EDGAR 10-K Filing

Company CIK: 750558
Filing Year: 2025
Filename: 750558_10-K_2025_0000950170-25-040857.json

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ITEM 1. BUSINESS
ITEM 1. BUSINESS
Overview
QNB was incorporated under the laws of the Commonwealth of Pennsylvania on June 4, 1984. QNB is registered with the Board of Governors of the Federal Reserve System as a bank holding company under the Bank Holding Company Act of 1956 and conducts its business through its wholly-owned subsidiary, QNB Bank (the “Bank”).
Prior to December 28, 2007, the Bank was a national banking association organized in 1877 as The Quakertown National Bank, was chartered under the National Banking Act and was subject to Federal and state laws applicable to national banks. Effective December 28, 2007, the Bank became a Pennsylvania chartered commercial bank and changed its name to QNB Bank. The Bank, whose principal office is located in Quakertown, Bucks County, Pennsylvania, operated twelve full-service community banking offices in Bucks, Montgomery and Lehigh counties in southeastern Pennsylvania as of December 31, 2024.
The Bank is engaged in the general commercial banking business and provides a full range of banking services to its customers. These banking services consist of, among other things, attracting deposits and using these funds in making commercial loans, residential mortgage loans, consumer loans, and purchasing investment securities. These deposits are in the form of time, demand and savings accounts. Time deposits include certificates of deposit and individual retirement accounts. The Bank’s demand and savings accounts include money market accounts, interest-bearing demand accounts (including a higher yielding checking account), club accounts, traditional statement savings accounts, and a higher yielding online savings account.
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At December 31, 2024, QNB had total assets of $1,870,894,000, total loans receivable of $1,216,048,000, total deposits of $1,628,541,000 and total shareholders’ equity of $103,349,000. For the year ended December 31, 2024, QNB reported net income of $11,448,000 compared to net income for the year ended December 31, 2023 of $9,483,000 and December 31, 2022 of $15,921,000.
At February 18, 2025, the Bank had 193 full-time employees and five part-time employees. The Bank’s employees have a customer-oriented philosophy emphasizing personal service and flexible solutions which together make achieving our customers’ goals possible. They maintain close contact with both the residents and local business people in the communities in which they serve, responding to changes in market conditions and customer requests in a timely manner.
Competition and Market Area
The banking business is highly competitive, and the profitability of QNB depends principally upon the Bank’s ability to compete in its market area. QNB faces intense competition within its market, both in making loans and attracting deposits. Bucks, Lehigh, and Montgomery counties have a high concentration of financial institutions, including large national and regional banks, community banks, savings institutions and credit unions. Some of QNB’s competitors offer products and services that QNB currently does not offer, such as traditional trust services and full-service insurance.
In addition, as a result of consolidation in the banking industry, some of QNB’s competitors may enjoy advantages such as greater financial resources, a wider geographic presence, more favorable pricing alternatives and lower origination and operating costs. However, QNB has been able to compete effectively with other financial institutions by emphasizing the establishment of long-term relationships and customer loyalty. A strong focus on small-business solutions, providing fast local decision-making on loans, exceptional personal customer service and technology solutions, including internet- and mobile-banking, electronic bill pay and remote deposit capture, also enable QNB to compete successfully.
Competition for loans and deposits comes principally from commercial banks, savings institutions, credit unions and non-bank financial service providers. Factors in successfully competing for deposits include providing excellent customer service, convenient locations and hours of operation, attractive rates, low fees, and alternative delivery systems. One such delivery system is remote deposit capture for those commercial customers that are not conveniently located near one of our branches, or mobile banking for retail customers. Successful loan origination tends to depend not only on interest rate and terms of the loan but also on being responsive and flexible to the customers’ needs. While many competitors within the Bank’s primary market have substantially higher legal lending limits, QNB often has the ability, through loan participations, to meet the larger lending needs of its customers.
QNB’s success is dependent to a significant degree on economic conditions in southeastern Pennsylvania, especially Bucks, Lehigh and Montgomery counties, which it defines as its primary market. The banking industry is affected by general economic conditions, including the effects of recession, unemployment, declining real estate values, inflation, changes interest rates, trends in the national and global economies, and other factors beyond QNB’s control.
Monetary Policy and Economic Conditions
The business of financial institutions is affected not only by general economic conditions, but also by the policies of various governmental regulatory agencies, including the Board of Governors of the Federal Reserve (the “Federal Reserve”). The Federal Reserve regulates money, credit conditions and interest rates to influence general economic conditions primarily through open market operations in U.S. government securities, changes in the discount rate on bank borrowings and changes in the reserve requirements against depository institutions’ deposits. These policies and regulations significantly affect the overall growth and distribution of loans, investments and deposits, as well as the interest rates charged on loans and the interest rates paid on deposits.
The monetary policies of the Federal Reserve have had a significant effect on the operating results of financial institutions in the past and are expected to continue to have significant effects in the future. In view of the changing conditions in the economy and the financial markets in addition to the activities of monetary and fiscal authorities, the prediction of future changes in interest rates, credit availability or deposit levels is very challenging.
Supervision and Regulation
Banks and bank holding companies operate in a highly-regulated environment and are regularly examined by Federal and state regulatory authorities. Federal statutes that apply to QNB and its subsidiary include the Bank Holding Company Act of 1956 (“BHCA”), the Federal Reserve Act and the Federal Deposit Insurance Act (“FDIA”), as those statutes have been significantly amended by recent laws such as the Dodd-Frank Wall Street Reform and Consumer Protection Act the “Dodd-Frank Act”), the Gramm-Leach-Bliley Act (“GLBA”), and others. In general, these statutes regulate the corporate governance of the Bank and eligible business activities of QNB and impose certain restrictions and limitations on such important matters as mergers and acquisitions, intercompany transactions, loans and dividends, and capital adequacy, among others. Other corporate governance requirements are imposed on QNB by Federal securities and other laws, including the Sarbanes-Oxley Act, described later.
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The Company is under the jurisdiction of the Securities and Exchange Commission and of state securities commissions for matters relating to the offering and sale of its securities. In addition, the Company is subject to the Securities and Exchange Commission’s rules and regulations relating to periodic reporting, proxy solicitation and insider trading.
Set forth below is a brief summary of some of the significant regulatory concepts and laws that affect QNB and the Bank. To the extent that the following information describes statutory or regulatory provisions, it is qualified in its entirety by references to the particular statutory or regulatory provisions themselves. Proposals to change banking laws and regulations are frequently introduced in Congress, the state legislatures, and before the various bank regulatory agencies. QNB cannot determine the likelihood of passage or timing of any such proposals or legislation or the impact they may have on QNB and its subsidiary. A change in law, regulations or regulatory policy may have a material effect on QNB and its subsidiary.
Bank Holding Company Regulation
QNB is registered as a bank holding company and is subject to the regulations of the Federal Reserve under the BHCA. In addition, QNB Corp., as a Pennsylvania business corporation, is subject to the Pennsylvania Business Corporation Law of 1988 (the “BCL”), as amended, and to certain provisions of the Pennsylvania Banking Code of 1965, as amended (the “Banking Code”).
Bank holding companies are required to file periodic reports with, and are subject to examination by, the Federal Reserve. The Federal Reserve’s regulations require a bank holding company to serve as a source of financial and managerial strength to its subsidiary banks. As a result, the Federal Reserve, pursuant to its “source of strength” regulations, may require QNB to commit its resources to provide adequate capital funds to the Bank during periods of financial distress or adversity.
Federal Reserve approval may be required before QNB may begin to engage in any non-banking activity and before any non-banking business may be acquired by QNB.
Regulatory Restrictions on Dividends
Dividend payments made by the Bank to the Company are subject to the Pennsylvania Banking Code, the FDIA, and the regulations of the Federal Deposit Insurance Corporation (“FDIC”). Under the Banking Code, no dividends may be paid except from “accumulated net earnings” (generally retained earnings). The Federal Reserve and the FDIC have formal and informal policies which provide that insured banks and bank holding companies should generally pay dividends only out of current operating earnings, with some exceptions. Under the FDIA, the Bank is prohibited from paying any dividends, making other distributions or paying any management fees if, after such payment, it would fail to satisfy its minimum capital requirements. See also “Supervision and Regulation - Bank Regulation”.
In addition to the dividend restrictions described above, the banking regulators have the authority to prohibit or to limit the payment of dividends by the Bank if, in the banking regulator’s opinion, payment of a dividend would constitute an unsafe or unsound practice in light of the financial condition of the Bank.
Under Pennsylvania law, QNB may not pay a dividend, if, after giving effect thereto, it would be unable to pay its debts as they become due in the usual course of business and, after giving effect to the dividend, the total assets of QNB would be less than the sum of its total liabilities plus the amount that would be needed, if QNB were to be dissolved at the time of distribution, to satisfy the preferential rights upon dissolution of shareholders whose rights are superior to those receiving the dividend.
It is also the policy of the Federal Reserve that a bank holding company generally only pay dividends out of net income over the past year and only if the prospective rate of earnings retention appears consistent with a bank holding company’s capital needs, asset quality, and overall financial condition. In the current financial and economic environment, the Federal Reserve has indicated that bank holding companies should carefully review their dividend policy and has discouraged dividend pay-out ratios at the 100% level unless both asset quality and capital are very strong. A bank holding company also should not maintain a dividend level that places undue pressure on the capital of such institution’s subsidiaries, or that may undermine the bank holding company’s ability to serve as a source of strength for such subsidiaries.
The minimum capital requirements implemented by Basel III, and described below under “Capital Adequacy,” also introduced a capital conservation buffer, comprised of common equity Tier 1 capital, above a banking institution’s minimum risk-based capital requirements in an amount greater than 2.5% of total risk-weighted assets in order to avoid limitations on certain distributions, including dividend payments. Under the restrictions applicable to the Bank, to remain “well capitalized,” the Bank had approximately $54,062,000 available for payment of dividends to the Company at December 31, 2024.
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Capital Adequacy
In July 2013, the Federal bank regulatory agencies adopted revisions to the agencies’ capital adequacy guidelines and prompt corrective action rules, which were designed to enhance such requirements and implement the revised standards of the Basel Committee on Banking Supervision, commonly referred to as Basel III. The rules generally implemented higher minimum capital requirements, added a new common equity Tier 1 capital requirement, and established criteria that instruments must meet to be considered common equity Tier 1 capital, additional Tier 1 capital or Tier 2 capital. Tier 1 capital consists principally of common shareholders’ equity, plus retained earnings, less certain intangible assets. Tier 2 capital includes the allowance for loan and lease losses (up to 1.25 percent of risk-weighted assets), qualifying preferred stock, subordinated debt, and qualifying Tier 2 minority interests. The current minimum capital requirements are a common equity Tier 1 capital ratio of 4.5%, a Tier 1 capital ratio of 6.0%, and a total capital ratio of 8.0%. In addition, in order to avoid limitations on certain capital distributions (including dividend payments and certain discretionary bonus payments to executive officers), as of January 1, 2019, a banking organization must hold a capital conservation buffer comprised of common equity Tier 1 capital above its minimum risk-based capital requirements in an amount greater than 2.5% of total risk-weighted assets. At December 31, 2024, QNB’s Tier 1 capital, total capital (Tier 1 and Tier 2 combined) and common equity Tier 1 equity ratios were 12.02%, 15.56%, and 12.02%, respectively.
In addition to the risk-based capital guidelines, the Federal Reserve requires a bank holding company to maintain a minimum leverage ratio. This requires a minimum level of Tier 1 capital (as determined under the risk-based capital rules) to average total consolidated assets of 4% for those bank holding companies that have the highest regulatory examination ratings and are not contemplating or experiencing significant growth or expansion. The Federal Reserve expects all other bank holding companies to maintain a ratio of at least 1% to 2% above the stated minimum. At December 31, 2024, QNB’s leverage ratio was 8.70%.
During 2018, the FRB raised the threshold of its "Small Bank Holding Company" exemption to the application of consolidated capital requirements for qualifying small bank holding companies from $1 billion to $3 billion of consolidated assets. Consequently, qualifying bank holding companies having less than $3 billion of consolidated assets are not subject to the consolidated capital requirements unless otherwise directed by the FRB.
Under the Economic Growth, Regulatory Relief, and Consumer Protection Act enacted in May 2018, federal banking agencies adopted the community bank leverage ratio (“CBLR”) framework available to depository institutions having less than $10 billion in total assets and meeting certain other qualifying criteria. The CBLR rules provide that qualifying community banking organizations that adopt the CBLR framework and that maintain a CBLR in excess of 9% will be considered to have met the generally applicable leverage and risk-based capital requirements under the banking agencies’ capital rules and the capital ratio requirements necessary to be considered “well capitalized.” QNB has not elected to use the CBLR framework at this time.
Pursuant to the prompt corrective action provisions of the FDIA, the Federal banking agencies have specified, by regulation, the levels at which an insured institution is considered well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, or critically undercapitalized. Under these regulations, an institution is considered well capitalized if it satisfies each of the following requirements:
•Total risk-based capital ratio of 10% or more.
•Tier 1 risk-based capital ratio of 8% or more.
•Common equity tier 1 risk-based capital ratio of 6.5% or more.
•Leverage ratio of 5% or more, and
•Not subject to any order or written directive to meet and maintain a specific capital level
At December 31, 2024 and 2023, the Bank qualified as well capitalized under these regulatory standards. See Note 22 of the Notes to Consolidated Financial Statements included in Item 8 of this Report for additional information.
Bank Regulation
As a Pennsylvania-chartered insured commercial bank, the Bank is subject to extensive regulation and examination by the Pennsylvania Department of Banking and Securities (the “Department”) and by the FDIC, which insures its deposits to the maximum extent permitted by law.
The Federal and state laws and regulations applicable to banks regulate, among other things, the scope of their business, their investments, the reserves required to be kept against deposits, the timing of the availability of deposited funds, the nature and amount of collateral for certain loans, the activities of a bank with respect to mergers and consolidations, and the establishment of branches. The
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laws and regulations governing the Bank generally have been promulgated to protect depositors and not for the purpose of protecting QNB’s shareholders. This regulatory structure also gives the Federal and state banking agencies extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes. Any change in such regulation, whether by the Department, the FDIC or the United States Congress, could have a material impact on the Company, the Bank and their operations.
As a subsidiary bank of a bank holding company, the Bank is subject to certain restrictions imposed by the Federal Reserve Act on extensions of credit to QNB, on investments in the stock or other securities of QNB, and on taking such stock or securities as collateral for loans.
FDIC Insurance Assessments
The Bank’s deposits are insured to the applicable limits as determined by the FDIC, which is currently $250,000 per depositor. Under the FDIC's risk-based assessment system, deposit insurance assessments are based on each insured institution's total assets less tangible equity, thereby basing deposit insurance assessments on an institution’s total liabilities, not only insured deposits. Small banks (generally, those with less than $10 billion in assets) are assigned an individual rate based on a formula using financial data and CAMELS (capital adequacy, asset quality, management, earnings, liquidity, and sensitivity) ratings. A bank’s assessment is calculated by multiplying its individual assessment rate by its assessment base (average consolidated total assets less average tangible equity), determined quarterly.
For the years ended December 31, 2024, 2023 and 2022, the Bank recorded $1,156,000, $1,058,000, and $768,000, respectively, in FDIC deposit insurance premium expense.
Federal Home Loan Bank System
The Bank is a member of the Federal Home Loan Bank of Pittsburgh (“FHLB”), which is one of 11 regional Federal Home Loan Banks. Each Federal Home Loan Bank serves as a reserve or central bank for members within its assigned region. It is funded primarily from funds deposited by member institutions and proceeds from the sale of consolidated obligations of the Federal Home Loan Bank System. It makes loans to members (i.e. advances) in accordance with policies and procedures established by the board of directors of the Federal Home Loan Bank. At December 31, 2024 the Bank had $25,208,000 overnight FHLB advances outstanding $10,000,000 in short-tern borrowings and $30,000,000 in long-term debt.
The Bank is required to purchase and maintain stock in the FHLB as a condition of membership in an amount equal to 0.10% of its assets. In addition, each member is required to purchase and maintain activity-based stock of 4% of outstanding advances from the FHLB. At December 31, 2024, the Bank had $3,510,000 in stock of the FHLB.
Community Reinvestment Act
Under the Community Reinvestment Act (“CRA”) as amended, the FDIC is required to assess all financial institutions that it regulates to determine whether these institutions are meeting the credit needs of the communities that they serve. The CRA focuses specifically on low- and moderate-income neighborhoods.
An institution’s record is considered during the evaluation of any application made by such institutions for, among other things:
•Approval of a branch or other deposit facility;
•An office relocation or a merger; and
•Any acquisition of bank shares.
The CRA also requires that the regulatory agency make publicly available the evaluation of the Bank’s record of meeting the credit needs of its entire community, including low- and moderate-income neighborhoods. This evaluation includes a descriptive rating of either outstanding, satisfactory, needs to improve, or substantial noncompliance, and a statement describing the basis for the rating. The Bank’s most recent CRA rating was “Satisfactory”.
In October 2023, the federal banking regulators issued a final rule, effective April 1, 2024, to modernize their respective CRA regulations. The revised rule substantially alters the methodology for assessing compliance with the CRA. Among other things, the revised rule evaluates lending outside traditional assessment areas generated by the growth of non-branch delivery systems, such as online and mobile banking, apply a metrics-based benchmarking approach to assessment, and clarifies eligible CRA activities. Prior to the proposed effective date of the revised CRA rule, a federal District Court enjoined enforcement of the rule as it relates to certain
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industry trade groups and their members, including the Bank, pending further litigation on the merits. The injunction remains in place. Accordingly, it is not possible at present to determine the timing of the applicability of the revised CRA rule at the Bank.
USA Patriot Act
The USA Patriot Act strengthens the anti-money laundering provisions of the Bank Secrecy Act. The Act requires financial institutions to establish certain procedures to be able to identify and verify the identity of its customers. Specifically, the Bank must have procedures in place to:
•Verify the identity of persons applying to open an account;
•Ensure adequate maintenance of the records used to verify a person’s identity; and
•Determine whether a person is on any U.S. government agency list of known or suspected terrorists or a terrorist organization.
Sarbanes-Oxley Act of 2002
The Sarbanes-Oxley Act is intended to bolster public confidence in the nation’s capital markets by imposing new duties and penalties for non-compliance on public companies and their executives, directors, auditors, attorneys and securities analysts. Some of the more significant aspects of the Act as it relates to QNB include:
•Corporate Responsibility for Financial Reports - requires Chief Executive Officers (“CEOs”) and Chief Financial Officers (“CFOs”) to certify certain matters relating to a company’s financial records and accounting and internal controls.
•Management Assessment of Internal Controls - requires auditors to certify the company’s underlying controls and processes that are used to compile the financial results for companies that are accelerated filers.
•Real-time Issuer Disclosures - requires that companies provide real-time disclosures of any events that may affect the company’s stock price or financial performance, generally within a 48-hour period.
•Criminal Penalties for Altering Documents - provides severe penalties for “whoever knowingly alters, destroys, mutilates” any record or document with intent to impede an investigation. Penalties include monetary fines and prison time.
The Act also imposes requirements for corporate governance, auditor independence, accounting standards, audit committee member independence and increased authority, executive compensation, insider loans and whistleblower protection. As a result of the Act, QNB adopted a Code of Business Conduct and Ethics applicable to its CEO, CFO and Controller, which meets the requirements of the Act, to supplement its long-standing Code of Ethics, which applies to all directors and employees.
QNB’s Code of Business Conduct and Ethics can be found on the Bank’s website at QNBBank.com.
Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank Act”)
The Dodd-Frank Act was enacted on July 21, 2010. This law made significant changes to the bank regulatory structure and affects the lending, deposit, investment, trading and operating activities of financial institutions and their holding companies.
The Dodd-Frank Act created a new Consumer Financial Protection Bureau (“CFPB”) with broad powers to supervise and enforce consumer protection laws. The CFPB has broad rule-making authority for a wide range of consumer protection laws that apply to all banks and savings institutions, including the authority to prohibit “unfair, deceptive or abusive” acts and practices. The CFPB has examination and enforcement authority over all banks and savings institutions with more than $10 billion in assets. Banks and savings institutions with $10 billion or less in assets such as the Bank will continue to be examined for compliance with the consumer laws by their primary bank regulators. The Dodd-Frank Act also weakened the Federal preemption rules that had been applicable for national banks and Federal savings associations and gave state attorneys general the ability to enforce Federal consumer protection laws.
Many of the provisions of the Dodd-Frank Act do not apply to the Bank, as it does not engage in many of the specific activities sought to be regulated by the Dodd-Frank Act. Many of the provisions, however, such as increased capital requirements and changes to FDIC insurance premiums already implemented, affected all banking entities. In addition, the financial crisis of 2008 and the enactment of the Dodd-Frank Act in response to that crisis has resulted in an era of increased regulatory oversight over all financial entities. The ultimate changes resulting from the Dodd-Frank Act may impact the profitability of our business activities, require changes to certain of our business practices, impose upon us more stringent capital, liquidity and leverage ratio requirements or otherwise adversely affect our business. These changes may also require us to invest significant management attention and resources to evaluate and make necessary changes in order to comply with new statutory and regulatory requirements.
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Possible Future Legislation
Congress is often considering some financial industry legislation, and the Federal banking agencies routinely propose new regulations. The Company cannot predict the future effect any new legislation, or new rules adopted by Federal or state banking agencies, will have on the business of the Company and its subsidiaries. The Company expects that there will be legislative and regulatory actions that may materially affect the banking industry in the foreseeable future.
Additional Information
QNB’s principal executive offices are located at 320 West Broad Street, Quakertown, Pennsylvania. Its telephone number is (215) 538-5600.
QNB also makes its periodic and current reports available, including this annual report for Form 10-K, free of charge, on its website, QNBBank.com, as soon as reasonably practicable after such material is electronically filed with the SEC. Information available on the website is not a part of, and should not be incorporated into, this annual report on Form 10-K. In addition, the SEC maintains a website that contains reports, proxy and information statements and other information regarding registrants, including QNB, that file electronically with the SEC which can be accessed at SEC.gov.
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ITEM 1A. RISK FACTORS
ITEM 1A. RISK FACTORS
The following discusses risks that management believes are specific to our business and could have a negative impact on QNB’s financial performance. When analyzing an investment in QNB, the risks and uncertainties described below, together with all of the other information included or incorporated by reference in this report, should be carefully considered. This list should not be viewed as comprehensive and may not include all risks that may affect the financial performance of QNB.
Our net interest income, net income and results of operations are sensitive to fluctuations in interest rates.
QNB’s profitability is largely a function of the spread between the interest rates earned on earning assets and the interest rates paid on deposits and other interest-bearing liabilities. Like most financial institutions, QNB’s net interest income and margin will be affected by general economic conditions and other factors, including fiscal and monetary policies of the Federal government, that influence market interest rates and QNB’s ability to respond to changes in such rates. At any given time, QNB’s assets and liabilities may be such that they are affected differently by a change in interest rates. As a result, an increase or decrease in rates, the length of loan terms or the mix of adjustable- and fixed-rate loans or investment securities in QNB’s portfolio could have a positive or negative effect on its net income, capital and liquidity. Although management believes it has implemented strategies and guidelines to reduce the potential effects of adverse changes in interest rates on results of operations, any substantial and prolonged change in market interest rates could affect operating results negatively.
We are subject to credit risk in connection with our lending activities, and our financial condition and results of operations may be negatively affected by economic conditions and other factors that could adversely affect our customers.
As a lender, QNB is exposed to the risk that its borrowers may be unable to repay their loans and that the current market value of any collateral securing the payment of their loans may not be sufficient to assure repayment in full. Credit losses are inherent in the lending business and could have a material adverse effect on the operating results of QNB. Adverse changes in the economy or business conditions, either nationally or in QNB’s market areas, could increase credit-related losses and expenses and/or limit growth. Substantially all of QNB’s loans are to businesses and individuals in its limited geographic area and any economic decline in this market could impact QNB adversely. QNB makes various assumptions and judgments about the collectability of its loan portfolio and provides an allowance for loan losses based on a number of factors. If these assumptions are incorrect, the allowance for loan losses may not be sufficient to cover losses and may cause QNB to increase the allowance in the future by increasing the provision for loan losses, thereby having an adverse effect on operating results. QNB has adopted underwriting and credit monitoring procedures and credit policies that management believes are appropriate to control these risks; however, such policies and procedures may not prevent unexpected losses that could have a material adverse effect on QNB’s financial condition or results of operations.
A deterioration in regional or national economic conditions may adversely affect our financial condition and results of operations.
QNB primarily provides banking services to customers located in the Bucks, Lehigh and Montgomery Counties in Pennsylvania. Adverse effects of a regional economic downturn could affect QNB’s ability to attract deposits and qualified loans. Economic factors impacting the local economy with this region, such as a decline in real estate values, unemployment, natural disasters, or the effects of armed conflict in other parts of the world, including present armed conflicts in Ukraine and the Gaza Strip, may have a negative impact on credit-worthiness of customers, the value of collateral, and customers’ ability to repay loans, which would result in write-downs, increases in non-performing loans, and a decline in QNB’s financial performance measurements. Unlike larger banks that are more geographically diversified, we provide banking and financial services locally and therefore are more affected by adverse local economic conditions.
Similarly, potential adverse effects of any national economic downturn or concerns with the stability of the financial markets could lead to lack of consumer confidence, increased market volatility, and a general reduction in business activity. Such events may result in increased regulation of the financial services industry and increased compliance costs; greater difficulty in assessing the creditworthiness of customers and increased credit risk; greater difficulty in originating loans that meet our underwriting criteria; liquidity issues to the extent that it becomes more difficult to borrow from third parties, including other financial institutions; and limitations on growth.
We face significant competition from other banks and financial institutions in our market area, many of which are larger in terms of asset size and market capitalization.
The financial services industry is highly competitive, with competition for attracting and retaining deposits and making loans coming from other banks and savings institutions, credit unions, mutual fund companies, insurance companies and other non-bank businesses. Many of QNB’s competitors are much larger in terms of total assets and market capitalization, have a higher lending limit, have greater access to capital and funding, and offer a broader array of financial products and services. In light of this, QNB’s ability to continue to compete effectively is dependent upon its ability to maintain and build relationships by delivering top quality service. Competition within the financial services industry also impacts QNB’s ability to attract and retain low-cost deposits which could impact QNB’s liquidity. Lowering loan rates and increasing deposit rates compresses the interest rate margin and profitability.
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At December 31, 2024, our lending limit per borrower was approximately $28,809,000. Accordingly, the size of loans that we may offer to potential borrowers (without participation by other lenders) is less than the size of loans that many of our competitors with larger capitalization are able to offer. Our legal lending limit also impacts the efficiency of our lending operation because it tends to lower our average loan size, which means we have to generate a higher number of transactions to achieve the same portfolio volume. We may engage in loan participations with other banks for loans in excess of our legal lending limit. However, there can be no assurance that such participations will be available or on terms which are favorable to us and our customers.
Our results of operations may be adversely affected by impairment charges relating to our debt securities.
QNB purchases U.S. Government and U.S. Government agency debt securities, U.S. Government agency issued mortgage-backed securities or collateralized mortgage obligation securities, obligations of states and municipalities and corporate debt securities. QNB is exposed to the risk that the issuers of these debt securities may experience significant deterioration in credit quality which could impact the market value of such issuer’s securities. QNB periodically evaluates its debt securities to determine if market value declines indicate impairment. Once a decline is determined to be impairment, the value of the security is reduced and a corresponding charge to earnings is recognized for the credit related portion of the impairment.
Our results of operations may be adversely affected by fair value declines in our investments in equity securities.
The Company’s investment in marketable equity securities during 2024 were primarily consists of investments in large cap stock companies. Changes in fair value were recorded in unrealized gain/(losses) in non-interest income. These equity securities were sold in 2024.
At December 31, 2024, the Bank had $3,510,000 in capital stock of the FHLB and $12,000 in capital stock of ACBB. These equity securities are restricted in that they can only be sold back to the respective institutions or another member institution at par. Therefore, they are less liquid than other tradable equity securities, their fair value is equal to amortized cost, and no impairment write-downs have been recorded on these securities.
The Bank has a $914,000 non-controlling investment in a discrete class of non-voting limited liability company membership interests
issued by National Energy Improvement Fund, LLC (“NEIF”), a Pennsylvania limited liability company licensed in Pennsylvania as a
consumer discount company. The proceeds of the investment will be used by NEIF to fund a State-sponsored consumer loan program,
the KEEP Home Energy Loan Program, designed to assist Pennsylvania homeowners in reducing their energy costs.
The Bank owns 3,251 shares of Visa Class B-2 stock post conversion of its original Class B shares, which was necessary to participate in Visa services in support of the Bank’s credit card, debit card, and related payment programs (permissible activities under banking regulations) as a member institution. Following the resolution of Visa’s covered litigation, shares of Visa’s Class B-2 stock will be converted to Visa Class A shares using a conversion factor (1.5430 as of September 26, 2024), which is periodically adjusted to reflect VISA’s ongoing litigation costs. There is a very limited market for this stock, as only current owners of Class B-2 shares are permitted to transact in Class B-2. Due to the lack of orderly trades and public information of such trades, Visa Class B-2 does not have a readily determinable fair value.
The Bank owns 100 shares of preferred stock of SHCPFIC. These shares are not transferable without the consent of SHCPFIC and does not have a readily determinable fair value. These restricted investments are carried at cost and evaluated for impairment periodically. As of December 31, 2024, there was no impairment associated with these securities.
Our assets at December 31, 2024 included a deferred tax asset and we may not be able to realize the full benefit of that asset.
As of December 31, 2024, QNB had a net deferred tax asset of $18,325,000. Our ability to realize these tax benefits ultimately depends on the existence of sufficient taxable income of the appropriate character (ordinary income or capital gains) within the applicable carryback and carryforward periods provided under the tax law. Estimating whether the deferred tax asset will be realized requires us to exercise significant judgment and is inherently uncertain because it requires the prediction of future occurrences. The deferred tax asset may be reduced in the future if estimates of future income, our tax planning strategies, or tax rate changes resulting from Federal tax reform do not support the amount of the deferred tax asset. If it is determined in the future that a valuation allowance of the deferred tax asset is necessary, we may incur a charge to earnings and a reduction to regulatory capital for the amount included in any such allowance.
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A disruption in components of our business infrastructure resulting from financial or technological difficulties of our third- party vendors on which we rely could adversely affect our business.
Third parties provide key components of our business infrastructure, such as Internet connections, software platforms and network access. Any disruption in Internet, network access or other voice or data communication services provided by these third parties or any failure of these third parties to handle current or higher volumes of use could adversely affect the ability to deliver products and services to clients and otherwise to conduct business. Disruptions or failures in the business infrastructure or operating systems that support our business and customers, or cyber-attacks or security breaches of the networks, systems, or devices that our customers use to access our products and services, could damage our reputation, cause us to incur additional expenses, result in losses, or subject us to regulatory sanctions or additional regulatory scrutiny, any of which could adversely affect our results of operations or financial condition.
Our failure to properly or timely utilize effective technologies to deliver our products and services, or a systems failure or breach of network security with respect to our information systems could adversely affect our business.
The market for financial services is increasingly affected by advances in technology, including developments in telecommunications, data processing, computers, automation, Internet-based banking and mobile banking. Our ability to compete successfully in our markets may depend on the extent to which we are able to exploit such technological changes. However, we can provide no assurance that we will be able to properly or timely anticipate or implement such technologies or properly train our staff to use such technologies. Any failure to adapt to new technologies could adversely affect our business, financial condition or operating results.
In addition, we rely heavily on our information systems to conduct business. Maintaining and protecting those systems is difficult and expensive, as is dealing with any failure, interruption or breach in security of these systems, whether due to acts or omissions by us or by a third party and whether intentional or not. Any such failure, interruption or breach could result in failures or disruptions in our customer relationship management or our information systems. The policies, procedures and technical safeguards we have in place to prevent or limit the effect of any failure, interruption or security breach of our information systems may be insufficient to prevent or remedy the effects of any such event. Moreover, as cyber threats continue to evolve, we may be required to expend significant additional resources to modify or enhance our protective measures relating to information security. The occurrence of any failures, interruptions or security breaches of our information systems could damage our reputation, cause us to incur additional expenses, result in losses, or subject us to regulatory sanctions or additional regulatory scrutiny, any of which could adversely affect our business, financial condition or operating results.
Changes in accounting standards applicable to us could materially impact how we report our financial condition and results of operations.
Our accounting policies and methods are fundamental to how we record and report our financial condition and results of operations. From time to time the FASB changes the financial accounting and reporting standards that govern the preparation of our financial statements.
These changes can be hard to predict and can materially impact how we record and report our financial condition and results of operations. In some cases, we could be required to apply a new or revised standard retroactively, resulting in our restating prior period financial statements. Management believes the current financial statements are prepared in accordance with U.S. generally accepted accounting principles.
We operate in a highly regulated environment and are subject to examination and supervision by bank regulatory agencies, which could have an adverse impact on our operations or increase the cost of our operations.
We operate in a highly regulated environment and are subject to extensive examination by the Board of Governors of the Federal Reserve System, the FDIC, and the Pennsylvania Department of Banking and Securities. The bank regulatory agencies exercise broad discretion in connection with their supervisory and enforcement activities. Federal and state banking laws and regulations are designed primarily to protect depositors, the deposit funds, and consumers, and not necessarily shareholders of a financial institution. Banking regulations or the activities of bank regulatory agencies may, for example, limit a financial institution’s growth and potential shareholder returns by restricting certain activities such as the payment of dividends, expansion of branch offices, and acquisition activities.
The significant laws and regulations that govern our activities are described under “Item 1 - Description of Business” in this Form 10-K. These laws and regulations, along with existing tax, accounting, securities, and monetary laws, regulations, standards, policies, and interpretations control the manner in which financial institutions conduct business. Such laws, regulations, standards, policies, and interpretations are constantly evolving and may change significantly over time. The potential exists for additional federal or state laws or regulations, or new policies or interpretations by regulatory agencies having jurisdiction over our activities, to affect many aspects of our operations, including capital requirements, lending and funding practices, and liquidity standards. Additional laws, regulations or
- 11 -
other regulatory requirements, or any substantial change in regulation and oversight, may have a material impact on our operations by increasing our cost of regulatory compliance and of doing business and otherwise affecting our operations, and may significantly affect the markets in which we do business, the markets for and value of our investments, the fees we charge and our ongoing operations, costs and profitability.
High concentrations of commercial real estate loans ("CRE loans") could subject the Bank to increased regulatory scrutiny and directives, which could force us to preserve or raise capital and/or limit future commercial lending activities.
Bank regulators have expectations of banks with high CRE concentrations to manage the risk in the concentrated portfolio. Bank regulators recognize that diversification can be achieved within CRE portfolios and differentiates risk in different types of CRE loans. They focus on those CRE loans for which the cash flow from the real estate is the primary source of repayment rather than loans to a borrower for which real estate collateral is taken as a secondary source of repayment or through abundance of caution. Generally, these would include development and construction loans for which repayment is dependent upon the sale of the property as well as properties for which repayment is dependent upon rental income.
Financial institutions that have high concentrations of CRE loans within their lending portfolios could face increased risk of financial difficulties in an economic downturn effecting its CRE markets. Therefore, bank regulators have issued guidance directed financial institutions whose concentrations exceed certain percentages of capital to implement heightened risk management practices appropriate to their concentration risk. These general guidelines are not limits, are not viewed negatively, nor are they viewed a safe haven. If a financial institution’s CRE portfolio goes outside of these general guidelines they will not automatically be criticized, but heightened risk management practices may be needed. Risk management practices should align with the complexity of the financial institution and its portfolio and include factors such as: portfolio diversification across property types; geographic dispersion of CRE loans; underwriting standards; level of pre-sold units or other types of take-out commitments on construction loans; and portfolio liquidity (ability to sell or securitize exposures on the secondary market).
Bank regulators may require such financial institutions to reduce their concentrations and/or maintain higher capital ratios than financial institutions with lower concentrations in CRE. At December 31, 2024, our CRE loans did not result in concentrations that require heightened risk management practices.
If we lose the availability of wholesale funding we may be unable to support interest-earning asset growth, which could adversely impact our operating results and liquidity.
Management periodically uses wholesale funding sources to support loan demand and deposit withdrawals and to provide sufficient liquidity. Wholesale funding primarily is made up of borrowings from the FHLB but may also include unsecured Federal funds from correspondent banks, Federal advances and wholesale certificates of deposit.
If wholesale funding becomes unavailable, QNB may need to reduce interest-earning asset growth through production reduction, sale of assets, or participating out future and current loans; this could adversely impact future net income. A termination or change in borrowings from the FHLB, the Federal Reserve or correspondent banks may have an adverse effect on our liquidity and operating results.
Our disclosure controls and procedures and our internal control over financial reporting may not achieve their intended objectives.
Management diligently reviews and updates its internal controls, disclosure controls and procedures, and corporate governance policies and procedures. Our disclosure controls and procedures are designed to reasonably assure that information required to be disclosed by QNB in reports filed or submitted under the Exchange Act is accumulated and communicated to management, and recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. Management believes that any disclosure controls and procedures or internal controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Any undetected circumvention of these controls could have a material adverse impact on QNB’s financial condition and results of operations.
These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by an unauthorized override of the controls. Accordingly, because of the inherent limitations in our control system, misstatements due to error or fraud may occur and not be detected.
We may not be able to attract and retain highly qualified personnel to execute our business strategy.
Our success depends upon the ability to attract and retain highly motivated, well-qualified personnel. We face significant competition in the recruitment of qualified employees. Our ability to execute our business strategy and provide high-quality service may suffer if we
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are unable to recruit or retain a sufficient number of qualified employees or if the costs of employee compensation or benefits increase substantially. QNB currently has employment agreements and/or change of control agreements with six of its senior officers.
Acts of terrorism and other external events, including natural disasters, national or global health emergencies, and events of armed conflict in other countries, could impact our ability to do business or otherwise adversely affect our business, operations or financial condition.
Financial institutions have been, and continue to be, targets of terrorist threats aimed at compromising operating and communications systems. Such events could cause significant damage, impact the stability of our facilities, result in additional expenses, and impair the ability of our borrowers to repay their loans. Although we have established and regularly test disaster recovery procedures, the occurrence of any such event could have a material adverse effect on our business, operations, and financial condition. In addition, other external events, including natural disasters, health emergencies and epidemics or pandemics, and events of armed conflict in other parts of the world, such as the present armed conflicts involving Ukraine and Russia and involving Israel and Hamas, could adversely affect the global or regional economies resulting in unfavorable economic conditions in the United States. Any of such developments could have an adverse effect on our business, operations or financial condition.

---

ITEM 1B. UNRESOLVED STAFF COMMENTS
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.

---

ITEM 2. PROPERTIES
ITEM 2. PROPERTIES
The principal office of both QNB Bank and QNB Corp. is located at 15 North Third Street, Quakertown, Pennsylvania. QNB Bank conducts business from its principal office and eleven other branch offices located in Bucks, Lehigh, and Montgomery Counties in Pennsylvania. QNB Bank owns its principal office, four branch locations, its administrative and operations facility and a computer facility. QNB Bank leases its remaining seven branch properties. The leases on the properties generally contain renewal options. In management’s opinion, these properties are in good condition and are currently adequate for QNB’s purposes.
The following table details QNB Bank’s properties:
Location

Quakertown, PA - Downtown Branch (Principal Office) - 15 North Third Street
Owned

