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, 2024
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, 2024
Common Stock, par value $0.625
3,679,497
QNB CORP. AND SUBSIDIARY
QUARTER ENDED June 30, 2024
INDEX
PART I - FINANCIAL INFORMATION
ITEM 1.
CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
PAGE
Consolidated Balance Sheets at June 30, 2024 and December 31, 2023
2
Consolidated Statements of Income for the Three and Six Months Ended June 30, 2024 and 2023
3
Consolidated Statements of Comprehensive Income (Loss) for the Three and Six Months Ended June 30, 2024 and 2023
4
Consolidated Statement of Shareholders’ Equity for the Three and Six Months Ended June 30, 2024 and 2023
5
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2024 and 2023
6
Notes to Consolidated Financial Statements
7
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
40
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
57
ITEM 4.
CONTROLS AND PROCEDURES
58
PART II - OTHER INFORMATION
LEGAL PROCEEDINGS
59
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
60
SIGNATURES
61
CERTIFICATIONS
1
QNB Corp. and Subsidiary
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(current period unaudited)
June 30, 2024
December 31, 2023
Assets
Cash and due from banks
$
15,911
11,447
Interest-bearing deposits in banks
60,998
51,210
Total cash and cash equivalents
76,909
62,657
Investments:
Available-for-sale (amortized cost $542,491 and $576,178)
460,418
490,182
Equity securities (cost of $6,032 and $5,695)
7,233
5,910
Restricted investment in stocks
3,114
2,730
Loans held-for-sale
786
549
Loans receivable
1,162,310
1,093,533
Allowance for credit losses on loans
(8,858
)
(8,852
Loans receivable, net
1,153,452
1,084,681
Bank-owned life insurance
11,778
11,946
Premises and equipment, net
15,488
14,952
Accrued interest receivable
6,402
6,101
Net deferred tax assets
18,393
19,290
Other assets
7,514
7,320
Total assets
1,761,487
1,706,318
Liabilities
Deposits
Demand, non-interest bearing
190,333
185,098
Interest-bearing demand
481,760
462,712
Money market
234,996
222,843
Savings
287,057
303,079
Time less than $100
175,902
149,851
Time $100 through $250
148,907
121,793
Time greater than $250
53,884
43,337
Total deposits
1,572,839
1,488,713
Short-term borrowings
49,066
94,094
Long-term debt
30,000
20,000
Accrued interest payable
4,488
5,294
Other liabilities
8,209
7,393
Total liabilities
1,664,602
1,615,494
Shareholders' Equity
Common stock, par value $0.625 per share;
authorized 10,000,000 shares; 3,886,653 shares and 3,861,940
shares issued; 3,677,967 and 3,653,254 shares outstanding
2,429
2,414
Surplus
27,036
26,439
Retained earnings
136,295
133,945
Accumulated other comprehensive loss, net of tax
(64,838
(67,937
Treasury stock, at cost; 208,686 and 208,686 shares
(4,037
Total shareholders' equity
96,885
90,824
Total liabilities and shareholders' equity
The accompanying notes are an integral part of the consolidated financial statements.
CONSOLIDATED STATEMENTS OF INCOME
For the Three Months Ended June 30,
For the Six Months Ended June 30,
(in thousands, except per share data - unaudited)
2024
2023
Interest income
Interest and fees on loans
15,990
12,852
31,240
25,566
Interest and dividends on available-for-sale & equity securities:
Taxable
3,414
2,457
6,739
4,736
Tax-exempt
359
365
716
739
Interest on interest-bearing balances and other interest income
582
191
1,219
287
Total interest income
20,345
15,865
39,914
31,328
Interest expense
Interest on deposits
2,289
1,576
4,509
2,953
2,049
1,044
4,064
1,386
924
1,093
1,873
2,170
1,708
631
3,181
1,013
Time of $100 through $250
1,636
953
3,013
1,680
614
267
1,136
390
Interest on short-term borrowings
199
783
824
1,778
Interest on long-term debt
334
185
554
208
Total interest expense
9,753
6,532
19,154
11,578
Net interest income
10,592
9,333
20,760
19,750
Provision (reversal) for credit losses
114
209
28
(1,596
Net interest income after provision for credit losses
10,478
9,124
20,732
21,346
Non-interest income
Net (loss) gain on sales and calls of available-for-sale and equity securities
(1,096
519
(719
54
Unrealized gain (loss) on equity securities
1,016
(573
986
(516
Fees for services to customers
427
414
847
816
ATM and debit card
705
704
1,341
1,363
Retail brokerage and advisory
126
202
219
436
78
172
164
Merchant
83
106
182
Net (loss) gain on sale of loans
(2
(5
13
Other
128
135
260
282
Total non-interest income
1,465
1,580
3,301
2,799
Non-interest expense
Salaries and employee benefits
5,038
4,775
10,012
9,338
Net occupancy
535
1,113
1,089
Furniture and equipment
946
918
1,883
1,755
Marketing
228
259
494
462
Third party services
661
636
1,285
1,245
Telephone, postage and supplies
123
133
249
300
State taxes
216
316
184
FDIC insurance premiums
342
296
687
471
845
866
1,728
1,848
Total non-interest expense
8,934
8,492
17,767
16,692
Income before income taxes
3,009
2,212
6,266
7,453
Provision for income taxes
544
325
1,207
1,448
Net income
2,465
1,887
5,059
6,005
Earnings per share - basic
0.67
0.52
1.38
1.67
Earnings per share - diluted
Cash dividends per share
0.37
0.74
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands - unaudited)
Before tax amount
Tax expense (benefit)
Net of tax amount
Other comprehensive income (loss):
Net unrealized holding gains (losses) on available-for-sale securities:
Unrealized holding (losses) gains arising during the period
(471
(99
(372
(7,129
(1,497
(5,632
Reclassification adjustment for losses included in net income (1)
1,096
230
—
Net unrealized holding gains on fair value hedge:
Unrealized holding gains arising during the period
1,621
341
1,280
2,209
464
1,745
Reclassification adjustment for fair value remeasurements included in net income (2)
(52
(11
(41
38
8
30
Other comprehensive income (loss)
2,194
461
1,733
(4,882
(1,025
(3,857
Total comprehensive income (loss)
5,203
1,005
4,198
(2,670
(700
(1,970
Net unrealized holding losses on available-for-sale securities:
(4,937
(1,037
(3,900
4,023
3,178
231
865
257
203
7,742
1,626
6,116
22
18
Other comprehensive income
3,923
3,099
6,527
1,371
5,156
Total comprehensive income
10,189
2,031
8,158
13,980
2,819
11,161
(1) Included in Net gain on sales and calls of available-for-sale and equity securities on the Consolidated Statements of Income
(2) Included in Interest and dividends on available-for-sale & equity securities on the Consolidated Statements of Income
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
For the Three Months Ended June 30, 2024 and 2023
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, 2024
3,664,074
2,420
26,687
135,187
(66,571
93,686
Other comprehensive income, net of tax
Cash dividends declared ($0.37 per share)
(1,357
Stock issued in connection with dividend reinvestment and stock purchase plan
10,113
227
234
Stock issued for employee stock purchase plan
3,780
72
74
Stock-based compensation expense
50
Balance, June 30, 2024
3,677,967
Balance, April 1, 2023
3,597,345
2,379
25,048
132,598
(72,114
83,874
Other comprehensive loss, net of tax
(1,333
10,388
237
3,187
64
66
71
Balance, June 30, 2023
3,610,920
2,387
25,414
133,152
(75,971
80,945
For the Six Months Ended June 30, 2024 and 2023
Balance, January 1, 2024
3,653,254
Cash dividends declared ($0.74 per share)
(2,709
19,403
12
439
451
Stock issued for Non-Employee Director Compensation
1,530
(1
87
Balance, January 1, 2023
3,588,262
2,373
24,798
128,951
(81,127
70,958
Cumulative change in accounting principle
857
Balance at Janaury 2, 2023 (as adjusted for change in accounting principle)
129,808
71,815
(2,661
19,471
473
91
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
801
835
Provision (reversal of provision) for credit losses
Net loss (gain) on calls and sales of debt and equity securities
719
(54
Net unrealized (gain) loss on equity securities
(986
516
Net gain on sale of loans
(13
Proceeds from sales of residential mortgages held-for-sale
388
Origination of residential mortgages held-for-sale
(1,197
Increase in cash surrender value of bank-owned life insurance
(172
(164
Deferred income tax expense
73
Net decrease in income taxes payable
(8
(790
Net (increase) decrease in accrued interest receivable
(310
1,317
Fair value remeasurements on interest rate swap
Amortization of mortgage servicing rights and change in valuation allowance
23
27
Net amortization of premiums and discounts on investment securities
729
910
Net (decrease) increase in accrued interest payable
(806
1,500
Operating lease payments
(315
(312
Decrease in other assets
145
Increase (decrease) in other liabilities
649
(313
Net cash provided by operating activities
5,652
7,406
Investing Activities
Proceeds from payments, maturities and calls of investments available-for-sale
25,635
21,937
Proceeds from the sale of investments available-for-sale
13,139
9,081
Proceeds from the sale of equity securities
1,210
7,138
Purchases of investments available-for-sale
(7,434
(6,913
Purchases of equity securities
(1,170
(711
Proceeds from redemption of investment in restricted stock
16
7,628
Purchases of restricted stock
(400
(5,165
Net (increase) decrease in loans
(68,810
10,135
Net purchases of premises and equipment
(841
(403
Redemption of Bank Owned Life Insurance investment
Net cash (used in) provided by investing activities
(38,314
42,727
Financing Activities
Net increase (decrease) in non-interest bearing deposits
5,235
(19,453
Net increase in interest-bearing deposits
78,891
50,849
Net decrease in short-term borrowings
(45,028
(70,482
Proceeds from long-term debt
10,000
Repayment of long-term debt
(10,000
Cash dividends paid, net of reinvestment
(2,396
(2,312
Proceeds from issuance of common stock
212
190
Net cash provided by (used in) financing activities
46,914
(31,208
Increase in cash and cash equivalents
14,252
18,925
Cash and cash equivalents at beginning of year
15,899
Cash and cash equivalents at end of period
34,824
Supplemental Cash Flow Disclosures
Interest paid
19,960
3,547
Net income taxes paid
1,141
2,177
Non-cash transactions:
Trade-date settlement for matured securities
500
Cumulative change in accounting principal
Right-of-use assets obtained in exchange for new operating lease liabilities
457
369
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 2023 Annual Report incorporated in the Form 10-K. Operating results for the three- and six-month periods ended June 30, 2024 are not necessarily indicative of the results that may be expected for the year ending December 31, 2024.
