QUAINT OAK BANCORP, INC.

Current report

The following paragraphs describe what we believe are the material risks of an investment in the common stock of Quaint Oak Bancorp, Inc. (the“Company”). We may face other risks as well, which we have not anticipated. The risk factors listed below are not intended to represent a complete list of the general or specific risks that may affect us, our banking subsidiary, Quaint Oak Bank (the“Bank”) or the Bank’s subsidiaries. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business operations. The realization of any of the risks described below could have a material adverse effect on our business, financial condition, results of operations or future prospects. The order of these risk factors does not reflect their relative importance or likelihood of occurrence. All references to“we”* “our” and*“us”* include the Company and the Bank, depending on the context.*

Current report

We have entered into correspondent banking relationships with international banking entities and other business arrangements, and these activities involve risks and uncertainties that could affect our liquidity. A failure of any such relationship or the exit from any such relationship may cost more than anticipated, subject us to additional risk, and could have a material adverse effect on our business and results of operations.

Current report

As a part of our liquidity management, we utilize correspondent banking relationships with international banking entities and deposit placement agreements with third party banks as funding sources in addition to core deposit growth, repayments and maturities of loans, and interest-bearing deposits in other banks. The deposits obtained through these relationships and agreements have resulted in significant concentrations of deposits. For additional detail regarding such concentrations, see “-The Company’s operations could be impaired by liquidity risk and deposit concentration.”* *We provide oversight of these relationships, which must meet all internal and regulatory requirements. We may elect to exit relationships where such requirements are not met or we are required by our regulators to exit such relationships. Also, our partner(s) could terminate a relationship with us for many reasons. If a relationship were to be terminated, it could be costly to the Bank, materially reduce our deposits and adversely impact our liquidity. Further, the withdrawal of such deposits or adverse operating results or changes in industry conditions could lead to difficulty or an inability to access these additional funding sources. Our financial flexibility will be severely constrained if we are unable to maintain our access to funding or if adequate financing is not available. If we are required to rely more heavily on more expensive funding sources, our operating margins and profitability could be adversely affected.

Current report

The Company’s operations could be impaired by liquidity risk and deposit concentration.

Current report

Liquidity is essential to the Company’s business. The Company’s primary funding source is consumer deposits, a substantial portion of which consist of certificates of deposit. As of December 31, 2024, approximately 51.1% of our total deposits were comprised of certificates of deposit. As noted above, the Company has identified one major interest-bearing checking account deposit customer located in Puerto Rico and one major money market deposit customer located in Memphis, Tennessee, that accounted for approximately 8.6% and 18.1%, respectively, of total deposits at December 31, 2024. The combined outstanding balances of the two major deposit customers totaled approximately $147.8 million at December 31, 2024. The amount of uninsured deposits (deposits greater than $250,000) was approximately $156.3 million, or 28.3% of total deposits at December 31, 2024. If these deposits were to be withdrawn in whole or in part, replacement of the funds may require us to pay higher interest rates on retail deposits or brokered deposits which would have an adverse effect on our net interest income and net income. If the Bank is less than well capitalized, the Federal Deposit Insurance Act restricts the Bank from accepting brokered deposits absent a waiver from the FDIC. The replacement of these deposits with other sources of funding, such as borrowings, could also increase our overall cost of funds and would negatively impact our results of operations. The Company has significant borrowing capacity available to fund liquidity needs, including borrowing agreements with the Federal Home Loan Bank of Pittsburgh (the “FHLB”) and the Federal Reserve Bank of Philadelphia. As of December 31, 2024, we had $266.6 million in borrowing capacity from the FHLB and $15.8 million in borrowing capacity with the Federal Reserve Bank of Philadelphia.

