* 2023 and $184,000 for the year ending* December 31, 2022.*

Certain of the Company’s leases contain options to renew the lease after the initial term. Management considers the Company’s historical pattern of exercising renewal options on leases and the positive performance of the leased locations, when determining whether it is reasonably certain that the leases will be renewed. If management concludes that there is reasonable certainty about the renewal option, it is included in the calculation of the remaining term of each applicable lease. The discount rate utilized in calculating the present value of the remaining lease payments for each lease was the Federal Home Loan Bank of Pittsburgh advance rate corresponding to the remaining maturity of the lease. The following table presents the weighted-average remaining lease term and discount rate for the leases outstanding at* December 31, 2023.*

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Note17 – Leases (Continued)

The following table presents the undiscounted cash flows due related to operating leases as of* December 31, 2023,*along with a reconciliation to the discounted amount recorded on the Consolidated Balance Sheets:

Under Topic842, the lessee can elect tonot record on the Consolidated Balance Sheets a lease whose term istwelve months or less and doesnot include a purchase option that the lessee is reasonably certain to exercise. As of* December**31,* 2023, the Company hadno leases that had a term oftwelve months or less.

Rental expense under operating leases totaled approximately $531,000 in2023 and $438,000 in2022.

Note18 - Regulatory Matters

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

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth below) of total, Tier1, and common equity Tier1 capital (as defined in the regulations) to risk-weighted assets, and of Tier1 capital to average assets. Management believes, as of* December**31,* 2023, that the Bank meets all capital adequacy requirements to which it is subject.

In* Julyof2013* the respective U.S. federal banking agencies issued final rules implementing Basel III and the Dodd-Frank Act capital requirements to be fully-phased in on a global basis on* January 1, 2019.The new regulations established a new tangible common equity capital requirement, increase the minimum requirement for the current Tier1* risk-weighted asset (“RWA”) ratio, phase out certain kinds of tangibles treated as capital and certain types of instruments and change the risk weightings of certain assets used to determine requirement capital ratios. Provisions of the Dodd-Frank Act generally require these capital rules to apply to bank holding companies and their subsidiaries. The new common equity Tier1 capital component requires capital of the highest quality-predominantly composed of retained earnings and common stock instruments. For community banks, such as Quaint Oak Bank, a common equity Tier1 capital ratio of 4.5% became effective on* January 1, 2015.The new capital rules also increased the current minimum of Tier1* capital ratio from 4.0% to 6.0% beginning on* January 1, 2015.In addition, in order to make capital distributions and pay discretionary bonuses to executive officers without restriction, an institution must also maintain greater than 2.5% in common equity attributable to a capital conservation buffer to be phased in from January 1, 2016until January 1, 2019.*The new rules also increase the risk weights for several categories of assets, including an

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Quaint Oak Bancorp, Inc.

Note18 - Regulatory Matters (Continued)

increase from 100% to 150% for certain acquisition, development and construction loans and more than90-day past due exposures. The new capital rules maintain the general structure of the prompt corrective action rules, but incorporate the new common equity Tier1 capital requirement and the increased Tier1 RWA requirement into the prompt corrective action framework.

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

On* March 2, 2023,Quaint Oak Bancorp, Inc. completed a private offering of $12.0 in aggregate principal amount of fixed rate subordinated notes (see Note12*) to certain qualified buyers. On* March 16, 2023,Quaint Oak Bancorp, Inc. completed an additional private offering of $2.0 million in aggregate principal amount of fixed rate subordinated notes subordinated notes (see Note12*) to certain accredited investors. In* March, 2023,Quaint Oak Bancorp, Inc. infused $13.5 million to the Bank as Tier1* capital. On* November 2, 2023,the Company sold to an accredited investor 117,125 shares of common stock at a purchase price of $13.87 per share for aggregate proceeds of $1.6 million. The Company retained all of the net proceeds for general corporate purposes. As of December**31,* 2023, the Bank was well capitalized under the regulatory framework for prompt corrective action. The Company’s ratios donot differ significantly from the Bank’s ratios presented below.

The Bank’s actual capital amounts and ratios at* December**31,* 2023 and2022 and the minimum amounts and ratios required for capital adequacy purposes and to be well capitalized under the prompt corrective action provisions are as follows (dollars in thousands):

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Quaint Oak Bancorp, Inc.

Note18 - Regulatory Matters (Continued)

Under the Dodd-Frank Wall Street Reform and Consumer Protection Act the Board of Governors of the Federal Reserve System as the primary regulator for the Company is authorized to extend leverage capital requirements and risk based capital requirements applicable to depository institutions and bank holding companies to thrift holding companies. Legislation adopted in late2014 generally exempts small savings and loan holding companies like Quaint Oak Bancorp from these capital requirements if certain conditions are met.