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, 2024 for items that should potentially be recognized or disclosed in these consolidated financial statements and has not identified any subsequent event.
2. RECENT ACCOUNTING PRONOUNCEMENTS
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. Management has not completed its evaluation of the impact of this rule on the Company's operations as of June 30, 2024.
3. STOCK-BASED COMPENSATION AND SHAREHOLDERS’ EQUITY
QNB maintains a 2015 Stock Incentive Plan (the "2015 Plan"), administered by a Board committee (the “Committee”), under which both qualified and non-qualified stock options may be granted periodically to certain employees. Compensation cost has been measured using the fair value of an award on the grant date and is recognized over the service period, which is usually the vesting period.
Stock-based compensation expense related to the 2015 Plan was $20,000 and $23,000 for the three months ended June 30, 2024 and 2023, respectively. Stock-based compensation expense related to the 2015 Plan was $38,000 and $43,000 for the six months ended June 30, 2024 and 2023, respectively. At June 30, 2024, there was approximately $242,000 of unrecognized compensation cost related to unvested share-based compensation award grants that is expected to be recognized over the next 28 months.
Options are granted to certain employees at prices equal to the market value of the stock on the date the options are granted. The 2015 Plan authorized the issuance of 300,000 shares. The time period during which any option is exercisable under the 2015 Plan is determined by the Committee but shall not commence before the expiration of six months after the date of grant or continue beyond the expiration of five years after the date the option is awarded. The granted options vest after a three-year period. The 2015 Plan was amended, effective January 1, 2023, to increase the maximum term of any options granted under the plan from five years to ten years, and to also require that awards granted under the Plan will vest 20% each consecutive year commencing on the first anniversary date of the award unless otherwise specified in an award agreement. As of June 30, 2024, there were 252,550 options granted, 94,450 options forfeited, 20,825 options exercised, and 137,275 options outstanding under this Plan. The 2015 Plan expires on February 24, 2025.
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
3.98
%
3.64
Dividend yield
5.97
4.80
Volatility
20.96
20.36
Expected life (years)
8.19
8.35
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, 2024 and 2023 was $3.08 and $4.11, respectively.
Stock option activity during the six months ended June 30, 2024 and 2023 is as follows:
Number of options
Weighted averageexerciseprice
Weightedaverageremaining contractual term (in years)
Aggregate intrinsic value
Outstanding at December 31, 2023
121,550
34.29
Granted
40,000
23.40
Exercised
Forfeited
(24,275
37.69
Outstanding at June 30, 2024
137,275
30.51
5.74
3,600
Exercisable at June 30, 2024
45,315
33.74
2.26
Weightedaverageremaining contractual term(in years)
Outstanding at December 31, 2022
109,150
37.65
35,000
29.51
(22,600
43.15
Outstanding at June 30, 2023
3.83
Exercisable at June 30, 2023
41,375
37.37
0.60
QNB maintains 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). Stock-based compensation expense related to the 2021 ESPP was $13,000 and $7,000 for the six months ended June 30, 2024 and 2023, respectively. The 2021 ESPP authorized the issuance of 30,000 shares. As of June 30, 2024, 17,674 shares were issued under the 2021 ESPP Plan. The 2021 ESPP Plan expires May 31, 2026.
The QNB Corp. 2023 Non-Employee Director Compensation Plan was approved by shareholders on May 23, 2023 (The "Director Compensation Plan"). The Director Compensation Plan authorized the issuance of 50,000 shares, is effective January 1, 2023 and expires on January 1, 2033. The Plan requires each non-employee director of the QNB, or any subsidiary of QNB designated by the Board (including QNB Bank), to receive $8,000 of their total annual compensation for service as a director in the form of the QNB’s common stock. Under the Director Compensation Plan, commencing with the six-month period ended June 30, 2023, each non-employee director will receive, in addition to any cash compensation otherwise payable, a semi-annual grant of such number of shares of the QNB’s common stock determined by dividing (i) the Semi-Annual Stock Payment Amount of $4,000 by (ii) the market value of a share of common stock determined as of June 30 or December 31 of any year, as applicable. Payments will be made under the Director Compensation Plan only to non-employee directors in office on the applicable payment date. As of June 30, 2024, 3,270 shares were issued to non-employee directors and there were 46,730 shares remaining under the Plan. Stock-based compensation expense related to the Director Compensation Plan was $36,000 for the six months ended June 30, 2024 and $40,000 for the six months ended June 30, 2023.
4. 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
3,665,695
3,598,545
3,660,435
3,593,482
Effect of dilutive securities - employee stock options
Denominator for diluted earnings per share - adjusted weighted average shares outstanding
There were 137,275 and 121,550 stock options that were anti-dilutive for the three-month periods ended June 30, 2024 and 2023, respectively. There were 137,275 and 121,550 stock options that were anti-dilutive for the six-month periods ended June 30, 2024 and 2023, 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 29, 2021 to 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 0 and 0 shares repurchased during the six months ended June 30, 2024 and 2023, respectively. As of June 30, 2024, 102,000 shares were repurchased under this authorization at an average price of $24.93 and a total cost of approximately $2,543,000.
5. COMPREHENSIVE INCOME (LOSS)
The following shows the components of accumulated other comprehensive loss at June 30, 2024 and December 31, 2023:
June 30,
December 31,
Unrealized net holding losses on available-for-sale securities
(88,088
(84,247
Unrealized net holding gains (losses) on fair value hedge
6,015
(1,749
Accumulated other loss
(82,073
(85,996
Tax effect
17,235
18,059
The following table presents amounts reclassified out of accumulated other comprehensive loss for the three and six months ended June 30, 2024 and 2023:
Amount reclassified fromaccumulated othercomprehensive loss
Details about accumulated other comprehensive loss
Affected line item in statement of income
Net gain (loss) on sales of investments available-for-sale
Fair value remeasurements on fair value hedges
52
(38
Interest and dividends on available-for-sale & equity securities
(1,044
218
Total reclassification out of accumulated other comprehensive loss, net of tax
(826
(30
Net of tax
9
Unrealized net holding (losses) gains on available-for-sale securities
(257
(22
(1,118
(295
235
62
(883
(233
6. INVESTMENT SECURITIES
Available-For-Sale Securities
The amortized cost and estimated fair values of investment securities available-for-sale at June 30, 2024 and December 31, 2023 were as follows:
Fair
Gross unrealized holding
Gross unrealized fair value hedge
Amortized
value
gains
losses
gains (1)
cost
U.S. Treasury
6,449
6,450
U.S. Government agency
65,633
(10,322
75,955
State and municipal
86,693
(20,809
1,761
105,741
U.S. Government agencies and sponsored enterprises (GSEs):
Mortgage-backed
211,783
(39,741
4,254
247,270
Collateralized mortgage obligations (CMOs)
83,480
(16,868
100,348
Corporate debt and money market funds
6,380
(360
6,727
Total investment debt securities available-for-sale
(88,101
542,491
Gross
unrealized
holding
fair value hedge
losses (1)
6,451
6,448
74,122
(10,828
84,950
89,189
(18,714
(445
108,348
224,238
(37,831
(1,304
263,373
89,973
(16,383
106,356
6,209
(496
6,703
(84,252
576,178
(1) See Note 12
10
The amortized cost and estimated fair value of securities available-for-sale by contractual maturity at June 30, 2024 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
8,601
8,619
Due after one year through five years
50,606
57,284
Due after five years through ten years
39,675
44,804
Due after ten years
66,273
84,166
165,155
194,873
Residential mortgage-backed securities
Collateralized mortgage obligations
Proceeds from sales of investment securities available-for-sale were approximately $13,139,000 and $0 for the three months ended June 30, 2024 and 2023, respectively. Proceeds from sales of investment securities available-for-sale were approximately $13,139,000 and $9,081,000 for the six months ended June 30, 2024 and 2023, respectively.
At June 30, 2024 and December 31, 2023, investment securities available-for-sale totaling approximately $255,369,000 and $289,935,000, 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
Gross realized losses
Impairment
Total net gains (losses) on AFS securities
The tax applicable to the net realized losses for both of the three-month periods ended June 30, 2024 and 2023 was $230,000 and $0, respectively. The tax applicable to the net realized losses for both of the six-month periods ended June 30, 2024 and 2023 was $230,000 and $54,000, 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, the entity will not have to sell the security before recovery of its cost basis, it will recognize the credit component of an impairment of a debt security in earnings and the remaining portion in other comprehensive loss. No credit impairments were recognized on debt securities during the three or six months ended June 30, 2024 and 2023, respectively.
