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~~

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~September~~June 30, ~~2017~~ 2023

☐	~~TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934~~

☐ 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 9005Quakertown, PA		18951-9005
(Address of Principal Executive Offices)		(Zip Code)

~~(215)~~(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.~~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 ~~and posted on its corporate Web site, if any,~~ every Interactive Data File required to be submitted ~~and posted~~ 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 ~~and post~~ such files). Yes☒ No ☐

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or 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 ~~October 31, 2017~~July 28, 2023
Common Stock, par value $0.625		~~3,440,356~~3,612,486

QNB CORP. AND SUBSIDIARY

FORM 10-Q

QUARTER ENDED ~~SEPTEMBER 30, 2017~~March 31, 2023

INDEX


	PART I - FINANCIAL INFORMATION

ITEM 1.	CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)	PAGE

	Consolidated Balance Sheets at ~~September~~June 30, ~~2017~~2023 and December 31, ~~2016~~2022	32

	Consolidated Statements of Income for the Three and ~~Nine~~Six Months Ended ~~September~~June 30, ~~2017~~2023 and ~~2016~~2022	43

	Consolidated Statements of Comprehensive Income (Loss) for the Three and ~~Nine~~Six Months Ended ~~September~~June 30, ~~2017~~2023 and ~~2016~~2022	54

	Consolidated Statement of Shareholders’ Equity for the ~~Nine~~Three and Six Months Ended ~~September~~June 30, ~~2017~~2023 and ~~2016~~2022	65

	Consolidated Statements of Cash Flows for the ~~Nine~~Six Months Ended ~~September~~June 30, ~~2017~~2023 and ~~2016~~2022	76

	Notes to Consolidated Financial Statements	87

ITEM 2.	MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	3937

ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK	6057

ITEM 4.	CONTROLS AND PROCEDURES	6058

	PART II - OTHER INFORMATION

ITEM 1.	LEGAL PROCEEDINGS	6159

ITEM 1A.	RISK FACTORS	6159

ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	6159

ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	6159

ITEM 4.	MINE SAFETY DISCLOSURES	6159

ITEM 5.	OTHER INFORMATION	6159

ITEM 6.	EXHIBITS	6260

SIGNATURES		61

CERTIFICATIONS

QNB Corp. and Subsidiary

CONSOLIDATED BALANCE SHEETS


	(in thousands, except share data)						(in thousands, except share data)
	(current period unaudited)						(current period unaudited)
	September 30, 2017			December 31, 2016			June 30, 2023			December 31, 2022
Assets
Cash and due from banks	$	14,438		$	8,897		$	14,227		$	14,657
Interest-bearing deposits in banks		11,590			1,824			20,597			1,242
Total cash and cash equivalents		26,028			10,721			34,824			15,899

Investment securities
Trading		—			3,596
Available-for-sale (amortized cost $400,041 and $396,168)		396,413			390,475
Restricted investment in bank stocks		578			1,017
Investments:
Available-for-sale (amortized cost $623,907 and $649,217)								527,741			546,525
Equity securities (cost of $5,975 and $12,091)								5,424			12,056
Restricted investment in stocks								2,730			5,193
Loans held-for-sale		115			789			810			—
Loans receivable		704,214			633,079			1,029,744			1,039,385
Allowance for loan losses		(8,125	)		(7,394	)
Net loans		696,089			625,685
Allowance for credit losses on loans								(8,365	)		(10,531	)
Loans receivable, net								1,021,379			1,028,854
Bank-owned life insurance		10,811			11,297			11,790			11,625
Premises and equipment, net		8,546			8,683			15,437			15,463
Accrued interest receivable		3,616			3,128			3,721			5,038
Net deferred tax assets		4,741			5,473			21,418			23,077
Other assets		3,426			2,277			5,312			4,767
Total assets	$	1,150,363		$	1,063,141		$	1,650,586		$	1,668,497

Liabilities
Deposits
Demand, non-interest bearing	$	122,696		$	119,010		$	212,396		$	231,849
Interest-bearing demand		320,386			255,754			433,290			452,927
Money market		81,306			74,762			188,018			127,043
Savings		250,618			238,247			340,734			431,101
Time		127,430			131,370
Time of $100 or more		103,009			94,212
Time less than $100								120,749			91,329
Time $100 through $250								111,137			59,650
Time greater than $250								43,441			24,470
Total deposits		1,005,445			913,355			1,449,765			1,418,369
Short-term borrowings		40,176			52,660			90,845			161,327
Long-term debt								20,000			10,000
Accrued interest payable		336			335			1,966			467
Other liabilities		3,894			3,224			7,065			7,376
Total liabilities		1,049,851			969,574			1,569,641			1,597,539

Shareholders' Equity
Common stock, par value $0.625 per share;
authorized 10,000,000 shares; 3,604,825 shares and 3,576,270
shares issued; 3,440,256 and 3,411,701 shares outstanding		2,253			2,235
Common stock, par value $0.625 per share;
authorized 10,000,000 shares; 3,819,606 shares and 3,796,948
shares issued; 3,610,920 and 3,588,262 shares outstanding								2,387			2,373
Surplus		18,369			17,418			25,414			24,798
Retained earnings		84,761			80,147			133,152			128,951
Accumulated other comprehensive loss, net of tax		(2,395	)		(3,757	)		(75,971	)		(81,127	)
Treasury stock, at cost; 164,569 shares		(2,476	)		(2,476	)
Treasury stock, at cost; 208,686 and 208,686 shares								(4,037	)		(4,037	)
Total shareholders' equity		100,512			93,567			80,945			70,958
Total liabilities and shareholders' equity	$	1,150,363		$	1,063,141		$	1,650,586		$	1,668,497

The accompanying notes are an integral part of the consolidated financial statements.

QNB Corp. and Subsidiary

CONSOLIDATED STATEMENTS OF INCOME

	(in thousands, except per share data - unaudited)
	Three months ended September 30,						Nine months ended September 30,							For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2017			2016			2017			2016
(in thousands, except per share data - unaudited)														2023			2022			2023			2022
Interest income
Interest and fees on loans	$	7,722		$	6,376		$	21,909		$	19,060			$	12,852		$	9,391		$	25,566		$	18,394
Interest and dividends on investment securities (AFS & HTM):
Interest and dividends on available-for-sale & equity securities:
Taxable		1,558			1,317			4,672			3,964				2,457			2,415			4,736			4,689
Tax-exempt		507			478			1,456			1,483				365			502			739			1,019
Interest on trading securities		—			36			45			106
Interest on interest-bearing balances and other interest income		43			80			76			138				191			19			287			34
Total interest income		9,830			8,287			28,158			24,751				15,865			12,327			31,328			24,136

Interest expense
Interest on deposits
Interest-bearing demand		351			177			753			492				1,576			291			2,953			528
Money market		59			48			187			142				1,044			125			1,386			231
Savings		300			233			837			688				1,093			383			2,170			704
Time		387			378			1,127			1,122
Time of $100 or more		357			330			1,008			967
Time less than $100															631			170			1,013			354
Time of $100 through $250															953			77			1,680			162
Time greater than $250															267			45			390			87
Interest on short-term borrowings		61			36			193			115				783			93			1,778			152
Interest on long-term debt															185			40			208			79
Total interest expense		1,515			1,202			4,105			3,526				6,532			1,224			11,578			2,297
Net interest income		8,315			7,085			24,053			21,225				9,333			11,103			19,750			21,839
Provision for loan losses		100			—			700			125
Provision (reversal) for credit losses on loans															209			—			(1,596	)		—
Net interest income after provision for loan losses		8,215			7,085			23,353			21,100				9,124			11,103			21,346			21,839

Non-interest income
Total other-than-temporary impairment loss on investment securities		(80	)		—			(80	)		(192	)
Less: Portion of loss recognized in other comprehensive income (before taxes)		—			—			—			—
Net other-than temporary impairment losses on investment securities		(80	)		—			(80	)		(192	)
Net gain on sale of investment securities		178			316			1,042			842
Net gain on investment securities		98			316			962			650
Net (loss) gain on trading activities		—			(39	)		27			47
Net gain on sales and calls of available-for-sale and equity securities															519			457			54			493
Unrealized loss on investment equity securities															(573	)		(1,446	)		(516	)		(1,454	)
Fees for services to customers		429			425			1,242			1,205				414			403			816			787
ATM and debit card		435			419			1,301			1,229				704			705			1,363			1,346
Retail brokerage and advisory		168			129			375			425				202			205			436			410
Bank-owned life insurance		70			73			261			217				78			75			164			156
Merchant		91			86			263			242				106			109			199			204
Net gain on sale of loans		65			143			316			263
Net (loss) gain on sale of loans															(5	)		—			1			—
Other		114			92			328			316				135			131			282			308
Total non-interest income		1,470			1,644			5,075			4,594				1,580			639			2,799			2,250

Non-interest expense
Salaries and employee benefits		3,514			3,072			9,837			9,114				4,775			4,205			9,338			8,471
Net occupancy		469			438			1,345			1,305				549			550			1,089			1,128
Furniture and equipment		475			437			1,360			1,302				918			724			1,755			1,411
Marketing		188			220			724			681				259			297			462			491
Third party services		379			440			1,180			1,246				636			590			1,245			1,257
Telephone, postage and supplies		201			189			600			549				133			174			300			368
State taxes		161			178			509			499				60			188			184			460
FDIC insurance premiums		156			162			431			489				296			180			471			397
Other		648			480			1,735			1,543				866			838			1,848			1,576
Total non-interest expense		6,191			5,616			17,721			16,728				8,492			7,746			16,692			15,559
Income before income taxes		3,494			3,113			10,707			8,966				2,212			3,996			7,453			8,530
Provision for income taxes		940			821			2,907			2,311				325			647			1,448			1,471
Net income	$	2,554		$	2,292		$	7,800		$	6,655			$	1,887		$	3,349		$	6,005		$	7,059
Earnings per share - basic	$	0.74		$	0.68		$	2.28		$	1.97			$	0.52		$	0.94		$	1.67		$	1.99
Earnings per share - diluted	$	0.74		$	0.67		$	2.27		$	1.96			$	0.52		$	0.94		$	1.67		$	1.98
Cash dividends per share	$	0.31		$	0.30		$	0.93		$	0.90			$	0.37		$	0.36		$	0.74		$	0.72
The accompanying notes are an integral part of the consolidated financial statements.													The accompanying notes are an integral part of the consolidated financial statements.

QNB Corp. and Subsidiary

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)


	(in thousands - unaudited)
	2023									2022
For the Three Months Ended June 30,	Before tax amount			Tax expense			Net of tax amount			Before tax amount			Tax expense			Net of tax amount
Net income	$	2,212		$	325		$	1,887		$	3,996		$	647		$	3,349
Other comprehensive income (loss):
Net unrealized holding gains (losses) on available-for-sale securities:
Unrealized holding gains (losses) arising during the period		(7,129	)		(1,497	)		(5,632	)		(26,768	)		(5,620	)		(21,148	)
Reclassification adjustment for losses (gains) included in net income (1)		—			—			—			(3	)		(1	)		(2	)
Net unrealized holding gains (losses) on fair value hedge:
Unrealized holding gains (losses) arising during the period		2,209			464			1,745			—			—			—
Reclassification adjustment for fair value remeasurements included in net income (2)		38			8			30			—			—			—
Other comprehensive income (loss):		(4,882	)		(1,025	)		(3,857	)		(26,771	)		(5,621	)		(21,150	)
Total comprehensive income (loss)	$	(2,670	)	$	(700	)	$	(1,970	)	$	(22,775	)	$	(4,974	)	$	(17,801	)



For the Six Months Ended June 30,	2023						2022
	Before tax amount		Tax expense (benefit)		Net of tax amount		Before tax amount			Tax expense (benefit)			Net of tax amount
Net income	$	7,453	$	1,448	$	6,005	$	8,530		$	1,471		$	7,059
Other comprehensive (loss) income:
Net unrealized holding losses on available-for-sale securities:
Unrealized holding losses arising during the period		4,023		845		3,178		(73,099	)		(15,351	)		(57,748	)
Reclassification adjustment for losses (gains) included in net income (1)		257		54		203		(4	)		(1	)		(3	)
Net unrealized holding gains (losses) on interest rate swaps:
Unrealized holding gains (losses) arising during the period		2,209		464		1,745		—			—			—
Reclassification adjustment for fair value remeasurements included in net income (2)		38		8		30		—			—			—
Other comprehensive loss		6,527		1,371		5,156		(73,103	)		(15,352	)		(57,751	)
Total comprehensive (loss) income	$	13,980	$	2,819	$	11,161	$	(64,573	)	$	(13,881	)	$	(50,692	)

(1) Included in Net gain on sales and calls of available-for-sale and equity securities on the Concolidated Statements of Income

(2) Included in Interest and dividends on available-for-sale & equity securities on the Concolidated Statements of Income

The accompanying notes are an integral part of the consolidated financial statements.