Current report

Although the Company has historically been able to replace maturing deposits and advances as necessary, it might not be able to replace such funds in the future on a timely basis. An inability to raise funds through traditional deposits, brokered deposits, borrowings, and the sale of securities or loans could have a substantial negative effect on the Company’s liquidity. The Company’s access to funding sources on terms which are acceptable to the Company could be impaired by factors that affect the Company specifically or the financial services industry or economy in general. However, the Company’s ability to borrow or attract and retain deposits in the future could be adversely affected by the Company’s financial condition or regulatory restrictions, or impaired by factors that are not specific to the Company, such as FDIC insurance changes, disruption in the financial markets or negative views and expectations about the prospects for the banking industry. Liquidity also may be affected by the Bank’s routine commitments to extend credit.

Current report

Sources of funds may not remain adequate for liquidity needs and the Bank may be compelled to seek additional sources of financing in the future. Additional borrowings, if sought, may not be available or, if available, may not be on favorable terms. If additional financing sources are unavailable or not available on reasonable terms to provide necessary liquidity, the Company’s financial condition, results of operations and future prospects could be materially and adversely affected.

Current report

We rely on short-term funding, which can be adversely affected by local and general economic conditions.

Current report

As of December 31, 2024, approximately $282.9 million of total deposits consisted of certificates of deposit, approximately $171.8 million of which, or approximately 31.0% of our total deposits, are due to mature within one year. Certificates of deposit obtained through a national listing service totaled $64.5 million, or approximately 22.8% of our certificates of deposit at December 31, 2024. These customers and in particular, those in the listing service, are interest-rate conscious and may be willing to move funds into higher-yielding investment alternatives. Historically, a majority of our certificates of deposit are renewed upon maturity as long as we pay competitive interest rates. Our ability to attract and maintain deposits, as well as our cost of funds, has been, and will continue to be significantly affected by financial markets and general economic conditions. Given recent economic challenges, if we have to increase interest rates paid to retain deposits, our earnings may be adversely affected.

Current report

We may need to raise additional capital or increase our liquidity in the future, but sufficient capital may not be available when it is needed.

Current report

We face significant capital and other regulatory requirements as a financial institution. We may need to raise additional capital/liquidity in the future to provide us with sufficient capital resources and liquidity to meet our commitments and business needs, particularly if our asset quality or earnings were to deteriorate significantly. Our ability to raise additional capital/liquidity, if needed, will depend on, among other things, conditions in the capital and financial markets at that time, which are outside of our control, and our financial performance. Economic conditions and the loss of confidence in financial institutions may increase our cost of funding and limit access to certain customary sources of capital/liquidity, including depositors, other financial institution borrowings, repurchase agreements and borrowings from the discount window of the FRB. Any occurrence that may limit our access to the capital/liquidity markets, such as a decline in the confidence of other financial institutions, depositors or counterparties participating in the capital markets, may adversely affect our costs and our ability to raise capital/liquidity. An inability to raise additional capital/liquidity on acceptable terms when needed could have a materially adverse effect on our financial condition, results of operations and liquidity.

Current report

If the Company fails to maintain sufficient capital and liquidity under regulatory requirements, whether due to losses, an inability to raise additional capital or otherwise, that failure would adversely affect the Company’s financial condition and results of operations, as well as the Company’s ability to maintain regulatory compliance.

Current report

The Bank must meet regulatory capital requirements and maintain sufficient liquidity, and its regulators may modify and adjust such requirements in the future. Pursuant to FDIC regulations, all state nonmember banks, such as the Bank, must maintain certain minimum capital ratios to be deemed adequately capitalized (common equity Tier 1 capital of at least 4.5%, Tier 1 risk-weighted capital of at least 6.0%, total risk-weighted capital of at least 8.0%, and Tier 1 leverage ratio of at least 4.0%). Notwithstanding the minimum requirements, all FDIC-supervised institutions are required to maintain capital commensurate with the level and nature of all risks to which they are exposed. As of December 31, 2024, the Bank’s common equity Tier 1 capital ratio was 13.09%, its Tier 1 risk-weighted capital ratio was 13.09%, its total risk-weighted capital ratio was 14.34% and its Tier 1 leverage ratio was 10.80% and it was deemed to be “well-capitalized.”