11
The following table indicates the length of time individual debt securities have been in a continuous unrealized loss position as of June 30, 2024 and December 31, 2023:
Less than 12 months
12 months or longer
No. of
Unrealized
securities
5,460
35
187
289
84,636
84,925
153
207,501
125
6,215
515
5,749
447,465
(88,100
453,214
39
380
89,238
89,618
165
225,500
225,501
Corporate debt and money markets
526
875
484,934
485,809
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, 2024 in U.S. Treasury, 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.
QNB holds one pooled trust preferred security as of June 30, 2024. This security has a total amortized cost of approximately $58,000 and a fair value of $52,000. The pooled trust preferred security is available-for-sale and is carried at fair value.
Marketable Equity Securities
The Company’s investment in marketable equity securities primarily consists of investments with readily determinable fair values in large cap stock companies. Changes in fair value is recorded in unrealized gain/(losses) in non-interest income.
In April 2024, Visa, Inc. commenced an initial exchange offer for all of its outstanding shares of Class B-1 common stock for a combination of Class B-2 and Class C common shares. The exchange offer was optional for current Class B-1 holders and expired at 11:59 pm on May 3, 2024. QNB elected to participate in the exchange offer including a required makewhole agreement pursuant to which participating Class B-1 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-1 stockholder as a result of its ownership of the Class B-1 common stock. QNB had 6,502 Class B-1 common shares with a cost basis of $0. Under the exchange offer, QNB received 3,251 shares of Class B-2 common shares and 1,290 Class C shares. The Class C shares are convertible into Class A shares.
QNB recorded an unrealized gain on the Class C shares in the second quarter of 2024 of $1,354,000 and a reserve of the makewhole agreement of $85,000.
At June 30, 2024 and December 31, 2023, QNB had $7,233,000 and $5,910,000, respectively, in equity securities recorded at fair value. The following is a summary of unrealized and realized gains and losses recognized in net income on equity securities during the three and six months ended June 30, 2024 and 2023:
Net gains (losses) recognized during the period on equity securities
(205
Less: Net gains recognized during the period on equity securities sold during the period
377
311
Net unrealized gains (losses) recognized during the reporting period on equity securities still held at the reporting date
Taxes applicable to the net gains (losses) recognized for the three months ended June 30, 2024 resulted in an expense of $191,000 compared to a benefit of $15,000 for the three months ended June 30, 2023. Taxes applicable to the net gains (losses) recognized for the six months ended June 30, 2024 resulted in an expense of $287,000 compared to a benefit of $58,000 for the six months ended June 30, 2023. Proceeds from sales of investment equity securities were $1,210,000 and $7,138,000 for the six months ended June 30, 2024 and 2023, respectively.
7. RESTRICTED INVESTMENT IN STOCKS
Restricted investment in stocks includes Federal Home Loan Bank of Pittsburgh (“FHLB”) with a carrying cost of $2,102,000, Atlantic Community Bankers Bank (“ACBB”) stock with a carrying cost of $12,000, VISA Class B-2 stock with a carrying cost of $0 and Senior Housing Crime Prevention Investment Corporation ("SHCPFIC") preferred stock of $1,000,000 at June 30, 2024. FHLB and ACBB stock was issued to the Bank as a requirement to facilitate the Bank’s participation in borrowing and other banking services. The SHCPFIC stock was issued to the Bank to enable its participation in a Community Reinvestment Act qualified investment. The Bank’s investment in FHLB stock may fluctuate, as it is based on the member banks’ use of FHLB’s services.
The Bank owns 3,251 shares of Visa Class B-2 common shares, which was necessary to participate in Visa services in support of the Bank’s credit card, debit card, and related payment programs (permissible activities under banking regulations) as a member institution. Following the resolution of Visa’s covered litigation, shares of Visa’s Class B-2 stock will be converted to Visa Class A shares using a conversion factor (1.5875 as of September 28, 2023), which is periodically adjusted to reflect VISA’s ongoing litigation costs. There is a very limited market for this stock, as only current owners of Class B-2 shares are permitted to transact in Class B-2. Due to the lack of orderly trades and public information of such trades, Visa Class B-2 stock does not have a readily determinable fair value.
The Bank owns 100 shares of preferred stock of SHCPFIC. These shares are not transferable without the consent of SHCPFIC and do not have a readily determinable fair value.
These restricted investments are carried at cost and evaluated for impairment periodically. As of June 30, 2024, there was no impairment associated with these shares.
8. 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, which is intended to absorb probable known and inherent 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 allowance for loan losses to a level considered necessary by management.
The allowance for credit losses 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 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 allowance for loan losses. Management meets monthly to review the credit quality of the loan portfolio and quarterly to review the allowance for loan losses.
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 allowance for credit losses on loans 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 allowance will not be necessary should the quality of any loans deteriorate.
14
Major classes of loans are as follows:
Commercial:
Commercial and industrial
147,747
137,086
Construction and land development
129,843
116,173
Real estate secured by multi-family properties
115,205
109,193
Real estate secured by owner-occupied properties
165,951
160,695
Real estate secured by other commercial properties
296,501
265,101
Revolving real estate secured by 1-4 family properties-business
4,331
5,442
Real estate secured by 1st lien on 1-4 family properties-business
104,443
103,572
Real estate secured by junior lien on 1-4 family properties-business
2,884
3,445
State and political subdivisions
17,524
18,708
Retail:
1-4 family residential mortgages
108,563
108,906
Construction-individual
Revolving home equity secured by 1-4 family properties-personal
46,408
34,231
Real estate secured by 1st lien on 1-4 family properties-personal
7,251
11,981
Real estate secured by junior lien on 1-4 family properties-personal
12,708
15,625
Student loans
1,602
1,662
Overdrafts
149
194
Other consumer
1,701
1,757
Total loans
1,162,811
1,093,771
Net unearned (fees) costs
(501
(238
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.
15
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 rating to all loans in the portfolio at the time the loan is originated. Loans with risk ratings of one through five are reviewed annually based on the borrower’s fiscal year. Loans with risk ratings of six are reviewed every six to twelve months based on the dollar amount of the relationship with the borrower. 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 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 methodology for the allowance for loan losses to determine compliance to policy and regulatory guidance.
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, 2024 and December 31, 2023:
Term Loans by Origination Year
2022
2021
2020
Prior
Revolving
Commercial Loans
Commercial and industrial:
Risk rating
Pass
12,264
16,851
12,620
6,580
4,124
10,809
79,331
142,579
Special mention
1,295
158
2,699
4,277
Substandard
77
814
891
Doubtful
Total commercial and industrial
18,146
6,738
4,249
10,886
82,844
Construction and land development:
26,991
40,451
30,950
13,876
3,431
8,305
124,004
5,800
Total construction and land development
46,251
8,344
Real estate secured by multi-family properties:
6,589
12,741
28,408
22,865
9,566
32,218
112,387
2,818
Total real estate secured by multi-family properties
35,036
Real estate secured by owner-occupied properties:
8,181
11,301
28,128
26,062
18,069
60,200
151,941
63
6,575
6,638
926
6,446
7,372
Total real estate secured by owner-occupied properties
8,244
17,876
29,054
66,646
Real estate secured by other commercial properties:
24,291
31,982
57,152
41,566
15,069
122,665
292,725
671
2,351
3,022
754
Total real estate secured by other commercial properties
32,653
17,420
123,419
Revolving real estate secured by 1-4 family properties-business:
Total revolving real estate secured by 1-4 family properties-business
Real estate secured by 1st lien on 1-4 family properties-business:
6,924
14,417
26,896
19,212
9,224
26,691
103,364
134
223
945
Total real estate secured by 1st lien on 1-4 family properties-business
27,083
19,569
27,226
17
Real estate secured by junior lien on 1-4 family properties-business:
94
547
570
188
557
908
2,864
20
Total real estate secured by junior lien on 1-4 family properties-business
590
State and political subdivisions:
98
702
3,936
12,775
Total Commercial Loans:
85,432
128,992
184,724
134,285
60,053
274,571
83,662
951,719
14,341
292
2,476
19,871
1,133
10,669
12,839
Total Commercial loans
85,495
143,333
185,857
134,800
62,529
285,240
87,175
984,429
Current Period Gross Charge-Offs:
2019
20,473
14,439
8,574
5,913
8,626
7,175
70,716
135,916
1,170
71,886
46,171
43,472
14,630
3,434
4,028
4,395
116,130
43
4,438
10,826
28,858
23,430
9,808
5,804
27,609
106,335
2,154
2,858
6,508
29,763
14,430
29,576
26,908
18,693
12,239
53,030
154,876
5,819
58,849
32,297
44,526
42,582
17,798
28,947
98,173
264,323
778
98,951
14,697
28,596
20,890
9,794
8,441
20,262
102,680
137
189
423
143
755
28,785
21,027
8,864
20,405
19
558
604
542
580
934
3,258
1,121
707
4,247
5,444
8,292
140,159
190,071
141,803
66,038
73,569
219,870
76,158
907,668
1,127
11,610
190,260
141,940
74,696
228,994
77,328
919,415
229
84
313
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, 2024 and December 31, 2023:
Retail Loans
1-4 family residential mortgages:
Payment performance
Performing
2,991
12,544
14,416
29,272
19,589
29,076
107,888
Nonperforming
675
Total 1-4 family residential mortgages
29,751
Construction-individual:
Total construction-individual
Revolving home equity secured by 1-4 family properties-personal:
46,082
326
Total revolving home equity secured by 1-4 family properties-personal
Real estate secured by 1st lien on 1-4 family properties-personal:
484
1,042
1,125
927
2,719
7,052
105
Total real estate secured by 1st lien on 1-4 family properties-personal
2,824
Real estate secured by junior lien on 1-4 family properties-personal:
2,825
3,594
975
1,079
1,053
3,164
12,690
Total real estate secured by junior lien on 1-4 family properties-personal
993
Student loans:
1,591
Total student loans
Overdrafts:
Total overdrafts
Other consumer:
358
616
221
55
56
197
1,668
33
Total other consumer
89
Total Retail Loans:
6,658
17,509
16,654
31,641
21,624
36,606
46,428
177,120
112
1,262
Total Retail Loans
16,766
37,430
46,754
178,382
53
21
12,641
14,635
30,495
20,304
4,526
25,500
108,101
805
26,305
33,936
295
2,591
1,613
2,933
1,030
931
2,767
11,865
116
2,883
6,438
2,184
1,180
676
3,515
15,606
1,632
1,645
793
290
245
41
1,720
37
22,463
18,151
35,857
22,603
6,206
33,468
34,319
173,067
1,289
18,170
34,443
34,614
174,356
Revolving home equity lines of credit secured by 1-4 family properties termed out during 2024 and 2023 were $2,382,000 and $4,534,000; 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, 2024 and December 31, 2023:
30-59 dayspast due
60-89 dayspast due
90 days ormore pastdue
Total pastdue loans
Current
Total loansreceivable
338
129,505
174
165,592
2,916
293,585
244
572
103,871
161
370
531
108,032
46,391
129
335
6,916
1,585
136
1,688
3,502
737
890
5,129
1,157,682
137,009
186
160,509
9,675
255,426
323
103,249
433
381
481
107,611
34,046
96
11,885
15,607
171
1,749
10,771
498
634
11,903
1,081,868
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 impaired loans. A loan is considered impaired 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. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. When placing a loan on non-accrual status, management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. All non-accrual loans, except student loans, are individually evaluated for an allowance for credit losses ("ACL"). This ACL is measured using either the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral less costs to sell if the loan is collateral dependent.