QNB Corp. and Subsidiary

~~CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME~~

(in thousands - unaudited)

Three months ended September 30,

2017

2016

Before
tax
amount

Tax
expense
(benefit)

Net of
tax
amount

Before
tax
amount

Tax
expense
(benefit)

Net of
tax
amount

Net income

$
3,494

$
940

$
2,554

$
3,113

$
821

$
2,292

Other comprehensive income:

Net unrealized holding gains (losses) on securities:

Unrealized holding gains (losses) arising during
the period

96

33

63

(875
)

(298
)

(577
)
Reclassification adjustment for gains
included in net income

(98
)

(33
)

(65
)

(316
)

(107
)

(209
)
Other comprehensive loss

(2
)

-

(2
)

(1,191
)

(405
)

(786
)
Total comprehensive income

$
3,492

$
940

$
2,552

$
1,922

$
416

$
1,506

Nine months ended September 30,

2017

2016

Before
tax
amount

Tax
expense
(benefit)

Net of
tax
amount

Before
tax
amount

Tax
expense
(benefit)

Net of
tax
amount

Net income

$
10,707

$
2,907

$
7,800

$
8,966

$
2,311

$
6,655

Other comprehensive income:

Net unrealized holding gains on securities:

Unrealized holding gains arising during
the period

3,027

1,029

1,998

4,944

1,681

3,263

Reclassification adjustment for gains
included in net income

(962
)

(326
)

(636
)

(650
)

(221
)

(429
)
Other comprehensive income

2,065

703

1,362

4,294

1,460

2,834

Total comprehensive income

$
12,772

$
3,610

$
9,162

$
13,260

$
3,771

$
9,489

~~The accompanying notes are an integral part of the consolidated financial statements~~

~~QNB Corp. and Subsidiary~~

CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY

~~Nine months ended September 30, 2017 and 2016~~


For the Three Months Ended June 30, 2023 and 2022

										Accumulated
	Number of									Other
(unaudited)	Shares		Common				Retained			Comprehensive			Treasury
(in thousands, except share and per share data)	Outstanding		Stock		Surplus		Earnings			Loss			Stock			Total
Balance, April 1, 2023		3,597,345	$	2,379	$	25,048	$	132,598		$	(72,114	)	$	(4,037	)	$	83,874
Net income				—		—		1,887			—			—			1,887
Other comprehensive income, net of tax				—		—		—			(3,857	)		—			(3,857	)
Cash dividends declared ($0.37 per share)				—		—		(1,333	)		—			—			(1,333	)
Stock issued in connection with dividend reinvestment and stock purchase plan		10,388		6		231		—			—			—			237
Stock issued for employee stock purchase plan		3,187		2		64		—			—			—			66
Stock-based compensation expense				—		71		—			—			—			71
Balance, June 30, 2023		3,610,920	$	2,387	$	25,414	$	133,152		$	(75,971	)	$	(4,037	)	$	80,945


										Accumulated
	Number of									Other
(unaudited)	Shares		Common				Retained			Comprehensive			Treasury
(in thousands, except share and per share data)	Outstanding		Stock		Surplus		Earnings			Loss			Stock			Total
Balance, April 1, 2022		3,557,806	$	2,354	$	23,928	$	120,594		$	(40,341	)	$	(4,037	)	$	102,498
Net income				—		—		3,349			—			—			3,349
Other comprehensive loss, net of tax				—		—		—			(21,150	)		—			(21,150	)
Cash dividends declared ($0.36 per share)				—		—		(1,281	)		—			—			(1,281	)
Stock issued in connection with dividend reinvestment and stock purchase plan		7,802		5		219		—			—			—			224
Stock issued for employee stock purchase plan		2,286		1		66		—			—			—			67
Stock-based compensation expense				—		31		—			—			—			31
Balance, June 30, 2022		3,567,894	$	2,360	$	24,244	$	122,662		$	(61,491	)	$	(4,037	)	$	83,738

The accompanying notes are an integral part of the consolidated financial statements.


For the Six Months Ended June 30, 2023 and 2022
											Accumulated
											Other
	Number of										Comprehensive
(unaudited)	Shares			Common				Retained			Income			Treasury
(in thousands, except share and per share data)	Outstanding			Stock		Surplus		Earnings			(Loss)			Stock			Total
Balance, January 1, 2023		3,588,262		$	2,373	$	24,798	$	128,951		$	(81,127	)	$	(4,037	)	$	70,958
Cumulative change in accounting principle							—		857			—			—			857
Balance at Janaury 2, 2023 (as adjusted for change in acounting principle)					2,373		24,798		129,808			(81,127	)		(4,037	)		71,815
Net income					—		—		6,005			—			—			6,005
Other comprehensive loss, net of tax					—		—		—			5,156			—			5,156
Cash dividends declared ($0.74 per share)					—		—		(2,661	)		—			—			(2,661	)
Stock issued in connection with dividend reinvestment and stock purchase plan		19,471			12		461		—			—			—			473
Stock issued for employee stock purchase plan		3,187			2		64		—			—			—			66
Stock-based compensation expense		—			—		91		—			—			—			91
Balance, June 30, 2023		3,610,920		$	2,387	$	25,414	$	133,152		$	(75,971	)	$	(4,037	)	$	80,945


											Accumulated
	Number of										Other
(unaudited)	Shares			Common				Retained			Comprehensive			Treasury
(in thousands, except share and per share data)	Outstanding			Stock		Surplus		Earnings			Income			Stock			Total
Balance, January 1, 2022		3,553,629		$	2,350	$	23,683	$	118,163		$	(3,740	)	$	(3,962	)	$	136,494
Net income					—		—		7,059			—			—			7,059
Other comprehensive loss, net of tax					—		—		—			(57,751	)		—			(57,751	)
Cash dividends declared ($0.72 per share)					—		—		(2,560	)		—			—			(2,560	)
Stock issued in connection with dividend reinvestment and stock purchase plan		13,979			9		442		—			—			—			451
Stock issued for employee stock purchase plan		2,286			1		66		—			—			—			67
Stock-based compensation expense					—		53		—			—			—			53
Treasury stock purchase		(2,000	)		—		—		—			—			(75	)		(75	)
Balance, June 30, 2022		3,567,894		$	2,360	$	24,244	$	122,662		$	(61,491	)	$	(4,037	)	$	83,738

The accompanying notes are an integral part of the consolidated financial statements.

Accumulated

Number of

Other

(unaudited)

Shares

Common

Retained

Comprehensive

Treasury

(in thousands, except share and per share data)

Outstanding

Stock

Surplus

Earnings

Income (Loss)

Stock

Total

Balance, December 31, 2016

3,411,701

$
2,235

$
17,418

$
80,147

$
(3,757
)

$
(2,476
)

$
93,567

Net income

—

—

7,800

—

—

7,800

Other comprehensive income, net of tax

—

—

—

1,362

—

1,362

Cash dividends declared ($0.93 per share)

—

—

(3,186
)

—

—

(3,186
)
Stock issued in connection with dividend
reinvestment and stock purchase plan

19,495

12

727

—

—

—

739

Stock issued for employee stock purchase
plan

1,318

1

41

—

—

—

42

Stock issued for options exercised

7,742

5

111

—

—

—

116

Stock-based compensation expense

—

72

—

—

—

72

Balance, September 30, 2017

3,440,256

$
2,253

$
18,369

$
84,761

$
(2,395
)

$
(2,476
)

$
100,512

Accumulated

Number of

Other

(unaudited)

Shares

Common

Retained

Comprehensive

Treasury

(in thousands, except share and per share data)

Outstanding

Stock

Surplus

Earnings

Income (Loss)

Stock

Total

Balance, December 31, 2015

3,359,794

$
2,203

$
15,973

$
75,289

$
(546
)

$
(2,476
)

$
90,443

Net income

—

—

6,655

—

—

6,655

Other comprehensive income, net of tax

—

—

—

2,834

—

2,834

Cash dividends declared ($0.90 per share)

—

—

(3,045
)

—

—

(3,045
)
Stock issued in connection with dividend
reinvestment and stock purchase plan

24,886

15

738

—

—

—

753

Stock issued for employee stock purchase
plan

1,540

1

40

—

—

—

41

Stock issued for options exercised

13,868

9

234

—

—

—

243

Tax benefit of stock options exercised

—

12

—

—

—

12

Stock-based compensation expense

—

60

—

—

—

60

Balance, September 30, 2016

3,400,088

$
2,228

$
17,057

$
78,899

$
2,288

$
(2,476
)

$
97,996

~~The accompanying notes are an integral part of the consolidated financial statements.~~

QNB Corp. and Subsidiary

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands, unaudited)

Nine months ended September 30,

2017

2016

Operating Activities

Net income

$
7,800

$
6,655

Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation and amortization

607

668

Provision for loan losses

700

125

Net gain on investment securities available-for-sale

(962
)

(650
)
Net gain on sale of other real estate owned, repossessed assets and premises and equipment

(1
)

(2
)
Gain on sale of loan held for investment

(99
)

—

Net gain on sale of loans

(217
)

(263
)
Proceeds from sales of residential mortgages held-for-sale

6,867

7,188

Origination of residential mortgages held-for-sale

(5,976
)

(6,394
)
Income on bank-owned life insurance

(261
)

(217
)
Stock-based compensation expense

72

60

Net decrease (increase) in trading securities

3,596

(123
)
Deferred income taxes

28

(121
)
Net increase in income taxes payable

205

141

Net increase in accrued interest receivable

(488
)

(11
)
Amortization of mortgage servicing rights and change in valuation allowance

65

59

Net amortization of premiums and discounts on investment securities

1,267

1,396

Net increase (decrease) in accrued interest payable

1

(20
)
Increase in other assets

(1,219
)

(775
)
Increase in other liabilities

464

329

Net cash provided by operating activities

12,449

8,045

Investing Activities

Proceeds from payments, maturities and calls of investment securities available-for-sale

39,570

85,046

Proceeds from the sale of investment securities available-for-sale

33,711

31,892

Purchases of investment securities available-for-sale

(77,459
)

(118,245
)
Proceeds from redemption of investment in restricted bank stock

4,790

1,482

Purchase of restricted bank stock

(4,351
)

(1,496
)
Net (increase) decrease in loans

(71,104
)

6,953

Proceeds from the sale of loan held for investment

99

—

Net purchases of premises and equipment

(471
)

(188
)
Redemption of bank-owned life insurance

754

—

Proceeds from sales of other real estate owned and repossessed assets

2

2

Net cash (used in) provided by investing activities

(74,459
)

5,446

Financing Activities

Net increase in non-interest bearing deposits

3,686

6,486

Net increase in interest-bearing deposits

88,404

30,440

Net (decrease) increase in short-term borrowings

(12,484
)

4,016

Tax benefit from exercise of stock options

—

12

Cash dividends paid, net of reinvestment

(2,794
)

(2,662
)
Proceeds from issuance of common stock

505

654

Net cash provided by financing activities

77,317

38,946

Increase in cash and cash equivalents

15,307

52,437

Cash and cash equivalents at beginning of year

10,721

16,991

Cash and cash equivalents at end of period

$
26,028

$
69,428

Supplemental Cash Flow Disclosures

Interest paid

$
4,104

$
3,546

Income taxes paid

2,668

2,227

Non-cash transactions:

Unsettled trades to sell securities

—

2,558


	(in thousands, unaudited)
For the Six Months Ended June 30,	2023			2022
Operating Activities
Net income	$	6,005		$	7,059
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		835			844
Reversal of provision for credit losses		(1,596	)		—
Net gain on calls and sales of debt and equity securities		(54	)		(493	)
Net unrealized loss on equity securities		516			1,454
Net gain on sale of loans		(1	)		—
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		(164	)		(156	)
Stock-based compensation expense		91			53
Deferred income tax provision (benefit)		61			(257	)
Net decrease in income taxes payable		(790	)		(399	)
Net decrease in accrued interest receivable		1,317			476
Fari value remeasurements on interest rate swap		38			—
Amortization of mortgage servicing rights and change in valuation allowance		27			34
Net amortization of premiums and discounts on investment securities		910			1,202
Net increase (decrease) in accrued interest payable		1,500			(15	)
Operating lease payments		(312	)		(309	)
Decrease (increase) in other assets		145			(614	)
Decrease in other liabilities		(313	)		(954	)
Net cash provided by operating activities		7,406			7,925
Investing Activities
Proceeds from payments, maturities and calls of investments available-for-sale		21,937			43,493
Proceeds from the sale of investments available-for-sale		9,081			—
Proceeds from the sale of equity securities		7,138			1,543
Purchases of investments available-for-sale		(6,913	)		(35,001	)
Purchases of equity securities		(711	)		(1,715	)
Proceeds from redemption of investment in restricted stock		7,628			4,759
Purchases of restricted stock		(5,165	)		(5,314	)
Net decrease (increase) in loans		10,135			(36,831	)
Net purchases of premises and equipment		(403	)		(381	)
Net cash provided by (used in) investing activities		42,727			(29,447	)
Financing Activities
Net decrease in non-interest bearing deposits		(19,453	)		(2,725	)
Net increase in interest-bearing deposits		50,849			20,708
Net (decrease) increase in short-term borrowings		(70,482	)		9,360
Proceeds from long-term debt		20,000			—
Repayment of long-term debt		(10,000	)		—
Cash dividends paid, net of reinvestment		(2,312	)		(2,261	)
Purchase of treasury shares		—			(75	)
Proceeds from issuance of common stock		190			219
Net cash (used in) provided by financing activities		(31,208	)		25,226
Increase in cash and cash equivalents		18,925			3,704
Cash and cash equivalents at beginning of year		15,899			13,390
Cash and cash equivalents at end of period	$	34,824		$	17,094
Supplemental Cash Flow Disclosures
Interest paid	$	3,547		$	2,311
Net income taxes paid		2,177			2,111
Non-cash transactions:
Cumulative change in accounting principal		857			—
Right-of-use assets obtained in exchange for new operating lease liabilities		369			43
The accompanying notes are an integral part of the consolidated financial statements.

~~The accompanying notes are an integral part of the consolidated financial statements~~

QNB CORP. AND SUBSIDIARY

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 ~~2016~~2022 Annual Report incorporated in the Form 10-K. Operating results for the ~~three~~three- and ~~nine-month~~six-month periods ended ~~September~~June 30, ~~2017~~2023 are not necessarily indicative of the results that may be expected for the year ending December 31, ~~2017.~~2023.

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.

~~The Company~~

QNB has evaluated events and transactions occurring subsequent to the balance sheet date of ~~September~~June 30, ~~2017,~~2023 for items that should potentially be recognized or disclosed in these consolidated financial statements.

2. RECENT ACCOUNTING PRONOUNCEMENTS

~~In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09,~~ ~~Revenue from Contracts with Customers~~ (Topic 606). This ASU was issued to help improve comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets. The ASU’s core principle is that a company will recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, this update specifies the accounting for certain costs to obtain or fulfill a contract with a customer and expands disclosure requirements for revenue recognition. This guidance does not apply to revenue associated with financial instruments, including loans, securities, and derivatives that are accounted for under other U.S. GAAP guidance. For that reason, we do not expect it to have a material impact on our consolidated results of operations for elements of the statement of income associated with financial instruments, including securities gains, interest income and interest expense. However, we do believe the new standard will result in new disclosure requirements. We are currently in the process of reviewing contracts to assess the impact of the new guidance on our service offerings that are in the scope of the guidance, included in non-interest income such as insurance commission fees, service charges, payment processing fees, trust services fees, and brokerage services fees. The Company is continuing to evaluate the effect of the new guidance on revenue sources other than financial instruments on our financial position and consolidated results of operations. The guidance is effective for the QNB’s financial statements beginningOn January 1, ~~2018. The~~2023, the Company ~~expects to use the modified retrospective method for transition in which the cumulative effect will be recognized at the date of adoption with no restatement of comparative periods presented.~~

~~On January 5, 2016, the FASB issued ASU 2016-01,~~ ~~Financial Instruments – Overall~~ ~~(Subtopic 825-10):~~ ~~Recognition and Measurement of Financial Assets and Financial Liabilities~~. This ASU was issued to enhance the reporting model for financial instruments to address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. It will require the following:

~~Equity investments with readily determinable fair values must be measured at fair value with changes in fair value recognized in net income.~~

Equity investments without readily determinable fair values must be measured at either fair value or at cost adjusted for changes in observable prices minus impairment. Changes in value under either of these methods would be recognized in net income.

Entities that record financial liabilities at fair value due to a fair value option election must recognize changes in fair value in other comprehensive income if it is related to instrument-specific credit risk.

