UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2026
OR
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-17706
QNB Corp.
(Exact Name of Registrant as Specified in Its Charter)
Pennsylvania
23-2318082
(State or Other Jurisdiction of
Incorporation or Organization)
(I.R.S. Employer
Identification No.)
15 North Third Street, P.O. Box 9005 Quakertown, PA
18951-9005
(Address of Principal Executive Offices)
(Zip Code)
(215) 538-5600
Registrant's Telephone Number, Including Area Code
Not Applicable
Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report
Securities registered pursuant to Section 12(b) of the Act: None.
Title of each class
Trading
Symbol(s)
Name of each exchange on which registered
Common Stock
QNBC
N/A
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
☐
Accelerated filer
Non-accelerated filer
☒
Smaller Reporting Company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
Class
Outstanding at July 31, 2026
Common Stock, par value $0.625
4,979,570
QNB CORP. AND SUBSIDIARY
QUARTER ENDED JUNE 30, 2026
INDEX
PART I - FINANCIAL INFORMATION
ITEM 1.
CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
PAGE
Consolidated Balance Sheets at June 30, 2026 and December 31, 2025
2
Consolidated Statements of Income for the Three and Six Months Ended June 30, 2026 and 2025
3
Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2026 and 2025
4
Consolidated Statement of Shareholders’ Equity for the Three and Six Months Ended June 30, 2026 and 2025
5
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2026 and 2025
7
Notes to Consolidated Financial Statements
8
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
47
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
66
ITEM 4.
CONTROLS AND PROCEDURES
67
PART II - OTHER INFORMATION
LEGAL PROCEEDINGS
68
ITEM 1A.
RISK FACTORS
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
DEFAULTS UPON SENIOR SECURITIES
MINE SAFETY DISCLOSURES
ITEM 5.
OTHER INFORMATION
ITEM 6.
EXHIBITS
69
SIGNATURES
70
CERTIFICATIONS
1
QNB Corp. and Subsidiary
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(current period unaudited)
June 30, 2026
December 31, 2025
Assets
Cash and due from banks
$
26,799
12,900
Interest-bearing deposits in banks
52,541
37,397
Total cash and cash equivalents
79,340
50,297
Investments:
Available-for-sale (amortized cost $572,778 and $602,047)
516,978
542,830
Equity securities
268
—
Restricted investment in stocks
7,287
6,663
Loans held-for-sale
395
246
Loans receivable
1,716,599
1,262,074
Allowance for credit losses on loans
(12,770
)
(9,215
Loans receivable, net
1,703,829
1,252,859
Bank-owned life insurance
18,628
12,275
Premises and equipment, net
25,273
16,886
Goodwill
11,164
Other intangible assets
7,358
346
Accrued interest receivable
6,399
4,839
Net deferred tax assets
13,384
13,993
Other assets
8,667
4,771
Total assets
2,398,970
1,906,005
Liabilities
Deposits
Demand, non-interest bearing
266,120
189,957
Interest-bearing demand
626,897
534,854
Money market
388,326
260,742
Savings
352,077
281,161
Time less than or equal to $250
353,948
316,760
Time greater than $250
79,783
59,037
Total deposits
2,067,151
1,642,511
Short-term borrowings
75,428
80,601
Subordinated debt
54,018
39,268
Accrued interest payable
4,337
5,050
Other liabilities
14,522
9,012
Total liabilities
2,215,456
1,776,442
Shareholders' Equity
Common stock, par value $0.625 per share;
authorized 10,000,000 shares; 5,185,847 shares and 3,947,561
shares issued; 4,977,161 and 3,738,875 shares outstanding
3,241
2,467
Surplus
77,334
29,206
Retained earnings
150,764
148,397
Accumulated other comprehensive loss, net of tax
(43,788
(46,470
Treasury stock, at cost; 208,686 and 208,686 shares
(4,037
Total shareholders' equity
183,514
129,563
Total liabilities and shareholders' equity
The accompanying notes are an integral part of the consolidated financial statements.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data - unaudited)
For the Three Months Ended June 30,
For the Six Months Ended June 30,
2026
2025
Interest income
Interest and fees on loans
26,632
18,067
45,258
35,382
Interest and dividends on available-for-sale & equity securities:
Taxable
3,120
3,970
6,263
7,983
Tax-exempt
368
355
723
708
Interest on interest-bearing balances and other interest income
511
718
863
1,235
Total interest income
30,631
23,110
53,107
45,308
Interest expense
Interest on deposits
2,660
2,315
4,654
4,715
2,691
1,862
4,294
3,680
1,361
901
2,264
1,794
2,956
3,159
5,594
6,442
736
527
1,266
1,045
Interest on short-term borrowings
596
689
1,358
1,145
Interest on long-term debt
423
Interest on subordinated debt
1,280
938
2,217
1,875
Total interest expense
12,280
10,458
21,647
21,119
Net interest income
18,351
12,652
31,460
24,189
Provision (reversal) for credit losses
222
(146
522
404
Net interest income after provision (reversal) for credit losses
18,129
12,798
30,938
23,785
Non-interest income
Fees for services to customers
658
485
1,171
932
ATM and debit card
811
724
1,552
1,380
Retail brokerage and advisory
148
140
351
281
133
81
225
168
Merchant
82
163
157
Net gain on sale of securities
96
Net unrealized gain on equity securities
Net loss on interest-rate swap termination
(303
Net gain on sale of loans
36
44
22
Other
211
136
373
296
Total non-interest income
2,139
1,652
3,940
3,236
Non-interest expense
Salaries and employee benefits
7,200
5,251
12,816
10,283
Net occupancy
767
546
1,452
1,160
Furniture and equipment
1,422
1,135
2,629
2,257
Marketing
242
250
600
439
Third party services
1,193
788
2,007
1,450
Telephone, postage and supplies
150
120
273
244
State taxes
441
236
646
503
FDIC insurance premiums
302
269
494
543
Merger-related expenses
3,084
3,972
1,635
967
2,685
2,052
Total non-interest expense
16,436
9,562
27,574
18,931
Income before income taxes
3,832
4,888
7,304
8,090
Provision for income taxes
817
1,005
1,524
1,629
Net income
3,015
3,883
5,780
6,461
Earnings per share - basic
0.61
1.05
1.32
1.74
Earnings per share - diluted
0.60
1.04
Cash dividends per share
0.39
0.38
0.78
0.76
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands - unaudited)
Before tax amount
Tax expense (benefit)
Net of tax amount
Other comprehensive gain:
Net unrealized holding gains on available-for-sale securities:
Unrealized holding gains arising during the period
4,229
909
3,320
2,794
2,194
Reclassification adjustment for gains included in net income
(96
(20
(76
Other comprehensive gain
4,133
889
3,244
Total comprehensive income
7,965
1,706
6,259
7,682
1,605
6,077
3,513
755
2,758
6,927
1,490
5,437
3,417
735
2,682
10,721
2,259
8,462
15,017
3,119
11,898
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
For the Three Months Ended June 30, 2026 and 2025
Accumulated
Number of
(unaudited)
Shares
Common
Retained
Comprehensive
Treasury
(in thousands, except share and per share data)
Outstanding
Stock
Earnings
Loss
Total
Balance, April 1, 2026
3,784,227
2,496
30,268
149,689
(47,032
131,384
Impact of The Victory Bancorp, Inc. Acquisition
1,178,182
46,367
47,103
Other comprehensive income, net of tax
Cash dividends declared ($0.39 per share)
(1,940
Stock issued in connection with dividend reinvestment and stock purchase plan
4,642
197
200
Stock issued for employee stock purchase plan
2,712
84
86
Stock issued for options exercised
7,398
237
241
Stock-based compensation expense
181
Balance, June 30, 2026
4,977,161
Balance, April 1, 2025
3,709,497
2,449
28,085
141,129
(59,403
108,223
Cash dividends declared ($0.38 per share)
(1,411
6,026
198
202
2,950
83
85
100
91
Balance, June 30, 2025
3,718,573
2,455
28,459
143,601
(57,209
113,269
For the Six Months Ended June 30, 2026 and 2025
Balance, January 1, 2026
3,738,875
Cash dividends declared ($0.78 per share)
(3,413
9,778
6
390
396
32,148
20
999
1,019
Issuance of restricted stock awards
13,000
(8
Stock issued for Non-Employee Director Compensation
2,466
(2
298
Balance, January 1, 2025
3,696,616
2,441
27,633
139,958
(62,646
103,349
Cash dividends declared ($0.76 per share)
(2,818
12,629
425
433
5,325
155
158
1,053
(1
164
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, unaudited)
Operating Activities
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
927
890
Provision for credit losses
Reserve for make whole agreement
23
Net gain on investment debit and equity securities
(268
(44
(22
Proceeds from sales of residential mortgages held-for-sale
2,565
668
Origination of residential mortgages held-for-sale
(2,670
(2,005
Increase in cash surrender value of bank-owned life insurance
(225
(168
Amortization of core deposit intangible asset
332
-
Deferred income tax (income) expense
(917
32
Net (decrease) increase in income taxes payable
(754
199
Net decrease (increase) in accrued interest receivable
31
(37
Fair value remeasurements on interest rate swap
42
(70
Amortization of mortgage servicing rights and change in valuation allowance
21
Net amortization of premiums and discounts on investment securities
252
520
Net amortization of deferred costs on subordinated debt
Net decrease in accrued interest payable
(988
(1,329
Operating lease payments
(395
(323
(Increase) decrease in other assets
(398
456
Increase (Decrease) in other liabilities
812
(1,217
Net cash provided by operating activities
4,950
4,744
Investing Activities
Proceeds from payments, maturities and calls of investments available-for-sale
68,094
49,226
Proceeds from sale of investment securities available-for-sale
6,752
Purchases of investments available-for-sale
(33,449
(40,452
Proceeds from redemption of investment in restricted stock
6,776
3,270
Purchases of restricted stock
(5,948
(3,606
Net increase in loans
(45,540
(1,615
Net purchases of premises and equipment
(1,525
(413
Cash received in acquisition
20,553
Net cash provided by investing activities
15,713
6,410
Financing Activities
Net increase in non-interest-bearing deposits
5,002
17,961
Net increase in interest-bearing deposits
10,463
5,165
Net (decrease) increase in short-term borrowings
(5,173
13,620
Repayments of long-term debt
(30,000
Cash dividends paid, net of reinvestment
(3,078
(2,489
Proceeds from issuance of common stock
1,166
347
Net cash provided by financing activities
8,380
4,604
Increase in cash and cash equivalents
29,043
15,758
Cash and cash equivalents at beginning of year
50,713
Cash and cash equivalents at end of period
66,471
Supplemental Cash Flow Disclosures
Interest paid
22,360
22,448
Federal income taxes paid, net of refunds received
2,000
1,400
State income taxes paid, net of refunds received
80
Supplemental Schedule of Non-cash Investing and Financing Activities
Transfer of loans from held-for-sale to loans receivable
857
Right-of-use assets obtained in exchange for new operating lease liabilities
3,420
Non-cash consideration transferred for the Victory Acquisition
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements include the accounts of QNB Corp. and its wholly-owned subsidiary, QNB Bank (the “Bank”). The consolidated entity is referred to herein as “QNB” or the “Company”. All significant intercompany accounts and transactions are eliminated in the consolidated financial statements.
These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in QNB's 2025 Annual Report incorporated in the Form 10-K. Operating results for the three- and six-month periods ended June 30, 2026 are not necessarily indicative of the results that may be expected for the year ending December 31, 2026.
The unaudited consolidated financial statements reflect all adjustments which, in the opinion of management, are necessary for a fair presentation of the results of operations for the period and are of a normal and recurring nature.
Tabular information, other than share and per share data, is presented in thousands of dollars.
In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities at the dates of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from such estimates.
QNB has evaluated events and transactions occurring subsequent to the balance sheet date of June 30, 2026 for items that should potentially be recognized or disclosed in these consolidated financial statements and has not identified any subsequent events.
2. RECENT ACCOUNTING PRONOUNCEMENTS AND UPDATES TO SIGNIFICANT ACCOUNTING POLICIES
Recent Accounting Policies Not Yet Adopted
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 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. The SEC’s climate-related disclosure rules are the subject of litigation by certain states and private parties, which has been consolidated in the federal Eighth Circuit Court of Appeals. The SEC previously stayed effectiveness of the rules pending completion of that litigation. On March 27, 2025, the SEC announced that it had voted to withdraw its defense of its climate-related disclosure rules. On April 4, 2025, the intervenor states filed a motion to hold the litigation in abeyance until the SEC determines whether it will amend or rescind the climate-related disclosure rules through the rulemaking process. On May 29, 2026, the SEC officially proposed to rescind its 2024 climate-related disclosure rules in their entirety. The formal rescission process has not been completed and the original rules never took effect.
On June 26, 2024, the Financial Accounting Standards Board (FASB) voted to issue final rules this year that will require public companies to provide enhanced detailed information about their income statement expenses. On November 4, 2024, FASB issued ASU 2024-03—Income Statement—Reporting Comprehensive Income, requiring companies to break out certain expense items, such as employee compensation and purchases of inventory, in footnotes to their income statements. On January 6, 2025, the FASB issued an amendment to ASU 2024-03 to clarify the effective date. The amendment clarifies that all public business entities are required to adopt the guidance in annual reporting periods beginning after December 15, 2026, and interim periods within annual reporting periods 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.