Quakertown, PA - Towne Bank Center - 320-322 West Broad Street
Owned

Quakertown, PA - Computer Center - 121 West Broad Street
Owned

Quakertown, PA - Country Square Branch - 240 South West End Boulevard
Owned

Quakertown, PA - Quakertown Commons Branch - 901 South West End Boulevard
Leased

Dublin, PA - Dublin Branch - 161 North Main Street
Leased

Pennsburg, PA - Upper Perkiomen Valley Branch - 410 Pottstown Avenue
Leased

Coopersburg, PA - Coopersburg Branch - 51 South Third Street
Owned

Perkasie, PA - Perkasie Branch - 607 Chestnut Street
Owned

Souderton, PA - Souderton Branch - 750 Route 113
Leased

Wescosville, PA - Wescosville Branch - 950 Mill Creek Road
Leased

Colmar, PA - Colmar Branch - 127 Bethlehem Pike
Owned

Warminster, PA - Warminster Branch - 1402 West Street Road
Leased

Allentown, PA - Allentown Branch - 535 N. 19th Street
Leased
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IITEM 3. LEGAL PROCEEDINGS
Although there are currently no material legal proceedings to which QNB is the subject, future litigation that arises during the normal course of QNB’s business could be material and have a negative impact on QNB’s earnings. Future litigation also could adversely impact the reputation of QNB in the communities that it serves.
ITEM 4. MINE SAFETY DISCLOSURES
None
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PART II
ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Stock Information
QNB common stock is quoted on the over-the-counter bulletin board (“OTCBB”). QNB had approximately 627 shareholders of record as of February 28, 2025.
The following table sets forth the high and low bid and ask stock prices for QNB common stock on a quarterly basis during 2024 and 2023. These prices reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.
Cash
High
Low
dividend
Bid
Ask
Bid
Ask
per share
First Quarter
$
26.19
$
27.69
$
22.00
$
23.00
$
0.37
Second Quarter
23.75
23.95
22.25
22.95
0.37
Third Quarter
29.70
30.25
22.70
23.39
0.37
Fourth Quarter
33.92
35.00
28.50
29.14
0.37
First Quarter
$
29.51
$
32.00
$
24.92
$
25.00
$
0.37
Second Quarter
25.05
25.70
22.00
22.43
0.37
Third Quarter
24.20
24.75
22.57
22.94
0.37
Fourth Quarter
25.28
27.75
21.50
21.85
0.37
QNB has traditionally paid quarterly cash dividends on the last Friday of each quarter. The Company expects to continue the practice of paying quarterly cash dividends to its shareholders; however, future dividends are dependent upon future earnings, financial condition, appropriate legal restrictions, and other factors relevant at the time the board of directors considers declaring a dividend. Certain laws restrict the amount of dividends that may be paid to shareholders in any given year. See “Shareholders’ Equity - Capital Adequacy” included in Item 7 of this Form 10-K filing and Note 22 of the Notes to Consolidated Financial Statements included in Item 8 of this Form 10-K filing, for additional information that discusses and quantifies this regulatory restriction.
The following table provides information on repurchases by QNB of its common stock in each month of the quarter ended December 31, 2024.
Period
Total Number
of Shares
Purchased
Average Price
Paid per Share
Total Number
of Shares
Purchased as
Part of Publicly
Announced
Plan
Maximum
Number of
Shares that
may yet be
Purchased
Under the Plan
October 1, 2024 through October 31, 2024
-
$
-
-
98,000
November 1, 2024 through November 30, 2024
-
-
-
98,000
December 1, 2024 through December 31, 2024
-
-
-
98,000
Total
-
$
-
-
98,000
(1)Transactions are reported as of settlement dates.
(2)QNB’s current stock repurchase plan was originally approved by its Board of Directors and announced on January 24, 2008 and subsequently increased on February 9, 2009 and April 27, 2021.
(3)The total number of shares approved for repurchase under QNB’s current stock repurchase plan is 200,000 as of the filing of this Form 10-K.
(4)QNB’s current stock repurchase plan has no expiration date.
(5)QNB has no stock repurchase plan that it has determined to terminate or under which it does not intend to make further purchases.
- 16 -
Stock Performance Graph
Set forth below is a performance graph comparing the yearly cumulative total shareholder return on QNB’s common stock with:
•the yearly cumulative total shareholder return on stocks included in the NASDAQ Composite Index, a broad market index;
•the yearly cumulative total shareholder return on the S&P US SmallCap Banks Index, a group encompassing publicly traded banking companies trading on the NYSE or NASDAQ with an average market capitalization of $2.0 billion (individually ranging from $133 million to $19.3 billion); and
•the yearly cumulative total shareholder return on the S&P U.S. BMI Banks - Mid-Atlantic Bank Index, a group encompassing publicly traded banking companies trading on the NYSE, AMEX, or NASDAQ headquartered in Delaware, District of Columbia, Maryland, New Jersey, New York, Pennsylvania, and Puerto Rico.
All of these cumulative total returns are computed assuming the reinvestment of dividends at the frequency with which dividends were paid during the applicable years.
Period Ending
Index
12/31/19
12/31/20
12/31/21
12/31/22
12/31/23
12/31/24
QNB Corp.
100.00
86.73
101.23
77.61
81.24
112.06
NASDAQ Composite Index
100.00
144.92
177.06
119.45
172.77
223.87
S&P U.S. SmallCap Banks Index
100.00
90.82
126.43
111.47
112.03
132.44
S&P U.S. BMI Banks - Mid-Atlantic Region Index
100.00
90.39
114.16
96.42
116.90
162.46
Source: S&P Global Market Intelligence© 2025
ITEM 6. [RESERVED]
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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations - Overview
QNB Corp. (“QNB” or the “Company”) earns its net income primarily through its subsidiary, QNB Bank (the “Bank”). Net interest income, or the spread between the interest, dividends and fees earned on loans and investment securities and the expense incurred on deposits and other interest-bearing liabilities, is the primary source of operating income for QNB. QNB seeks to achieve sustainable and consistent earnings growth while maintaining adequate levels of capital and liquidity and limiting its exposure to credit and interest rate risk levels approved by the Board of Directors. Due to its limited geographic area, comprised principally of Bucks, Lehigh and Montgomery counties, growth is pursued through expansion of existing customer relationships and building new relationships by stressing a consistent high level of service at all points of contact.
Tabular information presented throughout management’s discussion and analysis, other than share and per share data, is presented in thousands of dollars.
The following table displays five years of selected financial amounts and ratios for the QNB:
Year ended December 31,
Income and expense
Net interest income
$
42,862
$
40,155
$
44,497
$
42,127
$
37,248
Provision for credit losses
(68
)
(844
)
(850
)
1,250
Non-interest income
6,913
4,837
5,731
9,781
7,602
Non-interest expense
35,484
34,109
31,492
30,997
28,955
Net income
11,448
9,483
15,921
16,492
12,083
Share and Per Share Data
Net income - basic
$
3.12
$
2.63
$
4.47
$
4.64
$
3.42
Net income - diluted
3.12
2.63
4.47
4.64
3.42
Book value
27.96
24.86
19.78
38.41
37.80
Cash dividends
1.48
1.48
1.44
1.40
1.36
Average common shares outstanding - basic
3,672,251
3,610,713
3,564,481
3,553,949
3,537,323
Average common shares outstanding - diluted
3,673,697
3,610,713
3,564,481
3,554,138
3,537,360
Balance Sheet at Year-end
Investment securities
$
546,559
$
496,092
$
558,581
$
704,770
$
448,495
Loans receivable
1,216,048
1,093,533
1,039,385
926,470
920,042
Allowance for credit losses on loans
(8,744
)
(8,852
)
(10,531
)
(11,184
)
(10,826
)
Other earning assets
39,344
51,210
1,242
4,196
25,909
Total assets
1,870,894
1,706,318
1,668,497
1,673,340
1,440,229
Deposits
1,628,541
1,488,713
1,418,369
1,449,745
1,228,067
Total borrowed funds
122,912
114,094
171,327
78,476
68,838
Shareholders' equity
103,349
90,824
70,958
136,494
134,445
Selected Financial Ratios
Net interest margin
2.43
%
2.39
%
2.71
%
2.79
%
2.92
%
Net income as a percentage of:
Average total assets
0.62
0.54
0.93
1.04
0.90
Average shareholders' equity
7.05
6.04
10.90
12.19
9.76
Average shareholders' equity to average total assets
8.84
8.99
8.54
8.53
9.21
Dividend payout ratio
47.48
56.37
32.24
30.15
39.82
Net income for the year ended December 31, 2024 was $11,448,000, or $3.12 per share on a diluted basis. This compares to 2023 net income of $9,483,000, or $2.63 per share on a diluted basis and 2022 net income of $15,921,000, or $4.47 per share on a diluted basis. Two important measures of profitability in the banking industry are an institution’s return on average assets and return on average shareholders’ equity. Return on average assets was 0.62%, 0.54% and 0.93% in 2024, 2023, and 2022, respectively, and return on average shareholders’ equity was 7.05%, 6.04% and 10.90%, respectively, during those same periods.
- 18 -
The Bank contributed $12,237,000 to net income for the year ended December 31, 2024 compared to $9,395,000 for the same period in 2023; whereas the holding company contributed a net loss of $789,000 to consolidated net income for the year ended December 31, 2024 compared to net income of $88,000 for the same period in 2023. The increase at the Bank was primarily due to improvement in net interest margin and gains on sales of investments securities. The decrease at the holding company resulted primarily from an increase in interest expense related to the issuance of subordinated debt in 2024.
2024 versus 2023
The results for 2024 include the following significant components:
•Net interest income increased $2,707,000, or 6.74%, to $42,862,000 for 2024.
•The net interest margin on a tax-equivalent basis increased four basis points to 2.43% for 2024 from 2.39% for 2023.
•Reversal of the provision for credit losses was $68,000 for 2024, compared with $844,000 for 2023.
•Non-interest income for 2024 was $6,913,000, an increase of $2,076,000, or 42.9%, compared with 2023.
•Non-interest expense for 2024 was $35,484,000, an increase of $1,375,000, or 4.0%, compared with 2023.
•Total investment securities increased $50,467,000, or 10.2%, from December 31, 2023.
•Loans receivable grew $122,515,000, or 11.2%, from December 31, 2023.
•Deposits increased $139,828,000, or 9.4%, from December 31, 2023.
•The holding company issued $40,000,000 in subordinated debt in 2024.
•Total non-performing loans, which represent loans on non-accrual status and loans past due 90 days or more and still accruing interest, were $1,975,000, or 0.16% of total loans receivable at December 31, 2024, compared with $1,940,000, or 0.18% of total loans receivable at December 31, 2023. Loans on non-accrual status were $1,975,000 at December 31, 2024 compared with $1,940,000 at December 31, 2023. Net charge-offs for 2024 were $59,000, or 0.01% of average total loans, as compared with net recoveries for 2023 of $238,000, or 0.02% of average total loans for 2023.
2023 versus 2022
The results for 2023 include the following significant components:
•Net interest income decreased $4,342,000, or 9.76%, to $40,155,000 for 2023.
•The net interest margin on a tax-equivalent basis decreased 32 basis points to 2.39% for 2023 from 2.71% for 2022.
•Provision for credit losses was a credit of $844,000 for 2023, compared with a credit of $850,000 for 2022.
•Non-interest income for 2023 was $4,837,000, a decrease of $894,000, or 15.6%, compared with 2022.
•Non-interest expense for 2023 was $34,109,000, an increase of $2,617,000, or 8.3%, compared with 2022.
•Total investment securities declined $62,489,000, or 11.2%, from December 31, 2022.
•Loans receivable grew $54,148,000, or 5.2%, from December 31, 2022.
•Deposits increased $70,344,000, or 5.0%, from December 31, 2022.
•Total non-performing loans, which represent loans on non-accrual status and loans past due 90 days or more and still accruing interest, were $1,940,000, or 0.18% of total loans receivable at December 31, 2023, compared with $9,121,000, or 0.88% of total loans receivable at December 31, 2022. Loans on non-accrual status were $1,940,000 at December 31, 2023 compared with $4,820,000 at December 31, 2022. Net recoveries for 2023 were $238,000, or 0.02% of average total loans, as compared with net recoveries for 2022 of $197,000, or 0.02% of average total loans for 2022.
These items, as well as others, will be explained more thoroughly in the next sections.
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Net Interest Income
The following table presents the adjustment to convert net interest income to net interest income on a fully taxable equivalent basis for the years ended December 31, 2024, 2023, and 2022.
Year ended December 31,
Total interest income
$
84,068
$
69,082
$
52,421
Total interest expense
41,206
28,927
7,924
Net interest income
42,862
40,155
44,497
Tax-equivalent adjustment
Net interest income (tax-equivalent basis)
$
43,420
$
40,739
$
45,210
Net interest income is the primary source of operating income for QNB. Net interest income is interest income, dividends, and fees on earning assets, less interest expense incurred for funding sources. Earning assets primarily include loans, investment securities and interest-bearing balances at the Federal Reserve Bank (Fed). Sources used to fund these assets include deposits and borrowed funds. Net interest income is affected by changes in interest rates, the volume and mix of earning assets and interest-bearing liabilities, and the amount of earning assets funded by non-interest-bearing deposits.
For purposes of this discussion, interest income and the average yield earned on loans and investment securities are adjusted to a tax-equivalent basis as detailed in the table that appears above. This adjustment to interest income is made for analysis purposes only. Interest income is increased by the amount of savings of Federal income taxes, which QNB realizes by investing in certain tax-exempt state and municipal securities and by making loans to certain tax-exempt organizations. In this way, the ultimate economic impact of earnings from various assets can be more easily compared.
The net interest rate spread is the difference between average rates received on earning assets and average rates paid on interest-bearing liabilities, while the net interest margin, which includes interest-free sources of funds, is net interest income expressed as a percentage of average interest-earning assets. The Asset/Liability and Investment Management Committee works to manage and maximize the net interest margin for the Company.
2024 versus 2023
On a tax-equivalent basis, net interest income for 2024 increased $2,681,000, or 6.6%, to $43,420,000. The net interest margin, which increased four basis points to 2.43%, was favorably impacted by increased rates on and volume of loans and investments. The average rate earned on earning assets increased 64 basis points from 4.09% for 2023 to 4.73% for 2024 with the yield on investments increasing 57 basis points and the yield on loans increasing 50 basis points. The yield on investment securities was favorably impacted by increased yields on all categories except U.S. Treasuries and Equities, causing an increase in interest income of $2,721,000; the yield was unfavorably impacted by a decrease in average volume of $49,754,000 contributing to a $494,000 decrease in interest income. The yield on loans was favorably impacted by increased rates in all loan categories, contributing to a $5,890,000 increase in interest income. This was also favorably impacted by a $110,151,000 net increase in average volume, of which $97,231,000 was related to an increase in average commercial real estate loans contributing $4,757,000 in interest income, an increase of $7,570,000 in home equity loans contributing $494,000 in interest income, and an increase of $4,032,000 in commercial and industrial loans average balances contributing an increase of $303,000 in interest income. The yield on total average interest-bearing liabilities increased 69 basis points from 2.11% for 2023 to 2.80% for 2024. The growth in loans was funded by the growth in deposits of $113,977,000, or 7.8%. The average rate paid on interest-bearing deposits increased from 2.01% to 2.71% for the same time periods, respectively, contributing to an increase in interest expense of $7,967,000, and a $134,229,000 increase in average interest-bearing deposits resulting in additional interest expense of $4,508,000. The average rate paid on total borrowings increased from 3.15% to 4.16% for the same time periods, respectively, offset by an average volume decrease of $34,917,000; the net impact contributed to a decrease in interest expense of $196,000. Loan and deposit growth was partially offset by the competitive local interest rate market for quality loans and deposits. Net interest spread decreased five basis points to 1.93% for 2024 compared to 1.98% for 2023.
2023 versus 2022
On a tax-equivalent basis, net interest income for 2023 decreased $4,471,000, or 9.9%, to $40,739,000. The net interest margin, which decreased 32 basis points to 2.39%, was unfavorably impacted by increased rates on deposits and short-term borrowings. The average rate earned on earning assets increased 91 basis points from 3.18% for 2022 to 4.09% for 2023 with the yield on investments increasing 47 basis points and the yield on loans increasing 95 basis points. The yield on investment securities was favorably impacted by increased yields on all categories, causing an increase in interest income of $3,057,000; the yield was unfavorably impacted by a decrease in average volume of $67,778,000 contributing to a $1,307,000 decrease in interest income. The yield on loans was favorably impacted by increased rates in all loan categories, contributing to a $9,999,000 increase in interest income. This was also favorably impacted by a $73,104,000 net increase in average volume, of which $76,271,000 was related to an increase in average commercial real estate loans, contributing $3,204,000 in interest income; partially offset by a decrease of $7,613,000 in commercial and industrial loans average balances, resulting in a decrease of $389,000 in interest income. The yield on total average interest-bearing liabilities increased 151 basis points from 0.60% for 2022 to 2.11% for 2023. The average rate paid on interest-bearing deposits increased from 0.57% to 2.01% for the same time periods, respectively, contributing to an increase in interest expense of $17,446,000, and a $29,102,000 increase in average interest-bearing deposits resulting in additional interest expense of $651,000. The average rate paid on short-term borrowings increased from 1.00% to 3.01% for the same time periods, respectively, contributing to an increase in interest expense of $2,182,000. Net interest spread decreased 60 basis points to 1.98% for 2023 compared to 2.58% for 2022.
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Average Balances, Rates, and Interest Income and Expense Summary (Tax-Equivalent Basis)
Average
Average
Average
Average
Average
Average
balance
rate
Interest
balance
rate
Interest
balance
rate
Interest
Assets
Investment securities (AFS & Equity):
U.S. Treasury securities
$
11,682
5.00
%
$
$
4,535
5.06
%
$
$
1.18
%
$
U.S. Government agencies
80,332
1.17
100,409
1.11
1,119
101,455
1.10
1,119
State and municipal
106,806
3.39
3,623
109,598
2.89
3,164
128,126
2.39
3,056
Mortgage-backed and CMOs
357,977
2.68
9,580
399,599
2.14
8,555
447,369
1.58
7,059
Corporate debt securities and money market funds
17,560
5.76
1,012
6,655
4.40
6,673
4.37
Equities
4,269
3.88
7,584
4.22
12,011
3.32
Total investment securities
578,626
2.75
15,907
628,380
2.18
13,680
696,158
1.71
11,930
Loans:
Commercial real estate
810,525
5.53
44,805
713,294
4.89
34,900
637,023
4.20
26,759
Residential real estate
110,320
4.12
4,542
107,379
3.73
4,005
104,397
3.34
3,484
Home equity loans
65,714
6.81
4,475
58,144
6.52
3,794
56,155
4.38
2,459
Commercial and industrial
141,998
7.52
10,682
137,966
7.50
10,344
145,579
5.10
7,432
Consumer loans
3,635
8.12
3,889
7.29
4,512
5.63
Tax-exempt loans
18,507
3.90
19,876
3.56
19,778
3.42
Total loans, net of unearned income*
1,150,699
5.69
65,520
1,040,548
5.19
54,033
967,444
4.24
41,064
Other earning assets
59,734
5.36
3,199
34,816
5.61
1,953
5,782
2.42
Total earning assets
1,789,059
4.73
84,626
1,703,744
4.09
69,666
1,669,384
3.18
53,134
Cash and due from banks
13,847
13,918
13,803
Allowance for credit losses on loans
(8,965
)
(8,820
)
(11,287
)
Other assets
41,709
39,187
38,549
Total assets
$
1,835,650
$
1,748,029
$
1,710,449
Liabilities and Shareholders' Equity
Interest-bearing deposits:
Interest-bearing demand
$
346,590
0.93
%
$
3,225
$
315,990
0.60
%
$
1,900
$
345,054
0.27
%
$
Municipals
146,446
4.64
6,794
131,610
4.46
5,867
122,824
1.43
1,758
Money market
237,071
3.45
8,181
183,004
2.64
4,823
137,830
0.45
Savings
285,011
1.28
3,651
348,878
1.20
4,187
443,104
0.49
2,175
Time less than $100
170,998
3.98
6,808
121,622
2.63
3,194
91,216
0.79
Time $100 through $250
145,022
4.53
6,570
107,560
3.59
3,859
52,314
0.93
Time greater than $250
49,831
4.51
2,247
38,076
3.08
1,171
25,296
0.83
Total interest-bearing deposits
1,380,969
2.71
37,476
1,246,740
2.01
25,001
1,217,638
0.57
6,904
Short-term borrowings
48,526
2.37
1,148
108,862
3.01
3,273
85,876
1.00
Long-term debt
27,869
4.67
1,322
15,712
4.10
10,000
1.57
Subordinated debt
13,262
9.34
1,260
-
-
-
-
-
-
Total borrowings
89,657
4.16
3,730
-
124,574
3.15
3,926
-
95,876
1.06
1,020
Total interest-bearing liabilities
1,470,626
2.80
41,206
-
1,371,314
2.11
28,927
-
1,313,514
0.60
7,924
Non-interest-bearing deposits
188,525
208,777
242,778
Other liabilities
14,195
10,812
8,069
Shareholders' equity
162,304
157,126
146,088
Total liabilities and shareholders' equity
$
1,835,650
$
1,748,029
$
1,710,449
Net interest rate spread
1.93
%
1.98
%
2.58
%
Margin/net interest income
2.43
%
$
43,420
2.39
%
$
40,739
2.71
%
$
45,210
Tax-exempt securities and loans were adjusted to a tax-equivalent basis and are based on the marginal Federal corporate tax rate of 21 percent. Non-accrual loans and investment securities are included in earning assets.
* Includes loans held-for-sale
- 21 -
Rate-Volume Analysis of Changes in Net Interest Income (1) (2) (3)
2024 vs. 2023
2023 vs. 2022
Due to change in:
Total
Due to change in:
Total
Volume
Rate
Change
Volume
Rate
Change
Interest income:
Investment securities (AFS & Equity):
U.S. Treasury securities
$
$
(7
)
$
$
$
$
U.S. Government agencies
(224
)
(177
)
(12
)
-
State and municipal
(81
)
(441
)
Mortgage-backed and CMOs
(892
)
1,917
1,025
(753
)
2,249
1,496
Corporate debt securities and money market funds
(1
)
Equities
(140
)
(14
)
(154
)
(147
)
(79
)
Total Investment securities (AFS & Equity)
(494
)
2,721
2,227
(1,307
)
3,057
1,750
Loans:
Commercial real estate
4,757
5,148
9,905
3,204
4,937
8,141
Residential real estate
Home equity loans
1,248
1,335
Commercial and industrial
(389
)
3,301
2,912
Consumer loans
(18
)
(35
)
Tax-exempt loans
(48
)
Total loans
5,597
5,890
11,487
2,970
9,999
12,969
Other earning assets
1,397
(151
)
1,246
1,111
1,813
Total interest income
6,500
8,460
14,960
2,365
14,167
16,532
Interest expense:
Interest-bearing deposits:
Interest-bearing demand
1,141
1,325
(78
)
1,045
Municipals
3,984
4,109
Money market
1,425
1,933
3,358
4,003
4,206
Savings
(767
)
(536
)
(462
)
2,474
2,012
Time less than $100
1,297
2,317
3,614
2,229
2,471
Time $100 through $250
1,345
1,366
2,711
2,854
3,370
Time greater than $250
1,076
Total interest-bearing deposits
4,508
7,967
12,475
17,446
18,097
Short-term borrowings
(1,814
)
(311
)
(2,125
)
2,182
2,412
Long-term debt
Subordinated debt
1,260
-
1,260
-
-
-
Total borrowings
(46
)
(150
)
(196
)
2,585
2,906
Total interest expense
4,462
7,817
12,279
20,031
21,003
Net interest income
$
2,038
$
$
2,681
$
1,393
$
(5,864
)
$
(4,471
)
(1)Loan fees have been included in the change in interest income totals presented. Non-accrual loans and investment securities have been included in average balances.
(2)Changes due to both volume and rates have been allocated in proportion to the relationship of the dollar amount change in each.
(3)Interest income on loans and securities is presented on a tax-equivalent basis.
The Rate-Volume Analysis tables, as presented on a tax-equivalent basis, highlight the impact of changing rates and volumes on interest income and interest expense. Total interest income on a tax-equivalent basis increased $14,960,000 to $84,626,000 for 2024, while total interest expense increased $12,279,000 to $41,206,000. Volume growth in earning assets contributed an additional $6,500,000 of interest income and interest rate increases contributed an additional $8,460,000 of interest income. Rate-related interest expense increased $7,817,000, while volume-related interest expense increased $4,462,000.
Investments
2024 versus 2023
Interest income on available-for-sale and equity investment securities increased $2,227,000 when comparing the two years. The 57 basis-point increase in rate, of which the interest rate swaps contributed 38 basis points, contributed an additional $2,721,000 to interest income and the $49,754,000 decrease in volume reduced interest income $494,000. The average yield on the available-for-sale and equity investment portfolio increased to 2.75% for 2024 compared to 2.18% for 2023.
- 22 -
Income on U.S. Government agency securities yields were 1.17% for 2024 compared to 1.11% for 2023. Most of the bonds in the agency portfolio have call features ranging from three months to three years, none of which were exercised during 2024. Average balances, which decreased $20,077,000, reduced interest income by $224,000.
Interest income on state and municipal securities increased $459,000. Average balances, which decreased $2,792,000, reduced interest income by $81,000. The increase in yield of 50 basis points from 2.89% in 2023 to 3.39% in 2024 contributing $540,000 to interest income more than offset the decrease in interest income caused by volume. The rate and interest income increases on municipal securities was positively impacted by the interest rate swap, contributing 51 basis points of the increase in rate.
Many of these bonds have either reached maturity or their call dates and are being replaced with municipal bonds with less favorable tax-equivalent yields. Typically, QNB purchased municipal bonds with 10- to 15-year maturities with call dates between 2 and 5 years. Future demand for tax-exempt municipal securities is uncertain, as the tax-equivalent yield could be less favorable compared to other securities with similar risk-based capital asset-weighting characteristics.
All the mortgage-backed and collateralized mortgage obligations (“CMO”) securities owned by QNB are issued by U.S. Government agencies and sponsored enterprises (“GSE”) and carry the implicit backing of the U.S. Government, but they are not direct obligations of the U.S. Government. Interest income on mortgage-backed securities and CMOs increased $1,025,000 due to a 54 basis-point increase in rate from 2.14% for 2023 to 2.68% for 2024 adding $1,917,000 to interest income; this was partly offset by a $41,622,000 decrease in average balances reducing interest income by $892,000. The rate and interest income increases on mortgage-backed securities were positively impacted by the interest rate swap, contributing 46 basis points. This portfolio generally provides higher yields relative to agency bonds and provides monthly cash flow which can be used for liquidity purposes or can be reinvested as interest rates increase.
Income on corporate debt securities increased $719,000 due to an increase average balances of $10,905,000 and in yield from 4.40% for 2023 to 5.76% for 2024.
Excess cash at the holding company was invested in U.S. Treasury securities during 2024 adding $355,000 to interest income. The yield on U.S. Treasury securities was 5.00% for 2024 compared to 5.06% for 2023. Average balances increased $7,147,000.
Dividend income on equities decreased $154,000 due to a decrease in average balances of $3,315,000. The equity portfolio was sold during 2024.
2023 versus 2022
Interest income on available-for-sale and equity investment securities increased $1,750,000 when comparing the two years. The 47 basis-point increase in rate contributed an additional $3,057,000 to interest income and the $67,778,000 decrease in volume reduced interest income $1,307,000. The average yield on the available-for-sale and equity investment portfolio increased to 2.18% for 2023 compared to 1.71% for 2022.
Income on U.S. Government agency securities remained level at yields of 1.11% for 2023 compared to 1.10% for 2022. Most of the bonds in the agency portfolio have call features ranging from three months to three years, none of which were exercised during 2023.
Interest income on state and municipal securities increased $108,000. Average balances, which decreased $18,528,000, reduced interest income by $441,000. The increase in yield of 50 basis points from 2.39% in 2022 to 2.89% in 2023 contributing $549,000 to interest income more than offset the decrease in interest income caused by volume.
Interest income on mortgage-backed securities and CMOs increased $1,496,000 due to a 56 basis-point increase in rate from 1.58% for 2022 to 2.14% for 2023 adding $2,249,000 to interest income; this was partly offset by a $47,770,000 decrease in average balances reducing interest income by $753,000.
Income on corporate debt securities increased $2,000 due to an increase in yield from 4.37% for 2022 to 4.40% for 2023.
Excess cash at the holding company was invested in Treasury securities during 2023 adding $223,000 to interest income.
Dividend income on equities decreased $79,000 due to a decrease in average balances of $4,427,000, partially offset by an increase in yield of 90 basis points.
Loans
2024 versus 2023
The largest category of the loan portfolio is commercial real estate loans. This category of loans includes commercial purpose loans secured by either commercial properties such as office buildings, hotels, factories, warehouses, medical facilities and retail establishments, or residential real estate, usually the residence of the business owner or investment properties. The category also includes
- 23 -
construction and land development loans. Income on commercial real estate loans increased $9,905,000. The increase in average balances of $97,231,000, or 13.6%, contributed an increase in interest income of $4,757,000; the 64 basis-point increase in yield, from 4.89% in 2023 to 5.53% in 2024 contributed $5,148,000 to the increase in interest income.
Income on commercial and industrial loans, the second largest category, increased $338,000 with average balances increasing $4,032,000 resulting in an increase to interest income of $303,000 and an average yield increase of two basis points to 7.52% in 2024 from 7.50% in 2023, contributing to a $35,000 increase in interest income. Many of the loans in this category are indexed to the prime interest rate.
Tax-exempt loan income increased $14,000 to $721,000 in 2024. When comparing the same periods, average balances decreased $1,369,000 to $18,507,000, which contributed a $48,000 decrease in interest income. The average yield on the tax-exempt loan portfolio increased from 3.56% for 2023 to 3.90% for 2024, resulting in an increase in interest income of $62,000.
QNB strives to be the “local consumer lender of choice.” QNB continues to focus on its retail lending efforts by adding new product offerings and by marketing and promotion. Overall, retail lending balances increased $10,257,000 and interest income for retail lending increased $1,230,000 in 2024 compared with 2023, driven by a 41 basis-point increase in yield.
Given the low yields on alternative investment securities, QNB retained certain fixed rate and hybrid adjustable-rate mortgages to borrowers with high credit scores and low loan-to-value ratios. As a result, average residential mortgage loans secured by first lien 1-4 family residential mortgages increased by $2,941,000, or 2.7%, to $110,320,000 for 2024. The average yield on the residential real estate portfolio increased 39 basis points to 4.12% for 2024 compared to 3.73% for 2023. Overall, interest income for this segment grew $537,000 in 2024.
Income on home equity loans increased by $681,000 when comparing 2024 and 2023. During 2024 and 2023, QNB offered attractive rates on both variable rate and fixed rate home equity loans. Average balances in home equity loans increased $7,570,000, or 13.0%, to $65,714,000 when comparing 2024 and 2023. The yield on the home equity portfolio increased 29 basis points to 6.81% when comparing the two years. Home values have continued to grow; therefore, we expect the demand for home equity loans will continue.
Interest income on consumer loans increased $12,000. Consumer loans at QNB experienced a decline in average balances in 2024 of $254,000, or 6.5%, led by a decline in student loans. Student loan balances are no longer insured, and QNB ceased funding originations through its third-party provider during the second half of 2018; average balances decreased $302,000 and interest income decreased $2,000 when comparing 2024 and 2023. Student loans are primarily variable rate loans and interest income was favorably impacted by a 160 basis-point increase in rate.
2023 versus 2022
Income on commercial real estate loans increased $8,141,000. The increase in average balances of $76,271,000, or 12.0%, contributed an increase in interest income of $3,204,000; the 69 basis-point increase in yield, from 4.20% in 2022 to 4.89% in 2023 contributed $4,937,000 to the increase in interest income.
Income on commercial and industrial loans, the second largest category, increased $2,912,000 with average balances decreasing $7,613,000 resulting in a decrease to interest income of $389,000, this decrease was more than offset by the positive impact from an increase in average yield of 240 basis points to 7.50% in 2023 from 5.10% in 2022, contributing to a $3,301,000 increase in interest income.
Tax-exempt loan income increased $31,000 to $707,000 in 2023. When comparing the same periods, average balances increased $98,000 to $19,876,000, which contributed a $3,000 increase in interest income. The average yield on the tax-exempt loan portfolio increased from 3.42% for 2022 to 3.56% for 2023, resulting in an increase in interest income of $28,000.
Retail lending balances increased $4,348,000 and interest income for retail lending increased $1,885,000 in 2023 compared with 2022, driven by a 103 basis-point increase in yield. Average residential mortgage loans secured by first lien 1-4 family residential mortgages increased by $2,982,000, or 2.9%, to $107,379,000 for 2023. The average yield on the residential real estate portfolio increased 39 basis points to 3.73% for 2023 compared to 3.34% for 2022. Overall, interest income for this segment grew $521,000 in 2023.
Income on home equity loans increased by $1,335,000 when comparing 2023 and 2022. Average balances in home equity loans increased $1,989,000, or 3.5%, to $58,144,000 when comparing 2023 and 2022. The yield on the home equity portfolio increased 214 basis points to 6.52% when comparing the two years.
- 24 -
Interest income on consumer loans increased $29,000. Consumer loans at QNB experienced a decline in average balances in 2023 of $623,000, or 13.8%, led by a decline in installment loans and student loans. Installment loan average balances declined $164,000 and interest declined $2,000. Student loan balances are no longer insured, and QNB ceased funding originations through its third-party provider during the second half of 2018; average balances decreased $448,000 and interest income increased $25,000 when comparing 2023 and 2022.
Deposits and Borrowings
2024 versus 2023
Total interest expense for 2024 was $41,206,000 compared with $28,927,000 for 2023, an increase of $12,279,000. Interest expense on deposits increased $12,475,000 and interest expense on borrowed funds decreased $196,000 when comparing the two years. The rate paid on interest-bearing deposits increased 70 basis points; the rate paid on borrowings increased 101 basis points, when comparing the two periods. Deposit and borrowing costs increase due to an increase in competition for deposits when rates rise. QNB offered several new interest-bearing demand and money market products offering higher yields to retain large depositors and reduce the reliance on higher-cost short-term borrowings.
Average non-interest-bearing demand accounts decreased $20,252,000, or 9.7%, to $188,525,000 for 2024. Average interest-bearing demand accounts increased $30,600,000, or 9.7%, to $346,590,000 for 2024 compared with 2023, with interest expense on interest-bearing demand accounts increasing $1,325,000 to $3,225,000 for 2024. The average rate paid increased 33 basis points to 0.93% for 2024 compared to 0.60% for 2023. Interest-bearing business demand average balances increased by $41,304,000, or 58.2%, and related interest expense increased $1,346,000, or 45 basis points in yield, when comparing the two years. Also included in the interest-bearing demand category is QNB-Rewards checking, a tiered-rate retail checking account product. In order to receive the high rate a customer must receive an electronic statement, have one direct deposit or other ACH transaction and have at least 12 debit card purchase transactions post and clear per statement cycle. If these qualifications are not met, the rate paid is 0.10%. For 2024, the average balance in this product was $91,932,000 and the related interest expense was $373,000 for an average cost of funds of 0.41%. In comparison, the average balance in this product for 2023 was $93,336,000 and the related interest expense was $389,000 for an average cost of funds of 0.42%. The rates paid on the QNB-Rewards product, assuming qualifications are met, is attractive relative to competitors’ offerings as well as other QNB products. This product also generates fee income through the use of the debit card. The average balance of other interest-bearing demand accounts included in this category decreased from $151,647,000 for 2023 to $142,347,000 for 2024. The average rate paid on these balances was 0.05% in 2023 and 2024.
Average money market accounts increased $54,067,000, or 29.5%, to $237,071,000 for 2024 compared with 2023. Interest expense on money market accounts increased $3,358,000 to $8,181,000 for 2024 compared with 2023. The average interest rate paid on money market accounts was 3.45% for 2024, an increase of 81 basis points compared with 2023.
Interest expense on municipal interest-bearing demand accounts increased $927,000 to $6,794,000 for 2024. The average balance of municipal interest-bearing demand accounts increased $14,836,000, or 11.3%, to $146,446,000 and the average interest rate paid on these accounts increased 18 basis points to 4.64% for 2024 from 4.46% for 2023. Most of these accounts are indexed to the Federal funds rate with negotiated rate floors between 0.15% and 0.35%. Many of these deposits are seasonal in nature and are received during the third quarter as tax receipts are collected and are withdrawn over the course of the next year.
QNB’s online e-Savings product is the largest category of savings deposits and was created to compete with other online savings accounts. Average e-Savings balances decreased $48,383,000, or 18.9%, to $207,869,000 in 2024 compared with $256,252,000 in 2023. The average cost of funds on these accounts was 1.71% for 2024 and 1.57% for 2023. The yield on this account may rise along with market rates and as competition for savings balances increases. Traditional statement savings accounts and club accounts are also included in the savings category and decreased on average by $15,484,000, or 16.7%, to $77,142,000. The average rate paid on total savings accounts was 0.12% for 2024, a six basis-point decrease from 0.18% for 2023 and interest expense decreased $79,000, to $91,000 from $170,000 over the same period.
Interest expense on time deposits increased $7,401,000, to $15,625,000 in 2024, due to an increase in average balances of $98,593,000 in 2024, to $365,851,000 and a 119 basis-point increase in yield, from 3.08% in 2023 to 4.27% in 2024. Similar to fixed-rate loans and investment securities, time deposits reprice over time and, therefore, have less of an immediate impact on costs in either a rising or falling rate environment. However, the maturity and repricing characteristics of time deposits tend to be shorter.
Approximately $350,837,000, or 92.0%, in time deposits will reprice or mature over the next 12 months compared with 82.0% of the portfolio at December 31, 2023. The average rate paid on these time deposits is approximately 4.37%.
- 25 -
Short-term borrowings are comprised of sweep accounts structured as repurchase agreements with our commercial customers, overnight FHLB borrowing and short-term FRB borrowing with average balances in 2024 of $38,455,000, $98,000 and $9,973,000, respectively. Interest expense on short-term borrowings decreased $2,125,000 to $1,148,000 when comparing the two years. During this period average balances of repurchase agreements decreased $14,699,000 with a 44 basis-point increase in average rate paid, resulting in a decrease of cost of funds of $36,000. The average balances of borrowings from the FHLB decreased $15,747,000 with a 20 basis-point increase in average rate paid, resulting in a decrease in cost of funds of $772,000. During the first quarter of 2023, QNB borrowed $50,000,000 from the FRB under its Bank Term Funding Program and locked in a rate of 4.39%; this borrowing was paid off in the first quarter of 2024.
Average long-term debt increased $12,157,000 in 2024 to $27,869,000 with a 57 basis-point increase in average yield from 4.10% in 2023 to 4.67% in 2024.
During the third quarter of 2024, the QNB Corp. issued $40,000,000 of subordinated debt; the carrying value net of deferred costs was $39,068,000 at December 31, 2024. The average yield of 9.34% includes the amortization of the deferred costs. The subordinated debt will initially bear interest at 8.875% per annum from and including the original issue date of the subordinated notes to but excluding September 1, 2029, payable semi-annually in arrears. From September 1, 2029, through maturity or up to an early redemption date, the interest rate resets quarterly to an interest rate per annum equal to the then current three-month SOFR plus a spread, payable quarterly in arrears. On or after the fifth anniversary of the original issue date through maturity, the QNB has the option to redeem the subordinated debt, in whole or in part, on any scheduled interest payment date. QNB may also redeem the subordinated debt in whole at any time in the event of certain specified events. The subordinated debt will mature on September 1, 2034.
The yield on interest-bearing liabilities increased 69 basis points to 2.80% for 2024.
2023 versus 2022
Total interest expense for 2023 was $28,927,000 compared with $7,924,000 for 2022, an increase of $21,003,000. Interest expense on deposits increased $18,097,000 and interest expense on borrowed funds increased $2,906,000 when comparing the two years. The rate paid on interest-bearing deposits increased 144 basis points; the rate paid on borrowings increased 209 basis points, when comparing the two periods. Deposit and borrowing costs increase due to an increase in competition for deposits when rates rise.
The composition of the deposit accounts changed in 2023 as QNB offered several new interest-bearing demand and money market products offering higher yields to retain large depositors and reduce the reliance on higher-cost short-term borrowings. Average interest-bearing demand accounts decreased $29,064,000, or 8.4%, to $315,990,000 for 2023 compared with 2022, with interest expense on interest-bearing demand accounts increasing $967,000 to $1,900,000 for 2023. The average rate paid increased 33 basis points to 0.60% for 2023 compared to 0.27% for 2022. Interest-bearing business demand average balances decreased by $2,188,000, or 3.0%, and related interest expense increased $950,000, or 136 basis points in yield, when comparing the two years. For 2023, the average balance in QNB-Rewards checking was $93,336,000 and the related interest expense was $389,000 for an average cost of funds of 0.42%. In comparison, the average balance in this product for 2022 was $104,122,000 and the related interest expense was $366,000 for an average cost of funds of 0.35%. The average balance of other interest-bearing demand accounts included in this category decreased from $167,737,000 for 2022 to $151,647,000 for 2023. The average rate paid on these balances was 0.05% in 2022 and 0.05% in 2023.
Average money market accounts increased $45,174,000, or 32.8%, to $183,004,000 for 2023 compared with 2022. Interest expense on money market accounts increased $4,206,000 to $4,823,000 for 2023 compared with 2022. The average interest rate paid on money market accounts was 2.64% for 2023, an increase of 219 basis points compared with 2022. A new High Yield money market account was introduced in 2023.
Average e-Savings balances decreased $79,238,000, or 23.6%, to $256,252,000 in 2023 compared with $335,490,000 in 2022. The average cost of funds on these accounts was 1.57% for 2023 and 0.59% for 2022. The yield on this account may rise along with market rates and as competition for savings balances increases. Traditional statement savings accounts and club accounts are also included in the savings category and decreased on average by $14,988,000, or 13.9%, to $92,626,000. The average rate paid on total savings accounts was 0.18% for 2023, a one basis-point increase from 0.17% for 2022 and interest expense decreased $9,000, to $170,000 from $179,000 over the same period.
Interest expense on time deposits increased $6,803,000, to $8,224,000 in 2023, due to an increase in average balances of $98,432,000 in 2023, to $267,258,000 and a 224 basis-point increase in yield, from 0.84% in 2022 to 3.08% in 2023.
- 26 -
Short-term borrowings are comprised of sweep accounts structured as repurchase agreements with our commercial customers, overnight FHLB borrowing and short-term FRB borrowing with average balances in 2023 of $53,154,000, $15,845,000 and $39,863,000, respectively. Interest expense on short-term borrowings increased $2,412,000 to $3,273,000 when comparing the two years. During this period average balances of repurchase agreements decreased $15,496,000 with an 89 basis-point increase in average rate paid, resulting in an increase of cost of funds of $398,000. The average balances of borrowings from the FHLB decreased $1,381,000 with a 189 basis-point increase in average rate paid, resulting in an increase in cost of funds of $258,000.
Average long-term debt was $15,712,000 with an average yield of 4.10%. The yield on interest-bearing liabilities increased 151 basis points to 2.11% for 2023.
Provision for Credit Losses
The provision for credit losses represents management's determination of the amount necessary to be charged to operations to bring the allowance for credit losses on loans and the allowance for credit losses on unused commitments to amounts that are intended to absorb historical loss experience, current conditions and reasonable and supportable forecasts, in the outstanding loan portfolio and the unused commitments. Management believes that it uses the best information available to make determinations about the adequacy of these allowances and that it has established its existing allowances for credit losses on loan and on unused commitments in accordance with U.S. GAAP. The determination of an appropriate level for the allowance for credit losses on loans and the allowance for credit losses on unused commitments are based upon an analysis of the risks inherent in QNB’s loan portfolio. QNB recorded a reversal of the provision for credit losses on loans of $49,000 for the twelve months ended December 31, 2024 compared to a reversal of the provision for loan losses of $828,000 for the twelve-month period ended December 31, 2023 and a reversal of the provision for loan losses of $850,000 for the twelve-month period ended December 31, 2022. QNB recorded a reversal of the provision for credit losses on unused commitments of $19,000 during 2024 compared to a reversal of the provision for credit losses on unused commitments of $16,000 during 2023. The 2022 period adjustments for the reserve for unused commitments were included in non-interest expense. Net loan charge-offs were $59,000, or 0.01% of total average loans for 2024 compared with net loan recoveries were $238,000, or 0.02% of total average loans for 2023 and net loan recoveries were $197,000, or 0.02% of total average loans for 2022. The majority of the recoveries during 2024, 2023 and 2022, were on these previously charged off commercial loans. 2024 was offset by net charge-offs in overdrafts and student loans. Deterioration in credit quality resulting in charge-offs or significant growth in the loan portfolio may result in a higher provision for credit losses on loans in 2025.
Non-Interest Income
Non-interest income comparison
Change from prior year
$ Change
% Change
Year ended December 31,
2024 to
2023 to
2024 to
2023 to
Fees for services to customers
$
1,770
$
1,651
$
1,614
$
$
7.2
%
2.3
%
ATM and debit card
2,740
2,735
2,719
0.2
0.6
Retail brokerage and advisory
(386
)
-44.8
9.4
Bank-owned life insurance
(41
)
3.8
-11.4
Merchant
(46
)
-
-11.7
0.0
Net (loss) gain on sale of investment securities
(2,077
)
2,996
(2,343
)
N/M
N/M
Unrealized gain (loss) on investment equity securities
(215
)
(1,026
)
(465
)
1,276
N/M
N/M
Net gain on sale of loans
N/M
N/M
Other
(172
)
-25.1
12.6
Total
$
6,913
$
4,837
$
5,731
$
2,076
$
(894
)
42.9
%
-15.6
%
N/M - Not Meaningful
2024 versus 2023
QNB, through its core banking business, generates various fees and service charges. Total non-interest income includes service charges on deposit accounts, ATM and debit card income, retail brokerage and advisory income, income on bank-owned life insurance, merchant income and gains and losses on investment securities and residential mortgage loans. Total non-interest income was $6,913,000 in 2024 compared with $4,837,000 in 2023, an increase of $2,076,000. Excluding the unrealized (losses) gains on equity securities and gains (losses) on sales of investment securities, noninterest income was $6,209,000 in 2024 compared to $6,664,000 in 2023, a decrease of $455,000.
- 27 -
Fees for services to customers are primarily comprised of service charges on deposit accounts. These fees were $1,770,000 for 2024, an increase of $119,000 from 2023. Overdraft income, which represented approximately 75% of total fees for services to customers in 2024 and 78% in 2023, increased by $38,000, or 2.9%, when comparing 2024 to 2023. The increase in overdraft income primarily reflects an increase in the number of overdraft occurrences. Other fees for services increased $119,000 primarily due to the increase in deposit accounts.
ATM and debit card income is primarily comprised of transaction income on debit cards and ATM cards and ATM surcharge income for the use of QNB’s ATM machines by non-QNB customers. ATM and debit card income was $2,740,000 in 2024, an increase of $5,000 from the amount recorded in 2023. Debit card interchange income increased $10,000 to $2,695,000 in 2024, while ATM surcharge income and monthly card fees income decreased $5,000 to $45,000. The growth in checking accounts and card usage contributed to the increase in debit card income, including the QNB Rewards checking product, a tiered-rate checking account which requires, among other terms, the posting of a minimum of twelve debit card purchase transactions per statement cycle to receive the high interest rate.
QNB provides securities and advisory services under the name QNB Financial Services through an independent third-party registered Broker/Dealer and Registered Investment Advisor. QNB receives a percentage of the revenue generated but is responsible for salaries and expenses of advisors who are QNB employees. Retail brokerage and advisory revenue was $476,000 for 2024 compared with $862,000 for 2023, a decrease of $386,000, or 44.8%. Advisory fees decreased $461,000 comparing 2024 to 2023 due to a decrease in client balances following employee turnover. Sales in front-loaded products, such as annuities and alternative investments (which include private equity, hedge funds, managed futures, real estate “REITs”, commodities and derivatives contracts) and trailing income related to these increased $75,000 in 2024 over 2023. In 2024, the net income provided by QNB Financial Services was $112,000, compared with $186,000 in net income for 2023.
Income on bank-owned life insurance (“BOLI”) represents the earnings and death benefits on life insurance policies in which the Bank is the beneficiary. The insurance carriers reset the rates on these policies annually taking into consideration the interest rate environment as well as mortality costs. The existing policies have rate floors which limit how low the earnings rate can go. Some of these policies are currently at their floor. Income on these policies during 2024 was $332,000 compared to $320,000 for 2023.
Merchant income represents fees charged to merchants for the Bank’s handling of credit card or charge sales. Merchant income was $348,000 for 2024, a decrease of $46,000 compared to the amount reported in 2023.
The fixed-income securities portfolio represents a significant portion of QNB’s earning assets and is also a primary tool in liquidity and asset/liability management. QNB actively manages its fixed-income portfolio to take advantage of changes in the shape of the yield curve, changes in spread relationships in different sectors, and for liquidity purposes. Management continually reviews strategies that will result in an increase in the yield or improvement in the structure of the investment portfolio, including monitoring credit and concentration risk in the portfolio. In addition, the Corporation owned a small portfolio of equity securities for the purpose of generating both dividend income and capital appreciation; this equity portfolio was sold during 2024.
Net gains (losses) on sales of investment securities increased $2,996,000 to a net gain of $919,000 for the year ended December 31, 2024, compared with a net loss of $2,077,000 for the year ended December 31, 2023. Net gains from sales of equity securities were $2,015,000 in 2024 compared to a net loss of $19,000 in 2023. QNB completed the exchange offer to convert the Bank's Visa B-1 shares to B-2 and C shares in the second quarter of 2024; QNB sold the Visa Class C shares in the fourth quarter of 2024 and realized a gain of $1,498,000. QNB sold its other equity securities and realized a gain of $517,000 during the twelve months ended December 31, 2024 compared to a loss of $19,000 for the same period of 2023. Net loss on the sale of fixed income securities were $1,096,000 for 2024 compared to a net loss of $2,058,000 for 2023. QNB improved the efficiency of its investment portfolio by executing sales of low yielding fixed rate available-for-sale securities during 2023 and 2024. QNB sold both state and municipal securities and mortgage-backed and CMO securities totaling $13,139,000 during 2024 and $33,213,000 during 2023. Unrealized losses on equity securities of $215,000 were recorded during 2024 compared to unrealized gains of $250,000 during 2023.
The net gain on residential mortgage sales is directly related to the volume of mortgages sold and the timing of the sales relative to the interest rate environment. Residential mortgage loans to be sold are identified at origination. The net gain on the sale of residential mortgage loans was $29,000 and $16,000 for 2024 and 2023, respectively. Mortgage financing activity was greater in 2024, due to available properties. Proceeds from the sale of residential mortgages were $1,765,000 and $989,000 for the years ended December 31, 2024 and 2023, respectively. Included in the gains on the sale of residential mortgages in 2024 and 2023 are $13,000 and $7,000, respectively, related to the recognition of mortgage servicing assets.
- 28 -
QNB retains servicing rights for residential mortgages sold in the secondary market. A servicing fee is retained on all mortgage loans sold and serviced. QNB recognizes its obligation to service financial assets that are retained in a transfer of assets in the form of a servicing asset. The servicing asset is amortized in proportion to, and over, the period of net servicing income or loss. On a quarterly basis, servicing assets are assessed for impairment based on their fair value. Mortgage servicing income of $116,000 for 2024 and $125,000 for 2023 is included in other non-interest income.
Other non-interest income, excluding mortgage servicing income, was $398,000 for 2024, a decrease of $163,000 from the amount recorded in 2023. Other non-interest income included sales tax refunds in 2023 of $117,000 and broker-dealer conversion costs reimbursements of $18,000 in 2023. Losses on premises and equipment were $14,000 in 2024 compared to gains in 2023 of $6,000. Letter of credit fees decreased $16,000 when comparing 2024 to 2023.
2023 versus 2022
Total non-interest income was $4,837,000 in 2023 compared with $5,731,000 in 2022, a decrease of $894,000. Excluding the unrealized (losses)gains on equity securities, gains(losses) on sales of investment securities and gains on sales of loans, noninterest income was $6,648,000 in 2023 compared to $6,485,000 in 2022, an increase of $163,000.
Fees for services to customers are primarily comprised of service charges on deposit accounts. These fees were $1,651,000 for 2023, an increase of $37,000 from 2022. Overdraft income, which represented approximately 78% of total fees for services to customers in both 2023 and 2022, increased by $32,000, or 2.5%, when comparing 2023 to 2022. The increase in overdraft income primarily reflects an increase in the number of overdraft occurrences.
ATM and debit card income was $2,735,000 in 2023, an increase of $16,000, or 0.6% from the amount recorded in 2022. Debit card interchange income increased $22,000, or 0.8%, to $2,686,000 in 2023, while ATM surcharge income and monthly card fees income decreased $6,000 to $49,000.
Retail brokerage and advisory revenue was $862,000 for 2023 compared with $788,000 for 2022, an increase of $74,000, or 9.4%. Advisory fees increased $27,000 comparing 2023 to 2022. Fee income from sales in front-loaded products and trailing income increased $47,000 in 2023 over 2022. In 2023, the net income provided by QNB Financial Services was $186,000, compared with $210,000 in net income for 2022.
BOLI income during 2023 was $320,000 compared to $361,000 for 2022; included in the 2022 number was a life insurance benefit of $46,000.
Net (losses) gains on sales of investment securities decreased $2,343,000 to a net loss of $2,077,000 for the year ended December 31, 2023, compared with a net gain of $266,000 for the year ended December 31, 2022. Net loss from sales of equity securities were $19,000 in 2023 compared to a net gain of $405,000 in 2022. Net loss on the sale of fixed income securities were 2,058,000 for 2023 compared to a net loss of $139,000 for 2022. QNB sold both state and municipal securities and mortgage-backed and CMO securities totaling $33,213,000 during 2023. Unrealized gains on equity securities of $250,000 were recorded during 2023 compared to unrealized losses of $1,026,000 during 2022.
The net gain on the sale of residential mortgage loans was $16,000 and $6,000 for 2023 and 2022, respectively. Mortgage financing activity was greater in 2023, due to available properties. Proceeds from the sale of residential mortgages were $989,000 and $304,000 for the years ended December 31, 2023 and 2022, respectively. Included in the gains on the sale of residential mortgages in 2023 and 2022 are $7,000 and $2,000, respectively, related to the recognition of mortgage servicing assets. Mortgage servicing income of $125,000 for 2023 and $143,000 for 2022 is included in other non-interest income.
Other non-interest income, excluding mortgage servicing income, was $561,000 for 2023, an increase of $95,000 from the amount recorded in 2022. Other non-interest income included sales tax refunds in 2023 of $117,000 and broker-dealer conversion costs reimbursements of $18,000 in 2023 compared to $39,000 in 2022. Title company income decreased $33,000, credit card income increased $21,000 and letter of credit fees increased $16,000 when comparing 2023 to 2022.
- 29 -
Non-Interest Expense
Non-interest expense comparison
Change from prior year
$ Change
% Change
Year ended December 31,
2024 to
2023 to
2024 to
2023 to
Salaries and employee benefits
$
19,741
$
19,026
$
17,306
$
$
1,720
3.8
%
9.9
%
Net occupancy
2,207
2,223
2,195
(16
)
-0.7
1.3
Furniture and equipment
3,973
3,602
2,917
10.3
23.5
Marketing
1,044
8.3
10.8
Third party services
2,595
2,422
2,474
(52
)
7.1
-2.1
Telephone, postage and supplies
(66
)
(177
)
-11.6
-23.7
State taxes
1,004
(637
)
57.2
-63.4
FDIC insurance premiums
1,156
1,058
9.3
37.8
Other
3,686
3,876
3,210
(190
)
-4.9
20.7
Total
$
35,484
$
34,109
$
31,492
$
1,375
$
2,617
4.0
%
8.3
%
2024 versus 2023
Non-interest expense is comprised of costs related to salaries and employee benefits, net occupancy, furniture and equipment, marketing, third party services, FDIC insurance premiums, regulatory assessments and taxes and various other operating expenses. Total non-interest expense was $35,484,000 in 2024, an increase of $1,375,000, or 4.0%, from the $34,109,000 in 2023. QNB’s overhead efficiency ratio, which represents the percentage of each dollar of revenue that is used for non-interest expense, is calculated by taking non-interest expense divided by net operating revenue (tax-equivalent net interest income plus non-interest income). QNB’s efficiency ratios for 2024, 2023 and 2022 were 70.5%, 74.8%, and 61.8%, respectively. The favorable decrease in the 2024 efficiency ratio is primarily due to an increase in tax-equivalent net interest income of $2,681,000 in 2024 over 2023.
Salaries and benefits expense is the largest component of non-interest expense. QNB monitors, using various surveys, the competitive salary and benefit information in its markets and makes adjustments when appropriate. Salaries and benefits expense for 2024 was $19,741,000, an increase of $715,000, or 3.8%, compared with $19,026,000 reported in 2023. Salary expense and related payroll taxes for 2024 was $16,882,000, an increase of $893,000 compared with $15,989,000 reported in 2023. Benefit expense for 2024 was $2,859,000, a decrease of $178,000, or 5.9%, from the amount recorded in 2023. Medical premiums decreased $225,000 primarily due to a decrease in claims. Retirement plan matching and safe harbor increased $44,000 compared to 2023. QNB utilized unvested forfeited 401(k) contributions to offset retirement plan matching in 2024 and 2023. During 2023, the Bank adopted a Nonqualified Deferred Compensation Plan ("NQDC Plan"). The purpose of the NQDC Plan is to provide a deferred compensation vehicle to which the Bank may credit discretionary amounts on behalf of key employees for recruitment and reward. NQDC Plan expense was $136,000 for the year ended December 31, 2024 compared to $108,000 for the year ended December 31, 2023.
Net occupancy and furniture and equipment expense increased $355,000, to $6,180,000 when comparing 2024 to 2023, due primarily to increased software maintenance.
Marketing expense was $1,044,000 for 2024, an $80,000 increase from the expense recorded in 2023. QNB’s contributions and sponsorships for not-for-profit organizations, events and clubs in the communities it serves are included in public relations expense which decreased $28,000 in 2024 Advertising and sales promotions costs increased $119,000 in 2024 over 2023.
Third party services are comprised of professional services, including legal, accounting, auditing and consulting services, as well as fees paid to outside vendors for support services of day-to-day operations. These support services include correspondent banking services, statement printing and mailing, investment security safekeeping and supply management services. Third party services increased $173,000.
Telephone, postage and supplies expense decreased $66,000 to $505,000 in 2024 compared with 2023, primarily due to reduction in transportation costs for supplies and mail delivery services due to usage.
The premium assessment formula for small institutions is based on asset growth and related risk assumptions determined by the FDIC as well as capital. Small institutions, for FDIC premium assessments purposes, are defined as those with total consolidated assets less than $10 billion. FDIC insurance premium expense increased $98,000 in 2024 due to an increase in capital.
- 30 -
State tax expense represents the payment of the Pennsylvania Shares Tax and Pennsylvania sales and use tax. State tax expense was $577,000 and $367,000 for the years 2024 and 2023, respectively. The Pennsylvania Shares Tax is based primarily on the equity of the Bank. The increase in Pennsylvania Shares Tax is a result of higher capital and a decrease in tax credits.
Other operating expenses for the twelve months ended December 31, 2024 decreased $190,000, or 4.9%. There was a decrease of $478,000 in write-offs primarily due to fraud on customer accounts offset by increases in debit card expense of $233,000 and the recording of a potential expense of $85,000 related to the Visa stock exchange make-whole agreement.
2023 versus 2022
Total non-interest expense was $34,109,000 in 2023, an increase of $2,617,000, or 8.3%, from the $31,492,000 in 2022. Salaries and benefits expense for 2023 was $19,026,000, an increase of $1,720,000 compared with $17,306,000 reported in 2022. Salary expense and related payroll taxes for 2023 was $15,989,000, an increase of $1,250,000 compared with $14,739,000 reported in 2022. Benefit expense for 2023 was $3,037,000, an increase of $470,000, or 18.3%, from the amount recorded in 2022. Medical premiums increased $319,000 primarily due to an increase in claims. Retirement plan matching and safe harbor increased $101,000 compared to 2022. QNB utilized unvested forfeited 401(k) contributions to offset retirement plan matching in 2023 and 2022. NQDC Plan expense was $108,000 for the year ended December 31, 2023.
Net occupancy and furniture and equipment expense increased $713,000, to $5,825,000 when comparing 2023 to 2022, due primarily to increased software maintenance.
Marketing expense was $964,000 for 2023, a $94,000 increase from the expense recorded in 2022. QNB’s contributions and sponsorships for not-for-profit organizations, events and clubs in the communities it serves are included in public relations expense which increased $97,000 in 2023.
Third party services decreased $52,000; QNB incurred additional legal, consulting and other third-party services to implement core-processing software in 2022.
Telephone, postage and supplies expense decreased $177,000 to $571,000 in 2023 compared with 2022, primarily due to reduction in transportation costs for supplies and mail delivery services due to usage.
FDIC insurance premium expense increased $290,000 in 2023 due to an increase in the assessment rate.
State tax expense represents the payment of the Pennsylvania Shares Tax and Pennsylvania sales and use tax. State tax expense was $367,000 and $1,004,000 for the years 2023 and 2022, respectively.
Other operating expenses for the twelve months ended December 31, 2022 increased $666,000, or 20.7%. There was an increase of $499,000 in write-offs primarily due to fraud on customer accounts. Director fees increase $74,000 primarily due to additional expense related to the QNB Corp. 2023 Non-Employee Director Compensation Plan. Business development expenses increased $49,000 as in-person meetings increased. There was a $43,000 increase in loan work-out costs as there was a large recovery in 2022 of $45,000 to reimburse the Bank for insurance costs.
Income Taxes
Applicable income tax expense and effective tax rates were $2,911,000, or 20.3% for 2024, $2,244,000, or 19.1% for 2023 and $3,665,000, or 18.7% for 2022. The primary reason for the increased effective tax rate for 2023 over 2022 was due to a decrease in allowable tax-exempt interest due to higher disallowed interest expense related to a higher cost of funds and an increase in the valuation allowance. The primary reason for the increased effective tax rate for 2022 over 2021 was due to the state taxes on the realized gains on equity sales securities in 2022.
QNB expects the effective tax rate in 2025 to be less than the 21% corporate rate, due to its holdings of tax-free assets, including municipal bonds, municipal loans, and life insurance contracts. For a more comprehensive analysis of income tax expense and deferred taxes, refer to Note 12 in the Notes to Consolidated Financial Statements.
- 31 -
Financial Condition
ASSETS
The following table presents total assets at the dates indicated:
Change from prior year
Year ended December 31,
Amount
Percent
Cash and cash equivalents
$
50,713
$
62,657
$
(11,944
)
-19.1
%
Investment securities AFS
546,559
490,182
56,377
11.5
Investment equity securities
-
5,910
(5,910
)
-100.0
Restricted investment in bank stocks
5,436
2,730
2,706
99.1
Loans held for sale
20.9
Loans receivable
1,216,048
1,093,533
122,515
11.2
Allowance for credit losses on loans
(8,744
)
(8,852
)
1.2
Premises and equipment, net
17,255
14,952
2,303
15.4
Bank-owned life insurance
11,937
11,946
(9
)
-0.1
Accrued interest receivable
4,965
6,101
(1,136
)
-18.6
Other assets
26,061
26,610
(549
)
-2.1
Total assets
$
1,870,894
$
1,706,318
$
164,576
9.6
%
Cash and interest-earning deposits
Total cash and cash equivalents decreased $11,944,000 to $50,713,000 at December 31, 2024 from $62,657,000 at December 31, 2023. QNB had interest-bearing balances at the Federal Reserve Bank of $35,867,000 compared with $48,755,000 and interest-bearing balances in a brokerage account of $3,414,000 compared with $565,000 at December 31, 2024 and December 31, 2023, respectively. At December 31, 2024 and December 31, 2023 there was $0 and $1,850,000, respectively, held as collateral against the fair value swaps held a correspondent bank. Net cash was provided by operating and financing activities. Proceeds received from deposit growth and net proceeds from the issuance of long-term and subordinated debt more than offset loan growth and net repayment of short-term borrowings, excess funds were used to purchase investment securities. The maturity, prepayment and sales of investment securities were also reinvested in investment securities.
Investment Securities and Other Short-Term Investments
At December 31, 2024 and 2023, QNB had no Federal funds sold.
QNB accounts for its investments by classifying securities into four categories. Debt securities that are bought and held principally for the purpose of selling them in the near term are classified as trading securities and reported at fair value, with unrealized gains and losses included in earnings. Debt securities that QNB has the positive intent and ability to hold to maturity are classified as held-to-maturity securities and reported at amortized cost. Debt securities not classified as either held-to-maturity securities or trading securities are classified as available-for-sale securities and reported at fair value, with unrealized gains and losses, net of tax, excluded from earnings and reported as a separate component of shareholders’ equity. Equity investments with readily determinable fair values are measured at fair value with changes in fair value recognized in net income. Management determines the appropriate classification of securities at the time of purchase.
- 32 -
Investment Portfolio History
December 31,
Investment Securities Available-for-Sale
U.S. Treasuries
$
18,010
$
6,451
$
U.S. Government agency
66,908
74,122
86,709
State and municipal
86,352
89,189
95,367
U.S. Government agencies and sponsored enterprises (GSEs):
Mortgage-backed
198,510
224,238
256,161
Collateralized mortgage obligations (CMOs)
161,646
89,973
101,672
Corporate debt and money market funds
15,133
6,209
6,315
Total investment securities available-for-sale
$
546,559
$
490,182
$
546,525
Equity Investments
Equity
$
-
$
5,910
$
12,056
Total equity investments
$
-
$
5,910
$
12,056
Total investment securities
$
546,559
$
496,092
$
558,581
Investments Available-For-Sale Debt Securities
Available-for-sale investment securities include securities that management intends to use as part of its liquidity and asset/liability management strategy. These securities may be sold in response to changes in market interest rates, changes in the securities prepayment or credit risk, the need for liquidity, or growth in loan demand. At December 31, 2024, the fair value of investment debt securities available-for-sale, including the impact of fair value hedges, was $546,559,000, or $79,832,000 less the amortized cost of $626,391,000. This compares to a fair value of $490,182,000, or $85,996,000 less the amortized cost of $576,178,000, at December 31, 2023. The available-for-sale portfolio had a weighted average maturity of approximately 6.6 years at December 31, 2024 and 6.9 years at December 31, 2023 and a weighted average tax-equivalent yield of 2.40% and 1.81% at December 31, 2024 and 2023, respectively.
At December 31, 2024, approximately 78% of QNB’s investment securities available-for-sale were either U.S. Government agency debt securities, U.S. Government agency issued mortgage-backed securities or CMOs. As of December 31, 2024, QNB held no securities of any one issue or any one issuer (excluding the U.S. Government and its agencies) that were in excess of 10% of shareholders’ equity.
The QNB investment portfolio represents a significant portion of earning assets and interest income. QNB actively manages the investment portfolio in an attempt to maximize earnings, while considering liquidity needs, interest rate risk and credit risk. The decrease of the investment portfolio as a percent of total assets in 2024 is due to the proceeds from payments, maturities and sales being used to fund loan growth. During 2024, $130,679,000 of investment securities available-for-sale were purchased compared with $14,381,000 during 2023. Proceeds from the sale of investment securities available-for-sale were $13,139,000 during 2024 compared with $33,213,000 during 2023. Proceeds from maturities, calls and prepayments were $64,959,000 during 2024 compared with $50,042,000 during 2023.
Treasury securities had a fair value of $18,010,000 at December 31, 2024 compared to $6,451,000 at December 31, 2023. Excess cash at the holding company was invested in short-term Treasury securities in 2024.
The balance of U.S. Government agency securities decreased $7,214,000 to $66,908,000 at December 31, 2024 and represents 12.2% of the available-for-sale investment portfolio, compared with 15.1% at December 31, 2023. U.S. Government agency issued CMO and MBS balances increased $45,945,000 to $360,156,000 and represents 65.9% of the available-for-sale portfolio compared with 64.1% at December 31, 2023. These bonds provide monthly cash flow to be reinvested in either loans or other securities, potentially at higher yields as rates increase.
The balance of municipal securities decreased $2,837,000 to $86,352,000 at December 31, 2024, representing 15.8% of the available-for-sale portfolio compared with 18.2% at December 31, 2023. QNB focuses on the financial performance of the underlying issuer for municipal bond purchases in addition to the bond rating of the issuer or the rating of bond insurer, if present.
- 33 -
QNB owns one collateralized debt obligations (“CDO”) in the form of a pooled trust preferred security and is included in the Corporate debt category. The security is comprised of securities issued by banks or bank holding companies. QNB owns the mezzanine tranche of this security. The security is structured so that the senior and mezzanine tranches are protected from defaults by over-collateralization and cash flow default protection provided by subordinated tranches. The trust preferred security the Bank continues to hold has a carrying balance of $51,000 at December 31, 2024 and represents the senior-most obligation of the trust. There was no credit-related impairment charge during 2024, 2023 or 2020. Future estimates of fair value of the remaining security could require recording additional impairment charges through earnings. For additional detail on these securities see Note 18 of the Notes to Consolidated Financial Statements.
The weighted average maturity is based on the stated contractual maturity or likely call date of all securities except for MBS and CMOs, which are based on estimated average life. The maturity of the portfolio could become shorter if interest rates decline and prepayments on MBS and CMOs increase or securities are called. However, the estimated average life could lengthen if interest rates were to increase and principal payments on MBS and CMOs slowed or securities anticipated to be called extend past their call date.
Investment Portfolio Maturities and Weighted Average Yields
December 31, 2024
One year
or less
After one
year
through
five years
After five
years
through
ten years
After ten
years
Total
Investment Securities Available-for-Sale
U.S. Treasuries
Fair value
$
18,010
$
-
$
-
$
-
$
18,010
Weighted average yield
4.62
%
-
-
-
4.62
%
U.S. Government agency:
Fair value
-
52,672
14,236
-
$
66,908
Weighted average yield
-
1.08
%
1.51
%
-
1.17
%
State and municipal:
Fair value
-
1,477
24,189
60,686
86,352
Weighted average yield
-
1.56
%
2.17
%
1.98
%
2.03
%
Mortgage-backed:
Fair value
65,376
133,004
-
198,510
Weighted average yield
2.51
%
1.53
%
1.67
%
-
1.62
%
Collateralized mortgage obligations (CMOs):
Fair value
38,768
116,327
6,091
161,646
Weighted average yield
1.99
%
3.01
%
3.46
%
5.44
%
3.42
%
Corporate debt and money market funds:
Fair value
7,842
7,054
-
15,133
Weighted average yield
6.91
%
7.62
%
5.83
%
-
6.77
%
Total fair value
$
18,837
$
166,135
$
294,810
$
66,777
$
546,559
Weighted average yield
4.57
%
2.02
%
2.51
%
2.30
%
2.40
%
Securities are assigned to categories based on stated contractual maturity except for mortgage-backed securities and CMOs which are based on anticipated payment periods and state and municipal securities which are based on pre-refunded date, if applicable. Tax-exempt securities were adjusted to a tax-equivalent basis and are based on the marginal Federal corporate tax rate of 21% and a Tax Equity and Financial Responsibility Act (“TEFRA”) adjustment for the cost of funds. Weighted average yields on investment securities available-for-sale are based on amortized cost.
Investments in Equity Securities
Equity securities decreased $5,910,000 to $0 at December 31, 2024 from $5,910,000 at December 31, 2023. Proceeds from the sale of equity securities were $8,880,000, including a net gain of $2,015,000, and purchased $1,170,000 in equities during 2024. QNB completed the exchange offer to convert the Bank's Visa B-1 shares to B-2 and C shares in the second quarter of 2024; QNB sold the Visa Class C shares in the fourth quarter of 2024 and realized a gain of $1,498,000.
- 34 -
Increases and decreases in the fair value of equity securities were recognized in net income. QNB sold its equity portfolio during 2024, reducing the volatility to earnings. However, QNB still has unconverted Visa B-2 shares, as discussed in Note 1, that in the future could be converted to equity securities with a readily determinable fair value. At December 31, 2023, the fair value of the equity securities was $5,910,000, or $215,000 above the cost of $5,695,000.
The equities portfolio comprises blue-chip large-capitalized stocks, providing a taxable equivalent dividend yield of 3.88%.
Loans
QNB’s primary business is to accept deposits and to make loans to meet the credit needs of the communities it serves. Loans are the most significant component of earning assets, and growth in loans to small businesses and residents of these communities has been a primary focus of QNB. Inherent within the lending function is the evaluation and acceptance of credit risk and interest rate risk. QNB manages credit risk associated with its lending activities through portfolio diversification, underwriting policies and procedures and loan monitoring practices.
QNB has comprehensive policies and procedures that define and govern commercial and retail loan originations and the management of risk. All loans are underwritten in a manner that emphasizes the borrowers’ capacity to pay. The measurement of capacity to pay delineates the potential risk of non-payment or default. The higher potential for default determines the need for and amount of collateral required. QNB makes unsecured commercial loans when the capacity to pay is considered substantial. As capacity lessens, collateral is required to provide a secondary source of repayment and to mitigate the risk of loss. Various policies and procedures provide guidance to the lenders on such factors as amount, terms, price, maturity and appropriate collateral levels. Each risk factor is considered critical to ensuring that QNB receives an adequate return for the risk undertaken, and that the risk of loss is minimized.
QNB manages the risk associated with commercial loans by having lenders work in tandem with credit analysts while maintaining independence between personnel. In addition, a Bank loan committee and a committee of the Board of Directors review and approve certain loan requests on a weekly basis. Other than disclosed in the forthcoming Loan Portfolio Table, at December 31, 2024, there was a concentration of loans to lessors of residential buildings and dwellings of 21.9% of total loans and to lessors of nonresidential buildings of 23.3% of total loans, compared with 21.5% and 24.7% of total loans, respectively, at December 31, 2023.
QNB’s commercial lending activity is focused on small businesses within the local community. Commercial purpose loans are generally perceived as having more risk of default than residential real estate loans with a personal purpose and consumer loans. These types of loans involve larger loan balances to a single borrower or group of related borrowers and are more susceptible to a risk of loss during a downturn in the business cycle. These loans may involve greater risk because the availability of funds to repay these loans depends on the successful operation of the borrower’s business. The assets financed are used within the business for its ongoing operation. Repayment of these types of loans generally comes from the cash flow of the business or the ongoing conversions of assets, such as accounts receivable and inventory, to cash. Commercial and industrial loans represent commercial purpose loans that are either secured by collateral other than real estate or unsecured.
Commercial loans secured by commercial real estate include commercial purpose loans collateralized at least in part by commercial real estate. Some of these loans may not be for the express purpose of conducting commercial real estate transactions. Commercial loans secured by residential real estate are commercial purpose loans generally secured by the business owner’s residence or residential investment properties owned by the borrower and rented to tenants. Commercial loans secured by either commercial real estate or residential real estate are originated primarily within the Eastern Pennsylvania market area, are within the Bank’s underwriting criteria, and generally include the guarantee of the borrowers. Repayment of this kind of loan is dependent upon either the ongoing cash flow of the borrowing entity or the resale of or lease of the subject property. Commercial real estate and commercial construction loans may be affected to a greater extent than residential loans by adverse conditions in real estate markets or the economy because commercial real estate borrowers’ ability to repay their loans depends on successful development of their properties.
Loans to state and political subdivisions are tax-exempt or taxable loans to municipalities, school districts and housing and industrial development authorities. These loans can be general obligations of the municipality or school district repaid through their taxing authority, revenue obligations repaid through the income generated by the operations of the authority, such as a water or sewer authority, or loans issued to a housing and industrial development agency, for which a private corporation is responsible for payments on the loans.
- 35 -
The Company originates fixed rate and adjustable-rate residential real estate loans that are secured by the underlying 1-4 family residential properties. Credit risk exposure in this area of lending is minimized by the evaluation of the credit worthiness of the borrower, including debt-to-income ratios, credit scores and adherence to underwriting policies that emphasize conservative loan-to-value ratios of generally no more than 80%. To reduce interest rate risk, qualifying originations of fixed-rate loans to individuals for 1-4 family residential mortgages with maturities of 15 years or greater are generally sold in the secondary market. Mortgage loan origination activity increased in 2024 with $1,851,000 in residential mortgages originated for sale compared with $1,522,000 for 2023. There were $664,000 residential mortgage loans held-for-sale at December 31, 2024 and $549,000 at December 31, 2023. Loan held for sale are carried at the lower of aggregate cost or market.
The home equity portfolio consists of fixed-rate home equity loans and variable rate home equity lines of credit. These loans are often in a junior lien position and therefore carry a higher risk than first lien 1-4 family residential loans. Risks associated with loans secured by residential properties, either first lien residential mortgages or home equity loans and lines, are generally lower than commercial loans and include general economic risks, such as the strength of the job market, employment stability and the strength of the housing market. Since most loans are secured by a primary or secondary residence, the borrower’s continued employment is the greatest risk to repayment.
The Company offers a variety of loans to individuals for personal and household purposes. Consumer loans are generally considered to have greater risk than loans secured by residential real estate because they may be unsecured, or, if they are secured, the value of the collateral may be difficult to assess or more likely to decrease in value than real estate. Credit risk in this portfolio is controlled by conservative underwriting standards that consider debt-to-income levels and the creditworthiness of the borrower, and, if secured, the value of the collateral.
Total loan receivables at December 31, 2024 were $1,216,048,000, an increase of $122,515,000, or 11.2%, from December 31, 2023. A key financial ratio, loans to deposits was 74.7% at December 31, 2024, compared with 73.5% at December 31, 2023. QNB continues to be committed to make loans available to credit worthy consumers and businesses.
Loan Portfolio
December 31,
Commercial:
Commercial and industrial
$
153,187
$
137,086
$
160,875
$
148,610
$
227,431
Construction and land development
129,464
116,173
62,955
55,855
57,594
Real estate secured by multi-family properties
137,461
109,193
99,758
69,765
52,268
Real estate secured by owner-occupied properties
163,955
160,695
158,286
147,264
132,948
Real estate secured by other commercial properties
313,390
265,101
260,026
234,375
192,370
Revolving real estate secured by 1-4 family properties-business
5,652
5,442
5,256
5,517
5,376
Real estate secured by 1st lien on 1-4 family properties-business
105,779
103,572
99,805
81,274
79,072
Real estate secured by junior lien on 1-4 family properties-business
3,238
3,445
3,613
3,467
2,825
State and political subdivisions
17,683
18,708
20,971
19,775
25,302
Retail:
1-4 family residential mortgages
114,423
108,906
105,524
97,075
79,714
Construction-individual
-
-
3,206
3,025
Revolving home equity secured by 1-4 family properties-personal
48,231
34,231
36,732
33,476
36,350
Real estate secured by 1st lien on 1-4 family properties-personal
6,561
11,981
10,575
11,172
9,467
Real estate secured by junior lien on 1-4 family properties-personal
14,092
15,625
11,018
11,617
12,750
Student loans
1,444
1,662
2,180
2,436
2,724
Overdrafts
Other consumer
1,782
1,757
1,801
2,172
2,382
Total loans
1,216,551
1,093,771
1,039,637
927,147
921,856
Net unearned costs (fees)
(503
)
(238
)
(252
)
(677
)
(1,814
)
Loans receivable
$
1,216,048
$
1,093,533
$
1,039,385
$
926,470
$
920,042
- 36 -
Loan Maturities and Interest Sensitivity
Loans due after one year
December 31, 2024
One year
or less
After one
year through
five years
After
five through 15 years
After
15 years
Total
With fixed predetermined interest rate
With variable or adjustable interest rates
Commercial:
Commercial and industrial
$
94,791
$
42,171
$
15,489
$
$
153,187
$
36,580
$
21,816
Construction and land development
23,030
48,458
16,611
41,365
129,464
6,889
99,545
Real estate secured by multi-family properties
19,304
1,368
44,993
71,796
137,461
5,174
112,983
Real estate secured by owner-occupied properties
6,226
5,381
53,226
99,122
163,955
3,078
154,651
Real estate secured by other commercial properties
8,111
2,679
126,350
176,250
313,390
16,701
288,578
Revolving real estate secured by 1-4 family properties-business
5,562
-
-
5,652
-
Real estate secured by 1st lien on 1-4 family properties-business
3,305
31,501
70,124
105,779
1,579
103,351
Real estate secured by junior lien on 1-4 family properties-business
-
1,760
3,238
2,609
State and political subdivisions
3,601
11,630
2,407
17,683
2,025
15,613
Retail:
1-4 family residential mortgages
13,991
100,042
114,423
45,631
68,770
Revolving home equity secured by 1-4 family properties-personal
3,212
8,109
36,818
48,231
9,956
38,183
Real estate secured by 1st lien on 1-4 family properties-personal
4,472
1,125
6,561
6,478
-
Real estate secured by junior lien on 1-4 family properties-personal
2,987
8,912
2,158
14,092
13,997
Student loans
-
1,444
-
1,444
Overdrafts
-
-
-
-
-
Other consumer
1,201
1,782
1,502
Total
$
158,619
$
116,348
$
337,194
$
604,390
$
1,216,551
$
150,219
$
907,713
Demand loans and loans with no stated maturity are included in one year or less. Table details final maturity.
The Allowance for Credit Losses on Loans Allocation table on Page 40 shows the percentage composition of the loan portfolio over the past five years. There was little change in the composition of the portfolio between the periods ended December 31, 2024 and 2023. Loans secured by commercial real estate, including loans secured by multi-family, owner-occupied and other commercial properties, remained the largest sector of the portfolio amounting to 50.6% and 48.9% of the portfolio at December 31, 2024 and December 31, 2023, respectively, as the balances in this sector grew by $79,817,000, or 14.9%, from $534,989,000 at December 31, 2023 to $614,806,000 at December 31, 2024. While loans secured by commercial real estate represent a significant portion of the total portfolio, the collateral is diversified, including investment properties, manufacturing facilities, office buildings, hospitality properties, hospitals, retirement and nursing home facilities, warehouses and owner-occupied facilities. Commercial real estate loans have drawn the attention of the regulators in recent years as a potential source of risk. QNB monitors these types of loans closely, obtaining updated appraisals on loans classified substandard or worse. As detailed in the Allowance for Credit Losses on Loans table, QNB had no charge-offs in this category in 2024, 2023 or 2022.
Commercial loans secured by residential real estate, which includes first lien, junior lien and revolving lines loans, increased by $2,210,000, or 2.0%, to $114,669,000 at December 31, 2024 and at 9.4% remained fairly level with the overall portfolio compared to 10.3% at December 31, 2023. Some of the properties that serve as collateral for these loans are located outside the Bank’s market area and have experienced vacancies and significant declines in market value in prior years. Non-accrual commercial loans secured by residential real estate were $535,000, $165,000, and $365,000 at December 31, 2024, 2023, and 2022, respectively. Charge-offs in this category have significantly decreased over the past three years. Net recoveries of $10,000 in 2024, compared to net recoveries of $10,000 in 2023 and net recoveries of $45,000 in 2022. In 2024, $5,000 in net recoveries were on out-of-market properties compared with $5,000 in net recoveries in 2023 and $41,000 of the net charge-offs in 2022.
Commercial and industrial loans, the second largest sector of the portfolio, experienced an increase in balances of $16,101,000, or 11.7%, to $153,187,000 at December 31, 2024. Commercial and industrial loans represented 12.6% of the portfolio at year-end 2024 compared with 12.5% at December 31, 2023. This category of loans generally presents a greater risk than loans secured by real estate since these loans are either secured by accounts receivable, inventory or equipment, or are unsecured. During 2024, nonaccrual commercial and industrial loan balances decreased $284,000 to $27,000, the majority of which is due to one loan returning accrual status of $278,000. During 2023, nonaccrual commercial and industrial loan balances decreased $1,264,000 to $311,000, the majority of which is due to paydowns of $1,264,000. During 2022, nonaccrual commercial and industrial loan balances decreased $1,794,000 to $1,575,000, the majority of which is due to paydowns of $1,811,000. In 2024, 2023 and 2022, there were net recoveries of $29,000, $348,000 and $268,000, respectively.
- 37 -
Construction and land development loans increased 11.4% to $129,464,000, or 10.6% of the portfolio at December 31, 2024, from $116,173,000, or 10.6% of the portfolio at December 31, 2023. These loans are primarily to developers and builders for the construction of residential units or commercial buildings or to businesses for the construction of owner-occupied facilities. This portfolio is diversified among different types of collateral including: 1-4 family residential, medical and retirement home facilities, office buildings, hotels and land for development loans. Construction loans are generally made only on projects that have municipal approval. These loans are usually originated to include a short construction period followed by permanent financing provided through a commercial mortgage after construction is complete. Once construction is complete, the balance is moved to the appropriate secured by commercial real estate category if the permanent financing is provided by the Bank. There were no charge-offs in the construction loan portfolio since 2011, and no construction loans on non-accrual since 2014.
Loans to state and political subdivisions decreased $1,025,000, or 5.5%, to $17,683,000 at December 31, 2024 from $18,708,000 at December 31, 2023. This sector decreased to 1.4% of the total loan portfolio at December 31, 2024 from 1.7% at December 31, 2023. Many municipalities, counties and school districts refinanced their existing bonds or bank debt due to rate.
Residential mortgage loans secured by first lien balances increased by $5,517,000, or 5.1%, to $114,423,000 at December 31, 2024 from $108,906,000 at December 31, 2023. In 2024 and 2023, QNB retained some adjustable and fixed rate mortgages to borrowers with high credit scores and low loan-to-value ratios.
Balances in home equity loans and lines, including first lien, junior lien and revolving line loans, increased $7,047,000, or 11.4%, to $68,884,000 at December 31, 2024. During 2024, QNB continued to offer very attractive rates on both variable and fixed rate home equity loans and lines. These attractive rates, along with excellent customer service, including quick turnaround time, resulted in new originations in home equity loans, however, paydowns and refinancing into mortgage loans contributed to the decline. QNB expects demand for home equity loans will increase as rates normalize and debt consolidation into mortgage loans decline.
As of December 31, 2024 the balance of student loans was $1,444,000, a decrease of $218,000 compared with December 31, 2023. In 2013, QNB reentered the private student loan market through a relationship with a third party. These student loans are either fixed or variable rate with the rate dependent on the credit scores of the student and/or the cosigner. Student loan balances will decline, as their balances are no longer insured, and QNB ceased funding originations through the third party during 2019 and forward.
Overdrafts increased $15,000, to $209,000 at December 31, 2024. Other consumer loan balances increased $25,000 to $1,782,000 at December 31, 2024.
Non-Performing Assets
Non-performing assets include non-performing loans, OREO and repossessed assets. Non-performing assets totaled $1,975,000, or 0.11% of total assets at December 31, 2024, a $35,000 increase over the $1,940,000, or 0.11% of total assets at December 31, 2023.
Total non-performing loans, which represent loans on non-accrual status and loans past due 90 days or more and still accruing interest were $1,975,000, or 0.16% of total loans receivable at December 31, 2024 compared with $1,940,000, or 0.18% of total loans receivable at December 31, 2023. Loans on non-accrual status were $1,975,000 at December 31, 2024 compared $1,940,000 at December 31, 2023. The increase was primarily due to $1,296,000 being placed on nonaccrual; partially offset by paydowns of $823,000, net charge-offs of $52,000 and loans returned to accruing of $386,000. Specific impairment reserves have been established based on updated collateral values even if the borrower continues to pay in accordance with the terms of the agreement. Of the total amount of non-accrual loans at December 31, 2024, $1,178,000, or approximately 60% of the loans classified as non-accrual, are current or past due less than 30 days.
QNB had no loans 90 days or more past due and still accruing at December 31, 2024 or at December 31, 2023. Total loans that are 30 days or more past due decreased $9,716,000 to $2,187,000, representing 0.18% of total loans at December 31, 2024 compared with $11,903,000, representing 1.09% of total loans at December 31, 2023; the decrease is primarily due to one commercial customer in the refinancing process.
QNB held no OREO at December 31, 2024 or 2023. There were no repossessed assets as of December 31, 2024 or 2023.
- 38 -
Non-Performing Assets
December 31,
Loans past due 90 days or more and accruing
Commercial:
Commercial and industrial
$
-
$
-
$
-
$
-
$
-
Construction and land development
-
-
-
-
-
Real estate secured by multi-family properties
-
-
-
-
-
Real estate secured by owner-occupied properties
-
-
-
-
-
Real estate secured by other commercial properties
-
-
-
-
-
Revolving real estate secured by 1-4 family properties-business
-
-
-
-
-
Real estate secured by 1st lien on 1-4 family properties-business
-
-
-
-
-
Real estate secured by junior lien on 1-4 family properties-business
-
-
-
-
-
State and political subdivisions
-
-
-
-
-
Retail:
1-4 family residential mortgages
-
-
-
-
-
Revolving home equity secured by 1-4 family properties-personal
-
-
-
-
-
Real estate secured by 1st lien on 1-4 family properties-personal
-
-
-
-
-
Real estate secured by junior lien on 1-4 family properties-personal
-
-
-
-
-
Student loans
-
-
-
-
-
Overdrafts
-
-
-
-
-
Other consumer
-
-
-
-
-
Total loans past due 90 days or more and accruing
-
-
-
-
-
Non-accrual loans
Commercial:
Commercial and industrial
1,575
3,369
4,367
Construction and land development
-
-
-
-
-
Real estate secured by multi-family properties
-
-
-
-
-
Real estate secured by owner-occupied properties
1,000
2,857
Real estate secured by other commercial properties
-
-
1,165
1,279
Revolving real estate secured by 1-4 family properties-business
-
-
Real estate secured by 1st lien on 1-4 family properties-business
-
Real estate secured by junior lien on 1-4 family properties-business
State and political subdivisions
-
-
-
-
-
Retail:
1-4 family residential mortgages
Revolving home equity secured by 1-4 family properties-personal
Real estate secured by 1st lien on 1-4 family properties-personal
Real estate secured by junior lien on 1-4 family properties-personal
-
Student loans
Other consumer
Total non-accrual loans
1,975
1,940
4,820
7,530
9,640
Troubled debt restructured loans, not included above
N/A
N/A
4,301
4,142
4,469
Total non-performing assets
$
1,975
$
1,940
$
9,121
$
11,672
$
14,109
Total non-performing assets as a percent of total
assets
0.11
%
0.11
%
0.55
%
0.70
%
0.98
%
Nonaccrual loans to total loans
0.16
0.18
0.88
1.26
1.53
Additional loan quality information can be found in Note 5 of the Notes to the Consolidated Financial Statements included in Item 8 of this Form 10-K. Management’s view is that loans classified as substandard or doubtful that are not included in the past due, non-accrual or restructured categories are potential problem loans. For some of these loans, management may have knowledge of possible credit problems that will cause management to question the ability of the borrowers to comply with the present loan repayment terms. Commercial loans classified as substandard or doubtful, which includes non-performing loans, continue to show improvement. At December 31, 2024, commercial substandard or doubtful loans totaled $34,301,000, an increase of $22,691,000 from the $11,610,000, reported as of December 31, 2023. The increase was primarily due to $19,253,000 in loans to two commercial customers downgraded