Current report

The Company’s ability to raise additional capital, when and if needed, will depend on conditions in the capital markets, economic conditions and a number of other factors, including investor preferences regarding the banking industry, market conditions and governmental activities, many of which are outside the Company’s control, and on the Company’s financial condition and performance. Accordingly, the Company may not be able to raise additional capital if needed or on terms acceptable to the Company. If the Company fails to meet the minimum capital and other regulatory requirements, the Company’s regulators could take formal or informal actions against the Company and the Company’s growth prospects, financial condition, liquidity and results of operations would be materially and adversely affected.

Current report

Regulatory scrutiny of correspondent banking partnerships and related technology considerations have recently increased.

Current report

We provide correspondent banking services to our international correspondent bank partners, which includes facilitating U.S. dollar payments and providing other financial services infrastructure. Recently, federal bank regulators have increasingly focused on the risks related to international correspondent banking partnerships, raising concerns regarding risk management, oversight, internal controls, information security, change management, and information technology operational resilience. We could be subject to additional regulatory scrutiny with respect to our correspondent banking business that could have a material adverse effect on the business, financial condition, results of operations and growth prospects of the Company.

Current report

Our relationships with correspondent banks located in Puerto Rico create increased Office of Foreign Assets Control (“OFAC”), Bank Secrecy Act and Anti-Money Laundering compliance risk.

Current report

The Company has correspondent banking relationships, including one major interest-bearing checking account customer, located in Puerto Rico. The correspondent banking entities acquire deposits from individuals located in various international jurisdictions including Europe, Latin America, the Caribbean, and Asia. These cross-border correspondent banking relationships pose unique risks because it creates situations in which a U.S. financial institution will be handling funds from individuals in these jurisdictions who may not be transparent to us. Accordingly, these foreign individuals may pose higher money laundering risk to us. Because of the large amount of funds, multiple transactions, and our potential lack of familiarity with a foreign customer, these customers may be able to more easily conceal the source and use of illicit funds. Consequently, we may have a higher risk of non-compliance with the Bank Secrecy Act and other Anti-Money Laundering rules and regulations due to our correspondent banking relationships with these banking entities.

Current report

In recent years, sanctions that the regulators have imposed on banks that have not complied with all Bank Secrecy Act and Anti-Money Laundering requirements have been especially severe. In order to comply with regulations, guidelines and examination procedures in this area, we have dedicated significant resources to our Anti Money Laundering/Combating the Financing of Terrorism Program (“AML/CFT Program”). If our policies, procedures and systems are deemed deficient, we could be subject to liability, including fines and regulatory actions such as additional restrictions on our ability to pay dividends and the necessity to obtain regulatory approvals to proceed with certain aspects of our business plans, such as acquisitions andde novobranching. Further, our failure to strictly adhere to the terms and requirements of our OFAC license or our failure to adequately manage our AML/CFT Program in light of our correspondent banking relationships could result in regulatory or other actions being taken against us, including the imposition of civil money penalties, formal agreements and cease and desist orders. Lastly, failure to meet regulatory requirements could require the Bank to incur additional significant costs in order to bring our AML/CFT Program and operations into compliance, negatively impact our reputation, and have a material adverse effect on our business, financial condition and results of operations.

Current report

Potential gaps in our risk management policies and internal audit procedures may leave us exposed to unidentified or unanticipated risk, which could negatively affect our business.

Current report

Our enterprise risk management and internal audit programs are designed to mitigate material risks and loss to us. We have developed and continue to develop comprehensive risk management policies and procedures to identify, mitigate and provide a sound operational environment for the types of risk to which we are subject, including credit risk, market risk (interest rate and liquidity risks), operational risk, information security risk, compliance risk (including Bank Secrecy Act and Anti-Money Laundering and OFAC compliance), strategic risk, and reputational risk. In addition, we have designed and implemented internal audit policies and procedures to reflect ongoing reviews of our risks and expect to continue to do so in the future. Nonetheless, as with any risk management framework, there are inherent limitations to our current and future risk management strategies, including risks that we have not appropriately anticipated or identified, and our internal audit process may fail to detect such weaknesses or deficiencies in our risk management framework. Many of our methods for managing risk and exposures are based upon the use of observed historical market behavior to model or project potential future exposure. Models used by our business are based on assumptions and projections. These models may not operate properly or our inputs and assumptions may be inaccurate or may not be adopted quickly enough to reflect changes in behavior, markets or technology. As a result, these methods may not fully predict future exposures, which can be significantly different and greater than historical measures indicate. In addition, our business and the markets in which we operate are continuously evolving and we may fail to fully understand the implications of changes in our business or the financial markets or fail to adequately or timely enhance our enterprise risk framework to address those changes. Furthermore, there can be no assurance that we can effectively review and monitor all risks or that all of our employees will closely follow our risk management policies and procedures, nor can there be any assurance that our risk management policies and procedures will enable us to accurately identify all risks and limit timely our exposures based on our assessments. If our enterprise risk management framework proves ineffective, we could suffer unexpected losses, which could materially adversely affect our financial condition and results of operations.