Recent Accounting Policies Adopted
QNB adopted FASB issued ASU 2025-08--Finance Instruments--Credit Losses (Topic 326): Purchased Loans, amending ASC 326 to expand use of the gross-up approach in ASC 326, Credit Losses, to all purchased seasoned loans (PSLs). This approach was previously only applied to purchased credit deteriorated (PCD) assets. Purchased seasoned loans are defined as loans that are not PCD assets, credit card receivables, debt securities or trade receivables that are acquired in a business combination, or obtained through a transfer that is not a business combination or initially recognized through the consolidation of a variable interest entity, if certain seasoning criteria are met. A loan is considered seasoned if it is obtained more than 90 days after its origination date and the transferee was not involved in the origination. QNB first applied ASU 2025-08 as of April 1, 2026, the effective date on which QNB closed the merger with The Victory Bancorp, Inc. (the "Victory Merger").
Updates to Significant Accounting Polices
QNB updated its accounting policies for loans in conjunction with the adoption of ASU 2025-08. Additionally, QNB added policies on goodwill and other acquired identifiable intangible assets, and the amortization and accretion purchase accounting fair value adjustments on loan and certificate of deposits as detailed below.
Loans
Loans are generally reported at the principal balance 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 acquired by QNB through a purchase or business combination are initially evaluated for classification as PCD. Acquired loans are classified as PCD when there is evidence of more than insignificant deterioration in credit quality since origination. Loans that do not meet the criteria to be classified as PCD, are evaluated to determine whether they qualify as PSLs. Loans acquired in a business combination are automatically deemed PSLs.
PCD loans and PSLs are accounted for under the gross-up approach, as of the date of acquisition, recognizing an allowance for credit losses (ACL) and an offsetting entry added, or gross-up, to the fair value of the loan; resulting in an initial amortized cost basis in an amount equal to the sum of the purchase price plus the ACL. The difference between the amortized cost basis of the PCD and PSLs (as adjusted for expected credit losses) and the unpaid principal balance is recognized as a noncredit discount or premium and accreted or amortized into interest income over the life of the loan as an adjustment to yield.
Goodwill and Core Deposit Intangibles
QNB accounts for its acquisitions using the purchase accounting method. The total purchase price is allocated to the estimated fair values of assets acquired and liabilities assumed, including recognized intangible assets. The excess in the purchase price exceeding the fair value of net assets acquired is recorded as goodwill.
Core deposit intangibles are a measure of the value of checking, money market and savings deposits acquired in business combinations accounted for under the purchase method. Core deposit intangibles are amortized using the sum of the year's digits over their estimated useful lives of up to ten years.
QNB will perform an assessment of goodwill and other identifiable intangible assets at least annually, or more often if events and circumstances indicate, that an impairment test should be performed.
3. ACQUISITION OF THE VICTORY BANCORP, INC.
On April 1, 2026, QNB closed the Victory Merger in an all-stock transaction, including cash paid for fractional shares, valued at approximately $47,106,000. Victory was headquartered in Limerick, Pennsylvania, with two full-service bank branches and two loans production offices. Under the terms of the merger agreement, each outstanding share of Victory’s common stock was converted into 0.55 shares of QNB common stock. QNB issued 1,178,182 shares of its common stock to holders of Victory common stock as of the acquisition date, representing a value per common share of $39.98, based on the closing price of QNB's common stock on March 31,
9
2026. Fractional shares were not issued and were instead paid in cash. Upon closing of the transaction, all shares of Victory common stock were cancelled and retired.
The Victory Merger constituted a business combination and was accounted for under the acquisition method of accounting. Accordingly, the assets acquired and liabilities assumed were recorded at their estimated fair values as of the acquisition date. Fair value estimates, including those for loans, intangible assets, deposits, bank premises and equipment, other liabilities, certain tax-related matters and goodwill, are preliminary and subject to change as management continues to identify and assess information regarding the assets acquired and liabilities assumed, including more comprehensive information and management review of any new information that may arise as a result of integration activities.
The following table reflects total consideration transferred for Victory’s net assets and the amounts of acquired identifiable assets and
liabilities assumed at their preliminary estimated fair values as of the acquisition date:
( $ in thousands)
Purchase price
47,106
Recognized amounts of identifiable assets acquired and liabilities assumed:
Cash and equivalents
Investment securities available-for-sale
15,605
408,379
(3,020
405,359
Premises and equipment
3,580
6,128
Core deposit intangible
7,302
1,591
2,322
Total assets acquired
463,892
Liabilities:
409,165
17,650
Total liabilities assumed
427,950
Net identifiable assets acquired
35,942
In connection with the merger, QNB recognized approximately $11,164,000 of goodwill, which is not expected to be tax-deductible.
The following is a description of the methods used to determine the estimated fair values of significant assets and liabilities:
Cash and cash equivalents: Carrying amounts approximate fair value.
Investment securities: Fair values were based on quoted market prices, where available. If quoted market prices were not available, fair value estimates were based on observable inputs including quoted market prices for similar instruments, quoted market prices that are not in an active market or other inputs that are observable in the market. In the absence of observable inputs, fair value was estimated based on pricing models and/or discounted cashflow methodologies.
Restricted investment in stocks: Includes ACBB, Federal Home Loan Bank and the Federal Reserve Bank stock. The carrying amount, based on redemption provisions, and the limited marketability of such securities, approximate fair value.
Loans, net: Fair values were estimated individually based on a discounted cashflow methodology that considered factors including the type of loan and related collateral, fixed or variable interest rate, remaining term, credit quality ratings or scores. Loans with similar characteristics were pooled together to determine certain inputs or assumptions when applying various valuation techniques. The discount rates used for loans were based on an evaluation of current market rates for new originations of comparable loans and a market participant’s required rate of return to purchase similar assets, including adjustments for liquidity and credit quality when necessary. The
10
initial amortized cost basis of acquired loans also included the initial ACL amount for instruments designated as PCD loans or PSLs. The following table reflects the unpaid principal balance, fair value and initial amortized cost basis of acquired loans as of April 1, 2026:
($ in thousands)
PCD
PSLs
Fair Value of acquired loans
33,114
372,207
38
Adjustments for credit losses
178
2,842
3,020
Initial amortized cost basis of acquired loans
33,292
375,049
Unpaid principal balance of acquired loans
33,356
376,749
410,143
Noncredit discount, net.
(64
(1,700
(1,764
Premises and equipment: Fair values for bank premises and equipment were generally based on appraisals of the property values.
Bank owned life insurance: Recognized at their cash surrender value which approximates fair value.
Core Deposit Intangible: The fair value was estimated based on a discounted cashflow methodology that considered expected customer attrition rates, net maintenance cost of the deposit base, the alternative cost of funds and the interest costs associated with customer deposits. The core deposit intangible is being amortized on an accelerated basis over its estimated useful life.
Deposits: The fair values for time deposits were estimated using a discounted cashflow methodology whereby the contractual remaining cash flows were discounted using market rates currently being offered for time deposits of similar maturities. For transactional deposits, carrying amounts approximate fair value.
Subordinated debt: 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.
Unaudited Pro Forma Information
Results for the three and six months of 2026 include three months of post-merger activity related to the Victory Merger. The acquired business was fully integrated into the Company's operations. As a result, it is impracticable to separately identify the revenue and earnings attributable to the acquired business since the acquisition date. The following table presented unaudited pro forma information as if the Victory Merger occurred on January 1, 2026. This unaudited pro forma information combines the historical condensed consolidated results of operations of QNB and Victory after giving effect to certain adjustments, including purchase accounting adjustments, amortization of intangible assets and merger costs, and the related income tax effects. Comparative historical information for the 2025 interim period is not readily available for Victory.
The unaudited pro forma information does not necessarily reflect the results of operations that would have occurred had QNB acquired Victory on January 1, 2025. Furthermore, cost savings and other synergies related the merger are not reflected in the unaudited amounts for the six months ended June 30, 2026.
For the Six Months Ended June 30, 2026
35,503
Non-interest income (loss)
3,470
2,218
Merger Related Charges
Direct merger-related charges associated with the Victory Merger were expensed as incurred by QNB. These merger-related charges primarily related to employee change in control and termination expenses, system conversions and other costs of integrating and conforming the acquired operations with those of QNB. The table below summarizes the direct merger-related charges recorded in the Condensed Consolidated Statements of Income:
11
For the Three Months Ended June 30, 2026
Legal and consultant expenses
131
Compensation and benefits
1,033
1,055
Contract termination fees
654
Regulatory filings and special shareholder meeting costs
146
235
Success Fee
117
System Conversion/Technology Costs
884
1,444
Communications
119
121
4. STOCK-BASED COMPENSATION AND SHAREHOLDERS’ EQUITY
All Stock-based compensation plans are administered by a Board committee (the “Committee”).
2015 Stock Incentive Plan (the "2015 Plan"), under which both qualified and non-qualified stock options were granted periodically to certain employees, was authorized to issue 300,000 shares. 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 2015 Plan expired February 24, 2025.
The 2025 Stock Incentive Plan (the "2025 Plan"), authorizing the issuance of 500,000 shares, was approved at the Company's 2025 Meeting of Shareholders. Under the 2025 Plan, qualified stock options may be granted to certain employees and non-qualified stock options, restricted stock and awards may be granted to certain employees and non-employee directors. Compensation cost will be measured using the fair value of an award on the grant date and recognized over the service period, which is usually the vesting period. The 2025 Plan will expire on May 19, 2035.
As part of the acquisition of Victory, QNB assumed outstanding stock options equating to 628 shares. These options had been fully expensed by Victory and no additional fair value adjustments were necessary. Subsequently, all options were exercised in the second quarter of 2026. These options are excluded from the tables below.
Stock-based compensation expense related to the 2015 Plan and 2025 Plan was $101,000 and $35,000 for the three months ended June 30, 2026 and 2025, respectively, and $170,000 and $65,000 for the six months ended June 30, 2026 and 2025, respectively. At June 30, 2026, there was approximately $680,000 of unrecognized compensation cost related to unvested share-based compensation on stock option award grants that is expected to be recognized over the next 28 months; and $414,000 or unrecognized compensation cost related to share-based compensation on restricted stock awards that is expected to be recognized over the next 17 months.
Options were granted to certain employees at prices equal to the market value of the stock on the date the options are granted. The time period during which any option is exercisable under the 2025 Plan was determined by the Committee but shall not commence before the expiration of six months after the date of grant. Stock option 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. Restrict Stock Awards granted under the plan will vest over three year; however, some of the awards are performance-based and will vest over three years based of performance factors. As of June 30, 2026 there were 50,000 total options and awards granted and outstanding and 450,000 shares available for future grants under the 2025 Plan. As of June 30, 2026 there were 142,675 options outstanding under the 2015 Plan.
The following assumptions were used in the option pricing model in determining the fair value of options granted during the period:
Risk free interest rate
3.82
%
4.44
Dividend yield
4.35
4.36
Volatility
26.34
24.96
Expected life (years)
6.50
12
The risk-free interest rate was selected based upon yields of U.S. Treasury securities with a term approximating the expected life of the option being valued. Historical information was the basis for the selection of the expected dividend yield, expected volatility and expected lives of the options.
The fair market value of options granted in the six months ended June 30, 2026 and 2025 was $7.17 and $6.64, respectively.
Stock option activity during the six months ended June 30, 2026 and 2025 is as follows:
Number of options
Weighted averageexerciseprice
Weightedaverageremaining contractual term (in years)
Aggregate intrinsic value
Outstanding at December 31, 2025
176,145
31.07
2,251
Granted
37,000
38.00
216
Exercised
(31,520
32.00
Forfeited
(1,950
32.50
Outstanding at June 30, 2026
179,675
32.32
7.51
2,072
Exercisable at June 30, 2026
51,315
31.85
4.99
616
Weightedaverageremaining contractual term(in years)
Outstanding at December 31, 2024
137,275
30.51
578
68,975
33.50
13
(5,325
29.69
(21,050
36.04
Outstanding at June 30, 2025
179,875
31.04
7.11
565
Exercisable at June 30, 2025
60,280
32.80
3.32
141
Restricted stock award activity during the six months ended June 30, 2026 is as follows; there were no restricted stock awards granted prior to February 2026:
Weighted averageFair Value
570
Vested
9.7
Awards Nonvested at June 30, 2026
QNB maintained a 2021 Employee Stock Purchase Plan (the "2021 ESPP") offering 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). There was $32,000 and $13,000 of stock-based compensation expense related to the 2021 ESPP for the both three and six months ended June 30, 2026 and 2025, respectively. The 2021 ESPP authorized the issuance of 30,000 shares. As of June 30, 2026 there were 607 shares remaining under the 2021 ESPP Plan; however the 2021 ESPP Plan expired May 31, 2026. At the 2026 Annual Shareholders Meeting, the 2026 Employee Stock Purchase Plan (the "2026 ESPP") was approved and authorized the issuance of 50,000 shares. The 2026 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).
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 initially required each non-employee director of 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; this amount was increased to $19,230 for 2025 to align director compensation with our peers. 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 (which is one-half of the annual compensation paid in stock) 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 June 30, 2026, 10,884 shares were issued to non-employee directors and there were 39,116 shares remaining under the Plan. Stock-based compensation expense related to the Director Compensation Plan was $96,000 for the six months ended June 30, 2026 and $86,000 for the six months ended June 30, 2025.