Banking regulations place certain restrictions on dividends paid by the Bank to the Company. The Company is dependent upon dividends from the Bank to provide funds for the payment of dividends to the Company’s shareholders, interest payments on the subordinated debt and other general corporate purposes. The Bank’s ability to pay cash dividends directly or indirectly to the Company is governed by federal law, regulations and related guidance. These include the requirement that the Bank must receive approval to declare a dividend if the total amount of all dividends, including the proposed dividend, declared by the Bank in any current year exceeds the total of the Bank’s net income for the current year to date, combined with its retained net income for the previoustwo years. The term “retained net income” as defined by federal regulations means the Bank’s net income for a specified period less the total amount of all dividends declared in that period.

The Bank* may**not* pay dividends to the Company if, after paying those dividends, it would fail to meet the required minimum levels under risk-based capital guidelines or if the bank regulators have notified the Bank that it is in need of more than normal supervision. Under the Federal Deposit Insurance Act, an insured depository institution such as the Bank is prohibited from making capital distributions, including the payment of dividends, if, after making such distribution, the institution would become “undercapitalized” (as such term is used in the Federal Deposit Insurance Act). Payment of dividends by the Bank also* may*be restricted at any time at the discretion of the appropriate regulator if it deems the payment to constitute an unsafe and unsound banking practice.

The Bank didnot pay any cash dividends to the Company in2023 or2022. At* December 31, 2023,the Bank’s retained net income for the years ended December 31, 2023and2022* totaled $11.6 million.

Note19 – Fair Value Measurements and Fair Values of Financial Instruments

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

Fair value is determined atone point in time and isnot representative of future value. These amounts donot reflect the total value of a going concern organization. Management doesnot have the intention to dispose of a significant portion of its assets and liabilities and therefore, the unrealized gains or losses shouldnot be interpreted as a forecast of future earnings and cash flows.

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

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

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Quaint Oak Bancorp, Inc.

The methods of determining the fair value of assets and liabilities presented in this note are consistent with our methodologies disclosed in Note19 of the Company’s Form10-K for the fiscal year ended* December 31, 2022,as the fair value of loans, excluding previously presented impaired loans measured at fair value on a non-recurring basis, is estimated using discounted cash flow analyses. The discount rates used to determine fair value use interest rate spreads that reflect factors such as liquidity, credit and non-performance risk. Loans are considered a Level3* classification.

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

Investment Securities Available For Sale: The fair value of securities available for sale are determined by obtaining quoted market prices on nationally recognized securities exchanges (Level1), or matrix pricing (Level2), which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted market prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted prices.

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

Individually Evaluated Loans: Individually evaluated loans are carried at the lower of cost or the fair value of the collateral for collateral-dependent loans less estimated costs to sell. Collateral is primarily in the form of real estate. The use of independent appraisals, discounted cash flow models and management’s best judgment are significant inputs in arriving at the fair value measure of the underlying collateral and impaired loans are therefore classified within Level3 of the fair value hierarchy.

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Quaint Oak Bancorp, Inc.

The table below sets forth the financial assets and liabilities that were accounted for on a recurring and nonrecurring basis by level within the fair value hierarchy as of* December 31, 2023 (*in thousands):

The table below sets forth the financial assets and liabilities that were accounted for on a recurring and nonrecurring basis by level within the fair value hierarchy as of* December 31, 2022 (*in thousands):

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Quaint Oak Bancorp, Inc.

The following table presents additional quantitative information about assets measured at fair value on a nonrecurring basis and for which the Company has used Level3 inputs to determine fair value as of* December 31, 2022 (*dollars in thousands):

The estimated fair values of the Company’s financial instruments that arenot required to be measured or reported at fair value were as follows at* December 31, 2023and2022* (in thousands):

For cash and cash equivalents, accrued interest receivable, investment in FHLB stock, bank-owned life insurance, FHLB short-term borrowings, accrued interest payable, and advances from borrowers for taxes and insurance, the carrying value is a reasonable estimate of the fair value and are considered Level1 measurements.

Note20 – Operating Segments

The Company's operations currently consist oftwo reportable operating segments: Banking and Oakmont Capital Holdings, LLC. The Company offers different products and services through itstwo segments. The accounting policies of the segments are generally the same as those of the consolidated company.

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

The Oakmont Capital Holdings, LLC Segment originates equipment loans which are generally sold tothird party institutions with the loans’ servicing rights retained. The profitability of this segment’s operations depends primarily on the gains realized from the sale of loans, processing fees, and service fees. The Oakmont Capital Holdings, LLC Segment is also subject to an extensive system of laws and regulations that are intended primarily for the protection of commercial customers. The Bank’s 51% ownership interest in Oakmont Capital is currently being marketed for sale in order to reduce the Bank’s asset size and increase its capital ratios. While Oakmont Capital is currently being marketed for sale, there can beno assurances that the transaction will be completed.

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Note20 – Operating Segments (Continued)

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

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Quaint Oak Bancorp, Inc.

Note21–** Quaint Oak Bancorp, Inc. (Parent Company Only)**

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