Current report

Our operations are subject to third-party risk.

Current report

We rely on third-party service providers and partners, including other financial institutions, who, in turn, rely on their own networks of vendors, to deliver goods and services to us, our affiliates, and our customers. Our third-party service providers and partners are subject to the same or similar risks as we are, including technology failures, capacity constraints, and inadequate data management or privacy protections, the risk of which we may not be able to effectively monitor or mitigate. Any of these risks could impede their ability to provide products or services to us and materially disrupt our business (including our ability to process transactions and communicate with customers and counterparties), damage our reputation, and expose us to financial and regulatory consequences.

Current report

Additionally, failures experienced by shared financial market systems and providers, such as central banks, clearinghouses, custodians, exchanges and other shared technology infrastructure providers could have a material adverse effect on market participants, including us, and could disrupt the functioning of the overall financial system.

Current report

The FDIC requires financial institutions to maintain third-party and service provider risk management programs, which include due diligence requirements for third parties and service providers as well as for our affiliates who may perform services for us. In June 2023, the federal banking agencies issued updated guidance on managing risks associated with third-party relationships. The guidance sets forth considerations and a framework with respect to the management of risks arising from third-party relationships and replaces the federal banking agencies’ existing guidance on the topic. The guidance broadly applies to business arrangements between a banking organization and a third party. If our third-party risk and service provider management and due diligence program is not sufficiently robust, this could lead to regulatory intervention. Any of these occurrences could diminish our ability to operate one or more of our business lines, and may result in potential liability to clients, reputational damage or regulatory intervention, all of which could materially adversely affect us.

Current report

A decline in general business conditions and economic trends and any regulatory responses to such conditions and trends could adversely affect the Company’s business, financial condition and results of operations.

Current report

Our business and operations, which primarily consist of real estate mortgage loans and borrowing money from customers in the form of deposits, are sensitive to general business and economic conditions in the U.S., generally. Uncertainty about the federal fiscal policymaking process, and the medium- and long-term fiscal outlook of the U.S. government and U.S. economy, is a concern for businesses, consumers and investors in the U.S. In addition, economic conditions in foreign countries, including global political hostilities, U.S. and foreign tariff policies and uncertainty over the stability of the other currencies, could affect the stability of global financial markets, which could hinder domestic economic growth. A significant outbreak of disease pandemics or other adverse public health developments in the population could result in a widespread health crisis that could adversely affect the economies and financial markets of many countries, resulting in an economic downturn that could adversely affect our customers’ businesses and results of operations.

Current report

The resurgence of elevated levels of inflation may have an adverse impact on our business and on our customers.

Current report

Inflation risk is the risk that the value of assets or income from investments will be worth less in the future as inflation decreases the value of money. The inflationary outlook in the United States remains uncertain. The consumer price index increased 2.9% for the twelve (12) months ended December 31, 2024. While this is a significant reduction to the rate of inflation experienced in the past year, it is still above the FRB’s targeted rate. The risks to our business from inflation depend on the durability of the inflationary pressures in our markets. Although the FRB has reduced the federal fund rate twice in 2024, no assurance can be given that it will continue to do so. The resurgence of elevated levels of inflation could lead the FRB to cease reducing its benchmark rate or potentially starting to increase it again which could, in turn, increase the borrowings costs of our customers, making it more difficult for them to repay their loans or other obligations. Elevated interest rates may be needed to tame inflationary price pressures, which could also push down asset prices, including collateral values, and weaken economic activity.