5. EARNINGS PER SHARE & SHARE REPURCHASE PLAN
The following sets forth the computation of basic and diluted earnings per share:
Numerator for basic and diluted earnings per share - net income
Denominator for basic earnings per share - weighted average shares outstanding
4,968,665
3,710,878
4,368,001
3,705,396
Effect of dilutive securities - employee stock options
32,945
13,930
22,152
13,117
Denominator for diluted earnings per share - adjusted weighted average shares outstanding
5,001,610
3,724,808
4,390,153
3,718,513
There were 37,000 and 92,075 stock options that were anti-dilutive for the three-month periods ended June 30, 2026 and 2025, respectively. There were 37,000 and 92,075 stock options that were anti-dilutive for the six-month periods ended June 30, 2026 and 2025, 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, increased in amount on February 9, 2009 to 100,000 shares, and subsequently increased on April 27, 2021 up to 200,000 shares of common stock in the open market or privately negotiated transactions. The repurchase authorization has no termination date. There were no shares repurchased during the six months ended June 30, 2026 and 2025. As of June 30, 2026, 102,000 shares were repurchased under this authorization at an average price of $24.93 and a total cost of approximately $2,543,000.
6. COMPREHENSIVE INCOME (LOSS)
The following shows the components of accumulated other comprehensive loss at June 30, 2026 and December 31, 2025:
June 30,
December 31,
Unrealized net holding losses on available-for-sale securities
(55,800
(59,217
Tax effect
12,012
12,747
14
The following table presents amounts reclassified out of accumulated other comprehensive loss for the three and six months ended June 30, 2026 and 2025:
Amount reclassified fromaccumulated othercomprehensive gain
Details about accumulated other comprehensive income
Affected line item in statement of income
Unrealized net holding loss on available-for-sale securities
Net gain (loss) on sales of investments available-for-sale
Total reclassification out of accumulated other comprehensive gain, net of tax
76
Net of tax
Amount reclassified fromaccumulated othercomprehensive loss
Unrealized net holding gains on available-for-sale securities
7. INVESTMENT SECURITIES
Available-For-Sale Securities
The amortized cost and estimated fair values of investment securities available-for-sale at June 30, 2026 and December 31, 2025 were as follows:
Fair
Gross unrealized holding
Gross unrealized fair value hedge
Amortized
value
gains
losses
gains (1)
cost
U.S. Treasury
17,990
17,992
U.S. Government agency
70,762
(5,211
75,973
State and municipal
89,597
(15,500
841
104,256
U.S. Government agencies and sponsored enterprises (GSEs):
Mortgage-backed
172,676
(26,132
1,659
197,149
Collateralized mortgage obligations (CMOs)
136,756
162
(11,503
148,097
Corporate debt and money market funds
29,197
337
(451
29,311
Total investment debt securities available-for-sale
499
(58,799
2,500
572,778
(1) See Note 13
15
Gross
unrealized
holding
fair value hedge
losses (1)
21,583
21,577
70,850
(5,118
75,968
88,787
(15,326
(583
104,696
182,208
(25,767
(1,109
209,084
149,203
19
(11,170
160,354
30,199
314
(483
30,368
339
(57,864
(1,692
602,047
The amortized cost and estimated fair value of securities available-for-sale by contractual maturity at June 30, 2026 is 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. Maturities for mortgage-backed securities and collateralized mortgage obligations are dependent upon the interest rate environment and prepayments of the underlying loans.
Fair value
Amortized cost
Due in one year or less
25,461
25,505
Due after one year through five years
74,206
79,459
Due after five years through ten years
54,284
57,286
Due after ten years
53,595
65,282
207,546
227,532
Residential mortgage-backed securities
Collateralized mortgage obligations
Proceeds from sales of investment securities available-for-sale were approximately $6,752,000 and $0 for the six months ended June 30, 2026 and 2025, respectively.
At June 30, 2026 and December 31, 2025, investment securities available-for-sale totaling approximately $296,472,000 and $234,159,000, respectively, were pledged as collateral for repurchase agreements and deposits of public funds.
The following table presents information related to the Company’s gains and losses on the sales and calls of securities available-for-sale, and losses recognized for the impairment of these investments. Gains and losses on available-for-sale securities are computed on the specific identification method and included in non-interest income. Gross realized losses on debt securities are net of impairment charges:
Gross realized gains
109
Gross realized losses
(13
Impairment
Total net gains (losses) on AFS securities
The tax applicable to the net realized gains for the three-month periods ended June 30, 2026 and 2025 was $21,000 and $0, respectively. The tax applicable to the net realized gains for the six-month periods ended June 30, 2026 and 2025 was $21,000 and $0, respectively.
QNB follows the accounting guidance in FASB ASC 326-10 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 that the entity will not have to sell the
16
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 loss. No credit impairments were recognized on debt securities during the six months ended June 30, 2026 and 2025, respectively.
The following table indicates the length of time individual debt securities have been in a continuous unrealized loss position as of June 30, 2026 and December 31, 2025:
Less than 12 months
12 months or longer
No. of
Unrealized
securities
3,000
35
188
1,508
(19
87,172
(15,481
88,680
153
34
170,838
170,872
58,651
(281
78,104
(11,222
136,755
26
26,053
(447
2,652
(4
28,705
553
89,246
(749
409,528
(58,050
498,774
187
89,085
151
183,138
149
22,618
(91
111,962
(11,079
134,580
Corporate debt and money markets
9,232
(404
1,421
(79
10,653
528
31,850
(495
456,456
(57,369
488,306
Management evaluates debt securities, which are comprised of U.S. Treasury, U.S. Government agencies, state and municipalities, mortgage-backed securities, CMOs and corporate debt securities, for impairment and considers the current economic conditions, interest rates and the bond rating of each security. The unrealized losses at June 30, 2026 in U.S. Government agency securities, state and municipal securities, mortgage-backed securities, CMOs and corporate debt securities are primarily the result 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
The Company’s investment in marketable equity securities primarily consisted of investments with readily determinable fair values in large cap stock companies. Changes in fair value are recorded in unrealized gain/(losses) in non-interest income. The Company sold its equity portfolio during 2024.
Visa, Inc. commenced their second exchange offer for all of its outstanding shares of Class B-2 common stock for a combination of Class B-3 and Class C common shares. The exchange offer was optional for current Class B-2 holders and expired at 11:59 pm on May 8, 2026. QNB elected to participate in the exchange offer including a required makewhole agreement pursuant which participating Class B-2 stockholders agree to reimburse Visa for future obligations relating to certain litigation which, but for participation in the exchange offer, would have otherwise been the responsibility of the Class B-2 stockholder as a result of its ownership of the Class B-2 common stock. QNB had 3,251 Class B-2 common shares with a cost basis of $0. Under the exchange offer, received 1,625 if Class B-3 common shares and 612 Class C shares. The Class C shares are convertible to Class A shares. 204 of the Class C shares were
17
converted to 204 Class A shares in the second quarter. QNB recorded an unrealized gain on the Class A shares in the second quarter of 2026 of $268,000 and a reserve of the makewhole agreement of $23,000.
8. RESTRICTED INVESTMENTS IN STOCK
Restricted investment in stocks includes Federal Home Loan Bank of Pittsburgh (“FHLB”) with a carrying cost of $3,453,000, Atlantic Community Bankers Bank (“ACBB”) stock with a carrying cost of $72,000, VISA Class B-3 and Class C stock with a carrying cost of $0, and Senior Housing Crime Prevention Investment Corporation ("SHCPFIC") preferred stock of $1,000,000 at June 30, 2026. FHLB and ACBB stock were issued to the Bank as a requirement to facilitate the Bank’s participation in borrowing and other banking services. Due to the Victory Merger, QNB acquired $611,000 of FHLB and $60,000 of ACBB stock. QNB also acquired $781,000 of Federal Reserve Bank stock which was redeemed during the second quarter of 2026. The SHCPFIC stock was issued to the Bank to enable its participation in a Community Reinvestment Act qualified investment. The Bank owns 100 shares of preferred stock of SHCPFIC. These shares are not transferable without the consent of SHCPFIC and do not have a readily-determinable fair value. The Bank’s investment in FHLB stock may fluctuate, as it is based on the member banks’ use of FHLB’s services.
The Bank has a $2,762,000 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.
As noted in Footnote 7 above, Visa, Inc. commenced their second exchange offer for all of its outstanding shares of Class B-2 common stock for a combination of Class B-2 and Class C common shares. At June 30, 2026, QNB held 1,625 Class B-3 and 408 Class C common shares; the original shares were 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-3 stock will be converted to Visa Class A shares using a conversion factor (1.4953 as of June 25, 2026), 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-3 shares are permitted to transact in Class B-3. The Class C shares are restricted and will converted to marketable Class A shares over the next quarter as the restrictions are released. Due to the lack of orderly trades and public information of such trades, Visa Class B-3 stock did not have a readily determinable fair value at June 30, 2026. Due to the restrictions on the Class C shares, they will not have a readily determinable fair value until they are converted to Class A shares.
These restricted investments are carried at cost and evaluated for impairment periodically. As of June 30, 2026, there was no impairment associated with these shares.
9. LOANS & ALLOWANCE FOR CREDIT LOSSES ON LOANS
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 and 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 consists of residential mortgage loans that 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.
The Company maintains an allowance for credit losses on loans (ACL), which is intended to absorb estimated lifetime losses in the outstanding loan portfolio. 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 ACL to a level considered necessary by management.
The ACL is measured on a pool basis when similar risk characteristics exist; these pools are identified in the first table below. The Company establishes a general valuation allowance for performing loans, including non-accrual student loans. QNB calculates each segment's historical loss rate using a full economic cycle of loan balance and historical loss experienced. 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
18
by estimating the inherent loss on each credit after giving consideration to the value of underlying collateral. The general component is adjusted for qualitative factors. These qualitative risk factors include:
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. The Company’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 the Company's allowance for credit losses on loans. Such agencies may require the Company 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 Accounting Principles Generally Accepted in the United States of America (U.S. GAAP.) If circumstances differ substantially from the current calculation, future adjustments to the allowance for credit losses on loans 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 ACL will not be necessary should the quality of any loans deteriorate.
Major classes of loans are as follows and are inclusive of net unaccreted purchase discounts of $1,476,000 at June 30, 2026; there were no purchase discounts at December 31, 2025:
Commercial:
Commercial and industrial
168,849
139,452
Construction and land development
139,253
93,862
Real estate secured by multi-family properties
211,485
153,319
Real estate secured by owner-occupied properties
258,205
161,130
Real estate secured by other commercial properties
476,718
364,486
Revolving real estate secured by 1-4 family properties-business
11,475
8,065
Real estate secured by 1st lien on 1-4 family properties-business
190,410
115,114
Real estate secured by junior lien on 1-4 family properties-business
7,279
5,248
State and political subdivisions
21,128
20,646
Retail:
1-4 family residential mortgages
120,878
119,759
Construction-individual
2,343
2,307
Revolving home equity secured by 1-4 family properties-personal
85,526
56,073
Real estate secured by 1st lien on 1-4 family properties-personal
6,468
7,178
Real estate secured by junior lien on 1-4 family properties-personal
12,178
12,937
Student loans
1,713
1,228
Overdrafts
582
Other consumer
2,576
1,455
Total loans
1,717,066
1,262,511
Net unearned (fees) costs
(467
(437
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.
The Company engages in a variety of lending activities, including commercial, residential real estate and consumer transactions. The Company 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 consumer 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 kinds 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 eastern 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 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.
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.
The Company 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.
The Company 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.
The Company 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.
The Company 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 risk rating to all loans in the portfolio 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. The Company 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 with an independent review of the Company’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 adequacy of the allowance for credit losses on loans.