- 39 -
from special mention, and another $5,019,000 in commercial loans downgraded from pass categories; most of these loans are secured by real estate.
Allowance for Credit Losses on Loans
QNB adopted ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326), as amended ("ASU 326"), which replaces the incurred loss methodology with an expected credit losses (“CECL”), using the modified retrospective method. QNB recorded a reduction in its allowance for credit losses on loans of $1,089,000 as of January 1, 2023 for the cumulative effect of adopting ASU 326. Since the implementation of ASU 326 on January 1, 2023, the Company may make loan modifications to borrowers experiencing financial difficulty ("FDM"). A FDM could involve principal forgiveness, term extension, an other-than-insignificant payment delay, interest rate reduction or exchanging or paying off existing debt for new debt with the Company. The effect of most modifications made to borrowers experiencing financial difficulty is already included in the allowance for credit losses because of the measurement methodologies used to estimate the allowance, a change to the allowance for credit losses is generally not recorded upon modification.
The allowance for credit losses on loans ("ACL") represents management’s best estimate of expected credit losses in the existing loan portfolio, based on historical experience, current conditions and reasonable and supportable forecasts. Management believes that it uses the best information available to make determinations about the adequacy of the allowance and that it has established its existing allowance for credit losses on loans in accordance with U.S. generally accepted accounting principles (“US GAAP”). Since the ACL is dependent on conditions that may be beyond QNB’s control, it is at least reasonably possible that management’s estimates of the ACL and actual results could differ. In addition, various regulatory agencies, as an integral part of their examination process, periodically review QNB’s ACL. Such agencies may require QNB to recognize changes to the ACL based on their judgments about information available to them at the time of their examination. Actual loan losses, net of recoveries, serve to reduce the allowance.
Management closely monitors the quality of its loan portfolio and performs a quarterly analysis of the appropriateness of the ACL. This analysis considers a number of relevant factors including: specific impairment reserves, historical loan loss experience, general economic conditions, levels of and trends in delinquent and non-performing loans, levels of classified loans, trends in the growth rate of loans, and concentrations of credit.
Asset and credit quality remained strong in QNB's market area in 2024. The ACL level stated as a percent of loans receivable decreased from 0.81% at December 31, 2023 to 0.72% at December 31, 2024. The ACL on loans decreased to $8,744,000 at year-end 2024 from $8,852,000 at year-end 2023.
Allowance for Credit Losses on Loans Allocation
December 31,
Amount
Percent
gross
loans
Amount
Percent
gross
loans
Amount
Percent
gross
loans
Amount
Percent
gross
loans
Amount
Percent
gross
loans
Balance at end of period applicable to:
Commercial:
Commercial and industrial
$
12.6
%
$
12.5
%
$
1,316
15.5
%
$
3,368
16.0
%
$
4,050
24.7
%
Construction and land development
1,336
10.6
1,252
10.6
6.1
6.0
6.2
Real estate secured by multi-family properties
2,012
11.3
1,735
10.0
9.6
7.5
5.7
Real estate secured by owner-occupied properties
13.5
1,001
14.7
1,549
15.2
1,460
15.9
1,383
14.4
Real estate secured by other commercial properties
1,142
25.8
1,167
24.2
2,458
25.0
2,074
25.3
1,710
20.9
Revolving real estate secured by 1-4 family properties-business
0.5
0.5
0.5
0.6
0.6
Real estate secured by 1st lien on 1-4 family properties-business
1,238
8.7
1,507
9.5
1,210
9.6
8.8
8.6
Real estate secured by junior lien on 1-4 family properties-business
0.3
0.3
0.3
0.4
0.3
State and political subdivisions
1.4
1.7
2.0
2.1
2.7
Retail:
1-4 family residential mortgages
9.4
10.0
10.2
10.5
8.7
Revolving home equity secured by 1-4 family properties-personal
4.0
3.1
3.5
3.6
3.9
Real estate secured by 1st lien on 1-4 family properties-personal
0.5
1.1
1.0
1.2
1.0
Real estate secured by junior lien on 1-4 family properties-personal
1.2
1.4
1.1
1.3
1.4
Student loans
0.1
0.2
0.2
0.3
0.3
Overdrafts
-
-
-
-
-
Other consumer
0.1
0.2
0.2
0.2
0.3
Unallocated
-
-
Total
$
8,744
100.0
%
$
8,852
100.0
%
$
10,530
100.0
%
$
11,163
99.7
%
$
10,806
99.7
%
- 40 -
Gross loans represent loans before unamortized net loan fees and costs. Percent gross loans lists the percentage of each loan type to total loans.
A loan is considered impaired, based on current information and events, if it is probable that QNB will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls may not be classified as impaired. Management determines the significance of payment delays and shortfalls on a case-by-case basis, taking into consideration all the circumstances surrounding the loan and the borrower, including length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis for commercial loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral, if the loan is collateral dependent. Upon the adoption of CECL, performing troubled debt restructured loans are no longer considered impaired. At December 31, 2024 and 2023, the recorded investment in collateral dependent loans totaled $357,000 and $1,923,000, respectively, of which $0 and $1,451,000, respectively, required no specific ACL. The recorded investment in collateral dependent loans requiring a specific ACL was $357,000 and $472,000 at December 31, 2024 and 2023, respectively. At December 31, 2024 and 2023, the related ACL associated with these loans was $357,000 and $308,000, respectively. See Note 5 to the Notes to Consolidated Financial Statements included in Item 8 of this Form 10-K for additional detail of impaired loans.
- 41 -
Allowance for Credit Losses on Loans
Allowance for credit losses on loans:
Balance, January 1
$
8,852
$
10,531
$
11,184
$
10,826
$
9,887
Impact of adopting ASC 326
(1,089
)
As reported under ASC 326
9,442
Charge-offs
Commercial:
Commercial and industrial
-
Construction and land development
-
-
-
-
-
Real estate secured by multi-family properties
-
-
-
-
-
Real estate secured by owner-occupied properties
-
-
-
-
-
Real estate secured by other commercial properties
-
-
-
-
-
Revolving real estate secured by 1-4 family properties-business
-
-
-
-
-
Real estate secured by 1st lien on 1-4 family properties-business
-
-
-
-
Real estate secured by junior lien on 1-4 family properties-business
-
-
-
-
-
State and political subdivisions
-
-
-
-
-
Retail:
1-4 family residential mortgages
-
-
-
-
-
Revolving home equity secured by 1-4 family properties-personal
-
-
-
-
Real estate secured by 1st lien on 1-4 family properties-personal
-
-
-
-
-
Real estate secured by junior lien on 1-4 family properties-personal
-
-
-
-
-
Student loans
-
Overdrafts
-
Other consumer
Total charge-offs
Recoveries
Commercial:
Commercial and industrial
Construction and land development
-
-
-
-
-
Real estate secured by multi-family properties
-
-
-
-
-
Real estate secured by owner-occupied properties
-
-
-
-
Real estate secured by other commercial properties
-
-
-
-
-
Revolving real estate secured by 1-4 family properties-business
-
-
-
-
-
Real estate secured by 1st lien on 1-4 family properties-business
-
Real estate secured by junior lien on 1-4 family properties-business
-
-
-
-
State and political subdivisions
-
-
-
-
-
Retail:
1-4 family residential mortgages
-
-
-
-
Revolving home equity secured by 1-4 family properties-personal
-
-
-
-
-
Real estate secured by 1st lien on 1-4 family properties-personal
-
-
-
-
Real estate secured by junior lien on 1-4 family properties-personal
-
-
Student loans
-
Overdrafts
Other consumer
- 42 -
Total recoveries
Net (charge-offs) recoveries
(59
)
(100
)
(311
)
(Reversal) provision for credit losses on loans
(49
)
(828
)
(850
)
1,250
Balance, December 31
$
8,744
$
8,852
$
10,531
$
11,184
$
10,826
Total loans (excluding loans held-for-sale)
Average
$
1,150,699
$
1,040,121
$
967,438
$
928,017
$
868,461
Year-end
1,216,048
1,093,533
1,039,385
926,470
920,042
Ratios:
Net charge-offs (recoveries) to:
Average loans
0.01
%
-0.02
%
-0.02
%
0.01
%
0.04
%
Loans at year-end
0.00
-0.02
-0.02
0.01
0.03
Allowance for credit losses on loans
0.67
-2.69
-1.87
0.89
2.87
(Reversal) provision for credit losses on loan
-120.41
28.74
23.18
21.83
24.88
Allowance for credit losses on loan to:
Average loans (excluding loans held-for-sale)
0.76
%
0.85
%
1.09
%
1.21
%
1.25
%
Loans receivable at year-end
0.72
0.81
1.01
1.21
1.18
Nonaccrual loans
442.73
456.29
218.49
148.53
112.30
QNB had net loan charge-offs of $59,000, or 0.01% of average loans for 2024 compared to net recoveries of $238,000, or 0.02% of average loans for 2023 and net recoveries of $197,000, or 0.02% of average loans for 2022. The majority of charge-offs recorded during these periods had specific reserves established during the allowance for credit losses on loans calculation process prior to the decision to charge-off the loan.
Management believes the ACL of $8,744,000 is adequate as of December 31, 2024, in relation to the estimate of known and inherent losses in the portfolio.
Premises and equipment
Premises and equipment includes a right-of-use asset of $2,618,000 and $2,722,000 at December 31, 2024 and December 31, 2023 respectively. The discount rates used in determining the initial value of the right of use assets are based on the FHLB Amortizing Fixed Loan Rate for the term of each lease. QNB typically enters into lease agreements with an initial term of 5 to 10 years and subsequent additional optional terms in increments of 5 years. The lease agreements also contain termination options. None of the leases contain purchase options and none transfer the ownership of the leased asset. QNB has renewed two operating lease during 2024. QNB renewed one operating lease during 2023. Operating lease liabilities are included with “Other liabilities” on the Consolidated Balance Sheets. All operating lease costs are included in non-interest expense within “Net occupancy” on the Consolidated Statements of Income. Other premises and equipment, net of depreciation increased $2,407,000 to $14,637,000 at December 31, 2024; this was primarily due to renovations to currently owned properties.
Other assets
Other assets decreased $549,000 from $26,610,000 at December 31, 2023 to $26,061,000 at December 31, 2024. Most of the decrease in other assets relates to a decrease to the deferred tax asset resulting from the fair value adjustment on interest rate swaps on investment securities available-for-sale. The detail of the net deferred tax asset can be found in Note 12 in the Notes to Consolidated Financial Statements.
- 43 -
LIABILITIES
The following table presents total liabilities at the dates indicated:
Change from prior year
Year ended December 31,
Amount
Percent
Deposits
$
1,628,541
$
1,488,713
$
139,828
9.4
%
Short-term borrowings
53,844
94,094
(40,250
)
-42.8
Long-term debt
30,000
20,000
10,000
50.0
Subordinated debt
39,068
-
39,068
N/M
Accrued interest payable
7,580
5,294
2,286
43.2
Other liabilities
8,512
7,393
1,119
15.1
Total liabilities
$
1,767,545
$
1,615,494
$
152,051
9.4
%
Deposits
QNB primarily attracts deposits from within its market area by offering various deposit products. These deposits are in the form of time deposits, which include certificates of deposit and individual retirement accounts (“IRAs”) which have a stated maturity, and non-maturity deposit accounts, which include: non-interest-bearing demand accounts, interest-bearing demand accounts, money market accounts and savings accounts.
Total deposits increased $139,828,000, or 9.4%, to $1,628,541,000 at December 31, 2024. The mix of deposits continues to be impacted by customers’ reactions to the competition, regulations and the interest rate environment. Many customers are looking for transaction accounts that provide liquidity and pay a reasonable amount of interest, while others look for high rate. Time deposit balances increased $66,477,000, or 21.1% between 2023 and 2024, as customers took advantage of a higher rate environment. Customers appear to be looking for the safety of FDIC insured deposits and the stability of a strong local community bank.
Non-interest-bearing demand accounts decreased $1,599,000 to $183,499,000 at December 31, 2024. These deposits are both retail and commercial checking accounts and are volatile depending on the timing of deposits and withdrawals. QNB has been successful in attracting new customers and expanding relationships with existing customers, which provides an opportunity for fee income.
Interest-bearing demand accounts, retail and business interest-checking and municipal accounts, increased $75,134,000, or 16.2%, to $537,846,000 at December 31, 2024. QNB has been successful in maintaining relationships with several school districts and municipalities as well as expanding existing relationships, the balances in these accounts are seasonal in nature and can be volatile on a daily basis. Most of the school district taxes are collected during the third quarter of the year and are disbursed over a nine-month period. Municipal accounts balances increased $21,489,000, or 16.2% at December 31, 2024 over 2023. Business accounts increased from $88,714,000 at December 31, 2023 to $144,540,000, or 62.9%, at December 31, 2024. Retail checking accounts decreased $2,181,000 to $239,057,000 at December 31, 2024. QNB continues to open a significant number of new checking accounts; additionally, customers may choose to switch products.
Money Market accounts increased $27,450,000 from $222,843,000 at December 31, 2023 to $250,293,000 at December 31, 2024. Money market products offering higher yields to retain large depositors and reduce the reliance on higher-cost short-term borrowings were offered to both retail and business customers. Personal money market accounts increased $20,001,000 to $104,625,000 at December 31, 2024. Business money market accounts increased $7,449,000, to $145,668,000 at December 31, 2024.
Total savings account balances decreased $27,634,000, or 9.1%, to $275,445,000 at December 31, 2024. This decrease is due primarily to a decrease of $18,015,000, or 8.2%, in the online eSavings accounts over December 31, 2023. Although the rate on eSavings accounts was 1.70% at the end of 2023 and 2024, rates on time deposits and the new money market products were more favorable.
Total time deposit account balances were $381,458,000 at December 31, 2024, an increase of $66,477,000, or 21.1%, from the amount reported at December 31, 2023. QNB was able to retain many maturing deposits during 2024 by offering competitive rates and many current customers moved balances from more liquid accounts to take advantage of these rates.
- 44 -
Maturity of Time Deposits of $250,000 or More
Year ended December 31,
Three months or less
$
27,110
$
11,852
$
3,287
Over three months through six months
8,568
9,629
3,579
Over six months through twelve months
8,368
13,197
7,645
Over twelve months
2,635
8,659
9,959
Total
$
46,681
$
43,337
$
24,470
To continue to attract and retain deposits, QNB plans to remain competitive with respect to rates and to continue to deliver products with terms and features that appeal to customers. The QNB Rewards checking, high yield money market accounts and time deposits are examples of such products.
The following table presents trends in balances and yield on the major deposit groups.
Average Deposits by Major Classification
Balance
Rate
Balance
Rate
Balance
Rate
Demand, non-interest bearing
$
188,525
$
208,777
$
242,778
Interest-bearing demand
346,590
0.93
%
315,990
0.60
%
345,054
0.27
%
Municipals interest-bearing demand
146,446
4.64
131,610
4.46
122,824
1.43
Money market
237,071
3.45
183,004
2.64
137,830
0.45
Savings
285,011
1.28
348,878
1.20
443,104
0.49
Time less than $100
170,998
3.98
121,622
2.63
91,216
0.79
Time $100 through $250
145,022
4.53
107,560
3.59
52,314
0.93
Time greater than $250
49,831
4.51
38,076
3.08
25,296
0.83
Total
$
1,569,494
2.71
%
$
1,455,517
2.01
%
$
1,460,416
0.47
%
Short-term borrowings
Short-term borrowings comprising commercial sweep accounts, overnight and short-term FHLB borrowings and short-term FRB borrowings, decreased $40,250,000, or 42.8%, to $53,844,000 at December 31, 2024. During the first quarter of 2023, QNB borrowed $50,000,000 from the FRB under its Bank Term Funding Program and locked in a rate of 4.39%; there are no pre-payment penalties. Commercial sweep accounts decreased $25,458,000 from $44,094,000 at December 31, 2023 to $18,636,000 at December 31, 2024. There were $25,208,000 in overnight FHLB borrowings and $10,000,000 in short-term FHLB borrowings outstanding at December 31, 2024 and none at December 31, 2023. The FHLB borrowings were used to support loan growth.
Long-term debt
Long-term debt is comprised of $30,000,0000 in FHLB borrowings. QNB borrowed long-term debt to lock in borrowing at a lower yield than short-term borrowings.
Subordinated debt
On August 30, 2024, the Company entered into Subordinated Note Purchase Agreements with certain qualified institutional buyers and accredited investors (collectively, the "Subordinated Note Purchasers") pursuant to which the Company issued and sold $40.0 million in aggregate principal amount of its 8.875% Fixed-to-Floating Rate Subordinated Notes due 2034 (the "Subordinated Notes"). The Subordinated Notes mature on September 1, 2034 and bear interest at a fixed annual rate of 8.875%, payable semi-annually in arrears, to but excluding September 1, 2029. From and including September 1, 2029 to but excluding the maturity date or early redemption date, the interest rate will reset quarterly to an interest rate per annum initially equal to the then-current three-month Secured Overnight Financing Rate published by the Federal Reserve Bank of New York plus 545 basis points, payable quarterly in arrears. The Company is entitled to redeem the Subordinated Notes, in whole or in part, at any time on or after September 1, 2029, and to redeem the Subordinated Notes at any time in whole upon certain other events. Any redemption of the Subordinated Notes will be subject to prior regulatory approval to the extent required. The carrying cost of the Subordinated Notes on the balance sheet represents the outstanding balance of the notes of $40,000,000 net of unamortized origination costs of $932,000 which are amortized to interest expense through September 1, 2029.
- 45 -
Other liabilities
Other liabilities comprise accrued expenses including salaries, post-retirement life insurance benefits and income taxes, operating lease liability, deferred revenue, and ATM/debit card processing clearing. These balances increased $1,119,000, to $8,512,000 at December 31, 2024.
SHAREHOLDERS’ EQUITY
The following table presents total shareholders’ equity at the dates indicated:
Change from prior year
Year ended December 31,
Amount
Percent
Common stock
$
2,441
$
2,414
$
1.1
%
Surplus
27,633
26,439
1,194
4.5
Retained earnings
139,958
133,945
6,013
4.5
Accumulated other comprehensive loss, net of tax
(62,646
)
(67,937
)
5,291
-7.8
Treasury stock
(4,037
)
(4,037
)
-
-
Total shareholders' equity
$
103,349
$
90,824
$
12,525
13.8
%
Total shareholders’ equity increased $12,525,000, or 13.8%, to $103,349,000 at December 31, 2024 with an improvement in the negative impact of the market value of available-for-sale securities, net of tax, adjustment contributing $119,000 and an improvement in market value on the fair value hedge, net of tax, of $5,172,000. Retained earnings increased $6,013,000 due to net income of $11,448,000, partly offset by dividends declared of $5,435,000. The dividend reinvestment and stock purchase plan, employee stock purchase plan and stock option plan contributed $1,221,000.
Accumulated other comprehensive loss improved from a loss of $67,937,000 to a loss of $62,646,000, resulting from the fair value of the available-for-sale investment portfolio primarily due to a improvement in market values and the impact of the market value on the fair value hedge, net of tax.
QNB offers a Dividend Reinvestment and Stock Purchase Plan (the “Plan”) to provide participants a convenient and economical method for investing cash dividends paid on the Company’s common stock in additional shares. The Plan also allows participants to make additional cash purchases of stock. Stock purchases under the Plan contributed $873,000 and $1,363,000 to capital during 2024 and 2023, respectively.
The Board of Directors has authorized the repurchase of up to 200,000 shares of QNB’s common stock in open market or privately
negotiated transactions. The repurchase authorization does not bear a termination date. As of December 31, 2024, a total of 102,000 shares were repurchased under this authorization at an average price of $24.93 and a total cost of $2,543,000.
Liquidity and Capital Resources
Liquidity Management
Liquidity represents an institution’s ability to generate cash or otherwise obtain funds at reasonable rates to satisfy demand for loans and deposit withdrawals. QNB attempts to manage its mix of cash and interest-bearing balances, Federal funds sold and investment securities to match the volatility, seasonality, interest sensitivity and growth trends of its loans and deposits. The Company manages its liquidity risk by measuring and monitoring its liquidity sources and estimated funding needs. Liquidity is provided from asset sources through repayments and maturities of loans and investment securities. The portfolio of investment securities classified as available for sale and QNB's policy of selling certain residential mortgage originations in the secondary market also provide sources of liquidity. Core deposits and cash management repurchase agreements have historically been the most significant funding source for QNB. These deposits and repurchase agreements are generated from a base of consumers, businesses and public funds primarily located in the Company’s market area.
- 46 -
An additional source of liquidity is provided by the Bank’s membership in the FHLB. At December 31, 2024, the Bank’s total maximum borrowing capacity at the FHLB was $442,339,000 of which $376,489,000 remained available. The Bank had $35,208,000 in overnight and short-term borrowings and $30,000,000 in long-term debt outstanding at year-end 2024, related interest payable of $342,000, $283,000 in FHLB-issued letters of credit, and other commitments of $17,000. The maximum borrowing capacity changes depending upon the Bank’s level of qualifying collateral assets. In addition, the Bank maintains unsecured Federal funds lines with four correspondent banks totaling $86,000,000. At December 31, 2024 and 2023, there were no outstanding borrowings under these lines. Future availability under these lines is subject to the policies of the granting banks and may be withdrawn. As part of its contingency funding plan, QNB successfully tested its ability to borrow from these sources during 2024.
Total cash and cash equivalents, equity and available-for-sale securities and loans held-for-sale totaled $597,936,000 at December 31, 2024 and $559,298,000 at December 31, 2023, of which $241,586,000 and $289,935,000, respectively, were pledged as collateral for repurchase agreements and public deposits. This increase in liquid sources is primarily the result of purchases of available-for-sale securities. Management anticipates that these liquid sources are adequate to meet normal fluctuations in loan demand or deposit withdrawals. It is anticipated that the investment portfolio will continue to provide sufficient liquidity as municipal bonds are called and as principal and interest payments on mortgage-backed and CMO securities provide steady cash flow. Increases in interest rates, however, result in decreased cash flow available from the investment portfolio.
QNB is a member of the Certificate of Deposit Account Registry Services (“CDARS”) program offered by the Promontory Interfinancial Network, LLC. CDARS is a funding and liquidity management tool used by banks to access funds and manage their balance sheet. At December 31, 2024 approximately 17% of QNB deposits were uninsured or not collateralized, CDARS enables financial institutions to provide customers with full FDIC insurance on time deposits over $250,000 that are placed in the program. QNB also has available Insured Cash Sweep (“ICS”), another program through Promontory Interfinancial Network, LLC, which is a product similar to CDARS, but one that provides liquidity like a money market or savings account. QNB had $14,749,000 in CDARS time deposits at December 31, 2024 compared to $9,502,000 at December 31, 2023.
Capital Resources
A strong capital position is fundamental to support continued growth and profitability and to serve the needs of depositors. QNB’s shareholders’ equity at December 31, 2024 was $103,349,000, or 5.52% of total assets, compared with shareholders’ equity of $90,824,000, or 5.32% of total assets, at December 31, 2023. Shareholders’ equity at December 31, 2024 included a negative $66,436,000 related to unrealized holding losses, net of taxes, on investment securities available for sale and a positive $3,790,000, net of taxes, related to unrealized holding gains on fair value hedges, compared to a negative $66,555,000 related to unrealized holding losses, net of taxes, on investment securities available for sale and a negative $1,382,000, net of taxes, related to unrealized holding losses on fair value hedges at December 31, 2023. Excluding these adjustments, shareholders’ equity to total assets would have been 8.59% and 8.95% at December 31, 2024 and 2023, respectively.
Average shareholders’ equity and average total assets were $162,304,000 and $1,835,650,000 for 2024, an increase of 3.3% and 5.0%, respectively, from 2023 average equity and average total assets of $157,126,000 and $1,748,029,000, respectively. The ratio of average total equity to total average assets was 8.84% for 2024, compared with 8.99% for 2023.
QNB is subject to restrictions on the payment of dividends to its shareholders pursuant to the Pennsylvania Business Corporation Law of 1988 as amended (the BCL). The BCL operates generally to preclude dividend payments, if the effect thereof would render QNB insolvent, as defined. As a practical matter, QNB’s payment of dividends is contingent upon its ability to obtain funding in the form of dividends from the Bank. Under Pennsylvania banking law, the Bank is subject to certain restrictions on the amount of dividends that it may declare without prior regulatory approval. At December 31, 2024, the retained earnings of the Bank totaling $140,012,000 was available for dividends without prior Pennsylvania Department of Banking approval, subject to the regulatory capital requirements discussed below. Under the Federal Deposit Insurance Act, an insured depository institution may not pay a dividend if, after the payment of the dividend, the institution would be undercapitalized under the FDIC’s prompt corrective action rules. In addition, federal banking agencies have the authority to restrict dividend payments under certain circumstances if such payments are not consistent with the capital needs and financial condition of the institution. It is the policy of the Federal Reserve that a bank holding company generally should not maintain its existing rate of cash dividends on common stock unless the net income available to common shareholders over the prior four quarters, net of dividends previously paid during that period, has been sufficient to fully fund the dividends and the prospective rate of earnings retention appears consistent with the company’s capital needs, asset quality, and overall financial condition. QNB paid dividends to its shareholders of $1.48 per share, $1.48 per share, and $1.44 per share, in 2024, 2023, and 2022, respectively.
QNB is subject to various regulatory capital requirements as issued by Federal regulatory authorities. Regulatory capital is defined in terms of Tier 1 capital and Tier 2. Risk-based capital ratios are expressed as a percentage of risk-weighted assets. Risk-weighted assets are determined by assigning various weights to all assets and off-balance sheet arrangements, such as letters of credit and loan commitments, based on associated risk. QNB is subject to various regulatory capital requirements as issued by Federal regulatory authorities.
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Minimum requirements for both the quantity and quality of capital held by banks are as follows: Common equity Tier 1 capital to risk-weighted assets of 4.5%; Tier 1 capital to risk-weighted assets of 6.0%; Total Capital to risk-weighted assets of 8.0%; and Tier 1 leverage ratio of 4.0%. The capital conservation buffer, comprised of common equity Tier 1 capital, was established above the regulatory minimum capital requirements at 2.5%.
The Federal Deposit Insurance Corporation Improvement Act of 1991 established five capital level designations for insured institutions ranging from “well capitalized” to “critically undercapitalized.” At December 31, 2024 and 2023, management believes that the Company and the Bank met all capital adequacy requirements to which they are subject and have met the “well capitalized” criteria.
Capital Analysis
December 31,
Regulatory Capital
Shareholders' equity
$
103,349
$
90,824
Net unrealized securities losses, net of tax
62,646
67,937
Deferred tax assets on net operating loss
-
-
Disallowed goodwill and other disallowed intangible assets
-
(8
)
Common equity tier I capital
165,995
158,753
Tier 1 capital
165,995
158,753
Allowable portion:
Suboridnated debt
40,000
-
Allowance for credit losses on loans and unfunded commitments
8,831
8,958
Total regulatory capital
$
214,826
$
167,711
Risk-weighted assets
$
1,381,002
$
1,281,418
Quarterly average assets for leverage capital purposes
$
1,908,914
$
1,779,619
Capital Ratios
December 31,
Common equity tier I capital / risk-weighted assets
12.02
%
12.39
%
Tier 1 capital / risk-weighted assets
12.02
%
12.39
%
Total regulatory capital / risk-weighted assets
15.56
%
13.09
%
Tier 1 capital / average assets (leverage ratio)
8.70
%
8.92
%
Material Cash Requirements from Known Contractual and Other Obligations
QNB has various financial obligations, including contractual obligations and commitments, which may require future cash payments.
The following table presents, as of December 31, 2024, significant contractual obligations to third parties by payment date and the amounts and expected maturities of significant commitments. Further discussion of the nature of each obligation can be found in the Notes to Consolidated Financial Statements. The Company’s reserve for credit losses on unfunded commitments totaled $87,000 at December 31, 2024 compared to $106,000 at December 31, 2023.
December 31, 2024
One year
or less
After one
year
through
three years
After three
years
through
five years
After
five years
Total
Time deposits
$
350,836
$
26,860
$
3,762
$
-
$
381,458
Short-term borrowings
53,844
-
-
-
53,844
Long-term debt
30,000
-
-
-
30,000
Subordinated debt
-
-
-
39,068
39,068
Operating leases
1,926
4,137
Commitments to extend credit (a)
199,656
60,382
13,734
55,737
329,509
Standby letters of credit
15,988
3,030
-
-
19,018
Total
$
650,976
$
91,207
$
18,120
$
96,731
$
857,034
(a)Includes available amounts for overdraft protection program in one year or less
- 48 -
Commitments to extend credit, including loan commitments, standby letters of credit, and commercial letters of credit do not necessarily represent future cash requirements, as these commitments often expire without being drawn upon. The Company does not currently have any commitments for significant capital expenditures or other purchase obligations.
RECENTLY ISSUED ACCOUNTING STANDARDS
Refer to Note 1 of the Notes to Consolidated Financial Statements for discussion of recently issued accounting standards.
CRITICAL ACCOUNTING ESTIMATES
Disclosure of the Company’s significant accounting policies is included in Note 1 to Consolidated Financial Statements. Additional information is contained in Management’s Discussion and Analysis and the Notes to Consolidated Financial Statements for the most sensitive of these issues. The discussion and analysis of the financial condition and results of operations are based on the Consolidated Financial Statements of QNB, which are prepared in accordance with US GAAP and predominant practices within the banking industry. The preparation of these Consolidated Financial Statements requires QNB to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. QNB evaluates estimates on an on-going basis, including those related to the determination of the allowance for credit losses on investments, loans and unused commitments, the determination of the valuation of other real estate owned, the determination of impairment of securities and restricted stock, the valuation of deferred tax assets, stock-based compensation and income taxes. QNB bases its estimates on historical experience and various other factors and assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Impairment on Securities and Restricted Stock
Securities are evaluated periodically to determine whether a decline in their value is impairment. Management utilizes criteria such as the magnitude and duration of the decline, in addition to the reasons underlying the decline, to determine whether the loss in value is impairment. The term “impairment” is not intended to indicate that the decline is permanent but indicates that the prospect for a near-term recovery of value is not necessarily favorable, or that there is a lack of evidence to support a realizable value equal to or greater than the carrying value of the investment.
The Company follows the accounting guidance in Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 326-30 as it relates to the recognition and presentation of impairment. This accounting guidance specifies that (a) if a company does not have the intent to sell a debt security prior to recovery and (b) it is more likely than not that it will not have to sell the debt security prior to recovery, the security would not be considered impaired unless there is a credit loss. When an entity does not intend to sell the security, and it is more likely than not, the entity will not have to sell the security before recovery of its cost basis, it will recognize the credit component of an impairment of a debt security in earnings and the remaining portion in other comprehensive income. For held to maturity debt securities, the amount of an impairment recorded in other comprehensive income for the non-credit portion of a previous impairment should be amortized prospectively over the remaining life of the security on the basis of the timing of future estimated cash flows of the security. For equity securities without a readily determinable market value, once a decline in value is determined to be impairment, the value of the equity security is reduced to fair value and a corresponding charge to earnings is recognized.
Allowance for Credit Losses on Loans and Unused Commitments
The Company maintains an allowance for credit losses on loans and unused commitments, which is intended to absorb probable known and inherent losses in the outstanding loan portfolio. The allowance for credit losses is calculated with the objective of maintaining a level believed by management to be sufficient to absorb probable known and inherent losses in the outstanding loan portfolio.
The allowance for credit losses is measured on a pool basis when similar risk characteristics exist. The Company establishes a general valuation allowance for performing loans, including non-accrual student loans. QNB calculates each pool's historical loss rate using a full economic cycle of loan balance and historical loss experienced. The general component is adjusted for qualitative factors including concentrations and economic forecast.
The level of the allowance is determined by assigning specific reserves to all non-accrual loans, except the homogeneous pool of student loans which are measured in the general reserve. An allowance on these non-accrual loans is established when the discounted cash flows (or collateral value) of the loan is lower than the carrying value of that loan. The portion of the allowance that is allocated to non-accrual loans is determined by estimating the inherent loss on each credit after giving consideration to the value of underlying collateral.
- 49 -
Management believes that it uses the best information available to make determinations about the adequacy of the allowance and that it has established its existing allowance for credit losses in accordance with U.S. GAAP. If circumstances differ substantially from the assumptions used in making determinations, future adjustments to the allowance for credit losses may be necessary and results of operations could be affected. Because future events affecting borrowers and collateral cannot be predicted with certainty, increases to the allowance may be necessary should the quality of any loans deteriorate as a result of the factors discussed above.
Stock-Based Compensation
QNB sponsored stock-based compensation plans, administered by a Board committee, under which both qualified and nonqualified stock options may be granted periodically to certain employees. QNB accounts for all awards granted under stock-based compensation plans in accordance with ASC 718, Compensation - Stock Compensation. Compensation cost has been measured using the fair value of an award on the grant date and is recognized over the service period, which is usually the vesting period. The fair value of each option is amortized into compensation expense on a straight-line basis between the grant date for the option and each vesting date. QNB estimates the fair value of stock options on the date of the grant using the Black-Scholes option pricing model. The model requires the use of numerous assumptions, many of which are highly subjective in nature.
Income Taxes
QNB accounts for income taxes under the asset/liability method in accordance with income tax accounting guidance, ASC 740 - Income Taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, as well as operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is established against deferred tax assets when, in the judgment of management, it is more likely than not that such deferred tax assets will not become available. Because the judgment about the level of future taxable income is dependent to a great extent on matters that may, at least in part, be beyond QNB’s control, it is at least reasonably possible that management’s judgment about the need for a valuation allowance for deferred taxes could change in the near term.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk reflects the risk of economic loss resulting from changes in interest rates and market prices. QNB’s primary market risk exposure is interest rate risk and liquidity risk. QNB’s liquidity position was discussed in a prior section.
QNB’s largest source of revenue is net interest income, which is subject to changes in market interest rates. Interest rate risk management seeks to minimize the effect of interest rate changes on net interest margins and interest rate spreads and to provide growth in net interest income through periods of changing interest rates. QNB’s Asset/Liability and Investment Management Committee (“ALCO”) is responsible for managing interest rate risk and for evaluating the impact of changing interest rate conditions on net interest income.
QNB uses computer simulation analysis to measure the sensitivity of projected earnings to changes in interest rates. Simulation considers current balance sheet volumes and the scheduled repricing dates, instrument level optionality, and maturities of assets and liabilities. It incorporates assumptions for growth, changes in the mix of assets and liabilities, prepayments, and average rates earned and paid. Based on this information, management uses the model to project net interest income under multiple interest rate scenarios.
A balance sheet is considered asset sensitive when its assets (investment securities and loans) reprice faster than its interest-bearing liabilities (deposits and borrowings). An asset sensitive balance sheet will produce relatively higher net interest income when interest rates rise and less net interest income when they decline. A balance sheet is considered liability sensitive when its liabilities (deposits and borrowings) reprice faster or to a greater extent than its earning assets (loans and securities). A liability sensitive balance sheet will produce relatively less net interest income when interest rates rise and more net interest income when they decline. Based on our simulation analysis, management believes QNB’s interest sensitivity position at December 31, 2024 is relatively asset sensitive. Management expects market interest rates to decrease in the next 12 months, based on the economic environment and policy of the Federal Reserve.
The following table shows the estimated impact of changes in interest rates on net interest income as of December 31, 2024 and 2023 assuming instantaneous rate shocks, and consistent levels of assets and liabilities. Net interest income for the subsequent twelve months is projected to increase when interest rates are higher than current rates.
Estimated change in net interest income
Change in interest rates
December 31,
(basis points)
+300
-0.3
%
7.1
%
+200
0.0
%
4.8
%
+100
0.2
%
2.6
%
-0.7
%
-3.4
%
-1.7
%
-7.8
%
-3.8
%
-13.7
%
Computations of future effects of hypothetical interest rate changes are based on numerous assumptions and should not be relied upon as indicative of actual results. Assets and liabilities may react differently than projected to changes in market interest rates. The interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while rates on other types of assets and liabilities may lag changes in market interest rates. Interest rate shifts may not be parallel.
Changes in interest rates can cause substantial changes in the amount of prepayments of loans and mortgage-backed securities, which may in turn affect QNB’s interest rate sensitivity position. Additionally, credit risk may rise if an interest rate increase adversely affects the ability of borrowers to service their debt. At December 31, 2024 and December 31, 2023, QNB had two derivatives designated as fair value hedging instruments, these interest rate swaps had a notional value of $300,000,000.
QNB is not subject to foreign currency exchange or commodity price risk.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following audited financial statements are set forth in this Annual Report on Form 10-K on the following pages:
Report of Independent Registered Public Accounting Firm: Baker Tilly US, LLP (PCAOB ID 23) Allentown, PA
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Comprehensive Income (Loss)
Consolidated Statements of Shareholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
- 52 -
Management’s Report on Internal Control over Financial Reporting
March 18, 2025
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to consolidated financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2024, in relation to criteria for effective internal control over financial reporting as described in “Internal Control Integrated Framework (2013),” issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on this assessment, management concludes that, as of December 31, 2024, the Company’s system of internal control over financial reporting is effective and meets the criteria of the “Internal Control Integrated Framework (2013).”
/s/ David W. Freeman
/s/ Jeffrey Lehocky
David W. Freeman
Jeffrey Lehocky
Chief Executive Officer
Chief Financial Officer
- 53 -
Report of Independent Registered Public Accounting Firm
Shareholders and the Board of Directors of QNB Corp.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of QNB Corp. and subsidiary (the "Company") as of December 31, 2024 and 2023, the related consolidated statements of income, comprehensive income (loss), shareholders' equity, and cash flows, for each of the three years in the period ended December 31, 2024, and the related notes (collectively referred to as the "consolidated financial statements"). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2024 and 2023, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2024, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company's consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Allowance for Credit Losses (ACL) on Loans Receivable - Qualitative Factors
Critical Audit Matter Description
As disclosed in Notes 1 and 5 to the Company's consolidated financial statements, the Company accounts for credit losses under ASC 326, Financial Instruments - Credit Losses. ASC 326 requires the measurement of current estimate of lifetime credit losses inherent in the loan portfolio at the balance sheet date. As described in the notes, the ACL consists of two components: a specific reserve based on the analysis of individually evaluated loans, and a general reserve that is measured on a pool basis for loans sharing similar risk characteristics (“general valuation allowance”). The Company estimates the ACL for the general valuation allowance via a quantitative analysis and qualitative factors both which consider relevant available information from internal and external sources related to past events and current conditions, as well as the incorporation of reasonable and supportable forecasts.
The determination of qualitative factor adjustments involves a high degree of management judgment. Management has identified risk factors related to concentrations of credit and economic data as areas where the historical data requires adjustment to reflect current and expected conditions. Changes to these qualitative factors could have a material impact on the Company's financial results.
- 54 -
We have identified auditing the qualitative factors as a critical audit matter as management’s determination of the qualitative factors is subjective and involves significant management judgments. Our audit procedures related to the qualitative factors involved a high degree of auditor judgment and significant auditor effort was required in evaluating the audit evidence obtained related to the qualitative factor adjustments.
How the Critical Audit Matter was Addressed in the Audit
The primary procedures we performed to address this critical audit matter included:
Substantively testing the appropriateness of the judgment and assumptions used in management's estimation process for developing the qualitative factor adjustments, including:
•Assessing whether all relevant factors have been considered that affect the collectability of the loan portfolio;
•Evaluation of the relevance and reliability of underlying internal and external data inputs used as a basis for the qualitative factor adjustments and corroboration of these inputs by comparison to the Company's historical loan portfolio performance, and third-party macroeconomic data
•Recalculation of the allowance for credit loss and allocation of qualitative loss factors to the appropriate loan segments
/s/ Baker Tilly US, LLP
We have served as the Company's auditor since 2007.
Allentown, Pennsylvania
March 18, 2025
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CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
December 31,
Assets
Cash and due from banks
$
11,369
$
11,447
Interest-bearing deposits in banks
39,344
51,210
Total cash and cash equivalents
50,713
62,657
Investment securities:
Available-for-sale (amortized cost $626,391 and $576,178)
546,559
490,182
Equity securities (cost of $0 and $5,695)
-
5,910
Restricted investment in stocks
5,436
2,730
Loans held-for-sale
Loans receivable
1,216,048
1,093,533
Allowance for loan losses
(8,744
)
(8,852
)
Net loans
1,207,304
1,084,681
Bank-owned life insurance
11,937
11,946
Premises and equipment, net
17,255
14,952
Accrued interest receivable
4,965
6,101
Net deferred tax assets
18,325
19,290
Other assets
7,736
7,320
Total assets
$
1,870,894
$
1,706,318
Liabilities
Deposits
Demand, non-interest bearing
$
183,499
$
185,098
Interest-bearing demand
537,846
462,712
Money market
250,293
222,843
Savings
275,445
303,079
Time less than $100
178,163
149,851
Time $100 through $250
156,614
121,793
Time greater than $250
46,681
43,337
Total deposits
1,628,541
1,488,713
Short-term borrowings
53,844
94,094
Long-term debt
30,000
20,000
Subordinated debt
39,068
-
Accrued interest payable
7,580
5,294
Other liabilities
8,512
7,393
Total liabilities
1,767,545
1,615,494
Shareholders' Equity
Common stock, par value $0.625 per share; authorized 10,000,000 shares; 3,905,302 shares and 3,861,940 shares issued; 3,696,616 and 3,653,254 shares outstanding
2,441
2,414
Surplus
27,633
26,439
Retained earnings
139,958
133,945
Accumulated other comprehensive loss, net of tax
(62,646
)
(67,937
)
Treasury stock, at cost; 208,686 and 208,686 shares
(4,037
)
(4,037
)
Total shareholders' equity
103,349
90,824
Total liabilities and shareholders' equity
$
1,870,894
$
1,706,318
The accompanying notes are an integral part of the consolidated financial statements.
- 56 -
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
Year ended December 31,
Interest income
Interest and fees on loans
$
65,367
$
53,884
$
40,922
Interest and dividends on investment securities (AFS & Equity):
Taxable
14,090
11,794
9,396
Tax-exempt
1,424
1,460
1,965
Interest on interest-bearing balances and other interest income
3,187
1,944
Total interest income
84,068
69,082
52,421
Interest expense
Interest on deposits
Interest-bearing demand
10,019
7,767
2,691
Money market
8,181
4,823
Savings
3,651
4,187
2,175
Time less than $100
6,808
3,194
Time $100 through $250
6,570
3,859
Time greater than $250
2,247
1,171
Interest on short-term borrowings
1,148
3,273
Interest on long-term debt
1,322
Interest on subordinated debt
1,260
-
-
Total interest expense
41,206
28,927
7,924
Net interest income
42,862
40,155
44,497
(Reversal of) provision for credit losses
(68
)
(844
)
(850
)
Net interest income after provision for loan losses
42,930
40,999
45,347
Non-interest income
Net unrealized (loss) gain on investment equity securities
(215
)
(1,026
)
Net gain (loss) on sale of investment securities
(2,077
)
Net gain (loss) on investment securities
(1,827
)
(760
)
Fees for services to customers
1,770
1,651
1,614
ATM and debit card
2,740
2,735
2,719
Retail brokerage and advisory
Bank-owned life insurance
Merchant
Net gain on sale of loans
Other
Total non-interest income
6,913
4,837
5,731
Non-interest expense
Salaries and employee benefits
19,741
19,026
17,306
Net occupancy
2,207
2,223
2,195
Furniture and equipment
3,973
3,602
2,917
Marketing
1,044
Third party services
2,595
2,422
2,474
Telephone, postage and supplies
State taxes
1,004
FDIC insurance premiums
1,156
1,058
Other
3,686
3,876
3,210
Total non-interest expense
35,484
34,109
31,492
Income before income taxes
14,359
11,727
19,586
Provision for income taxes
2,911
2,244
3,665
Net income
$
11,448
$
9,483
$
15,921
Earnings per share - basic
$
3.12
$
2.63
$
4.47
Earnings per share - diluted
$
3.12
$
2.63
$
4.47
Cash dividends per share
$
1.48
$
1.48
$
1.44
The accompanying notes are an integral part of the consolidated financial statements.
- 57 -
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
Year ended December 31,
Before
tax
amount
Tax
expense
(benefit)
Net of
tax
amount
Before
tax
amount
Tax
expense
(benefit)
Net of
tax
amount
Before
tax
amount
Tax
expense
(benefit)
Net of
tax
amount
Net income
$
14,359
$
2,911
$
11,448
$
11,727
$
2,244
$
9,483
$
19,586
$
3,665
$
15,921
Other comprehensive income/(loss):
Net unrealized holding gain/(loss) on available-for-sale securities:
Unrealized holding (loss)/gain arising during the period
5,068
4,425
14,638
3,074
11,564
(98,097
)
(20,600
)
(77,497
)
Reclassification adjustment for loss included in net income
1,096
2,058
1,626
Other comprehensive income/(loss):
6,164
5,291
16,696
3,506
13,190
(97,958
)
(20,571
)
(77,387
)
Total comprehensive income (loss)
$
20,523
$
3,784
$
16,739
$
28,423
$
5,750
$
22,673
$
(78,372
)
$
(16,906
)
$
(61,466
)
The accompanying notes are an integral part of the consolidated financial statements.
- 58 -
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Accumulated
Number of
Other
Shares
Common
Retained
Comprehensive
Treasury
Outstanding
Stock
Surplus
Earnings
Income (Loss)
Stock
Total
Balance, January 1, 2022
3,553,629
$
2,350
$
23,683
$
118,163
$
(3,740
)
$
(3,962
)
$
136,494
Net income
-
-
15,921
-
-
15,921
Other comprehensive loss, net of tax
-
-
-
(77,387
)
-
(77,387
)
Cash dividends declared ($1.40 per share)
-
-
(5,133
)
-
-
(5,133
)
Treasury stock purchase
(2,000
)
-
-
-
-
(75
)
(75
)
Stock issued in connection with dividend reinvestment and stock purchase plan
31,531
-
-
-
Stock issued for employee stock purchase plan
5,102
-
-
-
Stock-based compensation expense
-
-
-
-
Balance, December 31, 2022
3,588,262
$
2,373
$
24,798
$
128,951
$
(81,127
)
$
(4,037
)
$
70,958
Cumulative change in accounting principle
-
-
-
Balance at January 2, 2023 (as adjusted for change in accounting principle)
2,373
24,798
129,808
(81,127
)
(4,037
)
71,815
Net income
-
-
9,483
-
-
9,483
Other comprehensive income, net of tax
-
-
-
13,190
-
13,190
Cash dividends declared ($1.48 per share)
-
-
(5,346
)
-
-
(5,346
)
Stock issued in connection with dividend reinvestment and stock purchase plan
56,622
1,327
-
-
-
1,363
Stock issued for employee stock purchase plan
6,630
-
-
-
Stock issued for non-employee director compensation
1,740
(1
)
-
-
-
-
Stock-based compensation expense
-
-
-
-
Balance, December 31, 2023
3,653,254
$
2,414
$
26,439
$
133,945
$
(67,937
)
$
(4,037
)
$
90,824
Net income
-
-
11,448
-
-
11,448
Other comprehensive income, net of tax
-
-
-
5,291
-
5,291
Cash dividends declared ($1.48 per share)
-
-
(5,435
)
-
-
(5,435
)
Stock issued in connection with dividend reinvestment and stock purchase plan
32,963
-
-
-
Stock issued for employee stock purchase plan
7,339
-
-
-
Stock issued for non-employee director compensation
3,060
(2
)
-
-
-
-
Stock-based compensation expense
-
-
-
-
Balance, December 31, 2024
3,696,616
$
2,441
$
27,633
$
139,958
$
(62,646
)
$
(4,037
)
$
103,349
The accompanying notes are an integral part of the consolidated financial statements.
- 59 -
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year ended December 31,
Operating Activities
Net income
$
11,448
$
9,483
$
15,921
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
1,726
1,714
1,724
(Reversal of provision) provision for credit losses
(68
)
(844
)
(850
)
Net (gain) loss on sales of investment debt and equity securities
(919
)
2,077
(266
)
Net unrealized loss (gain)on equity securities
(250
)
1,026
Net gain on sale of loans
(29
)
(16
)
(6
)
Proceeds from sales of residential mortgages held-for-sale
1,765
Origination of residential mortgages held-for-sale
(1,851
)
(1,522
)
(298
)
Increase on bank-owned life insurance
(332
)
(320
)
(361
)
Stock-based compensation expense
Amortization of deferred costs on subordinated debt
-
Deferred income tax provision (benefit)
(57
)
Net increase (decrease) in income taxes payable
(2,094
)
(534
)
Net decrease (increase) in accrued interest receivable
1,136
(1,063
)
(934
)
Fair value remeasurements on interest rate swap
(44
)
(57
)
-
Amortization of mortgage servicing rights and change in valuation
allowance
Net amortization of premiums and discounts on investment securities
1,316
1,665
2,222
Net increase in accrued interest payable
2,286
4,827
Operating lease payments
(633
)
(626
)
(620
)
Increase in other assets
(991
)
(91
)
(298
)
Increase (decrease) in other liabilities
(550
)
Net cash provided by operating activities
16,217
14,457
16,835
Investing Activities
Proceeds from payments, maturities and calls of investment debt securities
available-for-sale
64,959
50,042
72,965
Proceeds from the sale of investment securities available-for-sale
13,139
33,213
7,551
Purchases of investment securities available-for-sale
(130,679
)
(14,381
)
(35,001
)
Proceeds from the sale of equity securities
8,880
8,556
1,594
Purchases of equity securities
(1,170
)
(2,179
)
(1,860
)
Proceeds from redemption of investment in restricted bank stock
7,629
5,155
Purchase of restricted bank stock
(2,809
)
(5,166
)
(9,019
)
Net increase in loans
(122,574
)
(53,910
)
(112,718
)
Net purchases of premises and equipment
(3,516
)
(765
)
(552
)
Redemption of Bank Owned Life Insurance investment
-
Net cash (used) provided in investing activities
(173,326
)
23,039
(71,646
)
Financing Activities
Net (decrease) increase in non-interest bearing deposits
(1,599
)
(46,751
)
(11,157
)
Net increase (decrease) in interest-bearing deposits
141,427
117,095
(20,219
)
Net (decrease) increase in short-term borrowings
(40,250
)
(67,233
)
92,851
Issuance of long-term debt
10,000
20,000
-
Repayment of long-term debt
-
(10,000
)
-
Issuance of subordinated debt
40,000
-
-
Treasury stock purchase
-
-
(75
)
Cash dividends paid, net of reinvestment
(4,798
)
(4,671
)
(4,498
)
Proceeds from issuance of common stock
Net cash provided by financing activities
145,165
9,262
57,320
(Decrease) increase in cash and cash equivalents
(11,944
)
46,758
2,509
Cash and cash equivalents at beginning of year
62,657
15,899
13,390
Cash and cash equivalents at end of period
$
50,713
$
62,657
$
15,899
Supplemental Cash Flow Disclosures
Interest paid
$
38,920
$
24,100
$
7,668
Income taxes paid, net of refunds received
2,278
4,286
4,257
Non-cash transactions:
Cumulative change in accounting principal
-
-
Trade-date settlements for matured securities
-
-
Right-of-use assets obtained in exchange for new operating lease liabilities
The accompanying notes are an integral part of the consolidated financial statement.
- 60 -
QNB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Summary of Significant Accounting Policies
Business
QNB Corp. (the “Company”), through its wholly-owned subsidiary, QNB Bank (the “Bank”), has been serving the residents and businesses of Bucks, Lehigh, and Montgomery counties in Pennsylvania since 1877. The Bank is a Pennsylvania chartered commercial bank. The Company and the Bank are subject to regulations of certain state and Federal agencies. These regulatory agencies periodically examine the Company and the Bank for adherence to laws and regulations.
Segment Reporting
The Company manages and operates its business as a single operating segment. The segment's financial information is the same as presented in the Consolidated Financial Statements. The segment is locally managed and provides a full range of commercial, retail banking and retail brokerage services. The Company's Banking segment is determined by the President and Chief Executive Officer ("CEO") who is the chief operating decision maker (the "CODM"). The CODM evaluates the financial performance of the Company's business components using consolidated revenue, expenses, balance sheet growth and financial ratios to budget and prior periods to determine the allocation of resources and to measure performance. The CODM utilizes consolidated net income to benchmark the Company against its competitors and peer group. This information is used by the CODM to achieve strategic initiatives and allocate resources. Significant revenues are provided by loans, investments and deposits. Significant expenses include interest expense, the provision for credit losses and payroll.
Basis of Presentation
The Consolidated Financial Statements include the accounts of the Company and its wholly-owned subsidiary, the Bank. The consolidated entity is referred to herein as “QNB”. All significant inter-company accounts and transactions have been eliminated in the Consolidated Financial Statements.
Tabular information, other than share and per share data, is presented in thousands of dollars. Certain prior period amounts have been reclassified to conform with the current year’s presentation.
Use of Estimates
These statements are prepared in accordance with Accounting Principles Generally Accepted in the United States of America (“US GAAP”) and predominant practices within the banking industry. The preparation of these Consolidated Financial Statements requires QNB to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. QNB evaluates estimates on an on-going basis. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for credit losses, the fair value of financial instruments, impairment of investment securities, the determination of impairment of restricted bank stock and the valuation of deferred tax assets and income taxes. QNB bases its estimates on historical experience and various other factors and assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Significant Group Concentrations of Credit Risk
Most of the QNB’s activities are with customers located within Bucks, Montgomery and Lehigh Counties in southeastern Pennsylvania. Note 4 discusses the types of investment securities in which the QNB invests. Note 5 discusses the types of lending in which QNB engages. QNB does not have any significant concentrations to any one industry or customer other than what is discussed in Note 5. Although QNB has a diversified loan portfolio, its debtors’ ability to honor their contracts is influenced by the region’s economy.
Cash and Cash Equivalents
For purposes of the statement of cash flows, cash and cash equivalents consist of cash on hand, cash items in process of collection, amounts due from banks, interest-bearing deposits in the Federal Reserve Bank and other banks and Federal funds sold. QNB maintains a portion of its interest-bearing deposits at various commercial financial institutions. At times, the balances exceed the FDIC insured limits; QNB has not experienced a loss due to the balances exceeding FDIC limits.
- 61 -
Investment Securities
Investment debt securities that QNB has the positive intent and ability to hold to maturity are classified as held-to-maturity securities and reported at amortized cost. Interest is included in interest income. Debt securities not classified as either held-to-maturity securities or trading securities are classified as available-for-sale debt securities and reported at fair value, with unrealized gains and losses, net of tax, excluded from earnings and reported in other comprehensive income or loss, a separate component of shareholders’ equity. Management determines the appropriate classification of securities at the time of purchase.
Available-for-sale debt securities include securities that management intends to use as part of its asset/liability management strategy and that may be sold in response to changes in credit ratings, changes in market interest rates and related changes in the securities’ prepayment risk or to meet liquidity needs.
Premiums and discounts on debt securities are recognized in interest income using a constant yield method. Gains and losses on sales of available-for-sale securities are recorded on the trade date and are computed on the specific identification method and included in non-interest income.
Equity investments with readily determinable fair values are measured at fair value. The changes in fair value are recognized in net income. Dividends are included in interest income.
Impairment of Investment Securities
Securities are evaluated periodically to determine whether a decline in their value is impairment. Management utilizes criteria such as the magnitude and duration of the decline, in addition to the reasons underlying the decline, to determine whether the loss in value is impairment. The term impairment is not intended to indicate that the decline is permanent, it indicates that the prospect for a near-term recovery of value is not necessarily favorable, or that there is a lack of evidence to support a realizable value equal to or greater than the carrying value of the investment. For equity securities that do not have readily-determinable fair values, once a decline in value is determined to be impairment, the value of the equity security is reduced and a corresponding charge to earnings is recognized.
QNB follows the accounting guidance in Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 326-30 as it relates to the recognition and presentation of impairment. This accounting guidance specifies that (a) if a company does not have the intent to sell a debt security prior to recovery and (b) it is more likely than not that it will not have to sell the debt security prior to recovery, the security would not be considered impaired unless there is a credit loss. When an entity does not intend to sell the security, and it is more likely than not, the entity will not have to sell the security before recovery of its cost basis, it will recognize the credit component of an impairment of a debt security in earnings and the remaining portion in other comprehensive income.
Derivatives and Hedges
The fair value hedges are accounted for under Derivatives and Hedging (Topic 815). QNB adopted ASU 2022-01 Derivatives and Hedging (Topic 815): Fair Value Hedging--Portfolio Layer Method ("ASC 2022-01") as of January 1, 2023. ASC 2022-01 allows for the use of an amortizing notional swap when entering a portfolio layer method hedge. This guidance allows the interest rate swap to be considered a hedge of a single layer of portfolio. QNB's risk management objective with respect to derivative financial instruments is to hedge the risk of changes in the fair value of certain fixed-rate investment securities, included in a closed portfolio, for changes in the Secured Overnight Financing Rate ("SOFR"). The changes in the fair value of each derivative financial instrument is reported in accumulated other comprehensive (loss) income, net of tax, and are reclassified to interest income as interest payments are made or received on the hedged portfolios. QNB assesses the effectiveness of each hedging relationship using a regression analysis of prior periodic changes in fair value of both the hedge and the hedged item. In the assessment of hedge effectiveness, QNB considers the likelihood of the counterparty's compliance with the contractual terms of the hedging derivative that could require the counterparty to make payments (counterparty default risk). If the likelihood that the counterparty will not default ceases to be probable, the hedge may no longer be highly effective and hedge ineffectiveness due to counterparty payment risk will be assessed.
Restricted Investment in Stock
Restricted stock is comprised of Federal Home Loan Bank of Pittsburgh (“FHLB”) in the amount of $3,510,000, the Atlantic Community Bankers Bank in the amount of $12,000, VISA Class B-2 stock with a carrying cost of $0, and Senior Housing Crime Prevention Investment Corporation ("SHCPFIC") preferred stock of $1,000,000 at December 31, 2024. Federal law requires a member institution of the FHLB to hold stock of its district bank according to a predetermined formula. These restricted securities are carried at cost and evaluated for impairment periodically. As of December 31, 2024, there was no impairment associated with these securities.
The Bank has a $914,000 non-controlling investment in a discrete class of non-voting limited liability company membership interests
- 62 -
issued by National Energy Improvement Fund, LLC (“NEIF”), a Pennsylvania limited liability company licensed in Pennsylvania as a
consumer discount company. The proceeds of the investment will be used by NEIF to fund a State-sponsored consumer loan program,
the KEEP Home Energy Loan Program, designed to assist Pennsylvania homeowners in reducing their energy costs.
The Bank owns 3,251 shares of Visa Class B-2 stock post conversion of its original Class B shares, which was necessary to participate in Visa services in support of the Bank’s credit card, debit card, and related payment programs (permissible activities under banking regulations) as a member institution. Following the resolution of Visa’s covered litigation, shares of Visa’s Class B-2 stock will be converted to Visa Class A shares using a conversion factor (1.5430 as of September 26, 2024), which is periodically adjusted to reflect VISA’s ongoing litigation costs. There is a very limited market for this stock, as only current owners of Class B-2 shares are permitted to transact in Class B-2. Due to the lack of orderly trades and public information of such trades, Visa Class B-2 does not have a readily determinable fair value.
The Bank owns 100 shares of preferred stock of SHCPFIC. These shares are not transferable without the consent of SHCPFIC and does not have a readily determinable fair value.
Loans
Loans are segmented and reported on a pool basis with similar risk characteristics; these segments or pools are identified in Note 5. Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off are stated at the principal amount outstanding, net of deferred loan fees and costs. Interest income is accrued on the principal amount outstanding. Loan origination and commitment fees net of related direct costs are deferred and amortized to income over the term of the respective loan and loan commitment period as a yield adjustment.
Loans held-for-sale consist of residential mortgage loans and are carried at the lower of aggregate cost or fair value. Net unrealized losses, if any, are recognized through a valuation allowance charged to income. Gains and losses on residential mortgages held-for-sale are included in non-interest income.
Non-Performing Assets
Non-performing assets are comprised of accruing loans past due 90 days or more, non-accrual loans and investment securities, other real estate owned and repossessed assets. Non-accrual loans and investment securities are those on which the accrual of interest has ceased. Loans are placed on non-accrual status immediately if, in the opinion of management, collection is doubtful, or when principal or interest is past due 90 days or more and collateral is insufficient to cover principal and interest. Interest accrued, but not collected at the date a loan is placed on non-accrual status, is reversed and charged against interest income. Loans are returned to an accrual status when the borrower’s ability to make periodic principal and interest payments has returned to normal (i.e. brought current with respect to principal or interest or restructured) and the paying capacity of the borrower and/or the underlying collateral is deemed sufficient to cover principal and interest.
Since the implementation of ASU 326 on January 1, 2023, loan modifications to borrowers experiencing financial difficulty ("FDM") could involve principal forgiveness, term extension, an other-than-insignificant payment delay, interest rate reduction or exchanging or paying off existing debt for new debt with QNB. Any amount forgiven would be charged to the allowance for credit losses. There were $1,000,000 and $0 FDMs at December 31, 2024 and 2023, respectively.
Accounting for impairment in the performance of a loan is required when it is probable that all amounts, including both principal and interest, will not be collected in accordance with the loan agreement. Impaired loans are measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate or, at the loan’s observable market price or the fair value of the collateral if the loans are collateral dependent. Impairment criteria are applied to the loan portfolio exclusive of smaller homogeneous loans such as residential mortgage and consumer loans which are evaluated collectively for impairment.
Loans are fully charged-off or charged down to net realizable value (fair value of collateral less estimated costs to sell) when deemed uncollectible due to bankruptcy or other factors, or when they reach a defined number of days past due based on loan product, industry practice, terms and other factors.
Loans are considered past due when contractually required principal or interest payments have not been made on the due dates.
- 63 -
Allowance for Credit Losses on Loans and Commitments
QNB maintains an allowance for credit losses on loans ("ACL") , which is intended to absorb probable known and inherent losses in the outstanding loan portfolio. QNB utilizes the Cohort method to calculate its ACL. QNB elected not to measure an allowance for credit losses on accrued interest receivable. The allowance is reduced by actual credit losses and is increased or decreased by the provision (reversal) for loan losses and increased by recoveries of previous losses. The provisions or reversals for credit losses are charged to earnings to bring the total allowance for credit losses on loans to a level considered necessary by management. QNB estimates the ACL via a quantitative analysis and qualitative factors both which consider relevant available information from internal and external sources related to past events and current conditions, as well as the incorporation of reasonable and supportable forecasts.
The level of the ACL is determined by assigning specific reserves to all non-accrual loans, except the homogeneous pool of student loans which are measured in the general reserve. An allowance on these non-accrual loans is established when the discounted cash flows (or collateral value) of the loan is lower than the carrying value of that loan. The portion of the allowance that is allocated to non-accrual loans is determined by estimating the inherent loss on each credit after giving consideration to the value of underlying collateral.
The general reserve is measured on a pool basis when similar risk characteristics exist; these pools are identified in Note 5. QNB establishes a general valuation allowance for performing loans, including non-accrual student loans. QNB calculates each pool's or segment's historical loss rate using a full economic cycle of loan balance and historical loss experience. The general component is adjusted for qualitative factors. These qualitative risk factors include:
1.Concentrations: QNB adjusts historic loss for concentrations in the current portfolio that were not present during the down-turn of the economic cycle.
2.Economic Forecast: The QNB utilizes an entire economic cycle of data to determine loss rates by segment. This approach reflects an inherent reversion to the historical losses during life of the loans within the pool considering prepayments and loss experience throughout an entire economic cycle. However, QNB feels it is prudent to maintain a floor in its ACL model to assure that there is enough reserve on hand to sustain any losses upon a possible recession.
Management emphasizes loan quality and close monitoring of potential problem credits. Credit risk identification and review processes are utilized in order to assess and monitor the degree of risk in the loan portfolio. QNB’s lending and credit administration staff are charged with reviewing the loan portfolio and identifying changes in the economy or in a borrower’s circumstances which may affect the ability to repay debt or the value of pledged collateral. A loan classification and review system exists that identifies those loans with a higher than normal risk of collectability. Each commercial loan is assigned a grade based upon an assessment of the borrower’s financial capacity to service the debt and the presence and value of collateral for the loan. An independent firm reviews risk assessment and evaluates the adequacy of the ACL. Management meets monthly to review the credit quality of the loan portfolio and quarterly to review the ACL.
In addition, various regulatory agencies, as an integral part of their examination process, periodically review QNB's ACL. Such agencies may require QNB to recognize additions to the allowance based on their judgments using information available to them at the time of their examination.
Management believes that it uses the best information available to make determinations about the adequacy of the allowance and that it has established its existing ACL in accordance with U.S. GAAP. If circumstances differ substantially from the current calculation, future adjustments to the ACL may be necessary and results of operations could be affected. Because future events affecting borrowers and collateral cannot be predicted with certainty, there can be no assurance that increases to the allowance will not be necessary should the quality of any loans deteriorate.
QNB uses the same lending standards and policies in making credit commitments as it does for on-balance sheet instruments. The activity is controlled through credit approvals, control limits, and monitoring procedures. QNB applies the resulting loss factors under the allowance for credit losses on loans to its unused commitments, assuming: additional funding for commercial lines up to the average line usage for non-pass rated lines with no current usage; and, additional funding up to the average line usage for retail lines with no current usage.
Transfers of Financial Assets
Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from QNB, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) QNB does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.
- 64 -
Servicing Assets
Servicing assets are recognized as separate assets when rights are acquired through the sale of financial assets. When mortgage loans are sold, a portion of the cost of originating the loan is allocated to the servicing rights based on relative fair value. Fair value is based on market prices for comparable mortgage servicing contracts, when available, or alternatively, is based on a valuation model that calculates the present value of estimated future net servicing income. The Company subsequently measures servicing rights using the amortization method where servicing rights are amortized in proportion to and over the period of estimated net servicing income. On a quarterly basis, an independent third party determines the fair value of QNB’s servicing assets. These assets are evaluated for impairment based upon the fair value of the rights as compared to amortized cost. Impairment is determined by stratifying rights into tranches based on predominant characteristics, such as interest rate, loan type and investor type. Impairment is recognized through a valuation allowance for an individual tranche, to the extent that fair value is less than the capitalized amount for the tranches. If QNB later determines that all or a portion of the impairment no longer exists for a particular tranche, a reduction of the valuation allowance may be recorded as an increase to income. Capitalized servicing rights are reported in other assets and are amortized into other non-interest income in proportion to, and over the period of, the estimated future net servicing income of the underlying financial assets.
Servicing fee income is recorded for fees earned for servicing loans. The fees are based on a contractual percentage of the outstanding principal, or a fixed amount per loan and are recorded as other non-interest income when earned and netted against the amortization of mortgage servicing rights.
Premises and Equipment
Premises and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation and amortization are calculated principally on an accelerated or straight-line basis over the estimated useful lives of the assets, or the shorter of the estimated useful life or lease term for leasehold improvements, as follows:
Buildings
10 to 39 years
Furniture and equipment
3 to 15 years
Leasehold improvements
5 to 30 years
Expenditures for maintenance and repairs are charged to operations as incurred. Gains or losses upon disposition are reflected in earnings as realized.
The “Premises and equipment, net” category on the Consolidated Balance Sheets also includes the right-of-use assets associated with operating leases. The discount rates used in determining the initial value of the right of use assets are based on the FHLB Amortizing Fixed Loan Rate for the term of each lease. QNB typically enters into lease agreements with an initial term of 5 to 10 years and subsequent additional optional terms in increments of 5 years. The lease agreements also contain termination options. None of the leases contain purchase options and none transfer the ownership of the leased asset. QNB has renewed two operating leases during 2024. Operating lease liabilities are included with “Other liabilities” on the Consolidated Balance Sheets. All operating lease costs are included in non-interest expense within “Net occupancy” on the Consolidated Statements of Income. QNB performs an impairment analysis on it right-of-use asset on an annual basis; there were no impairments at December 31, 2024.
Bank-Owned Life Insurance
The Bank invests in bank-owned life insurance (“BOLI”) as a source of funding for employee benefit expenses. BOLI involves the purchasing of life insurance by the Bank on a select group of employees. The Bank is the owner and beneficiary of the policies. Income from the increase in cash surrender value of the policies as well as the receipt of death benefits is included in non-interest income on the Consolidated Statements of Income. The BOLI policies are an asset that can be liquidated, if necessary, with associated tax costs. However, the Bank intends to hold these policies and, accordingly, has not provided for deferred income taxes on the earnings from the increase in cash surrender value.
The Bank follows the accounting guidance for postretirement benefit aspects of endorsement split-dollar life insurance arrangements which applies to life insurance arrangements that provide an employee with a specified benefit that is not limited to the employee’s active service period, including certain bank-owned life insurance policies. It requires an employer to recognize a liability and related compensation costs for future benefits that extend to postretirement periods. The expense recorded during 2024, 2023 and 2022 was approximately $25,000, $56,000 and $118,000, respectively, and is included in non-interest expense under "Salaries and employee benefits" expense.
- 65 -
Stock-Based Compensation
At December 31, 2024, QNB sponsored 2015 Stock Incentive Plan (the "2015 Plan"), administered by a Board committee, under which both qualified and non-qualified stock options may be granted periodically to certain employees. QNB accounts for all awards granted under stock-based compensation plans in accordance with FASB ASC 718, Compensation - Stock Compensation. Compensation cost has been measured using the fair value of an award on the grant date and is recognized over the service period, which is usually the vesting period.
Stock-based compensation expense related to the 2015 Plan was approximately $87,000, $90,000 and $70,000 for the years ended December 31, 2024, 2023 and 2022, respectively. There were $4,000, $3,000 and $2,000 in tax benefits recognized related to the nonqualified compensation and disqualifying dispositions for the years ended December 31, 2024, 2023 and 2022, respectively.
The fair value of each option is amortized into compensation expense on a straight-line basis between the grant date for the option and each vesting date. QNB estimated the fair value of stock options on the date of the grant using the Black-Scholes option pricing model. The model requires the use of numerous assumptions, many of which are highly subjective in nature. The following assumptions were used in the option pricing model in determining the fair value of options granted during the periods presented.
Year ended December 31,
Risk free interest rate
3.98
%
3.64
%
1.25
%
Dividend yield
5.97
%
4.80
%
3.64
%
Volatility
20.96
%
20.36
%
22.68
%
Expected life (years)
8.19
8.35
4.05
The weighted average fair value per share of options granted during 2024, 2023 and 2022 was $3.08, $4.11 and $5.20, respectively. The risk-free interest rate was selected based upon yields of U.S. Treasury issues with a term equal to the expected life of the option being valued. Historical information was the primary basis for the selection of the expected dividend yield, expected volatility and expected lives of the options.
Income Taxes
QNB accounts for income taxes under the asset/liability method in accordance with income tax accounting guidance, ASC 740 - Income Taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, as well as operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is established against deferred tax assets when, in the judgment of management, it is more likely than not that such deferred tax assets will not become available. Because the judgment about the level of future taxable income is dependent to a great extent on matters that may, at least in part, be beyond QNB’s control, it is at least reasonably possible that management’s judgment about the need for a valuation allowance for deferred taxes could change in the near term.
In connection with the accounting guidance related to accounting for uncertainty in income taxes, which sets out a consistent framework to determine the appropriate level of tax reserves to maintain for uncertain tax positions, QNB has evaluated its tax positions as of December 31, 2024. A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that has more than a 50 percent likelihood of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. Under the “more-likely-than-not” threshold guidelines, QNB believes no significant uncertain tax positions exist, either individually or in the aggregate, which would give rise to the non-recognition of an existing tax benefit. As of December 31, 2024, QNB had a valuation allowance of $172,000 for unrecognized tax benefits related to non-qualified stock option expense and a state net operating loss as discussed in Note 12. As of December 31, 2024 QNB had no interest expense and no tax penalties. QNB’s policy is to account for interest as a component of interest expense and penalties as a component of other expense. The Company and its subsidiary are subject to U.S. Federal income tax as well as income tax of the Commonwealth of Pennsylvania and the State of New Jersey. Tax years from 2021 to date remain subject to examination by the tax authorities.
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Treasury Stock
Common stock shares repurchased are recorded as treasury stock at cost.
Earnings Per Share
Basic earnings per share excludes any dilutive effects of options and is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per share gives effect to all dilutive potential common shares that were outstanding during the period. Potential common shares that may be issued by the Company relate solely to outstanding stock options and are determined using the treasury stock method.
Treasury shares are not deemed outstanding for earnings per share calculations.
Comprehensive Income (Loss)
Comprehensive income (loss) is defined as the change in equity of a business entity during a period due to transactions and other events and circumstances, excluding those resulting from investments by and distributions to owners. Comprehensive income (loss) consists of net income and other comprehensive income (loss). For QNB, the primary component of other comprehensive income (loss) is the unrealized holding gains or losses on available-for-sale investment securities.
Advertising Costs
Advertising costs are recorded in the period they are incurred within operating expenses in non-interest expense in the Consolidated Statements of Income.
Financial Instruments with Off-Balance-Sheet Risk
QNB’s exposure to credit loss in the event of non-performance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual notional amount of these instruments. QNB uses the same credit policies in making commitments and contractual obligations as it does for on-balance-sheet instruments. QNB reflects its estimate of credit risk for these instruments in “Other liabilities” on the Consolidated Balance Sheet with the corresponding expense recorded in “Provision for credit losses” in the Consolidated Statements of Income.
Subsequent Events
QNB has evaluated events and transactions occurring subsequent to the balance sheet date of December 31, 2024 through the date the Consolidated Financial Statements are being issued for items that should potentially be recognized or disclosed in these Consolidated Financial Statements. QNB identified the following event:
QNB identified additional weakness in a large commercial relationship that was reported as Substandard at December 31, 2024, primarily caused by continued delays in obtaining necessary approvals from the Department of Environmental Protection. The customer's loans totaled $6,695,000 and had unused commitments of $3,306,000 which comprised mostly for the construction of a commercial property. The relationship was placed on non-accrual status in March 2025. Although the relationship is sufficiently collateralized, QNB is in the process of securing additional collateral to support the customers obligations as they await approvals to move forward on the construction of the project.
Recent Accounting Pronouncements
In November 2023, the the Financial Accounting Standards Board (FASB) issued ASU 2023-07, Segment Reporting (Topic 280); Improvements to Reportable Segment Disclosures (ASU 2023-07). ASU 2023-07 enhances segment reporting which includes requiring an entity with a single reportable segment to report additional disclosures about how its chief operating decision maker utilizes information to assess segment performance and allocate resources. ASU 2023-07 was effective for fiscal years beginning after December 15, 2023. QNB adopted ASU 2023-07 as of December 31, 2024 on a retrospective basis. There was no impact to QNB's consolidated financial statements and only minimal additional disclosures.
On March 6, 2024, the Securities and Exchange Commission (SEC) adopted final rules requiring registrants to disclose climate-related information in registration statements and annual reports. These enhanced and standardized disclosures requires that an entity with a signle reportable segment include material climate-related risks, board oversight and risk management activities descriptions, material impacts of these risks on a registrant’s strategy, business model and outlook, and any material climate-related targets or goals.
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On June 26, 2024, the FASB voted to issue final rules this year that will require public companies to provide enhanced detailed information about their income statement expenses. Companies will be required to break out certain expense items, such as employee compensation and purchases of inventory, in footnotes to their income statements. The standard will apply to fiscal years that start after December 15, 2026 and interim periods within fiscal years beginning after December 15, 2027. Early adoption will be permitted prospectively for the disclosure requirements, with optional retrospective application, for both interim and year-end reporting periods
In December 2023, the FASB issued Accounting Standards Update (ASU) No. 2023-09, "Income Taxes (Topic 740): Improvements to Income Tax Disclosures." The amendments in this ASU enhance the rate reconciliation and income taxes paid disclosures improving the transparency of income tax disclosures and require: (1) consistent categories and greater disaggregation of information in the rate reconciliation; and (2) income taxes paid disaggregated by jurisdiction. This ASU is effective for the Company's reporting periods beginning after December 15, 2024. The Company does not expect the adoption of this ASU will have a material impact on it's financial statements.
Note 2 - Earnings Per Share and Share Repurchase Plan
The following table sets forth the computation of basic and diluted earnings per share:
Year ended December 31,
Numerator for basic and diluted earnings per share - net income
$
11,448
$
9,483
$
15,921
Denominator for basic earnings per share - weighted average shares
outstanding
3,672,251
3,610,713
3,564,481
Effect of dilutive securities - employee stock options
1,446
-
-
Denominator for diluted earnings per share - adjusted weighted
average shares outstanding
3,673,697
3,610,713
3,564,481
Earnings per share - basic
$
3.12
$
2.63
$
4.47
Earnings per share - diluted
$
3.12
$
2.63
$
4.47
There were 97,275, 121,550, and 109,150 stock options that were anti-dilutive as of December 31, 2024, 2023, and 2022 respectively. These stock options were not included in the above calculation.
QNB’s current stock repurchase plan was originally approved by the Board of Directors on January 21, 2008 and authorized the repurchase of up to 50,000 shares, increased the amount on February 9, 2009 to 100,000 shares, and subsequently increased on April 27, 2021 up to 200,000 shares of its common stock in the open market or privately negotiated transactions. The repurchase authorization has no termination date. There were no shares purchased during the years ended December 31, 2024 and 2023, and 2,000 shares purchased during the year ended December 31, 2022. As of December 31, 2024, 102,000 shares were purchased under this authorization at an average price of $24.93 and a total cost of $2,543,000 and were recorded to Treasury stock.
Note 3 - Cash and Cash Equivalents
Included in cash and cash equivalents are deposits with the Federal Reserve Bank of Philadelphia. As of December 31, 2024 and 2023, QNB was not required to maintain reserves with the Federal Reserve Bank of Philadelphia. At December 31, 2024 and 2023, there was $0 and $1,850,000, respectively, held as collateral against the fair value hedge held a correspondent bank.
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Note 4 - Investment Securities
Available-For-Sale Debt Securities
The amortized cost and fair values of investment debt securities available-for-sale at December 31, 2024 and 2023 were as follows:
Gross
Gross
Gross
unrealized
unrealized
unrealized
Fair
holding
holding
fair value
Amortized
December 31, 2024
value
gains
losses
hedge gains
cost
U.S. Treasuries
$
18,010
$
$
-
$
-
$
18,004
U.S. Government agency
66,908
-
(9,051
)
-
75,959
State and municipal
86,352
-
(20,631
)
1,566
105,417
U.S. Government agencies and sponsored
enterprises (GSEs):
Mortgage-backed
198,510
-
(38,902
)
3,264
234,148
Collateralized mortgage obligations (CMOs)
161,646
(15,821
)
-
177,436
Corporate debt and money market funds
15,133
(304
)
-
15,427
Total investment securities available-for-sale
$
546,559
$
$
(84,709
)
$
4,830
$
626,391
Gross
Gross
Gross
unrealized
unrealized
unrealized
Fair
holding
holding
fair value
Amortized
December 31, 2023
value
gains
losses
hedge losses
cost
U.S. Treasuries
$
6,451
$
$
-
$
-
$
6,448
U.S. Government agency
74,122
-
(10,828
)
-
84,950
State and municipal
89,189
-
(18,714
)
(445
)
108,348
U.S. Government agencies and sponsored
enterprises (GSEs):
Mortgage-backed
224,238
-
(37,831
)
(1,304
)
263,373
Collateralized mortgage obligations (CMOs)
89,973
-
(16,383
)
-
106,356
Corporate debt
6,209
(496
)
-
6,703
Total investment securities available-for-sale
$
490,182
$
$
(84,252
)
$
(1,749
)
$
576,178
The amortized cost and fair value of debt securities available-for-sale by contractual maturity at December 31, 2024 are shown in the following table. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Securities are assigned to categories based on contractual maturity except for state and municipal securities which are based on pre-refunded date, if applicable; and, mortgage-backed securities and CMOs which are dependent upon the interest rate environment and prepayments of the underlying loans.
Amortized
December 31, 2024
Fair value
cost
Due in one year or less
$
18,247
$
18,231
Due after one year through five years
61,991
68,542
Due after five years through ten years
45,479
50,445
Due after ten years
60,686
77,589
186,403
214,807
Mortgage-backed securities
198,510
234,148
Collateralized mortgage obligations
161,646
177,436
Total investment securities available-for-sale
$
546,559
$
626,391
Proceeds from sales of investment debt securities available-for-sale were $13,139,000, $33,213,000 and $7,551,000 for the years ended December 31, 2024, 2023 and 2022, respectively.
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The following table presents information related to QNB’s gains and losses on the sales of debt securities, and losses recognized for credit impairments of these investments.
December 31,
Gross realized gains
$
-
$
-
$
Gross realized losses
(1,096
)
(2,058
)
(147
)
Impairment
-
-
-
Total net losses on available-for-sale securities
$
(1,096
)
$
(2,058
)
$
(139
)
The tax benefit applicable to the net realized losses on debt securities was $230,000 for the year ended December 31, 2024. The tax benefit applicable to the net realized losses on debt securities was $432,000 for the year ended December 31, 2023. The tax benefit applicable to the net realized losses on debt securities was $29,000 for the year ended December 31, 2022.
There were no credit impairment charges recognized for debt securities still held by QNB for the years ended December 31, 2024, 2023 or 2022. The cumulative credit-related impairment charges for debt securities still held by QNB was $1,000.
At December 31, 2024 and 2023, investments in debt securities available-for-sale totaling $241,586,000 and $289,935,000, respectively, were pledged as collateral for repurchase agreements and deposits of public funds.
Debt securities that have been in a continuous unrealized loss position are as follows:
December 31, 2024
Less than 12 months
12 months or longer
Total
No. of
Fair
Unrealized
Fair
Unrealized
Fair
Unrealized
securities
value
losses
value
losses
value
losses
U.S. Treasuries
-
$
-
$
-
$
-
$
-
$
-
$
-
U.S. Government agency
-
-
75,959
(9,051
)
75,959
(9,051
)
State and municipal
(2
)
84,471
(20,629
)
84,759
(20,631
)
U.S. Government agencies
and sponsored enterprises
(GSEs):
Mortgage-backed
-
234,073
(38,902
)
234,074
(38,902
)
Collateralized mortgage
obligations (CMOs)
83,026
(262
)
78,569
(15,559
)
161,595
(15,821
)
Corporate debt and money markets
10,672
(28
)
4,275
(276
)
14,947
(304
)
Total
$
93,987
$
(292
)
$
477,347
$
(84,417
)
$
571,334
$
(84,709
)
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December 31, 2023
Less than 12 months
12 months or longer
Total
No. of
Fair
Unrealized
Fair
Unrealized
Fair
Unrealized
securities
value
losses
value
losses
value
losses
U.S. Treasuries
$
$
-
$
-
$
-
$
$
-
U.S. Government agency
-
-
74,122
(10,828
)
74,122
(10,828
)
State and municipal
-
89,238
(18,714
)
89,618
(18,714
)
U.S. Government agencies
and sponsored enterprises
(GSEs):
Mortgage-backed
-
225,500
(37,831
)
225,501
(37,831
)
Collateralized mortgage
obligations (CMOs)
-
-
89,973
(16,383
)
89,973
(16,383
)
Corporate debt
$
-
$
-
$
6,101
$
(496
)
$
6,101
$
(496
)
Total
$
$
-
$
484,934
$
(84,252
)
$
485,809
$
(84,252
)
Management evaluates debt securities, which are comprised of U.S. Government Agencies, state and municipalities, mortgage-backed securities, CMOs and other issuers, for impairment and considers the current economic conditions, the length of time and the extent to which the fair value has been less than cost, interest rates and the bond rating of each security. The unrealized losses at December 31, 2024 in U.S. Government securities, state and municipal securities, mortgage-backed securities, CMOs and corporate debt securities are primarily the results of interest rate fluctuations. If held to maturity, these bonds will mature at par, and QNB will not realize a loss. QNB has the intent to hold the securities and does not believe it will be required to sell the securities before recovery occurs.
Marketable Equity Securities
QNB’s equity securities consist of investments with readily determinable fair values in large cap stock companies. At December 31, 2024 and 2023, QNB had $0 and $5,910,000, respectively, in equity securities recorded at fair value. The following is a summary of unrealized and realized gains and losses recognized in net income on equity securities during 2024, 2023 and 2022:
December 31,
Net gain (loss) recognized during the period on equity securities
$
1,800
$
$
(621
)
Less: Net gain (loss) recognized during the period on equity securities sold during the period
2,015
(19
)
Net unrealized (loss) gain recognized during the reporting period on equity securities still held at the reporting date
$
(215
)
$
$
(1,026
)
Tax expense applicable to the net realized gains for the year ended December 31, 2024 was $499,000. Tax expense applicable to the net realized gains for the year ended December 31, 2023 was $67,000. Tax benefit applicable to the net realized losses for the year ended December 31, 2022 was $179,000. Proceeds from sale of investment equity securities were $8,880,000, $8,556,000 and $1,594,000 for the years ended December 31, 2024, 2023 and 2022, respectively.
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Note 5 - Loans Receivable and the Allowance for Credit Losses on Loans
Major classes of loans are as follows:
December 31,
Commercial:
Commercial and industrial
$
153,187
$
137,086
Construction and land development
129,464
116,173
Real estate secured by multi-family properties
137,461
109,193