An allowance for credit losses 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
24
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, 2024 and December 31, 2023:
90 Days or More Past Due-Still Accruing
Nonaccrual With No Specifically-Related ACL
Nonaccrual With Related ACL
Total Nonaccrual Loans
226
256
337
138
1,910
168
2,078
25
278
175
274
1,468
472
1,940
26
QNB recognized interest income of $36,000 and $316,000 on non-accrual loans during the six months ended June 30, 2024 and 2023, respectively.
The following tables present the collateral-dependent loans by loan category at June 30, 2024 and December 31, 2023:
Real Estate Secured
Other (1)
Deficiency in Collateral
Total Collateral Dependent Nonaccrual Loans
95
1,683
2,067
(1) Secured by business assets, personal property and equipment or guarantees
110
1,300
315
308
1,923
Activity in the allowance for credit losses on loans for the three and six months ended June 30, 2024 and 2023 are as follows:
For the Three Months Ended June 30, 2024
Balance, beginning of period
Credit loss expense (reversal)
Charge-offs
Recoveries
Balance, endof period
954
(24
(23
920
1,274
1,388
1,753
65
1,818
989
(19
970
1,203
1,246
31
1,299
(4
1,298
47
(3
44
393
166
147
79
350
(18
336
(20
34
(7
32
8,738
132
(43
8,858
29
For the Three Months Ended June 30, 2023
899
(75
(40
795
749
854
1,577
1,624
972
985
1,091
1,228
1,273
1,277
258
51
405
(15
67
86
448
(32
418
8,191
(60
8,365
For the Six Months Ended June 30, 2024
823
1,252
1,735
1,001
(31
1,167
1,507
(214
(47
(48
(26
(35
(6
36
(53
8,852
(90
For the Six Months Ended June 30, 2023
Beginning balance prior to adoption of ASC 326
Impact of adopting ASC 326
1,316
(70
(1,015
(10
109
995
684
(55
1,549
(374
(190
2,458
(1,128
(102
490
(428
(14
682
(196
299
(58
454
(9
Unallocated
502
(502
10,531
(1,089
(1,571
(138
632
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. Any amount forgiven would be charged to the allowance for credit losses. There were no FDMs in 2024 or 2023.
The Company has two relationships secured by residential real estate totaling $387,000 for which foreclosure proceedings are in process at June 30, 2024.
9. 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 table 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, 2024:
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
Available-for-sale securities:
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
6,328
Total debt securities available-for-sale
460,366
Equity securities
Total recurring fair value measurements
467,651
Nonrecurring fair value measurements
Collateral dependent loans
Mortgage servicing rights
Total nonrecurring fair value measurements
Debt securities available-for-sale
U.S. Treasuries
Corporate debt securities
6,157
490,130
496,092
(1) Includes derivatives designated as fair value hedging instruments as discussed in Note 12
There were no transfers in and out of Level 1, Level 2, or Level 3 fair value measurements during the three or six months ended June 30, 2024. 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, 2024.
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
Discounted cash flow
Remaining term
1 to 30 years
Prepayment speeds
94% to 177%
Discount rate
12.0% to 12.5%
-10%
2 to 30 yrs
104% to 214%
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, 2024 and 2023:
Fair value measurementsusing significantunobservable inputs(Level 3)
Balance, January 1,
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, 2024 was not active and markets for similar securities also are not active. The new issue market is also inactive and there are currently very few market participants who are willing and 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 8.35% 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, 2024 and December 31, 2023:
Cash and cash equivalents, accrued interest receivable and accrued interest payable (carried at cost): The carrying amounts reported in the balance sheet approximate those assets’ fair value.
Investment securities (including derivative instruments) (carried at fair value): The fair value of securities is primarily determined by obtaining quoted market prices on nationally recognized securities exchanges (Level 1), or matrix pricing (Level 2), which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted market prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted prices. Level 2 debt securities are valued by a third-party pricing service commonly used in the banking industry. Level 2 fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution date,
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 and SHCPFIC 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.
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)
Equities
Loans held for sale
790
Net loans
1,144,269
399
Financial liabilities
Deposits with no stated maturities
1,194,146
Deposits with stated maturities
378,693
375,939
29,903
Off-balance sheet instruments
Commitments to extend credit
Standby letters of credit
46
Equity
Restricted investment in bank stocks
560
1,077,544
415
585
1,173,732
314,981
311,735
19,906
10. 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 $95,000 at June 30, 2024 and $106,000 at December 31, 2023, 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
384,679
378,954
19,029
18,820
Total financial instrument commitments
403,708
397,774
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require the payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. QNB evaluates each customer’s creditworthiness on a case-by-case basis.
Standby letters of credit are conditional commitments issued by the 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 $14,482,000 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, 2024 and December 31, 2023 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 were two lease renewals during the six months ended June 30, 2024.
11. 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, 2024, 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
Amount
Ratio
Total risk-based capital (to risk-weighted assets):
The Company
170,668
12.60
108,377
8.00
135,471
10.00
Bank
156,749
11.73
106,899
133,624
Tier 1 capital (to risk-weighted assets):
161,715
11.94
81,283
6.00
147,796
11.06
80,174
Common equity tier 1 capital (to risk-weighted assets):
60,962
4.50
60,131
86,855
6.50
Tier 1 capital (to average assets):
8.99
71,921
4.00
8.28
71,361
89,201
5.00
As of December 31, 2023
167,711
13.09
102,513
128,142
154,062
12.20
101,032
126,290
158,753
12.39
76,885
145,104
11.49
75,774
57,664
56,830
82,088
8.92
71,185
8.18
70,961
88,701
12. 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 is reported in accumulated other comprehensive (loss) income, net of tax, and are reclassified to interest income as interest payments are made or received on the hedged portfolios. QNB assesses the effectiveness of each hedging relationship using a regression analysis of prior periodic changes in fair value of both the hedge and the hedged item. In the assessment of hedge effectiveness, QNB will consider the likelihood of the counterparty's
compliance with the contractual terms of the hedging derivative that could require the counterparty to make payments (counterparty default risk). If the likelihood that the counterparty will not default ceases to be probable, the hedge may no longer be highly effective and hedge ineffectiveness due to counterparty payment risk will be assessed.
The following tables present the notional amounts of derivatives designated as fair value hedging instruments at June 30, 2024, and December 31, 2023. QNB pledges cash or securities to cover the negative fair value of derivatives instruments. Cash collateral associated with the derivative instruments are not added to or netted against the fair value amounts.
Interest Rate Swaps-Fair Value Hedges
At June 30, 2024
At December 31, 2023
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
97,044
97,373
U.S. Government agencies and GSE mortgage backed securities
225,000
326,879
343,453
300,000
423,923
440,826
The following table presents amounts included in the Consolidated Statements on Income for derivatives designated as fair value hedging instruments for the three and six months ended June 30, 2024 and 2023.
Income Sheet Classification
Interest and dividends on available-for-sale and equity securities:
Recognized on fair value hedge
1,000
2,010
Recognized on hedge portfolio
(661
(134
(1,329
Recognized on remeasurement of fair value hedge
2,999
569
5,995
(2,039
(407
(4,076
(12
1,351
180
2,578
The following table presents amounts included in accumulated other comprehensive gain (loss) income for derivatives designated as fair value hedging instruments at June 30, 2024 and December 31, 2023.
Net unrealized holding gains (losses) on fair value hedge, net of tax
4,752
(1,382
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”.
Tabular information presented throughout management’s discussion and analysis, other than share and per share data, is presented in thousands of dollars.