~~Entities must assess whether a valuation allowance is required for deferred tax assets related to available-for-sale debt securities.~~

~~QNB CORP. AND SUBSIDIARY~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

~~This ASU is effective for public companies for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. If QNB~~ adopted this guidance on October 1, 2017 it would have resulted in a decrease in retained earnings of approximately $160,000 and a corresponding increase in accumulated other comprehensive loss to reflect the reclassification of the unrealized losses as of September 30, 2017. There would have been no overall impact on shareholder’s equity as the equity securities held by QNB are currently recorded at fair value through accumulated other comprehensive income (loss).

Based on an evaluation of our deferred tax asset and considering the effect of the new guidance, management believes that deferred tax assets related to AFS debt securities are realizable and no valuation allowance would be required. Management believes the potential effect of using exit versus entry price is most relevant for fair value disclosures of loans, which considers the impact of credit risk on fair value. The Company expects to use the modified retrospective method for transition in which the cumulative effect will be recognized at the date of adoption with no restatement of comparative periods presented.

~~On February 25, 2016, the FASB issued ASU 2016-02,~~ ~~Leases (Topic 842)~~. This new standard on accounting for leases introduces a lessee model that brings most leases on the balance sheet, but recognizes expenses in the income statement similar to how items are recorded today. The new standard eliminates the requirement in current U.S. GAAP for an entity to use bright-line tests in determining lease classification. The ASU also eliminates the current real estate-specific provisions and changes the guidance on sale-leaseback transactions, initial direct costs and lease executory costs for all entities. All entities will classify leases to determine how to recognize the related revenue and expense and this classification will affect amounts that lessors record on the balance sheet. The new guidance will be effective for public companies for annual periods beginning after December 15, 2018, and interim periods therein. Early adoption is permitted. QNB is evaluating the impact of this new standard on its consolidated financial statements.

~~On March 17, 2016, the FASB issued ASU 2016-08,~~ ~~Revenue from Contracts with Customers (Topic 606), Principal versus Agent Considerations (Reporting Revenue Gross versus Net)~~. This ASU amends the principal-versus agent implementation guidance and illustrations in the Board’s new revenue standard (ASU 2014-09). The FASB issued the ASU in response to concerns identified by stakeholders, including those related to (1) determining the appropriate unit of account under the revenue standard’s principal-versus-agent guidance and (2) applying the indicators of whether an entity is a principal or an agent in accordance with the revenue standard’s control principle. This ASU clarifies that an entity should evaluate whether it is the principal or the agent for each specified good or service promised in a contract with a customer. The ASU has the same effective date as the new revenue standard (as amended by the one-year deferral and the early adoption provisions in ASU 2015-14).

~~On March 30, 2016, the FASB issued ASU 2016-09,~~ ~~Stock Compensation (Topic 718), Improvements to Employee Share-Based Payment Accounting~~. This ASU simplifies several aspects of the accounting for employee share-based payment transactions for both public and nonpublic entities, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. Entities will be required to recognize the income tax effects of awards in the income statement when awards vest or are settled which will eliminate additional-paid-in-capital or APIC pools. For public companies, the ASU is effective for annual reporting periods beginning after December 15, 2016, including interim periods within those annual reporting periods. QNB adopted this standard effective January 1, 2017. It did not have a material impact on its consolidated financial statements; however, the most significant impact relates to how tax benefits related to stock option exercises are recorded in the financial statements.

~~QNB CORP. AND SUBSIDIARY~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

~~On June 16, 2016, the FASB issued~~ ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326)~~. The new guidance requires organizations to measure all~~, 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.

~~To that end, the new guidance:~~

Eliminates the probable initial recognition threshold in current U.S. GAAP and, instead, reflects an organization’s current estimate of all expected credit losses over the contractual term of its financial assets

~~Broadens the information an entity can consider when measuring credit losses~~ The measurement under CECL is applicable to ~~include forward-looking information~~

~~Increases usefulness of the financial statements by requiring timely inclusion of forecasted information in forming expectations of credit losses~~

Increases comparability of purchased financial assets with credit deterioration (PCD assets) with other purchased assets that do not have credit deterioration as well as originated assets because credit losses that are expected will be recorded through an allowance for credit losses for all assets

~~Increases users’ understanding of underwriting standards and credit quality trends by requiring additional information about credit quality indicators by year of origination (vintage)~~

For available-for-sale debt securities, aligns the income statement recognition of credit losses with the reporting period in which changes occur by recording credit losses (and subsequent changes in credit losses) through an allowance rather than a write down

The new guidance affects organizations that hold financial assets and net investments in leases that are not accounted for at fair value with changes in fair value reported in net income. The new guidance affects loans, debt securities, trade receivables, net investments in leases, off-balance-sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash.

For public business entities that are U.S. Securities and Exchange Commission (SEC) filers, the new guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early application will be permitted for all organizations for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. QNB is evaluating the impact of this new standard on its consolidated financial statements.

~~On March 30, 2017, the FASB issued~~ Additionally, ASU ~~2017-08,~~ ~~Premium Amortization on Purchased Callable Debt Securities. This ASU is intended~~326 made changes to ~~enhance~~ the accounting for ~~the amortization of premiums for purchased callable~~available-for-sale debt securities, ~~and will require premiums~~requiring credit losses to be presented as an allowance rather as a write-down on available-for-sale debt securities management does not intend to sell or believes it is more-likely-than-not they will be required to sell. The Company made an accounting policy election to exclude accrued interest receivable from the amortized cost basis of loans, available for sale securities, and held to maturity securities. Accrued interest receivable is reported as a component of accrued interest receivable on the ~~earliest call date. For public companies,~~Consolidated Statement of Financial Condition.

The Company adopted CECL using the ~~ASU is effective~~modified retrospective method for ~~annual~~all financial assets measured at amortized cost and off-balance-sheet credit exposures. Results for reporting periods beginning after December ~~15, 2018, including interim periods within those annual reporting periods. QNB does not anticipate this new standard will have~~31, 2022 are presented under ASU 326 while prior period amounts continue to be reported in accordance with previously applicable US GAAP. The Company recorded a ~~material~~net increase of $857,000 to retained earnings as of January 1, 2023 for the cumulative effect of adopting ASU 326.

The following table illustrates the impact ~~on its consolidated financial statements~~of ASC 326:


January 1, 2023
	As Reported under ASC 326			Pre-ASC 326 Adoption			Impact of ASC 326 Adoption
Assets:
Commercial loans:
Revolving real estate secured by 1-4 family properties	$	5,255		$	—		$	5,255
Retail loans:
1-4 family residential mortgages		105,524			105,654			(130	)
Construction-individual		130			—			130
Revolving home equity secured by 1-4 family properties		36,732			41,987			(5,255	)
Allowance for credit losses on loans (ACL):
Commercial:
Commercial and industrial		(1,246	)		(1,316	)		70
Construction and land development		(745	)		(755	)		10
Real estate secured by multi-family properties		(1,679	)		(995	)		(684	)
Real estate secured by owner-occupied properties		(1,175	)		(1,549	)		374
Real estate secured by other commercial properties		(1,330	)		(2,458	)		1,128
Revolving real estate secured by 1-4 family properties-business		(32	)		(25	)		(7	)
Real estate secured by 1st lien on 1-4 family properties-business		(1,700	)		(1,210	)		(490	)
Real estate secured by junior lien on 1-4 family properties-business		(16	)		(30	)		14
State and political subdivisions		(74	)		(94	)		20
Retail:
1-4 family residential mortgages		(486	)		(682	)		196
Construction-individual		(1	)		(1	)		—
Revolving home equity secured by 1-4 family properties-personal		(292	)		(299	)		7
Real estate secured by 1st lien on 1-4 family properties-personal		(72	)		(57	)		(15	)
Real estate secured by junior lien on 1-4 family properties-personal		(84	)		(55	)		(29	)
Student loans		(466	)		(454	)		(12	)
Overdrafts		(11	)		(8	)		(3	)
Other consumer		(33	)		(41	)		8
Unallocated		—			(502	)		502
Total ACL		(9,442	)		(10,531	)		1,089
Deferred tax assets		4,540			4,767			(227	)
Liabilities:
Allowance for credit losses on unused commitments	$	122		$	117		$	5
Equity:
Retained earnings	$	129,808		$	128,951		$	857

The Company adopted ASU 2022-01 Derivatives and Hedging (Topic 815): Fair Value Hedging--Portfolio Layer Method ("ASC 2022-01") as ~~it already uses~~of the ~~earliest call date~~first fiscal year beginning after 12/15/2022. ASC 2022-01 allows for the use of an amortizing notional swap when entering a portfolio layer method hedge. This guidance now allows the interest rate swap to ~~amortize premiums on callable debt securities.~~be considered a hedge of a single layer of portfolio.

3. STOCK-BASED COMPENSATION AND SHAREHOLDERS’ EQUITY

QNB ~~sponsors stock-based compensation plans,~~maintains a 2015 Stock Incentive Plan (the "2015 Plan"), administered by a Board ~~Committee,~~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 was ~~$21,000~~$71,000 and ~~$18,000~~$31,000 for the three months ended ~~September~~June 30, ~~2017~~2023 and ~~2016,~~2022, respectively. Stock-based compensation expense was ~~$72,000~~$91,000 and ~~$60,000~~$53,000 for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2023 and ~~2016,~~2022, respectively. ~~As of September~~At June 30, ~~2017,~~2023, there was approximately ~~$108,000~~$213,000 of unrecognized compensation cost related to unvested share-based compensation award grants that is expected to be recognized over the next 2956 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 ~~2005~~2015 Plan authorized the issuance of ~~200,000~~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 ~~September~~June 30, ~~2017,~~ there were ~~184,200~~212,550 options granted, ~~65,150~~120,875 options forfeited, ~~80,475~~20,825 options exercised, and ~~38,575~~121,550 options outstanding under this Plan. ~~The 2005 Plan expired on March 15, 2015.~~

~~QNB CORP. AND SUBSIDIARY~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

The 2015 Plan authorizes the issuance of 300,000 shares. The terms of the 2015 Plan are identical to the 2005 Plan. There were 48,500 options granted and outstanding under this Plan as of September 30, 2017. There were no options forfeited or exercised as of September 30, 2017. The 2015 Plan expires on February 24, 2025.

The fair value of each option is amortized into compensation expense on a straight-line basis between the grant date for the option and each vesting date. QNB estimated the fair value of stock options on the date of the grant using the Black-Scholes option pricing model. The model requires the use of numerous assumptions, many of which are highly subjective in nature.

The following assumptions were used in the option pricing model in determining the fair value of options granted during the period:

Nine months ended September 30,	2017			2016

For the Six Months Ended June 30,							2023			2022
Risk free interest rate		1.48	%		1.14	%		3.64	%		1.25	%
Dividend yield		3.19	%		3.78	%		4.80	%		3.64	%
Volatility		17.89	%		22.62	%		20.36	%		22.68	%
Expected life (years)		4.20			4.20			8.35			4.05

The risk-free interest rate was selected based upon yields of U.S. Treasury ~~issues~~securities with a term approximating the expected life of the option being valued. Historical information was the ~~primary~~ basis for the selection of the expected dividend yield, expected volatility and expected lives of the options.

The fair market value of options granted in the ~~first nine~~six months ~~of 2017~~ended June 30, 2023 and ~~2016~~2022 was ~~$3.88~~$4.11 and ~~$3.79,~~$5.20, respectively.

Stock option activity during the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2023 and ~~2016~~2022 is as follows:


	Number of options			Weighted average exercise price		Weighted average remaining contractual term (in years)		Aggregate intrinsic value
Outstanding at December 31, 2022		109,150		$	37.65
Granted		35,000			29.51
Exercised		—			—
Forfeited		(22,600	)		43.15
Outstanding at June 30, 2023		121,550		$	34.29		3.83	$	—
Exercisable at June 30, 2023		41,375		$	37.37		0.60	$	—

	Number of options			Weighted average exercise price		Weighted average remaining contractual term (in years)		Aggregate intrinsic value
Outstanding at December 31, 2016		73,950		$	27.14
										Number of options			Weighted average exercise price		Weighted average remaining contractual term (in years)		Aggregate intrinsic value
Outstanding at December 31, 2021											113,950		$	37.58
Granted		25,000			37.60						29,350			37.26
Exercised		(11,775	)		22.33						—			—
Forfeited		(100	)		21.35						(22,075	)		37.38
Outstanding at September 30, 2017		87,075		$	30.80		2.87	$	848
Exercisable at September 30, 2017		20,725		$	24.39		0.93	$	335
Outstanding at June 30, 2022											121,225		$	37.45		2.78	$	—
Exercisable at June 30, 2022											43,925		$	40.82		1.15	$	—

Number
of options

Weighted
average
exercise
price

Weighted
average
remaining
contractual term
(in years)

Aggregate
intrinsic value

Outstanding at December 31, 2015

82,875

$
24.33

Granted

23,500

30.40

Exercised

(18,425
)

20.70

Forfeited

(9,725
)

25.61

Outstanding at September 30, 2016

78,225

$
26.85

2.74

$
560

Exercisable at September 30, 2016

23,100

$
22.38

0.87

$
268

119

The QNB ~~CORP. AND SUBSIDIARY~~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 Pan 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 ending 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, 2023, no shares were issued to non-employee directors and there were 50,000 shares remaining under the Plan.

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

4. EARNINGS PER SHARE & SHARE REPURCHASE PLAN

The following sets forth the computation of basic and diluted earnings per share:


	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2023		2022		2023		2022
Numerator for basic and diluted earnings per share - net income	$	1,887	$	3,349	$	6,005	$	7,059
Denominator for basic earnings per share - weighted average shares outstanding		3,598,545		3,559,185		3,593,482		3,556,037
Effect of dilutive securities - employee stock options		—		—		—		531
Denominator for diluted earnings per share - adjusted weighted average shares outstanding		3,598,545		3,559,185		3,593,482		3,556,568
Earnings per share - basic	$	0.52	$	0.94	$	1.67	$	1.99
Earnings per share - diluted		0.52		0.94		1.67		1.98

Three months
ended September 30,

Nine months
ended September 30,

2017

2016

2017

2016

Numerator for basic and diluted earnings per share - net income

$
2,554

$
2,292

$
7,800

$
6,655

Denominator for basic earnings per share - weighted average
shares outstanding

3,433,811

3,391,471

3,424,813

3,381,491

Effect of dilutive securities - employee stock options

18,771

12,568

16,393

9,238

Denominator for diluted earnings per share - adjusted
weighted average shares outstanding

3,452,582

3,404,039

3,441,206

3,390,729

Earnings per share - basic

$
0.74

$
0.68

$
2.28

$
1.97

Earnings per share - diluted

0.74

0.67

2.27

1.96

There were 0121,550 and ~~25,000~~121,225 stock options that were anti-dilutive for the ~~three and nine-month~~three-month periods ended ~~September~~June 30, ~~2017,~~2023 and 2022, respectively. There were 0121,550 and ~~41,350~~97,225 stock options that were anti-dilutive for the ~~three and nine-month~~six-month periods ended ~~September~~June 30, ~~2016.~~2023 and 2022, respectively. These stock options were not included in the above calculation.