Real estate secured by owner-occupied properties
163,955
160,695
Real estate secured by other commercial properties
313,390
265,101
Revolving real estate secured by 1-4 family properties-business
5,652
5,442
Real estate secured by 1st lien on 1-4 family properties-business
105,779
103,572
Real estate secured by junior lien on 1-4 family properties-business
3,238
3,445
State and political subdivisions
17,683
18,708
Retail:
1-4 family residential mortgages
114,423
108,906
Revolving home equity secured by 1-4 family properties-personal
48,231
34,231
Real estate secured by 1st lien on 1-4 family properties-personal
6,561
11,981
Real estate secured by junior lien on 1-4 family properties-personal
14,092
15,625
Student loans
1,444
1,662
Overdrafts
Other consumer
1,782
1,757
Total loans
1,216,551
1,093,771
Net unearned (fees) and deferred costs
(503
)
(238
)
Allowance for credit losses on loans
(8,744
)
(8,852
)
Loans receivable, net
$
1,207,304
$
1,084,681
Loans secured by commercial real estate include all loans collateralized at least in part by commercial real estate. These loans may not be for the express purpose of conducting commercial real estate transactions.
QNB generally lends in Bucks, Lehigh, and Montgomery counties in southeastern Pennsylvania. To a large extent, QNB makes loans collateralized at least in part by real estate. Its lending activities could be affected by changes in the general economy, the regional economy, or real estate values. Other than disclosed in the table above, at December 31, 2024, there was a concentration of loans to lessors of residential buildings and dwellings of 21.9% of total loans and to lessors of nonresidential buildings of 23.3% of total loans, compared with 21.5% and 24.7% of total loans, respectively, at December 31, 2023. These concentrations were primarily within the commercial real estate categories.
QNB engages in a variety of lending activities, including commercial, residential real estate and consumer transactions. QNB focuses its lending activities on individuals, professionals and small to medium sized businesses. Risks associated with lending activities include economic conditions and changes in interest rates, which can adversely impact both the ability of borrowers to repay their loans and the value of the associated collateral.
Commercial and industrial loans, commercial real estate loans, construction loans and residential real estate loans with a business purpose are generally perceived as having more risk of default than residential real estate loans with a personal purpose and retail loans. These types of loans involve larger loan balances to a single borrower or groups of related borrowers and are more susceptible to a risk of loss during a downturn in the business cycle. These loans may involve greater risk because the availability of funds to repay these loans depends on the successful operation of the borrower’s business. The assets financed are used within the business for its ongoing operation. Repayment of these types of loans generally comes from the cash flow of the business or the ongoing conversions of assets, such as accounts receivable and inventory, to cash. Typical collateral for commercial and industrial loans includes the borrower’s accounts receivable, inventory and machinery and equipment. Commercial real estate and residential real estate loans secured for a business purpose are originated primarily within the southeastern Pennsylvania market area at conservative loan-to-value ratios and often backed by the individual guarantees of the borrowers or owners. Repayment of this kind of loan is dependent upon either the ongoing cash flow of the borrowing entity or the resale of or lease of the subject property. Commercial real estate loans may be affected to a greater extent than residential loans by adverse conditions in real estate markets or the economy because commercial real estate borrowers’ ability to repay their loans depends on successful development of their properties, as well as the factors affecting residential real estate borrowers.
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Loans to state and political subdivisions are tax-exempt or taxable loans to municipalities, school districts and housing and industrial development authorities. These loans can be general obligations of the municipality or school district repaid through their taxing authority, revenue obligations repaid through the income generated by the operations of the authority, such as a water or sewer authority, or loans issued to a housing and industrial development agency, for which a private corporation is responsible for payments on the loans.
QNB originates fixed-rate and adjustable-rate real estate-residential mortgage loans for personal purposes that are secured by first liens on the underlying 1-4 family residential properties. Credit risk exposure in this area of lending is minimized by the evaluation of the credit worthiness of the borrower, including debt-to-income ratios, credit scores and adherence to underwriting policies that emphasize conservative loan-to-value ratios of generally no more than 80%. Residential mortgage loans granted in excess of the 80% loan-to-value ratio criterion are generally insured by private mortgage insurance.
The real estate-home equity portfolio consists of fixed-rate home equity loans and variable-rate home equity lines of credit. Risks associated with loans secured by residential properties are generally lower than commercial loans and include general economic risks, such as the strength of the job market, employment stability and the strength of the housing market. Since most loans are secured by a primary or secondary residence, the borrower’s continued employment is the greatest risk to repayment.
QNB offers a variety of loans to individuals for personal and household purposes. Consumer loans are generally considered to have greater risk than first or second mortgages on real estate because they may be unsecured, or, if they are secured, the value of the collateral may be difficult to assess and is more likely to decrease in value than real estate. Credit risk in this portfolio is controlled by conservative underwriting standards that consider debt-to-income levels and the creditworthiness of the borrower and, if secured, collateral values.
QNB employs a ten-grade risk rating system related to the credit quality of commercial loans and loans to state and political subdivisions of which the first six categories are pass categories (credits not adversely rated). The following is a description of the internal risk ratings and the likelihood of loss related to each risk rating.
1 - Excellent - no apparent risk
2 - Good - minimal risk
3 - Acceptable - lower risk
4 - Acceptable - average risk
5 - Acceptable - higher risk
6 - Pass watch
7 - Special Mention - potential weaknesses
8 - Substandard - well defined weaknesses
9 - Doubtful - full collection unlikely
10 - Loss - considered uncollectible
QNB maintains a loan review system, which allows for a periodic review of our loan portfolio and the early identification of potential problem loans. Each loan officer assigns a rating to commercial loans and loans to state and political subdivisions at the time the loan is originated. Loans are generally reviewed annually based on the borrower’s fiscal year and the dollar amount of the relationship. Loans with risk ratings of seven through ten are reviewed at least quarterly, and as often as monthly, at management’s discretion. QNB also utilizes an outside loan review firm to review the portfolio on a semi-annual basis to provide the Board of Directors and senior management an independent review of the Bank’s loan portfolio on an ongoing basis. These reviews are designed to recognize deteriorating credits in their earliest stages in an effort to reduce and control risk in the lending function as well as identifying potential shifts in the quality of the loan portfolio. The examinations by the outside loan review firm include the review of lending activities with respect to underwriting and processing new loans, monitoring the risk of existing loans and to provide timely follow-up and corrective action for loans showing signs of deterioration in quality. In addition, the outside firm reviews the methodology for the allowance for credit losses on loans to determine compliance to policy and regulatory guidance.
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The following tables present the classes of the loan portfolio summarized by the aggregate pass rating and the classified ratings of special mention, substandard and doubtful within the QNB’s internal risk rating system as of December 31, 2024 and 2023:
Term Loans by Origination Year
December 31, 2024
Prior
Revolving
Total
Commercial Loans
Commercial and industrial:
Risk rating
Pass
$
24,130
$
11,476
$
10,818
$
4,796
$
2,513
$
8,138
$
86,094
$
147,965
Special mention
-
-
-
-
-
2,557
2,949
Substandard
-
-
2,273
Doubtful
-
-
-
-
-
-
-
-
Total commercial and industrial
$
24,130
$
12,423
$
10,818
$
4,909
$
2,597
$
8,814
$
89,496
$
153,187
Construction and land development:
Risk rating
Pass
$
53,278
$
33,332
$
11,404
$
13,998
$
3,268
$
8,056
$
-
$
123,336
Special mention
-
-
-
-
-
-
-
-
Substandard
-
6,094
-
-
-
-
6,128
Doubtful
-
-
-
-
-
-
-
-
Total construction and land development
$
53,278
$
39,426
$
11,404
$
13,998
$
3,268
$
8,090
$
-
$
129,464
Real estate secured by multi-family properties:
Risk rating
Pass
$
26,080
$
17,395
$
27,638
$
22,402
$
9,210
$
31,488
$
-
$
134,213
Special mention
-
-
-
-
-
-
-
-
Substandard
-
-
-
-
2,777
-
3,248
Doubtful
-
-
-
-
-
-
-
-
Total real estate secured by multi-family properties
$
26,080
$
17,866
$
27,638
$
22,402
$
9,210
$
34,265
$
-
$
137,461
Real estate secured by owner-occupied properties:
Risk rating
Pass
$
14,110
$
14,121
$
25,747
$
23,080
$
14,890
$
53,062
$
-
$
145,010
Special mention
-
-
-
-
-
1,525
Substandard
7,027
1,665
-
2,131
5,852
-
17,420
Doubtful
-
-
-
-
-
-
-
-
Total real estate secured by owner-occupied properties
$
15,511
$
21,148
$
27,412
$
23,080
$
17,021
$
59,783
$
-
$
163,955
Real estate secured by other commercial properties:
Risk rating
Pass
$
42,414
$
30,132
$
67,747
$
40,771
$
13,624
$
115,015
$
-
$
309,703
Special mention
-
-
-
-
-
-
-
-
Substandard
-
-
-
2,298
-
3,687
Doubtful
-
-
-
-
-
-
-
-
Total real estate secured by other commercial properties
$
42,414
$
30,795
$
67,747
$
40,771
$
15,922
$
115,741
$
-
$
313,390
Revolving real estate secured by 1-4 family properties-business:
Risk rating
Pass
$
-
$
-
$
-
$
-
$
-
$
-
$
5,652
$
5,652
Special mention
-
-
-
-
-
-
-
-
Substandard
-
-
-
-
-
-
-
-
Doubtful
-
-
-
-
-
-
-
-
Total revolving real estate secured by 1-4 family properties-business
$
-
$
-
$
-
$
-
$
-
$
-
$
5,652
$
5,652
- 74 -
Term Loans by Origination Year
December 31, 2024
Prior
Revolving
Total
Commercial Loans
Real estate secured by 1st lien on 1-4 family properties-business:
Risk rating
Pass
$
9,890
$
16,641
$
26,410
$
18,786
$
8,349
$
24,375
$
-
$
104,451
Special mention
-
-
-
-
-
-
Substandard
-
-
-
1,196
Doubtful
-
-
-
-
-
-
-
-
Total real estate secured by 1st lien on 1-4 family properties-business
$
9,890
$
16,641
$
26,749
$
19,123
$
8,494
$
24,882
$
-
$
105,779
Real estate secured by junior lien on 1-4 family properties-business:
Risk rating
Pass
$
$
$
$
$
$
$
-
$
2,889
Special mention
-
-
-
-
-
-
-
-
Substandard
-
-
-
-
-
Doubtful
-
-
-
-
-
-
-
-
Total real estate secured by junior lien on 1-4 family properties-business
$
$
$
$
$
$
$
-
$
3,238
State and political subdivisions:
Risk rating
Pass
$
1,914
$
1,141
$
-
$
3,749
$
$
10,871
$
-
$
17,683
Special mention
-
-
-
-
-
-
-
-
Substandard
-
-
-
-
-
-
-
-
Doubtful
-
-
-
-
-
-
-
-
Total real estate secured by junior lien on 1-4 family properties-business
$
1,914
$
1,141
$
-
$
3,749
$
$
10,871
$
-
$
17,683
Total Commercial Loans:
Risk rating
Pass
$
172,029
$
124,771
$
170,338
$
127,758
$
52,400
$
251,860
$
91,746
$
990,902
Special mention
-
-
2,557
4,606
Substandard
1,075
14,810
2,023
4,658
10,572
34,301
Doubtful
-
-
-
-
-
-
-
-
Total Commercial loans
$
173,760
$
139,973
$
172,361
$
128,208
$
57,058
$
263,301
$
95,148
$
1,029,809
Current Period Gross Charge-Offs:
Commercial and industrial
$
-
$
-
$
-
$
-
$
-
$
-
$
$
- 75 -
Term Loans by Origination Year
December 31, 2023
Prior
Revolving
Total
Commercial Loans
Commercial and industrial:
Risk rating
Pass
$
20,473
$
14,439
$
8,574
$
5,913
$
8,626
$
7,175
$
70,716
$
135,916
Special mention
-
-
-
-
-
-
-
-
Substandard
-
-
-
-
-
-
1,170
1,170
Doubtful
-
-
-
-
-
-
-
-
Total commercial and industrial
$
20,473
$
14,439
$
8,574
$
5,913
$
8,626
$
7,175
$
71,886
$
137,086
Construction and land development:
Risk rating
Pass
$
46,171
$
43,472
$
14,630
$
3,434
$
4,028
$
4,395
$
-
$
116,130
Special mention
-
-
-
-
-
-
-
-
Substandard
-
-
-
-
-
-
Doubtful
-
-
-
-
-
-
-
-
Total construction and land development
$
46,171
$
43,472
$
14,630
$
3,434
$
4,028
$
4,438
$
-
$
116,173
Real estate secured by multi-family properties:
Risk rating
Pass
$
10,826
$
28,858
$
23,430
$
9,808
$
5,804
$
27,609
$
-
$
106,335
Special mention
-
-
-
-
-
-
-
-
Substandard
-
-
-
-
2,154
-
2,858
Doubtful
-
-
-
-
-
-
-
-
Total real estate secured by multi-family properties
$
10,826
$
28,858
$
23,430
$
9,808
$
6,508
$
29,763
$
-
$
109,193
Real estate secured by owner-occupied properties:
Risk rating
Pass
$
14,430
$
29,576
$
26,908
$
18,693
$
12,239
$
53,030
$
-
$
154,876
Special mention
-
-
-
-
-
-
-
-
Substandard
-
-
-
-
5,819
-
5,819
Doubtful
-
-
-
-
-
-
-
-
Total real estate secured by owner-occupied properties
$
14,430
$
29,576
$
26,908
$
18,693
$
12,239
$
58,849
$
-
$
160,695
Real estate secured by other commercial properties:
Risk rating
Pass
$
32,297
$
44,526
$
42,582
$
17,798
$
28,947
$
98,173
$
-
$
264,323
Special mention
-
-
-
-
-
-
-
-
Substandard
-
-
-
-
-
-
Doubtful
-
-
-
-
-
-
-
-
Total real estate secured by other commercial properties
$
32,297
$
44,526
$
42,582
$
17,798
$
28,947
$
98,951
$
-
$
265,101
Revolving real estate secured by 1-4 family properties-business:
Risk rating
Pass
$
-
$
-
$
-
$
-
$
-
$
-
$
5,442
$
5,442
Special mention
-
-
-
-
-
-
-
-
Substandard
-
-
-
-
-
-
-
-
Doubtful
-
-
-
-
-
-
-
-
Total revolving real estate secured by 1-4 family properties-business
$
-
$
-
$
-
$
-
$
-
$
-
$
5,442
$
5,442
Real estate secured by 1st lien on 1-4 family properties-business:
Risk rating
Pass
$
14,697
$
28,596
$
20,890
$
9,794
$
8,441
$
20,262
$
-
$
102,680
Special mention
-
-
-
-
-
-
- 76 -
Term Loans by Origination Year
December 31, 2023
Prior
Revolving
Total
Commercial Loans
Substandard
-
-
-
-
Doubtful
-
-
-
-
-
-
-
-
Total real estate secured by 1st lien on 1-4 family properties-business
$
14,697
$
28,785
$
21,027
$
9,794
$
8,864
$
20,405
$
-
$
103,572
Real estate secured by junior lien on 1-4 family properties-business:
Risk rating
Pass
$
$
$
$
$
$
$
-
$
3,258
Special mention
-
-
-
-
-
-
-
-
Substandard
-
-
-
-
-
-
Doubtful
-
-
-
-
-
-
-
-
Total real estate secured by junior lien on 1-4 family properties-business
$
$
$
$
$
$
1,121
$
-
$
3,445
State and political subdivisions:
Risk rating
Pass
$
$
-
$
4,247
$
$
5,444
$
8,292
$
-
$
18,708
Special mention
-
-
-
-
-
-
-
-
Substandard
-
-
-
-
-
-
-
-
Doubtful
-
-
-
-
-
-
-
-
Total real estate secured by junior lien on 1-4 family properties-business
$
$
-
$
4,247
$
$
5,444
$
8,292
$
-
$
18,708
Total Commercial Loans:
Risk rating
Pass
$
140,159
$
190,071
$
141,803
$
66,038
$
73,569
$
219,870
$
76,158
$
907,668
Special mention
-
-
-
-
-
-
Substandard
-
-
-
1,127
9,124
1,170
11,610
Doubtful
-
-
-
-
-
-
-
-
Total Commercial loans
$
140,159
$
190,260
$
141,940
$
66,038
$
74,696
$
228,994
$
77,328
$
919,415
Current Period Gross Charge-Offs:
Commercial and industrial
$
-
$
$
-
$
-
$
-
$
-
$
$
The following tables present the recorded investment in the retail classes of the loan portfolio based on payment activity as of December 31, 2024 and 2023:
Term Loans by Origination Year
December 31, 2024
Prior
Revolving
Total
Retail Loans
1-4 family residential mortgages:
Payment performance
Performing
$
12,129
$
12,404
$
13,901
$
28,707
$
18,871
$
27,643
$
-
$
113,655
Nonperforming
-
-
-
-
-
-
Total 1-4 family residential mortgages
$
12,129
$
12,404
$
13,901
$
28,707
$
18,871
$
28,411
$
-
$
114,423
Revolving home equity secured by 1-4 family properties-personal:
Payment performance
Performing
$
-
$
-
$
-
$
-
$
-
$
-
$
47,918
$
47,918
Nonperforming
-
-
-
-
-
-
Total revolving home equity secured by 1-4 family properties-personal
$
-
$
-
$
-
$
-
$
-
$
-
$
48,231
$
48,231
- 77 -
Term Loans by Origination Year
December 31, 2024
Prior
Revolving
Total
Retail Loans
Real estate secured by 1st lien on 1-4 family properties-personal:
Payment performance
Performing
$
$
$
$
1,027
$
$
2,315
$
-
$
6,443
Nonperforming
-
-
-
-
-
Total real estate secured by 1st lien on 1-4 family properties-personal
$
$
$
1,058
$
1,027
$
$
2,343
$
-
$
6,561
Real estate secured by junior lien on 1-4 family properties-personal:
Payment performance
Performing
$
5,241
$
3,317
$
$
$
$
2,804
$
-
$
14,075
Nonperforming
-
-
-
-
-
-
Total real estate secured by junior lien on 1-4 family properties-personal
$
5,241
$
3,317
$
$
$
$
2,804
$
-
$
14,092
Student loans:
Payment performance
Performing
$
-
$
-
$
-
$
-
$
-
$
1,433
$
-
$
1,433
Nonperforming
-
-
-
-
-
-
Total student loans
$
-
$
-
$
-
$
-
$
-
$
1,444
$
-
$
1,444
Overdrafts:
Payment performance
Performing
$
-
$
-
$
-
$
-
$
-
$
-
$
$
Nonperforming
-
-
-
-
-
-
-
-
Total overdrafts
$
-
$
-
$
-
$
-
$
-
$
-
$
$
Other consumer:
Payment performance
Performing
$
$
$
$
$
$
$
$
1,753
Nonperforming
-
-
-
-
-
-
Total other consumer
$
$
$
$
$
$
$
$
1,782
Total Retail Loans:
Payment performance
Performing
$
18,754
$
16,929
$
15,829
$
30,796
$
20,622
$
34,227
$
48,329
$
185,486
Nonperforming
-
-
-
-
1,256
Total Retail Loans
$
18,754
$
16,929
$
15,936
$
30,796
$
20,622
$
35,063
$
48,642
$
186,742
Current Period Gross Charge-Offs:
Student loans
$
-
$
-
$
-
$
-
$
-
$
$
-
$
Overdrafts
-
-
-
-
-
-
Other consumer
-
-
-
- 78 -
Term Loans by Origination Year
December 31, 2023
Prior
Revolving
Total
Retail Loans
1-4 family residential mortgages:
Payment performance
Performing
$
12,641
$
14,635
$
30,495
$
20,304
$
4,526
$
25,500
$
-
$
108,101
Nonperforming
-
-
-
-
-
-
Total 1-4 family residential mortgages
$
12,641
$
14,635
$
30,495
$
20,304
$
4,526
$
26,305
$
-
$
108,906
Revolving home equity secured by 1-4 family properties-personal:
Payment performance
Performing
$
-
$
-
$
-
$
-
$
-
$
-
$
33,936
$
33,936
Nonperforming
-
-
-
-
-
-
Total revolving home equity secured by 1-4 family properties-personal
$
-
$
-
$
-
$
-
$
-
$
-
$
34,231
$
34,231
Real estate secured by 1st lien on 1-4 family properties-personal:
Payment performance
Performing
$
2,591
$
1,613
$
2,933
$
1,030
$
$
2,767
$
-
$
11,865
Nonperforming
-
-
-
-
-
-
Total real estate secured by 1st lien on 1-4 family properties-personal
$
2,591
$
1,613
$
2,933
$
1,030
$
$
2,883
$
-
$
11,981
Real estate secured by junior lien on 1-4 family properties-personal:
Payment performance
Performing
$
6,438
$
1,613
$
2,184
$
1,180
$
$
3,515
$
-
$
15,606
Nonperforming
-
-
-
-
-
-
Total real estate secured by junior lien on 1-4 family properties-personal
$
6,438
$
1,632
$
2,184
$
1,180
$
$
3,515
$
-
$
15,625
Student loans:
Payment performance
Performing
$
-
$
-
$
-
$
-
$
-
$
1,645
$
-
$
1,645
Nonperforming
-
-
-
-
-
-
Total student loans
$
-
$
-
$
-
$
-
$
-
$
1,662
$
-
$
1,662
Overdrafts:
Payment performance
Performing
$
-
$
-
$
-
$
-
$
-
$
-
$
$
Nonperforming
-
-
-
-
-
-
-
-
Total overdrafts
$
-
$
-
$
-
$
-
$
-
$
-
$
$
Other consumer:
Payment performance
Performing
$
$
$
$
$
$
$
$
1,720
Nonperforming
-
-
-
-
-
-
Total other consumer
$
$
$
$
$
$
$
$
1,757
Total Retail Loans:
Payment performance
Performing
$
22,463
$
18,151
$
35,857
$
22,603
$
6,206
$
33,468
$
34,319
$
173,067
Nonperforming
-
-
-
-
1,289
Total Retail Loans
$
22,463
$
18,170
$
35,857
$
22,603
$
6,206
$
34,443
$
34,614
$
174,356
Current Period Gross Charge-Offs:
- 79 -
Term Loans by Origination Year
December 31, 2023
Prior
Revolving
Total
Retail Loans
Student loans
$
-
$
-
$
-
$
-
$
-
$
$
-
$
Overdrafts
-
-
-
-
-
-
Other consumer
-
-
-
-
Retail revolving lines of credit that were termed out during 2024 and 2023 were $3,394,000 and $4,534,000, respectively; all which are performing.
The performance and credit quality of the loan portfolio is also monitored by analyzing the age of the loans receivable as determined by the length of time a recorded payment is past due. The following table presents the classes of the loan portfolio (excluding deferred fees and costs) summarized by the past due status, regardless of whether the loan is on non-accrual status, as of December 31, 2024 and 2023:
December 31, 2024
30-59 days
past due
60-89 days
past due
90 days or
more past
due
Total past
due loans
Current
Total loans
receivable
Commercial:
Commercial and industrial
$
-
$
-
$
-
$
-
$
153,187
$
153,187
Construction and land development
-
-
-
-
129,464
129,464
Real estate secured by multi-family properties
-
-
-
-
137,461
137,461
Real estate secured by owner-occupied properties
-
163,636
163,955
Real estate secured by other commercial properties
-
-
-
-
313,390
313,390
Revolving real estate secured by 1-4 family properties-business
-
-
-
-
5,652
5,652
Real estate secured by 1st lien on 1-4 family properties-business
-
-
-
-
105,779
105,779
Real estate secured by junior lien on 1-4 family properties-business
-
-
-
-
3,238
3,238
State and political subdivisions
-
-
-
-
17,683
17,683
Retail:
1-4 family residential mortgages
1,125
113,298
114,423
Revolving home equity secured by 1-4 family properties-personal
47,835
48,231
Real estate secured by 1st lien on 1-4 family properties-personal
-
6,344
6,561
Real estate secured by junior lien on 1-4 family properties-personal
-
13,980
14,092
Student loans
-
-
-
-
1,444
1,444
Overdrafts
-
-
Other consumer
-
-
1,777
1,782
Total
$
$
$
$
2,187
$
1,214,364
$
1,216,551
- 80 -
December 31, 2023
30-59 days
past due
60-89 days
past due
90 days or
more past
due
Total past
due loans
Current
Total loans
receivable
Commercial:
Commercial and industrial
$
$
-
$
-
$
$
137,009
$
137,086
Construction and land development
-
-
-
-
116,173
116,173
Real estate secured by multi-family properties
-
-
-
-
109,193
109,193
Real estate secured by owner-occupied properties
-
-
160,509
160,695
Real estate secured by other commercial properties
9,675
-
-
9,675
255,426
265,101
Revolving real estate secured by 1-4 family properties-business
-
-
-
-
5,442
5,442
Real estate secured by 1st lien on 1-4 family properties-business
-
-
103,249
103,572
Real estate secured by junior lien on 1-4 family properties-business
-
-
-
-
3,445
3,445
State and political subdivisions
-
-
-
-
18,708
18,708
Retail:
1-4 family residential mortgages
1,295
107,611
108,906
Revolving home equity secured by 1-4 family properties-personal
-
34,046
34,231
Real estate secured by 1st lien on 1-4 family properties-personal
-
-
11,885
11,981
Real estate secured by junior lien on 1-4 family properties-personal
-
-
15,607
15,625
Student loans
-
1,645
1,662
Overdrafts
-
Other consumer
-
-
1,749
1,757
Total
$
10,771
$
$
$
11,903
$
1,081,868
$
1,093,771
As previously discussed, QNB maintains a loan review system, which includes a continuous review of the loan portfolio by internal and external parties to aid in the early identification of potential collateral dependent loans. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as collateral dependent. When placing a loan on non-accrual status, management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. All non-accrual loans, except student loans, are individually evaluated for an allowance for credit losses ("ACL"). This ACL is measured using either the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral if the loan is collateral dependent.
An allowance for credit loss is established for a non-accrual loan if its carrying value exceeds its estimated fair value.
For commercial loans secured by real estate, estimated fair values are determined primarily through third-party appraisals. When a real estate secured loan becomes impaired, a decision is made regarding whether an updated certified appraisal of the real estate is necessary. This decision is based on various considerations, including the age of the most recent appraisal, the loan-to-value ratio based on the original appraisal and the condition of the property. Appraised values are discounted to arrive at the estimated selling price of the collateral, which is considered to be the estimated fair value. The discounts also include estimated costs to sell the property.
- 81 -
For commercial loans secured by non-real estate collateral, such as accounts receivable, inventory and equipment, estimated fair values are determined based on the borrower’s financial statements, inventory reports, accounts receivable agings or equipment appraisals or invoices. Indications of value from these sources are generally discounted based on the age of the financial information or the quality of the assets.
The following tables disclose the recorded investment in loans receivable that are either on non-accrual status or past due 90 days or more and still accruing interest as of December 31, 2024 and 2023:
December 31, 2024
90 Days or More Past Due-Still Accruing
Nonaccrual With No Specifically-Related ACL
Nonaccrual With Related ACL
Total Nonaccrual Loans
Commercial:
Commercial and industrial
$
-
$
-
$
$
Construction and land development
-
-
-
-
Real estate secured by multi-family properties
-
-
-
-
Real estate secured by owner-occupied properties
-
-
Real estate secured by other commercial properties
-
-
-
-
Revolving real estate secured by 1-4 family properties-business
-
-
-
-
Real estate secured by 1st lien on 1-4 family properties-business
-
-
Real estate secured by junior lien on 1-4 family properties-business
-
-
State and political subdivisions
-
-
-
-
Retail:
1-4 family residential mortgages
-
-
Revolving home equity secured by 1-4 family properties-personal
-
-
Real estate secured by 1st lien on 1-4 family properties-personal
-
-
Real estate secured by junior lien on 1-4 family properties-personal
-
-
Student loans
-
-
Other consumer
-
-
Total
$
-
$
1,618
$
$
1,975
- 82 -
December 31, 2023
90 Days or More Past Due-Still Accruing
Nonaccrual With No Specifically-Related ACL
Nonaccrual With Related ACL
Total Nonaccrual Loans
Commercial:
Commercial and industrial
$
-
$
$
$
Construction and land development
-
-
-
-
Real estate secured by multi-family properties
-
-
-
-
Real estate secured by owner-occupied properties
-
-
Real estate secured by other commercial properties
-
-
-
-
Revolving real estate secured by 1-4 family properties-business
-
-
-
-
Real estate secured by 1st lien on 1-4 family properties-business
-
-
-
-
Real estate secured by junior lien on 1-4 family properties-business
-
-
State and political subdivisions
-
-
-
-
Retail:
1-4 family residential mortgages
-
-
Revolving home equity secured by 1-4 family properties-personal
-
Real estate secured by 1st lien on 1-4 family properties-personal
-
-
Real estate secured by junior lien on 1-4 family properties-personal
-
-
Student loans
-
-
Other consumer
-
-
Total
$
-
$
1,468
$
$
1,940
QNB recognized interest income of $126,000 and $557,000 on non-accrual loans for the years ended December 31, 2024 and 2023, respectively.
- 83 -
The following table presents the collateral-dependent loans by loan category at December 31, 2024 and 2023:
December 31, 2024
Real Estate Secured
Other (1)
Deficiency in Collateral
Total Collateral Dependent Nonaccrual Loans
Commercial:
Commercial and industrial
$
-
$
-
$
$
Construction and land development
-
-
-
-
Real estate secured by multi-family properties
-
-
-
-
Real estate secured by owner-occupied properties
-
-
Real estate secured by other commercial properties
-
-
-
-
Revolving real estate secured by 1-4 family properties-business
-
-
-
-
Real estate secured by 1st lien on 1-4 family properties-business
-
-
Real estate secured by junior lien on 1-4 family properties-business
-
-
State and political subdivisions
-
-
-
-
Retail:
1-4 family residential mortgages
-
-
Revolving home equity secured by 1-4 family properties-personal
-
-
Real estate secured by 1st lien on 1-4 family properties-personal
-
-
Real estate secured by junior lien on 1-4 family properties-personal
-
-
Other consumer
-
-
Total
$
1,578
$
$
$
1,964
(1) Secured by business assets, personal property and equipment or guarantees
- 84 -
December 31, 2023
Real Estate Secured
Other (1)
Deficiency in Collateral
Total Collateral Dependent Nonaccrual Loans
Commercial:
Commercial and industrial
$
-
$
$
$
Construction and land development
-
-
-
-
Real estate secured by multi-family properties
-
-
-
-
Real estate secured by owner-occupied properties
-
-
Real estate secured by other commercial properties
-
-
-
-
Revolving real estate secured by 1-4 family properties-business
-
-
-
-
Real estate secured by 1st lien on 1-4 family properties-business
-
-
Real estate secured by junior lien on 1-4 family properties-business
-
-
State and political subdivisions
-
-
-
-
Retail:
1-4 family residential mortgages
-
-
Revolving home equity secured by 1-4 family properties-personal
-
Real estate secured by 1st lien on 1-4 family properties-personal
-
-
Real estate secured by junior lien on 1-4 family properties-personal
-
-
Other consumer
-
-
Total
$
1,300
$
$
$
1,923
(1) Secured by business assets, personal property and equipment or guarantees
- 85 -
Activity in the allowance for credit losses on loans for the years ended December 31, 2024, 2023 and 2022 are as follows:
Year ended December 31, 2024
Beginning balance
Credit loss expense (reversal)
Charge-offs
Recoveries
Balance, end
of period
Commercial:
Commercial and industrial
$
$
(23
)
$
(23
)
$
$
Construction and land development
1,252
-
-
1,336
Real estate secured by multi-family properties
1,735
-
-
2,012
Real estate secured by owner-occupied properties
1,001
(148
)
-
-
Real estate secured by other commercial properties
1,167
(25
)
-
-
1,142
Revolving real estate secured by 1-4 family properties-business
(3
)
-
-
Real estate secured by 1st lien on 1-4 family properties-business
1,507
(279
)
-
1,238
Real estate secured by junior lien on 1-4 family properties-business
-
-
State and political subdivisions
(21
)
-
-
Retail:
1-4 family residential mortgages
(108
)
-
Revolving home equity secured by 1-4 family properties-personal
-
-
Real estate secured by 1st lien on 1-4 family properties-personal
(151
)
-
-
Real estate secured by junior lien on 1-4 family properties-personal
(28
)
-
-
Student loans
(37
)
(52
)
Overdrafts
(101
)
Other consumer
(23
)
Total
$
8,852
$
(49
)
$
(199
)
$
$
8,744
- 86 -
Year ended December 31, 2023
Beginning balance prior to adoption of ASC 326
Impact of adopting ASC 326
Credit loss expense (reversal)
Charge-offs
Recoveries
Balance, end
of period
Commercial:
Commercial and industrial
$
1,316
$
(70
)
$
(771
)
$
(313
)
$
$
Construction and land development
(10
)
-
-
1,252
Real estate secured by multi-family properties
-
-
1,735
Real estate secured by owner-occupied properties
1,549
(374
)
(174
)
-
-
1,001
Real estate secured by other commercial properties
2,458
(1,128
)
(163
)
-
-
1,167
Revolving real estate secured by 1-4 family properties-business
(5
)
-
-
Real estate secured by 1st lien on 1-4 family properties-business
1,210
(203
)
-
1,507
Real estate secured by junior lien on 1-4 family properties-business
(14
)
(2
)
-
-
State and political subdivisions
(20
)
(19
)
-
-
Retail:
1-4 family residential mortgages
(196
)
(59
)
-
-
Construction-individual
-
(1
)
-
-
-
Revolving home equity secured by 1-4 family properties-personal
(7
)
(154
)
-
-
Real estate secured by 1st lien on 1-4 family properties-personal
-
-
Real estate secured by junior lien on 1-4 family properties-personal
-
Student loans
(48
)
(57
)
Overdrafts
(91
)
Other consumer
(8
)
(14
)
Unallocated
(502
)
-
N/A
N/A
-
Total
$
10,531
$
(1,089
)
$
(828
)
$
(475
)
$
$
8,852
Year ended December 31, 2022
Balance,
beginning of
period
Provision for
(credit to)
loan losses
Charge-offs
Recoveries
Balance, end
of period
Commercial:
Commercial and industrial
$
3,368
$
(2,320
)
$
(38
)
$
$
1,316
Construction
-
-
Secured by commercial real estate
4,280
-
-
5,002
Secured by residential real estate
1,035
-
1,240
State and political subdivisions
-
-
Retail:
1-4 family residential mortgages
-
-
Home equity loans and lines
-
Consumer
(158
)
Unallocated
(3
)
N/A
N/A
Total
$
11,184
$
(850
)
$
(196
)
$
$
10,531
Since the implementation of ASU 326 on January 1, 2023, the Company may make loan modifications to borrowers experiencing financial difficulty ("FDM"). A FDM could involve principal forgiveness, term extension, an other-than-insignificant payment delay, interest rate reduction or exchanging or paying off existing debt for new debt with the Company. The effect of most modifications made to borrowers experiencing financial difficulty is already included in the allowance for credit losses because of the measurement
- 87 -
methodologies used to estimate the allowance, a change to the allowance for credit losses is generally not recorded upon modification. Any amount forgiven would be charged to the allowance for credit losses. The amount of the principal forgiveness is deemed to be uncollectible; therefore, that portion of the loan is written off, resulting in a reduction of the amortized cost basis and a corresponding adjustment to the allowance for credit losses. In some cases, modifications could include multiple types of concessions. Typically, one type of concession, such as a term extension, is granted initially. If the borrower continues to experience financial difficulty, another concession, such as principal forgiveness, may be granted. The following table shows the amortized cost basis at the end of the reporting period of the loans modified to borrowers experiencing financial difficulty, disaggregated by loan class, type of concession granted and the financial effect of the modification:
Year ended December 31,
Payment Modification to Interest Only for Six Months
Amortized Cost Basis
% of Total Loan Class
Fiancial Effect
Commercial:
Real estate secured by owner-occupied properties
$
1,000
0.61
%
Temporary reduction of principal payments with no extension of term
Total
$
1,000
There were no payment defaults during the 2024 period on FDMs. There were no FDMs in 2023.
There was 3 mortgage loan(s) secured by residential real estate with a recorded investment of $457,000 for which foreclosure proceedings were in process at December 31, 2024. QNB had no loans secured by residential real estate for which foreclosure proceedings were in process as of December 31, 2023.
Note 6 - Premises and Equipment
Premises and equipment, stated at cost less accumulated depreciation and amortization, are summarized below:
December 31,
Land and buildings
$
18,333
$
16,102
Furniture and equipment
15,429
14,470
Leasehold improvements
3,637
3,632
Right-of-use asset
2,618
2,722
Book value
40,017
36,926
Accumulated depreciation and amortization
(22,762
)
(21,974
)
Net book value
$
17,255
$
14,952
Depreciation and amortization expense on premises and equipment, which excludes operating lease costs in the table below, amounted to $1,095,000, $1,714,000, and $1,115,000 for the years ended December 31, 2024, 2023 and 2022, respectively. During 2024 QNB renewed two operating leases and recorded right-of-use assets of $457,000 and operating liabilities of $457,000.
- 88 -
The following table summarized the quantitative attributes of QNB’s operating leases:
Year ended December 31,
Lease cost
Operating lease cost
$
$
Total lease cost
Other information
Cash paid for amounts included in the measurement of lease liabilities:
Cashflows from operating leases
$
$
Right-of-use assets obtained in exchange for new operating lease liabilities
$
$
Weighted average remaining lease terms:
Operating leases
12.1 years
13.1 years
Weighted average discount rates:
Operating leases
3.09
%
2.90
%
Note 7 - Intangible Assets and Loan Servicing
Loans serviced for others are not included in the accompanying Consolidated Balance Sheets. The unpaid principal balances of mortgage loans serviced for others were $63,411,000 and $68,349,000 at December 31, 2024 and 2023, respectively.
The following table reflects the activity of mortgage servicing rights for the periods indicated:
Year ended December 31,
Balance at beginning of year
$
$
$
Mortgage servicing rights capitalized
Mortgage servicing rights amortized
(50
)
(61
)
(80
)
Fair market value adjustments
-
-
Balance at end of year
$
$
$
The balance of these mortgage servicing rights is included in "Other assets" at December 31, 2024 and 2023 and the fair value of these rights was $556,000 and $583,000, respectively. The fair value of servicing rights was determined using discount rates ranging from 12.0% to 12.5% for both 2024 and 2023; and prepayment speeds ranging from 90% to 185% for 2024 compared to 104% to 214% for 2023.
The annual estimated amortization expense of intangible assets for each of the five succeeding fiscal years is as follows:
$
Note 8 - Time Deposits
The aggregate amount of time deposits was $381,458,000 and $314,981,000 at December 31, 2024 and 2023, respectively. Time deposits that meet or exceed the FDIC insurance limit of $250,000 at December 31, 2024 and 2023 were $46,681,000 and $43,337,000, respectively.
- 89 -
At December 31, 2024, the scheduled maturities of time deposits were as follows:
$
350,836
19,034
7,826
2,402
1,360
Thereafter
-
Total time deposits
$
381,458
Note 9 - Short-Term Borrowings
December 31,
Securities sold
under agreements
to repurchase (a)
Other short - term
borrowings (b)
Balance
$
18,636
$
35,208
Maximum indebtedness at any month end
55,088
50,000
Daily average indebtedness outstanding
38,455
10,071
Average rate paid for the year
1.83
%
4.41
%
Average rate on period-end borrowings
2.46
4.81
Balance
$
44,094
$
50,000
Maximum indebtedness at any month end
69,343
136,799
Daily average indebtedness outstanding
53,154
55,708
Average rate paid for the year
1.39
%
4.55
%
Average rate on period-end borrowings
4.59
4.39
(a)Securities sold under agreements to repurchase mature overnight. The repurchase agreements were collateralized by U.S. Government mortgage-backed securities and CMOs with an amortized cost of $30,729,000 and $72,012,000 and a fair value of $26,501,000 and $61,650,000 and at December 31, 2024 and 2023 respectively. These securities are held in safekeeping at the Federal Reserve Bank of Boston.
(b)Other short-term borrowings include Federal funds purchased, overnight and short term borrowings from the FHLB, and short-term FRB borrowings.
During the first quarter of 2023, QNB borrowed $50,000,000 from the FRB under its Bank Term Funding Program and locked in a rate of 4.39%; there are no pre-payment penalties and the funds were paid off in 2024. The Bank has four unsecured Federal funds lines granted by correspondent banks totaling $86,000,000. Federal funds purchased under these lines were $0 at both December 31, 2024 and 2023.
Note 10 - Long-Term Debt
FHLB advances are collateralized by certain mortgage loans and also require the purchase of FHLB capital stock, which is included within "Restricted investment in stocks" on the Consolidated Balance Sheets. QNB’s FHLB stock was $3,510,000 and $1,718,000 at December 31, 2024 and 2023, respectively.
QNB has a maximum borrowing capacity with the FHLB of approximately $442,339,000. At December 31, 2024 QNB had $30,000,000 in long-term advances outstanding with the FHLB at fixed rates, $35,208,000 in short term borrowings as reported in Note 9 and a letter of credit issued of $283,000. At December 31, 2023 QNB had $20,000,000 in long-term advances outstanding with the FHLB at fixed rates, no short-term borrowings as reported in Note 9 and a letter of credit issued of $283,000.
- 90 -
Long-term advances at the FHLB mature as follows:
As of December 31, 2024
Balance Maturing
Weighted-Average Rate
$
30,000
4.75
%
-
-
-
-
-
-
-
-
Thereafter
-
-
Total long-term debt
$
30,000
4.75
%
Note 11 - Subordinated Debt
On August 30, 2024, the Company entered into Subordinated Note Purchase Agreements with certain qualified institutional buyers and accredited investors (collectively, the "Subordinated Note Purchasers") pursuant to which the Company issued and sold $40.0 million in aggregate principal amount of its 8.875% Fixed-to-Floating Rate Subordinated Notes due 2034 (the "Subordinated Notes"). The Subordinated Notes were offered and sold by the Company to the Subordinated Note Purchasers in a private offering in reliance on the Section 4(a)(2) exemption from the registration requirements of the Securities Act of 1933, as amended (the "Securities Act"), and the provisions of Regulation D thereunder. The Company intends to use the proceeds from the offering for general corporate purposes and potential future strategic opportunities.
The Subordinated Notes mature on September 1, 2034 and bear interest at a fixed annual rate of 8.875%, payable semi-annually in arrears, to but excluding September 1, 2029. From and including September 1, 2029 to but excluding the maturity date or early redemption date, the interest rate will reset quarterly to an interest rate per annum initially equal to the then-current three-month Secured Overnight Financing Rate published by the Federal Reserve Bank of New York plus 545 basis points, payable quarterly in arrears. The Company is entitled to redeem the Subordinated Notes, in whole or in part, at any time on or after September 1, 2029, and to redeem the Subordinated Notes at any time in whole upon certain other events. Any redemption of the Subordinated Notes will be subject to prior regulatory approval to the extent required.
The Subordinated Notes are not subject to any sinking fund and are not convertible into or exchangeable for any other securities or
assets of the Company or any of its subsidiaries. The Subordinated Notes are not subject to redemption at the option of the holders. The Subordinated Notes are unsecured, subordinated obligations of the Company only and are not obligations of, and are not guaranteed by, any subsidiary of the Company. The Subordinated Notes rank junior in right to payment to the Company's current and future senior indebtedness. The Subordinated Notes are intended to qualify as Tier 2 capital for regulatory capital purposes.
The carrying cost of the Subordinated Notes on the consolidated balance sheets represents the outstanding balance of the notes net of unamortized origination costs of $932,000 which amortize to interest expense through September 1, 2029.
- 91 -
Note 12 - Income Taxes
The components of the provision for income taxes are as follows:
Year ended December 31,
Current Federal income taxes
$
2,739
$
2,109
$
3,543
Current state income taxes
Deferred Federal income taxes (benefits)
Deferred state income taxes (benefits)
(169
)
(15
)
(102
)
Valuation adjustment
(4
)
Net provision
$
2,911
$
2,244
$
3,665
At December 31, 2024 and 2023, the tax effects of temporary differences that represent the significant portion of deferred tax assets and liabilities are as follows:
December 31,
Deferred tax assets
Allowance for credit losses on loans
$
1,882
$
1,859
Net unrealized holding losses on investment
securities available-for-sale
18,226
17,692
Net unrealized holding losses on investment
rate swaps
-
Non-accrual interest income
Leasing liability
Deferred revenue
-
Incurred but not reported medical expense
Bonus
State net operating loss carryforward
Other
Total deferred tax assets
21,554
20,931
Deferred tax liabilities
Deferred loan income
Depreciation
Mortgage servicing rights
Net unrealized holding losses on investment
rate swaps
1,040
-
Fair value remeasurements on interest rate swap
Fair value adjustment on equity securities
-
Prepaid expenses
Right of use asset
Subordinated debt costs
-
Other
-
Total deferred tax liabilities
3,057
1,637
Valuation allowance
Net deferred tax asset
$
18,325
$
19,290
The ability to realize deferred tax assets is dependent upon a variety of factors, including the generation of future taxable income, the existence of taxes paid and recoverable, the reversal of deferred tax liabilities and tax planning strategies. Based upon these and other factors, management believes it is more likely than not that QNB will realize the benefits of the above deferred tax assets except a $1,000 deferred tax asset related to non-qualified stock option that it is more likely than not that the options will expire unexercised due to the strike price and a $171,000 deferred tax related to a state net operating loss that it is more likely than not that the carryforward period will expire prior to the ability to offset the loss. A valuation allowance was recorded for this amount.
- 92 -
A reconciliation of the tax provision on income before taxes computed at the statutory rates of 21% for 2024, 2023 and 2022 and the actual tax provision was as follows:
Year ended December 31,
Dollar
%
Dollar
%
Dollar
%
Provision at statutory rate
$
3,015
21.0
%
$
2,463
21.0
%
$
4,113
21.0
%
Tax-exempt interest and dividend income
(194
)
(1.4
)
(267
)
(2.3
)
(504
)
(2.6
)
Bank-owned life insurance
(68
)
(0.5
)
(67
)
(0.6
)
(75
)
(0.4
)
Stock-based compensation expense
0.2
0.2
0.1
State income tax
(47
)
(0.3
)
0.5
0.3
Other
0.1
0.4
0.2
Income tax provision
2,743
19.1
2,248
19.2
3,657
18.7
Valuation Adjustment
1.2
(4
)
(0.1
)
0.0
$
2,911
20.3
%
$
2,244
19.1
%
$
3,665
18.7
%
Note 13 - Employee Benefit Plans
The QNB Bank Retirement Savings Plan provides for elective employee contributions up to the maximum allowed by the IRS and a matching company contribution limited to 3%. In addition, the plan provides for safe harbor non-elective contributions of 5% of total compensation by QNB. QNB contributed a matching contribution of $400,000, $376,000 and $345,000 for the years ended December 31, 2024, 2023, and 2022, respectively, and a safe harbor contribution of $706,000 for 2024, $669,000 for 2023, and $606,000 for 2022.
QNB’s Employee Stock Purchase Plan (the Plan) offers eligible employees an opportunity to purchase shares of QNB Corp. common stock at a 10% discount from the lesser of fair market value on the first or last day of each offering period (as defined by the Plan). At the 2021 Annual Meeting, shareholders approved the 2021 Employee Stock Purchase Plan (the 2021 Plan), which authorizes the issuance of 30,000 shares. As of December 31, 2024, 18,792 shares were issued under the 2021 Plan. The 2021 Plan expires May 31, 2026.
Shares issued pursuant to the Plan were as follows:
Year ended December 31,
Shares
7,339
6,630
5,102
Price per share
$22.00 and $23.20
$23.10
$29.48 and $24.21
QNB implemented the Nonqualified Deferred Compensation Plan (NDCP) during 2023 for the benefit of a select group of its management or highly compensated employees. The purpose of the NDCP is to provide a deferred compensation vehicle to which QNB may credit discretionary amounts on behalf of the participants for recruitment and reward. QNB contributed $136,000 and $108,000 to the NDCP in 2024 and 2023, respectively. The NDCP liability was $244,000 at December 31, 2024.
Note 14 - Stock Option Plan and Non-Employee Director Compensation Plan
QNB has a stock option plan (the 2015 Plan) administered by a committee which consists of three or more members of QNB’s Board of Directors. The 2015 Plan provides for the granting of either (i) Non-Qualified Stock Options (NQSOs) or (ii) Incentive Stock Options (ISOs). The exercise price of an option, as defined by the 2015 Plan, is the fair market value of QNB’s common stock at the date of grant. The 2015 Plan provides for the exercise either in cash or in securities of the Company or in any combination thereof. The 2015 Plan, which expires March 15, 2025, authorizes the issuance of 300,000 shares. The time period by which any option is exercisable under this Plan is determined by the Committee but shall not commence before the expiration of six months after the date of grant. The 2015 Plan was amended, effective January 1, 2023, to increase the maximum term of any options granted under the plan from five years to ten years, and to also require that awards granted under the Plan will vest 20% each consecutive year commencing on the first anniversary date of the award unless otherwise specified in an award agreement. There were 252,550 options granted, 94,450 options forfeited, 20,825 options exercised and 137,275 options outstanding under the 2015 Plan as of December 31, 2024.
As of December 31, 2024, there was approximately $193,000 of unrecognized compensation cost related to unvested stock option awards granted. That cost is expected to be recognized over the next 27 months.
- 93 -
Stock option activity during 2024, 2023, and 2022 was as follows:
Number
of options
Weighted
average
exercise
price
Weighted
average
remaining
contractual
term
(in years)
Aggregate
intrinsic
value
Outstanding at December 31, 2021
113,950
$
37.58
Exercised
-
-
Forfeited
(34,150
)
37.07
Granted
29,350
37.26
Outstanding at December 31, 2022
109,150
37.65
Exercised
-
-
Forfeited
(22,600
)
43.15
Granted
35,000
29.51
Outstanding at December 31, 2023
121,550
34.29
Exercised
-
-
Forfeited
(24,275
)
37.69
Granted
40,000
23.40
Outstanding at December 31, 2024
137,275
$
30.51
5.24
$
Exercisable at December 31, 2024
45,315
$
33.74
1.76
$
As of December 31, 2024, outstanding stock options consist of the following:
Options
outstanding
Exercise
price
Remaining life
(in years)
Options
exercisable
Exercise
price
40,000
$
23.40
9.13
-
$
-
34,200
29.51
8.13
6,840
29.51
19,325
32.50
1.13
19,325
32.50
19,150
36.50
0.12
19,150
36.50
24,600
37.26
2.12
-
-
Outstanding at December 31, 2024
137,275
$
30.51
5.24
45,315
$
33.74
The intrinsic value related to total stock options exercised during 2024, 2023, and 2022 are as follows:
Intrinsic value of stock options exercised
$
-
$
-
$
-
The QNB Corp. 2023 Non-Employee Director Compensation Plan was approved by shareholders on May 23, 2023 (The "Director Compensation Plan"). The Director Compensation Plan authorized the issuance of 50,000 shares, is effective January 1, 2023 and expires on January 1, 2033. The Plan requires each non-employee director of the QNB, or any subsidiary of QNB designated by the Board (including QNB Bank), to receive $8,000 of their total annual compensation for service as a director in the form of the QNB’s common stock. Under the Director Compensation Plan, commencing with the six-month period ended June 30, 2023, each non-employee director will receive, in addition to any cash compensation otherwise payable, a semi-annual grant of such number of shares of the QNB’s common stock determined by dividing (i) the Semi-Annual Stock Payment Amount of $4,000 by (ii) the market value of a share of common stock determined as of June 30 or December 31 of any year, as applicable. Payments will be made under the Director Compensation Plan only to non-employee directors in office on the applicable payment date. As of December 31, 2024, 4,800 shares were issued to non-employee directors and there were 45,200 shares remaining under the Director Compensation Plan. Stock-based compensation expense related to the Director Compensation Plan was $72,000 and $80,000 for the for the years ended December 31, 2024 and 2023, respectively.
Note 15 - Related Party Transactions
QNB has had, and may be expected to have in the future, banking transactions in the ordinary course of business with its executive officers, directors, principal shareholders, their immediate families and affiliated companies. The following table presents activity and amounts due from directors, principal officers, and their related interests. All of these transactions were made in the ordinary course of business on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable
- 94 -
transactions with other persons. These transactions did not involve more than normal risk of collectability or present any other unfavorable features.
Balance, December 31, 2023
$
16,547
New loans
20,851
Repayments
(18,306
)
Balance, December 31, 2024
$
19,092
The following table provides additional information regarding transactions with related parties.
December 31,
Commitments to extend credit
$
5,627
$
5,763
Letters of credit
2,050
2,050
Deposits received
7,232
6,023
Note 16 - Commitments and Contingencies
Financial instruments with off-balance sheet risk:
In the normal course of business there are various legal proceedings, commitments, and contingent liabilities which are not reflected in the Consolidated Financial Statements. Management does not anticipate any material losses as a result of these transactions and activities. They include, among other things, commitments to extend credit and standby letters of credit. The maximum exposure to credit loss, which represents the possibility of sustaining a loss due to the failure of the other parties to a financial instrument to perform according to the terms of the contract, is represented by the contractual amount of these instruments. QNB uses the same lending standards and policies in making credit commitments as it does for on-balance sheet instruments. The activity is controlled through credit approvals, control limits, and monitoring procedures. QNB applies the resulting loss factors under the allowance for credit losses on loans to its unused commitments, assuming: additional funding for commercial lines up to the average line usage for non-pass rated lines with no current usage; and, additional funding up to the average line usage for retail lines with no current usage. This resulted in an allowance for credit losses on unused commitments of $87,000 at December 31, 2024 and $106,000 at December 31, 2023, which is included in other liabilities on the Consolidated Balance Sheets.
A summary of the Bank's financial instrument commitments is as follows:
December 31,
Commitments to extend credit and unused lines of credit
$
329,509
$
378,954
Standby letters of credit
19,018
18,820
Total financial instrument commitments
$
348,527
$
397,774
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require the payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. QNB evaluates each customer’s creditworthiness on a case-by-case basis.
Standby letters of credit are conditional commitments issued by the Bank to guarantee the financial or performance obligation of a customer to a third party. QNB’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for standby letters of credit is represented by the contractual amount of those instruments. The Bank uses the same credit policies in making conditional obligations as it does for on-balance sheet instruments. Standby letters of credit totaling $15,988,000 expire within one year. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending other loan commitments. The Bank requires collateral and personal guarantees supporting these letters of credit as deemed necessary. The amount of collateral obtained for letters of credit and commitments to extend credit is based on management’s credit evaluation of the customer. Collateral varies, but may include real estate, accounts receivable, marketable securities, pledged deposits, inventory or equipment. Management believes that the proceeds obtained through a liquidation of such collateral and the enforcement of personal guarantees would be sufficient to cover the maximum potential amount of future payments required under the corresponding guarantees. The amount of the liability as of December 31, 2024 and 2023 for guarantees under standby letters of credit issued is not material.
- 95 -
Other commitments:
QNB has committed to various operating leases for several of their branch and office facilities. Some of these leases include specific provisions relating to rent increases. A maturity analysis of the operating lease liabilities and reconciliation of the undiscounted cash flows to the total operating lease liability is as follows:
Operating Leases
$
Thereafter
1,926
Total undiscounted cashflows
4,137
Total discount on cashflows
(1,211
)
Total lease liabilities
$
2,926
Some of the leases contain renewal options to extend the initial terms of the lease for periods ranging from five to ten years and certain leases allow for multiple extensions, the commitment for such renewals is not included above if they have not been exercised as of December 31, 2024. Operating lease costs, which include common area maintenance costs not included in the minimum lease payments above, for the years ended December 31, 2024, 2023 and 2022, was $734,000, $723,000 and $712,000, respectively.
Note 17 - Accumulated Other Comprehensive Income (Loss)
The following shows the components of accumulated other comprehensive income (loss) during the periods ended December 31, 2024, 2023 and 2022:
December 31,
Unrealized net holding loss on available-for-sale securities
$
(79,832
)
$
(85,996
)
$
(102,692
)
Tax effect*
17,186
18,059
21,565
Accumulated other comprehensive (loss) income, net of tax
$
(62,646
)
$
(67,937
)
$
(81,127
)
* At blended rates of federal and state tax rates of 21.5%, 21.0% and 21.0%
The following table presents amounts reclassified out of accumulated other comprehensive income (loss) for the years ended December 31, 2024, 2023 and 2022:
Amount reclassified from accumulated other
comprehensive income (loss)
Details about accumulated other comprehensive (loss) income
Affected line item in statement of income
Realized net holding loss on available-for-sale securities
$
(1,096
)
$
(2,058
)
$
(139
)
Net (loss) gain on sales of investment securities
Tax effect*
Provision for income taxes
Total reclassification out of accumulated other
comprehensive (loss) income, net of tax
$
(866
)
$
(1,626
)
$
(110
)
Net of tax
** At blended rates of federal and state tax rates of 21.0%, 21.0% and 21.0%
Note 18 - Fair Value Measurements and Fair Values of Financial Instruments
FASB ASC 820, Fair Value Measurements and Disclosures, defines fair value as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants (fair values are not adjusted for transaction costs). ASC 820 also establishes a framework (fair value hierarchy) for measuring fair value under US GAAP and expands disclosures about fair value measurements.
- 96 -
ASC 820 establishes a fair value hierarchy that prioritizes the inputs to valuation methods used to measure fair value. 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 the fair value hierarchy are as follows:
Level 1:
Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
Level 2:
Quoted prices in markets that are not active, or inputs that are observable either directly or indirectly, for substantially the full term of the asset or liability.
Level 3:
Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported with little or no market activity).
An asset’s or liability’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.
The measurement of fair value should be consistent with one of the following valuation techniques: market approach, income approach, and/or cost approach. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities (including a business). For example, valuation techniques consistent with the market approach often use market multiples derived from a set of comparables. Multiples might lie in ranges with a different multiple for each comparable. The selection of where within the range the appropriate multiple falls requires judgment, considering factors specific to the measurement (qualitative and quantitative). Valuation techniques consistent with the market approach include matrix pricing. Matrix pricing is a mathematical technique used principally to value debt securities without relying exclusively on quoted prices for the specific securities, but rather by relying on the security’s relationship to other benchmark quoted securities.
For financial assets measured at fair value on a recurring and nonrecurring basis, the fair value measurements by level within the fair value hierarchy used were as follows:
December 31, 2024
Quoted prices
in active
markets
for identical
assets
(Level 1)
Significant
other
observable
input
(Level 2)
Significant
unobservable
inputs
(Level 3)
Balance at end
of period
Recurring fair value measurements
Securities available-for-sale
U.S. Treasuries
$
-
$
18,010
$
-
$
18,010
U.S. Government agency securities
-
66,908
-
66,908
State and municipal securities (1)
-
86,352
-
86,352
U.S. Government agencies and sponsored enterprises (GSEs):
Mortgage-backed securities (1)
-
198,510
-
198,510
Collateralized mortgage obligations (CMOs)
-
161,646
-
161,646
Corporate debt securities and money market funds
-
15,082
15,133
Total securities available-for-sale
-
546,508
546,559
Equity securities
-
-
-
-
Total recurring fair value measurements
$
-
$
546,508
$
$
546,559
Nonrecurring fair value measurements *
Collateral dependent loans
$
-
$
-
$
-
$
-
Mortgage servicing rights
-
-
Total nonrecurring fair value measurements
$
-
$
-
$
$
(1) Includes derivatives designated as fair value hedging instruments.
* impairment
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December 31, 2023
Quoted prices
in active
markets
for identical
assets
(Level 1)
Significant
other
observable
input
(Level 2)
Significant
unobservable
inputs
(Level 3)
Balance at end
of period
Recurring fair value measurements
Securities available-for-sale
U.S. Treasuries
$
-
$
6,451
$
-
$
6,451
U.S. Government agency securities
-
74,122
-
74,122
State and municipal securities (1)
-
89,189
-
89,189
U.S. Government agencies and sponsored enterprises (GSEs):
Mortgage-backed securities (1)
-
224,238
-
224,238
Collateralized mortgage obligations (CMOs)
-
89,973
-
89,973
Corporate debt securities
-
6,157
6,209
Total securities available-for-sale
-
490,130
490,182
Equity securities
5,910
-
-
5,910
Total recurring fair value measurements
$
5,910
$
490,130
$
$
496,092
Nonrecurring fair value measurements *
Collateral dependent loans
$
-
$
-
$
$
Mortgage servicing rights
-
-
Total nonrecurring fair value measurements
$
-
$
-
$
$
(1) Includes derivatives designated as fair value hedging instruments.
* impairment
The following table presents additional quantitative information about assets measured at fair value on a nonrecurring basis and for which QNB has utilized Level 3 inputs to determine fair value:
Quantitative information about Level 3 fair value measurements
December 31, 2024
Fair value
Valuation
techniques
Unobservable
input
Value or range
of values
Collateral dependent loans
$
-
Appraisal of collateral
(1)
Appraisal adjustments
(2)
-100%
Liquidation expenses
(3)
%
Mortgage servicing rights
Discounted cash flow
Remaining term
0.4 to 29.2 yrs
Prepayment Speeds
90% to 350%
Discount rate
12.0% to 12.5%
Quantitative information about Level 3 fair value measurements
December 31, 2023
Fair value
Valuation
techniques
Unobservable
input
Value or range
of values
Collateral dependent loans
$
Appraisal of collateral
(1)
Appraisal adjustments
(2)
-20% to -100%
Liquidation expenses
(3)
-10%
Mortgage servicing rights
Discounted cash flow
Remaining term
1.5 to 29.9 yrs
Prepayment Speeds
104% to 214%
Discount rate
12.0% to 12.5%
(1)Fair value is primarily determined through appraisals of the underlying collateral by independent parties, which generally includes various level 3 inputs which are not always identifiable.
(2)Appraisals may be adjusted by management for qualitative factors such as economic conditions and the age of the appraisal. The range is presented as a percent of the initial appraised value.
(3)Appraisals and pending agreements of sale are adjusted by management for estimated liquidation expenses. The range is presented as a percent of the initial appraised value.
- 98 -
The following table presents additional information about the securities available-for-sale measured at fair value on a recurring basis and for which QNB utilized significant unobservable inputs (Level 3 inputs) to determine fair value for the year ended December 31:
Fair value measurements using
significant unobservable inputs (Level 3)
Securities available-for-sale
Balance, beginning of year
$
$
Payments received
(3
)
(1
)
Sale of securities
-
-
Total gains or losses (realized/unrealized)
Included in earnings
-
-
Included in other comprehensive
income
-
Transfers in and/or out of Level 3
-
-
Balance, end of year
$
$
There were also no transfers in or out of level 3 for the same periods. There were no losses included in earnings attributable to the change in unrealized gains or losses relating to the available-for-sale securities above with fair value measurements utilizing significant unobservable inputs for the years ended December 31, 2024 and 2023.
The Level 3 securities consist of one collateralized debt obligation security (“PreTSL”), which is backed by trust preferred securities issued by banks. The market for this security at December 31, 2024 was not active and markets for similar securities also are not active. The new issue market is also inactive and there are currently very few market participants who are willing and or able to transact for these securities.
Given conditions in the debt markets today and the absence of observable transactions in the secondary and new issue markets, we determined:
•The few observable transactions and market quotations that are available are not reliable for purposes of determining fair value at December 31, 2024;
•An income valuation approach technique (present value technique) that maximizes the use of relevant observable inputs and minimizes the use of unobservable inputs will be equally or more representative of fair value than the market approach valuation technique used at prior measurement dates; and
•PreTSLs will be classified within Level 3 of the fair value hierarchy because significant adjustments are required to determine fair value at the measurement date.
The Bank used an independent third party to value this security using a discounted cash flow analysis. Based on management’s review of the bond’s single underlying issuer, there are no expected credit losses or prepayments; cashflows used were contractual based on the Bloomberg YA screen. The assumed cashflows have been discounted using an estimated market discount rate based on the 30-year swap rate. The 30-year swap rate is used as the reference rate since it is indicative of market expectation for short-term rates in the future. This is consistent with the 30-year nature of PreTSL securities, which are priced using the 3-month LIBOR as a reference rate. The discount rate of 8.6% includes the risk-free rate, a credit component and a spread for illiquidity.
The following information should not be interpreted as an estimate of the fair value of QNB since a fair value calculation is only provided for a limited portion of QNB’s assets and liabilities. Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between QNB’s disclosures and those of other companies may not be meaningful.
The following methods and assumptions were used to estimate the fair values of each major classification of financial instrument and non-financial asset at December 31, 2024 and 2023:
Cash and cash equivalents, accrued interest receivable and accrued interest payable (carried at cost): The carrying amounts reported in the balance sheet approximate those assets’ fair value.
Investment securities (including derivative instruments) (carried at fair value): The fair value of securities is primarily determined by obtaining quoted market prices on nationally recognized securities exchanges (Level 1), or matrix pricing (Level 2), 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. Level 2 debt securities are valued by a third-party pricing service commonly used in the banking industry. Level 2 fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution date,
- 99 -
market consensus prepayment speeds, credit information and the security’s terms and conditions, among other things. For certain securities which are not traded in active markets or are subject to transfer restrictions, valuations are adjusted to reflect illiquidity and/or non-transferability, and such adjustments are generally based on available market evidence (Level 3). In the absence of such evidence, management’s best estimate is used. Management’s best estimate consists of both internal and external support on certain Level 3 investments. Cash flow models using a present value formula that includes assumptions market participants would use along with indicative exit pricing obtained from broker/dealers (where available) were used to support fair values of certain Level 3 investments.
The fair value of derivatives instruments designated as fair value hedges are based on estimates QNB would receive or pay to terminate the contracts or agreement, taking into account current interest rates and when appropriate, the credit-worthiness of the counterparties; these values are included in Level 2.
Restricted investment in stocks (carried at cost): The fair value of stock in ACBB, the FHLB, the SHCPFIC and VISA Class B-2 is the carrying amount, based on redemption provisions, and considers the limited marketability of such securities.
Loans Held for Sale (carried at lower of cost or fair value): The fair value of loans held for sale is determined, when possible, using quoted secondary market prices. If no such quoted prices exist, the fair value of a loan is determined using quoted prices for a similar loan or loans, adjusted for the specific attributes of that loan.
Loans Receivable (carried at cost): The fair values of loans are estimated using discounted cash flow analyses, using market rates at the balance sheet date that reflect the credit and interest rate-risk inherent in the loans. Projected future cash flows are calculated based upon contractual maturity or call dates, projected repayments and prepayments of principal. Generally, for variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values.
Collateral Dependent Loans (generally collateral value less cost to sell): Collateral dependent loans are loans for which the Company has measured generally based on the fair value of the loan’s collateral, less cost to sell. The 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.
Mortgage Servicing Rights (carried at lower of cost or fair value): The fair value of mortgage servicing rights is based on a valuation model that calculates the present value of estimated net servicing income. The mortgage servicing rights are stratified into tranches based on predominant characteristics, such as interest rate, loan type and investor type. The valuation incorporates assumptions that market participants would use in estimating future net servicing income.
Deposit liabilities (carried at cost): The fair value of deposits with no stated maturity (e.g. demand deposits, interest-bearing demand accounts, money market accounts and savings accounts) are by definition, equal to the amount payable on demand at the reporting date (i.e. their carrying amounts). This approach to estimating fair value excludes the significant benefit that results from the low-cost funding provided by such deposit liabilities, as compared to alternative sources of funding. Deposits with a stated maturity (time deposits) have been valued using the present value of cash flows discounted at rates approximating the current market for similar deposits.
Short-term borrowings (carried at cost): The carrying amount of short-term borrowings approximates their fair values.
Long-term debt (carried at cost): Long-term debt has stated maturities and have been valued using the present value of cash flows discounted at rates approximating the current market for similar debt instruments.
Subordinated debt (carried at cost): Subordinated debt has stated maturities and call dates and have been valued using the present value of cash flows discounted at rates approximating the current market for similar debt instruments.
Off-balance-sheet instruments (disclosed at cost): The fair value for the Bank’s off-balance sheet instruments (lending commitments and letters of credit) are based on fees currently charged in the market to enter into similar agreements, taking into account, the remaining terms of the agreements and the counterparties’ credit standing.
Management uses its best judgment in estimating the fair value of QNB’s financial instruments; however, there are inherent weaknesses in any estimation technique. Therefore, for substantially all financial instruments, the fair value estimates herein are not necessarily indicative of the amounts the Company could have realized in a sales transaction on the dates indicated. The estimated fair value amounts have been measured as of the respective period ends and have not been re-evaluated or updated for purposes of these financial statements subsequent to those respective dates. As such, the estimated fair values of these financial instruments subsequent to the respective reporting dates may be different than the amounts reported at each year end.
- 100 -
The estimated fair values and carrying amounts of QNB’s financial and off-balance sheet instruments are summarized as follows:
Fair value measurements
December 31, 2024
Carrying
amount
Fair value
Quoted
prices in
active
markets for
identical
assets
(Level 1)
Significant
other
observable
inputs
(Level 2)
Significant
unobservable
inputs
(Level 3)
Financial assets
Cash and cash equivalents
$
50,713
$
50,713
$
50,713
$
-
$
-
Investment securities:
Available-for-sale (1)
546,559
546,559
-
546,508
Equity
-
-
-
-
-
Restricted investment in bank stocks
5,436
5,436
-
5,436
-
Loand held for sale
-
-
Net loans
1,207,304
1,212,780
-
-
1,212,780
Mortgage servicing rights
-
-
Accrued interest receivable
4,965
4,965
-
4,965
-
Financial liabilities
Deposits with no stated maturities
$
1,247,083
$
1,247,083
$
1,247,083
$
-
$
-
Deposits with stated maturities
381,458
379,960
-
379,960
-
Short-term borrowings
53,844
53,844
53,844
-
-
Long-term debt
30,000
30,033
-
30,033
-
Subordinated debt
39,068
40,600
-
40,600
-
Accrued interest payable
7,580
7,580
-
7,580
-
Off-balance sheet instruments
Commitments to extend credit
$
-
$
-
$
-
$
-
$
-
Standby letters of credit
-
-
-
(1) Includes derivatives designated as fair value hedging instruments.
- 101 -
Fair value measurements
December 31, 2023
Carrying
amount
Fair value
Quoted
prices in
active
markets for
identical
assets
(Level 1)
Significant
other
observable
inputs
(Level 2)
Significant
unobservable
inputs
(Level 3)
Financial assets
Cash and cash equivalents
$
62,657
$
62,657
$
62,657
$
-
$
-
Investment securities:
Available-for-sale (1)
490,182
490,182
-
490,130
Equity
5,910
5,910
5,910
-
-
Restricted investment in bank stocks
2,730
2,730
-
2,730
-
Loand held for sale
-
-
Net loans
1,084,681
1,077,544
-
-
1,077,544
Mortgage servicing rights
-
-
Accrued interest receivable
6,101
6,101
-
6,101
-
Financial liabilities
Deposits with no stated maturities
$
1,173,732
$
1,173,732
$
1,173,732
$
-
$
-
Deposits with stated maturities
314,981
311,735
-
311,735
-
Short-term borrowings
94,094
94,094
94,094
-
-
Long-term debt
20,000
19,906
-
19,906
-
Accrued interest payable
5,294
5,294
-
5,294
-
Off-balance sheet instruments
Commitments to extend credit
$
-
$
-
$
-
$
-
$
-
Standby letters of credit
-
-
-
(1) Includes derivatives designated as fair value hedging instruments.
Note 19 - Derivatives and Hedging Activities
QNB's risk management objective with respect to derivative financial instruments is to hedge the risk of changes in the fair value of certain fixed-rate available-for-sale investment securities, included in a closed portfolio, for changes in the Secured Overnight Financing Rate ("SOFR"), to add stability to interest income and to manage its exposure to interest rate movements. The effective and ineffective portions of changes in the fair value of each derivative financial instrument is reported in accumulated other comprehensive (loss) income, net of tax, and are reclassified to interest income as interest payments are made or received on the hedged portfolios. QNB assesses the effectiveness of each hedging relationship using a regression analysis of prior periodic changes in fair value of both the hedge and the hedged item. In the assessment of hedge effectiveness, QNB will consider the likelihood of the counterparty's compliance with the contractual terms of the hedging derivative that could require the counterparty to make payments (counterparty default risk). If the likelihood that the counterparty will not default ceases to be probable, the hedge may no longer be highly effective and hedge ineffectiveness due to counterparty payment risk will be assessed.
The following table presents the notional amounts of derivatives designated as fair value hedging instruments at December 31, 2024 and 2023. QNB pledges cash or securities to cover the negative fair value of derivatives instruments. Cash collateral associated with the derivative instruments are not added to or netted against the fair value amounts.
- 102 -
At December 31, 2024
At December 31, 2023
Interest Rate Swaps-Fair Value Hedges
Interest Rate Swaps-Fair Value Hedges
Balance Sheet Classification
Notional Amount
Amortized Cost of Hedged Portfolio
Cumulative Amount of Fair Value Hedging Adjustment Included in Carrying Amount of Hedged Asset
Notional Amount
Amortized Cost of Hedged Portfolio
Cumulative Amount of Fair Value Hedging Adjustment Included in Carrying Amount of Hedged Asset
Investment Securities Available-for-sale:
State and municipal securities
$
75,000
$
96,709
$
1,566
$
75,000
$
97,373
$
(445
)
U.S. Government agencies and GSE mortgage backed securities
225,000
309,546
3,264
225,000
343,453
(1,304
)
Total
$
300,000
$
406,255
$
4,830
$
300,000
$
440,826
$
(1,749
)
The following table presents amounts of included in the Consolidated Statements on Income for derivatives designated as fair value hedging instruments for the years ended December 31, 2024 and 2023.
For the year ended
December 31,
Income Sheet Classification
Interest and dividends on available-for-sale and equity securities:
State and municipal securities
Recognized on fair value hedge
$
3,910
$
2,180
Recognized on hedge portfolio
(2,664
)
(1,470
)
Recognized on remeasurement of fair value hedge
U.S. Government agencies and GSE mortgage backed securities
Recognized on fair value hedge
11,731
6,517
Recognized on hedge portfolio
(8,243
)
(4,483
)
Recognized on remeasurement of fair value hedge
Total
$
4,778
$
2,801
- 103 -
Note 20 - Revenue Recognition from Contracts with Customer
QNB generally fully satisfies its performance obligations on its contracts with customers as services are rendered and the transaction prices are typically fixed; charged either on a periodic basis or based on activity. Because performance obligations are satisfied as services are rendered and the transaction prices are fixed, there is little judgment involved in applying Topic 606 that significantly affects the determination of the amount and timing of revenue from contracts with customers. The main types of revenue contracts included in non-interest income within the Consolidated Statements of Income are as follows:
•Fees for services to customers-fees include service charges on deposits which are included as liabilities in the consolidated statement of financial position and consist of transaction-based fees, stop payment fees, Automated Clearing House (ACH) fees, account maintenance fees, and overdraft services fees for various retail and business checking customers. These fees are charged as earned on the day of the transaction or within the month of the service, with the exception of Enhanced Account Analysis Fees, which are calculated on the previous month’s activity and assessed on the following month. The Enhanced Account Analysis Fees are currently being accrued; the revenue is currently being recorded in the month it is earned. Service charges on deposits are withdrawn directly from the customer’s account balance.
•ATM and debit card - fees are recognized at the time the transaction is executed as that is the point in time QNB fulfills the customer’s request.
•Retail brokerage and advisory-fee income and related expenses are accrued monthly to properly record the revenues in the month they are earned. Advisory fees are collected in advance on a quarterly basis. These advisory fees are received in the first month of the quarter for which the service is being performed and recognized evenly in each month of the quarter. Fees that are transaction based are recognized at the point in time that the transaction is executed (i.e. trade date).
•Merchant - QNB earns interchange fees from credit/debit cardholder transactions conducted through VISA/MasterCard payment networks. Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized monthly, concurrently with the transaction processing services provided to the cardholder within the month.
•Other-includes credit card fees, sales of checks to depositors, miscellaneous fees and gain/losses on sale of other real estate owned (OREO).
•Credit card fees are recognized monthly, concurrently with the transaction processing services provided to the cardholder within the month.
•Sales of checks to depositors are commissions earned from a third-party who provides checks to QNB’s customers. There is a pre-paid incentive with the third party which is recognized over the term of the contract. Other commissions on the sales of checks are recorded weekly.
•Miscellaneous fees, such as wire, cashier check and garnishment fees, are charged as earned on the day of the transaction.
•Gain (loss) on sales of OREO - QNB records a gain or loss from the sale of OREO when control of the property transfers to the buyer, which generally occurs at the time of an executed deed. When QNB finances the sale of OREO to the buyer, QNB assesses whether the buyer is committed to perform their obligations under the contract and whether collectability of the transaction price is probable. Once these criteria are met, the OREO asset is derecognized and the gain or loss on sale is recorded upon the transfer of control of the property to the buyer. In determining the gain or loss on the sale, QNB adjusts the transaction prices and related gain (loss) on sale if a significant financing component is present.
- 104 -
Note 21 - Parent Company Financial Information
Condensed financial statements of QNB Corp. only:
Balance Sheets
December 31,
Assets
Cash and cash equivalents
Balances with subsidiary or affiliated depository institutions
$
1,193
$
-
Balances with unrelated depository institutions
3,414
Investment securities:
Available-for-sale (amortized cost $18,004 and $6,448)
18,010
6,451
Equity securities (cost of $0 and $5,695)
-
5,910
Investment in subsidiary
120,576
77,173
Other assets
Total assets
$
143,867
$
90,851
Liabilities
Subordinated debt
$
39,068
$
-
Other liabilities
1,450
Total liabilities
40,518
Shareholders' equity
103,349
90,824
Total liabilities and shareholders' equity
$
143,867
$
90,851
Statements of Income
Year ended December 31,
Dividends from subsidiary
$
7,023
$
4,407
$
4,329
Interest, dividend and other income
Securities gains (losses)
(19
)
Net unrealized (loss) gain on investment equity securities
(215
)
(1,026
)
Total income
8,058
5,155
4,066
Expenses
1,923
Income before applicable income taxes and equity in
undistributed income of subsidiary
6,135
4,494
3,570
Provision for income tax (benefit) expense
(99
)
(1
)
(235
)
Income before equity in undistributed income of subsidiary
6,234
4,495
3,805
Equity in undistributed income of subsidiary
5,214
4,988
12,116
Net income
$
11,448
$
9,483
$
15,921
Statements of Comprehensive Income (Loss)
Year ended December 31,
Before
tax
amount
Tax
expense
(benefit)
Net of
tax
amount
Before
tax
amount
Tax
expense
(benefit)
Net of
tax
amount
Before
tax
amount
Tax
expense
(benefit)
Net of
tax
amount
Net income
$
14,359
$
2,911
$
11,448
$
11,727
$
2,244
$
9,483
$
19,586
$
3,665
$
15,921
Other comprehensive income/(loss):
Net unrealized holding gain/(loss) on available-for-sale securities:
Unrealized holding (loss)/gain arising during the period
5,068
4,425
14,638
3,074
11,564
(98,097
)
(20,600
)
(77,497
)
Reclassification adjustment for loss included in net income
1,096
2,058
1,626
Other comprehensive income/(loss):
6,164
5,291
16,696
3,506
13,190
(97,958
)
(20,571
)
(77,387
)
Total comprehensive income (loss)
$
20,523
$
3,784
$
16,739
$
28,423
$
5,750
$
22,673
$
(78,372
)
$
(16,906
)
$
(61,466
)
- 105 -
Statements of Cash Flows
Year ended December 31,
Operating Activities
Net income
$
11,448
$
9,483
$
15,921
Adjustments to reconcile net income to net cash provided
by operating activities:
Equity in undistributed income from subsidiary
(5,214
)
(4,988
)
(12,116
)
Net securities gains (losses)
(517
)
(405
)
Net unrealized loss (gain) on investment equity securities
(250
)
1,026
Stock-based compensation expense
Accretion of discounts on investment securities
(349
)
(174
)
(6
)
Amortization of deferred costs on subordinated debt
-
-
Increase (decrease) in other liabilities
(36
)
(266
)
Decrease (increase) in other assets
(122
)
(121
)
Deferred income tax (benefit) provision
(285
)
Net cash provided by operating activities
6,351
4,159
3,833
Investing activities
Purchase of investment equity securities
(1,170
)
(2,179
)
(1,860
)
Purchase of investment securities available-for-sale
(35,783
)
(14,275
)
(1,193
)
Proceeds from sale of investment equity securities
7,382
8,556
1,594
Proceeds from maturities of investment securities available-for-sale
24,575
7,800
Capital contribution to Bank
(32,900
)
-
-
Net cash (used) provided by investing activities
(37,896
)
(98
)
(559
)
Financing activities
Issuance of subordinated debt
40,000
-
-
Cash dividend paid
(4,798
)
(4,671
)
(4,498
)
Treasury stock purchase
-
-
(75
)
Proceeds from issuance of common stock
Net cash provided by (used) by financing activities
35,587
(3,849
)
(4,155
)
Increase (decrease) in cash and cash equivalents
4,042
(881
)
Cash and cash equivalents at beginning of year
1,234
Cash and cash equivalents at end of year
$
4,607
$
$
Note 22 - Regulatory Restrictions
Dividends payable by the Company and the Bank are subject to various limitations imposed by statutes, regulations and policies adopted by bank regulatory agencies. Under Pennsylvania and Federal banking law, the Bank is subject to certain restrictions on the amount of dividends that it may declare without prior regulatory approval. Under Federal Reserve regulations, the Bank is limited as to the amount it may lend affiliates, including the Company, unless such loans are collateralized by specific obligations.
Both the Company and the Bank are subject to regulatory capital requirements administered by Federal bank regulatory agencies. Failure to meet minimum capital requirements can initiate actions by regulators that could have an effect on the financial statements. Under the framework for prompt corrective action, both the Company and the Bank must meet capital guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance-sheet items. The capital amounts and classification are also subject to qualitative judgments by the regulators. Management believes, as of December 31, 2024, that the Company and the Bank met capital adequacy requirements to which they were subject.
- 106 -
The Bank is presently considered to be “well capitalized” under the regulatory framework. To be categorized as well capitalized, the Company and the Bank must maintain minimum ratios set forth in the table below. The Company and the Bank’s actual capital amounts and ratios are presented as follows:
Capital levels
Actual
Adequately capitalized
Well capitalized
As of December 31, 2024
Amount
Ratio
Amount
Ratio
Amount
Ratio
Total risk-based capital (to risk-weighted
assets):
Consolidated
$
214,826
15.56
%
110,480
8.00
%
138,100
10.00
%
Bank
192,057
13.92
110,396
8.00
137,995
10.00
Tier I capital (to risk-weighted assets):
Consolidated
165,995
12.02
82,860
6.00
82,860
6.00
Bank
183,226
13.28
82,797
6.00
110,396
8.00
Common equity tier 1 capital (to risk-
weighted assets):
Consolidated
165,995
12.02
62,145
4.50
N/A
N/A
Bank
183,226
13.28
62,098
4.50
89,696
6.50
Tier I capital (to average assets):
Consolidated
165,995
8.70
76,357
4.00
N/A
N/A
Bank
183,226
9.71
75,483
4.00
94,353
5.00
Capital levels
Actual
Adequately capitalized
Well capitalized
As of December 31, 2023
Amount
Ratio
Amount
Ratio
Amount
Ratio
Total risk-based capital (to risk-weighted
assets):
Consolidated
$
167,711
13.09
%
102,513
8.00
%
128,142
10.00
%
Bank
154,062
12.20
101,032
8.00
126,290
10.00
Tier I capital (to risk-weighted assets):
Consolidated
158,753
12.39
76,885
6.00
76,885
6.00
Bank
145,104
11.49
75,774
6.00
101,032
8.00
Common equity tier 1 capital (to risk-
weighted assets):
Consolidated
158,753
12.39
57,664
4.50
N/A
N/A
Bank
145,104
11.49
56,830
4.50
82,088
6.50
Tier I capital (to average assets):
Consolidated
158,753
8.92
71,185
4.00
N/A
N/A
Bank
145,104
8.18
70,961
4.00
88,701
5.00
- 107 -
Note 23 - Consolidated Quarterly Financial Data (Unaudited)
The unaudited quarterly results of operations for the years ended 2024 and 2023 are in the following table:
Quarters Ended 2024
Quarters Ended 2023
March 31
June 30
September 30
December 31
March 31
June 30
September 30
December 31
Interest income
$
19,569
$
20,345
$
21,945
$
22,209
$
15,463
$
15,865
$
18,497
$
19,257
Interest expense
9,401
9,753
10,818
11,234
5,046
6,532
8,284
9,065
Net interest income
10,168
10,592
11,127
10,975
10,417
9,333
10,213
10,192
(Reversal of) provision for credit losses
(86
)
(255
)
(1,805
)
Non-interest income
1,836
1,465
1,967
1,645
1,219
1,580
1,755
Non-interest expense
8,833
8,934
8,636
9,081
8,200
8,492
8,671
8,746
Income before income taxes
3,257
3,009
4,299
3,794
5,241
2,212
2,838
1,436
Provision for income taxes
1,123
Net Income
$
2,594
$
2,465
$
3,338
$
3,051
$
4,118
$
1,887
$
2,344
$
1,134
Earnings Per Share - basic *
$
0.71
$
0.67
$
0.91
$
0.83
$
1.15
$
0.52
$
0.65
$
0.31
Earnings Per Share - diluted *
$
0.71
$
0.67
$
0.91
$
0.83
$
1.15
$
0.52
$
0.65
$
0.31
* Due to rounding, quarterly earnings per share may not sum to annual earnings per share
- 108 -
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
a)Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of QNB’s Chief Executive Officer, or CEO, and Chief Financial Officer, or CFO (its principal executive officer and principal financial officer), management has evaluated the effectiveness of the design and operation of QNB’s disclosure controls and procedures as of December 31, 2024. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934, as amended, or the Exchange Act, is recorded, processed, summarized and reported within the time periods required by the Securities and Exchange Commission, or the SEC, and that such information is accumulated and communicated to QNB’s management, including the CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.
Based on and as of the date of such evaluation, our CEO and CFO concluded that the design and operation of our disclosure controls and procedures were effective as of the end of the period covered by this Report.
b)Internal Control over Financial Reporting
Information required by this item is set forth in Management’s Report included under Item 8, which is incorporated by reference into this item.
c)Changes in Internal Control over Financial Reporting
On May 14, 2013, COSO issued an updated version of its Internal Control - Integrated Framework, referred to as the 2013 COSO Framework. Management’s assessment of the overall effectiveness of our internal controls over financial reporting for the year ended December 31, 2024 was based on the 2013 COSO Framework.
There were no changes to the Company’s internal controls over financial reporting (as defined in Rule 13a-15(f) of the Securities Exchange Act) during the quarter ended December 31, 2024 that materially affected, or are reasonably likely to materially affect, the Company’s control over financial reporting.
ITEM 9B. OTHER INFORMATION
Securities Trading Plans of Directors and Executive Officers
During the three months ended December 31, 2024, none of QNB’s directors or executive officers adopted or terminated any contract, instruction or written plan for the purchase or sale of the QNB's securities that was intended to satisfy the affirmation defense conditions of Rule 10b5-1(c) or any "non-Rule 10b5-1 trading arrangement" as defined in Item 408 of SEC Regulation S-K.
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
None.
- 109 -
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by Item 10 is incorporated by reference to information appearing in QNB Corp.’s definitive proxy statement to be used in connection with the 2025 Annual Meeting of Shareholders under the captions:
•“Election of Directors”
•“Governance of the Company - Code of Ethics”
•“Meetings and Committees of the Board of Directors of QNB and the Bank”
•“Executive Officers of QNB and/or the Bank”
The Company has adopted a Code of Business Conduct and Ethics applicable to its CEO, CFO and Controller as well as its long-standing Code of Ethics which applies to all directors and employees. The codes are available on the Company’s website at www.qnbbank.com.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated by reference to the information appearing in QNB Corp.’s definitive proxy statement to be used in connection with the 2025 Annual Meeting of Shareholders under the captions:
•“Compensation Committee Report”
•“Executive Compensation”
•“Director Compensation”
•“Compensation Tables”
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Equity Compensation Plan Information
The following table summarizes QNB’s equity compensation plan information as of December 31, 2024. Information is included for both equity compensation plans approved by QNB shareholders and equity compensation plans not approved by QNB shareholders.
Plan Category
Number of shares to be
issued upon exercise of
outstanding options,
warrants and rights
Weighted-average
exercise price of
outstanding options,
warrants and rights
Number of shares
available for future
issuance under equity
compensation plans
[excluding securities
reflected in column (a)]
(a)
(b)
(c)
Equity compensation plans approved by QNB shareholders:
2015 Stock option plan
137,275
$
30.51
141,900
2021 Employee stock purchase plan
-
-
8,767
Equity compensation plans not approved by QNB shareholders:
None
-
-
-
Total
137,275
$
30.51
150,667
Additional information required by Item 12 is incorporated by reference to the information appearing in QNB Corp.’s definitive proxy statement to be used in connection with the 2025 Annual Meeting of Shareholders under the captions:
•“Security Ownership of Certain Beneficial Owners and Management”
- 110 -
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by Item 13 is incorporated by reference to the information appearing in QNB Corp.’s definitive proxy statement to be used in connection with the 2025 Annual Meeting of Shareholders under the captions:
•“Certain Relationships and Related Party Transactions”
•“Governance of the Company - Director Independence”
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by Item 14 is incorporated by reference to the information appearing in QNB Corp.’s definitive proxy statement to be used in connection with the 2025 Annual Meeting of Shareholders under the captions:
•“Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of Independent Auditors”
•“Audit Fees, Audit Related Fees, Tax Fees, and All Other Fees”
- 111 -
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a)1. Financial Statements
The following financial statements are included by reference in Part II, Item 8 hereof.
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Comprehensive Income (Loss)
Consolidated Statements of Shareholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
2. Financial Statement Schedules
The financial statement schedules required by this Item are omitted because the information is either inapplicable, not required or is in the Consolidated Financial Statements as a part of this Report.
- 112 -
3. The following exhibits are incorporated by reference herein or filed with this Form 10-K:
3.1-
Articles of Incorporation of Registrant, as amended. (Incorporated by reference to Exhibit 3(i) of Registrant's Annual Report on Form 10-K, SEC File No. 0-17706, filed with the Commission on March 13, 2015)
3.2-
By-laws of Registrant, as amended January 26, 2021. (Incorporated by reference to Exhibit 3.1 of the Registrant's Report on Form 8-K, SEC File No. 0-17706, filed with the Commission on January 27, 2021)
4.1-
Description of Capital Securities (Incorporated by reference to Exhibit 4.1 of Registrant's Annual Report on Form 10-K, SEC File No. 0-17706, filed with the Commission on March 11, 2021)
4.2-
Form of Subordinated Note, dated August 30, 2024. (Incorporated be reference to Exhibit 4.1 of Registrant's Current Report on Form 8-K, SEC file No. 0-17706, filed with the Commission on September 3, 2024.)
10.1-
Employment Agreement between Registrant and David W. Freeman. (Incorporated by reference to Exhibit 10.1 of Registrant’s Current Report on Form 8-K, SEC File No. 0-17706, filed with the Commission on December 28, 2012)*
10.2-
Change of Control Agreement between Registrant and Scott G. Orzehoski. (Incorporated by reference to Exhibit 10.2 of the registrant's Annual Report on Form 10-K, SEC File No. 0-17706 filed with the Commission on March 14, 2023)*
10.3-
Change of Control Agreement between Registrant and Jeffrey Lehocky. (Incorporated by reference to Exhibit 10.1 of Registrant’s Annual Report on Form 8-K, SEC File No. 0-17706, filed with the Commission on November 3, 2022)*
10.4-
Change of Control Agreement between Registrant and Christopher T. Cattie. (Incorporated by reference to Exhibit 10.9 of Registrant’s Annual Report on Form 10-K, SEC File No. 0-17706, filed with the Commission on March 14, 2016)*
10.5-
Change of Control Agreement between Registrant and Courtney L. Covelens. (Incorporated by reference to Exhibit 10.5 of the registrant's Annual Report on Form 10-K, SEC File No. 0-17706 filed with the Commission on March 14, 2023)*
10.6-
Change of Control Agreement between Registrant and Christina S. McDonald. (Incorporated by reference to Exhibit 10.6 of the registrant's Annual Report on Form 10-K, SEC File No. 0-17706 filed with the Commission on March 14, 2023*
10.7-
QNB Corp 2015 Stock Incentive Plan (Incorporated by reference to Exhibit A to QNB Corp.’s proxy statement, filed April 15, 2015)*
10.8-
Amendment to the QNB Corp 2015 Stock Incentive Plan (Incorporated by reference to Exhibit 10.1 to QNB Corp.’s Form 8-K statement, filed October 31, 2022)*
10.9-
QNB Corp. 2021 Employee Stock Purchase Plan. (Incorporated by reference to Exhibit A to QNB Corp.’s proxy statement, filed with the Commission on April 15, 2021)
10.10-
QNB Corp. 2023 Non-Employee Director Compensation Plan. (Incorporated by reference to Appendix A to QNB Corp.'s proxy statement, filed April 11, 2023)*
10.11-
QNB Bank Nonqualified Deferred Compensation Plan effective August 1, 2023 (Incorporated by reference to Exhibit 10.11 of the registrant's Annual Report on Form 10-K, SEC File No. 00-17706 filed Commission on March 15, 2024)*.
10.12-
Form of Subordinated Note Purchase Agreement, dated August 30, 2024. (Incorporated by reference to Exhibit 10.1 of Registrant's Current Report on Form 8-K, SEC File no. 0-17706, filed with the Commission on September 3, 2024.)
19.1-
Policies and Procedures Governing Trading in Securities and Confidentiality of of Insider Information for Officers, Directors and Other Information Sensitive Employees
21.1-
Subsidiaries of the Registrant
23.1-
Consent of Independent Registered Public Accounting Firm
31.1-
Section 302 Certification of the Chief Executive Officer
31.2-
Section 302 Certification of the Chief Financial Officer
32.1-
Section 906 Certification of the Chief Executive Officer
32.2-
Section 906 Certification of the Chief Financial Officer
* Indicates compensatory plan or arrangement
The following Exhibits are being furnished ** as part of this report:
No.
Description
101.INS
Inline XBRL Instance Document **
101.SCH
Inline XBRL Taxonomy Extension Schema With Embedded Linkbase Documents **
Cover page interactive data file (formatted as inline XBRL and continued in Exhibit 101).
** These interactive data files are being furnished as part of this Annual Report, and, in accordance with Rule 402 of Regulation S-T, shall not be deemed filed for purposes of Section 11 or 12 of the Securities Act of 1933, as amended, or Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability under those sections.
- 113 -
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
QNB Corp.
March 18, 2025
BY:
/s/ David W. Freeman
David W. Freeman
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report is signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated
/s/ Randy S. Bimes
Director, Chairman
March 18, 2025
Randy S. Bimes
/s/ David W. Freeman
Chief Executive Officer,
March 18, 2025
David W. Freeman
Principal Executive
Officer and Director
/s/ Autumn R. Bayles
Director
March 18, 2025
Autumn R. Bayles
/s/ Laurie A. Bergman
Director
March 18, 2025
Laurie A. Bergman
/s/ Kenneth F. Brown, Jr.
Director
March 18, 2025
Kenneth F. Brown, Jr.
/s/ Gerald E.Gorski
Director
March 18, 2025
Gerald E. Gorski
/s/ Jennifer L. Mann
Director
March 18, 2025
Jennifer L. Mann
/s/ Ranajoy Ray-Chaudhuri
Director
March 18, 2025
Ranajoy Ray-Chaudhuri
/s/ W. Randall Stauffer
Director
March 18, 2025
W. Randall Stauffer
/s/ Scott R. Stevenson
Director
March 18, 2025
Scott R. Stevenson
/s/ Jeffrey Lehocky
Chief Financial Officer
March 18, 2025
Jeffrey Lehocky
(Principal Financial Officer)
/s/ Mary E. Liddle
Chief Accounting Officer
March 18, 2025
Mary E. Liddle
(Principal Accounting Officer)
- 114 -