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 Company’s internal risk rating system as of June 30, 2026 and December 31, 2025:
Term Loans by Origination Year
2024
2023
2022
Prior
Revolving
Commercial Loans
Commercial and industrial:
Risk rating
Pass
9,330
21,664
13,846
8,845
9,213
77,394
158,643
Special mention
338
1,277
2,720
4,335
Substandard
201
1,833
537
1,598
1,011
624
5,871
Doubtful
Total commercial and industrial
9,531
23,497
14,383
10,781
10,557
19,362
80,738
Construction and land development:
23,565
49,099
39,777
13,667
2,260
4,445
132,813
6,421
6,440
Total construction and land development
20,088
4,464
Real estate secured by multi-family properties:
23,092
36,968
20,021
17,567
34,375
70,561
202,584
6,200
452
2,249
8,901
Total real estate secured by multi-family properties
26,221
18,019
72,810
Real estate secured by owner-occupied properties:
13,694
42,027
31,225
26,429
41,056
83,134
237,565
59
628
687
50
10,228
2,275
1,628
5,426
19,953
Total real estate secured by owner-occupied properties
13,803
52,255
33,500
26,775
42,684
89,188
Real estate secured by other commercial properties:
38,025
70,432
66,389
59,377
86,331
151,422
471,976
500
822
636
2,784
4,742
Total real estate secured by other commercial properties
38,525
67,211
60,013
154,206
Revolving real estate secured by 1-4 family properties-business:
11,425
Total revolving real estate secured by 1-4 family properties-business
Real estate secured by 1st lien on 1-4 family properties-business:
14,085
34,401
25,845
25,955
39,550
47,664
187,500
1,477
321
962
2,910
Total real estate secured by 1st lien on 1-4 family properties-business
34,551
27,432
39,871
48,626
Real estate secured by junior lien on 1-4 family properties-business:
1,458
2,756
493
555
1,460
6,990
276
289
Total real estate secured by junior lien on 1-4 family properties-business
544
568
State and political subdivisions:
2,599
2,816
1,960
11,535
Total state and political subdivision
Total Commercial Loans:
125,848
260,163
199,331
154,551
213,340
388,572
88,819
1,430,624
5,022
751
12,211
10,110
10,930
2,029
12,451
674
49,156
Total Commercial loans
126,658
272,374
209,441
165,819
216,646
401,651
92,213
1,484,802
Current Period Gross Charge-Offs:
2021
17,291
14,966
8,183
7,424
2,600
6,993
77,629
135,086
357
1,702
2,059
916
518
77
74
688
18,207
9,058
7,501
2,634
7,067
80,019
21,131
45,435
16,140
1,405
2,492
87,541
6,296
25
6,321
22,436
2,517
36,520
11,313
9,415
26,537
21,516
39,548
144,849
5,729
458
2,283
8,470
17,042
9,873
41,831
21,614
13,606
12,974
23,265
21,711
49,785
142,955
722
10,001
1,883
5,569
17,453
25,148
56,076
63,437
47,036
41,150
73,158
39,243
96,950
360,974
645
2,867
3,512
41,795
99,817
21,377
8,649
15,925
23,651
16,550
28,060
114,212
24
327
317
258
902
23,978
16,867
28,318
2,362
207
507
432
1,333
4,994
239
254
446
447
1,959
3,511
3,248
9,671
Total state and political subdivisions
185,691
144,723
106,551
155,405
106,426
234,832
85,694
1,019,322
2,781
10,917
5,968
7,917
2,302
11,076
39,219
196,608
150,691
114,825
157,707
106,777
246,630
88,084
1,061,322
For retail loans, the Company evaluates credit quality based on the performance of the individual credits. The following tables present the recorded investment in the retail classes of the loan portfolio based on payment activity as of June 30, 2026 and December 31, 2025:
Retail Loans
1-4 family residential mortgages:
Payment performance
Performing
4,954
12,670
10,994
11,539
11,963
67,078
119,198
Nonperforming
770
1,680
Total 1-4 family residential mortgages
12,672
10,998
11,541
12,865
67,848
Construction-individual:
429
1,914
Total construction-individual
Revolving home equity secured by 1-4 family properties-personal:
85,230
Total revolving home equity secured by 1-4 family properties-personal
Real estate secured by 1st lien on 1-4 family properties-personal:
376
1,685
400
509
796
2,591
6,357
90
111
Total real estate secured by 1st lien on 1-4 family properties-personal
886
2,612
Real estate secured by junior lien on 1-4 family properties-personal:
925
2,270
3,723
1,839
534
2,873
12,164
Total real estate secured by junior lien on 1-4 family properties-personal
548
Student loans:
Total student loans
Overdrafts:
Total overdrafts
Other consumer:
261
372
230
1,119
2,560
Total other consumer
112
Total Retail Loans:
6,945
18,911
15,575
14,117
13,317
74,340
86,931
230,136
1,006
818
2,128
Total Retail Loans
18,913
15,579
14,119
14,323
75,158
87,227
232,264
27
12,930
11,088
11,643
13,202
26,786
43,295
118,944
815
44,110
55,768
305
2,206
437
852
924
2,102
7,065
113
942
2,125
2,545
4,366
2,015
599
592
2,805
12,922
614
369
41
29
1,435
20,357
16,419
14,471
14,694
28,331
49,448
56,201
199,921
105
858
1,268
14,799
50,306
56,506
201,189
92
28
Revolving home equity lines of credit secured by 1-4 family properties termed out during 2026 and 2025 were $133,330 and $1,095,000 all of 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 summarized by the past due status as of June 30, 2026 and December 31, 2025:
30-59 dayspast due
60-89 dayspast due
90 days ormore pastdue
Total pastdue loans
Current
Total loansreceivable
114
168,735
1,676
137,577
1,536
209,949
1,181
257,024
475,896
413
947
189,463
1,103
119,775
63
85,327
116
6,352
171
1,542
39
519
2,559
5,117
132
2,696
7,945
1,709,121
129
114,985
5,009
127
118,754
134
55,939
7,062
101
12,836
1,216
234
1,446
727
556
480
1,763
1,260,748
As previously discussed, the Company 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 problem loans. A loan is considered collateral dependent when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. 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 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 less costs to sell if the loan is collateral dependent.
An ACL is established for a non-accrual loan if its carrying value exceeds its estimated fair value. The estimated fair values of the majority of the Company’s non-accrual loans are measured based on the estimated fair value of the loan’s collateral less costs to sell.
For commercial loans secured by real estate, estimated fair values are determined primarily through third-party appraisals. When a real estate secured loan becomes individually evaluated, 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.
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 discloses 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 June 30, 2026 and December 31, 2025:
30
90 Days or More Past Due-Still Accruing
Nonaccrual With No Specifically-Related ACL
Nonaccrual With Related ACL
Total Nonaccrual Loans
496
515
122
179
231
279
10,151
267
10,418
539
290
1,704
7,089
8,793
QNB recognized interest income of $10,000 and $0 on non-accrual loans during the six months ended June 30, 2026 and 2025, respectively.
The following tables present the collateral-dependent loans by loan category at June 30, 2026 and December 31, 2025:
Real Estate Secured
Other (1)
Deficiency in Collateral
Total Collateral Dependent Nonaccrual Loans
98
9,728
512
167
10,407
(1) Secured by business assets, personal property and equipment or guarantees
405
4,925
1,371
110
7,124
1,649
33
Activity in the allowance for credit losses on loans for the three and six months ended June 30, 2026 and 2025 are as follows:
Balance, beginning of period
ACL on PSLs at acquisition
ACL on PCD loans at acquisition
Provision for (credit to) loan losses
Charge-offs
Recoveries
Balance, endof period
775
144
1,049
2,471
227
(1,260
1,440
2,269
638
(219
697
470
55
1,594
1,041
729
2,174
1,297
781
(66
2,051
308
186
125
72
379
56
79
205
(3
291
(10
48
94
(12
218
(24
12,770
For the Three Months Ended June 30, 2025
Credit loss expense (reversal)
810
821
1,099
1,977
(139
1,838
845
2,028
(67
1,991
1,471
(107
1,366
320
356
160
278
(26
257
(31
9,298
(145
(32
9,169
744
2,165
(954
2,344
(294
716
353
1,042
728
1,252
(23
45
248
138
165
58
226
(39
40
9,215
521
For the Six Months Ended June 30, 2025
829
(25
1,336
(201
2,012
(174
853
1,142
819
1,238
123
323
143
310
37
8,744
406
(56
75
Since the implementation of ASC 326 on January 1, 2023, the Company may give 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. 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 during the periods ended June 30, 2026 and December 31, 2025 of the loans modified to borrowers experiencing financial difficulty, disaggregated by loan class, type of concession granted and the financial effect of the modification:
During the period ended:
Amortized Cost Basis
% of Total Loan Class
Financial Effect
Payment Modification to Interest Only for Three Months and Deferal of Payment for One Month
C&I Other
764
0.45
Temporary reduction of three principal payments and one principal and interest payment with no extension of term
Payment Modification to Interest Only for 12 Months
0.37
Temporary reduction of principal payments with no extension of term
Construction Other and Land Development
6.71
6,814
There were no payment defaults during the six months ended June 30, 2026 and 2025 on FDMs. However, FDMs of $6,917,000 modified in 2025 remain on nonaccrual status with no related allowance due to collateral surplus. At June 30, 2026, there were $2,160,000 in commitments to extend credit on the FDMs.
The Company has five relationships with mortgage loans secured by residential real estate totaling $714,000 for which foreclosure proceedings are in process at June 30, 2026.
10. FAIR VALUE MEASUREMENTS AND DISCLOSURES
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 U.S. GAAP and expands disclosures about fair value measurements.
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.
The following tables sets forth QNB’s financial assets measured at fair value on a recurring and nonrecurring basis and the fair value measurements by level within the fair value hierarchy as of June 30, 2026 and December 31, 2025:
Quoted prices in active markets for identical assets(Level 1)
Significant other observable inputs(Level 2)
Significant unobservable inputs(Level 3)
Balance at endof period
Recurring fair value measurements
Securities available-for-sale
U.S. Treasury securities
U.S. Government agency securities
State and municipal securities (1)
Mortgage-backed securities (1)
Corporate debt securities and money market funds
29,148
49
Total available-for-sale and equity securities
516,929
517,246
Total recurring fair value measurements
Nonrecurring fair value measurements
Collateral dependent loans
Total nonrecurring fair value measurements
30,149
Total securities available-for-sale
542,780
5,440
Mortgage servicing rights
5,441
(1) Includes derivatives designated as fair value hedges.
There were no transfers in and out of Level 1, Level 2, or Level 3 fair value measurements during the six months ended June 30, 2026. 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 three- or six-month periods ended June 30, 2026.
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
Valuationtechniques
Unobservableinputs
Value or rangeof values
Appraisal of collateral
(1)
Appraisal adjustments
(2)
-20% to -100%
Liquidation expenses
(3)
-10
-10 to -100%
Discounted cash flow
Remaining term
2.8 to 29.1 yrs
Prepayment speeds
92% to 199%
Discount rate
12.0% to 12.5%
The following table presents additional information about the available-for-sale securities 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 six months ended June 30, 2026 and 2025:
Fair value measurementsusing significantunobservable inputs(Level 3)
Balance, January 1,
52
Payments received
Total gains or losses (realized/unrealized)
Included in earnings
Included in other comprehensive (loss) income
Transfers in and/or out of Level 3
Balance, June 30,
The Level 3 securities consist of one collateralized debt obligation security, the PreTSL security, which is backed by trust preferred securities issued by banks. The market for this security at June 30, 2026 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 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:
QNB used an independent third party to value this security using a discounted cash flow analysis. Based on management’s review of the bond’s three underlying issuers, 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 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 the PreTSL security, which is priced using the 3-month LIBOR as a reference rate. The discount rate of 8.89% 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 the entire Company 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 June 30, 2026 and December 31, 2025:
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, 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 Atlantic Community Bankers Bank, the Federal Home Loan Bank, VISA Class B-2 SHCPFIC and NEIF is the carrying amount, based on redemption provisions, and considers the limited marketability of and restrictions on 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 liquidity, 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). 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 values for QNB’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 the Company’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 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 period end.
The estimated fair values and carrying amounts of the Company’s financial and off-balance sheet instruments are summarized as follows:
Fair value measurements
Carryingamount
Quoted prices in activemarkets for identical assets(Level 1)
Significant other observable inputs (Level 2)
Significant unobservable inputs (Level 3)
Financial assets
Cash and cash equivalents
Investment securities:
Available-for-sale (1)
Restricted investment in bank stocks
Loans held for sale
Net loans
1,706,522
344
Financial liabilities
Deposits with no stated maturities
1,633,420
Deposits with stated maturities
433,731
433,342
56,673
Off-balance sheet instruments
Commitments to extend credit
Standby letters of credit
51
249
1,265,478
530
1,266,714
375,797
374,988
40,541
43
11. 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 $221,000, inclusive of $144,000 related to the acquisition of Victory, at June 30, 2026 and $76,000 at December 31, 2025, which is included in other liabilities on the Consolidated Balance Sheets.
A summary of the Company's financial instrument commitments is as follows:
Commitments to extend credit and unused lines of credit
510,477
401,073
21,188
19,522
Total financial instrument commitments
531,665
420,595
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 Company 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 Company uses the same credit policies in making conditional obligations as it does for on-balance sheet instruments. Standby letters of credit of $17,681,000 will 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 Company requires collateral and personal guarantees supporting these letters of credit as deemed necessary. 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 June 30, 2026 and December 31, 2025 for guarantees under standby letters of credit issued is not material.
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.
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. 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. There was one new lease during the six months ended June 30, 2026 and there were three leases assumed in the acquisition of Victory; QNB recorded right-of-use assets of $3,420,000.
12. REGULATORY RESTRICTIONS
Dividends payable by QNB and the Bank are subject to various limitations imposed by statutes, regulations and policies adopted by bank regulatory agencies. Under Federal and Pennsylvania 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 QNB, unless such loans are collateralized by specific obligations.
Both QNB and the Bank are subject to regulatory capital requirements administered by Federal banking 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, 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 June 30, 2026, that QNB and the Bank met capital adequacy requirements to which they were subject.
As of the most recent notification, the primary regulator of the Bank considered it to be “well capitalized” under the regulatory framework. There are no conditions or events since that notification that management believes have changed the classification. To be categorized as well capitalized, bank holding companies and insured depository institutions must maintain minimum ratios as set forth in the following table below.
The Company and the Bank’s actual capital amounts and ratios are presented as follows:
Capital levels
Actual
Adequately capitalized
Well capitalized
At June 30, 2026
Amount
Ratio
Total risk-based capital (to risk-weighted assets):
The Company
271,546
14.30
151,933
8.00
189,916
10.00
Bank
249,126
13.13
151,769
189,711
Tier 1 capital (to risk-weighted assets):
209,705
11.04
113,949
6.00
236,135
12.45
113,826
Common equity tier 1 capital (to risk-weighted assets):
85,462
4.50
85,370
123,312
Tier 1 capital (to average assets):
8.65
96,955
4.00
9.84
95,972
119,965
5.00
At December 31, 2025
225,324
15.86
113,675
142,093
201,024
14.15
113,623
142,029
176,033
12.39
85,256
191,733
13.50
85,217
63,942
63,913
92,319
9.02
78,045
9.94
77,131
96,414
13. 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 investment securities, included in a closed portfolio, for changes in the Secured Overnight Financing Rate ("SOFR"). The effective portions of changes in the fair value of each derivative financial instrument are 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 tables present the notional amounts of derivatives designated as fair value hedging instruments at June 30, 2026, and December 31, 2025. 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.