~~The~~QNB’s current stock repurchase plan was originally approved by the Board of Directors ~~has authorized the repurchase of~~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 ~~100,000~~200,000 shares of ~~its~~ common stock in the open market or privately negotiated transactions. The repurchase authorization ~~does not bear a~~has no termination date. There were no0 and 2,000 shares repurchased during the ~~three or nine~~six months ended ~~September~~June 30, ~~2017~~2023 and ~~2016.~~2022, respectively. As of ~~September~~June 30, ~~2017, 57,883~~2023, 102,000 shares were repurchased under this authorization at an average price of ~~$16.97~~$24.93 and a total cost of ~~$982,000.~~approximately $2,543,000.

5. COMPREHENSIVE INCOME (LOSS)

The following shows the components of accumulated other comprehensive ~~loss~~income (loss) at ~~September~~June 30, ~~2017~~2023 and December 31, ~~2016:~~2022:


	September 30,			December 31,			June 30,			December 31,
	2017			2016			2023			2022
Unrealized net holding losses on available-for-sale securities	$	(3,599	)	$	(5,446	)	$	(98,412	)	$	(102,692	)
Unrealized losses on available-for-sale securities for which a portion of an other-than-temporary impairment loss has been recognized in earnings		(29	)		(247	)
Accumulated other comprehensive loss		(3,628	)		(5,693	)
Unrealized gains (losses) on available-for-sale securities for which a portion of an other-than-temporary impairment loss has been recognized in earnings								—			—
Unrealized net holding gains (losses) on interest rate swaps								2,246			—
Accumulated other loss								(96,166	)		(102,692	)
Tax effect		1,233			1,936			20,195			21,565
Accumulated other comprehensive loss, net of tax	$	(2,395	)	$	(3,757	)	$	(75,971	)	$	(81,127	)

1210

~~QNB CORP. AND SUBSIDIARY~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

The following ~~tables present~~table presents amounts reclassified out of accumulated other comprehensive income (loss) for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2023 and ~~2016:~~2022:


For the Three Months Ended June 30,	Amount reclassified from accumulated other comprehensive income
Details about accumulated other comprehensive income	2023			2022			Affected line item in statement of income
Unrealized net holding (losses) gains on available-for-sale securities	$	—		$	3		Net gain on sales of investments available-for-sale
Other-than-temporary impairment on investment securities		—			—		Net other-than-temporary impairment losses on investment securities
Fair value remeasurements on fair value hedges		(38	)		—		Interest and dividends on available-for-sale & equity securities
		(38	)		3
Tax effect		8			(1	)	Provision for income taxes
Total reclassification out of accumulated other comprehensive (loss) income, net of tax	$	(30	)	$	2		Net of tax


For the Six Months Ended June 30,	Amount reclassified from accumulated other comprehensive income
Details about accumulated other comprehensive income (loss)	2023			2022			Affected line item in statement of income
Unrealized net holding (losses) gains on available-for-sale securities	$	(257	)	$	4		Net gain on sales of investments available-for-sale
Other-than-temporary impairment on investment securities		—			—		Net other-than-temporary impairment losses on investment securities
Fair value remeasurements on fair value hedges		(38	)		—		Interest and dividends on available-for-sale & equity securities
		(295	)		4
Tax effect		62			(1	)	Provision for income taxes
Total reclassification out of accumulated other comprehensive (loss) income , net of tax	$	(233	)	$	3		Net of tax

Three months ended September 30,

Amount reclassified from
accumulated other
comprehensive income

Details about accumulated other comprehensive income

2017

2016

Affected line item in statement of income
Unrealized net holding gains on available-for-sale
   securities

$
178

$
316

Net gain on sale of investment
   securities
Other-than-temporary impairment losses on
     investment securities

(80
)

-

Net other-than-temporary
     impairment losses on
     investment securities

98

316

Tax effect

(33
)

(107
)

Provision for income taxes
Total reclass out of accumulated other comprehensive
    income, net of tax

$
65

$
209

Net of tax

Nine months ended September 30,

Amount reclassified from
accumulated other
comprehensive income

Details about accumulated other comprehensive income

2017

2016

Affected line item in statement of income
Unrealized net holding gains on available-for-sale
   securities

$
1,042

$
842

Net gain on sale of investment
   securities
Other-than-temporary impairment losses on
     investment securities

(80
)

(192
)

Net other-than-temporary impairment
     losses on investment securities

962

650

Tax effect

(326
)

(221
)

Provision for income taxes
Total reclass out of accumulated other comprehensive
    income, net of tax

$
636

$
429

Net of tax

6. INVESTMENT SECURITIES

QNB engaged in trading activities for its own account, comprised of municipal securities that were held principally for resale in the near term recorded at fair value with changes in fair value recorded in non-interest income. During the second quarter 2017, QNB Bank redeemed the trading securities portfolio, as lack of market volatility and the interest rate environment resulted in declining performance of the portfolio. The net realized gains recorded for the nine months ended September 30, 2017 were $27,000. The net realized and unrealized losses recorded at December 31, 2016 were $40,000 and fair value was $3,596,000. Unrealized gains on trading activity related to trading securities held at December 31, 2016 totaled $69,000. Interest and dividends are included in interest income.Available-For-Sale Securities

~~QNB CORP. AND SUBSIDIARY~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

The amortized cost and estimated fair values of investment securities available-for-sale at ~~September~~June 30, ~~2017~~2023 and December 31, ~~2016~~2022 were as follows:

			Gross		Gross
			unrealized		unrealized					Fair		Gross unrealized holding		Gross unrealized holding			Gross unrealized fair value hedge		Amortized
	Fair		holding		holding			Amortized
September 30, 2017	value		gains		losses			cost
June 30, 2023										value		gains		losses			gains (1)		cost
U.S. Treasury										$	6,449	$	1	$	(1	)			$	6,449
U.S. Government agency	$	73,037	$	4	$	(1,437	)	$	74,470		87,878		—		(14,068	)				101,946
State and municipal		79,897		892		(154	)		79,159		88,222		—		(21,653	)		625		109,250
U.S. Government agencies and sponsored enterprises (GSEs):
Mortgage-backed		148,856		320		(1,522	)		150,058		244,557		—		(43,446	)		1,621		286,382
Collateralized mortgage obligations (CMOs)		78,974		51		(1,528	)		80,451		94,680		—		(18,581	)				113,261
Pooled trust preferred		212		—		(29	)		241
Corporate debt		8,074		27		(10	)		8,057		5,955		—		(664	)				6,619
Equity		7,363		107		(349	)		7,605
Total investment securities available-for-sale	$	396,413	$	1,401	$	(5,029	)	$	400,041
Total investment debt securities available-for-sale										$	527,741	$	1	$	(98,413	)	$	2,246	$	623,907

(1) See Footnote 13


			Gross		Gross
			unrealized		unrealized
	Fair		holding		holding			Amortized
December 31, 2022	value		gains		losses			cost
U.S. Treasuries	$	301	$	2	$	—		$	299
U.S. Government agency		86,709		—		(15,233	)		101,942
State and municipal		95,367		—		(23,494	)		118,861
U.S. Government agencies and sponsored enterprises (GSEs):
Mortgage-backed		256,161		—		(45,303	)		301,464
Collateralized mortgage obligations (CMOs)		101,672		—		(18,338	)		120,010
Corporate debt		6,315		—		(326	)		6,641
Total investment debt securities available-for-sale	$	546,525	$	2	$	(102,694	)	$	649,217

Gross

Gross

unrealized

unrealized

Fair

holding

holding

Amortized

December 31, 2016

value

gains

losses

cost

U.S. Government agency

$
76,650

$
36

$
(2,118
)

$
78,732

State and municipal

72,295

614

(398
)

72,079

U.S. Government agencies and sponsored enterprises (GSEs):

Mortgage-backed

145,301

561

(2,241
)

146,981

Collateralized mortgage obligations (CMOs)

77,415

109

(1,846
)

79,152

Pooled trust preferred

2,281

263

(891
)

2,909

Corporate debt

8,030

16

(57
)

8,071

Equity

8,503

587

(328
)

8,244

Total investment securities available-for-sale

$
390,475

$
2,186

$
(7,879
)

$
396,168

The amortized cost and estimated fair value of securities available-for-sale by contractual maturity at ~~September~~June 30, ~~2017 are~~2023 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. Securities are assigned to categories based on contractual maturity except for mortgage-backed securities and CMOs which are based on the estimated average life of these securities and municipal securities that have been pre-refunded.

			Amortized
September 30, 2017	Fair value		cost

June 30, 2023					Fair value		Amortized cost
Due in one year or less	$	6,468	$	6,438	$	6,815	$	6,826
Due after one year through five years		216,727		218,589		116,755		130,868
Due after five years through ten years		140,465		142,030		326,471		390,081
Due after ten years		25,390		25,379		77,700		96,132
Equity securities		7,363		7,605
Total investment securities available-for-sale	$	396,413	$	400,041
Total investment debt securities available-for-sale					$	527,741	$	623,907

Proceeds from sales of investment securities available-for-sale were ~~approximately $9,091,000~~$0 and ~~$3,078,000~~$0 for the three months ended ~~September~~June 30, ~~2017~~2023 and ~~2016,~~2022, respectively. Proceeds from sales of investment securities available-for-sale were approximately ~~$33,711,000~~$9,081,000 and ~~$31,892,000~~$0 for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2023 and ~~2016,~~2022, respectively.

At ~~September~~June 30, ~~2017~~2023 and December 31, ~~2016,~~2022, investment securities available-for-sale totaling approximately ~~$241,222,000~~$267,557,000 and ~~$166,628,000,~~$237,645,000, respectively, were pledged as collateral for repurchase agreements and deposits of public funds.

~~QNB CORP. AND SUBSIDIARY~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

The following table presents information related to the Company’s gains and losses on the sales and calls of ~~equity and debt~~ securities available-for-sale, and losses recognized for the other-than-temporary impairment (“OTTI”) 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 ~~equity and~~ debt securities are net of other-than-temporary impairment charges:

Three months ended September 30, 2017

Three months ended September 30, 2016

Other-than-

Other-than-

Gross

Gross

temporary

Gross

Gross

temporary

realized

realized

impairment

realized

realized

impairment

gains

losses

losses

Net gains (losses)

gains

losses

losses

Net gains (losses)

Equity securities

$
164

$
—

$
(80
)

$
84

$
316

$
—

$
—

$
316

Debt securities

56

(42
)

—

14

—

—

—

—

Total

$
220

$
(42
)

$
(80
)

$
98

$
316

$
—

$
—

$
316


	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2023		2022		2023			2022
Gross realized gains	$	—	$	3	$	—		$	4
Gross realized losses		—		—		(257	)		—
Other-than-temporary impairment		—		—		—			—
Total net gains (losses) on AFS securities	$	—	$	3	$	(257	)	$	4

Nine months ended September 30, 2017

Nine months ended September 30, 2016

Other-than-

Other-than-

Gross

Gross

temporary

Gross

Gross

temporary

realized

realized

impairment

realized

realized

impairment

gains

losses

losses

Net gains

gains

losses

losses

Net gains

Equity securities

$
1,020

$
—

$
(80
)

$
940

$
734

$
—

$
(192
)

$
542

Debt securities

566

(544
)

—

22

181

(73
)

—

108

Total

$
1,586

$
(544
)

$
(80
)

$
962

$
915

$
(73
)

$
(192
)

$
650

The tax ~~expense~~ applicable to the net realized gains for both of the ~~quarters and nine-month~~three-month periods ended ~~September~~June 30, ~~2017~~2023 and ~~2016 were $33,000~~2022 was $0 and ~~$107,000~~$1,000, respectively. The tax applicable to the net realized gains for both of the ~~quarter~~six-month periods ended June 30, 2023 and ~~$327,000~~2022 was $54,000 and ~~$221,000 year-to-date,~~$1,000, respectively.

QNB recognizes OTTI for debt securities classified as available-for-sale in accordance with FASB ASC 320, Investments – Debt and Equity Securities,, which requires ~~that we assess~~an assessment of whether ~~we intend~~QNB intends to sell or it is more likely than not that ~~the Company~~QNB will be required to sell a security before recovery of its amortized cost basis less any current-period credit losses. For debt securities that are considered other-than-temporarily impaired and that ~~we do~~QNB does not intend to sell and will not be required to sell prior to recovery of our amortized cost basis, the amount of the impairment is separated into the amount that is credit related (credit loss component) and the amount due to all other factors. The credit loss component is recognized in earnings and is the difference between the security’s amortized cost basis and the present value of its expected future cash flows discounted at the security’s effective yield. The remaining difference between the security’s fair value and the present value of future expected cash flows is due to factors that are not credit related and, therefore, is

not required to be recognized as a loss in the statement of income ~~statement,~~ but is recognized in other comprehensive income. ~~For equity securities, once a decline in value is determined to be other-than-temporary, the value of the equity security is reduced to fair value and a corresponding charge to earnings is recognized.~~ QNB believes that weit will fully collect the carrying value of securities on which ~~we have~~it has recorded a non-credit related impairment in other comprehensive income.

The following table presents a roll forward of the credit loss component recognized in earnings. The credit loss component of the amortized cost represents the difference between the present value of expected future cash flows and the amortized cost basis of the security prior to considering credit losses. The beginning balance represents the credit loss component for debt securities for which OTTI occurred prior to the beginning of the year. Credit-impaired debt securities must be presented in two components based upon whether the current period is the first time the debt security was credit-impaired (initial credit impairment) or is not the first time the debt security was credit-impaired (subsequent credit impairments). No credit impairments were recognized on debt securities during ~~third quarter of 2017~~the three or ~~2016. The table presents a summary of the cumulative credit-related other-than-temporary impairment charges recognized as components of earnings for debt securities still held by QNB:~~six months ended June 30, 2023 and 2022, respectively.

