Note

– Stock Compensation Plans

Employee Stock Ownership Plan

The Company maintains an Employee Stock Ownership Plan (ESOP) for the benefit of employees who meet the eligibility requirements of the plan. Using proceeds from a loan from the Company, the ESOP purchased

8%,

222,180

shares of the Company's then outstanding common stock in the open market during

2007.

The Bank makes cash contributions to the ESOP on a quarterly basis sufficient to enable the ESOP to make the required loan payments to the Company. The loan bears an interest rate of

7.75%

per annum, with principal and interest to be paid quarterly in equal installments over

years pursuant to the terms of the original note. The loan is secured by the unallocated shares of common stock held by the ESOP. As of

September 30, 2020

there were

three

quarterly payments remaining on the

2007

loan.

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

three

and

nine

months ended

September 30, 2020,

the Company recognized

$40,000

and

$129,000

of ESOP expense, respectively. During the

three

and

nine

months ended

September 30, 2019,

the Company recognized

$46,000

and

$136,000

of ESOP expense, respectively.

Stock Incentive

Plan

May 2013,

the shareholders of Quaint Oak Bancorp approved the adoption of the

2013

Stock Incentive Plan (the

“2013

Stock Incentive Plan”). The

2013

Stock Incentive Plan approved by shareholders in

May 2013

covered a total of

195,000

shares, of which

48,750,

25%,

may

be restricted stock awards, for a balance of

146,250

stock options assuming all the restricted shares are awarded. In

May 2018,

the shareholders of Quaint Oak Bancorp approved the adoption of the

2018

Stock Incentive Plan (the

“2018

Stock Incentive Plan”). The

2018

Stock Incentive Plan approved by shareholders in

May 2018

covered a total of

155,000

shares, of which

38,750,

25%,

may

be restricted stock awards, for a balance of

116,250

stock options assuming all the restricted shares are awarded.

As of

September 30, 2020

a total of

28,266

share awards were unvested under the

2013

and

2018

Stock Incentive Plans and up to

11,750

share awards were available for future grant under the

2018

Stock Incentive Plan and

1,200

share awards under the

2013

Stock Incentive Plan. The

2013

and

2018

Stock Incentive Plan share awards have vesting periods of

five

years.

A summary of the status of the share awards under the

2013

and

2018

Stock Incentive Plans as of

September 30, 2020

and

2019

and changes during the

nine

months ended

September 30, 2020

and

2019

is as follows:

	September 30, 2020					September 30, 2019
	Number of Shares			Weighted Average Grant Date Fair Value		Number of Shares			Weighted Average Gran t Date Fair Value
Unvested at the beginning of the period		38,887		$	13.30		48,608		$	13.30
Granted		-			-		-			-
Vested		(9,421	)		13.30		(9,721	)		13.30
Forfeited		(1,200	)		13.30		-			-
Unvested at the end of the period		28,266		$	13.30		38,887		$	13.30

Compensation expense on the restricted stock awards is recognized ratably over the

five

year vesting period in an amount which is equal to the fair value of the common stock at the date of grant. During both the

three

months ended

September 30, 2020

and

2019,

the Company recognized approximately

$32,000

of compensation expense. A tax benefit of approximately

$7,000

was recognized during both the

three

months ended

September 30, 2020

and

2019.

During both the

nine

months ended

September 30, 2020

and

2019,

the Company recognized approximately

$97,000

of compensation expense. A tax benefit of approximately

$20,000

was recognized during the

nine

months ended

September 30, 2020

and

2019.

As of

September 30, 2020,

approximately

$340,000

in additional compensation expense will be recognized over the remaining service period of approximately

2.6

years.

Stock Option

and Stock Incentive Plans

May 2008,

the shareholders of Quaint Oak Bancorp approved the adoption of the

2008

Stock Option Plan (the “Option Plan”). The Option Plan authorized the grant of stock options to officers, employees and directors of the Company to acquire

277,726

shares of common stock with an exercise price

less than the fair market value on the date of the grant. The Option Plan expired

February 13, 2018,

however, outstanding options granted in

2013

remain valid and existing for the remainder of their

year terms. In

May 2013,

the shareholders of Quaint Oak Bancorp approved the adoption of the

2013

Stock Incentive Plan (the

“2013

Stock Incentive Plan”). The

2013

Stock Incentive Plan approved by shareholders in

May 2013

covered a total of

195,000

shares, of which

48,750,

25%,

may

be restricted stock awards, for a balance of

146,250

stock options assuming all the restricted shares are awarded. In

May 2018,

the shareholders of Quaint Oak Bancorp approved the adoption of the

2018

Stock Incentive Plan (the

“2018

Stock Incentive Plan”). The

2018

Stock Incentive Plan approved by shareholders in

May 2018

covered a total of

155,000

shares, of which

38,750,

25%,

may

be restricted stock awards, for a balance of

116,250

stock options assuming all the restricted shares are awarded.

All incentive stock options issued under the Option Plan and the

2013

and

2018

Stock Incentive Plans are intended to comply with the requirements of Section

422

of the Internal Revenue Code. Options will become vested and exercisable over a

five

year period and are generally exercisable for a period of

ten

years after the grant date.

As of

September 30, 2020,

a total of

240,636

grants of stock options were outstanding under the Option Plan and

2013

and

2018

Stock Incentive Plans and

37,250

stock options were available for future grant under the

2018

Stock Incentive Plan,

3,200

stock options under the

2013

Stock Incentive Plan and

none

under the Option Plan. Options will become vested and exercisable over a

five

year period and are generally exercisable for a period of

ten

years after the grant date.

A summary of option activity under the Company's Option Plan and

2013

and

2018

Stock Incentive Plans as of

September 30, 2020

and

2019

and changes during the

nine

months ended

September 30, 2020

and

2019

is as follows:

	20 20							201 9
	Number of Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (in years)		Number of Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (in years)
Outstanding at the beginning of the period		256,336		$	10.87		6.0		279,836		$	10.64		6.8
Granted		-			-		-		-			-		-
Exercised		(12,500	)		8.10		-		(23,500	)		8.10		-
Forfeited		(3,200	)		8.10		-		-			-		-
Outstanding at end of period		240,636		$	10.94		5.5		256,336		$	10.87		6.3
Exercisable at end of period		161,054		$	9.84		5.0		147,027		$	9.07		3.6

The estimated fair value of the options granted in

May 2018

was

$1.75

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	2.11	%
Risk-free interest rate	2.96	%
Expected life of options (in years)	6.5
Expected stock-price volatility	12.42	%

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. 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.

During both the

three

months ended

September 30, 2020

and

2019,

approximately

$11,000

in compensation expense on stock options was recognized. A tax benefit of approximately

$1,000

was recognized during each of these periods. During both the

nine

months ended

September 30, 2020

and

2019,

approximately

$33,000

of compensation expense on stock options was recognized. A tax benefit of

$2,000

was recognized during each of these periods. As of

September 30, 2020,

approximately

$116,000

in additional compensation expense will be recognized over the remaining service period of approximately

2.6

years.