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 2023 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, 2023, which is incorporated herein by reference. Some of these policies are particularly sensitive requiring significant judgments, estimates and assumptions.
RESULTS OF OPERATIONS - OVERVIEW
QNB reported net income for the second quarter of 2024 of $2,465,000, or $0.67 per share on a diluted basis, compared to net income of $1,887,000, or $0.52 per share on a diluted basis, for the same period in 2023. For the six-month period ended June 30, 2024, QNB reported net income of $5,059,000, or $1.38 per share on a diluted basis, compared to net income of $6,005,000, or $1.67 per share on a diluted basis, for the same period in 2023. The Bank contributed $5,072,000 to net income for the six months ended June 30, 2024 compared to $6,234,000 for the same period 2023; and the holding company had a negative contribution $13,000 to net income for the
six months ended June 30, 2024 compared to a negative $229,000 for the same period 2023. The results at the Bank were primarily due to an increase in the provision for credit losses on loans and unused commitments and an increase in non-interest expense. The results at the holding company are due primarily to less unrealized losses on equity securities included in the investment portfolio.
Net income expressed as an annualized rate of return on average assets and average shareholders’ equity was 0.55% and 6.14%, respectively, for the quarter ended June 30, 2024 compared with 0.44% and 4.82%, respectively, for the quarter ended June 30, 2023.
For the six months ended June 30, 2024, the annualized rate of return on average assets and average shareholders' equity was 0.57% and 6.34%, respectively, compared with 0.70% and 7.78%, for the same period in 2023.
Total assets as of June 30, 2024 were $1,761,487,000, compared with $1,706,318,000 at December 31, 2023. Loans receivable at June 30, 2024 were $1,162,310,000, a $68,777,000 increase from $1,093,533,000 at December 31, 2023. Total deposits of $1,572,839,000 at June 30, 2024 increased $84,126,000 compared with total deposits of $1,488,713,000 at December 31, 2023.
Results for the three and six months ended June 30, 2024 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, 2024 and 2023.
Tax-equivalent adjustment
148
279
298
Net interest income (fully taxable-equivalent)
10,730
9,481
21,039
20,048
Net interest income is the primary source of operating income for QNB. Net interest income is interest income, dividends, and fees on earning assets, less interest expense incurred for funding sources. Earning assets primarily include loans, investment securities, 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.
42
Average Balances, Rate, and Interest Income and Expense Summary (Tax-Equivalent Basis)
For the Three Months Ended
June 30, 2023
Average
Balance
Rate
Interest
Investment securities (AFS & Equity):
6,824
5.19
88
3,398
4.81
U.S. Government agencies
84,558
1.17
246
101,945
1.11
283
107,881
3.51
947
109,345
2.38
651
Mortgage-backed and CMOs
356,650
2.73
2,436
406,442
1.76
1,786
6,721
5.72
6,625
4.42
6,501
3.55
8,355
4.65
97
Total investment securities
569,135
2.72
3,870
636,110
1.84
2,931
Loans:
Commercial real estate
801,691
5.46
10,876
696,223
4.72
8,201
Residential real estate
108,693
4.07
1,106
107,402
3.66
984
Home equity loans
65,575
6.83
1,114
57,601
6.44
925
142,174
7.60
2,686
142,438
7.14
2,538
Consumer loans
3,781
7.50
3,918
7.22
70
Tax-exempt loans
18,284
3.87
176
19,742
3.50
Total loans, net of unearned income*
1,140,198
5.65
16,029
1,027,324
5.03
12,890
Other earning assets
43,200
5.44
584
11,555
6.69
192
Total earning assets
1,752,533
4.70
20,483
1,674,989
16,013
13,313
13,547
(8,885
(8,297
41,079
39,129
1,798,040
1,719,368
Liabilities and Shareholders' Equity
Interest-bearing deposits:
334,017
0.84
305,067
0.43
Municipals
132,762
1,587
114,965
4.36
1,251
229,984
3.58
175,243
2.39
290,172
1.28
359,733
1.22
Time < $100
170,640
4.03
111,455
2.27
143,315
4.59
109,462
3.49
Time > $250
53,316
4.63
38,005
2.82
Total interest-bearing deposits
1,354,206
2.74
9,220
1,213,930
5,564
52,383
1.52
108,117
2.90
28,132
16,813
4.35
Total interest-bearing liabilities
1,434,721
1,338,860
1.96
Non-interest-bearing deposits
188,455
213,308
13,524
10,310
Shareholders' equity
161,340
156,890
Net interest rate spread
1.97
1.87
Margin/net interest income
2.46
For the Six Months Ended
6,803
5.26
178
1,842
4.57
84,755
101,944
566
108,027
3.46
1,871
110,243
2.31
1,272
361,317
2.66
4,809
411,760
1.69
3,471
6,714
5.66
6,631
4.41
146
6,260
3.63
113
10,215
3.91
198
573,876
2.67
7,655
642,635
1.77
5,695
788,413
5.40
21,176
688,959
15,803
108,808
3.99
2,172
106,555
3.61
1,921
63,922
6.82
2,169
57,126
6.34
1,795
141,233
7.55
5,301
147,568
7.70
5,634
3,712
7.80
144
4,003
6.97
18,462
3.85
353
20,164
349
1,124,550
5.60
31,315
1,024,375
5.05
25,640
44,922
5.48
1,223
9,290
6.32
291
1,743,348
4.64
40,193
1,676,300
3.80
31,626
13,041
13,216
(8,916
(9,113
40,839
38,865
1,788,312
1,719,268
327,961
0.82
1,345
311,306
0.41
627
132,325
113,468
4.13
2,326
228,928
3.57
153,058
1.83
294,262
382,775
1.14
164,175
3.90
106,360
1.92
135,464
4.47
103,570
3.27
51,536
4.43
32,894
1,334,651
2.68
17,776
1,203,431
1.61
9,592
69,912
2.37
121,443
2.95
24,066
4.56
11,354
1,428,629
2.70
1,336,228
1.75
185,525
217,604
13,619
9,732
160,539
155,704
1.94
2.05
2.43
2.41
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, 2024 and 2023.
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.
June 30, 2024 compared
to June 30, 2023
Due to change in:
Change
Volume
Interest income:
(37
(49
(72
(96
305
599
(25
624
650
(219
869
1,338
(425
1,763
(85
(76
Total Investment securities (AFS & Equity)
939
1,196
1,960
(507
2,467
2,675
1,216
1,459
5,373
2,331
3,042
122
111
251
211
374
155
160
(333
(227
(106
(28
Total Loans
3,139
1,325
1,814
5,675
3,349
392
527
(135
932
(189
4,470
1,595
2,875
8,567
2,940
5,627
Interest expense:
346
718
838
394
444
322
683
2,678
694
1,984
(169
(213
(297
(497
200
1,077
333
744
2,168
555
391
1,333
524
809
347
107
240
746
222
3,656
1,061
2,595
8,184
1,928
6,256
(584
(404
(180
(954
(751
(203
124
3,221
781
2,440
7,576
1,411
6,165
1,249
435
991
1,529
(538
Net Interest Income and Net Interest Margin – Quarterly Comparison
Average earning assets for the second quarter of 2024 were $1,752,533,000, an increase of $77,544,000, or 4.6%, from the second quarter of 2023, with average loans increasing $112,874,000, or 11.0%, average other interest earning assets increasing $31,645,000, primarily interest-earnings cash at the Federal Reserve Bank, and average investment securities decreasing $66,975,000, or 10.5%, over the same period in 2023. Cash generated from repayments on the investment portfolio supported loan growth. Average loans as a percent of average earning assets was 65.1% for the second quarter of 2024, compared with 61.3% for the second quarter of 2023. On the funding side, average deposits increased $115,423,000, or 8.1%, to $1,542,661,000 for the second quarter of 2024 primarily due to an increase in time deposits and money market products. Average short-term borrowed funds, which consisted primarily of average commercial repurchase agreements, short-term Federal Reserve Bank ("FRB") borrowing and over-night FHLB borrowings, decreased $55,734,000 to $52,383,000 during the second quarter of 2024 compared to $108,117,000 for the same period in 2023.
The net interest margin for the second quarter of 2024 increased 19 basis points to 2.46% from 2.27% for the same period in 2023. Competition for quality loans and deposits in our local market continues to exert pressure on the net interest margin. The increases in
45
interest rates starting in March 2022 have compressed the net interest margin as QNB had been liability sensitive; QNB entered into interest rate hedging derivatives during the second quarter of 2023 moving QNB to be asset sensitive. This along with repricing strategies on loans and deposits and the sale of lower-yielding investments have moved QNB to have a neutral interest-rate sensitivity. The swaps added 27 basis points to the net interest margin for the second quarter of 2024. The net interest margin is expected to improve as loans and deposits reprice.
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 $4,470,000, or 27.9%, to $20,483,000 for the second quarter of 2024; total interest expense increased $3,221,000 to $9,753,000.
The yield on earning assets on a tax-equivalent basis increased 87 basis points to 4.70% for the second quarter of 2024, from 3.83% for the second quarter of 2023. The cost of interest-bearing liabilities was 2.73% for the second quarter of 2024, compared with 1.96% for the same period in 2023.
Interest income on investment securities (available-for-sale and equity) increased $939,000 when comparing the quarters ended June 30, 2024 and 2023. The average yield on the investment portfolio was 2.72% for the second quarter of 2024 compared with 1.84% for the same period in 2023, an increase of 88 basis points of which the interest rate swaps contributed 84 basis points.
The yield on U.S. Treasury securities was 5.19% for the second quarter of 2024 compared to 4.81% for the same period in 2023. The yield on U.S. Government agency securities increased six basis points offset by a decrease in average balances of $17,387,000, for a net reduction in interest income of $37,000.