Nine months ended September 30,

2017

2016

Balance, beginning of period

$
1,153

$
1,153

Reductions: sale, pooled trust preferred

(1,152
)

—

Additions:

Initial credit impairments

—

—

Subsequent credit impairments

—

—

Balance, end of period

$
1

$
1,153

~~QNB CORP. AND SUBSIDIARY~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

The following table indicates the length of time individual debt securities have been in a continuous unrealized loss position ~~at September~~as of June 30, ~~2017~~2023 and December 31, ~~2016:~~2022:


			Less than 12 months					12 months or longer					Total
	No. of		Fair		Unrealized			Fair		Unrealized			Fair		Unrealized					Less than 12 months					12 months or longer					Total
September 30, 2017	securities		value		losses			value		losses			value		losses
																		No. of		Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
June 30, 2023																		securities		value		losses			value		losses			value		losses
U.S. Treasury																			8	$	3,718	$	(1	)	$	—	$	—		$	3,718	$	(1	)
U.S. Government agency		52	$	49,541	$	(935	)	$	20,497	$	(502	)	$	70,038	$	(1,437	)		46		—		—			87,878		(14,068	)		87,878		(14,068	)
State and municipal		33		11,432		(98	)		2,964		(56	)		14,396		(154	)		192		650		(13	)		86,960		(21,640	)		87,610		(21,653	)
U.S. Government agencies and sponsored enterprises (GSEs):
Mortgage-backed		90		121,062		(1,306	)		7,891		(216	)		128,953		(1,522	)		191		1,101		(58	)		241,859		(43,388	)		242,960		(43,446	)
Collateralized mortgage obligations (CMOs)		66		39,063		(529	)		34,064		(999	)		73,127		(1,528	)		127		178		(7	)		94,502		(18,574	)		94,680		(18,581	)
Pooled trust preferred		1		—		—			212		(29	)		212		(29	)
Corporate debt		3		3,022		(10	)		—		—			3,022		(10	)		4		2,710		(290	)		3,245		(374	)		5,955		(664	)
Equity		16		4,130		(311	)		309		(38	)		4,439		(349	)
Total		261	$	228,250	$	(3,189	)	$	65,937	$	(1,840	)	$	294,187	$	(5,029	)		568	$	8,357	$	(369	)	$	514,444	$	(98,044	)	$	522,801	$	(98,413	)



			Less than 12 months					12 months or longer					Total
	No. of		Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
December 31, 2022	securities		value		losses			value		losses			value		losses
U.S. Government agency		46	$	3,647	$	(353	)	$	83,062	$	(14,880	)	$	86,709	$	(15,233	)
State and municipal		216		50,156		(7,816	)		45,210		(15,678	)		95,366		(23,494	)
U.S. Government agencies and sponsored enterprises (GSEs):
Mortgage-backed		197		58,811		(6,775	)		197,351		(38,528	)		256,162		(45,303	)
Collateralized mortgage obligations (CMOs)		129		35,797		(3,983	)		65,875		(14,355	)		101,672		(18,338	)
Corporate debt		4		6,262		(318	)		53		(8	)		6,315		(326	)
Total		592	$	154,673	$	(19,245	)	$	391,551	$	(83,449	)	$	546,224	$	(102,694	)

Less than 12 months

12 months or longer

Total

No. of

Fair

Unrealized

Fair

Unrealized

Fair

Unrealized

December 31, 2016

securities

value

losses

value

losses

value

losses

U.S. Government agency

55

$
72,626

$
(2,118
)

$
—

$
—

$
72,626

$
(2,118
)
State and municipal

70

29,280

(398
)

—

—

29,280

(398
)
U.S. Government agencies and sponsored enterprises (GSEs):

Mortgage-backed

88

123,087

(2,241
)

—

—

123,087

(2,241
)
Collateralized mortgage obligations (CMOs)

68

56,853

(1,269
)

15,426

(577
)

72,279

(1,846
)
Pooled trust preferred

5

—

—

1,952

(891
)

1,952

(891
)
Corporate debt

4

4,002

(57
)

—

—

4,002

(57
)
Equity

16

2,985

(268
)

888

(60
)

3,873

(328
)
Total

306

$
288,833

$
(6,351
)

$
18,266

$
(1,528
)

$
307,099

$
(7,879
)

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 other-than-temporary impairment and considers the current economic conditions, the length of time and the extent to which the fair value has been less than cost, interest rates and the bond rating of each security. The unrealized losses at ~~September~~June 30, ~~2017~~2023 in U.S. Treasury, U.S. Government agency securities, state and municipal securities, mortgage-backed securities, ~~CMOs~~ and ~~corporate debt securities~~CMOs 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. ~~The Company~~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, 2023. This security has a total amortized cost of approximately $60,000 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. ~~These~~Changes in fair value is recorded in unrealized gain/(losses) in non-interest income.

At June 30, 2023 and December 31, 2022, the Company had $5,424,000 and $12,056,000, respectively, in equity securities ~~are analyzed for impairment~~recorded at fair value. The following is a summary of unrealized and realized gains and losses recognized in net income on ~~an ongoing basis. Management believes these~~ equity securities ~~will recover~~during the three and six months ended June 30, 2023 and 2022:


	For the Three Months Ended June 30,						For the Six Months Ended June 30,

	2023			2022			2023			2022
Net (loss) gains recognized during the period on equity securities	$	(54	)	$	(992	)	$	(205	)	$	(965	)
Less: Net (losses) gains recognized during the period on equity securities sold during the period		519			454			311			489
Net unrealized gains (losses) recognized during the reporting period on equity securities still held at the reporting date	$	(573	)	$	(1,446	)	$	(516	)	$	(1,454	)

Taxes applicable to the net gains (losses) recognized for the three months ended June 30, 2023 resulted in a benefit of $16,000 compared to a benefit of $287,000 for the ~~foreseeable future. QNB evaluated~~three months ended June 30, 2022. Taxes applicable to the ~~near-term prospects~~net gains (losses) recognized for the six months ended June 30, 2023 and 2022 was a benefit of $59,000 and a benefit of $279,000, respectively. Proceeds from sales of investment equity securities were $7,138,000 and $1,543,000 for the six months ended June 30, 2023 and 2022, respectively.

7. RESTRICTED INVESTMENT IN STOCKS

Restricted investment in stocks includes Federal Home Loan Bank of Pittsburgh (“FHLB”) with a carrying cost of $1,718,000, Atlantic Community Bankers Bank (“ACBB”) stock with a carrying cost of $12,000, VISA Class B stock with a carrying cost of $0 and Senior Housing Crime Prevention Investment Corporation ("SHCPFIC") preferred stock of $1,000,000 at June 30, 2023. 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 6,502 shares of Visa Class B stock, which was necessary to participate in Visa services in support of the ~~issuers~~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 stock will be converted to Visa Class A shares using a conversion factor (1.5991 as of December 29, 2022), 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 shares are permitted to transact in ~~relation~~Class B. Due to the ~~severity~~lack of orderly trades and ~~duration~~public information of ~~the impairment. Based on that evaluation and the Company’s ability and intent to hold those securities for a reasonable period of time sufficient for a forecasted recovery of fair value, the Company~~such trades, Visa Class B stock does not ~~consider these equity securities to be other-than-temporarily impaired.~~have a readily determinable fair value.

~~QNB holds one trust~~

The Bank owns 100 shares of preferred ~~security, PreTSL IV.~~stock of SHCPFIC. These shares are not transferable without the consent of SHCPFIC and does not have a readily determinable fair value.

These restricted investments are carried at cost and evaluated for OTTI periodically. As of June 30, ~~2017, PreTSL IV~~2023, there was ~~reclassified from impaired to a performing asset: all capitalized interest has been repaid,~~ no ~~cashflows are being diverted to any senior tranche, and the bond has excess subordination, which represents cushion to absorb future defaults or deferrals.~~ OTTI associated with these shares.

~~QNB CORP. AND SUBSIDIARY~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

~~The following table provides additional information related to the pooled trust preferred security (PreTSL) as of September 30, 2017:~~

Deal

Class

Book
value

Fair
value

Unrealized
gains (losses)

Realized
OTTI
credit
loss
(YTD 2017)

Total
recognized
OTTI
credit
loss

Moody's
/Fitch
ratings

Current
number of
performing
banks

Current
number of
performing
insurance
companies

Actual
deferrals
and defaults
as a % of
total
collateral

Total
performing collateral
as a % of
outstanding
bonds

PreTSL IV

Mezzanine
*

$
241

$
212

$
(29
)

$
—

$
(1
)

B1/BB

5

—

18.0
%

142.7
%

~~Mezzanine* - only class of bonds still outstanding (represents the senior-most obligation of the trust)~~

In June 2017, QNB Bank sold five non-performing pooled trust preferred securities, with a $2,235,000 carrying value, recording a loss on sale of $15,000, included in non-interest income in the consolidated statement of income. Several years ago, QNB had recorded $1,152,000 in OTTI for four of these five these bonds, and subsequently applied any cashflow received to the balance of these non-performing, nonaccrual assets. Improvement in market prices for these securities during the second quarter 2017 reduced realized losses, and the reduction of approximately $19,000,000 in risk-based assets required for the bonds drove the decision to redeem these debt securities.

On a quarterly basis we evaluate our debt securities for other-than-temporary impairment (OTTI), which involves the use of a third-party valuation firm to assist management with the valuation. When evaluating these investments, a credit-related portion and a non-credit related portion of impairment are determined. The credit related portion is recognized in earnings and represents the expected shortfall in future cash flows. The non-credit related portion is recognized in other comprehensive income and represents the difference between the book value and the fair value of the security less any current quarter credit related impairment. For the quarter and nine months ended September 30, 2017 and 2016, no other-than-temporary impairment charges representing credit impairment were recognized on our pooled trust preferred collateralized debt obligations.

~~PreTSL IV is rated lower than AA and measured for OTTI within the scope of ASC 325 (formerly known as EITF 99-20),~~ Recognition of Interest Income and Impairment on Purchased Beneficial Interests and Beneficial Interests That Continue to be Held by a Transferor in Securitized Financial Assets, and Amendments to the Impairment Guidance of EITF Issue No. 99-20 (formerly known as EITF 99-20-1). In addition to discounted cash-flows, QNB considers trends in the financial performance ratios of the bond’s underlying issuers, as well as the bond’s structure (QNB holds the senior-most obligation of the trust for PreTSL IV), determining there is little likelihood of default. In determining whether a credit loss exists, QNB uses its best estimate of the present value of cash flows expected to be collected from the debt security and discounts them at the effective yield implicit in the security at the date of acquisition or the prospective yield for those securities with prior OTTI charges. Lack of liquidity in the market for trust preferred collateralized debt obligations contributed to the temporary impairment of this security. Although classified as available-for-sale, the Company has the intent to hold PreTSL IV and does not believe it will be required to sell it before recovery occurs. QNB could be subject to additional write-downs in the future if additional deferrals and defaults occur.

7.8. LOANS & ALLOWANCE FOR ~~LOAN~~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.

~~QNB~~The Company maintains an allowance for ~~loan~~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 ~~loan~~credit losses are charged to earnings to bring the total allowance for loan losses to a level considered necessary by management.

~~QNB CORP. AND SUBSIDIARY~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

The allowance for ~~loan~~credit losses is ~~based~~measured on ~~management’s continuing review~~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 ~~evaluation of the loan portfolio.~~historical loss experienced. The level of the allowance is determined by assigning specific reserves to ~~individually identified problem credits and~~all non-accrual loans, except the homogeneous pool of student loans which are measured in the general ~~reserves to all other loans. For such~~reserve. An allowance on these non-accrual loans ~~that are also classified as impaired, an allowance~~ is established when the discounted cash flows (or collateral value) of the ~~impaired~~ loan is lower than the carrying value of that loan. The portion of the allowance that is allocated to ~~internally criticized and~~ 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 covers pools of loans by loan class including commercial loans not considered impaired, as well as smaller balance homogeneous loans, such as residential real estate, home equity and other consumer loans. These pools of loans are evaluated for loss exposure based upon historical loss rates. These loss rates are based on a three-year history of charge-offs and are more heavily weighted for recent experience for each of these categories of loans,is adjusted for qualitative factors. These qualitative risk factors include:

~~Lending policies and procedures, including underwriting standards and collection, charge-off and recovery practices.~~

Concentrations: The Company adjusts historic loss for concentrations in the current portfolio that were not present during the down-turn of economic cycle.

~~Effect of external factors, such as legal and regulatory requirements.~~

~~National, regional, and local economic and business conditions as well as the condition of various market segments, including the value of underlying collateral for collateral dependent loans.~~

~~Nature and volume of the portfolio including growth.~~

~~Experience, ability, and depth of lending management and staff.~~

~~Volume and severity of past due, classified and nonaccrual loans.~~

~~Quality of the Company’s loan review system, and the degree of oversight by the Company’s Board of Directors.~~

~~Existence and effect of any concentrations of credit and changes in the level of such concentrations.~~

~~Each factor is assigned a value~~Economic Forecast: The Company utilizes an entire economic cycle of data to ~~reflect improving, stable or declining conditions based on management’s best judgment using relevant information available at~~determine loss rates by segment. This approach reflects an inherent reversion to the ~~time~~historical losses during life of the ~~evaluation.~~

~~An unallocated component~~loans within the pool considering prepayments and loss experience throughout an entire economic cycle. However, the Company feels it is ~~maintained~~prudent to ~~cover uncertainties~~maintain a floor in its model to assure that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and generalthere is enough reserve on hand to sustain any losses ~~in the portfolio.~~

upon an upcoming recession.

Management emphasizes loan quality and close monitoring of potential problem credits. Credit risk identification and review processes are utilized in order to assess and monitor the degree of risk in the loan portfolio. ~~QNB’s~~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 ~~uncollectibility.~~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 ~~loan review group tests~~firm reviews risk ~~assessments~~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 ~~QNB’s~~the Company's allowance for ~~loan losses.~~credit losses on loans. Such agencies may require ~~QNB~~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 ~~loan~~credit losses on loans in accordance with U.S. GAAP. If circumstances differ substantially from the ~~assumptions used in making determinations,~~current calculation, future adjustments to the allowance for ~~loan~~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 as a result of the factors discussed above.~~deteriorate.