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
Investment Securities Available-for-sale:
State and municipal securities
75,000
95,706
96,037
U.S. Government agencies and GSE mortgage-backed securities
183,535
260,796
201,364
276,329
258,535
356,502
276,364
372,366
The following table presents amounts included in the Consolidated Statements of Income for derivatives designated as fair value hedging instruments for the three and six months ended June 30, 2026 and 2025.
Income Sheet Classification
Interest and dividends on available-for-sale and equity securities:
Recognized on fair value hedge
(668
(1,342
1,646
Recognized on hedge portfolio
683
1,385
(1,343
Recognized on remeasurement of fair value hedge
(1,715
2,430
(3,529
4,898
1,715
(2,034
3,552
(4,094
(34
601
1,176
QNB assumed an interest-rate swap due to the Victory acquisition. This $30,000,000 notional value swap hedged the interest-rate on loans where the Bank paid a fixed rate and received a variable SOFR. QNB decided to terminate the swap in lieu of redesignation and recorded a loss of $303,000 in the second quarter of 2026.
14. 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
46
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.
QNB acquired $17,650,000 of subordinated debt upon the completion of the Victory Merger. QNB had owned $3,000,000 of Victory's 2024 Subordinated Notes which was cancelled upon acquisition. The following table summarizes the details of the subordinated debt acquired and still remaining at June 30, 2026:
Balance at June 30, 2026
Original Issue Date
Maturity Date
Rate
Reedemable
2019 Subordinated Notes
March 14, 2019
March 14, 2029
3-Month SOFR + 390 bp
Yes, in whole or part upon occurrence of specific events with the agreement
2020 Subordinated Notes
10,000
June 23 2020
June 30, 2030
3-Month SOFR + 613 bp
Yes, in whole or part upon occurrence of specific events with the agreement; or in integral multiples of $100,000
2024 Subordinated Notes
1,650
December 5, 2024
December 31, 2027
Fixed rate of 8.5% through 2026; 3-Month SOFR + 442 bp thereafter
Yes, in whole or part upon occurrence of specific events with the agreement; or in integral multiples of $100,000 after December 31, 2027
14,650
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.
At June 30, 2026, the carrying cost of the Subordinated Notes on the consolidated balance sheet represents the outstanding balance of the notes net of unamortized origination costs of $632,000 which are amortized to interest expense through September 1, 2029.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
QNB Corp. is a bank holding company headquartered in Quakertown, Pennsylvania. QNB Corp., through its wholly-owned subsidiary, the Bank, has been serving the residents and businesses of upper Bucks, northern Montgomery and southern Lehigh counties in Pennsylvania since 1877. Due to its limited geographic area, 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. The Bank is a locally managed community bank that provides a full range of commercial and retail banking and retail brokerage services. The consolidated entity is referred to herein as “QNB” or the “Company”.
On April 1, 2026, QNB closed the acquisition of Victory Bancorp, Inc. ("Victory"), a highly complementary community banking franchise headquartered in Limerick, Pennsylvania, creating a franchise with nearly $2.4 billion in assets and expanding our presence deeper into Montgomery County. This strategic combination brings together two relationship-focused institutions with shared values, similar operating cultures, and strong community ties. Results for the three and six months of 2026 include three months of post-merger activity related to the acquisition of Victory.
Tabular information presented throughout management’s discussion and analysis, other than share and per share data, is presented in thousands of dollars.
The Company uses non-GAAP financial information in its analysis of performance. These non-GAAP ratios and calculations provide a better understanding of ongoing operations and comparability with prior period results by showing the effects of significant gains and charges in the periods presented. The Company believes that investors may use these non-GAAP measures to analyze the Company's financial performance without the impact of unusual items or events that may obscure trends. This non-GAAP data is not a substitute for GAAP results and should be considered in addition to results prepared in accordance with GAAP. Non-GAAP financial measures
include risks as companies might calculate these measures differently and persons might disagree as to the appropriateness of items included in these measures. Please see table under the RESULTS OF OPERATIONS - OVERVIEW section,"Impact of Merger-Related Costs--GAAP to Non-GAAP Measure Reconciliation."
FORWARD-LOOKING STATEMENTS
In addition to historical information, this document contains forward-looking statements. Forward-looking statements are typically identified by words or phrases such as “believe,” “expect,” “anticipate,” “intend,” “estimate,” “project” and variations of such words and similar expressions, or future or conditional verbs such as “will,” “would,” “should,” “could,” “may” or similar expressions. The U.S. Private Securities Litigation Reform Act of 1995 provides a safe harbor in regard to the inclusion of forward-looking statements in this document and documents incorporated by reference.
Shareholders should note that many factors, some of which are discussed elsewhere in this document and in the documents that are incorporated by reference, including the risk factors identified in Item 1A of QNB’s 2025 Form 10-K, could affect the future financial results of QNB and could cause those results to differ materially from those expressed in the forward-looking statements contained or incorporated by reference in this document. These factors include, but are not limited, to the following:
QNB cautions that these forward-looking statements are subject to numerous assumptions, risks and uncertainties, all of which change over time, and QNB assumes no duty to update forward-looking statements. Management cautions readers not to place undue reliance on any forward-looking statements. These statements speak only as of the date of this report on Form 10-Q, even if subsequently made available by QNB on its website or otherwise, and they advise readers that various factors, including those described above, could affect QNB’s financial performance and could cause actual results or circumstances for future periods to differ materially from those anticipated or projected. Except as required by law, QNB does not undertake, and specifically disclaims any obligation, to publicly release any revisions to any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Disclosure of our significant accounting policies is included in Note 1 to the consolidated financial statements of the Annual Report on Form 10-K for the year ended December 31, 2025, which is incorporated herein by reference. Some of these policies were impacted by the acquisition of Victory; the updates are details in Note 2 of this Form 10-Q. Some of these policies are particularly sensitive requiring significant judgments, estimates and assumptions.
RESULTS OF OPERATIONS - OVERVIEW
Results for the three and six months of 2026 include three months of post-merger activity related to the acquisition of Victory. QNB reported net income for the second quarter of 2026 of $3,015,000, or $0.60 per share on a diluted basis, compared to net income of $3,883,000, or $1.04 per share on a diluted basis, for the same period in 2025. For the three-month period of 2026, net income included after-tax merger-related cost of $2,227,000. The merger-related costs are significant one-time costs, related to the acquisition of Victory and are not normal recurring operating expenses. Adjusted diluted earnings per share excluding the impact of the merger-related cost for the three-month period of 2026 was $1.05.
QNB reported net income for the six months ended June 2026 of $5,780,000, or $1.32 per share on a diluted basis, compared to net income of $6,461,000, or $1.74 per share on a diluted basis, for the same period in 2025. For the six-month period of 2026, net income included after-tax merger-related cost of $3,249,000. Adjusted diluted earnings per share excluding the impact of the merger-related cost for the six-month period of 2026 was $2.06.
The following table shows calculated impact of the merger-related costs on net income and ratios, reconciling GAAP to non-GAAP measurements:
Impact of Merger-Related Costs--GAAP to Non-GAAP Measure Reconciliation
(Dollars in thousands, except per share data)
For the period:
Variance
Net income (GAAP)
(868
(681
Merger-related costs
Income tax benefit
(857
(723
Merger-related costs, net of tax
2,227
3,249
Net income excluding impact of merger-related costs (Non-GAAP)
5,242
1,359
9,029
2,568
Share and Per Share Data:
Basic:
EPS using Net income (GAAP)
(0.44
(0.42
EPS using Net income excluding impact of merger-related costs (Non-GAAP)
1.06
0.01
2.07
0.33
Fully-diluted:
2.06
0.32
Average common shares outstanding:
Basic
Diluted
Selected Ratios:
Return on Average Assets (ROAA):
ROAA using Net income (GAAP)
0.50
0.83
-33 bp
0.54
0.69
-15 bp
ROAA using Net income excluding impact of merger-related costs (Non-GAAP)
0.88
5 bp
0.85
16 bp
Return on Average Equity (ROAE):
ROAE using Net income (GAAP)
6.65
14.25
-760 bp
7.38
12.02
-464 bp
ROAE using Net income excluding impact of merger-related costs (Non-GAAP)
11.56
-269 bp
11.54
-48 bp
Average Assets
2,395,752
1,887,138
2,154,199
1,880,127
AverageEquity
181,911
109,299
157,846
108,406
The Bank contributed $4,575,000 to net income for the three months ended June 30, 2026 compared to $4,679,000 for the same period 2025; and the holding company had a negative contribution of $1,560,000 to net income for the three months ended June 30, 2026 compared to a negative contribution of $796,000 for the same period of 2025. The operating performance of the Bank included three months of post-merger activity and improved for the quarter ended June 30, 2026, in comparison with the same period in 2025, due primarily to improvement in the interest margin causing a $6,072,000 increase in net interest income and a $499,000 increase in non-interest income; this was partly offset by an increase in non-interest expense of $6,377,000 of which $2,677,000 was due to
merger-related costs. The contribution from QNB Corp., which included three months of post-merger activity, for the quarter ended June 30, 2026, declined compared with the same period in 2025, primarily due to a decrease in net interest income of $373,000, related to the subordinated debt acquired in the acquisition, and an increase in non-interest expense of $509,000, primarily due to merger-related expenses of $407,000.
The Bank contributed $8,334,000 of net income for the six months ended June 30 2026 compared to $7,971,000 for the same period 2025; and the holding company had a negative contribution of $2,554,000 to net income for the six months ended June 30, 2026 compared to a negative contribution of $1,510,000 for the same period 2025. The improved results at the Bank were primarily due to improvement in the interest margin causing a $7,671,000 increase in net interest income and a $728,000 increase in non-interest income; this was partly offset by and an increase in non-interest expense of $7,877,000, of which $3,299,000 was related to merger-related costs. The change in contribution from QNB Corp. is primarily due to a decrease in net interest income of $400,000 and an increase in non-interest expense of $790,000, primarily due to merger-related expenses of $673,000.
Net income expressed as an annualized rate of return on average assets and average shareholders’ equity was 0.50% and 6.65%, respectively, for the quarter ended June 30, 2026, compared with 0.83% and 14.25%, respectively, for the quarter ended June 30, 2025. Return on average assets and return on average shareholders’ equity, excluding the impact of the merger-related cost, for the three-month period of 2026 was 0.88% and 11.56%, respectively. Net income expressed as an annualized rate of return on average assets and average shareholders’ equity was 0.54% and 7.38%, respectively, for the six months ended June 30, 2026, compared with 0.69% and 12.02%, respectively, for the six months ended June 30, 2025. Return on average assets and return on average shareholders’ equity, excluding the impact of the merger-related cost, for the six-month period of 2026 was 0.85% and 11.54%, respectively.
Total assets as of June 30, 2026 were $2,398,970,000, compared with $1,906,005,000 at December 31, 2025. Loans receivable at June 30, 2026 were $1,716,599,000; excluding the $408,379,000 in acquired loans, QNB recognized a $46,146,000, or 3.7%, increase from $1,262,074,000 at December 31, 2025. Total deposits of $2,067,151,000 at June 30, 2026 increased $15,475,000, excluding the $409,165,000 in deposits acquired, compared with total deposits of $1,642,511,000 at December 31, 2025.
Results for the three and six months ended June 30, 2026 include the following significant components:
These items, as well as others, are explained more thoroughly in the next sections.
NET INTEREST INCOME
QNB earns its net income primarily through 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. Management 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.
The following table presents the adjustment to convert net interest income to net interest income on a fully taxable-equivalent basis for the three- and six-month periods ended June 30, 2026 and 2025.
Tax-equivalent adjustment
240
Net interest income (fully taxable-equivalent)
18,434
12,752
31,690
24,429
Net interest income is the primary source of operating income for QNB. Net interest income is interest income, dividends, fees on earning assets and the amortization and accretion of fair value premiums and discounts on acquired earnings assets, less interest expense incurred funding sources and the amortization and accretion of fair value premiums and discounts on acquired interest-bearing liabilities. Earning assets primarily include loans, investment securities, interest-bearing balances at the Federal Reserve Bank and Federal funds sold. 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 tables that appear 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 rate 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.