Interest income on municipal securities, which are primarily tax-exempt, increased $296,000 due to a 113 basis-point increase in rate, partly offset by a $1,464,000 decrease in average balances. The rate and interest income increases on municipal securities was positively impacted by the interest rate swap, contributing 113 basis points of the increase in rate. 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 increased $650,000 while average balances decreased $49,792,000 and yield increased 97 basis points. The rate and interest income increases on mortgage-backed securities were positively impacted by the interest rate swap, contributing 99 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.
The dividend yield on equities decreased 110 basis points as average balances decreased $1,854,000. Proceeds from sales of equities were reinvested in higher yielding treasury securities.
Income on loans increased $3,139,000 to $16,029,000 when comparing the second quarters of 2024 and 2023, with an $112,874,000 increase in average balances contributing to an increase in interest income of $1,325,000 and a 62-basis point increase in yield contributing to a $1,814,000 increase in interest income. Higher interest rates during the repricing period were partially offset by competitive pressures that compressed the yields on new loans.
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 $2,675,000 when comparing the second quarters of 2024 and 2023, primarily due to a 74-basis point increase in rate from 4.72% in 2023 to 5.46% and increased average balances of $105,468,000, or 15.1%.
Income on commercial and industrial loans increased $148,000 when comparing the second quarters of 2024 and 2023. The average yield on these loans increased 46 basis points to 7.60% resulting in an increase in income of $160,000; average balances decreased $264,000, to $142,174,000 for the second quarter of 2024 resulting in a $12,000 decrease in interest income. Many of the loans in this category are indexed to the prime interest rate.
Tax-exempt loan income increased $4,000 for the second quarter of 2024 compared to the same period in 2023. Average balances decreased $1,458,000, or 7.4%, to $18,284,000 for the second quarter of 2024. The yield on municipal loans increased 37 basis points, to 3.87% for the second quarter of 2024, compared with the same period in 2023.
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 $122,000 when comparing the
second quarter of 2024 to the same period in 2023. Average residential mortgage loan balances increased by $1,291,000, or 1.2%, to $108,693,000 for the second quarter of 2024 compared to the same period in 2023, which contributed a $11,000 increase in interest income. The average yield on the portfolio increased 41 basis points and contributed an increase of $111,000 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 2024 period by $7,974,000 to $65,575,000; interest income increased $189,000 as the average yield increased 39 basis points to 6.83%. The yield on the consumer portfolio increased 28 basis points to 7.50% for the second quarter of 2024 and there was a $137,000 decrease in average balances resulting in a net $1,000 increase in interest income. The decrease in consumer loans was primarily due to the repayment of student loan balances.
Earning assets are funded by deposits and borrowed funds. Interest expense increased $3,221,000, when comparing the second quarter of 2024 to the same period in 2023. QNB experienced average balance increases in all deposit categories except non-interest-bearing checking and savings accounts. Average non-interest-bearing demand accounts decreased $24,853,000 to $188,455,000 for the second quarter of 2024. Average savings balances decreased $69,561,000 to $290,172,000. QNB offered several new interest-bearing demand and money market products offering higher yields to retain large depositors and reduce the reliance on higher-cost short-term borrowings. Average interest-bearing demand accounts increased $28,950,000, or 9.5%, to $334,017,000 for the second quarter of 2024 and the average rate paid on these deposits increased 41 basis points; interest expense on interest-bearing demand accounts increased $377,000 to $702,000 for the same period. Average money market accounts increased $54,741,000, or 31.2%, to $229,894,000 for the second quarter of 2024 compared with the same period in 2023. Interest expense on money market accounts increased $1,005,000 to $2,049,000, and the average interest rate paid on money market accounts increased 119 basis points to 3.58% for the second quarter of 2024. 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 increased $336,000 to $1,587,000 for the second quarter of 2024. The average interest rate paid on municipal interest-bearing demand accounts increased 45 basis points to 4.81% for the second quarter of 2024 over the same quarter of 2023, and average balances increased $17,797,000, or 15.5%, to $132,762,000. 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 decreased $169,000 when comparing the second quarter of 2024 to the same quarter of 2023. The average interest rate paid on savings accounts increased six basis points to 1.28% for the second quarter of 2024. When comparing these same periods, average savings accounts decreased $69,561,000, or 19.3%, to $290,172,000 for the second quarter of 2024 primarily due to decreases in the e-Savings product. QNB’s online e-Savings product is the largest category of savings deposits, with average balances for the second quarter of 2024 of $211,598,000 compared to $263,717,000 in the same period of 2023. The average yield paid on these accounts was 1.71% for the second quarter of 2024 and 1.59% for the same period in 2023. Traditional statement savings accounts, passbook savings and club accounts are also included in the savings category and average balances in these types of savings accounts decreased $17,442,000 when comparing the second quarter of 2024 to the same period in 2023.
Interest expense on time deposits totaled $3,958,000 for the second quarter of 2024 compared to $1,851,000 in 2023. Average total time deposits increased $108,349,000 to $367,271,000 for the second quarter of 2024. 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. The average rate paid on total time deposits increased 145 basis points from 2.88% to 4.33% when comparing the second quarter of 2024 to the same period in 2023.
Approximately $338,265,000, or 89%, of time deposits at June 30, 2024 will mature over the next 12 months. The average rate paid on these time deposits is approximately 4.53%. 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, overnight FHLB borrowing and short-term FRB borrowing. Interest expense on short-term borrowings decreased $584,000 for the second quarter of 2024 to $199,000 when compared to the same period in 2023. When comparing these same periods, average balances decreased $55,734,000 to $52,383,000. The yield on customer repos increased 19 basis points for the second quarter of 2024 to 1.52%. There were no FHLB borrowings during 2024. The yield on the short-term FHLB borrowing was 5.19% for the second quarter of 2023 and average balances were $4,466,000. During the first quarter of 2023, QNB borrowed $50,000,000 from the FRB under its Bank Term Funding Program and locked in a rate of 4.39%; there are no pre-payment penalties. The FRB borrowings were paid off during the first quarter of 2024; there was an average balance of $50,000,000 for the second quarter of 2023 compared to no average balance in the second quarter of 2024. During the second quarter of 2024, QNB borrowed an additional $10,000,000 in long-term debt to lock in borrowing at a lower yield than short-term borrowings. Average long-term borrowings increased $11,319,000 and the interest rate increased 35 basis points when comparing the second quarter of 2024 to the same period in 2023.
Net Interest Income and Net Interest Margin – Six-Month Comparison
For the six-month period ending June 30, 2024 average earning assets increased $67,048,000, or 4.0%, to $1,743,348,000, with average loans increasing 9.8% and average investment securities decreasing 10.7%. Average total deposits increased $99,141,000, or 7.0%, to $1,520,176,000 for the six-month period ended June 30, 2024 compared to the same period in 2023. The net interest margin on a tax-equivalent basis was 2.43% for the six-month period ended June 30, 2024, a two-basis point increase from the same period in 2023.
Total interest income on a tax-equivalent basis increased $8,567,000, or 27.1%, to $40,193,000 from $31,626,000, when comparing the six-month periods ended June 30, 2024 and June 30, 2023 due to an increase in volume and rate on loans. Interest income on loans increased $2,431,000 as a result of volume and increased $3,244,000 as a result of yields. The analysis of the six-month comparison periods is similar to what was described in the quarterly analysis.
The yield on earning assets increased from 3.80% to 4.64% for the six-month periods with the yield on loans up 55 basis points to 5.20%. QNB continues to experience pressure on yields due to competitive pressures on loan pricing.
Total interest expense increased $7,576,000 for the six-month period ended June 30, 2024 compared with the same period in 2023 attributable to an increase in rates. The average rate paid on interest bearing deposits increased 107 basis points to 2.68% for the six-month period ended June 30, 2024 versus the same period in 2023. The average balance of total short-term borrowings decreased $51,531,000 primarily due to overnight FHLB borrowing. The yield on interest-bearing liabilities increased 95 basis points to 2.70% for the six months ended June 30, 2024. QNB invested proceeds from maturities and sales of investment securities and growth deposits into loans and to payoff short-term borrowing.
PROVISION FOR CREDIT LOSSES, ALLOWANCE FOR CREDIT LOSSES ON LOANS AND ALLOWANCE FOR CREDIT LOSSES ON UNUSED COMMITMENTS
On January 1, 2023, the Company adopted ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326), as amended ("ASU 326"), which replaces the incurred loss methodology with an expected credit losses (“CECL”) for financial instruments held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts. On January 1, 2023, QNB recorded a decrease to its allowance for credit losses on loans of $989,000 and an increase to its allowance for credit losses on unused commitments of $5,000.
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 $39,000 in the provision for credit losses for the six months ended June 30, 2024, through the allowance for credit losses on loans, compared to a reversal of $1,571,000 through the provision for credit losses for the same period in 2023. QNB recorded a reversal of provision of $11,000 for the allowance for credit losses for unused commitments in the six months ended June 30, 2024 compared to a reversal of $25,000 for the same period in 2023.