1815

~~QNB CORP. AND SUBSIDIARY~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

Major classes of loans are as follows:


	June 30,
	2023
Commercial:
Commercial and industrial	$	135,258
Construction and land development		74,057
Real estate secured by multi-family properties		102,497
Real estate secured by owner-occupied properties		162,546
Real estate secured by other commercial properties		258,532
Revolving real estate secured by 1-4 family properties-business		7,223
Real estate secured by 1st lien on 1-4 family properties-business		100,058
Real estate secured by junior lien on 1-4 family properties-business		3,592
State and political subdivisions		19,487
Retail:
1-4 family residential mortgages		105,871
Construction-individual		262
Revolving home equity secured by 1-4 family properties-personal		32,731
Real estate secured by 1st lien on 1-4 family properties-personal		11,452
Real estate secured by junior lien on 1-4 family properties-personal		12,658
Student loans		1,846
Overdrafts		162
Other consumer		1,780
Total loans		1,030,012
Net unearned (fees) costs		(268	)
Allowance for credit losses on loans		(8,365	)
Loans receivable, net	$	1,021,379


	December 31,
	2022
Commercial:
Commercial and industrial	$	160,875
Construction		62,955
Secured by commercial real estate		518,070
Secured by residential real estate		103,419
State and political subdivisions		20,971
Retail:
1-4 family residential mortgages		105,654
Home equity loans and lines		63,580
Consumer		4,113
Total loans		1,039,637
Net unearned (fees) costs		(252	)
Allowance for loan losses		(10,531	)
Loans receivable, net	$	1,028,854

September 30

December 31,

2017

2016

Commercial:

Commercial and industrial

$
135,786

$
110,233

Construction

46,006

39,268

Secured by commercial real estate

278,602

255,188

Secured by residential real estate

69,772

68,731

State and political subdivisions

37,474

35,260

Retail:

1-4 family residential mortgages

53,849

47,124

Home equity loans and lines

75,685

71,525

Consumer

6,863

5,670

Total loans

704,037

632,999

Net unearned costs

177

80

Loans receivable

$
704,214

$
633,079

Overdrafts are reclassified as loans and at December 31, 2022 are included in consumer loans above and total loans receivable on the Consolidated Balance Sheets. At December 31, 2022, overdrafts were approximately $132,000. 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 ~~expressed~~express purpose of conducting commercial real estate transactions.

Overdrafts are reclassified as loans and are included in consumer loans above and total loans on the balance sheet. At September 30, 2017 and December 31, 2016, overdrafts were approximately $184,000 and $171,000, respectively.

QNB generally lends in ~~its trade area which is comprised of Quakertown~~Bucks, Lehigh, and ~~the surrounding communities.~~Montgomery counties in southeastern Pennsylvania. To a large extent, QNB makes loans collateralized at least in part by real estate. Its lending activities could be affected by changes in the general economy, the regional economy, or real estate values. ~~Other than disclosed in the table above, at September 30, 2017, there were no concentrations of loans exceeding 10% of total loans.~~

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 of or lease of the subject property. Commercial real estate loans may be affected to a greater extent than residential loans by adverse conditions in real estate markets or the economy because commercial real estate borrowers’ ability to repay their loans depends on successful development of their properties, as well as the factors affecting residential real estate borrowers.

Loans to state and political subdivisions are tax-exempt or taxable loans to municipalities, school districts and housing and industrial development authorities. These loans can be general obligations of the municipality or school district repaid through their taxing authority, revenue obligations repaid through the income generated by the operations of the authority, such as a water or sewer authority, or loans issued to a housing and industrial development agency, for which a private corporation is responsible for payments on the loans.

~~QNB CORP. AND SUBSIDIARY~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

Indirect lease financing receivables represent loans to small businesses that are collateralized by equipment. These loans tend to have higher risk characteristics but generally provide higher rates of return. These loans are originated by a third party and purchased by QNB based on criteria specified by QNB. In October 2016, the Company sold its interest in these third-party originated lease financing receivables.

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%~~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 ~~an eight (8) grade~~a ten-grade risk rating system related to the credit quality of commercial loans and loans to state and political subdivisions ~~and indirect lease financing~~ of which the first ~~four~~six categories are pass categories (credits not adversely rated). The following is a description of the internal risk ratings and the likelihood of loss related to each risk rating.

~~1 -~~

Excellent - no apparent risk

~~2 -~~

Good - minimal risk

Acceptable - lower risk

Acceptable - average risk

~~4 - Watch List - greater than average~~

Acceptable – higher risk

~~5 -~~

Pass watch

Special Mention - potential weaknesses

~~6 -~~

Substandard - well defined weaknesses

~~7 -~~

Doubtful - full collection unlikely

~~8 -~~

10.

Loss - considered uncollectible

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 ~~three~~five are reviewed annually based on the borrower’s fiscal year. Loans with risk ratings of ~~four~~six are reviewed every six to twelve months based on the dollar amount of the relationship with the borrower. Loans with risk ratings of ~~five~~seven through ~~eight~~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 ~~Bank’s~~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.

~~QNB CORP. AND SUBSIDIARY~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

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 ~~September~~June 30, ~~2017~~2023 and December 31, ~~2016:~~2022:


	Term Loans by Origination Year
June 30, 2023	2023		2022		2021		2020		2019		Prior		Revolving		Total
Commercial Loans
Commercial and industrial:
Risk rating
Pass	$	8,564	$	15,920	$	9,765	$	7,428	$	6,557	$	8,182	$	77,315	$	133,731
Special mention		—		—		—		—		—		—		—		—
Substandard		—		—		—		—		18		231		1,278		1,527
Doubtful		—		—		—		—		—		—		—		—
Total commercial and industrial	$	8,564	$	15,920	$	9,765	$	7,428	$	6,575	$	8,413	$	78,593	$	135,258
Construction and land development:
Risk rating
Pass	$	19,280	$	29,627	$	13,427	$	3,147	$	4,111	$	4,418	$	—	$	74,010
Special mention		—		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		47		—		47
Doubtful		—		—		—		—		—		—		—		—
Total construction and land development	$	19,280	$	29,627	$	13,427	$	3,147	$	4,111	$	4,465	$	—	$	74,057
Real estate secured by multi-family properties:
Risk rating
Pass	$	2,542	$	28,995	$	23,648	$	10,057	$	5,895	$	28,916	$	—	$	100,053
Special mention		—		—		—		—		—		—		—		—
Substandard		—		—		—		—		713		1,731		—		2,444
Doubtful		—		—		—		—		—		—		—		—
Total real estate secured by multi-family properties	$	2,542	$	28,995	$	23,648	$	10,057	$	6,608	$	30,647	$	—	$	102,497
Real estate secured by owner-occupied properties:
Risk rating
Pass	$	8,985	$	30,143	$	28,759	$	19,366	$	12,261	$	56,370	$	—	$	155,884
Special mention		—		—		—		—		—		—		—		—
Substandard		—		—		126		—		—		6,536		—		6,662
Doubtful		—		—		—		—		—		—		—		—
Total real estate secured by owner-occupied properties	$	8,985	$	30,143	$	28,885	$	19,366	$	12,261	$	62,906	$	—	$	162,546
Real estate secured by other commercial properties:
Risk rating
Pass	$	14,458	$	44,781	$	44,818	$	20,070	$	30,199	$	101,111	$	—	$	255,437
Special mention		—		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		3,095		—		3,095
Doubtful		—		—		—		—		—		—		—		—
Total real estate secured by other commercial properties	$	14,458	$	44,781	$	44,818	$	20,070	$	30,199	$	104,206	$	—	$	258,532

September 30, 2017

Pass

Special
mention

Substandard

Doubtful

Total

Commercial:

Commercial and industrial

$
128,830

$
687

$
6,269

$
—

$
135,786

Construction

46,003

—

3

—

46,006

Secured by commercial real estate

264,271

4,592

9,739

—

278,602

Secured by residential real estate

67,494

225

2,053

—

69,772

State and political subdivisions

37,474

—

—

—

37,474

Total

$
544,072

$
5,504

$
18,064

$
—

$
567,640


	Term Loans by Origination Year
June 30, 2023	2023		2022		2021		2020		2019		Prior		Revolving		Total
Revolving real estate secured by 1-4 family properties-business:
Risk rating
Pass	$	—	$	—	$	—	$	—	$	—	$	—	$	7,223	$	7,223
Special mention		—		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		—		—		—
Doubtful		—		—		—		—		—		—		—		—
Total revolving real estate secured by 1-4 family properties-business	$	—	$	—	$	—	$	—	$	—	$	—	$	7,223	$	7,223
Real estate secured by 1st lien on 1-4 family properties-business:
Risk rating
Pass	$	7,296	$	28,716	$	21,637	$	10,869	$	8,970	$	21,643	$	—	$	99,131
Special mention		—		—		139		—		—		—		—		139
Substandard		—		192		—		—		443		153		—		788
Doubtful		—		—		—		—		—		—		—		—
Total real estate secured by 1st lien on 1-4 family properties-business	$	7,296	$	28,908	$	21,776	$	10,869	$	9,413	$	21,796	$	—	$	100,058
Real estate secured by junior lien on 1-4 family properties-business:
Risk rating
Pass	$	549	$	617	$	559	$	600	$	43	$	981	$	—	$	3,349
Special mention		—		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		243		—		243
Doubtful		—		—		—		—		—		—		—		—
Total real estate secured by junior lien on 1-4 family properties-business	$	549	$	617	$	559	$	600	$	43	$	1,224	$	—	$	3,592
State and political subdivisions:
Risk rating
Pass	$	53	$	40	$	4,569	$	23	$	5,931	$	8,871	$	—	$	19,487
Special mention		—		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		—		—		—
Doubtful		—		—		—		—		—		—		—		—
Total real estate secured by junior lien on 1-4 family properties-business	$	53	$	40	$	4,569	$	23	$	5,931	$	8,871	$	—	$	19,487
Total Commercial Loans:
Risk rating
Pass	$	61,727	$	178,839	$	147,182	$	71,560	$	73,967	$	230,492	$	84,538	$	848,305
Special mention		—		—		139		—		—		—		—		139
Substandard		—		192		126		—		1,174		12,036		1,278		14,806
Doubtful		—		—		—		—		—		—		—		—
Total Commercial loans	$	61,727	$	179,031	$	147,447	$	71,560	$	75,141	$	242,528	$	85,816	$	863,250


December 31, 2022	Pass		Special mention		Substandard		Doubtful		Total
Commercial:
Commercial and industrial	$	157,914	$	23	$	2,938	$	—	$	160,875
Construction		62,955		—		—		—		62,955
Secured by commercial real estate		505,657		2,597		9,816		—		518,070
Secured by residential real estate		102,295		194		930		—		103,419
State and political subdivisions		20,971		—		—		—		20,971
Total	$	849,792	$	2,814	$	13,684	$	—	$	866,290

December 31, 2016

Pass

Special
mention

Substandard

Doubtful

Total

Commercial:

Commercial and industrial

$
102,396

$
686

$
7,151

$
—

$
110,233

Construction

39,259

—

9

—

39,268

Secured by commercial real estate

238,290

5,185

11,713

—

255,188

Secured by residential real estate

65,169

231

3,331

—

68,731

State and political subdivisions

35,260

—

—

—

35,260

Total

$
480,374

$
6,102

$
22,204

$
—

$
508,680

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 ~~September~~June 30, ~~2017~~2023 and December ~~31, 2016:~~2022:

September 30, 2017

Performing

Non-performing

Total

Retail:

��

1-4 family residential mortgages

$
52,957

$
892

$
53,849

Home equity loans and lines

75,536

149

75,685

Consumer

6,771

92

6,863

Total

$
135,264

$
1,133

$
136,397


	Term Loans by Origination Year
June 30, 2023	2023		2022		2021		2020		2019		Prior		Revolving		Total
Retail Loans
1-4 family residential mortgages:
Payment performance
Performing	$	6,148	$	15,221	$	31,258	$	21,133	$	4,602	$	26,686	$	—	$	105,048
Nonperforming		—		—		—		—		—		823		—		823
Total 1-4 family residential mortgages	$	6,148	$	15,221	$	31,258	$	21,133	$	4,602	$	27,509	$	—	$	105,871
Construction-individual:
Payment performance
Performing	$	—	$	—	$	262	$	—	$	—	$	—	$	—	$	262
Nonperforming		—		—		—		—		—		—		—		—
Total construction-individual	$	—	$	—	$	262	$	—	$	—	$	—	$	—	$	262
Revolving home equity secured by 1-4 family properties-personal:
Payment performance
Performing	$	—	$	—	$	—	$	—	$	—	$	—	$	32,553	$	32,553
Nonperforming		—		—		—		—		—		—		178		178
Total revolving home equity secured by 1-4 family properties-personal	$	—	$	—	$	—	$	—	$	—	$	—	$	32,731	$	32,731
Real estate secured by 1st lien on 1-4 family properties-personal:
Payment performance
Performing	$	1,755	$	1,703	$	3,358	$	1,038	$	1,074	$	2,389	$	—	$	11,317
Nonperforming		—		—		—		—		—		135		—		135
Total real estate secured by 1st lien Real estate secured by 1st lien on 1-4 family properties-personal	$	1,755	$	1,703	$	3,358	$	1,038	$	1,074	$	2,524	$	—	$	11,452
Real estate secured by junior lien on 1-4 family properties-personal:
Payment performance
Performing	$	2,601	$	1,778	$	2,531	$	1,418	$	746	$	3,565	$	—	$	12,639
Nonperforming		—		19		—		—		—		—		—		19
Total real estate secured by junior lien on 1-4 family properties-personal	$	2,601	$	1,797	$	2,531	$	1,418	$	746	$	3,565	$	—	$	12,658
Student loans:
Payment performance
Performing	$	—	$	—	$	—	$	—	$	—	$	1,829	$	—	$	1,829
Nonperforming		—		—		—		—		—		17		—		17
Total student loans	$	—	$	—	$	—	$	—	$	—	$	1,846	$	—	$	1,846
Overdrafts:
Payment performance
Performing	$	—	$	—	$	—	$	—	$	—	$	—	$	162	$	162
Nonperforming		—		—		—		—		—		—		—		—
Total overdrafts	$	—	$	—	$	—	$	—	$	—	$	—	$	162	$	162
Other consumer:
Payment performance
Performing	$	477	$	397	$	351	$	125	$	125	$	64	$	201	$	1,740
Nonperforming		—		—		—		—		—		40		—		40
Total other consumer	$	477	$	397	$	351	$	125	$	125	$	104	$	201	$	1,780
Total Retail Loans:
Payment performance
Performing	$	10,981	$	19,099	$	37,760	$	23,714	$	6,547	$	34,533	$	32,916	$	165,550
Nonperforming		—		19		—		—		—		1,015		178		1,212
Total Retail Loans	$	10,981	$	19,118	$	37,760	$	23,714	$	6,547	$	35,548	$	33,094	$	166,762

December 31, 2016

Performing

Non-performing

Total

Retail:

1-4 family residential mortgages

$
46,858

$
266

$
47,124

Home equity loans and lines

71,436

89

71,525

Consumer

5,577

93

5,670

Total

$
123,871

$
448

$
124,319

2120

~~QNB CORP. AND SUBSIDIARY~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~


December 31, 2022	Performing		Non-performing		Total
Retail:
1-4 family residential mortgages	$	104,933	$	721	$	105,654
Home equity loans and lines		62,900		680		63,580
Consumer		4,023		90		4,113
Total	$	171,856	$	1,491	$	173,347

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 ~~September~~June 30, ~~2017~~2023 and December 31, ~~2016:~~2022:

September 30, 2017	30-59 days past due		60-89 days past due		90 days or more past due		Total past due loans		Current		Total loans receivable