---

ITEM 3. LEGAL PROCEEDINGS

---

ITEM 4. MINE SAFETY DISCLOSURE
ITEM 4. MINE SAFETY DISCLOSURES
None
- 15 -
PART II

---

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Stock Information
QNB common stock is quoted on the over-the-counter bulletin board (“OTCBB”). QNB had approximately 627 shareholders of record as of February 28, 2025.
The following table sets forth the high and low bid and ask stock prices for QNB common stock on a quarterly basis during 2024 and 2023. These prices reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.
Cash
High
Low
dividend
Bid
Ask
Bid
Ask
per share
First Quarter
$
26.19
$
27.69
$
22.00
$
23.00
$
0.37
Second Quarter
23.75
23.95
22.25
22.95
0.37
Third Quarter
29.70
30.25
22.70
23.39
0.37
Fourth Quarter
33.92
35.00
28.50
29.14
0.37
First Quarter
$
29.51
$
32.00
$
24.92
$
25.00
$
0.37
Second Quarter
25.05
25.70
22.00
22.43
0.37
Third Quarter
24.20
24.75
22.57
22.94
0.37
Fourth Quarter
25.28
27.75
21.50
21.85
0.37
QNB has traditionally paid quarterly cash dividends on the last Friday of each quarter. The Company expects to continue the practice of paying quarterly cash dividends to its shareholders; however, future dividends are dependent upon future earnings, financial condition, appropriate legal restrictions, and other factors relevant at the time the board of directors considers declaring a dividend. Certain laws restrict the amount of dividends that may be paid to shareholders in any given year. See “Shareholders’ Equity - Capital Adequacy” included in Item 7 of this Form 10-K filing and Note 22 of the Notes to Consolidated Financial Statements included in Item 8 of this Form 10-K filing, for additional information that discusses and quantifies this regulatory restriction.
The following table provides information on repurchases by QNB of its common stock in each month of the quarter ended December 31, 2024.
Period
Total Number
of Shares
Purchased
Average Price
Paid per Share
Total Number
of Shares
Purchased as
Part of Publicly
Announced
Plan
Maximum
Number of
Shares that
may yet be
Purchased
Under the Plan
October 1, 2024 through October 31, 2024
-
$
-
-
98,000
November 1, 2024 through November 30, 2024
-
-
-
98,000
December 1, 2024 through December 31, 2024
-
-
-
98,000
Total
-
$
-
-
98,000
(1)Transactions are reported as of settlement dates.
(2)QNB’s current stock repurchase plan was originally approved by its Board of Directors and announced on January 24, 2008 and subsequently increased on February 9, 2009 and April 27, 2021.
(3)The total number of shares approved for repurchase under QNB’s current stock repurchase plan is 200,000 as of the filing of this Form 10-K.
(4)QNB’s current stock repurchase plan has no expiration date.
(5)QNB has no stock repurchase plan that it has determined to terminate or under which it does not intend to make further purchases.
- 16 -
Stock Performance Graph
Set forth below is a performance graph comparing the yearly cumulative total shareholder return on QNB’s common stock with:
•the yearly cumulative total shareholder return on stocks included in the NASDAQ Composite Index, a broad market index;
•the yearly cumulative total shareholder return on the S&P US SmallCap Banks Index, a group encompassing publicly traded banking companies trading on the NYSE or NASDAQ with an average market capitalization of $2.0 billion (individually ranging from $133 million to $19.3 billion); and
•the yearly cumulative total shareholder return on the S&P U.S. BMI Banks - Mid-Atlantic Bank Index, a group encompassing publicly traded banking companies trading on the NYSE, AMEX, or NASDAQ headquartered in Delaware, District of Columbia, Maryland, New Jersey, New York, Pennsylvania, and Puerto Rico.
All of these cumulative total returns are computed assuming the reinvestment of dividends at the frequency with which dividends were paid during the applicable years.
Period Ending
Index
12/31/19
12/31/20
12/31/21
12/31/22
12/31/23
12/31/24
QNB Corp.
100.00
86.73
101.23
77.61
81.24
112.06
NASDAQ Composite Index
100.00
144.92
177.06
119.45
172.77
223.87
S&P U.S. SmallCap Banks Index
100.00
90.82
126.43
111.47
112.03
132.44
S&P U.S. BMI Banks - Mid-Atlantic Region Index
100.00
90.39
114.16
96.42
116.90
162.46
Source: S&P Global Market Intelligence© 2025