Average Balances, Rate, and Interest Income and Expense Summary (Tax-Equivalent Basis)
For the Three Months Ended
June 30, 2025
Average
Balance
Interest
Federal funds sold
1,163
3.63
Investment securities (AFS & Equity):
20,812
3.68
191
21,032
4.24
223
U.S. Government agencies
75,972
1.18
224
75,963
104,927
2.35
617
105,090
2.88
756
Mortgage-backed and CMOs
318,255
1.95
1,551
354,349
2.46
2,184
67,798
5.90
1,000
64,694
6.38
1,031
103
Total investment securities
587,867
2.44
3,583
621,128
2.84
4,418
Loans:
Commercial real estate
1,276,622
6.31
20,097
863,096
5.94
12,775
Residential real estate
122,950
4.63
1,424
114,600
4.38
1,255
Home equity loans
102,997
6.13
1,575
70,666
6.41
1,130
181,167
7.12
3,213
145,261
7.41
Consumer loans
5,328
7.59
3,355
7.70
65
Tax-exempt loans
21,242
5.31
19,347
4.23
Total loans, net of unearned income*
1,710,306
6.26
26,691
1,216,325
5.97
18,112
Other earning assets
45,439
4.05
61,355
4.45
680
Total earning assets
2,344,775
5.26
30,714
1,898,808
4.90
23,210
28,030
13,806
(45,720
(59,921
(12,668
(9,376
81,335
43,821
Liabilities and Shareholders' Equity
Interest-bearing deposits:
483,798
1.19
1,438
376,735
0.94
888
Municipals
150,200
3.26
1,222
146,214
3.92
1,427
386,952
2.79
259,621
352,087
1.55
281,076
1.29
Time < $250
358,826
3.30
334,437
3.79
Time > $250
82,968
3.56
51,832
4.08
Total interest-bearing deposits
1,814,831
2.30
10,404
1,449,915
2.42
8,764
69,006
3.46
70,942
3.90
Long-term debt
5,495
4.79
53,991
9.48
39,141
9.58
Total borrowings
122,997
6.12
1,876
115,578
5.88
1,694
Total interest-bearing liabilities
1,937,828
2.54
1,565,493
2.68
Non-interest-bearing deposits
259,935
198,075
16,078
14,271
Shareholders' equity
Net interest rate spread
2.72
2.22
Margin/net interest income
3.16
2.69
585
20,819
3.70
382
20,596
4.31
440
75,971
448
75,962
104,727
2.33
1,220
105,172
2.87
1,510
321,556
1.93
3,099
358,969
2.45
4,392
Corporate debt securities
69,230
5.86
63,128
6.62
2,089
592,355
7,177
623,827
2.85
8,879
1,094,783
6.18
33,541
860,363
5.82
24,844
122,661
4.59
114,436
2,493
89,839
2,674
69,327
2,204
161,296
7.08
5,661
146,962
5,399
4,137
3,400
7.69
130
20,444
5.09
516
19,073
4.19
397
1,493,160
45,366
1,213,561
5.89
35,467
41,293
783
54,536
1,202
2,127,393
5.06
53,337
1,891,924
4.85
45,548
20,505
13,517
(45,094
(59,954
(10,992
(9,059
62,387
43,699
441,756
1.08
2,369
378,504
0.98
1,832
142,712
3.23
2,285
147,887
3.93
2,883
321,450
257,952
318,359
1.43
280,371
337,703
3.34
333,536
3.89
71,069
3.59
50,317
1,633,049
2.23
18,072
1,448,567
17,676
76,249
59,300
17,735
4.74
46,681
9.50
39,117
9.59
122,930
3,575
116,152
5.98
3,443
1,755,979
2.49
1,564,719
224,958
192,067
15,416
14,935
2.57
2.13
3.00
2.60
53
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 for three and six months ended June 30, 2026 and 2025.
Non-accrual loans are included in earning assets.
* Includes loans held-for-sale
Rate/Volume Analysis. The following table shows the fully taxable equivalent effect of changes in volumes and rates on interest income and interest expense. Changes in net interest income that could not be specifically identified as either a rate or volume change were allocated to changes in volume.
For the Six Months Ended
June 30, 2026 compared
to June 30, 2025
Due to change in:
Change
Volume
Interest income:
(29
(58
(63
(138
(290
(7
(283
(633
(224
(409
(1,293
(458
(835
(80
(61
(263
Total Investment securities (AFS & Equity)
(179
(656
(1,702
(258
(1,444
7,322
6,121
1,201
8,697
6,769
1,928
169
445
(71
651
(181
531
663
(132
262
526
(264
57
Total Loans
8,579
7,449
9,899
8,181
1,718
(251
(205
(46
(419
(292
(127
7,504
7,076
428
7,789
7,642
147
Interest expense:
550
306
(244
(598
(101
(497
913
(84
906
460
228
232
243
(203
229
(432
(848
(928
209
316
221
431
(210
1,640
(337
1,865
(1,469
(93
(18
(75
213
328
(115
(423
342
(14
363
(21
182
271
(89
(136
1,822
2,248
(426
2,133
(1,605
5,682
4,828
854
7,261
5,509
1,752
Average earning assets and interest-bearing liabilities for the three and six months ended June 30, 2026 include the three-month impact of acquiring $434,318,000 in interest-earnings assets and $352,654,000 in interest-bearing liabilities which include the cancellation of
54
$3,000,0000 in subordinated notes owned by QNB and issued by Victory on the acquisition date. Additionally, total average assets, average liabilities and average equity for the three and six months ended June 30, 2026 include the three-month impact of the acquisition on non-earning assets of $37,735,000, non-interest bearing liabilities of $72,296,000 and equity of $47,103,000.
Net Interest Income and Net Interest Margin – Quarterly Comparison
Average earning assets for the second quarter of 2026 were $2,344,775,000, an increase of $445,967,000, or 23.5%, from the second quarter of 2025, with average loans increasing $493,981,000, or 40.6%, and average investment securities decreasing $33,261,000, or 5.4%, over the same period in 2025. Average loans as a percentage of average earning assets was 72.9% for the second quarter of 2026, compared to 64.1% for the second quarter of 2025. On the funding side, average deposits increased $426,776,000, or 25.9%, to $2,074,766,000 for the second quarter of 2026. Average short-term borrowed funds, which consisted primarily of average commercial repurchase agreements and FHLB borrowings, decreased $1,936,000 to $69,006,000 for the second quarter of 2026 compared to $70,942,000 for the same period in 2025. Subordinated debt increased $14,850,000, as a result of the Victory Merger, to $53,991,000.
The net interest margin for the second quarter of 2026 increased 47 basis points to 3.16% from 2.69% for the same period in 2025. Competition for quality loans and deposits in our local market continues to exert pressure on the net interest margin. Repricing strategies on loans and deposits have had a positive impact on the net interest margin.
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 $7,504,000, or 32.3%, to $30,714,000 for the second quarter of 2026; and total interest expense increased $1,822,000, or 17.4%, to $12,280,000.
The yield on earning assets on a tax-equivalent basis increased 36 basis points to 5.26% from 4.90% for the same period in 2025. The cost of interest-bearing liabilities declined 14 basis points to 2.54% for the second quarter of 2026, compared with 2.68% for the same period in 2025.
QNB acquired $3,000,0000 in federal funds from Victory; these funds matured in the second quarter of 2026.
Interest income on investment securities decreased $835,000 when comparing the second quarters of 2026 and 2025. The average yield on the investment portfolio was 2.44% for the second quarter of 2026 compared with 2.84% for the same period in 2025, a decrease of 40 basis points. Average securities for the three and six months ended June 30, 2026 include the three-month impact of acquiring $15,605,000 in securities from the acquisition and the cancellation of $3,000,000 subordinated note owned by QNB and issued by Victory.
The yield on U.S. Treasury securities was 3.68% for the second quarter of 2026 compared to 4.24% for the same period in 2025. The 56 basis-point decline in rate and the average balances decrease of $220,000 caused the decrease in interest income of $32,000. The average balances of U.S. Government agency securities increased $9,000 as the average rate remained unchanged at 1.18%.
Interest income on municipal securities, which are primarily tax-exempt, decreased $139,000 due to a 53 basis-point decrease in rate, and a $163,000 decrease in average balances. Typically, QNB purchases municipal bonds with 10- to 20-year maturities and may have call dates between 2-10 years.
Interest income on mortgage-backed securities and CMOs decreased $633,000 and average balances decreased $36,094,000 and the yield decreased 51 basis points. This portfolio generally provides higher yields relative to agency bonds and also provides monthly cash flow which can be used for liquidity purposes or can be reinvested as interest rates increase. Since most of these securities were purchased at a premium, any prepayments result in a shorter amortization period of this premium and therefore a reduction in income.
Interest income on corporate debt and mutual funds decreased $31,000 as average balances increased $3,104,000 and the average yield decreased 48 basis points.
Average loans the three and six months ended June 30, 2026 include the three-month impact of acquiring $408,379,000 in loans from the acquisition of Victory. Income on loans increased $8,579,000 to $26,691,000 when comparing the second quarters of 2026 and 2025, with a $493,981,000 increase in average balances contributing to an increase in interest income of $7,449,000 and a 29-basis point increase in yield contributing to a $1,130,000 increase in interest income.
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, factories, warehouses, hotels and restaurants, medical facilities and retail establishments, or residential real estate, usually the residence of the business owner. The category also includes construction and land development loans. Income on commercial real estate loans increased $7,322,000 when comparing the second quarters of 2026 and
2025, primarily due to a $413,526,000 increase in average balances contributing to an increase in interest income of $6,121,000 and a 37-basis point increase in rate from 5.94% in 2025 to 6.31% contributing to an increase of $1,201,000 to interest income.
Income on commercial and industrial loans increased $531,000 when comparing the second quarters of 2026 and 2025. The average yield on these loans decreased 29 basis points to 7.12% resulting in a decrease in income of $132,000; this was offset by an average balances increased $35,906,000, to $181,167,000 for the second quarter of 2026 resulting in a $663,000 increase in interest income. Many of the loans in this category are indexed to the prime interest rate.
Tax-exempt loan income increased $76,000 for the second quarter of 2026 compared to the same period in 2025. Average balances increased $1,895,000 to $21,242,000 for the second quarter of 2026. The yield on municipal loans increased 108 basis points, to 5.31% for the second quarter of 2026, compared with the same period in 2025.
QNB desires to be the “local consumer lender of choice”, focusing its retail lending efforts on product offerings and marketing and promotion. Interest income on residential mortgage loans secured by first lien 1-4 family increased $169,000 when comparing the second quarter of 2026 to the same period in 2025. Average residential mortgage loan balances increased by $8,350,000, or 7.3%, to $122,950,000 for the second quarter of 2026 compared to the same period in 2025, which contributed a $92,000 increase in interest income. The average yield on the portfolio increased 25 basis points and contributed an increase of $77,000 to interest income. QNB chose to retain certain mortgage loans instead of selling them in the secondary market, as the yield on our originated mortgages was higher than comparable mortgage-backed securities. Average home equity loans increased during the 2026 period by $32,331,000 to $102,997,000, contributing to a $516,000 increase in interest income; this was partly offset by an average yield decrease of 28 basis points causing a $71,000 decrease in interest income. The yield on the consumer portfolio decreased 11 basis points to 7.59% for the second quarter of 2026 and there was a $1,973,000 increase in average balances resulting in a net $36,000 increase in interest income.
Earning assets are funded by deposits and borrowed funds. Average interest-bearing deposits for the three and six months ended June 30, 2026 include the three-month impact of acquiring $338,004,000 from the acquisition of Victory. Average borrowings for the three and six months ended June 30, 2026 include the three-month impact of acquiring $14,650,000 in subordinated debt from the acquisition of Victory. Interest expense increased $1,822,000, when comparing the second quarter of 2026 to the same period in 2025. Interest expense on interest-bearing deposits increased $1,640,000 to $10,404,000 when comparing the second quarters of 2026 and 2025, with a net $364,916,000 increase in average balances contributing to a net increase in interest expense of $1,977,000 and a 12-basis point decrease in yield contributing to a $337,000 decrease in interest expense.
Average interest-bearing demand accounts increased $107,063,000 to $483,798,000 for the second quarter of 2026 and the average rate paid on these deposits increased 25 basis points; interest expense on interest-bearing demand accounts increased $550,000 to $1,438,000 for the same period. Average non-interest-bearing demand accounts increased $61,860,000 to $259,935,000 for the second quarter of 2026. Average money market accounts increased $127,331,000 to $386,952,000 for the second quarter of 2026 compared with the same period in 2025. Interest expense on money market accounts increased $829,000 to $2,691,000, and the average interest rate paid on money market accounts decreased nine basis points to 2.79% for the second quarter of 2026. Most of the balances in this category are in products that pay tiered rates based on account balances.
Interest expense on municipal interest-bearing demand accounts decreased $205,000 to $1,222,000 for the second quarter of 2026. The average interest rate paid on municipal interest-bearing demand accounts decreased 66 basis points to 3.26% for the second quarter of 2026 over the same quarter of 2025, and average balances increased $3,986,000 to $150,200,000. Many of these accounts are indexed to the Federal funds rate with rate floors. Municipal deposits are seasonal in nature and are received during the second and third quarters as tax receipts are collected and are withdrawn over the course of the year.
Interest expense on savings accounts increased $460,000 when comparing the second quarter of 2026 to the same quarter of 2025. The average interest rate paid on savings accounts increased 26 basis points to 1.55% for the second quarter of 2026 compared to 1.29% for the same period in 2025. Average savings balances increased $71,011,000 to $352,087,000 for the second quarter of 2026. QNB’s online e-Savings product is the largest category of savings deposits, with average balances for the second quarter of 2026 of $216,625,000 compared to $208,239,000 in the same period of 2025. The average yield paid on these accounts was 1.70% for the both second quarters of 2026 and 2025. Other savings account average balances, increased $62,625,000 when comparing the second quarter of 2026 compared to the same period in 2025 and interest expense increased $423,000.
Interest expense on time deposits totaled $3,692,000 for the second quarter of 2026 compared to $3,686,000 in 2025. Average total time deposits increased $55,525,000 to $441,794,000 for the second quarter of 2026. As with fixed-rate loans and investment securities, these 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 $416,806,000, or 96%, of time deposits at June 30, 2026 will mature over the next 12 months. The average rate paid on these time deposits is approximately 3.34%. The yield on the time deposit portfolio may change in the next quarter as short-term time deposits reprice; however, given the short-term nature of these deposits, interest expense may increase if short-term time deposit rates were to increase suddenly or if customers select higher paying time deposits.
Short-term borrowings are comprised of sweep accounts structured as repurchase agreements with our commercial customers and short-term FHLB borrowing. Interest expense on short-term borrowings decreased $93,000 for the second quarter of 2026 to $596,000 when compared to the same period in 2025. When comparing these same periods, average balances decreased $1,936,000 to $69,006,000 and average rate decreased 46 basis points to 3.45%.
Average long-term borrowings decreased $5,495,000 as short-term borrowing were used to payoff maturing long-term borrowings during the past year.