June 30, 2023													30-59 days past due		60-89 days past due		90 days or more past due		Total past due loans		Current		Total loans receivable
Commercial:
Commercial and industrial	$	174		—		—	$	174	$	135,612	$	135,786	$	44	$	—	$	—	$	44	$	135,214	$	135,258
Construction		—		—		—		—		46,006		46,006
Secured by commercial real estate		—	$	44	$	716		760		277,842		278,602
Secured by residential real estate		55		2		153		210		69,562		69,772
Construction and land development														—		—		—		—		74,057		74,057
Real estate secured by multi-family properties														—		—		—		—		102,497		102,497
Real estate secured by owner-occupied properties														—		—		—		—		162,546		162,546
Real estate secured by other commercial properties														8,822		—		—		8,822		249,710		258,532
Revolving real estate secured by 1-4 family properties-business														—		—		—		—		7,223		7,223
Real estate secured by 1st lien on 1-4 family properties-business														—		—		5		5		100,053		100,058
Real estate secured by junior lien on 1-4 family properties-business														—		—		—		—		3,592		3,592
State and political subdivisions		—		—		—		—		37,474		37,474		—		—		—		—		19,487		19,487
Retail:
1-4 family residential mortgages		—		—		506		506		53,343		53,849		—		343		156		499		105,372		105,871
Home equity loans and lines		134		—		122		256		75,429		75,685
Consumer		31		15		5		51		6,812		6,863
Construction-individual														—		—		—		—		262		262
Revolving home equity secured by 1-4 family properties-personal														97		—		—		97		32,634		32,731
Real estate secured by 1st lien on 1-4 family properties-personal														—		—		100		100		11,352		11,452
Real estate secured by junior lien on 1-4 family properties-personal														—		19		—		19		12,639		12,658
Student loans														—		21		—		21		1,825		1,846
Overdrafts														15		2		—		17		145		162
Other consumer														7		5		—		12		1,768		1,780
Total	$	394	$	61	$	1,502	$	1,957	$	702,080	$	704,037	$	8,985	$	390	$	261	$	9,636	$	1,020,376	$	1,030,012

December 31, 2016	30-59 days past due		60-89 days past due		90 days or more past due		Total past due loans		Current		Total loans receivable

December 31, 2022													30-59 days past due		60-89 days past due		90 days or more past due		Total past due loans		Current		Total loans receivable
Commercial:
Commercial and industrial	$	463		—		—	$	463	$	109,770	$	110,233	$	—	$	1,157	$	—	$	1,157	$	159,718	$	160,875
Construction		214		—		—		214		39,054		39,268		—		—		—		—		62,955		62,955
Secured by commercial real estate		64	$	395	$	1,596		2,055		253,133		255,188		—		—		—		—		518,070		518,070
Secured by residential real estate		—		—		285		285		68,446		68,731		—		—		13		13		103,406		103,419
State and political subdivisions		—		—		—		—		35,260		35,260		—		—		—		—		20,971		20,971
Retail:
1-4 family residential mortgages		1,459		323		—		1,782		45,342		47,124		703		168		216		1,087		104,567		105,654
Home equity loans and lines		107		15		—		122		71,403		71,525		95		—		—		95		63,485		63,580
Consumer		14		2		—		16		5,654		5,670		37		50		—		87		4,026		4,113
Total	$	2,321	$	735	$	1,881	$	4,937	$	628,062	$	632,999	$	835	$	1,375	$	229	$	2,439	$	1,037,198	$	1,039,637

The following tables disclose the recorded investment in loans receivable that are either on non-accrual status or past due 90 days or more and still accruing interest as of September 30, 2017 and December 31, 2016:

September 30, 2017

90 days or more past
due (still accruing)

Non-accrual

Commercial:

Commercial and industrial

—

$
4,360

Construction

—

—

Secured by commercial real estate

—

2,070

Secured by residential real estate

—

1,520

State and political subdivisions

—

—

Retail:

1-4 family residential mortgages

—

892

Home equity loans and lines

—

149

Consumer

$
5

87

Total

$
5

$
9,078

2221

~~QNB CORP. AND SUBSIDIARY~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

December 31, 2016

90 days or more past
due (still accruing)

Non-accrual

Commercial:

Commercial and industrial

$
—

$
4,798

Construction

—

—

Secured by commercial real estate

—

3,007

Secured by residential real estate

—

1,866

State and political subdivisions

—

—

Retail:

1-4 family residential mortgages

—

266

Home equity loans and lines

—

89

Consumer

—

93

Total

$
—

$
10,119

~~Activity in the allowance for loan losses for the three months ended September 30, 2017 and 2016 are as follows:~~

Three months ended September 30, 2017

Balance,
beginning of
period

Provision for
(credit to)
loan losses

Charge-offs

Recoveries

Balance, end
of period

Commercial:

Commercial and industrial

$
2,177

$
559

—

$
8

$
2,744

Construction

516

13

—

—

529

Secured by commercial real estate

2,640

(267
)

—

2

2,375

Secured by residential real estate

1,200

(93
)

—

-

1,107

State and political subdivisions

123

8

—

—

131

Retail:

1-4 family residential mortgages

439

(61
)

—

—

378

Home equity loans and lines

319

61

—

3

383

Consumer

78

30

$
(29
)

6

85

Unallocated

543

(150
)

N/A

N/A

393

Total

$
8,035

$
100

$
(29
)

$
19

$
8,125

Three months ended September 30, 2016

Balance,
beginning of
period

Provision for
(credit to)
loan losses

Charge-offs

Recoveries

Balance, end
of period

Commercial:

Commercial and industrial

$
1,350

$
(55
)

—

$
9

$
1,304

Construction

429

(79
)

—

—

350

Secured by commercial real estate

2,231

233

—

2

2,466

Secured by residential real estate

1,550

(57
)

—

50

1,543

State and political subdivisions

204

(64
)

—

—

140

Indirect lease financing

226

(6
)

—

—

220

Retail:

1-4 family residential mortgages

298

(20
)

—

—

278

Home equity loans and lines

343

(7
)

—

4

340

Consumer

73

33

$
(29
)

7

84

Unallocated

846

22

N/A

N/A

868

Total

$
7,550

$
—

$
(29
)

$
72

$
7,593

~~Activity in the allowance for loan losses for the nine months ended September 30, 2017 and 2016 are as follows:~~

~~QNB CORP. AND SUBSIDIARY~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

Nine months ended September 30, 2017

Balance,
beginning of
period

Provision for
(credit to)
loan losses

Charge-offs

Recoveries

Balance, end
of period

Commercial:

Commercial and industrial

$
1,459

$
1,257

—

$
28

$
2,744

Construction

449

80

—

—

529

Secured by commercial real estate

2,646

(277
)

—

6

2,375

Secured by residential real estate

1,760

(685
)

$
(3
)

35

1,107

State and political subdivisions

123

8

—

—

131

Retail:

1-4 family residential mortgages

366

12

—

—

378

Home equity loans and lines

353

22

—

8

383

Consumer

76

52

(68
)

25

85

Unallocated

162

231

N/A

N/A

393

Total

$
7,394

$
700

$
(71
)

$
102

$
8,125

Nine months ended September 30, 2016

Balance,
beginning of
period

Provision for
(credit to)
loan losses

Charge-offs

Recoveries

Balance, end
of period

Commercial:

Commercial and industrial

$
1,521

$
(105
)

$
(140
)

$
28

$
1,304

Construction

286

64

—

—

350

Secured by commercial real estate

2,411

49

—

6

2,466

Secured by residential real estate

1,812

(359
)

(20
)

110

1,543

State and political subdivisions

222

(82
)

—

—

140

Indirect lease financing

164

99

(52
)

9

220

Retail:

1-4 family residential mortgages

350

(72
)

—

—

278

Home equity loans and lines

428

(102
)

—

14

340

Consumer

76

49

(62
)

21

84

Unallocated

284

584

N/A

N/A

868

Total

$
7,554

$
125

$
(274
)

$
188

$
7,593

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. ~~Management~~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. ~~Impairment~~All non-accrual loans, except student loans, are individually evaluated for an allowance for credit losses ("ACL"). This ACL is measured ~~on a loan by loan basis for commercial loans, loans to state and political subdivisions and indirect lease financing loans by~~ using either the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral if the loan is collateral dependent.

Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual consumer and residential mortgage loans for impairment disclosures, unless such loans are part of a larger relationship that is impaired, or are classified as a troubled debt restructuring.

An allowance for ~~loan losses~~credit loss is established for ~~an impaired~~a non-accrual loan if its carrying value exceeds its estimated fair value. The estimated fair values of the majority of the Company’s ~~impaired~~non-accrual loans are measured based on the estimated fair value of the loan’s collateral.

For commercial loans secured by real estate, estimated fair values are determined primarily through third-party appraisals. When a real estate secured loan becomes impaired, a decision is made regarding whether an updated certified appraisal of the real estate is

~~QNB CORP. AND SUBSIDIARY~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

necessary. This decision is based on various considerations, including the age of the most recent appraisal, the loan-to-value ratio based on the original appraisal and the condition of the property. Appraised values are discounted to arrive at the estimated selling price of the collateral, which is considered to be the estimated fair value. The discounts also include estimated costs to sell the property.

For commercial loans secured by non-real estate collateral, such as accounts receivable, inventory and equipment, estimated fair values are determined based on the borrower’s financial statements, inventory reports, accounts receivable agings or equipment appraisals or invoices. Indications of value from these sources are generally discounted based on the age of the financial information or the quality of the assets. The following table disclose the recorded investment in loans receivable that are either on non-accrual status or past due 90 days or more and still accruing interest as of June 30, 2023:

~~From time~~


June 30, 2023	90 Days or More Past Due-Still Accruing		Nonaccrual With No Specifically-Related ACL		Nonaccrual With Related ACL		Total Nonaccrual Loans
Commercial:
Commercial and industrial	$	—	$	—	$	366	$	366
Construction and land development		—		—		—		—
Real estate secured by multi-family properties		—		—		—		—
Real estate secured by owner-occupied properties		—		784		—		784
Real estate secured by other commercial properties		—		2,207		—		2,207
Revolving real estate secured by 1-4 family properties-business		—		—		—		—
Real estate secured by 1st lien on 1-4 family properties-business		—		5		—		5
Real estate secured by junior lien on 1-4 family properties-business		—		—		220		220
State and political subdivisions		—		—		—		—
Retail:
1-4 family residential mortgages		—		480		343		823
Construction-individual		—		—		—		—
Revolving home equity secured by 1-4 family properties-personal		—		24		154		178
Real estate secured by 1st lien on 1-4 family properties-personal		—		135		—		135
Real estate secured by junior lien on 1-4 family properties-personal		—				19		19
Student loans		—		17		—		17
Other consumer		—		40		—		40
Total	$	—	$	3,692	$	1,102	$	4,794

QNB recognized interest income of $316,000 on non-accrual loans during the six months ended June 30, 2023.

The following table presents the collateral-dependent loans by loan category at June 30, 2023:


June 30, 2023	Real Estate Secured		Other (1)		Deficiency in Collateral		Total Collateral Dependent Nonaccrual Loans
Commercial:
Commercial and industrial	$	—	$	294	$	72	$	366
Construction and land development		—		—		—		—
Real estate secured by multi-family properties		—		—		—		—
Real estate secured by owner-occupied properties		784		—		—		784
Real estate secured by other commercial properties		2,207		—		—		2,207
Revolving real estate secured by 1-4 family properties-business		—		—		—		—
Real estate secured by 1st lien on 1-4 family properties-business		5						5
Real estate secured by junior lien on 1-4 family properties-business		—		—		220		220
State and political subdivisions		—		—		—		—
Retail:
1-4 family residential mortgages		778		—		45		823
Construction-individual		—		—		—		—
Revolving home equity secured by 1-4 family properties-personal		67		—		111		178
Real estate secured by 1st lien on 1-4 family properties-personal		135		—		—		135
Real estate secured by junior lien on 1-4 family properties-personal		17		—		2		19
Other consumer		—		40		—		40
Total	$	3,993	$	334	$	450	$	4,777

(1) Secured by business assets, personal property and equipment or guarantees

The following tables disclose the recorded investment in loans receivable that are either on non-accrual status or past due 90 days or more and still accruing interest as of December 31, 2022:


December 31, 2022	90 days or more past due (still accruing)		Non-accrual
Commercial:
Commercial and industrial	$	—	$	3,369
Construction		—		—
Secured by commercial real estate		—		2,279
Secured by residential real estate		—		391
State and political subdivisions		—		—
Retail:
1-4 family residential mortgages		—		721
Home equity loans and lines		—		680
Consumer		—		90
Total	$	—	$	7,530

The following table present the balance in the allowance for loan losses at December 31, 2022 disaggregated on the basis of the Company’s impairment method by class of loans receivable along with the balance of loans receivable by class, excluding unearned fees and costs, disaggregated on the basis of the Company’s impairment methodology:


	Allowance for Loan Losses						Loans Receivable
December 31, 2022	Balance		Balance related to loans individually evaluated for impairment		Balance related to loans collectively evaluated for impairment		Balance		Balance individually evaluated for impairment		Balance collectively evaluated for impairment
Commercial:
Commercial and industrial	$	1,316	$	125	$	1,191	$	160,875	$	1,821	$	159,054
Construction		755		—		755		62,955		—		62,955
Secured by commercial real estate		5,002		131		4,871		518,070		5,309		512,761
Secured by residential real estate		1,240		321		919		103,419		1,362		102,057
State and political subdivisions		94		—		94		20,971		—		20,971
Retail:
1-4 family residential mortgages		683		—		683		105,654		628		105,026
Home equity loans and lines		437		119		318		63,580		402		63,178
Consumer		502		—		502		4,113		45		4,068
Unallocated		502	N/A		N/A		N/A		N/A		N/A
Total	$	10,531	$	696	$	9,333	$	1,039,637	$	9,567	$	1,030,070

The following table summarizes additional information, in regards to ~~time, QNB may extend, restructure,~~impaired loans by loan portfolio class, as of December 31, 2022:


	December 31, 2022
	Recorded investment (after charge-offs)		Unpaid principal balance		Related allowance
With no specific allowance recorded:
Commercial:
Commercial and industrial	$	1,402	$	1,694
Construction		—		—
Secured by commercial real estate		2,198		2,608
Secured by residential real estate		430		482
Retail:
1-4 family residential mortgages		628		678
Home equity loans and lines		240		296
Consumer		45		62
Total	$	4,943	$	5,820

With an allowance recorded:
Commercial:
Commercial and industrial	$	419	$	601	$	125
Construction		—		—		—
Secured by commercial real estate		3,111		3,312		131
Secured by residential real estate		932		1,065		321
Retail:
1-4 family residential mortgages		—		—		—
Home equity loans and lines		162		191		119
Consumer		—		—		—
Total	$	4,624	$	5,169	$	696