---

ITEM 6. SELECTED FINANCIAL DATA
ITEM 6. [RESERVED]
- 17 -

---

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations - Overview
QNB Corp. (“QNB” or the “Company”) earns its net income primarily through its subsidiary, QNB Bank (the “Bank”). Net interest income, or the spread between the interest, dividends and fees earned on loans and investment securities and the expense incurred on deposits and other interest-bearing liabilities, is the primary source of operating income for QNB. QNB seeks to achieve sustainable and consistent earnings growth while maintaining adequate levels of capital and liquidity and limiting its exposure to credit and interest rate risk levels approved by the Board of Directors. Due to its limited geographic area, comprised principally of Bucks, Lehigh and Montgomery counties, growth is pursued through expansion of existing customer relationships and building new relationships by stressing a consistent high level of service at all points of contact.
Tabular information presented throughout management’s discussion and analysis, other than share and per share data, is presented in thousands of dollars.
The following table displays five years of selected financial amounts and ratios for the QNB:
Year ended December 31,
Income and expense
Net interest income
$
42,862
$
40,155
$
44,497
$
42,127
$
37,248
Provision for credit losses
(68
)
(844
)
(850
)
1,250
Non-interest income
6,913
4,837
5,731
9,781
7,602
Non-interest expense
35,484
34,109
31,492
30,997
28,955
Net income
11,448
9,483
15,921
16,492
12,083
Share and Per Share Data
Net income - basic
$
3.12
$
2.63
$
4.47
$
4.64
$
3.42
Net income - diluted
3.12
2.63
4.47
4.64
3.42
Book value
27.96
24.86
19.78
38.41
37.80
Cash dividends
1.48
1.48
1.44
1.40
1.36
Average common shares outstanding - basic
3,672,251
3,610,713
3,564,481
3,553,949
3,537,323
Average common shares outstanding - diluted
3,673,697
3,610,713
3,564,481
3,554,138
3,537,360
Balance Sheet at Year-end
Investment securities
$
546,559
$
496,092
$
558,581
$
704,770
$
448,495
Loans receivable
1,216,048
1,093,533
1,039,385
926,470
920,042
Allowance for credit losses on loans
(8,744
)
(8,852
)
(10,531
)
(11,184
)
(10,826
)
Other earning assets
39,344
51,210
1,242
4,196
25,909
Total assets
1,870,894
1,706,318
1,668,497
1,673,340
1,440,229
Deposits
1,628,541
1,488,713
1,418,369
1,449,745
1,228,067
Total borrowed funds
122,912
114,094
171,327
78,476
68,838
Shareholders' equity
103,349
90,824
70,958
136,494
134,445
Selected Financial Ratios
Net interest margin
2.43
%
2.39
%
2.71
%
2.79
%
2.92
%
Net income as a percentage of:
Average total assets
0.62
0.54
0.93
1.04
0.90
Average shareholders' equity
7.05
6.04
10.90
12.19
9.76
Average shareholders' equity to average total assets
8.84
8.99
8.54
8.53
9.21
Dividend payout ratio
47.48
56.37
32.24
30.15
39.82
Net income for the year ended December 31, 2024 was $11,448,000, or $3.12 per share on a diluted basis. This compares to 2023 net income of $9,483,000, or $2.63 per share on a diluted basis and 2022 net income of $15,921,000, or $4.47 per share on a diluted basis. Two important measures of profitability in the banking industry are an institution’s return on average assets and return on average shareholders’ equity. Return on average assets was 0.62%, 0.54% and 0.93% in 2024, 2023, and 2022, respectively, and return on average shareholders’ equity was 7.05%, 6.04% and 10.90%, respectively, during those same periods.
- 18 -
The Bank contributed $12,237,000 to net income for the year ended December 31, 2024 compared to $9,395,000 for the same period in 2023; whereas the holding company contributed a net loss of $789,000 to consolidated net income for the year ended December 31, 2024 compared to net income of $88,000 for the same period in 2023. The increase at the Bank was primarily due to improvement in net interest margin and gains on sales of investments securities. The decrease at the holding company resulted primarily from an increase in interest expense related to the issuance of subordinated debt in 2024.
2024 versus 2023
The results for 2024 include the following significant components:
•Net interest income increased $2,707,000, or 6.74%, to $42,862,000 for 2024.
•The net interest margin on a tax-equivalent basis increased four basis points to 2.43% for 2024 from 2.39% for 2023.
•Reversal of the provision for credit losses was $68,000 for 2024, compared with $844,000 for 2023.
•Non-interest income for 2024 was $6,913,000, an increase of $2,076,000, or 42.9%, compared with 2023.
•Non-interest expense for 2024 was $35,484,000, an increase of $1,375,000, or 4.0%, compared with 2023.
•Total investment securities increased $50,467,000, or 10.2%, from December 31, 2023.
•Loans receivable grew $122,515,000, or 11.2%, from December 31, 2023.
•Deposits increased $139,828,000, or 9.4%, from December 31, 2023.
•The holding company issued $40,000,000 in subordinated debt in 2024.
•Total non-performing loans, which represent loans on non-accrual status and loans past due 90 days or more and still accruing interest, were $1,975,000, or 0.16% of total loans receivable at December 31, 2024, compared with $1,940,000, or 0.18% of total loans receivable at December 31, 2023. Loans on non-accrual status were $1,975,000 at December 31, 2024 compared with $1,940,000 at December 31, 2023. Net charge-offs for 2024 were $59,000, or 0.01% of average total loans, as compared with net recoveries for 2023 of $238,000, or 0.02% of average total loans for 2023.
2023 versus 2022
The results for 2023 include the following significant components:
•Net interest income decreased $4,342,000, or 9.76%, to $40,155,000 for 2023.
•The net interest margin on a tax-equivalent basis decreased 32 basis points to 2.39% for 2023 from 2.71% for 2022.
•Provision for credit losses was a credit of $844,000 for 2023, compared with a credit of $850,000 for 2022.
•Non-interest income for 2023 was $4,837,000, a decrease of $894,000, or 15.6%, compared with 2022.
•Non-interest expense for 2023 was $34,109,000, an increase of $2,617,000, or 8.3%, compared with 2022.
•Total investment securities declined $62,489,000, or 11.2%, from December 31, 2022.
•Loans receivable grew $54,148,000, or 5.2%, from December 31, 2022.
•Deposits increased $70,344,000, or 5.0%, from December 31, 2022.
•Total non-performing loans, which represent loans on non-accrual status and loans past due 90 days or more and still accruing interest, were $1,940,000, or 0.18% of total loans receivable at December 31, 2023, compared with $9,121,000, or 0.88% of total loans receivable at December 31, 2022. Loans on non-accrual status were $1,940,000 at December 31, 2023 compared with $4,820,000 at December 31, 2022. Net recoveries for 2023 were $238,000, or 0.02% of average total loans, as compared with net recoveries for 2022 of $197,000, or 0.02% of average total loans for 2022.
These items, as well as others, will be explained more thoroughly in the next sections.
- 19 -
Net Interest Income
The following table presents the adjustment to convert net interest income to net interest income on a fully taxable equivalent basis for the years ended December 31, 2024, 2023, and 2022.
Year ended December 31,
Total interest income
$
84,068
$
69,082
$
52,421
Total interest expense
41,206
28,927
7,924
Net interest income
42,862
40,155
44,497
Tax-equivalent adjustment
Net interest income (tax-equivalent basis)
$
43,420
$
40,739
$
45,210
Net interest income is the primary source of operating income for QNB. Net interest income is interest income, dividends, and fees on earning assets, less interest expense incurred for funding sources. Earning assets primarily include loans, investment securities and interest-bearing balances at the Federal Reserve Bank (Fed). Sources used to fund these assets include deposits and borrowed funds. Net interest income is affected by changes in interest rates, the volume and mix of earning assets and interest-bearing liabilities, and the amount of earning assets funded by non-interest-bearing deposits.
For purposes of this discussion, interest income and the average yield earned on loans and investment securities are adjusted to a tax-equivalent basis as detailed in the table that appears above. This adjustment to interest income is made for analysis purposes only. Interest income is increased by the amount of savings of Federal income taxes, which QNB realizes by investing in certain tax-exempt state and municipal securities and by making loans to certain tax-exempt organizations. In this way, the ultimate economic impact of earnings from various assets can be more easily compared.
The net interest rate spread is the difference between average rates received on earning assets and average rates paid on interest-bearing liabilities, while the net interest margin, which includes interest-free sources of funds, is net interest income expressed as a percentage of average interest-earning assets. The Asset/Liability and Investment Management Committee works to manage and maximize the net interest margin for the Company.
2024 versus 2023
On a tax-equivalent basis, net interest income for 2024 increased $2,681,000, or 6.6%, to $43,420,000. The net interest margin, which increased four basis points to 2.43%, was favorably impacted by increased rates on and volume of loans and investments. The average rate earned on earning assets increased 64 basis points from 4.09% for 2023 to 4.73% for 2024 with the yield on investments increasing 57 basis points and the yield on loans increasing 50 basis points. The yield on investment securities was favorably impacted by increased yields on all categories except U.S. Treasuries and Equities, causing an increase in interest income of $2,721,000; the yield was unfavorably impacted by a decrease in average volume of $49,754,000 contributing to a $494,000 decrease in interest income. The yield on loans was favorably impacted by increased rates in all loan categories, contributing to a $5,890,000 increase in interest income. This was also favorably impacted by a $110,151,000 net increase in average volume, of which $97,231,000 was related to an increase in average commercial real estate loans contributing $4,757,000 in interest income, an increase of $7,570,000 in home equity loans contributing $494,000 in interest income, and an increase of $4,032,000 in commercial and industrial loans average balances contributing an increase of $303,000 in interest income. The yield on total average interest-bearing liabilities increased 69 basis points from 2.11% for 2023 to 2.80% for 2024. The growth in loans was funded by the growth in deposits of $113,977,000, or 7.8%. The average rate paid on interest-bearing deposits increased from 2.01% to 2.71% for the same time periods, respectively, contributing to an increase in interest expense of $7,967,000, and a $134,229,000 increase in average interest-bearing deposits resulting in additional interest expense of $4,508,000. The average rate paid on total borrowings increased from 3.15% to 4.16% for the same time periods, respectively, offset by an average volume decrease of $34,917,000; the net impact contributed to a decrease in interest expense of $196,000. Loan and deposit growth was partially offset by the competitive local interest rate market for quality loans and deposits. Net interest spread decreased five basis points to 1.93% for 2024 compared to 1.98% for 2023.
2023 versus 2022
On a tax-equivalent basis, net interest income for 2023 decreased $4,471,000, or 9.9%, to $40,739,000. The net interest margin, which decreased 32 basis points to 2.39%, was unfavorably impacted by increased rates on deposits and short-term borrowings. The average rate earned on earning assets increased 91 basis points from 3.18% for 2022 to 4.09% for 2023 with the yield on investments increasing 47 basis points and the yield on loans increasing 95 basis points. The yield on investment securities was favorably impacted by increased yields on all categories, causing an increase in interest income of $3,057,000; the yield was unfavorably impacted by a decrease in average volume of $67,778,000 contributing to a $1,307,000 decrease in interest income. The yield on loans was favorably impacted by increased rates in all loan categories, contributing to a $9,999,000 increase in interest income. This was also favorably impacted by a $73,104,000 net increase in average volume, of which $76,271,000 was related to an increase in average commercial real estate loans, contributing $3,204,000 in interest income; partially offset by a decrease of $7,613,000 in commercial and industrial loans average balances, resulting in a decrease of $389,000 in interest income. The yield on total average interest-bearing liabilities increased 151 basis points from 0.60% for 2022 to 2.11% for 2023. The average rate paid on interest-bearing deposits increased from 0.57% to 2.01% for the same time periods, respectively, contributing to an increase in interest expense of $17,446,000, and a $29,102,000 increase in average interest-bearing deposits resulting in additional interest expense of $651,000. The average rate paid on short-term borrowings increased from 1.00% to 3.01% for the same time periods, respectively, contributing to an increase in interest expense of $2,182,000. Net interest spread decreased 60 basis points to 1.98% for 2023 compared to 2.58% for 2022.
- 20 -
Average Balances, Rates, and Interest Income and Expense Summary (Tax-Equivalent Basis)
Average
Average
Average
Average
Average
Average
balance
rate
Interest
balance
rate
Interest
balance
rate
Interest
Assets
Investment securities (AFS & Equity):
U.S. Treasury securities
$
11,682
5.00
%
$
$
4,535
5.06
%
$
$
1.18
%
$
U.S. Government agencies
80,332
1.17
100,409
1.11
1,119
101,455
1.10
1,119
State and municipal
106,806
3.39
3,623
109,598
2.89
3,164
128,126
2.39
3,056
Mortgage-backed and CMOs
357,977
2.68
9,580
399,599
2.14
8,555
447,369
1.58
7,059
Corporate debt securities and money market funds
17,560
5.76
1,012
6,655
4.40
6,673
4.37
Equities
4,269
3.88
7,584
4.22
12,011
3.32
Total investment securities
578,626
2.75
15,907
628,380
2.18
13,680
696,158
1.71
11,930
Loans:
Commercial real estate
810,525
5.53
44,805
713,294
4.89
34,900
637,023
4.20
26,759
Residential real estate
110,320
4.12
4,542
107,379
3.73
4,005
104,397
3.34
3,484
Home equity loans
65,714
6.81
4,475
58,144
6.52
3,794
56,155
4.38
2,459
Commercial and industrial
141,998
7.52
10,682
137,966
7.50
10,344
145,579
5.10
7,432
Consumer loans
3,635
8.12
3,889
7.29
4,512
5.63
Tax-exempt loans
18,507
3.90
19,876
3.56
19,778
3.42
Total loans, net of unearned income*
1,150,699
5.69
65,520
1,040,548
5.19
54,033
967,444
4.24
41,064
Other earning assets
59,734
5.36
3,199
34,816
5.61
1,953
5,782
2.42
Total earning assets
1,789,059
4.73
84,626
1,703,744
4.09
69,666
1,669,384
3.18
53,134
Cash and due from banks
13,847
13,918
13,803
Allowance for credit losses on loans
(8,965
)
(8,820
)
(11,287
)
Other assets
41,709
39,187
38,549
Total assets
$
1,835,650
$
1,748,029
$
1,710,449
Liabilities and Shareholders' Equity
Interest-bearing deposits:
Interest-bearing demand
$
346,590
0.93
%
$
3,225
$
315,990
0.60
%
$
1,900
$
345,054
0.27
%
$
Municipals
146,446
4.64
6,794
131,610
4.46
5,867
122,824
1.43
1,758
Money market
237,071
3.45
8,181
183,004
2.64
4,823
137,830
0.45
Savings
285,011
1.28
3,651
348,878
1.20
4,187
443,104
0.49
2,175
Time less than $100
170,998
3.98
6,808
121,622
2.63
3,194
91,216
0.79
Time $100 through $250
145,022
4.53
6,570
107,560
3.59
3,859
52,314
0.93
Time greater than $250
49,831
4.51
2,247
38,076
3.08
1,171
25,296
0.83
Total interest-bearing deposits
1,380,969
2.71
37,476
1,246,740
2.01
25,001
1,217,638
0.57
6,904
Short-term borrowings
48,526
2.37
1,148
108,862
3.01
3,273
85,876
1.00
Long-term debt
27,869
4.67
1,322
15,712
4.10
10,000
1.57
Subordinated debt
13,262
9.34
1,260
-
-
-
-
-
-
Total borrowings
89,657
4.16
3,730
-
124,574
3.15
3,926
-
95,876
1.06
1,020
Total interest-bearing liabilities
1,470,626
2.80
41,206
-
1,371,314
2.11
28,927
-
1,313,514
0.60
7,924
Non-interest-bearing deposits
188,525
208,777
242,778
Other liabilities
14,195
10,812
8,069
Shareholders' equity
162,304
157,126
146,088
Total liabilities and shareholders' equity
$
1,835,650
$
1,748,029
$
1,710,449
Net interest rate spread
1.93
%
1.98
%
2.58
%
Margin/net interest income
2.43
%
$
43,420
2.39
%
$
40,739
2.71
%
$
45,210
Tax-exempt securities and loans were adjusted to a tax-equivalent basis and are based on the marginal Federal corporate tax rate of 21 percent. Non-accrual loans and investment securities are included in earning assets.
* Includes loans held-for-sale
- 21 -
Rate-Volume Analysis of Changes in Net Interest Income (1) (2) (3)
2024 vs. 2023
2023 vs. 2022
Due to change in:
Total
Due to change in:
Total
Volume
Rate
Change
Volume
Rate
Change
Interest income:
Investment securities (AFS & Equity):
U.S. Treasury securities
$
$
(7
)
$
$
$
$
U.S. Government agencies
(224
)
(177
)
(12
)
-
State and municipal
(81
)
(441
)
Mortgage-backed and CMOs
(892
)
1,917
1,025
(753
)
2,249
1,496
Corporate debt securities and money market funds
(1
)
Equities
(140
)
(14
)
(154
)
(147
)
(79
)
Total Investment securities (AFS & Equity)
(494
)
2,721
2,227
(1,307
)
3,057
1,750
Loans:
Commercial real estate
4,757
5,148
9,905
3,204
4,937
8,141
Residential real estate
Home equity loans
1,248
1,335
Commercial and industrial
(389
)
3,301
2,912
Consumer loans
(18
)
(35
)
Tax-exempt loans
(48
)
Total loans
5,597
5,890
11,487
2,970
9,999
12,969
Other earning assets
1,397
(151
)
1,246
1,111
1,813
Total interest income
6,500
8,460
14,960
2,365
14,167
16,532
Interest expense:
Interest-bearing deposits:
Interest-bearing demand
1,141
1,325
(78
)
1,045
Municipals
3,984
4,109
Money market
1,425
1,933
3,358
4,003
4,206
Savings
(767
)
(536
)
(462
)
2,474
2,012
Time less than $100
1,297
2,317
3,614
2,229
2,471
Time $100 through $250
1,345
1,366
2,711
2,854
3,370
Time greater than $250
1,076
Total interest-bearing deposits
4,508
7,967
12,475
17,446
18,097
Short-term borrowings
(1,814
)
(311
)
(2,125
)
2,182
2,412
Long-term debt
Subordinated debt
1,260
-
1,260
-
-
-
Total borrowings
(46
)
(150
)
(196
)
2,585
2,906
Total interest expense
4,462
7,817
12,279
20,031
21,003
Net interest income
$
2,038
$
$
2,681
$
1,393
$
(5,864
)
$
(4,471
)
(1)Loan fees have been included in the change in interest income totals presented. Non-accrual loans and investment securities have been included in average balances.
(2)Changes due to both volume and rates have been allocated in proportion to the relationship of the dollar amount change in each.
(3)Interest income on loans and securities is presented on a tax-equivalent basis.
The Rate-Volume Analysis tables, as presented on a tax-equivalent basis, highlight the impact of changing rates and volumes on interest income and interest expense. Total interest income on a tax-equivalent basis increased $14,960,000 to $84,626,000 for 2024, while total interest expense increased $12,279,000 to $41,206,000. Volume growth in earning assets contributed an additional $6,500,000 of interest income and interest rate increases contributed an additional $8,460,000 of interest income. Rate-related interest expense increased $7,817,000, while volume-related interest expense increased $4,462,000.
Investments
2024 versus 2023
Interest income on available-for-sale and equity investment securities increased $2,227,000 when comparing the two years. The 57 basis-point increase in rate, of which the interest rate swaps contributed 38 basis points, contributed an additional $2,721,000 to interest income and the $49,754,000 decrease in volume reduced interest income $494,000. The average yield on the available-for-sale and equity investment portfolio increased to 2.75% for 2024 compared to 2.18% for 2023.
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Income on U.S. Government agency securities yields were 1.17% for 2024 compared to 1.11% for 2023. Most of the bonds in the agency portfolio have call features ranging from three months to three years, none of which were exercised during 2024. Average balances, which decreased $20,077,000, reduced interest income by $224,000.
Interest income on state and municipal securities increased $459,000. Average balances, which decreased $2,792,000, reduced interest income by $81,000. The increase in yield of 50 basis points from 2.89% in 2023 to 3.39% in 2024 contributing $540,000 to interest income more than offset the decrease in interest income caused by volume. The rate and interest income increases on municipal securities was positively impacted by the interest rate swap, contributing 51 basis points of the increase in rate.
Many of these bonds have either reached maturity or their call dates and are being replaced with municipal bonds with less favorable tax-equivalent yields. Typically, QNB purchased municipal bonds with 10- to 15-year maturities with call dates between 2 and 5 years. Future demand for tax-exempt municipal securities is uncertain, as the tax-equivalent yield could be less favorable compared to other securities with similar risk-based capital asset-weighting characteristics.
All the mortgage-backed and collateralized mortgage obligations (“CMO”) securities owned by QNB are issued by U.S. Government agencies and sponsored enterprises (“GSE”) and carry the implicit backing of the U.S. Government, but they are not direct obligations of the U.S. Government. Interest income on mortgage-backed securities and CMOs increased $1,025,000 due to a 54 basis-point increase in rate from 2.14% for 2023 to 2.68% for 2024 adding $1,917,000 to interest income; this was partly offset by a $41,622,000 decrease in average balances reducing interest income by $892,000. The rate and interest income increases on mortgage-backed securities were positively impacted by the interest rate swap, contributing 46 basis points. This portfolio generally provides higher yields relative to agency bonds and provides monthly cash flow which can be used for liquidity purposes or can be reinvested as interest rates increase.
Income on corporate debt securities increased $719,000 due to an increase average balances of $10,905,000 and in yield from 4.40% for 2023 to 5.76% for 2024.
Excess cash at the holding company was invested in U.S. Treasury securities during 2024 adding $355,000 to interest income. The yield on U.S. Treasury securities was 5.00% for 2024 compared to 5.06% for 2023. Average balances increased $7,147,000.
Dividend income on equities decreased $154,000 due to a decrease in average balances of $3,315,000. The equity portfolio was sold during 2024.
2023 versus 2022
Interest income on available-for-sale and equity investment securities increased $1,750,000 when comparing the two years. The 47 basis-point increase in rate contributed an additional $3,057,000 to interest income and the $67,778,000 decrease in volume reduced interest income $1,307,000. The average yield on the available-for-sale and equity investment portfolio increased to 2.18% for 2023 compared to 1.71% for 2022.
Income on U.S. Government agency securities remained level at yields of 1.11% for 2023 compared to 1.10% for 2022. Most of the bonds in the agency portfolio have call features ranging from three months to three years, none of which were exercised during 2023.
Interest income on state and municipal securities increased $108,000. Average balances, which decreased $18,528,000, reduced interest income by $441,000. The increase in yield of 50 basis points from 2.39% in 2022 to 2.89% in 2023 contributing $549,000 to interest income more than offset the decrease in interest income caused by volume.
Interest income on mortgage-backed securities and CMOs increased $1,496,000 due to a 56 basis-point increase in rate from 1.58% for 2022 to 2.14% for 2023 adding $2,249,000 to interest income; this was partly offset by a $47,770,000 decrease in average balances reducing interest income by $753,000.
Income on corporate debt securities increased $2,000 due to an increase in yield from 4.37% for 2022 to 4.40% for 2023.
Excess cash at the holding company was invested in Treasury securities during 2023 adding $223,000 to interest income.
Dividend income on equities decreased $79,000 due to a decrease in average balances of $4,427,000, partially offset by an increase in yield of 90 basis points.
Loans
2024 versus 2023
The largest category of the loan portfolio is commercial real estate loans. This category of loans includes commercial purpose loans secured by either commercial properties such as office buildings, hotels, factories, warehouses, medical facilities and retail establishments, or residential real estate, usually the residence of the business owner or investment properties. The category also includes
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construction and land development loans. Income on commercial real estate loans increased $9,905,000. The increase in average balances of $97,231,000, or 13.6%, contributed an increase in interest income of $4,757,000; the 64 basis-point increase in yield, from 4.89% in 2023 to 5.53% in 2024 contributed $5,148,000 to the increase in interest income.
Income on commercial and industrial loans, the second largest category, increased $338,000 with average balances increasing $4,032,000 resulting in an increase to interest income of $303,000 and an average yield increase of two basis points to 7.52% in 2024 from 7.50% in 2023, contributing to a $35,000 increase in interest income. Many of the loans in this category are indexed to the prime interest rate.
Tax-exempt loan income increased $14,000 to $721,000 in 2024. When comparing the same periods, average balances decreased $1,369,000 to $18,507,000, which contributed a $48,000 decrease in interest income. The average yield on the tax-exempt loan portfolio increased from 3.56% for 2023 to 3.90% for 2024, resulting in an increase in interest income of $62,000.
QNB strives to be the “local consumer lender of choice.” QNB continues to focus on its retail lending efforts by adding new product offerings and by marketing and promotion. Overall, retail lending balances increased $10,257,000 and interest income for retail lending increased $1,230,000 in 2024 compared with 2023, driven by a 41 basis-point increase in yield.
Given the low yields on alternative investment securities, QNB retained certain fixed rate and hybrid adjustable-rate mortgages to borrowers with high credit scores and low loan-to-value ratios. As a result, average residential mortgage loans secured by first lien 1-4 family residential mortgages increased by $2,941,000, or 2.7%, to $110,320,000 for 2024. The average yield on the residential real estate portfolio increased 39 basis points to 4.12% for 2024 compared to 3.73% for 2023. Overall, interest income for this segment grew $537,000 in 2024.
Income on home equity loans increased by $681,000 when comparing 2024 and 2023. During 2024 and 2023, QNB offered attractive rates on both variable rate and fixed rate home equity loans. Average balances in home equity loans increased $7,570,000, or 13.0%, to $65,714,000 when comparing 2024 and 2023. The yield on the home equity portfolio increased 29 basis points to 6.81% when comparing the two years. Home values have continued to grow; therefore, we expect the demand for home equity loans will continue.
Interest income on consumer loans increased $12,000. Consumer loans at QNB experienced a decline in average balances in 2024 of $254,000, or 6.5%, led by a decline in student loans. Student loan balances are no longer insured, and QNB ceased funding originations through its third-party provider during the second half of 2018; average balances decreased $302,000 and interest income decreased $2,000 when comparing 2024 and 2023. Student loans are primarily variable rate loans and interest income was favorably impacted by a 160 basis-point increase in rate.
2023 versus 2022
Income on commercial real estate loans increased $8,141,000. The increase in average balances of $76,271,000, or 12.0%, contributed an increase in interest income of $3,204,000; the 69 basis-point increase in yield, from 4.20% in 2022 to 4.89% in 2023 contributed $4,937,000 to the increase in interest income.
Income on commercial and industrial loans, the second largest category, increased $2,912,000 with average balances decreasing $7,613,000 resulting in a decrease to interest income of $389,000, this decrease was more than offset by the positive impact from an increase in average yield of 240 basis points to 7.50% in 2023 from 5.10% in 2022, contributing to a $3,301,000 increase in interest income.
Tax-exempt loan income increased $31,000 to $707,000 in 2023. When comparing the same periods, average balances increased $98,000 to $19,876,000, which contributed a $3,000 increase in interest income. The average yield on the tax-exempt loan portfolio increased from 3.42% for 2022 to 3.56% for 2023, resulting in an increase in interest income of $28,000.
Retail lending balances increased $4,348,000 and interest income for retail lending increased $1,885,000 in 2023 compared with 2022, driven by a 103 basis-point increase in yield. Average residential mortgage loans secured by first lien 1-4 family residential mortgages increased by $2,982,000, or 2.9%, to $107,379,000 for 2023. The average yield on the residential real estate portfolio increased 39 basis points to 3.73% for 2023 compared to 3.34% for 2022. Overall, interest income for this segment grew $521,000 in 2023.
Income on home equity loans increased by $1,335,000 when comparing 2023 and 2022. Average balances in home equity loans increased $1,989,000, or 3.5%, to $58,144,000 when comparing 2023 and 2022. The yield on the home equity portfolio increased 214 basis points to 6.52% when comparing the two years.
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Interest income on consumer loans increased $29,000. Consumer loans at QNB experienced a decline in average balances in 2023 of $623,000, or 13.8%, led by a decline in installment loans and student loans. Installment loan average balances declined $164,000 and interest declined $2,000. Student loan balances are no longer insured, and QNB ceased funding originations through its third-party provider during the second half of 2018; average balances decreased $448,000 and interest income increased $25,000 when comparing 2023 and 2022.
Deposits and Borrowings
2024 versus 2023
Total interest expense for 2024 was $41,206,000 compared with $28,927,000 for 2023, an increase of $12,279,000. Interest expense on deposits increased $12,475,000 and interest expense on borrowed funds decreased $196,000 when comparing the two years. The rate paid on interest-bearing deposits increased 70 basis points; the rate paid on borrowings increased 101 basis points, when comparing the two periods. Deposit and borrowing costs increase due to an increase in competition for deposits when rates rise. QNB offered several new interest-bearing demand and money market products offering higher yields to retain large depositors and reduce the reliance on higher-cost short-term borrowings.
Average non-interest-bearing demand accounts decreased $20,252,000, or 9.7%, to $188,525,000 for 2024. Average interest-bearing demand accounts increased $30,600,000, or 9.7%, to $346,590,000 for 2024 compared with 2023, with interest expense on interest-bearing demand accounts increasing $1,325,000 to $3,225,000 for 2024. The average rate paid increased 33 basis points to 0.93% for 2024 compared to 0.60% for 2023. Interest-bearing business demand average balances increased by $41,304,000, or 58.2%, and related interest expense increased $1,346,000, or 45 basis points in yield, when comparing the two years. Also included in the interest-bearing demand category is QNB-Rewards checking, a tiered-rate retail checking account product. In order to receive the high rate a customer must receive an electronic statement, have one direct deposit or other ACH transaction and have at least 12 debit card purchase transactions post and clear per statement cycle. If these qualifications are not met, the rate paid is 0.10%. For 2024, the average balance in this product was $91,932,000 and the related interest expense was $373,000 for an average cost of funds of 0.41%. In comparison, the average balance in this product for 2023 was $93,336,000 and the related interest expense was $389,000 for an average cost of funds of 0.42%. The rates paid on the QNB-Rewards product, assuming qualifications are met, is attractive relative to competitors’ offerings as well as other QNB products. This product also generates fee income through the use of the debit card. The average balance of other interest-bearing demand accounts included in this category decreased from $151,647,000 for 2023 to $142,347,000 for 2024. The average rate paid on these balances was 0.05% in 2023 and 2024.
Average money market accounts increased $54,067,000, or 29.5%, to $237,071,000 for 2024 compared with 2023. Interest expense on money market accounts increased $3,358,000 to $8,181,000 for 2024 compared with 2023. The average interest rate paid on money market accounts was 3.45% for 2024, an increase of 81 basis points compared with 2023.
Interest expense on municipal interest-bearing demand accounts increased $927,000 to $6,794,000 for 2024. The average balance of municipal interest-bearing demand accounts increased $14,836,000, or 11.3%, to $146,446,000 and the average interest rate paid on these accounts increased 18 basis points to 4.64% for 2024 from 4.46% for 2023. Most of these accounts are indexed to the Federal funds rate with negotiated rate floors between 0.15% and 0.35%. Many of these deposits are seasonal in nature and are received during the third quarter as tax receipts are collected and are withdrawn over the course of the next year.
QNB’s online e-Savings product is the largest category of savings deposits and was created to compete with other online savings accounts. Average e-Savings balances decreased $48,383,000, or 18.9%, to $207,869,000 in 2024 compared with $256,252,000 in 2023. The average cost of funds on these accounts was 1.71% for 2024 and 1.57% for 2023. The yield on this account may rise along with market rates and as competition for savings balances increases. Traditional statement savings accounts and club accounts are also included in the savings category and decreased on average by $15,484,000, or 16.7%, to $77,142,000. The average rate paid on total savings accounts was 0.12% for 2024, a six basis-point decrease from 0.18% for 2023 and interest expense decreased $79,000, to $91,000 from $170,000 over the same period.
Interest expense on time deposits increased $7,401,000, to $15,625,000 in 2024, due to an increase in average balances of $98,593,000 in 2024, to $365,851,000 and a 119 basis-point increase in yield, from 3.08% in 2023 to 4.27% in 2024. Similar to fixed-rate loans and investment securities, time deposits reprice over time and, therefore, have less of an immediate impact on costs in either a rising or falling rate environment. However, the maturity and repricing characteristics of time deposits tend to be shorter.
Approximately $350,837,000, or 92.0%, in time deposits will reprice or mature over the next 12 months compared with 82.0% of the portfolio at December 31, 2023. The average rate paid on these time deposits is approximately 4.37%.
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Short-term borrowings are comprised of sweep accounts structured as repurchase agreements with our commercial customers, overnight FHLB borrowing and short-term FRB borrowing with average balances in 2024 of $38,455,000, $98,000 and $9,973,000, respectively. Interest expense on short-term borrowings decreased $2,125,000 to $1,148,000 when comparing the two years. During this period average balances of repurchase agreements decreased $14,699,000 with a 44 basis-point increase in average rate paid, resulting in a decrease of cost of funds of $36,000. The average balances of borrowings from the FHLB decreased $15,747,000 with a 20 basis-point increase in average rate paid, resulting in a decrease in cost of funds of $772,000. During the first quarter of 2023, QNB borrowed $50,000,000 from the FRB under its Bank Term Funding Program and locked in a rate of 4.39%; this borrowing was paid off in the first quarter of 2024.
Average long-term debt increased $12,157,000 in 2024 to $27,869,000 with a 57 basis-point increase in average yield from 4.10% in 2023 to 4.67% in 2024.
During the third quarter of 2024, the QNB Corp. issued $40,000,000 of subordinated debt; the carrying value net of deferred costs was $39,068,000 at December 31, 2024. The average yield of 9.34% includes the amortization of the deferred costs. The subordinated debt will initially bear interest at 8.875% per annum from and including the original issue date of the subordinated notes to but excluding September 1, 2029, payable semi-annually in arrears. From September 1, 2029, through maturity or up to an early redemption date, the interest rate resets quarterly to an interest rate per annum equal to the then current three-month SOFR plus a spread, payable quarterly in arrears. On or after the fifth anniversary of the original issue date through maturity, the QNB has the option to redeem the subordinated debt, in whole or in part, on any scheduled interest payment date. QNB may also redeem the subordinated debt in whole at any time in the event of certain specified events. The subordinated debt will mature on September 1, 2034.
The yield on interest-bearing liabilities increased 69 basis points to 2.80% for 2024.
2023 versus 2022
Total interest expense for 2023 was $28,927,000 compared with $7,924,000 for 2022, an increase of $21,003,000. Interest expense on deposits increased $18,097,000 and interest expense on borrowed funds increased $2,906,000 when comparing the two years. The rate paid on interest-bearing deposits increased 144 basis points; the rate paid on borrowings increased 209 basis points, when comparing the two periods. Deposit and borrowing costs increase due to an increase in competition for deposits when rates rise.
The composition of the deposit accounts changed in 2023 as QNB offered several new interest-bearing demand and money market products offering higher yields to retain large depositors and reduce the reliance on higher-cost short-term borrowings. Average interest-bearing demand accounts decreased $29,064,000, or 8.4%, to $315,990,000 for 2023 compared with 2022, with interest expense on interest-bearing demand accounts increasing $967,000 to $1,900,000 for 2023. The average rate paid increased 33 basis points to 0.60% for 2023 compared to 0.27% for 2022. Interest-bearing business demand average balances decreased by $2,188,000, or 3.0%, and related interest expense increased $950,000, or 136 basis points in yield, when comparing the two years. For 2023, the average balance in QNB-Rewards checking was $93,336,000 and the related interest expense was $389,000 for an average cost of funds of 0.42%. In comparison, the average balance in this product for 2022 was $104,122,000 and the related interest expense was $366,000 for an average cost of funds of 0.35%. The average balance of other interest-bearing demand accounts included in this category decreased from $167,737,000 for 2022 to $151,647,000 for 2023. The average rate paid on these balances was 0.05% in 2022 and 0.05% in 2023.
Average money market accounts increased $45,174,000, or 32.8%, to $183,004,000 for 2023 compared with 2022. Interest expense on money market accounts increased $4,206,000 to $4,823,000 for 2023 compared with 2022. The average interest rate paid on money market accounts was 2.64% for 2023, an increase of 219 basis points compared with 2022. A new High Yield money market account was introduced in 2023.
Average e-Savings balances decreased $79,238,000, or 23.6%, to $256,252,000 in 2023 compared with $335,490,000 in 2022. The average cost of funds on these accounts was 1.57% for 2023 and 0.59% for 2022. The yield on this account may rise along with market rates and as competition for savings balances increases. Traditional statement savings accounts and club accounts are also included in the savings category and decreased on average by $14,988,000, or 13.9%, to $92,626,000. The average rate paid on total savings accounts was 0.18% for 2023, a one basis-point increase from 0.17% for 2022 and interest expense decreased $9,000, to $170,000 from $179,000 over the same period.
Interest expense on time deposits increased $6,803,000, to $8,224,000 in 2023, due to an increase in average balances of $98,432,000 in 2023, to $267,258,000 and a 224 basis-point increase in yield, from 0.84% in 2022 to 3.08% in 2023.
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Short-term borrowings are comprised of sweep accounts structured as repurchase agreements with our commercial customers, overnight FHLB borrowing and short-term FRB borrowing with average balances in 2023 of $53,154,000, $15,845,000 and $39,863,000, respectively. Interest expense on short-term borrowings increased $2,412,000 to $3,273,000 when comparing the two years. During this period average balances of repurchase agreements decreased $15,496,000 with an 89 basis-point increase in average rate paid, resulting in an increase of cost of funds of $398,000. The average balances of borrowings from the FHLB decreased $1,381,000 with a 189 basis-point increase in average rate paid, resulting in an increase in cost of funds of $258,000.
Average long-term debt was $15,712,000 with an average yield of 4.10%. The yield on interest-bearing liabilities increased 151 basis points to 2.11% for 2023.
Provision for Credit Losses
The provision for credit losses represents management's determination of the amount necessary to be charged to operations to bring the allowance for credit losses on loans and the allowance for credit losses on unused commitments to amounts that are intended to absorb historical loss experience, current conditions and reasonable and supportable forecasts, in the outstanding loan portfolio and the unused commitments. Management believes that it uses the best information available to make determinations about the adequacy of these allowances and that it has established its existing allowances for credit losses on loan and on unused commitments in accordance with U.S. GAAP. The determination of an appropriate level for the allowance for credit losses on loans and the allowance for credit losses on unused commitments are based upon an analysis of the risks inherent in QNB’s loan portfolio. QNB recorded a reversal of the provision for credit losses on loans of $49,000 for the twelve months ended December 31, 2024 compared to a reversal of the provision for loan losses of $828,000 for the twelve-month period ended December 31, 2023 and a reversal of the provision for loan losses of $850,000 for the twelve-month period ended December 31, 2022. QNB recorded a reversal of the provision for credit losses on unused commitments of $19,000 during 2024 compared to a reversal of the provision for credit losses on unused commitments of $16,000 during 2023. The 2022 period adjustments for the reserve for unused commitments were included in non-interest expense. Net loan charge-offs were $59,000, or 0.01% of total average loans for 2024 compared with net loan recoveries were $238,000, or 0.02% of total average loans for 2023 and net loan recoveries were $197,000, or 0.02% of total average loans for 2022. The majority of the recoveries during 2024, 2023 and 2022, were on these previously charged off commercial loans. 2024 was offset by net charge-offs in overdrafts and student loans. Deterioration in credit quality resulting in charge-offs or significant growth in the loan portfolio may result in a higher provision for credit losses on loans in 2025.
Non-Interest Income
Non-interest income comparison
Change from prior year
$ Change
% Change
Year ended December 31,
2024 to
2023 to
2024 to
2023 to
Fees for services to customers
$
1,770
$
1,651
$
1,614
$
$
7.2
%
2.3
%
ATM and debit card
2,740
2,735
2,719
0.2
0.6
Retail brokerage and advisory
(386
)
-44.8
9.4
Bank-owned life insurance
(41
)
3.8
-11.4
Merchant
(46
)
-
-11.7
0.0
Net (loss) gain on sale of investment securities
(2,077
)
2,996
(2,343
)
N/M
N/M
Unrealized gain (loss) on investment equity securities
(215
)
(1,026
)
(465
)
1,276
N/M
N/M
Net gain on sale of loans
N/M
N/M
Other
(172
)
-25.1
12.6
Total
$
6,913
$
4,837
$
5,731
$
2,076
$
(894
)
42.9
%
-15.6
%
N/M - Not Meaningful
2024 versus 2023
QNB, through its core banking business, generates various fees and service charges. Total non-interest income includes service charges on deposit accounts, ATM and debit card income, retail brokerage and advisory income, income on bank-owned life insurance, merchant income and gains and losses on investment securities and residential mortgage loans. Total non-interest income was $6,913,000 in 2024 compared with $4,837,000 in 2023, an increase of $2,076,000. Excluding the unrealized (losses) gains on equity securities and gains (losses) on sales of investment securities, noninterest income was $6,209,000 in 2024 compared to $6,664,000 in 2023, a decrease of $455,000.
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Fees for services to customers are primarily comprised of service charges on deposit accounts. These fees were $1,770,000 for 2024, an increase of $119,000 from 2023. Overdraft income, which represented approximately 75% of total fees for services to customers in 2024 and 78% in 2023, increased by $38,000, or 2.9%, when comparing 2024 to 2023. The increase in overdraft income primarily reflects an increase in the number of overdraft occurrences. Other fees for services increased $119,000 primarily due to the increase in deposit accounts.
ATM and debit card income is primarily comprised of transaction income on debit cards and ATM cards and ATM surcharge income for the use of QNB’s ATM machines by non-QNB customers. ATM and debit card income was $2,740,000 in 2024, an increase of $5,000 from the amount recorded in 2023. Debit card interchange income increased $10,000 to $2,695,000 in 2024, while ATM surcharge income and monthly card fees income decreased $5,000 to $45,000. The growth in checking accounts and card usage contributed to the increase in debit card income, including the QNB Rewards checking product, a tiered-rate checking account which requires, among other terms, the posting of a minimum of twelve debit card purchase transactions per statement cycle to receive the high interest rate.
QNB provides securities and advisory services under the name QNB Financial Services through an independent third-party registered Broker/Dealer and Registered Investment Advisor. QNB receives a percentage of the revenue generated but is responsible for salaries and expenses of advisors who are QNB employees. Retail brokerage and advisory revenue was $476,000 for 2024 compared with $862,000 for 2023, a decrease of $386,000, or 44.8%. Advisory fees decreased $461,000 comparing 2024 to 2023 due to a decrease in client balances following employee turnover. Sales in front-loaded products, such as annuities and alternative investments (which include private equity, hedge funds, managed futures, real estate “REITs”, commodities and derivatives contracts) and trailing income related to these increased $75,000 in 2024 over 2023. In 2024, the net income provided by QNB Financial Services was $112,000, compared with $186,000 in net income for 2023.
Income on bank-owned life insurance (“BOLI”) represents the earnings and death benefits on life insurance policies in which the Bank is the beneficiary. The insurance carriers reset the rates on these policies annually taking into consideration the interest rate environment as well as mortality costs. The existing policies have rate floors which limit how low the earnings rate can go. Some of these policies are currently at their floor. Income on these policies during 2024 was $332,000 compared to $320,000 for 2023.
Merchant income represents fees charged to merchants for the Bank’s handling of credit card or charge sales. Merchant income was $348,000 for 2024, a decrease of $46,000 compared to the amount reported in 2023.
The fixed-income securities portfolio represents a significant portion of QNB’s earning assets and is also a primary tool in liquidity and asset/liability management. QNB actively manages its fixed-income portfolio to take advantage of changes in the shape of the yield curve, changes in spread relationships in different sectors, and for liquidity purposes. Management continually reviews strategies that will result in an increase in the yield or improvement in the structure of the investment portfolio, including monitoring credit and concentration risk in the portfolio. In addition, the Corporation owned a small portfolio of equity securities for the purpose of generating both dividend income and capital appreciation; this equity portfolio was sold during 2024.
Net gains (losses) on sales of investment securities increased $2,996,000 to a net gain of $919,000 for the year ended December 31, 2024, compared with a net loss of $2,077,000 for the year ended December 31, 2023. Net gains from sales of equity securities were $2,015,000 in 2024 compared to a net loss of $19,000 in 2023. QNB completed the exchange offer to convert the Bank's Visa B-1 shares to B-2 and C shares in the second quarter of 2024; QNB sold the Visa Class C shares in the fourth quarter of 2024 and realized a gain of $1,498,000. QNB sold its other equity securities and realized a gain of $517,000 during the twelve months ended December 31, 2024 compared to a loss of $19,000 for the same period of 2023. Net loss on the sale of fixed income securities were $1,096,000 for 2024 compared to a net loss of $2,058,000 for 2023. QNB improved the efficiency of its investment portfolio by executing sales of low yielding fixed rate available-for-sale securities during 2023 and 2024. QNB sold both state and municipal securities and mortgage-backed and CMO securities totaling $13,139,000 during 2024 and $33,213,000 during 2023. Unrealized losses on equity securities of $215,000 were recorded during 2024 compared to unrealized gains of $250,000 during 2023.
The net gain on residential mortgage sales is directly related to the volume of mortgages sold and the timing of the sales relative to the interest rate environment. Residential mortgage loans to be sold are identified at origination. The net gain on the sale of residential mortgage loans was $29,000 and $16,000 for 2024 and 2023, respectively. Mortgage financing activity was greater in 2024, due to available properties. Proceeds from the sale of residential mortgages were $1,765,000 and $989,000 for the years ended December 31, 2024 and 2023, respectively. Included in the gains on the sale of residential mortgages in 2024 and 2023 are $13,000 and $7,000, respectively, related to the recognition of mortgage servicing assets.
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QNB retains servicing rights for residential mortgages sold in the secondary market. A servicing fee is retained on all mortgage loans sold and serviced. QNB recognizes its obligation to service financial assets that are retained in a transfer of assets in the form of a servicing asset. The servicing asset is amortized in proportion to, and over, the period of net servicing income or loss. On a quarterly basis, servicing assets are assessed for impairment based on their fair value. Mortgage servicing income of $116,000 for 2024 and $125,000 for 2023 is included in other non-interest income.
Other non-interest income, excluding mortgage servicing income, was $398,000 for 2024, a decrease of $163,000 from the amount recorded in 2023. Other non-interest income included sales tax refunds in 2023 of $117,000 and broker-dealer conversion costs reimbursements of $18,000 in 2023. Losses on premises and equipment were $14,000 in 2024 compared to gains in 2023 of $6,000. Letter of credit fees decreased $16,000 when comparing 2024 to 2023.
2023 versus 2022
Total non-interest income was $4,837,000 in 2023 compared with $5,731,000 in 2022, a decrease of $894,000. Excluding the unrealized (losses)gains on equity securities, gains(losses) on sales of investment securities and gains on sales of loans, noninterest income was $6,648,000 in 2023 compared to $6,485,000 in 2022, an increase of $163,000.
Fees for services to customers are primarily comprised of service charges on deposit accounts. These fees were $1,651,000 for 2023, an increase of $37,000 from 2022. Overdraft income, which represented approximately 78% of total fees for services to customers in both 2023 and 2022, increased by $32,000, or 2.5%, when comparing 2023 to 2022. The increase in overdraft income primarily reflects an increase in the number of overdraft occurrences.
ATM and debit card income was $2,735,000 in 2023, an increase of $16,000, or 0.6% from the amount recorded in 2022. Debit card interchange income increased $22,000, or 0.8%, to $2,686,000 in 2023, while ATM surcharge income and monthly card fees income decreased $6,000 to $49,000.
Retail brokerage and advisory revenue was $862,000 for 2023 compared with $788,000 for 2022, an increase of $74,000, or 9.4%. Advisory fees increased $27,000 comparing 2023 to 2022. Fee income from sales in front-loaded products and trailing income increased $47,000 in 2023 over 2022. In 2023, the net income provided by QNB Financial Services was $186,000, compared with $210,000 in net income for 2022.
BOLI income during 2023 was $320,000 compared to $361,000 for 2022; included in the 2022 number was a life insurance benefit of $46,000.
Net (losses) gains on sales of investment securities decreased $2,343,000 to a net loss of $2,077,000 for the year ended December 31, 2023, compared with a net gain of $266,000 for the year ended December 31, 2022. Net loss from sales of equity securities were $19,000 in 2023 compared to a net gain of $405,000 in 2022. Net loss on the sale of fixed income securities were 2,058,000 for 2023 compared to a net loss of $139,000 for 2022. QNB sold both state and municipal securities and mortgage-backed and CMO securities totaling $33,213,000 during 2023. Unrealized gains on equity securities of $250,000 were recorded during 2023 compared to unrealized losses of $1,026,000 during 2022.
The net gain on the sale of residential mortgage loans was $16,000 and $6,000 for 2023 and 2022, respectively. Mortgage financing activity was greater in 2023, due to available properties. Proceeds from the sale of residential mortgages were $989,000 and $304,000 for the years ended December 31, 2023 and 2022, respectively. Included in the gains on the sale of residential mortgages in 2023 and 2022 are $7,000 and $2,000, respectively, related to the recognition of mortgage servicing assets. Mortgage servicing income of $125,000 for 2023 and $143,000 for 2022 is included in other non-interest income.
Other non-interest income, excluding mortgage servicing income, was $561,000 for 2023, an increase of $95,000 from the amount recorded in 2022. Other non-interest income included sales tax refunds in 2023 of $117,000 and broker-dealer conversion costs reimbursements of $18,000 in 2023 compared to $39,000 in 2022. Title company income decreased $33,000, credit card income increased $21,000 and letter of credit fees increased $16,000 when comparing 2023 to 2022.
- 29 -
Non-Interest Expense
Non-interest expense comparison
Change from prior year
$ Change
% Change
Year ended December 31,
2024 to
2023 to
2024 to
2023 to
Salaries and employee benefits
$
19,741
$
19,026
$
17,306
$
$
1,720
3.8
%
9.9
%
Net occupancy
2,207
2,223
2,195
(16
)
-0.7
1.3
Furniture and equipment
3,973
3,602
2,917
10.3
23.5
Marketing
1,044
8.3
10.8
Third party services
2,595
2,422
2,474
(52
)
7.1
-2.1
Telephone, postage and supplies
(66
)
(177
)
-11.6
-23.7
State taxes
1,004
(637
)
57.2
-63.4
FDIC insurance premiums
1,156
1,058
9.3
37.8
Other
3,686
3,876
3,210
(190
)
-4.9
20.7
Total
$
35,484
$
34,109
$
31,492
$
1,375
$
2,617
4.0
%
8.3
%
2024 versus 2023
Non-interest expense is comprised of costs related to salaries and employee benefits, net occupancy, furniture and equipment, marketing, third party services, FDIC insurance premiums, regulatory assessments and taxes and various other operating expenses. Total non-interest expense was $35,484,000 in 2024, an increase of $1,375,000, or 4.0%, from the $34,109,000 in 2023. QNB’s overhead efficiency ratio, which represents the percentage of each dollar of revenue that is used for non-interest expense, is calculated by taking non-interest expense divided by net operating revenue (tax-equivalent net interest income plus non-interest income). QNB’s efficiency ratios for 2024, 2023 and 2022 were 70.5%, 74.8%, and 61.8%, respectively. The favorable decrease in the 2024 efficiency ratio is primarily due to an increase in tax-equivalent net interest income of $2,681,000 in 2024 over 2023.
Salaries and benefits expense is the largest component of non-interest expense. QNB monitors, using various surveys, the competitive salary and benefit information in its markets and makes adjustments when appropriate. Salaries and benefits expense for 2024 was $19,741,000, an increase of $715,000, or 3.8%, compared with $19,026,000 reported in 2023. Salary expense and related payroll taxes for 2024 was $16,882,000, an increase of $893,000 compared with $15,989,000 reported in 2023. Benefit expense for 2024 was $2,859,000, a decrease of $178,000, or 5.9%, from the amount recorded in 2023. Medical premiums decreased $225,000 primarily due to a decrease in claims. Retirement plan matching and safe harbor increased $44,000 compared to 2023. QNB utilized unvested forfeited 401(k) contributions to offset retirement plan matching in 2024 and 2023. During 2023, the Bank adopted a Nonqualified Deferred Compensation Plan ("NQDC Plan"). The purpose of the NQDC Plan is to provide a deferred compensation vehicle to which the Bank may credit discretionary amounts on behalf of key employees for recruitment and reward. NQDC Plan expense was $136,000 for the year ended December 31, 2024 compared to $108,000 for the year ended December 31, 2023.
Net occupancy and furniture and equipment expense increased $355,000, to $6,180,000 when comparing 2024 to 2023, due primarily to increased software maintenance.
Marketing expense was $1,044,000 for 2024, an $80,000 increase from the expense recorded in 2023. QNB’s contributions and sponsorships for not-for-profit organizations, events and clubs in the communities it serves are included in public relations expense which decreased $28,000 in 2024 Advertising and sales promotions costs increased $119,000 in 2024 over 2023.
Third party services are comprised of professional services, including legal, accounting, auditing and consulting services, as well as fees paid to outside vendors for support services of day-to-day operations. These support services include correspondent banking services, statement printing and mailing, investment security safekeeping and supply management services. Third party services increased $173,000.
Telephone, postage and supplies expense decreased $66,000 to $505,000 in 2024 compared with 2023, primarily due to reduction in transportation costs for supplies and mail delivery services due to usage.
The premium assessment formula for small institutions is based on asset growth and related risk assumptions determined by the FDIC as well as capital. Small institutions, for FDIC premium assessments purposes, are defined as those with total consolidated assets less than $10 billion. FDIC insurance premium expense increased $98,000 in 2024 due to an increase in capital.
- 30 -
State tax expense represents the payment of the Pennsylvania Shares Tax and Pennsylvania sales and use tax. State tax expense was $577,000 and $367,000 for the years 2024 and 2023, respectively. The Pennsylvania Shares Tax is based primarily on the equity of the Bank. The increase in Pennsylvania Shares Tax is a result of higher capital and a decrease in tax credits.
Other operating expenses for the twelve months ended December 31, 2024 decreased $190,000, or 4.9%. There was a decrease of $478,000 in write-offs primarily due to fraud on customer accounts offset by increases in debit card expense of $233,000 and the recording of a potential expense of $85,000 related to the Visa stock exchange make-whole agreement.
2023 versus 2022
Total non-interest expense was $34,109,000 in 2023, an increase of $2,617,000, or 8.3%, from the $31,492,000 in 2022. Salaries and benefits expense for 2023 was $19,026,000, an increase of $1,720,000 compared with $17,306,000 reported in 2022. Salary expense and related payroll taxes for 2023 was $15,989,000, an increase of $1,250,000 compared with $14,739,000 reported in 2022. Benefit expense for 2023 was $3,037,000, an increase of $470,000, or 18.3%, from the amount recorded in 2022. Medical premiums increased $319,000 primarily due to an increase in claims. Retirement plan matching and safe harbor increased $101,000 compared to 2022. QNB utilized unvested forfeited 401(k) contributions to offset retirement plan matching in 2023 and 2022. NQDC Plan expense was $108,000 for the year ended December 31, 2023.
Net occupancy and furniture and equipment expense increased $713,000, to $5,825,000 when comparing 2023 to 2022, due primarily to increased software maintenance.
Marketing expense was $964,000 for 2023, a $94,000 increase from the expense recorded in 2022. QNB’s contributions and sponsorships for not-for-profit organizations, events and clubs in the communities it serves are included in public relations expense which increased $97,000 in 2023.
Third party services decreased $52,000; QNB incurred additional legal, consulting and other third-party services to implement core-processing software in 2022.
Telephone, postage and supplies expense decreased $177,000 to $571,000 in 2023 compared with 2022, primarily due to reduction in transportation costs for supplies and mail delivery services due to usage.
FDIC insurance premium expense increased $290,000 in 2023 due to an increase in the assessment rate.
State tax expense represents the payment of the Pennsylvania Shares Tax and Pennsylvania sales and use tax. State tax expense was $367,000 and $1,004,000 for the years 2023 and 2022, respectively.
Other operating expenses for the twelve months ended December 31, 2022 increased $666,000, or 20.7%. There was an increase of $499,000 in write-offs primarily due to fraud on customer accounts. Director fees increase $74,000 primarily due to additional expense related to the QNB Corp. 2023 Non-Employee Director Compensation Plan. Business development expenses increased $49,000 as in-person meetings increased. There was a $43,000 increase in loan work-out costs as there was a large recovery in 2022 of $45,000 to reimburse the Bank for insurance costs.
Income Taxes
Applicable income tax expense and effective tax rates were $2,911,000, or 20.3% for 2024, $2,244,000, or 19.1% for 2023 and $3,665,000, or 18.7% for 2022. The primary reason for the increased effective tax rate for 2023 over 2022 was due to a decrease in allowable tax-exempt interest due to higher disallowed interest expense related to a higher cost of funds and an increase in the valuation allowance. The primary reason for the increased effective tax rate for 2022 over 2021 was due to the state taxes on the realized gains on equity sales securities in 2022.
QNB expects the effective tax rate in 2025 to be less than the 21% corporate rate, due to its holdings of tax-free assets, including municipal bonds, municipal loans, and life insurance contracts. For a more comprehensive analysis of income tax expense and deferred taxes, refer to Note 12 in the Notes to Consolidated Financial Statements.
- 31 -
Financial Condition
ASSETS
The following table presents total assets at the dates indicated:
Change from prior year
Year ended December 31,
Amount
Percent
Cash and cash equivalents
$
50,713
$
62,657
$
(11,944
)
-19.1
%
Investment securities AFS
546,559
490,182
56,377
11.5
Investment equity securities
-
5,910
(5,910
)
-100.0
Restricted investment in bank stocks
5,436
2,730
2,706
99.1
Loans held for sale
20.9
Loans receivable
1,216,048
1,093,533
122,515
11.2
Allowance for credit losses on loans
(8,744
)
(8,852
)
1.2
Premises and equipment, net
17,255
14,952
2,303
15.4
Bank-owned life insurance
11,937
11,946
(9
)
-0.1
Accrued interest receivable
4,965
6,101
(1,136
)
-18.6
Other assets
26,061
26,610
(549
)
-2.1
Total assets
$
1,870,894
$
1,706,318
$
164,576
9.6
%
Cash and interest-earning deposits
Total cash and cash equivalents decreased $11,944,000 to $50,713,000 at December 31, 2024 from $62,657,000 at December 31, 2023. QNB had interest-bearing balances at the Federal Reserve Bank of $35,867,000 compared with $48,755,000 and interest-bearing balances in a brokerage account of $3,414,000 compared with $565,000 at December 31, 2024 and December 31, 2023, respectively. At December 31, 2024 and December 31, 2023 there was $0 and $1,850,000, respectively, held as collateral against the fair value swaps held a correspondent bank. Net cash was provided by operating and financing activities. Proceeds received from deposit growth and net proceeds from the issuance of long-term and subordinated debt more than offset loan growth and net repayment of short-term borrowings, excess funds were used to purchase investment securities. The maturity, prepayment and sales of investment securities were also reinvested in investment securities.
Investment Securities and Other Short-Term Investments
At December 31, 2024 and 2023, QNB had no Federal funds sold.
QNB accounts for its investments by classifying securities into four categories. Debt securities that are bought and held principally for the purpose of selling them in the near term are classified as trading securities and reported at fair value, with unrealized gains and losses included in earnings. Debt securities that QNB has the positive intent and ability to hold to maturity are classified as held-to-maturity securities and reported at amortized cost. Debt securities not classified as either held-to-maturity securities or trading securities are classified as available-for-sale securities and reported at fair value, with unrealized gains and losses, net of tax, excluded from earnings and reported as a separate component of shareholders’ equity. Equity investments with readily determinable fair values are measured at fair value with changes in fair value recognized in net income. Management determines the appropriate classification of securities at the time of purchase.
- 32 -
Investment Portfolio History
December 31,
Investment Securities Available-for-Sale
U.S. Treasuries
$
18,010
$
6,451
$
U.S. Government agency
66,908
74,122
86,709
State and municipal
86,352
89,189
95,367
U.S. Government agencies and sponsored enterprises (GSEs):
Mortgage-backed
198,510
224,238
256,161
Collateralized mortgage obligations (CMOs)
161,646
89,973
101,672
Corporate debt and money market funds
15,133
6,209
6,315
Total investment securities available-for-sale
$
546,559
$
490,182
$
546,525
Equity Investments
Equity
$
-
$
5,910
$
12,056
Total equity investments
$
-
$
5,910
$
12,056
Total investment securities
$
546,559
$
496,092
$
558,581
Investments Available-For-Sale Debt Securities
Available-for-sale investment securities include securities that management intends to use as part of its liquidity and asset/liability management strategy. These securities may be sold in response to changes in market interest rates, changes in the securities prepayment or credit risk, the need for liquidity, or growth in loan demand. At December 31, 2024, the fair value of investment debt securities available-for-sale, including the impact of fair value hedges, was $546,559,000, or $79,832,000 less the amortized cost of $626,391,000. This compares to a fair value of $490,182,000, or $85,996,000 less the amortized cost of $576,178,000, at December 31, 2023. The available-for-sale portfolio had a weighted average maturity of approximately 6.6 years at December 31, 2024 and 6.9 years at December 31, 2023 and a weighted average tax-equivalent yield of 2.40% and 1.81% at December 31, 2024 and 2023, respectively.
At December 31, 2024, approximately 78% of QNB’s investment securities available-for-sale were either U.S. Government agency debt securities, U.S. Government agency issued mortgage-backed securities or CMOs. As of December 31, 2024, QNB held no securities of any one issue or any one issuer (excluding the U.S. Government and its agencies) that were in excess of 10% of shareholders’ equity.
The QNB investment portfolio represents a significant portion of earning assets and interest income. QNB actively manages the investment portfolio in an attempt to maximize earnings, while considering liquidity needs, interest rate risk and credit risk. The decrease of the investment portfolio as a percent of total assets in 2024 is due to the proceeds from payments, maturities and sales being used to fund loan growth. During 2024, $130,679,000 of investment securities available-for-sale were purchased compared with $14,381,000 during 2023. Proceeds from the sale of investment securities available-for-sale were $13,139,000 during 2024 compared with $33,213,000 during 2023. Proceeds from maturities, calls and prepayments were $64,959,000 during 2024 compared with $50,042,000 during 2023.
Treasury securities had a fair value of $18,010,000 at December 31, 2024 compared to $6,451,000 at December 31, 2023. Excess cash at the holding company was invested in short-term Treasury securities in 2024.
The balance of U.S. Government agency securities decreased $7,214,000 to $66,908,000 at December 31, 2024 and represents 12.2% of the available-for-sale investment portfolio, compared with 15.1% at December 31, 2023. U.S. Government agency issued CMO and MBS balances increased $45,945,000 to $360,156,000 and represents 65.9% of the available-for-sale portfolio compared with 64.1% at December 31, 2023. These bonds provide monthly cash flow to be reinvested in either loans or other securities, potentially at higher yields as rates increase.
The balance of municipal securities decreased $2,837,000 to $86,352,000 at December 31, 2024, representing 15.8% of the available-for-sale portfolio compared with 18.2% at December 31, 2023. QNB focuses on the financial performance of the underlying issuer for municipal bond purchases in addition to the bond rating of the issuer or the rating of bond insurer, if present.
- 33 -
QNB owns one collateralized debt obligations (“CDO”) in the form of a pooled trust preferred security and is included in the Corporate debt category. The security is comprised of securities issued by banks or bank holding companies. QNB owns the mezzanine tranche of this security. The security is structured so that the senior and mezzanine tranches are protected from defaults by over-collateralization and cash flow default protection provided by subordinated tranches. The trust preferred security the Bank continues to hold has a carrying balance of $51,000 at December 31, 2024 and represents the senior-most obligation of the trust. There was no credit-related impairment charge during 2024, 2023 or 2020. Future estimates of fair value of the remaining security could require recording additional impairment charges through earnings. For additional detail on these securities see Note 18 of the Notes to Consolidated Financial Statements.
The weighted average maturity is based on the stated contractual maturity or likely call date of all securities except for MBS and CMOs, which are based on estimated average life. The maturity of the portfolio could become shorter if interest rates decline and prepayments on MBS and CMOs increase or securities are called. However, the estimated average life could lengthen if interest rates were to increase and principal payments on MBS and CMOs slowed or securities anticipated to be called extend past their call date.
Investment Portfolio Maturities and Weighted Average Yields
December 31, 2024
One year
or less
After one
year
through
five years
After five
years
through
ten years
After ten
years
Total
Investment Securities Available-for-Sale
U.S. Treasuries
Fair value
$
18,010
$
-
$
-
$
-
$
18,010
Weighted average yield
4.62
%
-
-
-
4.62
%
U.S. Government agency:
Fair value
-
52,672
14,236
-
$
66,908
Weighted average yield
-
1.08
%
1.51
%
-
1.17
%
State and municipal:
Fair value
-
1,477
24,189
60,686
86,352
Weighted average yield
-
1.56
%
2.17
%
1.98
%
2.03
%
Mortgage-backed:
Fair value
65,376
133,004
-
198,510
Weighted average yield
2.51
%
1.53
%
1.67
%
-
1.62
%
Collateralized mortgage obligations (CMOs):
Fair value
38,768
116,327
6,091
161,646
Weighted average yield
1.99
%
3.01
%
3.46
%
5.44
%
3.42
%
Corporate debt and money market funds:
Fair value
7,842
7,054
-
15,133
Weighted average yield
6.91
%
7.62
%
5.83
%
-
6.77
%
Total fair value
$
18,837
$
166,135
$
294,810
$
66,777
$
546,559
Weighted average yield
4.57
%
2.02
%
2.51
%
2.30
%
2.40
%
Securities are assigned to categories based on stated contractual maturity except for mortgage-backed securities and CMOs which are based on anticipated payment periods and state and municipal securities which are based on pre-refunded date, if applicable. Tax-exempt securities were adjusted to a tax-equivalent basis and are based on the marginal Federal corporate tax rate of 21% and a Tax Equity and Financial Responsibility Act (“TEFRA”) adjustment for the cost of funds. Weighted average yields on investment securities available-for-sale are based on amortized cost.
Investments in Equity Securities
Equity securities decreased $5,910,000 to $0 at December 31, 2024 from $5,910,000 at December 31, 2023. Proceeds from the sale of equity securities were $8,880,000, including a net gain of $2,015,000, and purchased $1,170,000 in equities during 2024. QNB completed the exchange offer to convert the Bank's Visa B-1 shares to B-2 and C shares in the second quarter of 2024; QNB sold the Visa Class C shares in the fourth quarter of 2024 and realized a gain of $1,498,000.
- 34 -
Increases and decreases in the fair value of equity securities were recognized in net income. QNB sold its equity portfolio during 2024, reducing the volatility to earnings. However, QNB still has unconverted Visa B-2 shares, as discussed in Note 1, that in the future could be converted to equity securities with a readily determinable fair value. At December 31, 2023, the fair value of the equity securities was $5,910,000, or $215,000 above the cost of $5,695,000.
The equities portfolio comprises blue-chip large-capitalized stocks, providing a taxable equivalent dividend yield of 3.88%.
Loans
QNB’s primary business is to accept deposits and to make loans to meet the credit needs of the communities it serves. Loans are the most significant component of earning assets, and growth in loans to small businesses and residents of these communities has been a primary focus of QNB. Inherent within the lending function is the evaluation and acceptance of credit risk and interest rate risk. QNB manages credit risk associated with its lending activities through portfolio diversification, underwriting policies and procedures and loan monitoring practices.
QNB has comprehensive policies and procedures that define and govern commercial and retail loan originations and the management of risk. All loans are underwritten in a manner that emphasizes the borrowers’ capacity to pay. The measurement of capacity to pay delineates the potential risk of non-payment or default. The higher potential for default determines the need for and amount of collateral required. QNB makes unsecured commercial loans when the capacity to pay is considered substantial. As capacity lessens, collateral is required to provide a secondary source of repayment and to mitigate the risk of loss. Various policies and procedures provide guidance to the lenders on such factors as amount, terms, price, maturity and appropriate collateral levels. Each risk factor is considered critical to ensuring that QNB receives an adequate return for the risk undertaken, and that the risk of loss is minimized.
QNB manages the risk associated with commercial loans by having lenders work in tandem with credit analysts while maintaining independence between personnel. In addition, a Bank loan committee and a committee of the Board of Directors review and approve certain loan requests on a weekly basis. Other than disclosed in the forthcoming Loan Portfolio Table, at December 31, 2024, there was a concentration of loans to lessors of residential buildings and dwellings of 21.9% of total loans and to lessors of nonresidential buildings of 23.3% of total loans, compared with 21.5% and 24.7% of total loans, respectively, at December 31, 2023.
QNB’s commercial lending activity is focused on small businesses within the local community. Commercial purpose loans are generally perceived as having more risk of default than residential real estate loans with a personal purpose and consumer loans. These types of loans involve larger loan balances to a single borrower or group of related borrowers and are more susceptible to a risk of loss during a downturn in the business cycle. These loans may involve greater risk because the availability of funds to repay these loans depends on the successful operation of the borrower’s business. The assets financed are used within the business for its ongoing operation. Repayment of these types of loans generally comes from the cash flow of the business or the ongoing conversions of assets, such as accounts receivable and inventory, to cash. Commercial and industrial loans represent commercial purpose loans that are either secured by collateral other than real estate or unsecured.
Commercial loans secured by commercial real estate include commercial purpose loans collateralized at least in part by commercial real estate. Some of these loans may not be for the express purpose of conducting commercial real estate transactions. Commercial loans secured by residential real estate are commercial purpose loans generally secured by the business owner’s residence or residential investment properties owned by the borrower and rented to tenants. Commercial loans secured by either commercial real estate or residential real estate are originated primarily within the Eastern Pennsylvania market area, are within the Bank’s underwriting criteria, and generally include the guarantee of the borrowers. Repayment of this kind of loan is dependent upon either the ongoing cash flow of the borrowing entity or the resale of or lease of the subject property. Commercial real estate and commercial construction loans may be affected to a greater extent than residential loans by adverse conditions in real estate markets or the economy because commercial real estate borrowers’ ability to repay their loans depends on successful development of their properties.
Loans to state and political subdivisions are tax-exempt or taxable loans to municipalities, school districts and housing and industrial development authorities. These loans can be general obligations of the municipality or school district repaid through their taxing authority, revenue obligations repaid through the income generated by the operations of the authority, such as a water or sewer authority, or loans issued to a housing and industrial development agency, for which a private corporation is responsible for payments on the loans.
- 35 -
The Company originates fixed rate and adjustable-rate residential real estate loans that are secured by the underlying 1-4 family residential properties. Credit risk exposure in this area of lending is minimized by the evaluation of the credit worthiness of the borrower, including debt-to-income ratios, credit scores and adherence to underwriting policies that emphasize conservative loan-to-value ratios of generally no more than 80%. To reduce interest rate risk, qualifying originations of fixed-rate loans to individuals for 1-4 family residential mortgages with maturities of 15 years or greater are generally sold in the secondary market. Mortgage loan origination activity increased in 2024 with $1,851,000 in residential mortgages originated for sale compared with $1,522,000 for 2023. There were $664,000 residential mortgage loans held-for-sale at December 31, 2024 and $549,000 at December 31, 2023. Loan held for sale are carried at the lower of aggregate cost or market.
The home equity portfolio consists of fixed-rate home equity loans and variable rate home equity lines of credit. These loans are often in a junior lien position and therefore carry a higher risk than first lien 1-4 family residential loans. Risks associated with loans secured by residential properties, either first lien residential mortgages or home equity loans and lines, are generally lower than commercial loans and include general economic risks, such as the strength of the job market, employment stability and the strength of the housing market. Since most loans are secured by a primary or secondary residence, the borrower’s continued employment is the greatest risk to repayment.
The Company offers a variety of loans to individuals for personal and household purposes. Consumer loans are generally considered to have greater risk than loans secured by residential real estate because they may be unsecured, or, if they are secured, the value of the collateral may be difficult to assess or more likely to decrease in value than real estate. Credit risk in this portfolio is controlled by conservative underwriting standards that consider debt-to-income levels and the creditworthiness of the borrower, and, if secured, the value of the collateral.
Total loan receivables at December 31, 2024 were $1,216,048,000, an increase of $122,515,000, or 11.2%, from December 31, 2023. A key financial ratio, loans to deposits was 74.7% at December 31, 2024, compared with 73.5% at December 31, 2023. QNB continues to be committed to make loans available to credit worthy consumers and businesses.
Loan Portfolio
December 31,
Commercial:
Commercial and industrial
$
153,187
$
137,086
$
160,875
$
148,610
$
227,431
Construction and land development
129,464
116,173
62,955
55,855
57,594
Real estate secured by multi-family properties
137,461
109,193
99,758
69,765
52,268
Real estate secured by owner-occupied properties
163,955
160,695
158,286
147,264
132,948
Real estate secured by other commercial properties
313,390
265,101
260,026
234,375
192,370
Revolving real estate secured by 1-4 family properties-business
5,652
5,442
5,256
5,517
5,376
Real estate secured by 1st lien on 1-4 family properties-business
105,779
103,572
99,805
81,274
79,072
Real estate secured by junior lien on 1-4 family properties-business
3,238
3,445
3,613
3,467
2,825
State and political subdivisions
17,683
18,708
20,971
19,775
25,302
Retail:
1-4 family residential mortgages
114,423
108,906
105,524
97,075
79,714
Construction-individual
-
-
3,206
3,025
Revolving home equity secured by 1-4 family properties-personal
48,231
34,231
36,732
33,476
36,350
Real estate secured by 1st lien on 1-4 family properties-personal
6,561
11,981
10,575
11,172
9,467
Real estate secured by junior lien on 1-4 family properties-personal
14,092
15,625
11,018
11,617
12,750
Student loans
1,444
1,662
2,180
2,436
2,724
Overdrafts
Other consumer
1,782
1,757
1,801
2,172
2,382
Total loans
1,216,551
1,093,771
1,039,637
927,147
921,856
Net unearned costs (fees)
(503
)
(238
)
(252
)
(677
)
(1,814
)
Loans receivable
$
1,216,048
$
1,093,533
$
1,039,385
$
926,470
$
920,042
- 36 -
Loan Maturities and Interest Sensitivity
Loans due after one year
December 31, 2024
One year
or less
After one
year through
five years
After
five through 15 years
After
15 years
Total
With fixed predetermined interest rate
With variable or adjustable interest rates
Commercial:
Commercial and industrial
$
94,791
$
42,171
$
15,489
$
$
153,187
$
36,580
$
21,816
Construction and land development
23,030
48,458
16,611
41,365
129,464
6,889
99,545
Real estate secured by multi-family properties
19,304
1,368
44,993
71,796
137,461
5,174
112,983
Real estate secured by owner-occupied properties
6,226
5,381
53,226
99,122
163,955
3,078
154,651
Real estate secured by other commercial properties
8,111
2,679
126,350
176,250
313,390
16,701
288,578
Revolving real estate secured by 1-4 family properties-business
5,562
-
-
5,652
-
Real estate secured by 1st lien on 1-4 family properties-business
3,305
31,501
70,124
105,779
1,579
103,351
Real estate secured by junior lien on 1-4 family properties-business
-
1,760
3,238
2,609
State and political subdivisions
3,601
11,630
2,407
17,683
2,025
15,613
Retail:
1-4 family residential mortgages
13,991
100,042
114,423
45,631
68,770
Revolving home equity secured by 1-4 family properties-personal
3,212
8,109
36,818
48,231
9,956
38,183
Real estate secured by 1st lien on 1-4 family properties-personal
4,472
1,125
6,561
6,478
-
Real estate secured by junior lien on 1-4 family properties-personal
2,987
8,912
2,158
14,092
13,997
Student loans
-
1,444
-
1,444
Overdrafts
-
-
-
-
-
Other consumer
1,201
1,782
1,502
Total
$
158,619
$
116,348
$
337,194
$
604,390
$
1,216,551
$
150,219
$
907,713
Demand loans and loans with no stated maturity are included in one year or less. Table details final maturity.
The Allowance for Credit Losses on Loans Allocation table on Page 40 shows the percentage composition of the loan portfolio over the past five years. There was little change in the composition of the portfolio between the periods ended December 31, 2024 and 2023. Loans secured by commercial real estate, including loans secured by multi-family, owner-occupied and other commercial properties, remained the largest sector of the portfolio amounting to 50.6% and 48.9% of the portfolio at December 31, 2024 and December 31, 2023, respectively, as the balances in this sector grew by $79,817,000, or 14.9%, from $534,989,000 at December 31, 2023 to $614,806,000 at December 31, 2024. While loans secured by commercial real estate represent a significant portion of the total portfolio, the collateral is diversified, including investment properties, manufacturing facilities, office buildings, hospitality properties, hospitals, retirement and nursing home facilities, warehouses and owner-occupied facilities. Commercial real estate loans have drawn the attention of the regulators in recent years as a potential source of risk. QNB monitors these types of loans closely, obtaining updated appraisals on loans classified substandard or worse. As detailed in the Allowance for Credit Losses on Loans table, QNB had no charge-offs in this category in 2024, 2023 or 2022.
Commercial loans secured by residential real estate, which includes first lien, junior lien and revolving lines loans, increased by $2,210,000, or 2.0%, to $114,669,000 at December 31, 2024 and at 9.4% remained fairly level with the overall portfolio compared to 10.3% at December 31, 2023. Some of the properties that serve as collateral for these loans are located outside the Bank’s market area and have experienced vacancies and significant declines in market value in prior years. Non-accrual commercial loans secured by residential real estate were $535,000, $165,000, and $365,000 at December 31, 2024, 2023, and 2022, respectively. Charge-offs in this category have significantly decreased over the past three years. Net recoveries of $10,000 in 2024, compared to net recoveries of $10,000 in 2023 and net recoveries of $45,000 in 2022. In 2024, $5,000 in net recoveries were on out-of-market properties compared with $5,000 in net recoveries in 2023 and $41,000 of the net charge-offs in 2022.
Commercial and industrial loans, the second largest sector of the portfolio, experienced an increase in balances of $16,101,000, or 11.7%, to $153,187,000 at December 31, 2024. Commercial and industrial loans represented 12.6% of the portfolio at year-end 2024 compared with 12.5% at December 31, 2023. This category of loans generally presents a greater risk than loans secured by real estate since these loans are either secured by accounts receivable, inventory or equipment, or are unsecured. During 2024, nonaccrual commercial and industrial loan balances decreased $284,000 to $27,000, the majority of which is due to one loan returning accrual status of $278,000. During 2023, nonaccrual commercial and industrial loan balances decreased $1,264,000 to $311,000, the majority of which is due to paydowns of $1,264,000. During 2022, nonaccrual commercial and industrial loan balances decreased $1,794,000 to $1,575,000, the majority of which is due to paydowns of $1,811,000. In 2024, 2023 and 2022, there were net recoveries of $29,000, $348,000 and $268,000, respectively.
- 37 -
Construction and land development loans increased 11.4% to $129,464,000, or 10.6% of the portfolio at December 31, 2024, from $116,173,000, or 10.6% of the portfolio at December 31, 2023. These loans are primarily to developers and builders for the construction of residential units or commercial buildings or to businesses for the construction of owner-occupied facilities. This portfolio is diversified among different types of collateral including: 1-4 family residential, medical and retirement home facilities, office buildings, hotels and land for development loans. Construction loans are generally made only on projects that have municipal approval. These loans are usually originated to include a short construction period followed by permanent financing provided through a commercial mortgage after construction is complete. Once construction is complete, the balance is moved to the appropriate secured by commercial real estate category if the permanent financing is provided by the Bank. There were no charge-offs in the construction loan portfolio since 2011, and no construction loans on non-accrual since 2014.
Loans to state and political subdivisions decreased $1,025,000, or 5.5%, to $17,683,000 at December 31, 2024 from $18,708,000 at December 31, 2023. This sector decreased to 1.4% of the total loan portfolio at December 31, 2024 from 1.7% at December 31, 2023. Many municipalities, counties and school districts refinanced their existing bonds or bank debt due to rate.
Residential mortgage loans secured by first lien balances increased by $5,517,000, or 5.1%, to $114,423,000 at December 31, 2024 from $108,906,000 at December 31, 2023. In 2024 and 2023, QNB retained some adjustable and fixed rate mortgages to borrowers with high credit scores and low loan-to-value ratios.
Balances in home equity loans and lines, including first lien, junior lien and revolving line loans, increased $7,047,000, or 11.4%, to $68,884,000 at December 31, 2024. During 2024, QNB continued to offer very attractive rates on both variable and fixed rate home equity loans and lines. These attractive rates, along with excellent customer service, including quick turnaround time, resulted in new originations in home equity loans, however, paydowns and refinancing into mortgage loans contributed to the decline. QNB expects demand for home equity loans will increase as rates normalize and debt consolidation into mortgage loans decline.
As of December 31, 2024 the balance of student loans was $1,444,000, a decrease of $218,000 compared with December 31, 2023. In 2013, QNB reentered the private student loan market through a relationship with a third party. These student loans are either fixed or variable rate with the rate dependent on the credit scores of the student and/or the cosigner. Student loan balances will decline, as their balances are no longer insured, and QNB ceased funding originations through the third party during 2019 and forward.
Overdrafts increased $15,000, to $209,000 at December 31, 2024. Other consumer loan balances increased $25,000 to $1,782,000 at December 31, 2024.
Non-Performing Assets
Non-performing assets include non-performing loans, OREO and repossessed assets. Non-performing assets totaled $1,975,000, or 0.11% of total assets at December 31, 2024, a $35,000 increase over the $1,940,000, or 0.11% of total assets at December 31, 2023.
Total non-performing loans, which represent loans on non-accrual status and loans past due 90 days or more and still accruing interest were $1,975,000, or 0.16% of total loans receivable at December 31, 2024 compared with $1,940,000, or 0.18% of total loans receivable at December 31, 2023. Loans on non-accrual status were $1,975,000 at December 31, 2024 compared $1,940,000 at December 31, 2023. The increase was primarily due to $1,296,000 being placed on nonaccrual; partially offset by paydowns of $823,000, net charge-offs of $52,000 and loans returned to accruing of $386,000. Specific impairment reserves have been established based on updated collateral values even if the borrower continues to pay in accordance with the terms of the agreement. Of the total amount of non-accrual loans at December 31, 2024, $1,178,000, or approximately 60% of the loans classified as non-accrual, are current or past due less than 30 days.
QNB had no loans 90 days or more past due and still accruing at December 31, 2024 or at December 31, 2023. Total loans that are 30 days or more past due decreased $9,716,000 to $2,187,000, representing 0.18% of total loans at December 31, 2024 compared with $11,903,000, representing 1.09% of total loans at December 31, 2023; the decrease is primarily due to one commercial customer in the refinancing process.
QNB held no OREO at December 31, 2024 or 2023. There were no repossessed assets as of December 31, 2024 or 2023.
- 38 -
Non-Performing Assets
December 31,
Loans past due 90 days or more and accruing
Commercial:
Commercial and industrial
$
-
$
-
$
-
$
-
$
-
Construction and land development
-
-
-
-
-
Real estate secured by multi-family properties
-
-
-
-
-
Real estate secured by owner-occupied properties
-
-
-
-
-
Real estate secured by other commercial properties
-
-
-
-
-
Revolving real estate secured by 1-4 family properties-business
-
-
-
-
-
Real estate secured by 1st lien on 1-4 family properties-business
-
-
-
-
-
Real estate secured by junior lien on 1-4 family properties-business
-
-
-
-
-
State and political subdivisions
-
-
-
-
-
Retail:
1-4 family residential mortgages
-
-
-
-
-
Revolving home equity secured by 1-4 family properties-personal
-
-
-
-
-
Real estate secured by 1st lien on 1-4 family properties-personal
-
-
-
-
-
Real estate secured by junior lien on 1-4 family properties-personal
-
-
-
-
-
Student loans
-
-
-
-
-
Overdrafts
-
-
-
-
-
Other consumer
-
-
-
-
-
Total loans past due 90 days or more and accruing
-
-
-
-
-
Non-accrual loans
Commercial:
Commercial and industrial
1,575
3,369
4,367
Construction and land development
-
-
-
-
-
Real estate secured by multi-family properties
-
-
-
-
-
Real estate secured by owner-occupied properties
1,000
2,857
Real estate secured by other commercial properties
-
-
1,165
1,279
Revolving real estate secured by 1-4 family properties-business
-
-
Real estate secured by 1st lien on 1-4 family properties-business
-
Real estate secured by junior lien on 1-4 family properties-business
State and political subdivisions
-
-
-
-
-
Retail:
1-4 family residential mortgages
Revolving home equity secured by 1-4 family properties-personal
Real estate secured by 1st lien on 1-4 family properties-personal
Real estate secured by junior lien on 1-4 family properties-personal
-
Student loans
Other consumer
Total non-accrual loans
1,975
1,940
4,820
7,530
9,640
Troubled debt restructured loans, not included above
N/A
N/A
4,301
4,142
4,469
Total non-performing assets
$
1,975
$
1,940
$
9,121
$
11,672
$
14,109
Total non-performing assets as a percent of total
assets
0.11
%
0.11
%
0.55
%
0.70
%
0.98
%
Nonaccrual loans to total loans
0.16
0.18
0.88
1.26
1.53
Additional loan quality information can be found in Note 5 of the Notes to the Consolidated Financial Statements included in Item 8 of this Form 10-K. Management’s view is that loans classified as substandard or doubtful that are not included in the past due, non-accrual or restructured categories are potential problem loans. For some of these loans, management may have knowledge of possible credit problems that will cause management to question the ability of the borrowers to comply with the present loan repayment terms. Commercial loans classified as substandard or doubtful, which includes non-performing loans, continue to show improvement. At December 31, 2024, commercial substandard or doubtful loans totaled $34,301,000, an increase of $22,691,000 from the $11,610,000, reported as of December 31, 2023. The increase was primarily due to $19,253,000 in loans to two commercial customers downgraded
- 39 -
from special mention, and another $5,019,000 in commercial loans downgraded from pass categories; most of these loans are secured by real estate.
Allowance for Credit Losses on Loans
QNB adopted ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326), as amended ("ASU 326"), which replaces the incurred loss methodology with an expected credit losses (“CECL”), using the modified retrospective method. QNB recorded a reduction in its allowance for credit losses on loans of $1,089,000 as of January 1, 2023 for the cumulative effect of adopting ASU 326. Since the implementation of ASU 326 on January 1, 2023, the Company may make loan modifications to borrowers experiencing financial difficulty ("FDM"). A FDM could involve principal forgiveness, term extension, an other-than-insignificant payment delay, interest rate reduction or exchanging or paying off existing debt for new debt with the Company. The effect of most modifications made to borrowers experiencing financial difficulty is already included in the allowance for credit losses because of the measurement methodologies used to estimate the allowance, a change to the allowance for credit losses is generally not recorded upon modification.
The allowance for credit losses on loans ("ACL") represents management’s best estimate of expected credit losses in the existing loan portfolio, based on historical experience, current conditions and reasonable and supportable forecasts. Management believes that it uses the best information available to make determinations about the adequacy of the allowance and that it has established its existing allowance for credit losses on loans in accordance with U.S. generally accepted accounting principles (“US GAAP”). Since the ACL is dependent on conditions that may be beyond QNB’s control, it is at least reasonably possible that management’s estimates of the ACL and actual results could differ. In addition, various regulatory agencies, as an integral part of their examination process, periodically review QNB’s ACL. Such agencies may require QNB to recognize changes to the ACL based on their judgments about information available to them at the time of their examination. Actual loan losses, net of recoveries, serve to reduce the allowance.
Management closely monitors the quality of its loan portfolio and performs a quarterly analysis of the appropriateness of the ACL. This analysis considers a number of relevant factors including: specific impairment reserves, historical loan loss experience, general economic conditions, levels of and trends in delinquent and non-performing loans, levels of classified loans, trends in the growth rate of loans, and concentrations of credit.
Asset and credit quality remained strong in QNB's market area in 2024. The ACL level stated as a percent of loans receivable decreased from 0.81% at December 31, 2023 to 0.72% at December 31, 2024. The ACL on loans decreased to $8,744,000 at year-end 2024 from $8,852,000 at year-end 2023.
Allowance for Credit Losses on Loans Allocation
December 31,
Amount
Percent
gross
loans
Amount
Percent
gross
loans
Amount
Percent
gross
loans
Amount
Percent
gross
loans
Amount
Percent
gross
loans
Balance at end of period applicable to:
Commercial:
Commercial and industrial
$
12.6
%
$
12.5
%
$
1,316
15.5
%
$
3,368
16.0
%
$
4,050
24.7
%
Construction and land development
1,336
10.6
1,252
10.6
6.1
6.0
6.2
Real estate secured by multi-family properties
2,012
11.3
1,735
10.0
9.6
7.5
5.7
Real estate secured by owner-occupied properties
13.5
1,001
14.7
1,549
15.2
1,460
15.9
1,383
14.4
Real estate secured by other commercial properties
1,142
25.8
1,167
24.2
2,458
25.0
2,074
25.3
1,710
20.9
Revolving real estate secured by 1-4 family properties-business
0.5
0.5
0.5
0.6
0.6
Real estate secured by 1st lien on 1-4 family properties-business
1,238
8.7
1,507
9.5
1,210
9.6
8.8
8.6
Real estate secured by junior lien on 1-4 family properties-business
0.3
0.3
0.3
0.4
0.3
State and political subdivisions
1.4
1.7
2.0
2.1
2.7
Retail:
1-4 family residential mortgages
9.4
10.0
10.2
10.5
8.7
Revolving home equity secured by 1-4 family properties-personal
4.0
3.1
3.5
3.6
3.9
Real estate secured by 1st lien on 1-4 family properties-personal
0.5
1.1
1.0
1.2
1.0
Real estate secured by junior lien on 1-4 family properties-personal
1.2
1.4
1.1
1.3
1.4
Student loans
0.1
0.2
0.2
0.3
0.3
Overdrafts
-
-
-
-
-
Other consumer
0.1
0.2
0.2
0.2
0.3
Unallocated
-
-
Total
$
8,744
100.0
%
$
8,852
100.0
%
$
10,530
100.0
%
$
11,163
99.7
%
$
10,806
99.7
%
- 40 -
Gross loans represent loans before unamortized net loan fees and costs. Percent gross loans lists the percentage of each loan type to total loans.
A loan is considered impaired, based on current information and events, if it is probable that QNB will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls may not be classified as impaired. Management determines the significance of payment delays and shortfalls on a case-by-case basis, taking into consideration all the circumstances surrounding the loan and the borrower, including length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis for commercial loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral, if the loan is collateral dependent. Upon the adoption of CECL, performing troubled debt restructured loans are no longer considered impaired. At December 31, 2024 and 2023, the recorded investment in collateral dependent loans totaled $357,000 and $1,923,000, respectively, of which $0 and $1,451,000, respectively, required no specific ACL. The recorded investment in collateral dependent loans requiring a specific ACL was $357,000 and $472,000 at December 31, 2024 and 2023, respectively. At December 31, 2024 and 2023, the related ACL associated with these loans was $357,000 and $308,000, respectively. See Note 5 to the Notes to Consolidated Financial Statements included in Item 8 of this Form 10-K for additional detail of impaired loans.
- 41 -
Allowance for Credit Losses on Loans
Allowance for credit losses on loans:
Balance, January 1
$
8,852
$
10,531
$
11,184
$
10,826
$
9,887
Impact of adopting ASC 326
(1,089
)
As reported under ASC 326
9,442
Charge-offs
Commercial:
Commercial and industrial
-
Construction and land development
-
-
-
-
-
Real estate secured by multi-family properties
-
-
-
-
-
Real estate secured by owner-occupied properties
-
-
-
-
-
Real estate secured by other commercial properties
-
-
-
-
-
Revolving real estate secured by 1-4 family properties-business
-
-
-
-
-
Real estate secured by 1st lien on 1-4 family properties-business
-
-
-
-
Real estate secured by junior lien on 1-4 family properties-business
-
-
-
-
-
State and political subdivisions
-
-
-
-
-
Retail:
1-4 family residential mortgages
-
-
-
-
-
Revolving home equity secured by 1-4 family properties-personal
-
-
-
-
Real estate secured by 1st lien on 1-4 family properties-personal
-
-
-
-
-
Real estate secured by junior lien on 1-4 family properties-personal
-
-
-
-
-
Student loans
-
Overdrafts
-
Other consumer
Total charge-offs
Recoveries
Commercial:
Commercial and industrial
Construction and land development
-
-
-
-
-
Real estate secured by multi-family properties
-
-
-
-
-
Real estate secured by owner-occupied properties
-
-
-
-
Real estate secured by other commercial properties
-
-
-
-
-
Revolving real estate secured by 1-4 family properties-business
-
-
-
-
-
Real estate secured by 1st lien on 1-4 family properties-business
-
Real estate secured by junior lien on 1-4 family properties-business
-
-
-
-
State and political subdivisions
-
-
-
-
-
Retail:
1-4 family residential mortgages
-
-
-
-
Revolving home equity secured by 1-4 family properties-personal
-
-
-
-
-
Real estate secured by 1st lien on 1-4 family properties-personal
-
-
-
-
Real estate secured by junior lien on 1-4 family properties-personal
-
-
Student loans
-
Overdrafts
Other consumer
- 42 -
Total recoveries
Net (charge-offs) recoveries
(59
)
(100
)
(311
)
(Reversal) provision for credit losses on loans
(49
)
(828
)
(850
)
1,250
Balance, December 31
$
8,744
$
8,852
$
10,531
$
11,184
$
10,826
Total loans (excluding loans held-for-sale)
Average
$
1,150,699
$
1,040,121
$
967,438
$
928,017
$
868,461
Year-end
1,216,048
1,093,533
1,039,385
926,470
920,042
Ratios:
Net charge-offs (recoveries) to:
Average loans
0.01
%
-0.02
%
-0.02
%
0.01
%
0.04
%
Loans at year-end
0.00
-0.02
-0.02
0.01
0.03
Allowance for credit losses on loans
0.67
-2.69
-1.87
0.89
2.87
(Reversal) provision for credit losses on loan
-120.41
28.74
23.18
21.83
24.88
Allowance for credit losses on loan to:
Average loans (excluding loans held-for-sale)
0.76
%
0.85
%
1.09
%
1.21
%
1.25
%
Loans receivable at year-end
0.72
0.81
1.01
1.21
1.18
Nonaccrual loans
442.73
456.29
218.49
148.53
112.30
QNB had net loan charge-offs of $59,000, or 0.01% of average loans for 2024 compared to net recoveries of $238,000, or 0.02% of average loans for 2023 and net recoveries of $197,000, or 0.02% of average loans for 2022. The majority of charge-offs recorded during these periods had specific reserves established during the allowance for credit losses on loans calculation process prior to the decision to charge-off the loan.
Management believes the ACL of $8,744,000 is adequate as of December 31, 2024, in relation to the estimate of known and inherent losses in the portfolio.
Premises and equipment
Premises and equipment includes a right-of-use asset of $2,618,000 and $2,722,000 at December 31, 2024 and December 31, 2023 respectively. The discount rates used in determining the initial value of the right of use assets are based on the FHLB Amortizing Fixed Loan Rate for the term of each lease. QNB typically enters into lease agreements with an initial term of 5 to 10 years and subsequent additional optional terms in increments of 5 years. The lease agreements also contain termination options. None of the leases contain purchase options and none transfer the ownership of the leased asset. QNB has renewed two operating lease during 2024. QNB renewed one operating lease during 2023. Operating lease liabilities are included with “Other liabilities” on the Consolidated Balance Sheets. All operating lease costs are included in non-interest expense within “Net occupancy” on the Consolidated Statements of Income. Other premises and equipment, net of depreciation increased $2,407,000 to $14,637,000 at December 31, 2024; this was primarily due to renovations to currently owned properties.
Other assets
Other assets decreased $549,000 from $26,610,000 at December 31, 2023 to $26,061,000 at December 31, 2024. Most of the decrease in other assets relates to a decrease to the deferred tax asset resulting from the fair value adjustment on interest rate swaps on investment securities available-for-sale. The detail of the net deferred tax asset can be found in Note 12 in the Notes to Consolidated Financial Statements.
- 43 -
LIABILITIES
The following table presents total liabilities at the dates indicated:
Change from prior year
Year ended December 31,
Amount
Percent
Deposits
$
1,628,541
$
1,488,713
$
139,828
9.4
%
Short-term borrowings
53,844
94,094
(40,250
)
-42.8
Long-term debt
30,000
20,000
10,000
50.0
Subordinated debt
39,068
-
39,068
N/M
Accrued interest payable
7,580
5,294
2,286
43.2
Other liabilities
8,512
7,393
1,119
15.1
Total liabilities
$
1,767,545
$
1,615,494
$
152,051
9.4
%
Deposits
QNB primarily attracts deposits from within its market area by offering various deposit products. These deposits are in the form of time deposits, which include certificates of deposit and individual retirement accounts (“IRAs”) which have a stated maturity, and non-maturity deposit accounts, which include: non-interest-bearing demand accounts, interest-bearing demand accounts, money market accounts and savings accounts.
Total deposits increased $139,828,000, or 9.4%, to $1,628,541,000 at December 31, 2024. The mix of deposits continues to be impacted by customers’ reactions to the competition, regulations and the interest rate environment. Many customers are looking for transaction accounts that provide liquidity and pay a reasonable amount of interest, while others look for high rate. Time deposit balances increased $66,477,000, or 21.1% between 2023 and 2024, as customers took advantage of a higher rate environment. Customers appear to be looking for the safety of FDIC insured deposits and the stability of a strong local community bank.
Non-interest-bearing demand accounts decreased $1,599,000 to $183,499,000 at December 31, 2024. These deposits are both retail and commercial checking accounts and are volatile depending on the timing of deposits and withdrawals. QNB has been successful in attracting new customers and expanding relationships with existing customers, which provides an opportunity for fee income.
Interest-bearing demand accounts, retail and business interest-checking and municipal accounts, increased $75,134,000, or 16.2%, to $537,846,000 at December 31, 2024. QNB has been successful in maintaining relationships with several school districts and municipalities as well as expanding existing relationships, the balances in these accounts are seasonal in nature and can be volatile on a daily basis. Most of the school district taxes are collected during the third quarter of the year and are disbursed over a nine-month period. Municipal accounts balances increased $21,489,000, or 16.2% at December 31, 2024 over 2023. Business accounts increased from $88,714,000 at December 31, 2023 to $144,540,000, or 62.9%, at December 31, 2024. Retail checking accounts decreased $2,181,000 to $239,057,000 at December 31, 2024. QNB continues to open a significant number of new checking accounts; additionally, customers may choose to switch products.
Money Market accounts increased $27,450,000 from $222,843,000 at December 31, 2023 to $250,293,000 at December 31, 2024. Money market products offering higher yields to retain large depositors and reduce the reliance on higher-cost short-term borrowings were offered to both retail and business customers. Personal money market accounts increased $20,001,000 to $104,625,000 at December 31, 2024. Business money market accounts increased $7,449,000, to $145,668,000 at December 31, 2024.
Total savings account balances decreased $27,634,000, or 9.1%, to $275,445,000 at December 31, 2024. This decrease is due primarily to a decrease of $18,015,000, or 8.2%, in the online eSavings accounts over December 31, 2023. Although the rate on eSavings accounts was 1.70% at the end of 2023 and 2024, rates on time deposits and the new money market products were more favorable.
Total time deposit account balances were $381,458,000 at December 31, 2024, an increase of $66,477,000, or 21.1%, from the amount reported at December 31, 2023. QNB was able to retain many maturing deposits during 2024 by offering competitive rates and many current customers moved balances from more liquid accounts to take advantage of these rates.
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Maturity of Time Deposits of $250,000 or More
Year ended December 31,
Three months or less
$
27,110
$
11,852
$
3,287
Over three months through six months
8,568
9,629
3,579
Over six months through twelve months
8,368
13,197
7,645
Over twelve months
2,635
8,659
9,959
Total
$
46,681
$
43,337
$
24,470
To continue to attract and retain deposits, QNB plans to remain competitive with respect to rates and to continue to deliver products with terms and features that appeal to customers. The QNB Rewards checking, high yield money market accounts and time deposits are examples of such products.
The following table presents trends in balances and yield on the major deposit groups.
Average Deposits by Major Classification
Balance
Rate
Balance
Rate
Balance
Rate
Demand, non-interest bearing
$
188,525
$
208,777
$
242,778
Interest-bearing demand
346,590
0.93
%
315,990
0.60
%
345,054
0.27
%
Municipals interest-bearing demand
146,446
4.64
131,610
4.46
122,824
1.43
Money market
237,071
3.45
183,004
2.64
137,830
0.45
Savings
285,011
1.28
348,878
1.20
443,104
0.49
Time less than $100
170,998
3.98
121,622
2.63
91,216
0.79
Time $100 through $250
145,022
4.53
107,560
3.59
52,314
0.93
Time greater than $250
49,831
4.51
38,076
3.08
25,296
0.83
Total
$
1,569,494
2.71
%
$
1,455,517
2.01
%
$
1,460,416
0.47
%
Short-term borrowings
Short-term borrowings comprising commercial sweep accounts, overnight and short-term FHLB borrowings and short-term FRB borrowings, decreased $40,250,000, or 42.8%, to $53,844,000 at December 31, 2024. During the first quarter of 2023, QNB borrowed $50,000,000 from the FRB under its Bank Term Funding Program and locked in a rate of 4.39%; there are no pre-payment penalties. Commercial sweep accounts decreased $25,458,000 from $44,094,000 at December 31, 2023 to $18,636,000 at December 31, 2024. There were $25,208,000 in overnight FHLB borrowings and $10,000,000 in short-term FHLB borrowings outstanding at December 31, 2024 and none at December 31, 2023. The FHLB borrowings were used to support loan growth.
Long-term debt
Long-term debt is comprised of $30,000,0000 in FHLB borrowings. QNB borrowed long-term debt to lock in borrowing at a lower yield than short-term borrowings.
Subordinated debt
On August 30, 2024, the Company entered into Subordinated Note Purchase Agreements with certain qualified institutional buyers and accredited investors (collectively, the "Subordinated Note Purchasers") pursuant to which the Company issued and sold $40.0 million in aggregate principal amount of its 8.875% Fixed-to-Floating Rate Subordinated Notes due 2034 (the "Subordinated Notes"). The Subordinated Notes mature on September 1, 2034 and bear interest at a fixed annual rate of 8.875%, payable semi-annually in arrears, to but excluding September 1, 2029. From and including September 1, 2029 to but excluding the maturity date or early redemption date, the interest rate will reset quarterly to an interest rate per annum initially equal to the then-current three-month Secured Overnight Financing Rate published by the Federal Reserve Bank of New York plus 545 basis points, payable quarterly in arrears. The Company is entitled to redeem the Subordinated Notes, in whole or in part, at any time on or after September 1, 2029, and to redeem the Subordinated Notes at any time in whole upon certain other events. Any redemption of the Subordinated Notes will be subject to prior regulatory approval to the extent required. The carrying cost of the Subordinated Notes on the balance sheet represents the outstanding balance of the notes of $40,000,000 net of unamortized origination costs of $932,000 which are amortized to interest expense through September 1, 2029.
- 45 -
Other liabilities
Other liabilities comprise accrued expenses including salaries, post-retirement life insurance benefits and income taxes, operating lease liability, deferred revenue, and ATM/debit card processing clearing. These balances increased $1,119,000, to $8,512,000 at December 31, 2024.
SHAREHOLDERS’ EQUITY
The following table presents total shareholders’ equity at the dates indicated:
Change from prior year
Year ended December 31,
Amount
Percent
Common stock
$
2,441
$
2,414
$
1.1
%
Surplus
27,633
26,439
1,194
4.5
Retained earnings
139,958
133,945
6,013
4.5
Accumulated other comprehensive loss, net of tax
(62,646
)
(67,937
)
5,291
-7.8
Treasury stock
(4,037
)
(4,037
)
-
-
Total shareholders' equity
$
103,349
$
90,824
$
12,525
13.8
%
Total shareholders’ equity increased $12,525,000, or 13.8%, to $103,349,000 at December 31, 2024 with an improvement in the negative impact of the market value of available-for-sale securities, net of tax, adjustment contributing $119,000 and an improvement in market value on the fair value hedge, net of tax, of $5,172,000. Retained earnings increased $6,013,000 due to net income of $11,448,000, partly offset by dividends declared of $5,435,000. The dividend reinvestment and stock purchase plan, employee stock purchase plan and stock option plan contributed $1,221,000.
Accumulated other comprehensive loss improved from a loss of $67,937,000 to a loss of $62,646,000, resulting from the fair value of the available-for-sale investment portfolio primarily due to a improvement in market values and the impact of the market value on the fair value hedge, net of tax.
QNB offers a Dividend Reinvestment and Stock Purchase Plan (the “Plan”) to provide participants a convenient and economical method for investing cash dividends paid on the Company’s common stock in additional shares. The Plan also allows participants to make additional cash purchases of stock. Stock purchases under the Plan contributed $873,000 and $1,363,000 to capital during 2024 and 2023, respectively.
The Board of Directors has authorized the repurchase of up to 200,000 shares of QNB’s common stock in open market or privately
negotiated transactions. The repurchase authorization does not bear a termination date. As of December 31, 2024, a total of 102,000 shares were repurchased under this authorization at an average price of $24.93 and a total cost of $2,543,000.
Liquidity and Capital Resources
Liquidity Management
Liquidity represents an institution’s ability to generate cash or otherwise obtain funds at reasonable rates to satisfy demand for loans and deposit withdrawals. QNB attempts to manage its mix of cash and interest-bearing balances, Federal funds sold and investment securities to match the volatility, seasonality, interest sensitivity and growth trends of its loans and deposits. The Company manages its liquidity risk by measuring and monitoring its liquidity sources and estimated funding needs. Liquidity is provided from asset sources through repayments and maturities of loans and investment securities. The portfolio of investment securities classified as available for sale and QNB's policy of selling certain residential mortgage originations in the secondary market also provide sources of liquidity. Core deposits and cash management repurchase agreements have historically been the most significant funding source for QNB. These deposits and repurchase agreements are generated from a base of consumers, businesses and public funds primarily located in the Company’s market area.
- 46 -
An additional source of liquidity is provided by the Bank’s membership in the FHLB. At December 31, 2024, the Bank’s total maximum borrowing capacity at the FHLB was $442,339,000 of which $376,489,000 remained available. The Bank had $35,208,000 in overnight and short-term borrowings and $30,000,000 in long-term debt outstanding at year-end 2024, related interest payable of $342,000, $283,000 in FHLB-issued letters of credit, and other commitments of $17,000. The maximum borrowing capacity changes depending upon the Bank’s level of qualifying collateral assets. In addition, the Bank maintains unsecured Federal funds lines with four correspondent banks totaling $86,000,000. At December 31, 2024 and 2023, there were no outstanding borrowings under these lines. Future availability under these lines is subject to the policies of the granting banks and may be withdrawn. As part of its contingency funding plan, QNB successfully tested its ability to borrow from these sources during 2024.
Total cash and cash equivalents, equity and available-for-sale securities and loans held-for-sale totaled $597,936,000 at December 31, 2024 and $559,298,000 at December 31, 2023, of which $241,586,000 and $289,935,000, respectively, were pledged as collateral for repurchase agreements and public deposits. This increase in liquid sources is primarily the result of purchases of available-for-sale securities. Management anticipates that these liquid sources are adequate to meet normal fluctuations in loan demand or deposit withdrawals. It is anticipated that the investment portfolio will continue to provide sufficient liquidity as municipal bonds are called and as principal and interest payments on mortgage-backed and CMO securities provide steady cash flow. Increases in interest rates, however, result in decreased cash flow available from the investment portfolio.
QNB is a member of the Certificate of Deposit Account Registry Services (“CDARS”) program offered by the Promontory Interfinancial Network, LLC. CDARS is a funding and liquidity management tool used by banks to access funds and manage their balance sheet. At December 31, 2024 approximately 17% of QNB deposits were uninsured or not collateralized, CDARS enables financial institutions to provide customers with full FDIC insurance on time deposits over $250,000 that are placed in the program. QNB also has available Insured Cash Sweep (“ICS”), another program through Promontory Interfinancial Network, LLC, which is a product similar to CDARS, but one that provides liquidity like a money market or savings account. QNB had $14,749,000 in CDARS time deposits at December 31, 2024 compared to $9,502,000 at December 31, 2023.
Capital Resources
A strong capital position is fundamental to support continued growth and profitability and to serve the needs of depositors. QNB’s shareholders’ equity at December 31, 2024 was $103,349,000, or 5.52% of total assets, compared with shareholders’ equity of $90,824,000, or 5.32% of total assets, at December 31, 2023. Shareholders’ equity at December 31, 2024 included a negative $66,436,000 related to unrealized holding losses, net of taxes, on investment securities available for sale and a positive $3,790,000, net of taxes, related to unrealized holding gains on fair value hedges, compared to a negative $66,555,000 related to unrealized holding losses, net of taxes, on investment securities available for sale and a negative $1,382,000, net of taxes, related to unrealized holding losses on fair value hedges at December 31, 2023. Excluding these adjustments, shareholders’ equity to total assets would have been 8.59% and 8.95% at December 31, 2024 and 2023, respectively.
Average shareholders’ equity and average total assets were $162,304,000 and $1,835,650,000 for 2024, an increase of 3.3% and 5.0%, respectively, from 2023 average equity and average total assets of $157,126,000 and $1,748,029,000, respectively. The ratio of average total equity to total average assets was 8.84% for 2024, compared with 8.99% for 2023.
QNB is subject to restrictions on the payment of dividends to its shareholders pursuant to the Pennsylvania Business Corporation Law of 1988 as amended (the BCL). The BCL operates generally to preclude dividend payments, if the effect thereof would render QNB insolvent, as defined. As a practical matter, QNB’s payment of dividends is contingent upon its ability to obtain funding in the form of dividends from the Bank. Under Pennsylvania banking law, the Bank is subject to certain restrictions on the amount of dividends that it may declare without prior regulatory approval. At December 31, 2024, the retained earnings of the Bank totaling $140,012,000 was available for dividends without prior Pennsylvania Department of Banking approval, subject to the regulatory capital requirements discussed below. Under the Federal Deposit Insurance Act, an insured depository institution may not pay a dividend if, after the payment of the dividend, the institution would be undercapitalized under the FDIC’s prompt corrective action rules. In addition, federal banking agencies have the authority to restrict dividend payments under certain circumstances if such payments are not consistent with the capital needs and financial condition of the institution. It is the policy of the Federal Reserve that a bank holding company generally should not maintain its existing rate of cash dividends on common stock unless the net income available to common shareholders over the prior four quarters, net of dividends previously paid during that period, has been sufficient to fully fund the dividends and the prospective rate of earnings retention appears consistent with the company’s capital needs, asset quality, and overall financial condition. QNB paid dividends to its shareholders of $1.48 per share, $1.48 per share, and $1.44 per share, in 2024, 2023, and 2022, respectively.
QNB is subject to various regulatory capital requirements as issued by Federal regulatory authorities. Regulatory capital is defined in terms of Tier 1 capital and Tier 2. Risk-based capital ratios are expressed as a percentage of risk-weighted assets. Risk-weighted assets are determined by assigning various weights to all assets and off-balance sheet arrangements, such as letters of credit and loan commitments, based on associated risk. QNB is subject to various regulatory capital requirements as issued by Federal regulatory authorities.
- 47 -
Minimum requirements for both the quantity and quality of capital held by banks are as follows: Common equity Tier 1 capital to risk-weighted assets of 4.5%; Tier 1 capital to risk-weighted assets of 6.0%; Total Capital to risk-weighted assets of 8.0%; and Tier 1 leverage ratio of 4.0%. The capital conservation buffer, comprised of common equity Tier 1 capital, was established above the regulatory minimum capital requirements at 2.5%.
The Federal Deposit Insurance Corporation Improvement Act of 1991 established five capital level designations for insured institutions ranging from “well capitalized” to “critically undercapitalized.” At December 31, 2024 and 2023, management believes that the Company and the Bank met all capital adequacy requirements to which they are subject and have met the “well capitalized” criteria.
Capital Analysis
December 31,
Regulatory Capital
Shareholders' equity
$
103,349
$
90,824
Net unrealized securities losses, net of tax
62,646
67,937
Deferred tax assets on net operating loss
-
-
Disallowed goodwill and other disallowed intangible assets
-
(8
)
Common equity tier I capital
165,995
158,753
Tier 1 capital
165,995
158,753
Allowable portion:
Suboridnated debt
40,000
-
Allowance for credit losses on loans and unfunded commitments
8,831
8,958
Total regulatory capital
$
214,826
$
167,711
Risk-weighted assets
$
1,381,002
$
1,281,418
Quarterly average assets for leverage capital purposes
$
1,908,914
$
1,779,619
Capital Ratios
December 31,
Common equity tier I capital / risk-weighted assets
12.02
%
12.39
%
Tier 1 capital / risk-weighted assets
12.02
%
12.39
%
Total regulatory capital / risk-weighted assets
15.56
%
13.09
%
Tier 1 capital / average assets (leverage ratio)
8.70
%
8.92
%
Material Cash Requirements from Known Contractual and Other Obligations
QNB has various financial obligations, including contractual obligations and commitments, which may require future cash payments.
The following table presents, as of December 31, 2024, significant contractual obligations to third parties by payment date and the amounts and expected maturities of significant commitments. Further discussion of the nature of each obligation can be found in the Notes to Consolidated Financial Statements. The Company’s reserve for credit losses on unfunded commitments totaled $87,000 at December 31, 2024 compared to $106,000 at December 31, 2023.
December 31, 2024
One year
or less
After one
year
through
three years
After three
years
through
five years
After
five years
Total
Time deposits
$
350,836
$
26,860
$
3,762
$
-
$
381,458
Short-term borrowings
53,844
-
-
-
53,844
Long-term debt
30,000
-
-
-
30,000
Subordinated debt
-
-
-
39,068
39,068
Operating leases
1,926
4,137
Commitments to extend credit (a)
199,656
60,382
13,734
55,737
329,509
Standby letters of credit
15,988
3,030
-
-
19,018
Total
$
650,976
$
91,207
$
18,120
$
96,731
$
857,034
(a)Includes available amounts for overdraft protection program in one year or less
- 48 -
Commitments to extend credit, including loan commitments, standby letters of credit, and commercial letters of credit do not necessarily represent future cash requirements, as these commitments often expire without being drawn upon. The Company does not currently have any commitments for significant capital expenditures or other purchase obligations.
RECENTLY ISSUED ACCOUNTING STANDARDS
Refer to Note 1 of the Notes to Consolidated Financial Statements for discussion of recently issued accounting standards.
CRITICAL ACCOUNTING ESTIMATES
Disclosure of the Company’s significant accounting policies is included in Note 1 to Consolidated Financial Statements. Additional information is contained in Management’s Discussion and Analysis and the Notes to Consolidated Financial Statements for the most sensitive of these issues. The discussion and analysis of the financial condition and results of operations are based on the Consolidated Financial Statements of QNB, which are prepared in accordance with US GAAP and predominant practices within the banking industry. The preparation of these Consolidated Financial Statements requires QNB to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. QNB evaluates estimates on an on-going basis, including those related to the determination of the allowance for credit losses on investments, loans and unused commitments, the determination of the valuation of other real estate owned, the determination of impairment of securities and restricted stock, the valuation of deferred tax assets, stock-based compensation and income taxes. QNB bases its estimates on historical experience and various other factors and assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Impairment on Securities and Restricted Stock
Securities are evaluated periodically to determine whether a decline in their value is impairment. Management utilizes criteria such as the magnitude and duration of the decline, in addition to the reasons underlying the decline, to determine whether the loss in value is impairment. The term “impairment” is not intended to indicate that the decline is permanent but indicates that the prospect for a near-term recovery of value is not necessarily favorable, or that there is a lack of evidence to support a realizable value equal to or greater than the carrying value of the investment.
The Company follows the accounting guidance in Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 326-30 as it relates to the recognition and presentation of impairment. This accounting guidance specifies that (a) if a company does not have the intent to sell a debt security prior to recovery and (b) it is more likely than not that it will not have to sell the debt security prior to recovery, the security would not be considered impaired unless there is a credit loss. When an entity does not intend to sell the security, and it is more likely than not, the entity will not have to sell the security before recovery of its cost basis, it will recognize the credit component of an impairment of a debt security in earnings and the remaining portion in other comprehensive income. For held to maturity debt securities, the amount of an impairment recorded in other comprehensive income for the non-credit portion of a previous impairment should be amortized prospectively over the remaining life of the security on the basis of the timing of future estimated cash flows of the security. For equity securities without a readily determinable market value, once a decline in value is determined to be impairment, the value of the equity security is reduced to fair value and a corresponding charge to earnings is recognized.
Allowance for Credit Losses on Loans and Unused Commitments
The Company maintains an allowance for credit losses on loans and unused commitments, which is intended to absorb probable known and inherent losses in the outstanding loan portfolio. The allowance for credit losses is calculated with the objective of maintaining a level believed by management to be sufficient to absorb probable known and inherent losses in the outstanding loan portfolio.
The allowance for credit losses is measured on a pool basis when similar risk characteristics exist. The Company establishes a general valuation allowance for performing loans, including non-accrual student loans. QNB calculates each pool's historical loss rate using a full economic cycle of loan balance and historical loss experienced. The general component is adjusted for qualitative factors including concentrations and economic forecast.
The level of the allowance is determined by assigning specific reserves to all non-accrual loans, except the homogeneous pool of student loans which are measured in the general reserve. An allowance on these non-accrual loans is established when the discounted cash flows (or collateral value) of the loan is lower than the carrying value of that loan. The portion of the allowance that is allocated to non-accrual loans is determined by estimating the inherent loss on each credit after giving consideration to the value of underlying collateral.
- 49 -
Management believes that it uses the best information available to make determinations about the adequacy of the allowance and that it has established its existing allowance for credit losses in accordance with U.S. GAAP. If circumstances differ substantially from the assumptions used in making determinations, future adjustments to the allowance for credit losses may be necessary and results of operations could be affected. Because future events affecting borrowers and collateral cannot be predicted with certainty, increases to the allowance may be necessary should the quality of any loans deteriorate as a result of the factors discussed above.
Stock-Based Compensation
QNB sponsored stock-based compensation plans, administered by a Board committee, under which both qualified and nonqualified stock options may be granted periodically to certain employees. QNB accounts for all awards granted under stock-based compensation plans in accordance with ASC 718, Compensation - Stock Compensation. Compensation cost has been measured using the fair value of an award on the grant date and is recognized over the service period, which is usually the vesting period. The fair value of each option is amortized into compensation expense on a straight-line basis between the grant date for the option and each vesting date. QNB estimates the fair value of stock options on the date of the grant using the Black-Scholes option pricing model. The model requires the use of numerous assumptions, many of which are highly subjective in nature.
Income Taxes
QNB accounts for income taxes under the asset/liability method in accordance with income tax accounting guidance, ASC 740 - Income Taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, as well as operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is established against deferred tax assets when, in the judgment of management, it is more likely than not that such deferred tax assets will not become available. Because the judgment about the level of future taxable income is dependent to a great extent on matters that may, at least in part, be beyond QNB’s control, it is at least reasonably possible that management’s judgment about the need for a valuation allowance for deferred taxes could change in the near term.
- 50 -