Current report

As inflation increases, the value of our investment securities, particularly those with longer maturities, would decrease, although this effect can be less pronounced for floating rate instruments. In addition, inflation increases the cost of goods and services we use in our business operations, such as electricity and other utilities, which increases our noninterest expenses. Furthermore, our customers are also affected by inflation and the rising costs of goods and services used in their households and businesses, which could have a negative impact on their ability to repay their loans with us. A deterioration in economic conditions in the United States and our markets could result in an increase in loan delinquencies and non- performing assets, decreases in loan collateral values and a decrease in demand for our products and services, all of which, in turn, would adversely affect our business, financial condition and results of operations. Changes in the FRB’s monetary or fiscal policies could adversely affect the Company’s results of operations and financial condition.

Current report

The Company’s results of operations will be affected by domestic economic conditions and the monetary and fiscal policies of the United States government and its agencies. The FRB has, and is likely to continue to have, an important impact on the operating results of depository institutions through its power to implement national monetary policy, among other things, in order to curb inflation or combat a recession. The FRB affects the levels of bank loans, investments and deposits through its control over the issuance of U.S. government securities, its purchases of government and other securities, its regulation of the discount rate applicable to member banks and its influence over reserve requirements to which member banks are subject. The Company cannot predict the nature or impact of future changes in monetary and fiscal policies.

Current report

Changes in interest rates may adversely affect the Company’s net interest income and profitability.

Current report

The Company’s results of operations are highly dependent on the difference between the interest earned on loans and investments and the interest paid on deposits and borrowings. We rely on in-market consumer certificates of deposit that are often priced at “top of market.” Changes in market interest rates impact the rates earned on loans and investment securities and the rates paid on deposits and borrowings. In addition, changes to the market interest rates may impact the level of loans, deposits and investments and the credit quality of existing loans. These rates may be affected by many factors beyond the Company’s control, including general economic conditions and the monetary and fiscal policies of various governmental and regulatory authorities. Changes in interest rates may negatively impact the Company’s ability to attract deposits, make loans and achieve satisfactory interest rate spreads, which could adversely affect the Company’s financial condition or results of operations.

Current report

The amount of nonperforming assets may increase, resulting in losses, costs and expenses that would negatively affect the Bank’s operations.

Current report

At December 31, 2024, the Bank’s nonperforming loans represented approximately 1.07% of our total loans. However, the economic outlook in the United States continues to remain uncertain. The Bank’s level of nonperforming assets could increase if industry or economic conditions deteriorate. Nonperforming asset levels could also increase due to a change in lending strategy, underwriting errors, a deterioration in our ability to effectively collect our loans, or due to other factors. Going forward, as the amount of nonperforming assets, classified assets, and special mention assets increase, the Bank’s losses, and the costs and expenses to maintain collateral likewise may increase as well. Any additional increase in losses related to such assets may have material adverse effects on the Bank’s business, financial condition, and results of operations.

Current report

Nonperforming assets adversely affect our net income in various ways. We could incur losses relating to an increase in nonperforming assets. We generally do not record interest income on nonperforming loans or other real estate owned (“OREO”), thereby adversely affecting our income, and increasing our loan administration costs. An increase in the level of nonperforming assets increases our risk profile and may impact the capital levels our regulators believe are appropriate in light of the ensuing risk profile. While we reduce problem assets through loan extensions, workouts, restructurings and otherwise, decreases in the value of the underlying collateral, or in these borrowers’ performance or financial condition, whether or not due to economic and market conditions beyond our control, could adversely affect our business, results of operations and financial condition. In addition, the resolution of nonperforming assets requires significant commitments of time from management, which may materially and adversely impact their ability to perform their other responsibilities and can distract management from daily operations and other income producing activities. There can be no assurance that we will not experience future increases in nonperforming assets. Additionally, there are legal fees associated with the resolution of problem assets as well as carrying costs such as taxes, insurance and maintenance related to assets acquired through foreclosure. Finally, if our estimate of the allowance for credit losses is inadequate, we would have to increase the allowance for credit losses accordingly, which would have an adverse effect on our earnings. Significant increases in the level of our nonperforming assets from current levels, or greater than anticipated costs to resolve these credits, would have an adverse effect on our earnings.