QNB's allowance for credit losses on loans of $8,858,000 represents 0.76% of loans receivable at June 30, 2024 compared with an allowance for credit losses on loans of $8,852,000 or 0.81% of loans receivable, at December 31, 2023, and $8,365,000, or 0.81%, at June 30, 2023. Management believes the allowance for credit losses on loans at June 30, 2024 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 charge-offs were $12,000 for the three months ended June 30, 2024 compared to net charge-offs of $38,000 for the three months ended June 30, 2023. Charge-offs consisted of overdrafts of $20,000 and a commercial and industrial loans of $23,000. Recoveries of approximately $31,000 during the three months ended June 30, 2024 consisted of $25,000 in repayments from borrowers of previously
48
charged-off credits and overdrafts recoveries of $6,000. Annualized net charge-offs as a percentage of average loans receivable were 0.00% for the three months ended June 30, 2024, compared to annualized net charge-offs of 0.01% for the three months ended June 30, 2023.
Net charge-offs were $33,000 for the six months ended June 30, 2024 compared to net recoveries of $494,000 for the six months ended June 30, 2023. Charge-offs of approximately $90,000 during the six months ended June 30, 2024 consisted primarily of a commercial loan of $23,000, student loans of $6,000, consumer loans of $8,000 and overdrafts of $53,000. These were offset by $57,000 in recoveries comprising $43,000 in repayments from borrowers of previously charged-off credits, and $14,000 related to overdraft recoveries. Annualized net charge-offs as a percentage of average loans receivable were 0.01% for the six months ended June 30, 2024, compared to annualized net recoveries of 0.10% for the six months ended June 30, 2023.
Non-performing assets were $2,078,000 at June 30, 2024 compared to $1,940,000 as of December 31, 2023 and $4,794,000 at June 30, 2023. Total non-performing loans, which represent loans on non-accrual status, loans past due 90 days or more and still accruing interest and restructured loans, were 0.18% of loans receivable at June 30, 2024, 0.18% at December 31, 2023, and 0.47% of loans receivable at June 30, 2023. 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. At June 30, 2024, $1,188,000, or approximately 57% of the loans classified as non-accrual are current or past due less than 30 days. Commercial loans classified as substandard or doubtful totaled $32,710,000, an increase of $21,100,000 from the $11,610,000 reported at December 31, 2023 and an increase of $17,904,000 from the $14,806,000 reported at June 30, 2023. The increase in classified loans since December 31, 2023 and June 30, 2023 was due to two commercial relationships downgraded to "Special Mention."
QNB had no loans past due 90 days or more and still accruing interest at June 30, 2024, December 31, 2023, or June 30, 2023. Total loans 30 days or more past due, which includes non-accrual loans by actual number of days delinquent, represented 0.44% of loans receivable at June 30, 2024 compared with 1.09% at December 31, 2023, and 0.94% at June 30, 2023. The December 31, 2023 past-dues included one large relationship past maturity and in the process of refinancing.
There were no modifications to borrowers experiencing financial difficulty identified during the six months ended June 30, 2024 or 2023. QNB had no other real estate owned or repossessed assets at June 30, 2024, December 31, 2023 or June 30, 2023.
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.
49
The following table shows detailed information and ratios pertaining to the Company’s loan and asset quality:
Non-accrual loans
4,794
Loans past due 90 days or more and still accruing interest
Troubled debt restructured loans (not already included above)
Total non-performing loans
Total non-performing assets
Total loans (excluding loans held-for-sale):
Average total loans (YTD)
1,124,354
1,040,121
1,024,088
1,029,744
Allowance for loan losses to:
Non-performing loans
426.28
456.29
174.49
Total loans (excluding held-for-sale)
0.76
0.81
Average total loans (excluding held-for-sale)
0.79
0.85
Non-performing loans / total loans (excluding held-for-sale)
0.18
0.47
Non-performing assets / total assets
0.12
0.11
0.29
An analysis of net loan charge-offs (recoveries) for the three and six months ended June 30, 2024 compared to 2023 is as follows:
Net charge-offs (recoveries)
(494
Net annualized charge-offs (recoveries) to:
0.00
0.01
(0.10
%)
Average total loans excluding held-for-sale
Allowance for loan losses
0.54
1.82
0.75
(11.91
At June 30, 2024 and December 31, 2023, the recorded investment in loans for which impairment has been identified totaled $2,067,000 and $1,923,000 of which $1,899,000 and $1,451,000, respectively, required no specific allowance for loan loss. The recorded investment in impaired loans requiring an allowance for loan losses was $168,000 and $472,000 at June 30, 2024 and December 31, 2023, respectively, and the related allowance for loan losses associated with these loans was $125,000 and $308,000, respectively. Most of the loans that have been identified as impaired are collateral-dependent. See Note 8 to the Notes to Consolidated Financial Statements for additional detail of impaired loans.
NON-INTEREST INCOME
Non-Interest Income Comparison
Change from prior year
Percent
(1,615
-311.2
(773
N/M%
1,589
(277.3
1,502
(291.1
3.1
3.8
0.1
(1.6
(37.6
(217
(49.8
-
4.9
(21.7
(17
(8.5
(60.0
N/M
(5.2
(7.8
(115
-7.3
17.9
Quarter to Quarter Comparison
Total non-interest income for the second quarter of 2024 was $1,465,000, a decrease of $115,000, compared to $1,580,000 for the second quarter of 2023. Excluding realized and unrealized gains (losses) on securities and loans, non-interest income decreased $89,000, or 5.4%, to $1,545,000 for the quarter ended June 30, 2024 compared with the same period in 2023.
There was a net realized loss of $1,096,000 on the sale of investments for the quarter ended June 30, 2024 compared to a net gain of $519,000 on the sales of securities in the same period in 2023. QNB took the strategic opportunity to better position future earnings by selling lower-yielding securities in the second quarter of 2024 at a loss and reinvesting the proceeds in higher-yielding assets.
During the second quarter of 2024, unrealized gains on investment equity securities of $1,016,000 were recorded compared to unrealized losses of $573,000 in the same period of 2023. The unrealized gains and losses for the three months ended June 30, 2024 and 2023 resulted from the change in the fair value of the equities included in the investment portfolio. The Bank completed the exchange offer to convert its Visa B-1 shares to B-2 and C shares; the Bank recorded a $1,354,000 unrealized gain on the Visa C shares.
QNB originates residential mortgage loans for sale in the secondary market. Net loss on sale of loans was $2,000 for second quarter of 2024; compared to a net loss of $5,000 in the second quarter of 2023. The net gain on residential mortgage sales is directly related to the volume of mortgages sold and the timing of the sales relative to the interest rate environment 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 service to customers increased $13,000 for the quarter ended June 30, 2024, as overdraft fees decreased $5,000 and other deposit-related fees increased $18,000.
QNB provides securities and advisory services under the name QNB Financial Services. Retail brokerage and advisory fees decreased for the second quarter of 2024 compared to the same period in 2023. Advisory fees decreased $112,000 for the second quarter of 2024 compared with the same period in 2023 and transactional fees increased $36,000; a net decrease of $76,000 due to a decrease in client balances following employee turnover.
Merchant fees decreased $23,000 for the same period due to volume.
Six-Month Comparison
Total non-interest income for the six-month periods ended June 30, 2024 and 2023 was $3,301,000 and $2,799,000, respectively, an increase of $502,000. Excluding realized and unrealized gain and losses on securities, total non-interest income was $3,034,000 and $3,261,000, respectively, a decrease of $227,000, or 7.0%.
Net investment securities gains decreased $773,000 to a net loss of $719,000 for the six months ended June 30, 2024 compared to a net gain of $54,000 for the comparable six months in 2023. Market conditions in the equities market for the six months ended June 30, 2024 versus the same period in 2023 resulted in greater opportunities for profitable sales in 2024. QNB recorded realized gains of $377,000 compared to gains of $311,000 on equity securities for the six months ended June 30, 2024 and 2023, respectively. Losses on sales of debt securities were $1,096,000 and $257,000 for the six months ended June 30, 024 and 2023, respectively, as QNB sold securities to lower its market risk in a rising rate environment.
Net gains on sales of loans increased to $13,000 from $1,000, when comparing the six months ended June 30, 2024 to the same period in 2023. Proceeds from the sale of residential mortgages were $801,000 and $388,000 for the six-month period ended June 30, 2024 and 2023, respectively.
Fees for services to customers increased $31,000 to $847,000 for the first six months of 2024, due primarily to an increase in deposit-related fees income. ATM and debit card decreased $22,000 for the first six months of 2024 compared to 2023, due to volume.
Retail brokerage and advisory fees decreased $217,000, or 49.8%, to $219,000 for the six months ended June 30, 2024 compared to the same period in 2023; advisory fees decreased $276,000 and transaction-based fees increased $59,000 due to a decrease in client balances following employee turnover.
Merchant income decreased $17,000. Other non-interest income decreased $22,000. Mortgage servicing income decreased $8,000 when comparing the two six-month periods primarily due to payoffs on the serviced portfolio. The six months ended June 30, 2023 included broker-dealer conversion fees of $12,000.
NON-INTEREST EXPENSE
Non-Interest Expense Comparison
263
5.5
674
7.2
(2.6
2.2
7.3
(12.0
6.9
Third-party services
3.9
3.2
(7.5
(51
(17.0
156
260.0
71.7
15.5
45.9
(21
(2.4
(120
(6.5
442
5.2
1,075
6.4
Total non-interest expense was $8,934,000 for the second quarter of 2024, an increase of $442,000 compared to the second quarter of 2023.
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 $263,000, or 5.5%, to $5,038,000 when comparing the two quarters. Salary expense and related payroll taxes increased $118,000, or 3.0% to $4,097,000 during the second quarter of 2024 compared to the same period in 2023 due to pay increases and filling open positions. Medical and dental premiums, net of employee contributions, increased $162,000 when comparing the two quarters due to medical claims. Retirement and post-retirement costs decreased $12,000.