---

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk reflects the risk of economic loss resulting from changes in interest rates and market prices. QNB’s primary market risk exposure is interest rate risk and liquidity risk. QNB’s liquidity position was discussed in a prior section.
QNB’s largest source of revenue is net interest income, which is subject to changes in market interest rates. Interest rate risk management seeks to minimize the effect of interest rate changes on net interest margins and interest rate spreads and to provide growth in net interest income through periods of changing interest rates. QNB’s Asset/Liability and Investment Management Committee (“ALCO”) is responsible for managing interest rate risk and for evaluating the impact of changing interest rate conditions on net interest income.
QNB uses computer simulation analysis to measure the sensitivity of projected earnings to changes in interest rates. Simulation considers current balance sheet volumes and the scheduled repricing dates, instrument level optionality, and maturities of assets and liabilities. It incorporates assumptions for growth, changes in the mix of assets and liabilities, prepayments, and average rates earned and paid. Based on this information, management uses the model to project net interest income under multiple interest rate scenarios.
A balance sheet is considered asset sensitive when its assets (investment securities and loans) reprice faster than its interest-bearing liabilities (deposits and borrowings). An asset sensitive balance sheet will produce relatively higher net interest income when interest rates rise and less net interest income when they decline. A balance sheet is considered liability sensitive when its liabilities (deposits and borrowings) reprice faster or to a greater extent than its earning assets (loans and securities). A liability sensitive balance sheet will produce relatively less net interest income when interest rates rise and more net interest income when they decline. Based on our simulation analysis, management believes QNB’s interest sensitivity position at December 31, 2024 is relatively asset sensitive. Management expects market interest rates to decrease in the next 12 months, based on the economic environment and policy of the Federal Reserve.
The following table shows the estimated impact of changes in interest rates on net interest income as of December 31, 2024 and 2023 assuming instantaneous rate shocks, and consistent levels of assets and liabilities. Net interest income for the subsequent twelve months is projected to increase when interest rates are higher than current rates.
Estimated change in net interest income
Change in interest rates
December 31,
(basis points)
+300
-0.3
%
7.1
%
+200
0.0
%
4.8
%
+100
0.2
%
2.6
%
-0.7
%
-3.4
%
-1.7
%
-7.8
%
-3.8
%
-13.7
%
Computations of future effects of hypothetical interest rate changes are based on numerous assumptions and should not be relied upon as indicative of actual results. Assets and liabilities may react differently than projected to changes in market interest rates. The interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while rates on other types of assets and liabilities may lag changes in market interest rates. Interest rate shifts may not be parallel.
Changes in interest rates can cause substantial changes in the amount of prepayments of loans and mortgage-backed securities, which may in turn affect QNB’s interest rate sensitivity position. Additionally, credit risk may rise if an interest rate increase adversely affects the ability of borrowers to service their debt. At December 31, 2024 and December 31, 2023, QNB had two derivatives designated as fair value hedging instruments, these interest rate swaps had a notional value of $300,000,000.
QNB is not subject to foreign currency exchange or commodity price risk.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following audited financial statements are set forth in this Annual Report on Form 10-K on the following pages:
Report of Independent Registered Public Accounting Firm: Baker Tilly US, LLP (PCAOB ID 23) Allentown, PA
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Comprehensive Income (Loss)
Consolidated Statements of Shareholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
- 52 -
Management’s Report on Internal Control over Financial Reporting
March 18, 2025
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to consolidated financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2024, in relation to criteria for effective internal control over financial reporting as described in “Internal Control Integrated Framework (2013),” issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on this assessment, management concludes that, as of December 31, 2024, the Company’s system of internal control over financial reporting is effective and meets the criteria of the “Internal Control Integrated Framework (2013).”
/s/ David W. Freeman
/s/ Jeffrey Lehocky
David W. Freeman
Jeffrey Lehocky
Chief Executive Officer
Chief Financial Officer
- 53 -
Report of Independent Registered Public Accounting Firm
Shareholders and the Board of Directors of QNB Corp.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of QNB Corp. and subsidiary (the "Company") as of December 31, 2024 and 2023, the related consolidated statements of income, comprehensive income (loss), shareholders' equity, and cash flows, for each of the three years in the period ended December 31, 2024, and the related notes (collectively referred to as the "consolidated financial statements"). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2024 and 2023, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2024, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company's consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Allowance for Credit Losses (ACL) on Loans Receivable - Qualitative Factors
Critical Audit Matter Description
As disclosed in Notes 1 and 5 to the Company's consolidated financial statements, the Company accounts for credit losses under ASC 326, Financial Instruments - Credit Losses. ASC 326 requires the measurement of current estimate of lifetime credit losses inherent in the loan portfolio at the balance sheet date. As described in the notes, the ACL consists of two components: a specific reserve based on the analysis of individually evaluated loans, and a general reserve that is measured on a pool basis for loans sharing similar risk characteristics (“general valuation allowance”). The Company estimates the ACL for the general valuation allowance via a quantitative analysis and qualitative factors both which consider relevant available information from internal and external sources related to past events and current conditions, as well as the incorporation of reasonable and supportable forecasts.
The determination of qualitative factor adjustments involves a high degree of management judgment. Management has identified risk factors related to concentrations of credit and economic data as areas where the historical data requires adjustment to reflect current and expected conditions. Changes to these qualitative factors could have a material impact on the Company's financial results.
- 54 -
We have identified auditing the qualitative factors as a critical audit matter as management’s determination of the qualitative factors is subjective and involves significant management judgments. Our audit procedures related to the qualitative factors involved a high degree of auditor judgment and significant auditor effort was required in evaluating the audit evidence obtained related to the qualitative factor adjustments.
How the Critical Audit Matter was Addressed in the Audit
The primary procedures we performed to address this critical audit matter included:
Substantively testing the appropriateness of the judgment and assumptions used in management's estimation process for developing the qualitative factor adjustments, including:
•Assessing whether all relevant factors have been considered that affect the collectability of the loan portfolio;
•Evaluation of the relevance and reliability of underlying internal and external data inputs used as a basis for the qualitative factor adjustments and corroboration of these inputs by comparison to the Company's historical loan portfolio performance, and third-party macroeconomic data
•Recalculation of the allowance for credit loss and allocation of qualitative loss factors to the appropriate loan segments
/s/ Baker Tilly US, LLP
We have served as the Company's auditor since 2007.
Allentown, Pennsylvania
March 18, 2025
- 55 -
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
December 31,
Assets
Cash and due from banks
$
11,369
$
11,447
Interest-bearing deposits in banks
39,344
51,210
Total cash and cash equivalents
50,713
62,657
Investment securities:
Available-for-sale (amortized cost $626,391 and $576,178)
546,559
490,182
Equity securities (cost of $0 and $5,695)
-
5,910
Restricted investment in stocks
5,436
2,730
Loans held-for-sale
Loans receivable
1,216,048
1,093,533
Allowance for loan losses
(8,744
)
(8,852
)
Net loans
1,207,304
1,084,681
Bank-owned life insurance
11,937
11,946
Premises and equipment, net
17,255
14,952
Accrued interest receivable
4,965
6,101
Net deferred tax assets
18,325
19,290
Other assets
7,736
7,320
Total assets
$
1,870,894
$
1,706,318
Liabilities
Deposits
Demand, non-interest bearing
$
183,499
$
185,098
Interest-bearing demand
537,846
462,712
Money market
250,293
222,843
Savings
275,445
303,079
Time less than $100
178,163
149,851
Time $100 through $250
156,614
121,793
Time greater than $250
46,681
43,337
Total deposits
1,628,541
1,488,713
Short-term borrowings
53,844
94,094
Long-term debt
30,000
20,000
Subordinated debt
39,068
-
Accrued interest payable
7,580
5,294
Other liabilities
8,512
7,393
Total liabilities
1,767,545
1,615,494
Shareholders' Equity
Common stock, par value $0.625 per share; authorized 10,000,000 shares; 3,905,302 shares and 3,861,940 shares issued; 3,696,616 and 3,653,254 shares outstanding
2,441
2,414
Surplus
27,633
26,439
Retained earnings
139,958
133,945
Accumulated other comprehensive loss, net of tax
(62,646
)
(67,937
)
Treasury stock, at cost; 208,686 and 208,686 shares
(4,037
)
(4,037
)
Total shareholders' equity
103,349
90,824
Total liabilities and shareholders' equity
$
1,870,894
$
1,706,318
The accompanying notes are an integral part of the consolidated financial statements.
- 56 -
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
Year ended December 31,
Interest income
Interest and fees on loans
$
65,367
$
53,884
$
40,922
Interest and dividends on investment securities (AFS & Equity):
Taxable
14,090
11,794
9,396
Tax-exempt
1,424
1,460
1,965
Interest on interest-bearing balances and other interest income
3,187
1,944
Total interest income
84,068
69,082
52,421
Interest expense
Interest on deposits
Interest-bearing demand
10,019
7,767
2,691
Money market
8,181
4,823
Savings
3,651
4,187
2,175
Time less than $100
6,808
3,194
Time $100 through $250
6,570
3,859
Time greater than $250
2,247
1,171
Interest on short-term borrowings
1,148
3,273
Interest on long-term debt
1,322
Interest on subordinated debt
1,260
-
-
Total interest expense
41,206
28,927
7,924
Net interest income
42,862
40,155
44,497
(Reversal of) provision for credit losses
(68
)
(844
)
(850
)
Net interest income after provision for loan losses
42,930
40,999
45,347
Non-interest income
Net unrealized (loss) gain on investment equity securities
(215
)
(1,026
)
Net gain (loss) on sale of investment securities
(2,077
)
Net gain (loss) on investment securities
(1,827
)
(760
)
Fees for services to customers
1,770
1,651
1,614
ATM and debit card
2,740
2,735
2,719
Retail brokerage and advisory
Bank-owned life insurance
Merchant
Net gain on sale of loans
Other
Total non-interest income
6,913
4,837
5,731
Non-interest expense
Salaries and employee benefits
19,741
19,026
17,306
Net occupancy
2,207
2,223
2,195
Furniture and equipment
3,973
3,602
2,917
Marketing
1,044
Third party services
2,595
2,422
2,474
Telephone, postage and supplies
State taxes
1,004
FDIC insurance premiums
1,156
1,058
Other
3,686
3,876
3,210
Total non-interest expense
35,484
34,109
31,492
Income before income taxes
14,359
11,727
19,586
Provision for income taxes
2,911
2,244
3,665
Net income
$
11,448
$
9,483
$
15,921
Earnings per share - basic
$
3.12
$
2.63
$
4.47
Earnings per share - diluted
$
3.12
$
2.63
$
4.47
Cash dividends per share
$
1.48
$
1.48
$
1.44
The accompanying notes are an integral part of the consolidated financial statements.
- 57 -
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
Year ended December 31,
Before
tax
amount
Tax
expense
(benefit)
Net of
tax
amount
Before
tax
amount
Tax
expense
(benefit)
Net of
tax
amount
Before
tax
amount
Tax
expense
(benefit)
Net of
tax
amount
Net income
$
14,359
$
2,911
$
11,448
$
11,727
$
2,244
$
9,483
$
19,586
$
3,665
$
15,921
Other comprehensive income/(loss):
Net unrealized holding gain/(loss) on available-for-sale securities:
Unrealized holding (loss)/gain arising during the period
5,068
4,425
14,638
3,074
11,564
(98,097
)
(20,600
)
(77,497
)
Reclassification adjustment for loss included in net income
1,096
2,058
1,626
Other comprehensive income/(loss):
6,164
5,291
16,696
3,506
13,190
(97,958
)
(20,571
)
(77,387
)
Total comprehensive income (loss)
$
20,523
$
3,784
$
16,739
$
28,423
$
5,750
$
22,673
$
(78,372
)
$
(16,906
)
$
(61,466
)
The accompanying notes are an integral part of the consolidated financial statements.
- 58 -
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Accumulated
Number of
Other
Shares
Common
Retained
Comprehensive
Treasury
Outstanding
Stock
Surplus
Earnings
Income (Loss)
Stock
Total
Balance, January 1, 2022
3,553,629
$
2,350
$
23,683
$
118,163
$
(3,740
)
$
(3,962
)
$
136,494
Net income
-
-
15,921
-
-
15,921
Other comprehensive loss, net of tax
-
-
-
(77,387
)
-
(77,387
)
Cash dividends declared ($1.40 per share)
-
-
(5,133
)
-
-
(5,133
)
Treasury stock purchase
(2,000
)
-
-
-
-
(75
)
(75
)
Stock issued in connection with dividend reinvestment and stock purchase plan
31,531
-
-
-
Stock issued for employee stock purchase plan
5,102
-
-
-
Stock-based compensation expense
-
-
-
-
Balance, December 31, 2022
3,588,262
$
2,373
$
24,798
$
128,951
$
(81,127
)
$
(4,037
)
$
70,958
Cumulative change in accounting principle
-
-
-
Balance at January 2, 2023 (as adjusted for change in accounting principle)
2,373
24,798
129,808
(81,127
)
(4,037
)
71,815
Net income
-
-
9,483
-
-
9,483
Other comprehensive income, net of tax
-
-
-
13,190
-
13,190
Cash dividends declared ($1.48 per share)
-
-
(5,346
)
-
-
(5,346
)
Stock issued in connection with dividend reinvestment and stock purchase plan
56,622
1,327
-
-
-
1,363
Stock issued for employee stock purchase plan
6,630
-
-
-
Stock issued for non-employee director compensation
1,740
(1
)
-
-
-
-
Stock-based compensation expense
-
-
-
-
Balance, December 31, 2023
3,653,254
$
2,414
$
26,439
$
133,945
$
(67,937
)
$
(4,037
)
$
90,824
Net income
-
-
11,448
-
-
11,448
Other comprehensive income, net of tax
-
-
-
5,291
-
5,291
Cash dividends declared ($1.48 per share)
-
-
(5,435
)
-
-
(5,435
)
Stock issued in connection with dividend reinvestment and stock purchase plan
32,963
-
-
-
Stock issued for employee stock purchase plan
7,339
-
-
-
Stock issued for non-employee director compensation
3,060
(2
)
-
-
-
-
Stock-based compensation expense
-
-
-
-
Balance, December 31, 2024
3,696,616
$
2,441
$
27,633
$
139,958
$
(62,646
)
$
(4,037
)
$
103,349
The accompanying notes are an integral part of the consolidated financial statements.
- 59 -
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year ended December 31,
Operating Activities
Net income
$
11,448
$
9,483
$
15,921
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
1,726
1,714
1,724
(Reversal of provision) provision for credit losses
(68
)
(844
)
(850
)
Net (gain) loss on sales of investment debt and equity securities
(919
)
2,077
(266
)
Net unrealized loss (gain)on equity securities
(250
)
1,026
Net gain on sale of loans
(29
)
(16
)
(6
)
Proceeds from sales of residential mortgages held-for-sale
1,765
Origination of residential mortgages held-for-sale
(1,851
)
(1,522
)
(298
)
Increase on bank-owned life insurance
(332
)
(320
)
(361
)
Stock-based compensation expense
Amortization of deferred costs on subordinated debt
-
Deferred income tax provision (benefit)
(57
)
Net increase (decrease) in income taxes payable
(2,094
)
(534
)
Net decrease (increase) in accrued interest receivable
1,136
(1,063
)
(934
)
Fair value remeasurements on interest rate swap
(44
)
(57
)
-
Amortization of mortgage servicing rights and change in valuation
allowance
Net amortization of premiums and discounts on investment securities
1,316
1,665
2,222
Net increase in accrued interest payable
2,286
4,827
Operating lease payments
(633
)
(626
)
(620
)
Increase in other assets
(991
)
(91
)
(298
)
Increase (decrease) in other liabilities
(550
)
Net cash provided by operating activities
16,217
14,457
16,835
Investing Activities
Proceeds from payments, maturities and calls of investment debt securities
available-for-sale
64,959
50,042
72,965
Proceeds from the sale of investment securities available-for-sale
13,139
33,213
7,551
Purchases of investment securities available-for-sale
(130,679
)
(14,381
)
(35,001
)
Proceeds from the sale of equity securities
8,880
8,556
1,594
Purchases of equity securities
(1,170
)
(2,179
)
(1,860
)
Proceeds from redemption of investment in restricted bank stock
7,629
5,155
Purchase of restricted bank stock
(2,809
)
(5,166
)
(9,019
)
Net increase in loans
(122,574
)
(53,910
)
(112,718
)
Net purchases of premises and equipment
(3,516
)
(765
)
(552
)
Redemption of Bank Owned Life Insurance investment
-
Net cash (used) provided in investing activities
(173,326
)
23,039
(71,646
)
Financing Activities
Net (decrease) increase in non-interest bearing deposits
(1,599
)
(46,751
)
(11,157
)
Net increase (decrease) in interest-bearing deposits
141,427
117,095
(20,219
)
Net (decrease) increase in short-term borrowings
(40,250
)
(67,233
)
92,851
Issuance of long-term debt
10,000
20,000
-
Repayment of long-term debt
-
(10,000
)
-
Issuance of subordinated debt
40,000
-
-
Treasury stock purchase
-
-
(75
)
Cash dividends paid, net of reinvestment
(4,798
)
(4,671
)
(4,498
)
Proceeds from issuance of common stock
Net cash provided by financing activities
145,165
9,262
57,320
(Decrease) increase in cash and cash equivalents
(11,944
)
46,758
2,509
Cash and cash equivalents at beginning of year
62,657
15,899
13,390
Cash and cash equivalents at end of period
$
50,713
$
62,657
$
15,899
Supplemental Cash Flow Disclosures
Interest paid
$
38,920
$
24,100
$
7,668
Income taxes paid, net of refunds received
2,278
4,286
4,257
Non-cash transactions:
Cumulative change in accounting principal
-
-
Trade-date settlements for matured securities
-
-
Right-of-use assets obtained in exchange for new operating lease liabilities
The accompanying notes are an integral part of the consolidated financial statement.
- 60 -
QNB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Summary of Significant Accounting Policies
Business
QNB Corp. (the “Company”), through its wholly-owned subsidiary, QNB Bank (the “Bank”), has been serving the residents and businesses of Bucks, Lehigh, and Montgomery counties in Pennsylvania since 1877. The Bank is a Pennsylvania chartered commercial bank. The Company and the Bank are subject to regulations of certain state and Federal agencies. These regulatory agencies periodically examine the Company and the Bank for adherence to laws and regulations.
Segment Reporting
The Company manages and operates its business as a single operating segment. The segment's financial information is the same as presented in the Consolidated Financial Statements. The segment is locally managed and provides a full range of commercial, retail banking and retail brokerage services. The Company's Banking segment is determined by the President and Chief Executive Officer ("CEO") who is the chief operating decision maker (the "CODM"). The CODM evaluates the financial performance of the Company's business components using consolidated revenue, expenses, balance sheet growth and financial ratios to budget and prior periods to determine the allocation of resources and to measure performance. The CODM utilizes consolidated net income to benchmark the Company against its competitors and peer group. This information is used by the CODM to achieve strategic initiatives and allocate resources. Significant revenues are provided by loans, investments and deposits. Significant expenses include interest expense, the provision for credit losses and payroll.
Basis of Presentation
The Consolidated Financial Statements include the accounts of the Company and its wholly-owned subsidiary, the Bank. The consolidated entity is referred to herein as “QNB”. All significant inter-company accounts and transactions have been eliminated in the Consolidated Financial Statements.
Tabular information, other than share and per share data, is presented in thousands of dollars. Certain prior period amounts have been reclassified to conform with the current year’s presentation.
Use of Estimates
These statements are prepared in accordance with Accounting Principles Generally Accepted in the United States of America (“US GAAP”) and predominant practices within the banking industry. The preparation of these Consolidated Financial Statements requires QNB to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. QNB evaluates estimates on an on-going basis. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for credit losses, the fair value of financial instruments, impairment of investment securities, the determination of impairment of restricted bank stock and the valuation of deferred tax assets and income taxes. QNB bases its estimates on historical experience and various other factors and assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Significant Group Concentrations of Credit Risk
Most of the QNB’s activities are with customers located within Bucks, Montgomery and Lehigh Counties in southeastern Pennsylvania. Note 4 discusses the types of investment securities in which the QNB invests. Note 5 discusses the types of lending in which QNB engages. QNB does not have any significant concentrations to any one industry or customer other than what is discussed in Note 5. Although QNB has a diversified loan portfolio, its debtors’ ability to honor their contracts is influenced by the region’s economy.
Cash and Cash Equivalents
For purposes of the statement of cash flows, cash and cash equivalents consist of cash on hand, cash items in process of collection, amounts due from banks, interest-bearing deposits in the Federal Reserve Bank and other banks and Federal funds sold. QNB maintains a portion of its interest-bearing deposits at various commercial financial institutions. At times, the balances exceed the FDIC insured limits; QNB has not experienced a loss due to the balances exceeding FDIC limits.
- 61 -
Investment Securities
Investment debt securities that QNB has the positive intent and ability to hold to maturity are classified as held-to-maturity securities and reported at amortized cost. Interest is included in interest income. Debt securities not classified as either held-to-maturity securities or trading securities are classified as available-for-sale debt securities and reported at fair value, with unrealized gains and losses, net of tax, excluded from earnings and reported in other comprehensive income or loss, a separate component of shareholders’ equity. Management determines the appropriate classification of securities at the time of purchase.
Available-for-sale debt securities include securities that management intends to use as part of its asset/liability management strategy and that may be sold in response to changes in credit ratings, changes in market interest rates and related changes in the securities’ prepayment risk or to meet liquidity needs.
Premiums and discounts on debt securities are recognized in interest income using a constant yield method. Gains and losses on sales of available-for-sale securities are recorded on the trade date and are computed on the specific identification method and included in non-interest income.
Equity investments with readily determinable fair values are measured at fair value. The changes in fair value are recognized in net income. Dividends are included in interest income.
Impairment of Investment Securities
Securities are evaluated periodically to determine whether a decline in their value is impairment. Management utilizes criteria such as the magnitude and duration of the decline, in addition to the reasons underlying the decline, to determine whether the loss in value is impairment. The term impairment is not intended to indicate that the decline is permanent, it indicates that the prospect for a near-term recovery of value is not necessarily favorable, or that there is a lack of evidence to support a realizable value equal to or greater than the carrying value of the investment. For equity securities that do not have readily-determinable fair values, once a decline in value is determined to be impairment, the value of the equity security is reduced and a corresponding charge to earnings is recognized.
QNB follows the accounting guidance in Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 326-30 as it relates to the recognition and presentation of impairment. This accounting guidance specifies that (a) if a company does not have the intent to sell a debt security prior to recovery and (b) it is more likely than not that it will not have to sell the debt security prior to recovery, the security would not be considered impaired unless there is a credit loss. When an entity does not intend to sell the security, and it is more likely than not, the entity will not have to sell the security before recovery of its cost basis, it will recognize the credit component of an impairment of a debt security in earnings and the remaining portion in other comprehensive income.
Derivatives and Hedges
The fair value hedges are accounted for under Derivatives and Hedging (Topic 815). QNB adopted ASU 2022-01 Derivatives and Hedging (Topic 815): Fair Value Hedging--Portfolio Layer Method ("ASC 2022-01") as of January 1, 2023. ASC 2022-01 allows for the use of an amortizing notional swap when entering a portfolio layer method hedge. This guidance allows the interest rate swap to be considered a hedge of a single layer of portfolio. QNB's risk management objective with respect to derivative financial instruments is to hedge the risk of changes in the fair value of certain fixed-rate investment securities, included in a closed portfolio, for changes in the Secured Overnight Financing Rate ("SOFR"). The changes in the fair value of each derivative financial instrument is reported in accumulated other comprehensive (loss) income, net of tax, and are reclassified to interest income as interest payments are made or received on the hedged portfolios. QNB assesses the effectiveness of each hedging relationship using a regression analysis of prior periodic changes in fair value of both the hedge and the hedged item. In the assessment of hedge effectiveness, QNB considers the likelihood of the counterparty's compliance with the contractual terms of the hedging derivative that could require the counterparty to make payments (counterparty default risk). If the likelihood that the counterparty will not default ceases to be probable, the hedge may no longer be highly effective and hedge ineffectiveness due to counterparty payment risk will be assessed.
Restricted Investment in Stock
Restricted stock is comprised of Federal Home Loan Bank of Pittsburgh (“FHLB”) in the amount of $3,510,000, the Atlantic Community Bankers Bank in the amount of $12,000, VISA Class B-2 stock with a carrying cost of $0, and Senior Housing Crime Prevention Investment Corporation ("SHCPFIC") preferred stock of $1,000,000 at December 31, 2024. Federal law requires a member institution of the FHLB to hold stock of its district bank according to a predetermined formula. These restricted securities are carried at cost and evaluated for impairment periodically. As of December 31, 2024, there was no impairment associated with these securities.
The Bank has a $914,000 non-controlling investment in a discrete class of non-voting limited liability company membership interests
- 62 -
issued by National Energy Improvement Fund, LLC (“NEIF”), a Pennsylvania limited liability company licensed in Pennsylvania as a
consumer discount company. The proceeds of the investment will be used by NEIF to fund a State-sponsored consumer loan program,
the KEEP Home Energy Loan Program, designed to assist Pennsylvania homeowners in reducing their energy costs.
The Bank owns 3,251 shares of Visa Class B-2 stock post conversion of its original Class B shares, which was necessary to participate in Visa services in support of the Bank’s credit card, debit card, and related payment programs (permissible activities under banking regulations) as a member institution. Following the resolution of Visa’s covered litigation, shares of Visa’s Class B-2 stock will be converted to Visa Class A shares using a conversion factor (1.5430 as of September 26, 2024), which is periodically adjusted to reflect VISA’s ongoing litigation costs. There is a very limited market for this stock, as only current owners of Class B-2 shares are permitted to transact in Class B-2. Due to the lack of orderly trades and public information of such trades, Visa Class B-2 does not have a readily determinable fair value.
The Bank owns 100 shares of preferred stock of SHCPFIC. These shares are not transferable without the consent of SHCPFIC and does not have a readily determinable fair value.
Loans
Loans are segmented and reported on a pool basis with similar risk characteristics; these segments or pools are identified in Note 5. Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off are stated at the principal amount outstanding, net of deferred loan fees and costs. Interest income is accrued on the principal amount outstanding. Loan origination and commitment fees net of related direct costs are deferred and amortized to income over the term of the respective loan and loan commitment period as a yield adjustment.
Loans held-for-sale consist of residential mortgage loans and are carried at the lower of aggregate cost or fair value. Net unrealized losses, if any, are recognized through a valuation allowance charged to income. Gains and losses on residential mortgages held-for-sale are included in non-interest income.
Non-Performing Assets
Non-performing assets are comprised of accruing loans past due 90 days or more, non-accrual loans and investment securities, other real estate owned and repossessed assets. Non-accrual loans and investment securities are those on which the accrual of interest has ceased. Loans are placed on non-accrual status immediately if, in the opinion of management, collection is doubtful, or when principal or interest is past due 90 days or more and collateral is insufficient to cover principal and interest. Interest accrued, but not collected at the date a loan is placed on non-accrual status, is reversed and charged against interest income. Loans are returned to an accrual status when the borrower’s ability to make periodic principal and interest payments has returned to normal (i.e. brought current with respect to principal or interest or restructured) and the paying capacity of the borrower and/or the underlying collateral is deemed sufficient to cover principal and interest.
Since the implementation of ASU 326 on January 1, 2023, loan modifications to borrowers experiencing financial difficulty ("FDM") could involve principal forgiveness, term extension, an other-than-insignificant payment delay, interest rate reduction or exchanging or paying off existing debt for new debt with QNB. Any amount forgiven would be charged to the allowance for credit losses. There were $1,000,000 and $0 FDMs at December 31, 2024 and 2023, respectively.
Accounting for impairment in the performance of a loan is required when it is probable that all amounts, including both principal and interest, will not be collected in accordance with the loan agreement. Impaired loans are measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate or, at the loan’s observable market price or the fair value of the collateral if the loans are collateral dependent. Impairment criteria are applied to the loan portfolio exclusive of smaller homogeneous loans such as residential mortgage and consumer loans which are evaluated collectively for impairment.
Loans are fully charged-off or charged down to net realizable value (fair value of collateral less estimated costs to sell) when deemed uncollectible due to bankruptcy or other factors, or when they reach a defined number of days past due based on loan product, industry practice, terms and other factors.
Loans are considered past due when contractually required principal or interest payments have not been made on the due dates.
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Allowance for Credit Losses on Loans and Commitments
QNB maintains an allowance for credit losses on loans ("ACL") , which is intended to absorb probable known and inherent losses in the outstanding loan portfolio. QNB utilizes the Cohort method to calculate its ACL. QNB elected not to measure an allowance for credit losses on accrued interest receivable. The allowance is reduced by actual credit losses and is increased or decreased by the provision (reversal) for loan losses and increased by recoveries of previous losses. The provisions or reversals for credit losses are charged to earnings to bring the total allowance for credit losses on loans to a level considered necessary by management. QNB estimates the ACL via a quantitative analysis and qualitative factors both which consider relevant available information from internal and external sources related to past events and current conditions, as well as the incorporation of reasonable and supportable forecasts.
The level of the ACL is determined by assigning specific reserves to all non-accrual loans, except the homogeneous pool of student loans which are measured in the general reserve. An allowance on these non-accrual loans is established when the discounted cash flows (or collateral value) of the loan is lower than the carrying value of that loan. The portion of the allowance that is allocated to non-accrual loans is determined by estimating the inherent loss on each credit after giving consideration to the value of underlying collateral.
The general reserve is measured on a pool basis when similar risk characteristics exist; these pools are identified in Note 5. QNB establishes a general valuation allowance for performing loans, including non-accrual student loans. QNB calculates each pool's or segment's historical loss rate using a full economic cycle of loan balance and historical loss experience. The general component is adjusted for qualitative factors. These qualitative risk factors include:
1.Concentrations: QNB adjusts historic loss for concentrations in the current portfolio that were not present during the down-turn of the economic cycle.
2.Economic Forecast: The QNB utilizes an entire economic cycle of data to determine loss rates by segment. This approach reflects an inherent reversion to the historical losses during life of the loans within the pool considering prepayments and loss experience throughout an entire economic cycle. However, QNB feels it is prudent to maintain a floor in its ACL model to assure that there is enough reserve on hand to sustain any losses upon a possible recession.
Management emphasizes loan quality and close monitoring of potential problem credits. Credit risk identification and review processes are utilized in order to assess and monitor the degree of risk in the loan portfolio. QNB’s lending and credit administration staff are charged with reviewing the loan portfolio and identifying changes in the economy or in a borrower’s circumstances which may affect the ability to repay debt or the value of pledged collateral. A loan classification and review system exists that identifies those loans with a higher than normal risk of collectability. Each commercial loan is assigned a grade based upon an assessment of the borrower’s financial capacity to service the debt and the presence and value of collateral for the loan. An independent firm reviews risk assessment and evaluates the adequacy of the ACL. Management meets monthly to review the credit quality of the loan portfolio and quarterly to review the ACL.
In addition, various regulatory agencies, as an integral part of their examination process, periodically review QNB's ACL. Such agencies may require QNB to recognize additions to the allowance based on their judgments using information available to them at the time of their examination.
Management believes that it uses the best information available to make determinations about the adequacy of the allowance and that it has established its existing ACL in accordance with U.S. GAAP. If circumstances differ substantially from the current calculation, future adjustments to the ACL may be necessary and results of operations could be affected. Because future events affecting borrowers and collateral cannot be predicted with certainty, there can be no assurance that increases to the allowance will not be necessary should the quality of any loans deteriorate.
QNB uses the same lending standards and policies in making credit commitments as it does for on-balance sheet instruments. The activity is controlled through credit approvals, control limits, and monitoring procedures. QNB applies the resulting loss factors under the allowance for credit losses on loans to its unused commitments, assuming: additional funding for commercial lines up to the average line usage for non-pass rated lines with no current usage; and, additional funding up to the average line usage for retail lines with no current usage.
Transfers of Financial Assets
Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from QNB, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) QNB does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.
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Servicing Assets
Servicing assets are recognized as separate assets when rights are acquired through the sale of financial assets. When mortgage loans are sold, a portion of the cost of originating the loan is allocated to the servicing rights based on relative fair value. Fair value is based on market prices for comparable mortgage servicing contracts, when available, or alternatively, is based on a valuation model that calculates the present value of estimated future net servicing income. The Company subsequently measures servicing rights using the amortization method where servicing rights are amortized in proportion to and over the period of estimated net servicing income. On a quarterly basis, an independent third party determines the fair value of QNB’s servicing assets. These assets are evaluated for impairment based upon the fair value of the rights as compared to amortized cost. Impairment is determined by stratifying rights into tranches based on predominant characteristics, such as interest rate, loan type and investor type. Impairment is recognized through a valuation allowance for an individual tranche, to the extent that fair value is less than the capitalized amount for the tranches. If QNB later determines that all or a portion of the impairment no longer exists for a particular tranche, a reduction of the valuation allowance may be recorded as an increase to income. Capitalized servicing rights are reported in other assets and are amortized into other non-interest income in proportion to, and over the period of, the estimated future net servicing income of the underlying financial assets.
Servicing fee income is recorded for fees earned for servicing loans. The fees are based on a contractual percentage of the outstanding principal, or a fixed amount per loan and are recorded as other non-interest income when earned and netted against the amortization of mortgage servicing rights.
Premises and Equipment
Premises and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation and amortization are calculated principally on an accelerated or straight-line basis over the estimated useful lives of the assets, or the shorter of the estimated useful life or lease term for leasehold improvements, as follows:
Buildings
10 to 39 years
Furniture and equipment
3 to 15 years
Leasehold improvements
5 to 30 years
Expenditures for maintenance and repairs are charged to operations as incurred. Gains or losses upon disposition are reflected in earnings as realized.
The “Premises and equipment, net” category on the Consolidated Balance Sheets also includes the right-of-use assets associated with operating leases. The discount rates used in determining the initial value of the right of use assets are based on the FHLB Amortizing Fixed Loan Rate for the term of each lease. QNB typically enters into lease agreements with an initial term of 5 to 10 years and subsequent additional optional terms in increments of 5 years. The lease agreements also contain termination options. None of the leases contain purchase options and none transfer the ownership of the leased asset. QNB has renewed two operating leases during 2024. Operating lease liabilities are included with “Other liabilities” on the Consolidated Balance Sheets. All operating lease costs are included in non-interest expense within “Net occupancy” on the Consolidated Statements of Income. QNB performs an impairment analysis on it right-of-use asset on an annual basis; there were no impairments at December 31, 2024.
Bank-Owned Life Insurance
The Bank invests in bank-owned life insurance (“BOLI”) as a source of funding for employee benefit expenses. BOLI involves the purchasing of life insurance by the Bank on a select group of employees. The Bank is the owner and beneficiary of the policies. Income from the increase in cash surrender value of the policies as well as the receipt of death benefits is included in non-interest income on the Consolidated Statements of Income. The BOLI policies are an asset that can be liquidated, if necessary, with associated tax costs. However, the Bank intends to hold these policies and, accordingly, has not provided for deferred income taxes on the earnings from the increase in cash surrender value.
The Bank follows the accounting guidance for postretirement benefit aspects of endorsement split-dollar life insurance arrangements which applies to life insurance arrangements that provide an employee with a specified benefit that is not limited to the employee’s active service period, including certain bank-owned life insurance policies. It requires an employer to recognize a liability and related compensation costs for future benefits that extend to postretirement periods. The expense recorded during 2024, 2023 and 2022 was approximately $25,000, $56,000 and $118,000, respectively, and is included in non-interest expense under "Salaries and employee benefits" expense.
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Stock-Based Compensation
At December 31, 2024, QNB sponsored 2015 Stock Incentive Plan (the "2015 Plan"), administered by a Board committee, under which both qualified and non-qualified stock options may be granted periodically to certain employees. QNB accounts for all awards granted under stock-based compensation plans in accordance with FASB ASC 718, Compensation - Stock Compensation. Compensation cost has been measured using the fair value of an award on the grant date and is recognized over the service period, which is usually the vesting period.
Stock-based compensation expense related to the 2015 Plan was approximately $87,000, $90,000 and $70,000 for the years ended December 31, 2024, 2023 and 2022, respectively. There were $4,000, $3,000 and $2,000 in tax benefits recognized related to the nonqualified compensation and disqualifying dispositions for the years ended December 31, 2024, 2023 and 2022, respectively.
The fair value of each option is amortized into compensation expense on a straight-line basis between the grant date for the option and each vesting date. QNB estimated the fair value of stock options on the date of the grant using the Black-Scholes option pricing model. The model requires the use of numerous assumptions, many of which are highly subjective in nature. The following assumptions were used in the option pricing model in determining the fair value of options granted during the periods presented.
Year ended December 31,
Risk free interest rate
3.98
%
3.64
%
1.25
%
Dividend yield
5.97
%
4.80
%
3.64
%
Volatility
20.96
%
20.36
%
22.68
%
Expected life (years)
8.19
8.35
4.05
The weighted average fair value per share of options granted during 2024, 2023 and 2022 was $3.08, $4.11 and $5.20, respectively. The risk-free interest rate was selected based upon yields of U.S. Treasury issues with a term equal to the expected life of the option being valued. Historical information was the primary basis for the selection of the expected dividend yield, expected volatility and expected lives of the options.
Income Taxes
QNB accounts for income taxes under the asset/liability method in accordance with income tax accounting guidance, ASC 740 - Income Taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, as well as operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is established against deferred tax assets when, in the judgment of management, it is more likely than not that such deferred tax assets will not become available. Because the judgment about the level of future taxable income is dependent to a great extent on matters that may, at least in part, be beyond QNB’s control, it is at least reasonably possible that management’s judgment about the need for a valuation allowance for deferred taxes could change in the near term.
In connection with the accounting guidance related to accounting for uncertainty in income taxes, which sets out a consistent framework to determine the appropriate level of tax reserves to maintain for uncertain tax positions, QNB has evaluated its tax positions as of December 31, 2024. A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that has more than a 50 percent likelihood of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. Under the “more-likely-than-not” threshold guidelines, QNB believes no significant uncertain tax positions exist, either individually or in the aggregate, which would give rise to the non-recognition of an existing tax benefit. As of December 31, 2024, QNB had a valuation allowance of $172,000 for unrecognized tax benefits related to non-qualified stock option expense and a state net operating loss as discussed in Note 12. As of December 31, 2024 QNB had no interest expense and no tax penalties. QNB’s policy is to account for interest as a component of interest expense and penalties as a component of other expense. The Company and its subsidiary are subject to U.S. Federal income tax as well as income tax of the Commonwealth of Pennsylvania and the State of New Jersey. Tax years from 2021 to date remain subject to examination by the tax authorities.
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Treasury Stock
Common stock shares repurchased are recorded as treasury stock at cost.
Earnings Per Share
Basic earnings per share excludes any dilutive effects of options and is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per share gives effect to all dilutive potential common shares that were outstanding during the period. Potential common shares that may be issued by the Company relate solely to outstanding stock options and are determined using the treasury stock method.
Treasury shares are not deemed outstanding for earnings per share calculations.
Comprehensive Income (Loss)
Comprehensive income (loss) is defined as the change in equity of a business entity during a period due to transactions and other events and circumstances, excluding those resulting from investments by and distributions to owners. Comprehensive income (loss) consists of net income and other comprehensive income (loss). For QNB, the primary component of other comprehensive income (loss) is the unrealized holding gains or losses on available-for-sale investment securities.
Advertising Costs
Advertising costs are recorded in the period they are incurred within operating expenses in non-interest expense in the Consolidated Statements of Income.
Financial Instruments with Off-Balance-Sheet Risk
QNB’s exposure to credit loss in the event of non-performance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual notional amount of these instruments. QNB uses the same credit policies in making commitments and contractual obligations as it does for on-balance-sheet instruments. QNB reflects its estimate of credit risk for these instruments in “Other liabilities” on the Consolidated Balance Sheet with the corresponding expense recorded in “Provision for credit losses” in the Consolidated Statements of Income.
Subsequent Events
QNB has evaluated events and transactions occurring subsequent to the balance sheet date of December 31, 2024 through the date the Consolidated Financial Statements are being issued for items that should potentially be recognized or disclosed in these Consolidated Financial Statements. QNB identified the following event:
QNB identified additional weakness in a large commercial relationship that was reported as Substandard at December 31, 2024, primarily caused by continued delays in obtaining necessary approvals from the Department of Environmental Protection. The customer's loans totaled $6,695,000 and had unused commitments of $3,306,000 which comprised mostly for the construction of a commercial property. The relationship was placed on non-accrual status in March 2025. Although the relationship is sufficiently collateralized, QNB is in the process of securing additional collateral to support the customers obligations as they await approvals to move forward on the construction of the project.
Recent Accounting Pronouncements
In November 2023, the the Financial Accounting Standards Board (FASB) issued ASU 2023-07, Segment Reporting (Topic 280); Improvements to Reportable Segment Disclosures (ASU 2023-07). ASU 2023-07 enhances segment reporting which includes requiring an entity with a single reportable segment to report additional disclosures about how its chief operating decision maker utilizes information to assess segment performance and allocate resources. ASU 2023-07 was effective for fiscal years beginning after December 15, 2023. QNB adopted ASU 2023-07 as of December 31, 2024 on a retrospective basis. There was no impact to QNB's consolidated financial statements and only minimal additional disclosures.
On March 6, 2024, the Securities and Exchange Commission (SEC) adopted final rules requiring registrants to disclose climate-related information in registration statements and annual reports. These enhanced and standardized disclosures requires that an entity with a signle reportable segment include material climate-related risks, board oversight and risk management activities descriptions, material impacts of these risks on a registrant’s strategy, business model and outlook, and any material climate-related targets or goals.
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On June 26, 2024, the FASB voted to issue final rules this year that will require public companies to provide enhanced detailed information about their income statement expenses. Companies will be required to break out certain expense items, such as employee compensation and purchases of inventory, in footnotes to their income statements. The standard will apply to fiscal years that start after December 15, 2026 and interim periods within fiscal years beginning after December 15, 2027. Early adoption will be permitted prospectively for the disclosure requirements, with optional retrospective application, for both interim and year-end reporting periods
In December 2023, the FASB issued Accounting Standards Update (ASU) No. 2023-09, "Income Taxes (Topic 740): Improvements to Income Tax Disclosures." The amendments in this ASU enhance the rate reconciliation and income taxes paid disclosures improving the transparency of income tax disclosures and require: (1) consistent categories and greater disaggregation of information in the rate reconciliation; and (2) income taxes paid disaggregated by jurisdiction. This ASU is effective for the Company's reporting periods beginning after December 15, 2024. The Company does not expect the adoption of this ASU will have a material impact on it's financial statements.
Note 2 - Earnings Per Share and Share Repurchase Plan
The following table sets forth the computation of basic and diluted earnings per share:
Year ended December 31,
Numerator for basic and diluted earnings per share - net income
$
11,448
$
9,483
$
15,921
Denominator for basic earnings per share - weighted average shares
outstanding
3,672,251
3,610,713
3,564,481
Effect of dilutive securities - employee stock options
1,446
-
-
Denominator for diluted earnings per share - adjusted weighted
average shares outstanding
3,673,697
3,610,713
3,564,481
Earnings per share - basic
$
3.12
$
2.63
$
4.47
Earnings per share - diluted
$
3.12
$
2.63
$
4.47
There were 97,275, 121,550, and 109,150 stock options that were anti-dilutive as of December 31, 2024, 2023, and 2022 respectively. These stock options were not included in the above calculation.
QNB’s current stock repurchase plan was originally approved by the Board of Directors on January 21, 2008 and authorized the repurchase of up to 50,000 shares, increased the amount on February 9, 2009 to 100,000 shares, and subsequently increased on April 27, 2021 up to 200,000 shares of its common stock in the open market or privately negotiated transactions. The repurchase authorization has no termination date. There were no shares purchased during the years ended December 31, 2024 and 2023, and 2,000 shares purchased during the year ended December 31, 2022. As of December 31, 2024, 102,000 shares were purchased under this authorization at an average price of $24.93 and a total cost of $2,543,000 and were recorded to Treasury stock.
Note 3 - Cash and Cash Equivalents
Included in cash and cash equivalents are deposits with the Federal Reserve Bank of Philadelphia. As of December 31, 2024 and 2023, QNB was not required to maintain reserves with the Federal Reserve Bank of Philadelphia. At December 31, 2024 and 2023, there was $0 and $1,850,000, respectively, held as collateral against the fair value hedge held a correspondent bank.
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Note 4 - Investment Securities
Available-For-Sale Debt Securities
The amortized cost and fair values of investment debt securities available-for-sale at December 31, 2024 and 2023 were as follows:
Gross
Gross
Gross
unrealized
unrealized
unrealized
Fair
holding
holding
fair value
Amortized
December 31, 2024
value
gains
losses
hedge gains
cost
U.S. Treasuries
$
18,010
$
$
-
$
-
$
18,004
U.S. Government agency
66,908
-
(9,051
)
-
75,959
State and municipal
86,352
-
(20,631
)
1,566
105,417
U.S. Government agencies and sponsored
enterprises (GSEs):
Mortgage-backed
198,510
-
(38,902
)
3,264
234,148
Collateralized mortgage obligations (CMOs)
161,646
(15,821
)
-
177,436
Corporate debt and money market funds
15,133
(304
)
-
15,427
Total investment securities available-for-sale
$
546,559
$
$
(84,709
)
$
4,830
$
626,391
Gross
Gross
Gross
unrealized
unrealized
unrealized
Fair
holding
holding
fair value
Amortized
December 31, 2023
value
gains
losses
hedge losses
cost
U.S. Treasuries
$
6,451
$
$
-
$
-
$
6,448
U.S. Government agency
74,122
-
(10,828
)
-
84,950
State and municipal
89,189
-
(18,714
)
(445
)
108,348
U.S. Government agencies and sponsored
enterprises (GSEs):
Mortgage-backed
224,238
-
(37,831
)
(1,304
)
263,373
Collateralized mortgage obligations (CMOs)
89,973
-
(16,383
)
-
106,356
Corporate debt
6,209
(496
)
-
6,703
Total investment securities available-for-sale
$
490,182
$
$
(84,252
)
$
(1,749
)
$
576,178
The amortized cost and fair value of debt securities available-for-sale by contractual maturity at December 31, 2024 are shown in the following table. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Securities are assigned to categories based on contractual maturity except for state and municipal securities which are based on pre-refunded date, if applicable; and, mortgage-backed securities and CMOs which are dependent upon the interest rate environment and prepayments of the underlying loans.
Amortized
December 31, 2024
Fair value
cost
Due in one year or less
$
18,247
$
18,231
Due after one year through five years
61,991
68,542
Due after five years through ten years
45,479
50,445
Due after ten years
60,686
77,589
186,403
214,807
Mortgage-backed securities
198,510
234,148
Collateralized mortgage obligations
161,646
177,436
Total investment securities available-for-sale
$
546,559
$
626,391
Proceeds from sales of investment debt securities available-for-sale were $13,139,000, $33,213,000 and $7,551,000 for the years ended December 31, 2024, 2023 and 2022, respectively.
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The following table presents information related to QNB’s gains and losses on the sales of debt securities, and losses recognized for credit impairments of these investments.
December 31,
Gross realized gains
$
-
$
-
$
Gross realized losses
(1,096
)
(2,058
)
(147
)
Impairment
-
-
-
Total net losses on available-for-sale securities
$
(1,096
)
$
(2,058
)
$
(139
)
The tax benefit applicable to the net realized losses on debt securities was $230,000 for the year ended December 31, 2024. The tax benefit applicable to the net realized losses on debt securities was $432,000 for the year ended December 31, 2023. The tax benefit applicable to the net realized losses on debt securities was $29,000 for the year ended December 31, 2022.
There were no credit impairment charges recognized for debt securities still held by QNB for the years ended December 31, 2024, 2023 or 2022. The cumulative credit-related impairment charges for debt securities still held by QNB was $1,000.
At December 31, 2024 and 2023, investments in debt securities available-for-sale totaling $241,586,000 and $289,935,000, respectively, were pledged as collateral for repurchase agreements and deposits of public funds.
Debt securities that have been in a continuous unrealized loss position are as follows:
December 31, 2024
Less than 12 months
12 months or longer
Total
No. of
Fair
Unrealized
Fair
Unrealized
Fair
Unrealized
securities
value
losses
value
losses
value
losses
U.S. Treasuries
-
$
-
$
-
$
-
$
-
$
-
$
-
U.S. Government agency
-
-
75,959
(9,051
)
75,959
(9,051
)
State and municipal
(2
)
84,471
(20,629
)
84,759
(20,631
)
U.S. Government agencies
and sponsored enterprises
(GSEs):
Mortgage-backed
-
234,073
(38,902
)
234,074
(38,902
)
Collateralized mortgage
obligations (CMOs)
83,026
(262
)
78,569
(15,559
)
161,595
(15,821
)
Corporate debt and money markets
10,672
(28
)
4,275
(276
)
14,947
(304
)
Total
$
93,987
$
(292
)
$
477,347
$
(84,417
)
$
571,334
$
(84,709
)
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December 31, 2023
Less than 12 months
12 months or longer
Total
No. of
Fair
Unrealized
Fair
Unrealized
Fair
Unrealized
securities
value
losses
value
losses
value
losses
U.S. Treasuries
$
$
-
$
-
$
-
$
$
-
U.S. Government agency
-
-
74,122
(10,828
)
74,122
(10,828
)
State and municipal
-
89,238
(18,714
)
89,618
(18,714
)
U.S. Government agencies
and sponsored enterprises
(GSEs):
Mortgage-backed
-
225,500
(37,831
)
225,501
(37,831
)
Collateralized mortgage
obligations (CMOs)
-
-
89,973
(16,383
)
89,973
(16,383
)
Corporate debt
$
-
$
-
$
6,101
$
(496
)
$
6,101
$
(496
)
Total
$
$
-
$
484,934
$
(84,252
)
$
485,809
$
(84,252
)
Management evaluates debt securities, which are comprised of U.S. Government Agencies, state and municipalities, mortgage-backed securities, CMOs and other issuers, for impairment and considers the current economic conditions, the length of time and the extent to which the fair value has been less than cost, interest rates and the bond rating of each security. The unrealized losses at December 31, 2024 in U.S. Government securities, state and municipal securities, mortgage-backed securities, CMOs and corporate debt securities are primarily the results of interest rate fluctuations. If held to maturity, these bonds will mature at par, and QNB will not realize a loss. QNB has the intent to hold the securities and does not believe it will be required to sell the securities before recovery occurs.
Marketable Equity Securities
QNB’s equity securities consist of investments with readily determinable fair values in large cap stock companies. At December 31, 2024 and 2023, QNB had $0 and $5,910,000, respectively, in equity securities recorded at fair value. The following is a summary of unrealized and realized gains and losses recognized in net income on equity securities during 2024, 2023 and 2022:
December 31,
Net gain (loss) recognized during the period on equity securities
$
1,800
$
$
(621
)
Less: Net gain (loss) recognized during the period on equity securities sold during the period
2,015
(19
)
Net unrealized (loss) gain recognized during the reporting period on equity securities still held at the reporting date
$
(215
)
$
$
(1,026
)
Tax expense applicable to the net realized gains for the year ended December 31, 2024 was $499,000. Tax expense applicable to the net realized gains for the year ended December 31, 2023 was $67,000. Tax benefit applicable to the net realized losses for the year ended December 31, 2022 was $179,000. Proceeds from sale of investment equity securities were $8,880,000, $8,556,000 and $1,594,000 for the years ended December 31, 2024, 2023 and 2022, respectively.
- 71 -
Note 5 - Loans Receivable and the Allowance for Credit Losses on Loans
Major classes of loans are as follows:
December 31,
Commercial:
Commercial and industrial
$
153,187
$
137,086
Construction and land development
129,464
116,173
Real estate secured by multi-family properties
137,461
109,193
Real estate secured by owner-occupied properties
163,955
160,695
Real estate secured by other commercial properties
313,390
265,101
Revolving real estate secured by 1-4 family properties-business
5,652
5,442
Real estate secured by 1st lien on 1-4 family properties-business
105,779
103,572
Real estate secured by junior lien on 1-4 family properties-business
3,238
3,445
State and political subdivisions
17,683
18,708
Retail:
1-4 family residential mortgages
114,423
108,906
Revolving home equity secured by 1-4 family properties-personal
48,231
34,231
Real estate secured by 1st lien on 1-4 family properties-personal
6,561
11,981
Real estate secured by junior lien on 1-4 family properties-personal
14,092
15,625
Student loans
1,444
1,662
Overdrafts
Other consumer
1,782
1,757
Total loans
1,216,551
1,093,771
Net unearned (fees) and deferred costs
(503
)
(238
)
Allowance for credit losses on loans
(8,744
)
(8,852
)
Loans receivable, net
$
1,207,304
$
1,084,681
Loans secured by commercial real estate include all loans collateralized at least in part by commercial real estate. These loans may not be for the express purpose of conducting commercial real estate transactions.
QNB generally lends in Bucks, Lehigh, and Montgomery counties in southeastern Pennsylvania. To a large extent, QNB makes loans collateralized at least in part by real estate. Its lending activities could be affected by changes in the general economy, the regional economy, or real estate values. Other than disclosed in the table above, at December 31, 2024, there was a concentration of loans to lessors of residential buildings and dwellings of 21.9% of total loans and to lessors of nonresidential buildings of 23.3% of total loans, compared with 21.5% and 24.7% of total loans, respectively, at December 31, 2023. These concentrations were primarily within the commercial real estate categories.
QNB engages in a variety of lending activities, including commercial, residential real estate and consumer transactions. QNB focuses its lending activities on individuals, professionals and small to medium sized businesses. Risks associated with lending activities include economic conditions and changes in interest rates, which can adversely impact both the ability of borrowers to repay their loans and the value of the associated collateral.
Commercial and industrial loans, commercial real estate loans, construction loans and residential real estate loans with a business purpose are generally perceived as having more risk of default than residential real estate loans with a personal purpose and retail loans. These types of loans involve larger loan balances to a single borrower or groups of related borrowers and are more susceptible to a risk of loss during a downturn in the business cycle. These loans may involve greater risk because the availability of funds to repay these loans depends on the successful operation of the borrower’s business. The assets financed are used within the business for its ongoing operation. Repayment of these types of loans generally comes from the cash flow of the business or the ongoing conversions of assets, such as accounts receivable and inventory, to cash. Typical collateral for commercial and industrial loans includes the borrower’s accounts receivable, inventory and machinery and equipment. Commercial real estate and residential real estate loans secured for a business purpose are originated primarily within the southeastern Pennsylvania market area at conservative loan-to-value ratios and often backed by the individual guarantees of the borrowers or owners. Repayment of this kind of loan is dependent upon either the ongoing cash flow of the borrowing entity or the resale of or lease of the subject property. Commercial real estate loans may be affected to a greater extent than residential loans by adverse conditions in real estate markets or the economy because commercial real estate borrowers’ ability to repay their loans depends on successful development of their properties, as well as the factors affecting residential real estate borrowers.
- 72 -
Loans to state and political subdivisions are tax-exempt or taxable loans to municipalities, school districts and housing and industrial development authorities. These loans can be general obligations of the municipality or school district repaid through their taxing authority, revenue obligations repaid through the income generated by the operations of the authority, such as a water or sewer authority, or loans issued to a housing and industrial development agency, for which a private corporation is responsible for payments on the loans.
QNB originates fixed-rate and adjustable-rate real estate-residential mortgage loans for personal purposes that are secured by first liens on the underlying 1-4 family residential properties. Credit risk exposure in this area of lending is minimized by the evaluation of the credit worthiness of the borrower, including debt-to-income ratios, credit scores and adherence to underwriting policies that emphasize conservative loan-to-value ratios of generally no more than 80%. Residential mortgage loans granted in excess of the 80% loan-to-value ratio criterion are generally insured by private mortgage insurance.
The real estate-home equity portfolio consists of fixed-rate home equity loans and variable-rate home equity lines of credit. Risks associated with loans secured by residential properties are generally lower than commercial loans and include general economic risks, such as the strength of the job market, employment stability and the strength of the housing market. Since most loans are secured by a primary or secondary residence, the borrower’s continued employment is the greatest risk to repayment.
QNB offers a variety of loans to individuals for personal and household purposes. Consumer loans are generally considered to have greater risk than first or second mortgages on real estate because they may be unsecured, or, if they are secured, the value of the collateral may be difficult to assess and is more likely to decrease in value than real estate. Credit risk in this portfolio is controlled by conservative underwriting standards that consider debt-to-income levels and the creditworthiness of the borrower and, if secured, collateral values.
QNB employs a ten-grade risk rating system related to the credit quality of commercial loans and loans to state and political subdivisions of which the first six categories are pass categories (credits not adversely rated). The following is a description of the internal risk ratings and the likelihood of loss related to each risk rating.
1 - Excellent - no apparent risk
2 - Good - minimal risk
3 - Acceptable - lower risk
4 - Acceptable - average risk
5 - Acceptable - higher risk
6 - Pass watch
7 - Special Mention - potential weaknesses
8 - Substandard - well defined weaknesses
9 - Doubtful - full collection unlikely
10 - Loss - considered uncollectible
QNB maintains a loan review system, which allows for a periodic review of our loan portfolio and the early identification of potential problem loans. Each loan officer assigns a rating to commercial loans and loans to state and political subdivisions at the time the loan is originated. Loans are generally reviewed annually based on the borrower’s fiscal year and the dollar amount of the relationship. Loans with risk ratings of seven through ten are reviewed at least quarterly, and as often as monthly, at management’s discretion. QNB also utilizes an outside loan review firm to review the portfolio on a semi-annual basis to provide the Board of Directors and senior management an independent review of the Bank’s loan portfolio on an ongoing basis. These reviews are designed to recognize deteriorating credits in their earliest stages in an effort to reduce and control risk in the lending function as well as identifying potential shifts in the quality of the loan portfolio. The examinations by the outside loan review firm include the review of lending activities with respect to underwriting and processing new loans, monitoring the risk of existing loans and to provide timely follow-up and corrective action for loans showing signs of deterioration in quality. In addition, the outside firm reviews the methodology for the allowance for credit losses on loans to determine compliance to policy and regulatory guidance.
- 73 -
The following tables present the classes of the loan portfolio summarized by the aggregate pass rating and the classified ratings of special mention, substandard and doubtful within the QNB’s internal risk rating system as of December 31, 2024 and 2023:
Term Loans by Origination Year
December 31, 2024
Prior
Revolving
Total
Commercial Loans
Commercial and industrial:
Risk rating
Pass
$
24,130
$
11,476
$
10,818
$
4,796
$
2,513
$
8,138
$
86,094
$
147,965
Special mention
-
-
-
-
-
2,557
2,949
Substandard
-
-
2,273
Doubtful
-
-
-
-
-
-
-
-
Total commercial and industrial
$
24,130
$
12,423
$
10,818
$
4,909
$
2,597
$
8,814
$
89,496
$
153,187
Construction and land development:
Risk rating
Pass
$
53,278
$
33,332
$
11,404
$
13,998
$
3,268
$
8,056
$
-
$
123,336
Special mention
-
-
-
-
-
-
-
-
Substandard
-
6,094
-
-
-
-
6,128
Doubtful
-
-
-
-
-
-
-
-
Total construction and land development
$
53,278
$
39,426
$
11,404
$
13,998
$
3,268
$
8,090
$
-
$
129,464
Real estate secured by multi-family properties:
Risk rating
Pass
$
26,080
$
17,395
$
27,638
$
22,402
$
9,210
$
31,488
$
-
$
134,213
Special mention
-
-
-
-
-
-
-
-
Substandard
-
-
-
-
2,777
-
3,248
Doubtful
-
-
-
-
-
-
-
-
Total real estate secured by multi-family properties
$
26,080
$
17,866
$
27,638
$
22,402
$
9,210
$
34,265
$
-
$
137,461
Real estate secured by owner-occupied properties:
Risk rating
Pass
$
14,110
$
14,121
$
25,747
$
23,080
$
14,890
$
53,062
$
-
$
145,010
Special mention
-
-
-
-
-
1,525
Substandard
7,027
1,665
-
2,131
5,852
-
17,420
Doubtful
-
-
-
-
-
-
-
-
Total real estate secured by owner-occupied properties
$
15,511
$
21,148
$
27,412
$
23,080
$
17,021
$
59,783
$
-
$
163,955
Real estate secured by other commercial properties:
Risk rating
Pass
$
42,414
$
30,132
$
67,747
$
40,771
$
13,624
$
115,015
$
-
$
309,703
Special mention
-
-
-
-
-
-
-
-
Substandard
-
-
-
2,298
-
3,687
Doubtful
-
-
-
-
-
-
-
-
Total real estate secured by other commercial properties
$
42,414
$
30,795
$
67,747
$
40,771
$
15,922
$
115,741
$
-
$
313,390
Revolving real estate secured by 1-4 family properties-business:
Risk rating
Pass
$
-
$
-
$
-
$
-
$
-
$
-
$
5,652
$
5,652
Special mention
-
-
-
-
-
-
-
-
Substandard
-
-
-
-
-
-
-
-
Doubtful
-
-
-
-
-
-
-
-
Total revolving real estate secured by 1-4 family properties-business
$
-
$
-
$
-
$
-
$
-
$
-
$
5,652
$
5,652
- 74 -
Term Loans by Origination Year
December 31, 2024
Prior
Revolving
Total
Commercial Loans
Real estate secured by 1st lien on 1-4 family properties-business:
Risk rating
Pass
$
9,890
$
16,641
$
26,410
$
18,786
$
8,349
$
24,375
$
-
$
104,451
Special mention
-
-
-
-
-
-
Substandard
-
-
-
1,196
Doubtful
-
-
-
-
-
-
-
-
Total real estate secured by 1st lien on 1-4 family properties-business
$
9,890
$
16,641
$
26,749
$
19,123
$
8,494
$
24,882
$
-
$
105,779
Real estate secured by junior lien on 1-4 family properties-business:
Risk rating
Pass
$
$
$
$
$
$
$
-
$
2,889
Special mention
-
-
-
-
-
-
-
-
Substandard
-
-
-
-
-
Doubtful
-
-
-
-
-
-
-
-
Total real estate secured by junior lien on 1-4 family properties-business
$
$
$
$
$
$
$
-
$
3,238
State and political subdivisions:
Risk rating
Pass
$
1,914
$
1,141
$
-
$
3,749
$
$
10,871
$
-
$
17,683
Special mention
-
-
-
-
-
-
-
-
Substandard
-
-
-
-
-
-
-
-
Doubtful
-
-
-
-
-
-
-
-
Total real estate secured by junior lien on 1-4 family properties-business
$
1,914
$
1,141
$
-
$
3,749
$
$
10,871
$
-
$
17,683
Total Commercial Loans:
Risk rating
Pass
$
172,029
$
124,771
$
170,338
$
127,758
$
52,400
$
251,860
$
91,746
$
990,902
Special mention
-
-
2,557
4,606
Substandard
1,075
14,810
2,023
4,658
10,572
34,301
Doubtful
-
-
-
-
-
-
-
-
Total Commercial loans
$
173,760
$
139,973
$
172,361
$
128,208
$
57,058
$
263,301
$
95,148
$
1,029,809
Current Period Gross Charge-Offs:
Commercial and industrial
$
-
$
-
$
-
$
-
$
-
$
-
$
$
- 75 -
Term Loans by Origination Year
December 31, 2023
Prior
Revolving
Total
Commercial Loans
Commercial and industrial:
Risk rating
Pass
$
20,473
$
14,439
$
8,574
$
5,913
$
8,626
$
7,175
$
70,716
$
135,916
Special mention
-
-
-
-
-
-
-
-
Substandard
-
-
-
-
-
-
1,170
1,170
Doubtful
-
-
-
-
-
-
-
-
Total commercial and industrial
$
20,473
$
14,439
$
8,574
$
5,913
$
8,626
$
7,175
$
71,886
$
137,086
Construction and land development:
Risk rating
Pass
$
46,171
$
43,472
$
14,630
$
3,434
$
4,028
$
4,395
$
-
$
116,130
Special mention
-
-
-
-
-
-
-
-
Substandard
-
-
-
-
-
-
Doubtful
-
-
-
-
-
-
-
-
Total construction and land development
$
46,171
$
43,472
$
14,630
$
3,434
$
4,028
$
4,438
$
-
$
116,173
Real estate secured by multi-family properties:
Risk rating
Pass
$
10,826
$
28,858
$
23,430
$
9,808
$
5,804
$
27,609
$
-
$
106,335
Special mention
-
-
-
-
-
-
-
-
Substandard
-
-
-
-
2,154
-
2,858
Doubtful
-
-
-
-
-
-
-
-
Total real estate secured by multi-family properties
$
10,826
$
28,858
$
23,430
$
9,808
$
6,508
$
29,763
$
-
$
109,193
Real estate secured by owner-occupied properties:
Risk rating
Pass
$
14,430
$
29,576
$
26,908
$
18,693
$
12,239
$
53,030
$
-
$
154,876
Special mention
-
-
-
-
-
-
-
-
Substandard
-
-
-
-
5,819
-
5,819
Doubtful
-
-
-
-
-
-
-
-
Total real estate secured by owner-occupied properties
$
14,430
$
29,576
$
26,908
$
18,693
$
12,239
$
58,849
$
-
$
160,695
Real estate secured by other commercial properties:
Risk rating
Pass
$
32,297
$
44,526
$
42,582
$
17,798
$
28,947
$
98,173
$
-
$
264,323
Special mention
-
-
-
-
-
-
-
-
Substandard
-
-
-
-
-
-
Doubtful
-
-
-
-
-
-
-
-
Total real estate secured by other commercial properties
$
32,297
$
44,526
$
42,582
$
17,798
$
28,947
$
98,951
$
-
$
265,101
Revolving real estate secured by 1-4 family properties-business:
Risk rating
Pass
$
-
$
-
$
-
$
-
$
-
$
-
$
5,442
$
5,442
Special mention
-
-
-
-
-
-
-
-
Substandard
-
-
-
-
-
-
-
-
Doubtful
-
-
-
-
-
-
-
-
Total revolving real estate secured by 1-4 family properties-business
$
-
$
-
$
-
$
-
$
-
$
-
$
5,442
$
5,442
Real estate secured by 1st lien on 1-4 family properties-business:
Risk rating
Pass
$
14,697
$
28,596
$
20,890
$
9,794
$
8,441
$
20,262
$
-
$
102,680
Special mention
-
-
-
-
-
-
- 76 -
Term Loans by Origination Year
December 31, 2023
Prior
Revolving
Total
Commercial Loans
Substandard
-
-
-
-
Doubtful
-
-
-
-
-
-
-
-
Total real estate secured by 1st lien on 1-4 family properties-business
$
14,697
$
28,785
$
21,027
$
9,794
$
8,864
$
20,405
$
-
$
103,572
Real estate secured by junior lien on 1-4 family properties-business:
Risk rating
Pass
$
$
$
$
$
$
$
-
$
3,258
Special mention
-
-
-
-
-
-
-
-
Substandard
-
-
-
-
-
-
Doubtful
-
-
-
-
-
-
-
-
Total real estate secured by junior lien on 1-4 family properties-business
$
$
$
$
$
$
1,121
$
-
$
3,445
State and political subdivisions:
Risk rating
Pass
$
$
-
$
4,247
$
$
5,444
$
8,292
$
-
$
18,708
Special mention
-
-
-
-
-
-
-
-
Substandard
-
-
-
-
-
-
-
-
Doubtful
-
-
-
-
-
-
-
-
Total real estate secured by junior lien on 1-4 family properties-business
$
$
-
$
4,247
$
$
5,444
$
8,292
$
-
$
18,708
Total Commercial Loans:
Risk rating
Pass
$
140,159
$
190,071
$
141,803
$
66,038
$
73,569
$
219,870
$
76,158
$
907,668
Special mention
-
-
-
-
-
-
Substandard
-
-
-
1,127
9,124
1,170
11,610
Doubtful
-
-
-
-
-
-
-
-
Total Commercial loans
$
140,159
$
190,260
$
141,940
$
66,038
$
74,696
$
228,994
$
77,328
$
919,415
Current Period Gross Charge-Offs:
Commercial and industrial
$
-
$
$
-
$
-
$
-
$
-
$
$
The following tables present the recorded investment in the retail classes of the loan portfolio based on payment activity as of December 31, 2024 and 2023:
Term Loans by Origination Year
December 31, 2024
Prior
Revolving
Total
Retail Loans
1-4 family residential mortgages:
Payment performance
Performing
$
12,129
$
12,404
$
13,901
$
28,707
$
18,871
$
27,643
$
-
$
113,655
Nonperforming
-
-
-
-
-
-
Total 1-4 family residential mortgages
$
12,129
$
12,404
$
13,901
$
28,707
$
18,871
$
28,411
$
-
$
114,423
Revolving home equity secured by 1-4 family properties-personal:
Payment performance
Performing
$
-
$
-
$
-
$
-
$
-
$
-
$
47,918
$
47,918
Nonperforming
-
-
-
-
-
-
Total revolving home equity secured by 1-4 family properties-personal
$
-
$
-
$
-
$
-
$
-
$
-
$
48,231
$
48,231
- 77 -
Term Loans by Origination Year
December 31, 2024
Prior
Revolving
Total
Retail Loans
Real estate secured by 1st lien on 1-4 family properties-personal:
Payment performance
Performing
$
$
$
$
1,027
$
$
2,315
$
-
$
6,443
Nonperforming
-
-
-
-
-
Total real estate secured by 1st lien on 1-4 family properties-personal
$
$
$
1,058
$
1,027
$
$
2,343
$
-
$
6,561
Real estate secured by junior lien on 1-4 family properties-personal:
Payment performance
Performing
$
5,241
$
3,317
$
$
$
$
2,804
$
-
$
14,075
Nonperforming
-
-
-
-
-
-
Total real estate secured by junior lien on 1-4 family properties-personal
$
5,241
$
3,317
$
$
$
$
2,804
$
-
$
14,092
Student loans:
Payment performance
Performing
$
-
$
-
$
-
$
-
$
-
$
1,433
$
-
$
1,433
Nonperforming
-
-
-
-
-
-
Total student loans
$
-
$
-
$
-
$
-
$
-
$
1,444
$
-
$
1,444
Overdrafts:
Payment performance
Performing
$
-
$
-
$
-
$
-
$
-
$
-
$
$
Nonperforming
-
-
-
-
-
-
-
-
Total overdrafts
$
-
$
-
$
-
$
-
$
-
$
-
$
$
Other consumer:
Payment performance
Performing
$
$
$
$
$
$
$
$
1,753
Nonperforming
-
-
-
-
-
-
Total other consumer
$
$
$
$
$
$
$
$
1,782
Total Retail Loans:
Payment performance
Performing
$
18,754
$
16,929
$
15,829
$
30,796
$
20,622
$
34,227
$
48,329
$
185,486
Nonperforming
-
-
-
-
1,256
Total Retail Loans
$
18,754
$
16,929
$
15,936
$
30,796
$
20,622
$
35,063
$
48,642
$
186,742
Current Period Gross Charge-Offs:
Student loans
$
-
$
-
$
-
$
-
$
-
$
$
-
$
Overdrafts
-
-
-
-
-
-
Other consumer
-
-
-
- 78 -
Term Loans by Origination Year
December 31, 2023
Prior
Revolving
Total
Retail Loans
1-4 family residential mortgages:
Payment performance
Performing
$
12,641
$
14,635
$
30,495
$
20,304
$
4,526
$
25,500
$
-
$
108,101
Nonperforming
-
-
-
-
-
-
Total 1-4 family residential mortgages
$
12,641
$
14,635
$
30,495
$
20,304
$
4,526
$
26,305
$
-
$
108,906
Revolving home equity secured by 1-4 family properties-personal:
Payment performance
Performing
$
-
$
-
$
-
$
-
$
-
$
-
$
33,936
$
33,936
Nonperforming
-
-
-
-
-
-
Total revolving home equity secured by 1-4 family properties-personal
$
-
$
-
$
-
$
-
$
-
$
-
$
34,231
$
34,231
Real estate secured by 1st lien on 1-4 family properties-personal:
Payment performance
Performing
$
2,591
$
1,613
$
2,933
$
1,030
$
$
2,767
$
-
$
11,865
Nonperforming
-
-
-
-
-
-
Total real estate secured by 1st lien on 1-4 family properties-personal
$
2,591
$
1,613
$
2,933
$
1,030
$
$
2,883
$
-
$
11,981
Real estate secured by junior lien on 1-4 family properties-personal:
Payment performance
Performing
$
6,438
$
1,613
$
2,184
$
1,180
$
$
3,515
$
-
$
15,606
Nonperforming
-
-
-
-
-
-
Total real estate secured by junior lien on 1-4 family properties-personal
$
6,438
$
1,632
$
2,184
$
1,180
$
$
3,515
$
-
$
15,625
Student loans:
Payment performance
Performing
$
-
$
-
$
-
$
-
$
-
$
1,645
$
-
$
1,645
Nonperforming
-
-
-
-
-
-
Total student loans
$
-
$
-
$
-
$
-
$
-
$
1,662
$
-
$
1,662
Overdrafts:
Payment performance
Performing
$
-
$
-
$
-
$
-
$
-
$
-
$
$
Nonperforming
-
-
-
-
-
-
-
-
Total overdrafts
$
-
$
-
$
-
$
-
$
-
$
-
$
$
Other consumer:
Payment performance
Performing
$
$
$
$
$
$
$
$
1,720
Nonperforming
-
-
-
-
-
-
Total other consumer
$
$
$
$
$
$
$
$
1,757
Total Retail Loans:
Payment performance
Performing
$
22,463
$
18,151
$
35,857
$
22,603
$
6,206
$
33,468
$
34,319
$
173,067
Nonperforming
-
-
-
-
1,289
Total Retail Loans
$
22,463
$
18,170
$
35,857
$
22,603
$
6,206
$
34,443
$
34,614
$
174,356
Current Period Gross Charge-Offs:
- 79 -
Term Loans by Origination Year
December 31, 2023
Prior
Revolving
Total
Retail Loans
Student loans
$
-
$
-
$
-
$
-
$
-
$
$
-
$
Overdrafts
-
-
-
-
-
-
Other consumer
-
-
-
-
Retail revolving lines of credit that were termed out during 2024 and 2023 were $3,394,000 and $4,534,000, respectively; all which are performing.
The performance and credit quality of the loan portfolio is also monitored by analyzing the age of the loans receivable as determined by the length of time a recorded payment is past due. The following table presents the classes of the loan portfolio (excluding deferred fees and costs) summarized by the past due status, regardless of whether the loan is on non-accrual status, as of December 31, 2024 and 2023:
December 31, 2024
30-59 days
past due
60-89 days
past due
90 days or
more past
due
Total past
due loans
Current
Total loans
receivable
Commercial:
Commercial and industrial
$
-
$
-
$
-
$
-
$
153,187
$
153,187
Construction and land development
-
-
-
-
129,464
129,464
Real estate secured by multi-family properties
-
-
-
-
137,461
137,461
Real estate secured by owner-occupied properties
-
163,636
163,955
Real estate secured by other commercial properties
-
-
-
-
313,390
313,390
Revolving real estate secured by 1-4 family properties-business
-
-
-
-
5,652
5,652
Real estate secured by 1st lien on 1-4 family properties-business
-
-
-
-
105,779
105,779
Real estate secured by junior lien on 1-4 family properties-business
-
-
-
-
3,238
3,238
State and political subdivisions
-
-
-
-
17,683
17,683
Retail:
1-4 family residential mortgages
1,125
113,298
114,423
Revolving home equity secured by 1-4 family properties-personal
47,835
48,231
Real estate secured by 1st lien on 1-4 family properties-personal
-
6,344
6,561
Real estate secured by junior lien on 1-4 family properties-personal
-
13,980
14,092
Student loans
-
-
-
-
1,444
1,444
Overdrafts
-
-
Other consumer
-
-
1,777
1,782
Total
$
$
$
$
2,187
$
1,214,364
$
1,216,551
- 80 -
December 31, 2023
30-59 days
past due
60-89 days
past due
90 days or
more past
due
Total past
due loans
Current
Total loans
receivable
Commercial:
Commercial and industrial
$
$
-
$
-
$
$
137,009
$
137,086
Construction and land development
-
-
-
-
116,173
116,173
Real estate secured by multi-family properties
-
-
-
-
109,193
109,193
Real estate secured by owner-occupied properties
-
-
160,509
160,695
Real estate secured by other commercial properties
9,675
-
-
9,675
255,426
265,101
Revolving real estate secured by 1-4 family properties-business
-
-
-
-
5,442
5,442
Real estate secured by 1st lien on 1-4 family properties-business
-
-
103,249
103,572
Real estate secured by junior lien on 1-4 family properties-business
-
-
-
-
3,445
3,445
State and political subdivisions
-
-
-
-
18,708
18,708
Retail:
1-4 family residential mortgages
1,295
107,611
108,906
Revolving home equity secured by 1-4 family properties-personal
-
34,046
34,231
Real estate secured by 1st lien on 1-4 family properties-personal
-
-
11,885
11,981
Real estate secured by junior lien on 1-4 family properties-personal
-
-
15,607
15,625
Student loans
-
1,645
1,662
Overdrafts
-
Other consumer
-
-
1,749
1,757
Total
$
10,771
$
$
$
11,903
$
1,081,868
$
1,093,771
As previously discussed, QNB maintains a loan review system, which includes a continuous review of the loan portfolio by internal and external parties to aid in the early identification of potential collateral dependent loans. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as collateral dependent. When placing a loan on non-accrual status, management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. All non-accrual loans, except student loans, are individually evaluated for an allowance for credit losses ("ACL"). This ACL is measured using either the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral if the loan is collateral dependent.
An allowance for credit loss is established for a non-accrual loan if its carrying value exceeds its estimated fair value.
For commercial loans secured by real estate, estimated fair values are determined primarily through third-party appraisals. When a real estate secured loan becomes impaired, a decision is made regarding whether an updated certified appraisal of the real estate is necessary. This decision is based on various considerations, including the age of the most recent appraisal, the loan-to-value ratio based on the original appraisal and the condition of the property. Appraised values are discounted to arrive at the estimated selling price of the collateral, which is considered to be the estimated fair value. The discounts also include estimated costs to sell the property.
- 81 -
For commercial loans secured by non-real estate collateral, such as accounts receivable, inventory and equipment, estimated fair values are determined based on the borrower’s financial statements, inventory reports, accounts receivable agings or equipment appraisals or invoices. Indications of value from these sources are generally discounted based on the age of the financial information or the quality of the assets.
The following tables disclose the recorded investment in loans receivable that are either on non-accrual status or past due 90 days or more and still accruing interest as of December 31, 2024 and 2023:
December 31, 2024
90 Days or More Past Due-Still Accruing
Nonaccrual With No Specifically-Related ACL
Nonaccrual With Related ACL
Total Nonaccrual Loans
Commercial:
Commercial and industrial
$
-
$
-
$
$
Construction and land development
-
-
-
-
Real estate secured by multi-family properties
-
-
-
-
Real estate secured by owner-occupied properties
-
-
Real estate secured by other commercial properties
-
-
-
-
Revolving real estate secured by 1-4 family properties-business
-
-
-
-
Real estate secured by 1st lien on 1-4 family properties-business
-
-
Real estate secured by junior lien on 1-4 family properties-business
-
-
State and political subdivisions
-
-
-
-
Retail:
1-4 family residential mortgages
-
-
Revolving home equity secured by 1-4 family properties-personal
-
-
Real estate secured by 1st lien on 1-4 family properties-personal
-
-
Real estate secured by junior lien on 1-4 family properties-personal
-
-
Student loans
-
-
Other consumer
-
-
Total
$
-
$
1,618
$
$
1,975
- 82 -
December 31, 2023
90 Days or More Past Due-Still Accruing
Nonaccrual With No Specifically-Related ACL
Nonaccrual With Related ACL
Total Nonaccrual Loans
Commercial:
Commercial and industrial
$
-
$
$
$
Construction and land development
-
-
-
-
Real estate secured by multi-family properties
-
-
-
-
Real estate secured by owner-occupied properties
-
-
Real estate secured by other commercial properties
-
-
-
-
Revolving real estate secured by 1-4 family properties-business
-
-
-
-
Real estate secured by 1st lien on 1-4 family properties-business
-
-
-
-
Real estate secured by junior lien on 1-4 family properties-business
-
-
State and political subdivisions
-
-
-
-
Retail:
1-4 family residential mortgages
-
-
Revolving home equity secured by 1-4 family properties-personal
-
Real estate secured by 1st lien on 1-4 family properties-personal
-
-
Real estate secured by junior lien on 1-4 family properties-personal
-
-
Student loans
-
-
Other consumer
-
-
Total
$
-
$
1,468
$
$
1,940
QNB recognized interest income of $126,000 and $557,000 on non-accrual loans for the years ended December 31, 2024 and 2023, respectively.
- 83 -
The following table presents the collateral-dependent loans by loan category at December 31, 2024 and 2023:
December 31, 2024
Real Estate Secured
Other (1)
Deficiency in Collateral
Total Collateral Dependent Nonaccrual Loans
Commercial:
Commercial and industrial
$
-
$
-
$
$
Construction and land development
-
-
-
-
Real estate secured by multi-family properties
-
-
-
-
Real estate secured by owner-occupied properties
-
-
Real estate secured by other commercial properties
-
-
-
-
Revolving real estate secured by 1-4 family properties-business
-
-
-
-
Real estate secured by 1st lien on 1-4 family properties-business
-
-
Real estate secured by junior lien on 1-4 family properties-business
-
-
State and political subdivisions
-
-
-
-
Retail:
1-4 family residential mortgages
-
-
Revolving home equity secured by 1-4 family properties-personal
-
-
Real estate secured by 1st lien on 1-4 family properties-personal
-
-
Real estate secured by junior lien on 1-4 family properties-personal
-
-
Other consumer
-
-
Total
$
1,578
$
$
$
1,964
(1) Secured by business assets, personal property and equipment or guarantees
- 84 -
December 31, 2023
Real Estate Secured
Other (1)
Deficiency in Collateral
Total Collateral Dependent Nonaccrual Loans
Commercial:
Commercial and industrial
$
-
$
$
$
Construction and land development
-
-
-
-
Real estate secured by multi-family properties
-
-
-
-
Real estate secured by owner-occupied properties
-
-
Real estate secured by other commercial properties
-
-
-
-
Revolving real estate secured by 1-4 family properties-business
-
-
-
-
Real estate secured by 1st lien on 1-4 family properties-business
-
-
Real estate secured by junior lien on 1-4 family properties-business
-
-
State and political subdivisions
-
-
-
-
Retail:
1-4 family residential mortgages
-
-
Revolving home equity secured by 1-4 family properties-personal
-
Real estate secured by 1st lien on 1-4 family properties-personal
-
-
Real estate secured by junior lien on 1-4 family properties-personal
-
-
Other consumer
-
-
Total
$
1,300
$
$
$
1,923
(1) Secured by business assets, personal property and equipment or guarantees
- 85 -
Activity in the allowance for credit losses on loans for the years ended December 31, 2024, 2023 and 2022 are as follows:
Year ended December 31, 2024
Beginning balance
Credit loss expense (reversal)
Charge-offs
Recoveries
Balance, end
of period
Commercial:
Commercial and industrial
$
$
(23
)
$
(23
)
$
$
Construction and land development
1,252
-
-
1,336
Real estate secured by multi-family properties
1,735
-
-
2,012
Real estate secured by owner-occupied properties
1,001
(148
)
-
-
Real estate secured by other commercial properties
1,167
(25
)
-
-
1,142
Revolving real estate secured by 1-4 family properties-business
(3
)
-
-
Real estate secured by 1st lien on 1-4 family properties-business
1,507
(279
)
-
1,238
Real estate secured by junior lien on 1-4 family properties-business
-
-
State and political subdivisions
(21
)
-
-
Retail:
1-4 family residential mortgages
(108
)
-
Revolving home equity secured by 1-4 family properties-personal
-
-
Real estate secured by 1st lien on 1-4 family properties-personal
(151
)
-
-
Real estate secured by junior lien on 1-4 family properties-personal
(28
)
-
-
Student loans
(37
)
(52
)
Overdrafts
(101
)
Other consumer
(23
)
Total
$
8,852
$
(49
)
$
(199
)
$
$
8,744
- 86 -
Year ended December 31, 2023
Beginning balance prior to adoption of ASC 326
Impact of adopting ASC 326
Credit loss expense (reversal)
Charge-offs
Recoveries
Balance, end
of period
Commercial:
Commercial and industrial
$
1,316
$
(70
)
$
(771
)
$
(313
)
$
$
Construction and land development
(10
)
-
-
1,252
Real estate secured by multi-family properties
-
-
1,735
Real estate secured by owner-occupied properties
1,549
(374
)
(174
)
-
-
1,001
Real estate secured by other commercial properties
2,458
(1,128
)
(163
)
-
-
1,167
Revolving real estate secured by 1-4 family properties-business
(5
)
-
-
Real estate secured by 1st lien on 1-4 family properties-business
1,210
(203
)
-
1,507
Real estate secured by junior lien on 1-4 family properties-business
(14
)
(2
)
-
-
State and political subdivisions
(20
)
(19
)
-
-
Retail:
1-4 family residential mortgages
(196
)
(59
)
-
-
Construction-individual
-
(1
)
-
-
-
Revolving home equity secured by 1-4 family properties-personal
(7
)
(154
)
-
-
Real estate secured by 1st lien on 1-4 family properties-personal
-
-
Real estate secured by junior lien on 1-4 family properties-personal
-
Student loans
(48
)
(57
)
Overdrafts
(91
)
Other consumer
(8
)
(14
)
Unallocated
(502
)
-
N/A
N/A
-
Total
$
10,531
$
(1,089
)
$
(828
)
$
(475
)
$
$
8,852
Year ended December 31, 2022
Balance,
beginning of
period
Provision for
(credit to)
loan losses
Charge-offs
Recoveries
Balance, end
of period
Commercial:
Commercial and industrial
$
3,368
$
(2,320
)
$
(38
)
$
$
1,316
Construction
-
-
Secured by commercial real estate
4,280
-
-
5,002
Secured by residential real estate
1,035
-
1,240
State and political subdivisions
-
-
Retail:
1-4 family residential mortgages
-
-
Home equity loans and lines
-
Consumer
(158
)
Unallocated
(3
)
N/A
N/A
Total
$
11,184
$
(850
)
$
(196
)
$
$
10,531
Since the implementation of ASU 326 on January 1, 2023, the Company may make loan modifications to borrowers experiencing financial difficulty ("FDM"). A FDM could involve principal forgiveness, term extension, an other-than-insignificant payment delay, interest rate reduction or exchanging or paying off existing debt for new debt with the Company. The effect of most modifications made to borrowers experiencing financial difficulty is already included in the allowance for credit losses because of the measurement
- 87 -
methodologies used to estimate the allowance, a change to the allowance for credit losses is generally not recorded upon modification. Any amount forgiven would be charged to the allowance for credit losses. The amount of the principal forgiveness is deemed to be uncollectible; therefore, that portion of the loan is written off, resulting in a reduction of the amortized cost basis and a corresponding adjustment to the allowance for credit losses. In some cases, modifications could include multiple types of concessions. Typically, one type of concession, such as a term extension, is granted initially. If the borrower continues to experience financial difficulty, another concession, such as principal forgiveness, may be granted. The following table shows the amortized cost basis at the end of the reporting period of the loans modified to borrowers experiencing financial difficulty, disaggregated by loan class, type of concession granted and the financial effect of the modification:
Year ended December 31,
Payment Modification to Interest Only for Six Months
Amortized Cost Basis
% of Total Loan Class
Fiancial Effect
Commercial:
Real estate secured by owner-occupied properties
$
1,000
0.61
%
Temporary reduction of principal payments with no extension of term
Total
$
1,000
There were no payment defaults during the 2024 period on FDMs. There were no FDMs in 2023.
There was 3 mortgage loan(s) secured by residential real estate with a recorded investment of $457,000 for which foreclosure proceedings were in process at December 31, 2024. QNB had no loans secured by residential real estate for which foreclosure proceedings were in process as of December 31, 2023.
Note 6 - Premises and Equipment
Premises and equipment, stated at cost less accumulated depreciation and amortization, are summarized below:
December 31,
Land and buildings
$
18,333
$
16,102
Furniture and equipment
15,429
14,470
Leasehold improvements
3,637
3,632
Right-of-use asset
2,618
2,722
Book value
40,017
36,926
Accumulated depreciation and amortization
(22,762
)
(21,974
)
Net book value
$
17,255
$
14,952
Depreciation and amortization expense on premises and equipment, which excludes operating lease costs in the table below, amounted to $1,095,000, $1,714,000, and $1,115,000 for the years ended December 31, 2024, 2023 and 2022, respectively. During 2024 QNB renewed two operating leases and recorded right-of-use assets of $457,000 and operating liabilities of $457,000.
- 88 -
The following table summarized the quantitative attributes of QNB’s operating leases:
Year ended December 31,
Lease cost
Operating lease cost
$
$
Total lease cost
Other information
Cash paid for amounts included in the measurement of lease liabilities:
Cashflows from operating leases
$
$
Right-of-use assets obtained in exchange for new operating lease liabilities
$
$
Weighted average remaining lease terms:
Operating leases
12.1 years
13.1 years
Weighted average discount rates:
Operating leases
3.09
%
2.90
%
Note 7 - Intangible Assets and Loan Servicing
Loans serviced for others are not included in the accompanying Consolidated Balance Sheets. The unpaid principal balances of mortgage loans serviced for others were $63,411,000 and $68,349,000 at December 31, 2024 and 2023, respectively.
The following table reflects the activity of mortgage servicing rights for the periods indicated:
Year ended December 31,
Balance at beginning of year
$
$
$
Mortgage servicing rights capitalized
Mortgage servicing rights amortized
(50
)
(61
)
(80
)
Fair market value adjustments
-
-
Balance at end of year
$
$
$
The balance of these mortgage servicing rights is included in "Other assets" at December 31, 2024 and 2023 and the fair value of these rights was $556,000 and $583,000, respectively. The fair value of servicing rights was determined using discount rates ranging from 12.0% to 12.5% for both 2024 and 2023; and prepayment speeds ranging from 90% to 185% for 2024 compared to 104% to 214% for 2023.
The annual estimated amortization expense of intangible assets for each of the five succeeding fiscal years is as follows:
$
Note 8 - Time Deposits
The aggregate amount of time deposits was $381,458,000 and $314,981,000 at December 31, 2024 and 2023, respectively. Time deposits that meet or exceed the FDIC insurance limit of $250,000 at December 31, 2024 and 2023 were $46,681,000 and $43,337,000, respectively.
- 89 -
At December 31, 2024, the scheduled maturities of time deposits were as follows:
$
350,836
19,034
7,826
2,402
1,360
Thereafter
-
Total time deposits
$
381,458
Note 9 - Short-Term Borrowings
December 31,
Securities sold
under agreements
to repurchase (a)
Other short - term
borrowings (b)
Balance
$
18,636
$
35,208
Maximum indebtedness at any month end
55,088
50,000
Daily average indebtedness outstanding
38,455
10,071
Average rate paid for the year
1.83
%
4.41
%
Average rate on period-end borrowings
2.46
4.81
Balance
$
44,094
$
50,000
Maximum indebtedness at any month end
69,343
136,799
Daily average indebtedness outstanding
53,154
55,708
Average rate paid for the year
1.39
%
4.55
%
Average rate on period-end borrowings
4.59
4.39
(a)Securities sold under agreements to repurchase mature overnight. The repurchase agreements were collateralized by U.S. Government mortgage-backed securities and CMOs with an amortized cost of $30,729,000 and $72,012,000 and a fair value of $26,501,000 and $61,650,000 and at December 31, 2024 and 2023 respectively. These securities are held in safekeeping at the Federal Reserve Bank of Boston.
(b)Other short-term borrowings include Federal funds purchased, overnight and short term borrowings from the FHLB, and short-term FRB borrowings.
During the first quarter of 2023, QNB borrowed $50,000,000 from the FRB under its Bank Term Funding Program and locked in a rate of 4.39%; there are no pre-payment penalties and the funds were paid off in 2024. The Bank has four unsecured Federal funds lines granted by correspondent banks totaling $86,000,000. Federal funds purchased under these lines were $0 at both December 31, 2024 and 2023.
Note 10 - Long-Term Debt
FHLB advances are collateralized by certain mortgage loans and also require the purchase of FHLB capital stock, which is included within "Restricted investment in stocks" on the Consolidated Balance Sheets. QNB’s FHLB stock was $3,510,000 and $1,718,000 at December 31, 2024 and 2023, respectively.
QNB has a maximum borrowing capacity with the FHLB of approximately $442,339,000. At December 31, 2024 QNB had $30,000,000 in long-term advances outstanding with the FHLB at fixed rates, $35,208,000 in short term borrowings as reported in Note 9 and a letter of credit issued of $283,000. At December 31, 2023 QNB had $20,000,000 in long-term advances outstanding with the FHLB at fixed rates, no short-term borrowings as reported in Note 9 and a letter of credit issued of $283,000.
- 90 -
Long-term advances at the FHLB mature as follows:
As of December 31, 2024
Balance Maturing
Weighted-Average Rate
$
30,000
4.75
%
-
-
-
-
-
-
-
-
Thereafter
-
-
Total long-term debt
$
30,000
4.75
%
Note 11 - Subordinated Debt
On August 30, 2024, the Company entered into Subordinated Note Purchase Agreements with certain qualified institutional buyers and accredited investors (collectively, the "Subordinated Note Purchasers") pursuant to which the Company issued and sold $40.0 million in aggregate principal amount of its 8.875% Fixed-to-Floating Rate Subordinated Notes due 2034 (the "Subordinated Notes"). The Subordinated Notes were offered and sold by the Company to the Subordinated Note Purchasers in a private offering in reliance on the Section 4(a)(2) exemption from the registration requirements of the Securities Act of 1933, as amended (the "Securities Act"), and the provisions of Regulation D thereunder. The Company intends to use the proceeds from the offering for general corporate purposes and potential future strategic opportunities.
The Subordinated Notes mature on September 1, 2034 and bear interest at a fixed annual rate of 8.875%, payable semi-annually in arrears, to but excluding September 1, 2029. From and including September 1, 2029 to but excluding the maturity date or early redemption date, the interest rate will reset quarterly to an interest rate per annum initially equal to the then-current three-month Secured Overnight Financing Rate published by the Federal Reserve Bank of New York plus 545 basis points, payable quarterly in arrears. The Company is entitled to redeem the Subordinated Notes, in whole or in part, at any time on or after September 1, 2029, and to redeem the Subordinated Notes at any time in whole upon certain other events. Any redemption of the Subordinated Notes will be subject to prior regulatory approval to the extent required.
The Subordinated Notes are not subject to any sinking fund and are not convertible into or exchangeable for any other securities or
assets of the Company or any of its subsidiaries. The Subordinated Notes are not subject to redemption at the option of the holders. The Subordinated Notes are unsecured, subordinated obligations of the Company only and are not obligations of, and are not guaranteed by, any subsidiary of the Company. The Subordinated Notes rank junior in right to payment to the Company's current and future senior indebtedness. The Subordinated Notes are intended to qualify as Tier 2 capital for regulatory capital purposes.
The carrying cost of the Subordinated Notes on the consolidated balance sheets represents the outstanding balance of the notes net of unamortized origination costs of $932,000 which amortize to interest expense through September 1, 2029.
- 91 -
Note 12 - Income Taxes
The components of the provision for income taxes are as follows:
Year ended December 31,
Current Federal income taxes
$
2,739
$
2,109
$
3,543
Current state income taxes
Deferred Federal income taxes (benefits)
Deferred state income taxes (benefits)
(169
)
(15
)
(102
)
Valuation adjustment
(4
)
Net provision
$
2,911
$
2,244
$
3,665
At December 31, 2024 and 2023, the tax effects of temporary differences that represent the significant portion of deferred tax assets and liabilities are as follows:
December 31,
Deferred tax assets
Allowance for credit losses on loans
$
1,882
$
1,859
Net unrealized holding losses on investment
securities available-for-sale
18,226
17,692
Net unrealized holding losses on investment
rate swaps
-
Non-accrual interest income
Leasing liability
Deferred revenue
-
Incurred but not reported medical expense
Bonus
State net operating loss carryforward
Other
Total deferred tax assets
21,554
20,931
Deferred tax liabilities
Deferred loan income
Depreciation
Mortgage servicing rights
Net unrealized holding losses on investment
rate swaps
1,040
-
Fair value remeasurements on interest rate swap
Fair value adjustment on equity securities
-
Prepaid expenses
Right of use asset
Subordinated debt costs
-
Other
-
Total deferred tax liabilities
3,057
1,637
Valuation allowance
Net deferred tax asset
$
18,325
$
19,290
The ability to realize deferred tax assets is dependent upon a variety of factors, including the generation of future taxable income, the existence of taxes paid and recoverable, the reversal of deferred tax liabilities and tax planning strategies. Based upon these and other factors, management believes it is more likely than not that QNB will realize the benefits of the above deferred tax assets except a $1,000 deferred tax asset related to non-qualified stock option that it is more likely than not that the options will expire unexercised due to the strike price and a $171,000 deferred tax related to a state net operating loss that it is more likely than not that the carryforward period will expire prior to the ability to offset the loss. A valuation allowance was recorded for this amount.
- 92 -
A reconciliation of the tax provision on income before taxes computed at the statutory rates of 21% for 2024, 2023 and 2022 and the actual tax provision was as follows:
Year ended December 31,
Dollar
%
Dollar
%
Dollar
%
Provision at statutory rate
$
3,015
21.0
%
$
2,463
21.0
%
$
4,113
21.0
%
Tax-exempt interest and dividend income
(194
)
(1.4
)
(267
)
(2.3
)
(504
)
(2.6
)
Bank-owned life insurance
(68
)
(0.5
)
(67
)
(0.6
)
(75
)
(0.4
)
Stock-based compensation expense
0.2
0.2
0.1
State income tax
(47
)
(0.3
)
0.5
0.3
Other
0.1
0.4
0.2
Income tax provision
2,743
19.1
2,248
19.2
3,657
18.7
Valuation Adjustment
1.2
(4
)
(0.1
)
0.0
$
2,911
20.3
%
$
2,244
19.1
%
$
3,665
18.7
%
Note 13 - Employee Benefit Plans
The QNB Bank Retirement Savings Plan provides for elective employee contributions up to the maximum allowed by the IRS and a matching company contribution limited to 3%. In addition, the plan provides for safe harbor non-elective contributions of 5% of total compensation by QNB. QNB contributed a matching contribution of $400,000, $376,000 and $345,000 for the years ended December 31, 2024, 2023, and 2022, respectively, and a safe harbor contribution of $706,000 for 2024, $669,000 for 2023, and $606,000 for 2022.
QNB’s Employee Stock Purchase Plan (the Plan) offers eligible employees an opportunity to purchase shares of QNB Corp. common stock at a 10% discount from the lesser of fair market value on the first or last day of each offering period (as defined by the Plan). At the 2021 Annual Meeting, shareholders approved the 2021 Employee Stock Purchase Plan (the 2021 Plan), which authorizes the issuance of 30,000 shares. As of December 31, 2024, 18,792 shares were issued under the 2021 Plan. The 2021 Plan expires May 31, 2026.
Shares issued pursuant to the Plan were as follows:
Year ended December 31,
Shares
7,339
6,630
5,102
Price per share
$22.00 and $23.20
$23.10
$29.48 and $24.21
QNB implemented the Nonqualified Deferred Compensation Plan (NDCP) during 2023 for the benefit of a select group of its management or highly compensated employees. The purpose of the NDCP is to provide a deferred compensation vehicle to which QNB may credit discretionary amounts on behalf of the participants for recruitment and reward. QNB contributed $136,000 and $108,000 to the NDCP in 2024 and 2023, respectively. The NDCP liability was $244,000 at December 31, 2024.
Note 14 - Stock Option Plan and Non-Employee Director Compensation Plan
QNB has a stock option plan (the 2015 Plan) administered by a committee which consists of three or more members of QNB’s Board of Directors. The 2015 Plan provides for the granting of either (i) Non-Qualified Stock Options (NQSOs) or (ii) Incentive Stock Options (ISOs). The exercise price of an option, as defined by the 2015 Plan, is the fair market value of QNB’s common stock at the date of grant. The 2015 Plan provides for the exercise either in cash or in securities of the Company or in any combination thereof. The 2015 Plan, which expires March 15, 2025, authorizes the issuance of 300,000 shares. The time period by which any option is exercisable under this Plan is determined by the Committee but shall not commence before the expiration of six months after the date of grant. The 2015 Plan was amended, effective January 1, 2023, to increase the maximum term of any options granted under the plan from five years to ten years, and to also require that awards granted under the Plan will vest 20% each consecutive year commencing on the first anniversary date of the award unless otherwise specified in an award agreement. There were 252,550 options granted, 94,450 options forfeited, 20,825 options exercised and 137,275 options outstanding under the 2015 Plan as of December 31, 2024.
As of December 31, 2024, there was approximately $193,000 of unrecognized compensation cost related to unvested stock option awards granted. That cost is expected to be recognized over the next 27 months.
- 93 -
Stock option activity during 2024, 2023, and 2022 was as follows:
Number
of options
Weighted
average
exercise
price
Weighted
average
remaining
contractual
term
(in years)
Aggregate
intrinsic
value
Outstanding at December 31, 2021
113,950
$
37.58
Exercised
-
-
Forfeited
(34,150
)
37.07
Granted
29,350
37.26
Outstanding at December 31, 2022
109,150
37.65
Exercised
-
-
Forfeited
(22,600
)
43.15
Granted
35,000
29.51
Outstanding at December 31, 2023
121,550
34.29
Exercised
-
-
Forfeited
(24,275
)
37.69
Granted
40,000
23.40
Outstanding at December 31, 2024
137,275
$
30.51
5.24
$
Exercisable at December 31, 2024
45,315
$
33.74
1.76
$
As of December 31, 2024, outstanding stock options consist of the following:
Options
outstanding
Exercise
price
Remaining life
(in years)
Options
exercisable
Exercise
price
40,000
$
23.40
9.13
-
$
-
34,200
29.51
8.13
6,840
29.51
19,325
32.50
1.13
19,325
32.50
19,150
36.50
0.12
19,150
36.50
24,600
37.26
2.12
-
-
Outstanding at December 31, 2024
137,275
$
30.51
5.24
45,315
$
33.74
The intrinsic value related to total stock options exercised during 2024, 2023, and 2022 are as follows:
Intrinsic value of stock options exercised
$
-
$
-
$
-
The QNB Corp. 2023 Non-Employee Director Compensation Plan was approved by shareholders on May 23, 2023 (The "Director Compensation Plan"). The Director Compensation Plan authorized the issuance of 50,000 shares, is effective January 1, 2023 and expires on January 1, 2033. The Plan requires each non-employee director of the QNB, or any subsidiary of QNB designated by the Board (including QNB Bank), to receive $8,000 of their total annual compensation for service as a director in the form of the QNB’s common stock. Under the Director Compensation Plan, commencing with the six-month period ended June 30, 2023, each non-employee director will receive, in addition to any cash compensation otherwise payable, a semi-annual grant of such number of shares of the QNB’s common stock determined by dividing (i) the Semi-Annual Stock Payment Amount of $4,000 by (ii) the market value of a share of common stock determined as of June 30 or December 31 of any year, as applicable. Payments will be made under the Director Compensation Plan only to non-employee directors in office on the applicable payment date. As of December 31, 2024, 4,800 shares were issued to non-employee directors and there were 45,200 shares remaining under the Director Compensation Plan. Stock-based compensation expense related to the Director Compensation Plan was $72,000 and $80,000 for the for the years ended December 31, 2024 and 2023, respectively.
Note 15 - Related Party Transactions
QNB has had, and may be expected to have in the future, banking transactions in the ordinary course of business with its executive officers, directors, principal shareholders, their immediate families and affiliated companies. The following table presents activity and amounts due from directors, principal officers, and their related interests. All of these transactions were made in the ordinary course of business on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable
- 94 -
transactions with other persons. These transactions did not involve more than normal risk of collectability or present any other unfavorable features.
Balance, December 31, 2023
$
16,547
New loans
20,851
Repayments
(18,306
)
Balance, December 31, 2024
$
19,092
The following table provides additional information regarding transactions with related parties.
December 31,
Commitments to extend credit
$
5,627
$
5,763
Letters of credit
2,050
2,050
Deposits received
7,232
6,023
Note 16 - Commitments and Contingencies
Financial instruments with off-balance sheet risk:
In the normal course of business there are various legal proceedings, commitments, and contingent liabilities which are not reflected in the Consolidated Financial Statements. Management does not anticipate any material losses as a result of these transactions and activities. They include, among other things, commitments to extend credit and standby letters of credit. The maximum exposure to credit loss, which represents the possibility of sustaining a loss due to the failure of the other parties to a financial instrument to perform according to the terms of the contract, is represented by the contractual amount of these instruments. QNB uses the same lending standards and policies in making credit commitments as it does for on-balance sheet instruments. The activity is controlled through credit approvals, control limits, and monitoring procedures. QNB applies the resulting loss factors under the allowance for credit losses on loans to its unused commitments, assuming: additional funding for commercial lines up to the average line usage for non-pass rated lines with no current usage; and, additional funding up to the average line usage for retail lines with no current usage. This resulted in an allowance for credit losses on unused commitments of $87,000 at December 31, 2024 and $106,000 at December 31, 2023, which is included in other liabilities on the Consolidated Balance Sheets.
A summary of the Bank's financial instrument commitments is as follows:
December 31,
Commitments to extend credit and unused lines of credit
$
329,509
$
378,954
Standby letters of credit
19,018
18,820
Total financial instrument commitments
$
348,527
$
397,774
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require the payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. QNB evaluates each customer’s creditworthiness on a case-by-case basis.
Standby letters of credit are conditional commitments issued by the Bank to guarantee the financial or performance obligation of a customer to a third party. QNB’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for standby letters of credit is represented by the contractual amount of those instruments. The Bank uses the same credit policies in making conditional obligations as it does for on-balance sheet instruments. Standby letters of credit totaling $15,988,000 expire within one year. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending other loan commitments. The Bank requires collateral and personal guarantees supporting these letters of credit as deemed necessary. The amount of collateral obtained for letters of credit and commitments to extend credit is based on management’s credit evaluation of the customer. Collateral varies, but may include real estate, accounts receivable, marketable securities, pledged deposits, inventory or equipment. Management believes that the proceeds obtained through a liquidation of such collateral and the enforcement of personal guarantees would be sufficient to cover the maximum potential amount of future payments required under the corresponding guarantees. The amount of the liability as of December 31, 2024 and 2023 for guarantees under standby letters of credit issued is not material.
- 95 -
Other commitments:
QNB has committed to various operating leases for several of their branch and office facilities. Some of these leases include specific provisions relating to rent increases. A maturity analysis of the operating lease liabilities and reconciliation of the undiscounted cash flows to the total operating lease liability is as follows:
Operating Leases
$
Thereafter
1,926
Total undiscounted cashflows
4,137
Total discount on cashflows
(1,211
)
Total lease liabilities
$
2,926
Some of the leases contain renewal options to extend the initial terms of the lease for periods ranging from five to ten years and certain leases allow for multiple extensions, the commitment for such renewals is not included above if they have not been exercised as of December 31, 2024. Operating lease costs, which include common area maintenance costs not included in the minimum lease payments above, for the years ended December 31, 2024, 2023 and 2022, was $734,000, $723,000 and $712,000, respectively.
Note 17 - Accumulated Other Comprehensive Income (Loss)
The following shows the components of accumulated other comprehensive income (loss) during the periods ended December 31, 2024, 2023 and 2022:
December 31,
Unrealized net holding loss on available-for-sale securities
$
(79,832
)
$
(85,996
)
$
(102,692
)
Tax effect*
17,186
18,059
21,565
Accumulated other comprehensive (loss) income, net of tax
$
(62,646
)
$
(67,937
)
$
(81,127
)
* At blended rates of federal and state tax rates of 21.5%, 21.0% and 21.0%
The following table presents amounts reclassified out of accumulated other comprehensive income (loss) for the years ended December 31, 2024, 2023 and 2022:
Amount reclassified from accumulated other
comprehensive income (loss)
Details about accumulated other comprehensive (loss) income
Affected line item in statement of income
Realized net holding loss on available-for-sale securities
$
(1,096
)
$
(2,058
)
$
(139
)
Net (loss) gain on sales of investment securities
Tax effect*
Provision for income taxes
Total reclassification out of accumulated other
comprehensive (loss) income, net of tax
$
(866
)
$
(1,626
)
$
(110
)
Net of tax
** At blended rates of federal and state tax rates of 21.0%, 21.0% and 21.0%
Note 18 - Fair Value Measurements and Fair Values of Financial Instruments
FASB ASC 820, Fair Value Measurements and Disclosures, defines fair value as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants (fair values are not adjusted for transaction costs). ASC 820 also establishes a framework (fair value hierarchy) for measuring fair value under US GAAP and expands disclosures about fair value measurements.
- 96 -
ASC 820 establishes a fair value hierarchy that prioritizes the inputs to valuation methods used to measure fair value. 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 the fair value hierarchy are as follows:
Level 1:
Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
Level 2:
Quoted prices in markets that are not active, or inputs that are observable either directly or indirectly, for substantially the full term of the asset or liability.
Level 3:
Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported with little or no market activity).
An asset’s or liability’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.
The measurement of fair value should be consistent with one of the following valuation techniques: market approach, income approach, and/or cost approach. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities (including a business). For example, valuation techniques consistent with the market approach often use market multiples derived from a set of comparables. Multiples might lie in ranges with a different multiple for each comparable. The selection of where within the range the appropriate multiple falls requires judgment, considering factors specific to the measurement (qualitative and quantitative). Valuation techniques consistent with the market approach include matrix pricing. Matrix pricing is a mathematical technique used principally to value debt securities without relying exclusively on quoted prices for the specific securities, but rather by relying on the security’s relationship to other benchmark quoted securities.
For financial assets measured at fair value on a recurring and nonrecurring basis, the fair value measurements by level within the fair value hierarchy used were as follows:
December 31, 2024
Quoted prices
in active
markets
for identical
assets
(Level 1)
Significant
other
observable
input
(Level 2)
Significant
unobservable
inputs
(Level 3)
Balance at end
of period
Recurring fair value measurements
Securities available-for-sale
U.S. Treasuries
$
-
$
18,010
$
-
$
18,010
U.S. Government agency securities
-
66,908
-
66,908
State and municipal securities (1)
-
86,352
-
86,352
U.S. Government agencies and sponsored enterprises (GSEs):
Mortgage-backed securities (1)
-
198,510
-
198,510
Collateralized mortgage obligations (CMOs)
-
161,646
-
161,646
Corporate debt securities and money market funds
-
15,082
15,133
Total securities available-for-sale
-
546,508
546,559
Equity securities
-
-
-
-
Total recurring fair value measurements
$
-
$
546,508
$
$
546,559
Nonrecurring fair value measurements *
Collateral dependent loans
$
-
$
-
$
-
$
-
Mortgage servicing rights
-
-
Total nonrecurring fair value measurements
$
-
$
-
$
$
(1) Includes derivatives designated as fair value hedging instruments.
* impairment
- 97 -
December 31, 2023
Quoted prices
in active
markets
for identical
assets
(Level 1)
Significant
other
observable
input
(Level 2)
Significant
unobservable
inputs
(Level 3)
Balance at end
of period
Recurring fair value measurements
Securities available-for-sale
U.S. Treasuries
$
-
$
6,451
$
-
$
6,451
U.S. Government agency securities
-
74,122
-
74,122
State and municipal securities (1)
-
89,189
-
89,189
U.S. Government agencies and sponsored enterprises (GSEs):
Mortgage-backed securities (1)
-
224,238
-
224,238
Collateralized mortgage obligations (CMOs)
-
89,973
-
89,973
Corporate debt securities
-
6,157
6,209
Total securities available-for-sale
-
490,130
490,182
Equity securities
5,910
-
-
5,910
Total recurring fair value measurements
$
5,910
$
490,130
$
$
496,092
Nonrecurring fair value measurements *
Collateral dependent loans
$
-
$
-
$
$
Mortgage servicing rights
-
-
Total nonrecurring fair value measurements
$
-
$
-
$
$
(1) Includes derivatives designated as fair value hedging instruments.
* impairment
The following table presents additional quantitative information about assets measured at fair value on a nonrecurring basis and for which QNB has utilized Level 3 inputs to determine fair value:
Quantitative information about Level 3 fair value measurements
December 31, 2024
Fair value
Valuation
techniques
Unobservable
input
Value or range
of values
Collateral dependent loans
$
-
Appraisal of collateral
(1)
Appraisal adjustments
(2)
-100%
Liquidation expenses
(3)
%
Mortgage servicing rights
Discounted cash flow
Remaining term
0.4 to 29.2 yrs
Prepayment Speeds
90% to 350%
Discount rate
12.0% to 12.5%
Quantitative information about Level 3 fair value measurements
December 31, 2023
Fair value
Valuation
techniques
Unobservable
input
Value or range
of values
Collateral dependent loans
$
Appraisal of collateral
(1)
Appraisal adjustments
(2)
-20% to -100%
Liquidation expenses
(3)
-10%
Mortgage servicing rights
Discounted cash flow
Remaining term
1.5 to 29.9 yrs
Prepayment Speeds
104% to 214%
Discount rate
12.0% to 12.5%
(1)Fair value is primarily determined through appraisals of the underlying collateral by independent parties, which generally includes various level 3 inputs which are not always identifiable.
(2)Appraisals may be adjusted by management for qualitative factors such as economic conditions and the age of the appraisal. The range is presented as a percent of the initial appraised value.
(3)Appraisals and pending agreements of sale are adjusted by management for estimated liquidation expenses. The range is presented as a percent of the initial appraised value.
- 98 -
The following table presents additional information about the securities available-for-sale measured at fair value on a recurring basis and for which QNB utilized significant unobservable inputs (Level 3 inputs) to determine fair value for the year ended December 31:
Fair value measurements using
significant unobservable inputs (Level 3)
Securities available-for-sale
Balance, beginning of year
$
$
Payments received
(3
)
(1
)
Sale of securities
-
-
Total gains or losses (realized/unrealized)
Included in earnings
-
-
Included in other comprehensive
income
-
Transfers in and/or out of Level 3
-
-
Balance, end of year
$
$
There were also no transfers in or out of level 3 for the same periods. There were no losses included in earnings attributable to the change in unrealized gains or losses relating to the available-for-sale securities above with fair value measurements utilizing significant unobservable inputs for the years ended December 31, 2024 and 2023.
The Level 3 securities consist of one collateralized debt obligation security (“PreTSL”), which is backed by trust preferred securities issued by banks. The market for this security at December 31, 2024 was not active and markets for similar securities also are not active. The new issue market is also inactive and there are currently very few market participants who are willing and or able to transact for these securities.
Given conditions in the debt markets today and the absence of observable transactions in the secondary and new issue markets, we determined:
•The few observable transactions and market quotations that are available are not reliable for purposes of determining fair value at December 31, 2024;
•An income valuation approach technique (present value technique) that maximizes the use of relevant observable inputs and minimizes the use of unobservable inputs will be equally or more representative of fair value than the market approach valuation technique used at prior measurement dates; and
•PreTSLs will be classified within Level 3 of the fair value hierarchy because significant adjustments are required to determine fair value at the measurement date.
The Bank used an independent third party to value this security using a discounted cash flow analysis. Based on management’s review of the bond’s single underlying issuer, there are no expected credit losses or prepayments; cashflows used were contractual based on the Bloomberg YA screen. The assumed cashflows have been discounted using an estimated market discount rate based on the 30-year swap rate. The 30-year swap rate is used as the reference rate since it is indicative of market expectation for short-term rates in the future. This is consistent with the 30-year nature of PreTSL securities, which are priced using the 3-month LIBOR as a reference rate. The discount rate of 8.6% includes the risk-free rate, a credit component and a spread for illiquidity.
The following information should not be interpreted as an estimate of the fair value of QNB since a fair value calculation is only provided for a limited portion of QNB’s assets and liabilities. Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between QNB’s disclosures and those of other companies may not be meaningful.
The following methods and assumptions were used to estimate the fair values of each major classification of financial instrument and non-financial asset at December 31, 2024 and 2023:
Cash and cash equivalents, accrued interest receivable and accrued interest payable (carried at cost): The carrying amounts reported in the balance sheet approximate those assets’ fair value.
Investment securities (including derivative instruments) (carried at fair value): The fair value of securities is primarily determined by obtaining quoted market prices on nationally recognized securities exchanges (Level 1), or matrix pricing (Level 2), 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. Level 2 debt securities are valued by a third-party pricing service commonly used in the banking industry. Level 2 fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution date,
- 99 -
market consensus prepayment speeds, credit information and the security’s terms and conditions, among other things. For certain securities which are not traded in active markets or are subject to transfer restrictions, valuations are adjusted to reflect illiquidity and/or non-transferability, and such adjustments are generally based on available market evidence (Level 3). In the absence of such evidence, management’s best estimate is used. Management’s best estimate consists of both internal and external support on certain Level 3 investments. Cash flow models using a present value formula that includes assumptions market participants would use along with indicative exit pricing obtained from broker/dealers (where available) were used to support fair values of certain Level 3 investments.
The fair value of derivatives instruments designated as fair value hedges are based on estimates QNB would receive or pay to terminate the contracts or agreement, taking into account current interest rates and when appropriate, the credit-worthiness of the counterparties; these values are included in Level 2.
Restricted investment in stocks (carried at cost): The fair value of stock in ACBB, the FHLB, the SHCPFIC and VISA Class B-2 is the carrying amount, based on redemption provisions, and considers the limited marketability of such securities.
Loans Held for Sale (carried at lower of cost or fair value): The fair value of loans held for sale is determined, when possible, using quoted secondary market prices. If no such quoted prices exist, the fair value of a loan is determined using quoted prices for a similar loan or loans, adjusted for the specific attributes of that loan.
Loans Receivable (carried at cost): The fair values of loans are estimated using discounted cash flow analyses, using market rates at the balance sheet date that reflect the credit and interest rate-risk inherent in the loans. Projected future cash flows are calculated based upon contractual maturity or call dates, projected repayments and prepayments of principal. Generally, for variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values.
Collateral Dependent Loans (generally collateral value less cost to sell): Collateral dependent loans are loans for which the Company has measured generally based on the fair value of the loan’s collateral, less cost to sell. The 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.
Mortgage Servicing Rights (carried at lower of cost or fair value): The fair value of mortgage servicing rights is based on a valuation model that calculates the present value of estimated net servicing income. The mortgage servicing rights are stratified into tranches based on predominant characteristics, such as interest rate, loan type and investor type. The valuation incorporates assumptions that market participants would use in estimating future net servicing income.
Deposit liabilities (carried at cost): The fair value of deposits with no stated maturity (e.g. demand deposits, interest-bearing demand accounts, money market accounts and savings accounts) are by definition, equal to the amount payable on demand at the reporting date (i.e. their carrying amounts). This approach to estimating fair value excludes the significant benefit that results from the low-cost funding provided by such deposit liabilities, as compared to alternative sources of funding. Deposits with a stated maturity (time deposits) have been valued using the present value of cash flows discounted at rates approximating the current market for similar deposits.
Short-term borrowings (carried at cost): The carrying amount of short-term borrowings approximates their fair values.
Long-term debt (carried at cost): Long-term debt has stated maturities and have been valued using the present value of cash flows discounted at rates approximating the current market for similar debt instruments.
Subordinated debt (carried at cost): Subordinated debt has stated maturities and call dates and have been valued using the present value of cash flows discounted at rates approximating the current market for similar debt instruments.
Off-balance-sheet instruments (disclosed at cost): The fair value for the Bank’s off-balance sheet instruments (lending commitments and letters of credit) are based on fees currently charged in the market to enter into similar agreements, taking into account, the remaining terms of the agreements and the counterparties’ credit standing.
Management uses its best judgment in estimating the fair value of QNB’s financial instruments; however, there are inherent weaknesses in any estimation technique. Therefore, for substantially all financial instruments, the fair value estimates herein are not necessarily indicative of the amounts the Company could have realized in a sales transaction on the dates indicated. The estimated fair value amounts have been measured as of the respective period ends and have not been re-evaluated or updated for purposes of these financial statements subsequent to those respective dates. As such, the estimated fair values of these financial instruments subsequent to the respective reporting dates may be different than the amounts reported at each year end.
- 100 -
The estimated fair values and carrying amounts of QNB’s financial and off-balance sheet instruments are summarized as follows:
Fair value measurements
December 31, 2024
Carrying
amount
Fair value
Quoted
prices in
active
markets for
identical
assets
(Level 1)
Significant
other
observable
inputs
(Level 2)
Significant
unobservable
inputs
(Level 3)
Financial assets
Cash and cash equivalents
$
50,713
$
50,713
$
50,713
$
-
$
-
Investment securities:
Available-for-sale (1)
546,559
546,559
-
546,508
Equity
-
-
-
-
-
Restricted investment in bank stocks
5,436
5,436
-
5,436
-
Loand held for sale
-
-
Net loans
1,207,304
1,212,780
-
-
1,212,780
Mortgage servicing rights
-
-
Accrued interest receivable
4,965
4,965
-
4,965
-
Financial liabilities
Deposits with no stated maturities
$
1,247,083
$
1,247,083
$
1,247,083
$
-
$
-
Deposits with stated maturities
381,458
379,960
-
379,960
-
Short-term borrowings
53,844
53,844
53,844
-
-
Long-term debt
30,000
30,033
-
30,033
-
Subordinated debt
39,068
40,600
-
40,600
-
Accrued interest payable
7,580
7,580
-
7,580
-
Off-balance sheet instruments
Commitments to extend credit
$
-
$
-
$
-
$
-
$
-
Standby letters of credit
-
-
-
(1) Includes derivatives designated as fair value hedging instruments.
- 101 -
Fair value measurements
December 31, 2023
Carrying
amount
Fair value
Quoted
prices in
active
markets for
identical
assets
(Level 1)
Significant
other
observable
inputs
(Level 2)
Significant
unobservable
inputs
(Level 3)
Financial assets
Cash and cash equivalents
$
62,657
$
62,657
$
62,657
$
-
$
-
Investment securities:
Available-for-sale (1)
490,182
490,182
-
490,130
Equity
5,910
5,910
5,910
-
-
Restricted investment in bank stocks
2,730
2,730
-
2,730
-
Loand held for sale
-
-
Net loans
1,084,681
1,077,544
-
-
1,077,544
Mortgage servicing rights
-
-
Accrued interest receivable
6,101
6,101
-
6,101
-
Financial liabilities
Deposits with no stated maturities
$
1,173,732
$
1,173,732
$
1,173,732
$
-
$
-
Deposits with stated maturities
314,981
311,735
-
311,735
-
Short-term borrowings
94,094
94,094
94,094
-
-
Long-term debt
20,000
19,906
-
19,906
-
Accrued interest payable
5,294
5,294
-
5,294
-
Off-balance sheet instruments
Commitments to extend credit
$
-
$
-
$
-
$
-
$
-
Standby letters of credit
-
-
-
(1) Includes derivatives designated as fair value hedging instruments.
Note 19 - Derivatives and Hedging Activities
QNB's risk management objective with respect to derivative financial instruments is to hedge the risk of changes in the fair value of certain fixed-rate available-for-sale investment securities, included in a closed portfolio, for changes in the Secured Overnight Financing Rate ("SOFR"), to add stability to interest income and to manage its exposure to interest rate movements. The effective and ineffective portions of changes in the fair value of each derivative financial instrument is reported in accumulated other comprehensive (loss) income, net of tax, and are reclassified to interest income as interest payments are made or received on the hedged portfolios. QNB assesses the effectiveness of each hedging relationship using a regression analysis of prior periodic changes in fair value of both the hedge and the hedged item. In the assessment of hedge effectiveness, QNB will consider the likelihood of the counterparty's compliance with the contractual terms of the hedging derivative that could require the counterparty to make payments (counterparty default risk). If the likelihood that the counterparty will not default ceases to be probable, the hedge may no longer be highly effective and hedge ineffectiveness due to counterparty payment risk will be assessed.
The following table presents the notional amounts of derivatives designated as fair value hedging instruments at December 31, 2024 and 2023. QNB pledges cash or securities to cover the negative fair value of derivatives instruments. Cash collateral associated with the derivative instruments are not added to or netted against the fair value amounts.
- 102 -
At December 31, 2024
At December 31, 2023
Interest Rate Swaps-Fair Value Hedges
Interest Rate Swaps-Fair Value Hedges
Balance Sheet Classification
Notional Amount
Amortized Cost of Hedged Portfolio
Cumulative Amount of Fair Value Hedging Adjustment Included in Carrying Amount of Hedged Asset
Notional Amount
Amortized Cost of Hedged Portfolio
Cumulative Amount of Fair Value Hedging Adjustment Included in Carrying Amount of Hedged Asset
Investment Securities Available-for-sale:
State and municipal securities
$
75,000
$
96,709
$
1,566
$
75,000
$
97,373
$
(445
)
U.S. Government agencies and GSE mortgage backed securities
225,000
309,546
3,264
225,000
343,453
(1,304
)
Total
$
300,000
$
406,255
$
4,830
$
300,000
$
440,826
$
(1,749
)
The following table presents amounts of included in the Consolidated Statements on Income for derivatives designated as fair value hedging instruments for the years ended December 31, 2024 and 2023.
For the year ended
December 31,
Income Sheet Classification
Interest and dividends on available-for-sale and equity securities:
State and municipal securities
Recognized on fair value hedge
$
3,910
$
2,180
Recognized on hedge portfolio
(2,664
)
(1,470
)
Recognized on remeasurement of fair value hedge
U.S. Government agencies and GSE mortgage backed securities
Recognized on fair value hedge
11,731
6,517
Recognized on hedge portfolio
(8,243
)
(4,483
)
Recognized on remeasurement of fair value hedge
Total
$
4,778
$
2,801
- 103 -
Note 20 - Revenue Recognition from Contracts with Customer
QNB generally fully satisfies its performance obligations on its contracts with customers as services are rendered and the transaction prices are typically fixed; charged either on a periodic basis or based on activity. Because performance obligations are satisfied as services are rendered and the transaction prices are fixed, there is little judgment involved in applying Topic 606 that significantly affects the determination of the amount and timing of revenue from contracts with customers. The main types of revenue contracts included in non-interest income within the Consolidated Statements of Income are as follows:
•Fees for services to customers-fees include service charges on deposits which are included as liabilities in the consolidated statement of financial position and consist of transaction-based fees, stop payment fees, Automated Clearing House (ACH) fees, account maintenance fees, and overdraft services fees for various retail and business checking customers. These fees are charged as earned on the day of the transaction or within the month of the service, with the exception of Enhanced Account Analysis Fees, which are calculated on the previous month’s activity and assessed on the following month. The Enhanced Account Analysis Fees are currently being accrued; the revenue is currently being recorded in the month it is earned. Service charges on deposits are withdrawn directly from the customer’s account balance.
•ATM and debit card - fees are recognized at the time the transaction is executed as that is the point in time QNB fulfills the customer’s request.
•Retail brokerage and advisory-fee income and related expenses are accrued monthly to properly record the revenues in the month they are earned. Advisory fees are collected in advance on a quarterly basis. These advisory fees are received in the first month of the quarter for which the service is being performed and recognized evenly in each month of the quarter. Fees that are transaction based are recognized at the point in time that the transaction is executed (i.e. trade date).
•Merchant - QNB earns interchange fees from credit/debit cardholder transactions conducted through VISA/MasterCard payment networks. Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized monthly, concurrently with the transaction processing services provided to the cardholder within the month.
•Other-includes credit card fees, sales of checks to depositors, miscellaneous fees and gain/losses on sale of other real estate owned (OREO).
•Credit card fees are recognized monthly, concurrently with the transaction processing services provided to the cardholder within the month.
•Sales of checks to depositors are commissions earned from a third-party who provides checks to QNB’s customers. There is a pre-paid incentive with the third party which is recognized over the term of the contract. Other commissions on the sales of checks are recorded weekly.
•Miscellaneous fees, such as wire, cashier check and garnishment fees, are charged as earned on the day of the transaction.
•Gain (loss) on sales of OREO - QNB records a gain or loss from the sale of OREO when control of the property transfers to the buyer, which generally occurs at the time of an executed deed. When QNB finances the sale of OREO to the buyer, QNB assesses whether the buyer is committed to perform their obligations under the contract and whether collectability of the transaction price is probable. Once these criteria are met, the OREO asset is derecognized and the gain or loss on sale is recorded upon the transfer of control of the property to the buyer. In determining the gain or loss on the sale, QNB adjusts the transaction prices and related gain (loss) on sale if a significant financing component is present.
- 104 -
Note 21 - Parent Company Financial Information
Condensed financial statements of QNB Corp. only:
Balance Sheets
December 31,
Assets
Cash and cash equivalents
Balances with subsidiary or affiliated depository institutions
$
1,193
$
-
Balances with unrelated depository institutions
3,414
Investment securities:
Available-for-sale (amortized cost $18,004 and $6,448)
18,010
6,451
Equity securities (cost of $0 and $5,695)
-
5,910
Investment in subsidiary
120,576
77,173
Other assets
Total assets
$
143,867
$
90,851
Liabilities
Subordinated debt
$
39,068
$
-
Other liabilities
1,450
Total liabilities
40,518
Shareholders' equity
103,349
90,824
Total liabilities and shareholders' equity
$
143,867
$
90,851
Statements of Income
Year ended December 31,
Dividends from subsidiary
$
7,023
$
4,407
$
4,329
Interest, dividend and other income
Securities gains (losses)
(19
)
Net unrealized (loss) gain on investment equity securities
(215
)
(1,026
)
Total income
8,058
5,155
4,066
Expenses
1,923
Income before applicable income taxes and equity in
undistributed income of subsidiary
6,135
4,494
3,570
Provision for income tax (benefit) expense
(99
)
(1
)
(235
)
Income before equity in undistributed income of subsidiary
6,234
4,495
3,805
Equity in undistributed income of subsidiary
5,214
4,988
12,116
Net income
$
11,448
$
9,483
$
15,921
Statements of Comprehensive Income (Loss)
Year ended December 31,
Before
tax
amount
Tax
expense
(benefit)
Net of
tax
amount
Before
tax
amount
Tax
expense
(benefit)
Net of
tax
amount
Before
tax
amount
Tax
expense
(benefit)
Net of
tax
amount
Net income
$
14,359
$
2,911
$
11,448
$
11,727
$
2,244
$
9,483
$
19,586
$
3,665
$
15,921
Other comprehensive income/(loss):
Net unrealized holding gain/(loss) on available-for-sale securities:
Unrealized holding (loss)/gain arising during the period
5,068
4,425
14,638
3,074
11,564
(98,097
)
(20,600
)
(77,497
)
Reclassification adjustment for loss included in net income
1,096
2,058
1,626
Other comprehensive income/(loss):
6,164
5,291
16,696
3,506
13,190
(97,958
)
(20,571
)
(77,387
)
Total comprehensive income (loss)
$
20,523
$
3,784
$
16,739
$
28,423
$
5,750
$
22,673
$
(78,372
)
$
(16,906
)
$
(61,466
)
- 105 -
Statements of Cash Flows
Year ended December 31,
Operating Activities
Net income
$
11,448
$
9,483
$
15,921
Adjustments to reconcile net income to net cash provided
by operating activities:
Equity in undistributed income from subsidiary
(5,214
)
(4,988
)
(12,116
)
Net securities gains (losses)
(517
)
(405
)
Net unrealized loss (gain) on investment equity securities
(250
)
1,026
Stock-based compensation expense
Accretion of discounts on investment securities
(349
)
(174
)
(6
)
Amortization of deferred costs on subordinated debt
-
-
Increase (decrease) in other liabilities
(36
)
(266
)
Decrease (increase) in other assets
(122
)
(121
)
Deferred income tax (benefit) provision
(285
)
Net cash provided by operating activities
6,351
4,159
3,833
Investing activities
Purchase of investment equity securities
(1,170
)
(2,179
)
(1,860
)
Purchase of investment securities available-for-sale
(35,783
)
(14,275
)
(1,193
)
Proceeds from sale of investment equity securities
7,382
8,556
1,594
Proceeds from maturities of investment securities available-for-sale
24,575
7,800
Capital contribution to Bank
(32,900
)
-
-
Net cash (used) provided by investing activities
(37,896
)
(98
)
(559
)
Financing activities
Issuance of subordinated debt
40,000
-
-
Cash dividend paid
(4,798
)
(4,671
)
(4,498
)
Treasury stock purchase
-
-
(75
)
Proceeds from issuance of common stock
Net cash provided by (used) by financing activities
35,587
(3,849
)
(4,155
)
Increase (decrease) in cash and cash equivalents
4,042
(881
)
Cash and cash equivalents at beginning of year
1,234
Cash and cash equivalents at end of year
$
4,607
$
$
Note 22 - Regulatory Restrictions
Dividends payable by the Company and the Bank are subject to various limitations imposed by statutes, regulations and policies adopted by bank regulatory agencies. Under Pennsylvania and Federal banking law, the Bank is subject to certain restrictions on the amount of dividends that it may declare without prior regulatory approval. Under Federal Reserve regulations, the Bank is limited as to the amount it may lend affiliates, including the Company, unless such loans are collateralized by specific obligations.
Both the Company and the Bank are subject to regulatory capital requirements administered by Federal bank regulatory agencies. Failure to meet minimum capital requirements can initiate actions by regulators that could have an effect on the financial statements. Under the framework for prompt corrective action, both the Company and the Bank must meet capital guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance-sheet items. The capital amounts and classification are also subject to qualitative judgments by the regulators. Management believes, as of December 31, 2024, that the Company and the Bank met capital adequacy requirements to which they were subject.
- 106 -
The Bank is presently considered to be “well capitalized” under the regulatory framework. To be categorized as well capitalized, the Company and the Bank must maintain minimum ratios set forth in the table below. The Company and the Bank’s actual capital amounts and ratios are presented as follows:
Capital levels
Actual
Adequately capitalized
Well capitalized
As of December 31, 2024
Amount
Ratio
Amount
Ratio
Amount
Ratio
Total risk-based capital (to risk-weighted
assets):
Consolidated
$
214,826
15.56
%
110,480
8.00
%
138,100
10.00
%
Bank
192,057
13.92
110,396
8.00
137,995
10.00
Tier I capital (to risk-weighted assets):
Consolidated
165,995
12.02
82,860
6.00
82,860
6.00
Bank
183,226
13.28
82,797
6.00
110,396
8.00
Common equity tier 1 capital (to risk-
weighted assets):
Consolidated
165,995
12.02
62,145
4.50
N/A
N/A
Bank
183,226
13.28
62,098
4.50
89,696
6.50
Tier I capital (to average assets):
Consolidated
165,995
8.70
76,357
4.00
N/A
N/A
Bank
183,226
9.71
75,483
4.00
94,353
5.00
Capital levels
Actual
Adequately capitalized
Well capitalized
As of December 31, 2023
Amount
Ratio
Amount
Ratio
Amount
Ratio
Total risk-based capital (to risk-weighted
assets):
Consolidated
$
167,711
13.09
%
102,513
8.00
%
128,142
10.00
%
Bank
154,062
12.20
101,032
8.00
126,290
10.00
Tier I capital (to risk-weighted assets):
Consolidated
158,753
12.39
76,885
6.00
76,885
6.00
Bank
145,104
11.49
75,774
6.00
101,032
8.00
Common equity tier 1 capital (to risk-
weighted assets):
Consolidated
158,753
12.39
57,664
4.50
N/A
N/A
Bank
145,104
11.49
56,830
4.50
82,088
6.50
Tier I capital (to average assets):
Consolidated
158,753
8.92
71,185
4.00
N/A
N/A
Bank
145,104
8.18
70,961
4.00
88,701
5.00
- 107 -
Note 23 - Consolidated Quarterly Financial Data (Unaudited)
The unaudited quarterly results of operations for the years ended 2024 and 2023 are in the following table:
Quarters Ended 2024
Quarters Ended 2023
March 31
June 30
September 30
December 31
March 31
June 30
September 30
December 31
Interest income
$
19,569
$
20,345
$
21,945
$
22,209
$
15,463
$
15,865
$
18,497
$
19,257
Interest expense
9,401
9,753
10,818
11,234
5,046
6,532
8,284
9,065
Net interest income
10,168
10,592
11,127
10,975
10,417
9,333
10,213
10,192
(Reversal of) provision for credit losses
(86
)
(255
)
(1,805
)
Non-interest income
1,836
1,465
1,967
1,645
1,219
1,580
1,755
Non-interest expense
8,833
8,934
8,636
9,081
8,200
8,492
8,671
8,746
Income before income taxes
3,257
3,009
4,299
3,794
5,241
2,212
2,838
1,436
Provision for income taxes
1,123
Net Income
$
2,594
$
2,465
$
3,338
$
3,051
$
4,118
$
1,887
$
2,344
$
1,134
Earnings Per Share - basic *
$
0.71
$
0.67
$
0.91
$
0.83
$
1.15
$
0.52
$
0.65
$
0.31
Earnings Per Share - diluted *
$
0.71
$
0.67
$
0.91
$
0.83
$
1.15
$
0.52
$
0.65
$
0.31
* Due to rounding, quarterly earnings per share may not sum to annual earnings per share
- 108 -