QNB Corp. issued $40,000,000 of subordinated debt in 2024 and acquired $17,650,000 of subordinated debt from Victory in the Victory Merger; $3,000,0000 of subordinated debt issued by Victory was owned by QNB and cancelled as of the merger date. The average carrying value net of deferred costs was $53,991,000 for the second quarter of 2026 compared to $39,141,000 for same period in 2025. The average yield decreased ten basis points from 9.58% to 9.48%.
Net Interest Income and Net Interest Margin – Six-Month Comparison
For the six-month period ended June 30, 2026 average earnings assets increased $235,469,000, or 12.4%, to $2,127,393,000, with average loans increasing 23.0%, average investment securities decreasing 5.0%, and average total deposits increasing $217,373,000, or 13.2%, to $1,858,007,000, compared to the same period in 2025. The net interest margin on a tax-equivalent basis was 3.00% for the six-month period ended June 30, 2026, a 40-basis point increase from the same period in 2025.
Total interest income on a tax-equivalent basis increased $7,789,000, or 17.1%, to $53,337,000, when comparing the six-month periods ended June 30, 2026 and June 30, 2025 due to an increase in volume and rate on loans. Interest income on loans increased $8,181,000 as a result of volume and increased $1,718,000 as a result of yields. The analysis of the six-month periods is similar to what was described in the quarterly analysis. The yield on earning assets increased from 4.85% to 5.06% for the six-month periods with the yield on loans up 24 basis points to 6.13%.
Total interest expense increased $528,000 for the six-month period ended June 30, 2026 compared with the same period in 2025 attributable to an increase in volume. Average interest-bearing liabilities increased $191,260,000 and the average rate paid on interest-bearing liabilities decreased 23 basis points to 2.49% for the six-month period ended June 30, 2026 versus the same period in 2025.
Average interest-bearing deposits increased $184,482,000 and the related interest expense increased $396,000 for the six-month period ended June 30, 2026 versus the same period in 2025. The average balance of total short-term borrowings increased $16,949,000 primarily due to an increase in FHLB borrowings of $19,667,000. Long-term borrowing average balance decreased $17,735,000 and interest expense decreased $423,000 due to maturity. Subordinated debt average balance increased $7,564,000 and interest expense increased $342,000 for the six-month period ended June 30, 2026 compared to the same period of 2025.
PROVISION FOR CREDIT LOSSES, ALLOWANCE FOR CREDIT LOSSES ON LOANS AND ALLOWANCE FOR CREDIT LOSSES ON UNUSED COMMITMENTS
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.
Since the allowance for credit losses on loans and the reserve on unused commitments is dependent, to a great extent, on conditions that may be beyond QNB’s control, it is at least reasonably possible that management’s calculations and actual results could differ. In addition, various regulatory agencies, as an integral part of their examination process, periodically review QNB’s allowance for credit losses on loans. Such agencies may require QNB to recognize changes to the allowance 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.
Based on this analysis, QNB recorded a $521,000 provision for credit losses on loans for the six months ended June 30, 2026, through the allowance for credit losses on loans, compared to a $406,000 provision for credit losses for the same period in 2025. QNB recorded a provision of $1,000 for the allowance for credit losses for unused commitments in the six months ended June 30, 2026 compared to a reversal in provision of $2,000 for the same period in 2025.
QNB recorded a $3,020,000 allowance for credit losses on loans and a $144,000 allowance for credit losses on unused commitments due to the Victory Merger.
QNB's allowance for credit losses on loans of $12,770,000 represents 0.74% of loans receivable at June 30, 2026 compared with an allowance for credit losses on loans of $9,215,000, or 0.73% of loans receivable, at December 31, 2025, and $9,169,000, or 0.75%, at June 30, 2025. Management believes the allowance for credit losses on loans at June 30, 2026 is adequate as of that date based on its analysis of historical loss experience, current conditions and reasonable and supportable forecasts in the portfolio.
Net recoveries were $14,000 for the six months ended June 30, 2026 compared to net recoveries of $19,000 for the six months ended June 30, 2025. Charge-offs of $44,000 during the six months ended June 30, 2026 consisted of overdrafts of $26,000, a real estate loan secured by junior lien on 1-4 family property of $4,000 and other consumer and student loans of $14,000. Recoveries of approximately $58,000 during the six months ended June 30, 2026 consisted of $45,000 in repayments from borrowers of previously charged-off credits and overdrafts recoveries of $13,000.
Non-performing assets were $10,418,000 at June 30, 2026 compared to $8,793,000 as of December 31, 2025 and $8,947,000 at June 30, 2025. Total non-performing loans, which represent loans on non-accrual status and loans past due 90 days or more and still accruing interest, were 0.61% of loans receivable at June 30, 2026, 0.70% at December 31, 2025 and 0.73% of loans receivable at June 30, 2025. The increase was primarily due to two commercial and one retail customer. At June 30, 2026, $7,832,000, or approximately 75% of the loans classified as non-accrual, are current or past due less than 30 days. In cases where there is a collateral shortfall on non-accrual loans, 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. Commercial loans classified as substandard or doubtful loans totaled $49,156,000 at June 30, 2026, compared with $39,219,000 at December 31, 2025, an increase of $9,937,000 which includes $6,475,000 of commercial real estate loans and $3,808,000 of commercial and industrial loans acquired.
QNB had no loans past due 90 days or more and still accruing interest at June 30, 2026, December 31, 2025, or June 30, 2025. Total loans 30 days or more past due, which includes non-accrual loans by actual number of days delinquent, represented 0.46% of loans receivable at June 30, 2026 compared with 0.14% at December 31, 2025, and 0.98% at June 30, 2025.
There was one loan modification to a borrower experiencing financial difficulty identified during the six months ended June 30, 2026. The loan continues to be reported as accruing. The loan was modified to interest only payments for three months and one month deferred payment. QNB had no other real estate owned or repossessed assets at June 30, 2026, December 31, 2025 or June 30, 2025.
A loan is considered collateral dependent, 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 if a loan is collateral dependent 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 generally are not collateral dependent. 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. Deficiency is measured on a loan-by-loan basis for all non-accrual loans, except student 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.
The following table shows detailed information and ratios pertaining to the Company’s loan and asset quality:
Non-accrual loans
8,947
Loans past due 90 days or more and still accruing interest
Total non-performing loans
Total non-performing assets
Total loans (excluding loans held-for-sale):
Average total loans (YTD)
1,492,696
1,225,178
1,213,173
1,218,539
Allowance for loan losses to:
Non-performing loans
122.58
104.80
102.48
Total loans (excluding held-for-sale)
0.74
0.73
0.75
Average total loans (excluding held-for-sale)
0.86
Non-performing loans / total loans (excluding held-for-sale)
0.70
Non-performing assets / total assets
0.43
0.46
0.47
An analysis of net loan charge-offs (recoveries) for the three and six months ended June 30, 2026 compared to the same periods in
2025 is as follows:
Net charge-offs (recoveries)
(16
Net annualized charge-offs (recoveries) to:
0.00
(0.01
)%
Average total loans excluding held-for-sale
Allowance for loan losses
(0.03
(0.70
(0.22
At June 30, 2026 and December 31, 2025, the recorded investment in collateral dependent loans totaled $10,418,000 and $8,793,000 of which $10,151,000 and $1,704,000, respectively, required no specific allowance for loan loss. The recorded investment in collateral dependent loans requiring an allowance for loan losses was $267,000 and $7,089,000 at June 30, 2026 and December 31, 2025, respectively, and the related allowance for loan losses associated with these loans was $167,000 and $1,649,000, respectively. See Note 9 to the Notes to Consolidated Financial Statements for additional detail of collateral dependent loans.
NON-INTEREST INCOME
Total non-interest income for 2026 includes three months of impact from the acquisition of Victory.
Non-Interest Income Comparison
Change from prior year
Percent
173
35.7
25.6
87
12.0
172
12.5
5.7
24.9
64.2
33.9
(1.2
3.8
100.0
(100.0
800.0
N/M
55.1
26.0
487
29.5
704
21.8
Quarter to Quarter Comparison
Total non-interest income was $2,139,000 for the second quarter of 2026 compared with $1,652,000 for the same period in 2025. The Bank completed the exchange offer to convert its Visa B-2 shares to B-3 and C shares; the Bank subsequently converted one-third of the Visa C shares to Visa A shares and recorded a $268,000 unrealized gain. Non-interest income for the three-months ended June 30, 2026 also included $96,000 of realized gains on the sales of investment securities and a $303,000 loss on the termination of an interest-rate swap acquired in the acquisition.
QNB originates residential mortgage loans for sale in the secondary market. Net gain on sale of loans was $36,000 for the second quarter of 2026 compared to a net gain $4,000 in the second quarter of 2025. The net gain or loss 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 and includes any lower-of-cost-market on the loans held-for-sale. Residential mortgage loans to be sold are identified at origination.
Fees for services to customers increased $173,000 for the quarter ended June, 2026, as overdraft fees increased $46,000 and other deposit-related fees increased $127,000.
QNB provides securities and advisory services under the name QNB Financial Services. Retail brokerage and advisory fees increased $8,000 for the second quarter of 2026 compared to the same period in 2025. Advisory fees increased $31,000 and transactional fees decreased $23,000 for the second quarter of 2026 compared with the same period in 2025.
ATM and debit card income increased $87,000 due to usage and merchant fees remained level for the second quarter of 2026 compared with the same period in 2025. Bank-owned life insurance income increased $52,000. Other non-interest income increased $75,000 primarily due to increases in letter of credit fees of $44,000, mortgage and other loan servicing fees of $7,000, and credit card income of $7,000.
Six-Month Comparison
Total non-interest income was $3,940,000 for the six months ended June 30, 2026 compared with $3,236,000 for the same period of 2025, an increase of $704,000, compared to the same period of 2025. There was a $268,000 gain related to the conversion of Visa shares, $96,000 of realized gains on the sales of investment securities and a $303,000 loss on the termination of an interest-rate swap as discussed in the three-month comparison.
Net gain on sale of loans was $44,000 for the six months ended June 30, 2026 compared to a net gain $22,000 for the same period of 2025. Fees for service to customers increased $239,000 for the six months ended June 30, 2026, as overdraft fees increased $97,000 and other deposit-related fees increased $142,000.
Retail brokerage and advisory fees increased $70,000 for the six months ended June 30, 2026 compared to the same period in 2025. Advisory fees increased $57,000 and transactional fees increased $13,000 for the six months ended June 30, 2026 compared with the same period in 2025.
ATM and debit card income increased $172,000 due to usage and merchant fees increased $6,000 for the six months ended June 30, 2026 compared with the same period in 2025. Other non-interest income increased $77,000, primarily due to increases in letter of credit fees of $44,000, title company income of $17,000 and credit card income of $13,000.
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NON-INTEREST EXPENSE
Total non-interest expense for 2026 includes three months of impact from the acquisition of Victory.
Non-Interest Expense Comparison
1,949
37.1
2,533
24.6
40.5
292
25.2
287
25.3
16.5
(3.2
161
36.7
Third-party services
51.4
557
38.4
25.0
11.9
86.9
28.4
12.3
(49
(9.0
69.1
633
30.8
6,874
71.9
8,643
45.7
Total non-interest expense was $16,436,000 for the second quarter of 2026, an increase of $6,874,000 compared to the second quarter of 2025. For the three-month period of 2026, non-interest expense included merger-related cost of $3,084,000. Excluding merger-related costs, noninterest expense increased $3,790,000 for the second quarter of 2026, compared to the same period in 2025.
Salaries and benefits comprise the largest component of non-interest expense. QNB monitors, through the use of various surveys, the competitive salary and benefit information in its markets and makes adjustments when appropriate. Salaries and benefits expense increased $1,949,000 to $7,200,000 when comparing the two quarters. Salary expense and related payroll taxes increased $1,570,000 to $6,017,000 during the second quarter of 2026 compared to the same period in 2025. Medical and dental premiums, net of employee contributions, increased $253,000 and retirement expense increased $121,000 when comparing the two quarters.
Net occupancy and furniture and equipment expenses combined increased $508,000 when comparing the second quarters of 2026 and 2025. This is due primarily to increased software maintenance expense. Marketing expense remained fairly flat.
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, IT services, statement printing and mailing, investment security safekeeping and supply management services. Third party services expense increased $405,000 due to consulting costs. State taxes increased $205,000 due to the timing of tax credits received for qualified charitable contributions. FDIC insurance premiums increased $33,000.
Other non-interest expense increased $668,000 due to the amortization of the core deposit intangible related to the Victory acquisition of $332,000, and increase in director fees of $65,000, business development of $82,000, debit card expense of $50,000, bank service fees of $42,000, courier expense of $36,000, and make-whole agreement reserve related to the Visa share exchange of $23,000.
Total non-interest expense was $27,574,000 for the six months ended June 30, 2026, an increase of $8,643,000 compared to the same period of 2025. For the six-month period of 2026, non-interest expense included merger-related cost of $3,972,000. Excluding merger-related costs, noninterest expense increased $4,671,000 for the six months ended June 30, 2026, compared to the same period in 2025.
Salaries and benefits expense increased $2,533,000 to $12,816,000 when comparing the six months ended June 30, 2026 to the same period in 2025. Salary expense and related payroll taxes increased $2,031,000 to $10,822,000 during the six months ended June 30, 2026 compared to the same period in 2025. Medical and dental premiums, net of employee contributions, increased $365,000 and retirement expense increased $135,000 when comparing the six-month periods.