Net occupancy and furniture and equipment expenses combined increased $14,000 when comparing the second quarters of 2024 and 2023. This is due primarily to increased software maintenance expense. Marketing expense decreased $31,000, or 12.0%, to $228,000 for the quarter ended June 30, 2024, due to timing of community support donations.
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 $25,000, due to legal costs. Telephone, postage and supplies expense decreased $10,000 primarily due to a reduction in postage and mailing expenses as there was an increase in the use of electronic delivery. State taxes increased $156,000 due to the timing of tax credits received for qualified charitable contributions. FDIC insurance premiums increased $46,000 due to an increase in the assessment rate.
Other non-interest expense decreased $21,000, or 2.4%, due to a reduction in write-offs due to fraud on customer accounts of $146,000 as the Bank was able to recover some losses from prior periods, partly offset by an increase in debit card expense of $67,000 and the recording of a potential expense of $85,000 related to the Visa stock exchange make-whole agreement.
Total non-interest expense was $17,767,000 for the six-month period ended June 30, 2024, an increase of $1,075,000, or 6.4%, compared to the six months ended June 30, 2023.
Salaries and benefits expense increased $674,000 to $10,012,000 for the six months ended June 30, 2024 compared to the same period in 2023. Salary and related payroll tax expense increased $297,000 during the period, to $8,243,000 and medical and dental costs increased $340,000.
Net occupancy and furniture and equipment expense increased $152,000, or 5.3%, to $2,996,000, due to the reasons described in the quarter to quarter comparison. Marketing expenses increased $32,000 due to advertising and promotions. Third-party services increased $40,000, or 3.2%, to $1,285,000 for the six months ended June 30, 2024. Telephone, postage and supplies expense decreased $51,000 due to the reasons described above in the quarter to quarter comparison.
FDIC insurance premiums increased $216,000 and state taxes increased $132,000, due to the reasons described in the quarter to quarter comparison.
Other non-interest expense decreased $120,000 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, 2024, QNB’s net deferred tax asset was $18,393,000. The primary components of deferred taxes are deferred tax assets of which $18,499,000 relates to investment securities fair value adjustments and $1,860,000 relates to the allowance for credit losses on loans, partly offset by a deferred tax liability on interest rate swap fair value adjustments of $1,263,000 and deferred loan costs of $516,000. As of December 31, 2023, QNB’s net deferred tax asset was $19,290,000 of which $17,692,000 is related to investment securities fair value adjustment and $1,859,000 related to the allowance for credit losses on loans. The decrease in the balance of net deferred tax assets when comparing June 30, 2024 to December 31, 2023 of $897,000 is due to the unrealized gains on interest rate swaps contributing a reduction of $1,630,000, partly offset by a reduction in unrealized losses on available for sale securities contributing $807,000.
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.
Applicable income tax expense was $544,000 for the quarter and $1,207,000 for the six months ended June 30, 2024, compared to $325,000 for the quarter and $1,448,000 for the six months ended June 30, 2023, respectively. The effective tax rate for the second quarter and six-month period ended June 30, 2024 was 18.1% and 19.3%, respectively, compared with 14.7% and 19.4%, respectively, for the same period in 2023. The effective tax rate for the six months ended June 30, 2024 remain relatively flat in comparison to the same period in 2023.
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 2024. It is also anticipated that the rate competition for attracting and retaining deposits may increase in the remainder of 2024, 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, 2024 were $1,761,487,000 compared with $1,706,318,000 at December 31, 2023. Cash and cash equivalents increased $14,252,000 from $62,657,000 at December 31, 2023 to $76,909,000 at June 30, 2024.
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 $29,764,000, due to maturities and prepayments of $25,635,000 and sales of $13,139,000; this was partly offset by purchases of $7,434,000 and improvement in the fair value mark of $3,923,000.
Loans receivable increased $68,777,000 with commercial loans increasing $65,014,000 to $984,429,000 at June 30, 2024, compared with $919,415,000 at year-end 2023 and retail loans increasing $4,026,000 over the same period.
Deposits grew $84,126,000 from December 31, 2023 to June 30, 2024. Non-interest-bearing demand deposits increased $5,235,000, with balances of $190,333,000 at June 30, 2024 compared with $185,098,000 at year-end 2023. Interest-bearing demand balances, excluding municipal deposits, increased $21,777,000 to $351,729,000, with increases in both personal and business interest-bearing checking products. The $12,153,000 increase in money market accounts was primarily due to the premium money market product offered to both personal and business customers. The $16,022,000 decrease in savings was primarily due to declines in the E-Savings on-line product as some of these funds moved to higher-yield certificates of deposit or the premium money market accounts. Total time deposits increased $63,712,000 from December 31, 2023 to June 30, 2024 as customers took advantage of higher-yielding time deposits, moving from lower-yielding products. Municipal deposit balances decreased $2,729,000, to $130,031,000, during the first six months of 2024. 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 47.9%, from $94,094,000 at December 31, 2023 to $49,066,000 at June 30, 2024. Commercial sweep accounts increased $4,972,000; these funds may be volatile based on businesses’ receipt and disbursement of funds and is offset by business non-interest-bearing demand accounts. During the first quarter of 2023, QNB borrowed $50,000,000 from the FRB under its Bank Term Funding Program and locked in a rate of 4.39%, there are no pre-payment penalties; these borrowing were paid off during the first quarter of 2024. During the six months ended June 30, 2023, QNB borrowed an additional $10,000,000 in long-term debt from the FHLB increasing it total to $30,000,000 to lock in a low yield.
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, 2024 the Bank had a maximum borrowing availability with the FHLB of approximately $398,000,000, which is net of long-term borrowing outstanding of $30,000,000, a $298,000 letter of credit 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, 2024 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 decreased $13,952,000 since December 31, 2023, totaling $545,346,000 at June 30, 2024. The reduction in the liquid sources of funds is primarily due to maturities and sales of available-for-sale securities. Growth in deposits provided cash flows of $84,126,000 and net proceeds from available-for-sale investment activities provided $31,340,000; combined, the proceeds enabled the net paydown on short-term borrowings of $45,028,000 and funding for the net growth in loans of $68,810,000. 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 continues to be steady.
Approximately $255,369,000 and $289,935,000 of available-for-sale debt securities at June 30, 2024 and December 31, 2023, 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, 2024 was $96,885,000, or 5.50% of total assets, compared with shareholders' equity of $90,824,000, or 5.32% of total assets, at December 31, 2023. Shareholders’ equity at June 30, 2024 included a negative adjustment of $64,838,000 compared to a negative adjustment of $67,937,000 at December 31, 2023, related to net unrealized holding losses, net of taxes, on investment securities available-for-sale and gains on fair value hedges, net of tax. Without these adjustments, shareholders' equity to total assets would have been 8.86% and 8.95% at June 30, 2024 and December 31, 2023, respectively.
Average shareholders' equity and average total assets were $160,539,000 and $1,788,312,000 for the six months ended June 30, 2024, an increase of 3.1% and 4.0%, respectively, from the averages for the six months ended June 30, 2023. The ratio of average total equity to average total assets was 8.98% for the six months ended June 30, 2024 compared to 9.06% for the same period in 2023.
Retained earnings at June 30, 2024 were impacted by six months of net income totaling $5,059,000 offset by dividends declared and paid of $2,709,000 for the six-month period. QNB offers a Dividend Reinvestment and Stock Purchase Plan (the “Plan”) to provide participants a convenient and economical method for investing cash dividends paid on the Company’s common stock in additional shares. The Plan also allows participants to make additional cash purchases of stock. Stock purchases under the Plan contributed $451,000 to capital during the six months ended June 30, 2024.
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, 2024, 102,000 shares have been repurchased since the initial authorization at an average price of $24.93 and a total cost of $2,543,000.
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
64,838
67,937
Deferred tax assets on net operating loss
Disallowed intangible assets
Common equity tier I capital
Tier 1 capital
Allowable portion: Allowance for loan losses and reserve for unfunded commitments
8,953
8,958
Total regulatory capital
Risk-weighted assets
1,354,712
1,281,418
Quarterly average assets for leverage capital purposes
1,798,032
1,779,619
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)
8.90
At June 30, 2024, common equity Tier 1, Tier 1 capital, and total regulatory capital ratios to risk-weighted assets decreased since December 31, 2023 primarily due to the growth in loans; however, the leverage ratio improved. The Company remains well-capitalized by all applicable regulatory requirements as of June 30, 2024.
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, 2024 is neutral. Management expects that market interest rates may decrease over the next 12 months, based on the economic environment and policy of the Board of Governors of the Federal Reserve System.
The following table shows the estimated impact of changes in interest rates on net interest income as of June 30, 2024 and 2023 assuming instantaneous rate shocks, and consistent levels of assets and liabilities. Net interest income for the subsequent twelve months is projected to decrease when interest rates are higher than current rates.
Estimated Change in Net Interest Income
Changes in Interest rates
(in basis points)
+300
-0.26
10.68
+200
-0.10
7.19
+100
0.16
3.67
-100
-0.89
-3.88
-200
-2.92
-8.95
-300
-5.95
-15.56
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, 2024, QNB had two derivatives designated as fair value hedging instruments, these interest rate swaps had a notional value of $300,000,000.
QNB is not subject to foreign currency exchange or commodity price risk.
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. 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 six-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, 2023.
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, 2024. 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, 2024 through April 30, 2024
98,000
May 1, 2024 through May 31, 2024
June 1, 2024 through June 30, 2024
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 January 26, 2021. (Incorporated by reference to Exhibit 3.1 of the Registrant's Report on Form 8-K, SEC File No. 0-17706, filed with the Commission on January 27, 2021.)
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 8, 2024
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