---

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.

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ITEM 9A. CONTROLS AND PROCEDURES
ITEM 9A. CONTROLS AND PROCEDURES
a)Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of QNB’s Chief Executive Officer, or CEO, and Chief Financial Officer, or CFO (its principal executive officer and principal financial officer), management has evaluated the effectiveness of the design and operation of QNB’s disclosure controls and procedures as of December 31, 2024. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934, as amended, or the Exchange Act, is recorded, processed, summarized and reported within the time periods required by the Securities and Exchange Commission, or the SEC, and that such information is accumulated and communicated to QNB’s management, including the CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.
Based on and as of the date of such evaluation, our CEO and CFO concluded that the design and operation of our disclosure controls and procedures were effective as of the end of the period covered by this Report.
b)Internal Control over Financial Reporting
Information required by this item is set forth in Management’s Report included under Item 8, which is incorporated by reference into this item.
c)Changes in Internal Control over Financial Reporting
On May 14, 2013, COSO issued an updated version of its Internal Control - Integrated Framework, referred to as the 2013 COSO Framework. Management’s assessment of the overall effectiveness of our internal controls over financial reporting for the year ended December 31, 2024 was based on the 2013 COSO Framework.
There were no changes to the Company’s internal controls over financial reporting (as defined in Rule 13a-15(f) of the Securities Exchange Act) during the quarter ended December 31, 2024 that materially affected, or are reasonably likely to materially affect, the Company’s control over financial reporting.

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ITEM 9B. OTHER INFORMATION
ITEM 9B. OTHER INFORMATION
Securities Trading Plans of Directors and Executive Officers
During the three months ended December 31, 2024, none of QNB’s directors or executive officers adopted or terminated any contract, instruction or written plan for the purchase or sale of the QNB's securities that was intended to satisfy the affirmation defense conditions of Rule 10b5-1(c) or any "non-Rule 10b5-1 trading arrangement" as defined in Item 408 of SEC Regulation S-K.

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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by Item 10 is incorporated by reference to information appearing in QNB Corp.’s definitive proxy statement to be used in connection with the 2025 Annual Meeting of Shareholders under the captions:
•“Election of Directors”
•“Governance of the Company - Code of Ethics”
•“Meetings and Committees of the Board of Directors of QNB and the Bank”
•“Executive Officers of QNB and/or the Bank”
The Company has adopted a Code of Business Conduct and Ethics applicable to its CEO, CFO and Controller as well as its long-standing Code of Ethics which applies to all directors and employees. The codes are available on the Company’s website at www.qnbbank.com.

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ITEM 11. EXECUTIVE COMPENSATION
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated by reference to the information appearing in QNB Corp.’s definitive proxy statement to be used in connection with the 2025 Annual Meeting of Shareholders under the captions:
•“Compensation Committee Report”
•“Executive Compensation”
•“Director Compensation”
•“Compensation Tables”

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Equity Compensation Plan Information
The following table summarizes QNB’s equity compensation plan information as of December 31, 2024. Information is included for both equity compensation plans approved by QNB shareholders and equity compensation plans not approved by QNB shareholders.
Plan Category
Number of shares to be
issued upon exercise of
outstanding options,
warrants and rights
Weighted-average
exercise price of
outstanding options,
warrants and rights
Number of shares
available for future
issuance under equity
compensation plans
[excluding securities
reflected in column (a)]
(a)
(b)
(c)
Equity compensation plans approved by QNB shareholders:
2015 Stock option plan
137,275
$
30.51
141,900
2021 Employee stock purchase plan
-
-
8,767
Equity compensation plans not approved by QNB shareholders:
None
-
-
-
Total
137,275
$
30.51
150,667
Additional information required by Item 12 is incorporated by reference to the information appearing in QNB Corp.’s definitive proxy statement to be used in connection with the 2025 Annual Meeting of Shareholders under the captions:
•“Security Ownership of Certain Beneficial Owners and Management”
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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by Item 13 is incorporated by reference to the information appearing in QNB Corp.’s definitive proxy statement to be used in connection with the 2025 Annual Meeting of Shareholders under the captions:
•“Certain Relationships and Related Party Transactions”
•“Governance of the Company - Director Independence”

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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by Item 14 is incorporated by reference to the information appearing in QNB Corp.’s definitive proxy statement to be used in connection with the 2025 Annual Meeting of Shareholders under the captions:
•“Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of Independent Auditors”
•“Audit Fees, Audit Related Fees, Tax Fees, and All Other Fees”
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PART IV

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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a)1. Financial Statements
The following financial statements are included by reference in Part II, Item 8 hereof.
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Comprehensive Income (Loss)
Consolidated Statements of Shareholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
2. Financial Statement Schedules
The financial statement schedules required by this Item are omitted because the information is either inapplicable, not required or is in the Consolidated Financial Statements as a part of this Report.
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3. The following exhibits are incorporated by reference herein or filed with this Form 10-K:
3.1-
Articles of Incorporation of Registrant, as amended. (Incorporated by reference to Exhibit 3(i) of Registrant's Annual Report on Form 10-K, SEC File No. 0-17706, filed with the Commission on March 13, 2015)
3.2-
By-laws of Registrant, as amended January 26, 2021. (Incorporated by reference to Exhibit 3.1 of the Registrant's Report on Form 8-K, SEC File No. 0-17706, filed with the Commission on January 27, 2021)
4.1-
Description of Capital Securities (Incorporated by reference to Exhibit 4.1 of Registrant's Annual Report on Form 10-K, SEC File No. 0-17706, filed with the Commission on March 11, 2021)
4.2-
Form of Subordinated Note, dated August 30, 2024. (Incorporated be reference to Exhibit 4.1 of Registrant's Current Report on Form 8-K, SEC file No. 0-17706, filed with the Commission on September 3, 2024.)
10.1-
Employment Agreement between Registrant and David W. Freeman. (Incorporated by reference to Exhibit 10.1 of Registrant’s Current Report on Form 8-K, SEC File No. 0-17706, filed with the Commission on December 28, 2012)*
10.2-
Change of Control Agreement between Registrant and Scott G. Orzehoski. (Incorporated by reference to Exhibit 10.2 of the registrant's Annual Report on Form 10-K, SEC File No. 0-17706 filed with the Commission on March 14, 2023)*
10.3-
Change of Control Agreement between Registrant and Jeffrey Lehocky. (Incorporated by reference to Exhibit 10.1 of Registrant’s Annual Report on Form 8-K, SEC File No. 0-17706, filed with the Commission on November 3, 2022)*
10.4-
Change of Control Agreement between Registrant and Christopher T. Cattie. (Incorporated by reference to Exhibit 10.9 of Registrant’s Annual Report on Form 10-K, SEC File No. 0-17706, filed with the Commission on March 14, 2016)*
10.5-
Change of Control Agreement between Registrant and Courtney L. Covelens. (Incorporated by reference to Exhibit 10.5 of the registrant's Annual Report on Form 10-K, SEC File No. 0-17706 filed with the Commission on March 14, 2023)*
10.6-
Change of Control Agreement between Registrant and Christina S. McDonald. (Incorporated by reference to Exhibit 10.6 of the registrant's Annual Report on Form 10-K, SEC File No. 0-17706 filed with the Commission on March 14, 2023*
10.7-
QNB Corp 2015 Stock Incentive Plan (Incorporated by reference to Exhibit A to QNB Corp.’s proxy statement, filed April 15, 2015)*
10.8-
Amendment to the QNB Corp 2015 Stock Incentive Plan (Incorporated by reference to Exhibit 10.1 to QNB Corp.’s Form 8-K statement, filed October 31, 2022)*
10.9-
QNB Corp. 2021 Employee Stock Purchase Plan. (Incorporated by reference to Exhibit A to QNB Corp.’s proxy statement, filed with the Commission on April 15, 2021)
10.10-
QNB Corp. 2023 Non-Employee Director Compensation Plan. (Incorporated by reference to Appendix A to QNB Corp.'s proxy statement, filed April 11, 2023)*
10.11-
QNB Bank Nonqualified Deferred Compensation Plan effective August 1, 2023 (Incorporated by reference to Exhibit 10.11 of the registrant's Annual Report on Form 10-K, SEC File No. 00-17706 filed Commission on March 15, 2024)*.
10.12-
Form of Subordinated Note Purchase Agreement, dated August 30, 2024. (Incorporated by reference to Exhibit 10.1 of Registrant's Current Report on Form 8-K, SEC File no. 0-17706, filed with the Commission on September 3, 2024.)
19.1-
Policies and Procedures Governing Trading in Securities and Confidentiality of of Insider Information for Officers, Directors and Other Information Sensitive Employees
21.1-
Subsidiaries of the Registrant
23.1-
Consent of Independent Registered Public Accounting Firm
31.1-
Section 302 Certification of the Chief Executive Officer
31.2-
Section 302 Certification of the Chief Financial Officer
32.1-
Section 906 Certification of the Chief Executive Officer
32.2-
Section 906 Certification of the Chief Financial Officer
* Indicates compensatory plan or arrangement
The following Exhibits are being furnished ** as part of this report:
No.
Description
101.INS
Inline XBRL Instance Document **
101.SCH
Inline XBRL Taxonomy Extension Schema With Embedded Linkbase Documents **
Cover page interactive data file (formatted as inline XBRL and continued in Exhibit 101).
** These interactive data files are being furnished as part of this Annual Report, and, in accordance with Rule 402 of Regulation S-T, shall not be deemed filed for purposes of Section 11 or 12 of the Securities Act of 1933, as amended, or Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability under those sections.
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