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Net occupancy and furniture and equipment expenses combined increased $664,000 when comparing the six months ended June 30, 2026 to the same period in 2025. This is due primarily to increased software maintenance expense. Marketing expense increased $161,000 due public relations and advertising expense when comparing the six-month periods.
Third party services expense increased $557,000 due to consulting costs. State taxes increased $143,000 due to the timing of tax credits received for qualified charitable contributions. FDIC insurance premiums decreased $49,000 due to a decrease in the assessment rate.
Other non-interest expense increased $633,000, due to the reasons described above in the quarter-to-quarter comparison.
INCOME TAXES
QNB utilizes an asset and liability approach for financial accounting and reporting of income taxes. As of June 30, 2026, QNB’s net deferred tax asset was $13,384,000. The primary components of deferred taxes are deferred tax assets of which $12,550,000 relates to investment securities fair value adjustments, $2,749,000 relates to the allowance for credit losses on loans and $974,000 related to a federal net operating loss related to the acquisition of Victory, partly offset by a deferred tax liability on the core deposit intangible, resulting from the acquisition of Victory, of $1,546,000, deferred loan costs of $609,000 and depreciation of $597,000. As of December 31, 2025, QNB’s net deferred tax asset was $13,993,000 of which $12,747,000 is related to investment securities fair value adjustment and $1,984,000 related to the allowance for credit losses on loans, partly offset by a deferred tax liability on deferred loan costs of $581,000. The decrease in the balance of net deferred tax assets when comparing June 30, 2026 to December 31, 2025 was $609,000.
The realizability of 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 these remaining deferred tax assets except for a $1,112,000 deferred tax asset related to a state net operating loss.
Applicable income tax expense was $817,000 for the quarter ended June 30, 2026, compared to $1,005,000 for the quarter ended June 30, 2025. The effective tax rate for the second quarter of 2026 was 21.3% compared with 20.6% for the same period in 2025. Applicable income tax expense was $1,524,000 for the six months ended June 30, 2026, compared to $1,629,000 for the same period in 2025. The effective tax rate for the six months ended June 30, 2026 was 20.9% compared with 20.1% for the same period in 2025. The increase in the tax rates for 2026 were due to non-taxable merger-related expenses.
FINANCIAL CONDITION ANALYSIS
Financial service organizations are challenged to demonstrate they can generate sustainable and consistent earnings growth in a dynamic operating environment. Rate competition for quality loans is anticipated to continue through 2026. It is also anticipated that the rate competition for attracting and retaining deposits may increase in the remainder of 2026, which could result in a lower net interest margin and a decline in net interest income.
QNB’s primary business is accepting deposits and making 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 is committed to make credit available to its customers.
Total assets at June 30, 2026 were $2,398,970,000 compared with $1,906,005,000 at December 31, 2025. QNB acquired $475,053,000 in assets due to the Victory Merger. Cash and cash equivalents increased $29,043,000 from $50,297,000 at December 31, 2025 to $79,340,000 at June 30, 2026; QNB acquired $20,550,000, net of cash paid for fractional shares due to the Victory Merger.
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 and 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. The available-for-sale securities portfolio decreased $25,852,000, due to maturities and prepayments of $68,094,000 and sales of $6,752,000; this was partly offset by purchases of $33,449,000; additionally, QNB acquired $12,605,000 in securities from Victory, which is net of the cancellation of $3,000,000 in subordinated notes issued by Victory and owned by QNB on the date on the merger.
62
Loans receivable increased $454,525,000; QNB acquired $408,379,000 in loans in the Victory Merger. Commercial loans increased $423,480,000, to $1,484,802,000 at June 30, 2026 compared to $1,061,322,000 at year-end 2025, and retail loans increased $31,075,000 to $232,264,000 at June 30, 2026, compared with $201,189,000 at year-end 2025.
Deposits grew $424,640,000 from December 31, 2025 to June 30, 2026; QNB acquired $409,165,000 in deposits in the Victory Merger. Non-interest-bearing demand deposits increased $76,163,000, with balances of $266,120,000 at June 30, 2026 compared with $189,957,000 at year-end 2025. Interest-bearing demand balances, excluding municipal deposits, increased $67,830,000 to $465,099,000, with increases in both business and retail interest-bearing checking products. Money market accounts increased $127,584,000, with increases in both personal and business customers. Savings increased $70,916,000 to $352,077,000 at June 30, 2026. Municipal deposit balances increased $24,213,000, to $161,798,000 from $137,585,000 at year-end. Municipal deposits can be volatile depending on the timing of deposits and withdrawals, and the cash flow needs of the school districts or municipalities. Municipal deposits increase as tax money is received from the local school districts during second and third quarters and it is anticipated that these funds will flow out for the subsequent twelve months as the schools use the funds for operations. These deposits provide an incremental funding source as they are used to fund loans as opposed to borrowing at a higher rate; this improves the net interest margin as it increases the spread related to the net interest margin.
Short-term borrowings decreased 6.4%, from $80,601,000 at December 31, 2025 to $75,428,000 at June 30, 2026. FHLB borrowings decreased $9,542,000. Commercial sweep accounts increased $4,369,000; these funds may be volatile based on businesses’ receipt and disbursement of funds and are offset by business non-interest-bearing demand accounts.
Subordinated debt increased $14,750,000; QNB acquired subordinated debt of $14,650,00 in the Victory Merger, which is net of the cancellation of $3,000,000 of subordinated notes issued by Victory and owned by QNB at the time of the Victory Merger.
LIQUIDITY
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.
Additional sources of liquidity are provided by the Bank’s membership in the FHLB. At June 30, 2026, the Bank had a maximum remaining borrowing availability with the FHLB of approximately $434,069,000, which is net of short-term borrowing outstanding of $56,458,000 and accrued interest payable. The maximum borrowing depends upon qualifying collateral assets and the Bank’s asset quality and capital adequacy. In addition, the Bank maintains unsecured Federal funds lines with four correspondent banks totaling $86,000,000. At June 30, 2026, 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.
Liquid sources of funds, including cash, available-for-sale and equity investment securities, and loans held-for-sale have increased $3,608,000 since December 31, 2025, totaling $596,981,000 at June 30, 2026. The increase in the liquid sources of funds is primarily due to an increase in cash, partly offset by decrease in investments. Cashflows from investments of $41,397,0000 provided funding for loan growth of $45,540,000. Management expects these liquid sources will be adequate to meet normal fluctuations in loan demand or deposit withdrawals. The investment portfolio is expected to continue to provide sufficient liquidity, as municipal bonds are called or mature and cash flow on mortgage-backed and CMO securities continue to be steady.
Approximately $296,472,000 and $234,159,000 of available-for-sale debt securities at June 30, 2026 and December 31, 2025, respectively, were pledged as collateral for repurchase agreements and deposits of public funds and the FRB short-term borrowing. The level of pledged securities corresponds with the municipal deposit and repurchase agreement balances.
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. It 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.
CAPITAL ADEQUACY
A strong capital position is fundamental to support continued growth and profitability and to serve the needs of depositors. QNB's shareholders' equity at June 30, 2026 was $183,514,000, or 7.65% of total assets, compared with shareholders' equity of $129,563,000, or 6.80% of total assets, at December 31, 2025. Shareholders’ equity at June 30, 2026 included a negative adjustment of $43,788,000 compared to a negative adjustment of $46,470,000 at December 31, 2025, related to net unrealized holding losses, net of taxes, on investment securities available-for-sale. Without these adjustments, shareholders' equity to total assets would have been 9.31% and 9.02% at June 30, 2026 and December 31, 2025, respectively.
Average shareholders' equity and average total assets, both impacted with three months post-merger activity, were $157,846,000 and $2,154,199,000 for the six months ended June 30, 2026, an increase of 45.6% and 14.6%, respectively, from the averages for the six months ended June 30, 2025. The ratio of average total equity to average total assets was 7.33% for the six months ended June 30, 2026 compared to 5.77% for the same period in 2025.
Retained earnings at June 30, 2026 were impacted by six months of net income totaling $5,780,000 offset by dividends declared and paid of $3,41,000 for the six-month period. Stock issued for the Victory Merger totaled $47,103,000. QNB offers a Dividend Reinvestment and Stock Purchase Plan (the “DRIP”) to provide participants a convenient and economical method for investing cash dividends paid on the Company’s common stock in additional shares. The DRIP also allows participants to make additional cash purchases of stock. Stock purchases under the DRIP contributed $396,000 to capital during the six months ended June 30, 2026. The exercise of stock options contributed $1,019,000 to capital during the six months ended June 30, 2026.
The Board of Directors has authorized the repurchase of up to 200,000 shares of QNB common stock in open market or privately negotiated transactions. The repurchase authorization does not bear a termination date. As of June 30, 2026, 102,000 shares have been repurchased since the initial authorization in 2008 at an average price of $24.93 and a total cost of $2,543,000. There were no shares repurchased during the six months ended June 30, 2026 and 2025.
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 capital. 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.
The required minimum Common equity Tier 1 capital to risk-weighted assets ratio is 4.5%, the required minimum ratio of Tier 1 capital to risk-weighted assets is 6.0%, the required minimum ratio of Total Capital to risk-weighted assets is 8.0%, and the required minimum Tier 1 leverage ratio is 4.0%. A capital conservation buffer of 2.5% of risk-weighted assets also applies to avoid limitations on certain capital distributions.
The following table sets forth consolidated information for QNB:
Capital Analysis
Regulatory Capital
Net unrealized securities losses, net of tax
43,788
46,470
Deferred tax assets on net operating loss
(974
Disallowed intangible assets
(16,623
Common equity tier I capital
Tier 1 capital
Allowable portion:
48,850
40,000
Allowance for credit losses on loans and unfunded commitments
12,991
9,291
Total regulatory capital
Risk-weighted assets
1,899,158
1,420,934
Quarterly average assets for leverage capital purposes
2,423,875
1,951,115
64
Capital Ratios
Common equity tier I capital / risk-weighted assets
Tier 1 capital / risk-weighted assets
Total regulatory capital / risk-weighted assets
Tier 1 capital / average assets (leverage ratio)
The capital ratios at June 30, 2026 include the impact of the Victory Merger and three months of post merger activity. At June 30, 2026, all capital ratios decreased since December 31, 2025 primarily due to the apportionment of equity acquired, net of disallowed intangible assets, to risk-based assets acquired. The Company remains well-capitalized by all applicable regulatory requirements as of June 30, 2026.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
MARKET RISK MANAGEMENT
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 than its earning assets (investments securities and loans). 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 June 30, 2026 is asset sensitive.
The following table shows the estimated impact of changes in interest rates on net interest income as of June 30, 2026 and 2025 assuming instantaneous rate shocks, and consistent levels of assets and liabilities. Net interest income for the subsequent twelve months is projected to decrease when interest rates are higher than current rates.
Estimated Change in Net Interest Income
Changes in Interest rates
(in basis points)
+300
1.30
3.61
+200
2.39
+100
0.23
1.40
-100
(0.52
(1.78
-200
(1.38
(3.91
-300
(3.38
(7.12
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 June 30, 2026 QNB had two derivatives designated as fair value hedging instruments; these interest rate swaps had a notional value of $258,535,000.
QNB is not subject to foreign currency exchange or commodity price risk.
ITEM 4. CONTROLS AND PROCEDURES
We maintain a system of controls and procedures designed to provide reasonable assurance as to the reliability of the consolidated financial statements and other disclosures included in this report, as well as to safeguard assets from unauthorized use or disposition.
On April 1, 2026, QNB Corp. completed the acquisition of The Victory Bancorp, Inc. and its subsidiary. Management completed its process of integrating the acquired operations into its overall financial reporting process and has extended its oversight and monitoring processes that support internal control over financial reporting to include the acquired operations.
We evaluated the effectiveness of the design and operation of our disclosure controls and procedures under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective as of the end of the period covered by this report. No changes were made to our internal control over financial reporting during the three-month period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
No material proceedings.
Item 1A. Risk Factors
There were no material changes to the Risk Factors described in Item 1A in QNB’s Annual Report on Form 10-K for the period ended December 31, 2025.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
QNB did not repurchase shares of its common stock during the quarter ended June 30, 2026. The following provides certain information relating to QNB's stock repurchase plan.
Period
Total Number ofShares Purchased
Average PricePaid per Share
Total Number ofSharesPurchased asPart of PubliclyAnnouncedPlan
MaximumNumber ofShares thatmay yet bePurchasedUnder the Plan
April 1, 2026 through April 30, 2026
98,000
May 1, 2026 through May 31, 2026
June 1, 2026 through June 30, 2026
Item 3. Default Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
Exhibit 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 September 13, 2015.)
Exhibit 3.2
By-laws of Registrant, as amended March 24, 2026. (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 April 8, 2026.)
Exhibit 31.1
Section 302 Certification of Chief Executive Officer
Exhibit 31.2
Section 302 Certification of Chief Financial Officer
Exhibit 32.1
Section 1350 Certification of Chief Executive Officer
Exhibit 32.2
Section 1350 Certification of Chief Financial Officer
The following Exhibits are being furnished* as part of this report:
No.
Description
101.SCH
Inline XBRL Taxonomy Extension Schema With Embedded Linkbase Documents*
104
Cover Page Interactive Data File (formatted as inline iXBRL and contained in Exhibit 101)
* These interactive data files are being furnished as part of this Quarterly 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.
Pursuant to the requirements 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.
Date: August 10, 2026
By:
/s/ David W. Freeman
David W. Freeman
Chief Executive Officer
/s/ Jeffrey Lehocky
Jeffrey Lehocky
Chief Financial Officer
/s/ Mary E. Liddle
Mary E. Liddle
Chief Accounting Officer, QNB Bank