Current report

Like all financial institutions, we maintain an allowance for credit losses, which is a reserve established through a provision for credit losses charged to expense, that we believe is appropriate to provide for lifetime expected credit losses on loans in our loan portfolio. The allowance is evaluated on a regular basis by management. Management’s determination of the adequacy of the allowance for credit losses is based on the assessment of the expected credit losses on loans over the expected life of the loans (using the weighted average maturity method). Consideration is given to a variety of factors in establishing this estimate including, but not limited to, current economic conditions, delinquency statistics, geographic and industry concentrations, the adequacy of the underlying collateral, the financial strength of the borrower, results of internal loan reviews and other relevant factors. This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant change. At December 31, 2024, the ratio of the allowance for credit losses to total loans and total nonperforming loans were 1.20% and 102.45%, respectively.

Current report

The determination of the appropriate level of the allowance for credit losses is complex, inherently involves a high degree of subjectivity and requires us to make significant assumptions, judgments and estimates of current credit risks and future trends, all of which may undergo material changes. Changes in economic conditions affecting borrowers, new information regarding existing loans, identification of additional problem loans and other factors, both within and outside of our control, may require an increase in the allowance for credit losses. Increases in nonperforming loans have a significant impact on the Company’s reserve for credit losses. Generally, the Company’s nonperforming loans reflect difficulties of individual borrowers resulting from continued financial stress on the borrowers’ asset values and cash flow abilities. If the real estate market or the economy in general deteriorate, the Company may experience increased delinquencies and credit losses. While the Company strives to monitor credit quality and to identify adversely risk rated loans on a consistent and timely basis, including those that may become nonperforming, at any time there are loans in the portfolio that could result in losses that have not been identified as problem or nonperforming loans. The Company cannot be certain that it will be able to identify deteriorating loans before they become nonperforming assets or that it will be able to limit losses on those loans that have been identified. The reserve for credit losses may not be sufficient to cover actual loan-related losses.

Current report

In addition, bank regulatory agencies periodically review our allowance for credit losses and may require an increase in the provision for possible credit losses or the recognition of further loan charge-offs, based on judgments different than those of management. In addition, if charge-offs in future periods exceed the allowance for credit losses, we will need additional provisions to increase the allowance for credit losses. Any increases in the allowance for credit losses due to increased provisions will result in a decrease in net income and, possibly, capital, and may have a material negative effect on our financial condition and results of operations.

Current report

We have a high concentration of commercial real estate loans, which involve credit risks that could adversely affect our financial condition and results of operations.

Previous report

We are marketing for sale of our 51% stake in Oakmont Capital Holdings, LLC, primarily to reduce our asset size and increase our capital ratios.

Previous report

The Bank maintains a 51% ownership interest in Oakmont Capital Holdings, LLC (“Oakmont Capital”), a multi-state equipment finance company based in West Chester, Pennsylvania with a second significant facility located in Albany, Minnesota. We are currently marketing the Bank’s interest in Oakmont Capital for sale in order to reduce our asset size and increase the Bank’s capital ratios. In recent periods, Oakmont Capital has materially contributed to our growth in assets and our non-interest income. While we are currently marketing Oakmont Capital for sale, we may not complete the transaction if we are unable to receive favorable terms for the acquisition. If we complete a sale, we anticipate that our non-interest income will decrease. If we do not complete a sale, we may be required to raise additional capital to support the growth attributable to continued ownership interest in Oakmont Capital. Our ability to raise additional capital, when and if needed, will depend on conditions in the capital markets, economic conditions and a number of other factors, including investor preferences regarding the banking industry, market conditions and governmental activities, many of which are outside of our control, and on our financial condition and performance.