Total:
Commercial:
Commercial and industrial	$	1,821	$	2,295	$	125
Construction		—		—		—
Secured by commercial real estate		5,309		5,920		131
Secured by residential real estate		1,362		1,547		321
Retail:
1-4 family residential mortgages		628		678		—
Home equity loans and lines		402		487		119
Consumer		45		62		—
Total	$	9,567	$	10,989	$	696

Activity in the allowance for credit losses on loans for the three and six months ended June 30, 2023 and 2022 are as follows:


For the Three Months Ended June 30, 2023	Beginning balance prior to adoption of ASC 326		Credit loss expense (reversal)			Charge-offs			Recoveries		Balance, end of period
Commercial:
Commercial and industrial	$	899	$	(75	)	$	(40	)	$	11	$	795
Construction and land development		749		105			—			—		854
Real estate secured by multi-family properties		1,577		47			—			—		1,624
Real estate secured by owner-occupied properties		972		13			—			—		985
Real estate secured by other commercial properties		1,091		137			—			—		1,228
Revolving real estate secured by 1-4 family properties-business		34		3			—			—		37
Real estate secured by 1st lien on 1-4 family properties-business		1,273		2			—			2		1,277
Real estate secured by junior lien on 1-4 family properties-business		258		(24	)		—			—		234
State and political subdivisions		55		(4	)		—			—		51
Retail:				—			—			—
1-4 family residential mortgages		405		28			—			—		433
Construction-individual		1		(1	)		—			—		—
Revolving home equity secured by 1-4 family properties-personal		249		(15	)		—			—		234
Real estate secured by 1st lien on 1-4 family properties-personal		64		3			—			—		67
Real estate secured by junior lien on 1-4 family properties-personal		77		7			—			2		86
Student loans		448		(32	)		—			2		418
Overdrafts		9		19			(20	)		5		13
Other consumer		30		(1	)		—			—		29
Total	$	8,191	$	212		$	(60	)	$	22	$	8,365


For the Three Months Ended June 30, 2022	Balance, beginning of period		Provision for (credit to) loan losses			Charge-offs			Recoveries		Balance, end of period
Commercial:
Commercial and industrial	$	3,192	$	(550	)	$	(8	)	$	76	$	2,710
Construction		709		(22	)		—			—		687
Secured by commercial real estate		3,813		523			—			—		4,336
Secured by residential real estate		1,029		149			—			3		1,181
State and political subdivisions		68		9			—			—		77
Retail:
1-4 family residential mortgages		665		15			—			—		680
Home equity loans and lines		398		13			—			1		412
Consumer		588		(100	)		(16	)		10		482
Unallocated		769		(37	)	N/A			N/A			732
Total	$	11,231	$	—		$	(24	)	$	90	$	11,297


For the Six Months Ended June 30, 2023	Beginning balance prior to adoption of ASC 326		Impact of adopting ASC 326			Credit loss expense (reversal)			Charge-offs			Recoveries		Balance, end of period
Commercial:
Commercial and industrial	$	1,316	$	(70	)	$	(1,015	)	$	(40	)	$	604	$	795
Construction and land development		755		(10	)		109			—			—		854
Real estate secured by multi-family properties		995		684			(55	)		—			—		1,624
Real estate secured by owner-occupied properties		1,549		(374	)		(190	)		—			—		985
Real estate secured by other commercial properties		2,458		(1,128	)		(102	)		—			—		1,228
Revolving real estate secured by 1-4 family properties-business		25		7			5			—			—		37
Real estate secured by 1st lien on 1-4 family properties-business		1,210		490			(428	)		—			5		1,277
Real estate secured by junior lien on 1-4 family properties-business		30		(14	)		218			—			—		234
State and political subdivisions		94		(20	)		(23	)		—			—		51
Retail:
1-4 family residential mortgages		682		(196	)		(53	)		—			—		433
Construction-individual		1		-			(1	)		—			—		—
Revolving home equity secured by 1-4 family properties-personal		299		(7	)		(58	)		—			—		234
Real estate secured by 1st lien on 1-4 family properties-personal		57		15			(5	)		—			—		67
Real estate secured by junior lien on 1-4 family properties-personal		55		29			(2	)		—			4		86
Student loans		454		12			(9	)		(43	)		4		418
Overdrafts		8		3			39			(52	)		15		13
Other consumer		41		(8	)		(1	)		(3	)		—		29
Unallocated		502		(502	)		—		N/A			N/A			—
Total	$	10,531	$	(1,089	)	$	(1,571	)	$	(138	)	$	632	$	8,365


For the Six Months Ended June 30, 2022	Balance, beginning of period		Provision for (credit to) loan losses			Charge-offs			Recoveries		Balance, end of period
Commercial:
Commercial and industrial	$	3,368	$	(792	)	$	(8	)	$	142	$	2,710
Construction		363		324			—			—		687
Secured by commercial real estate		4,280		56			—			—		4,336
Secured by residential real estate		1,035		140			—			6		1,181
State and political subdivisions		69		8			—			—		77
Retail:
1-4 family residential mortgages		646		34			—			—		680
Home equity loans and lines		376		34			—			2		412
Consumer		542		(31	)		(47	)		18		482
Unallocated		505		227		N/A			N/A			732
Total	$	11,184	$	—		$	(55	)	$	168	$	11,297

Since the implementation of ASU 326 on January 1, 2023, the Company measures loan modifications to borrowers in financial distress as a troubled debt modification ("TDM"). A TDM 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 TDMs in 2023.

The Company had extended, restructured, or otherwise ~~modify~~modified the terms of ~~existing~~ loans, on a case-by-case basis, to remain competitive and retain certain customers, as well as assist other customers that ~~may be~~had been experiencing financial difficulties. A loan iswas considered to be a troubled debt restructuring (“TDR”) loan when the Company ~~grants~~granted a concession to the borrower because of the borrower’s financial condition that it would not have otherwise ~~consider.~~considered. Such concessions include the reduction of interest rates, forgiveness of principal or interest, or other modifications of interest rates to less than the current market rate for new obligations with similar risk. Loans that

had been classified as TDRs are considered ~~non-performing and are also designated as impaired.~~non-performing. Under ASU 326, the account on these legacy TDRs will continue until the loan paid off.

The concessions made for the TDRs reported in the following disclosures involve lowering the monthly payments on loans through periods of interest only payments, a reduction in interest rate below a market rate or an extension of the term of the loan without a corresponding adjustment to the risk premium reflected in the interest rate, or a combination of these three methods. The restructurings rarely result in the forgiveness of principal or accrued interest. If the borrower has demonstrated performance under the previous terms and our underwriting process shows the borrower has the capacity to continue to perform under the restructured terms, the loan will continue to accrue interest. Non-accruing restructured loans may be returned to accrual status when there has been a sustained period of repayment performance (generally six consecutive months of payments) and both principal and interest are deemed collectible. TDR loans that are in compliance with their modified terms and that yield a market rate may be removed from the TDR status after a period of ~~performance.~~performance.The Company closely monitors the performance of loans that are modified to understand the effectiveness of its modification efforts. There were no payment default (60 days or more past due) during the six months ended June 30, 2023 and 2022, respectively, on loans modified within 12 months prior to June 30, 2023 and 2022, respectively.

Performing TDRs (not reported as non-accrual or past due 90 days or more and still accruing) totaled ~~$1,354,000~~$4,033,000 and ~~$1,819,000~~$4,301,000 as of ~~September~~June 30, ~~2017~~2023 and December 31, ~~2016,~~2022, respectively. Non-performing TDRs totaled ~~$3,120,000~~$301,000 and ~~$3,555,000~~$371,000 as of ~~September~~June 30, ~~2017~~2023 and December 31, ~~2016,~~2022, respectively. ~~All~~Non-accrual TDRs are included in ~~impaired loans.~~the specific reserve calculation in 2023. All TDRs were included in the specific reserve calculation for 2022.

The following table illustrates the specific reserve for loan losses allocated to loans modified as TDRs. These specific reserves are included in the allowance for loan losses for loans individually ~~evaluated for impairment.~~

September 30, 2017

December 31, 2016

Unpaid
principal
balance

Related
allowance

Unpaid
principal
balance

Related
allowance

TDRs with no specific allowance recorded

$
3,235

—

$
3,992

—

TDRs with an allowance recorded

1,239

$
302

1,382

$
761

Total

$
4,474

$
302

$
5,374

$
761

evaluated. There were no ~~newly identified TDRs~~loans modified as TDMs during the ~~nine months ended September 30, 2017.~~ period.


	June 30, 2023				December 31, 2022
	Unpaid principal balance		Related allowance		Unpaid principal balance		Related allowance

Legacy TDRs with no specific allowance recorded	$	4,114	$	—	$	1,272	$	—
Legacy TDRs with an allowance recorded		220		245		3,400		392
Total	$	4,334	$	245	$	4,672	$	392

As of ~~September~~June 30, ~~2017,~~2023 and December 31, ~~2016,~~2022, QNB had ~~commitments of $5,000~~$11,000 and ~~$30,000,~~$5,000, respectively, in commitments to lend additional funds to customers with loans whose terms have been modified ~~in troubled debt restructurings.~~as TDRs. There were ~~net~~no charge-offs ~~of $3,000 and $0~~ during the ~~nine~~three or six months ended ~~September~~June 30, ~~2017~~2023 and ~~2016, respectively,~~2022, resulting from loans previously modified as TDRs.

~~QNB CORP. AND SUBSIDIARY~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

The following tables present loans, by loan class, modified as TDRs during the three and nine months ended September 30, 2017 and 2016. The pre-modification and post-modification outstanding recorded investments disclosed in the tables below, represent carrying amounts immediately prior to the modification and as of the period end indicated.

Three months ended September 30,

2017

2016

Number of
contracts

Pre-modification
outstanding
recorded
investment

Post-modification
outstanding
recorded
investment

Number of
contracts

Pre-modification
outstanding
recorded
investment

Post-modification
outstanding
recorded
investment

Retail:

Consumer

—

$
—

$
—

1

$
96

$
95

Nine months ended September 30,

2017

2016

Number of
contracts

Pre-modification
outstanding
recorded
investment

Post-modification
outstanding
recorded
investment

Number of
contracts

Pre-modification
outstanding
recorded
investment

Post-modification
outstanding
recorded
investment

Commercial:

Commercial and industrial

—

$
—

$
—

6

$
1,074

$
1,033

Secured by residential real estate

—

—

—

4

524

503

Retail:

Consumer

—

—

—

1

96

95

Total

—

$
—

$
—

11

$
1,694

$
1,631

There was one loan with an outstanding balance of $18,000 that was modified as a TDR within 12 months prior to September 30, 2017 for which there was a payment default (60 days or more past due) during the nine months ended September 30, 2017. There were no loans modified as TDRs within 12 months prior to September 30, 2016 for which there was a payment default during the nine months ended September 30, 2016.

The Company has two ~~consumer mortgage~~ loans secured by residential real estate for which foreclosure proceedings are in process at ~~September~~June 30, ~~2017. The~~2023 with a total recorded investment ~~is $392,000.~~

~~The following tables present the balance in the allowance for loan losses at September 30, 2017 and December 31, 2016 disaggregated based on the Company’s impairment method by class~~ of ~~loans receivable along with the balance of loans receivable by class, excluding unearned fees and costs, disaggregated based on the Company’s impairment methodology:~~$212,000.

Allowance for Loan Losses

Loans Receivable

September 30, 2017

Balance

Balance related
to loans
individually
evaluated for
impairment

Balance related
to loans
collectively
evaluated for
impairment

Balance

Balance
individually
evaluated for
impairment

Balance
collectively
evaluated for
impairment

Commercial:

Commercial and industrial

$
2,744

$
1,759

$
985

$
135,786

$
4,586

$
131,200

Construction

529

—

529

46,006

3

46,003

Secured by commercial real estate

2,375

28

2,347

278,602

4,837

273,765

Secured by residential real estate

1,107

117

990

69,772

1,819

67,953

State and political subdivisions

131

—

131

37,474

—

37,474

Retail:

1-4 family residential mortgages

378

10

368

53,849

1,230

52,619

Home equity loans and lines

383

41

342

75,685

170

75,515

Consumer

85

—

85

6,863

92

6,771

Unallocated

393

N/A

N/A

N/A

N/A

N/A

Total

$
8,125

$
1,955

$
5,777

$
704,037

$
12,737

$
691,300

~~QNB CORP. AND SUBSIDIARY~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

Allowance for Loan Losses

Loans Receivable

December 31, 2016

Balance

Balance related
to loans
individually
evaluated for
impairment

Balance related
to loans
collectively
evaluated for
impairment

Balance

Balance
individually
evaluated for
impairment

Balance
collectively
evaluated for
impairment

Commercial:

Commercial and industrial

$
1,459

$
696

$
763

$
110,233

$
5,134

$
105,099

Construction

449

—

449

39,268

224

39,044

Secured by commercial real estate

2,646

—

2,646

255,188

6,383

248,805

Secured by residential real estate

1,760

494

1,266

68,731

2,313

66,418

State and political subdivisions

123

—

123

35,260

—

35,260

Retail:

1-4 family residential mortgages

366

8

358

47,124

748

46,376

Home equity loans and lines

353

—

353

71,525

111

71,414

Consumer

76

—

76

5,670

93

5,577

Unallocated

162

N/A

N/A

N/A

N/A

N/A

Total

$
7,394

$
1,198

$
6,034

$
632,999

$
15,006

$
617,993

~~QNB CORP. AND SUBSIDIARY~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

~~The following table summarizes additional information in regard to impaired loans by loan portfolio class as of September 30, 2017 and December 31, 2016:~~

September 30, 2017

December 31, 2016

Recorded
investment
(after
charge-offs)

Unpaid
principal
balance

Related
allowance

Recorded
investment
(after
charge-offs)

Unpaid
principal
balance

Related
allowance

With no specific allowance recorded:

Commercial:

Commercial and industrial

$
2,189

$
2,560

$
—

$
2,482

$
2,862

$
—

Construction

3

3

—

224

234

—

Secured by commercial real estate

4,748

5,304

—

6,383

6,367

—

Secured by residential real estate

633

982

—

1,046

1,438

—

State and political subdivisions

—

—

—

—

—

—

Retail:

1-4 family residential mortgages

1,066

1,113

—

570

589

—

Home equity loans and lines

129

173

—

111

174

—

Consumer

92

96

—

93

95

—

Total

$
8,860

$
10,231

$
—

$
10,909

$
11,759

$
—

With an allowance recorded:

Commercial:

Commercial and industrial

$
2,397

$
2,637

$
1,759

$
2,652

$
2,812

$
696

Construction

—

—

—

—

—

—

Secured by commercial real estate

89

92

28

—

—

—

Secured by residential real estate

1,186

1,338

117

1,267

1,435

494

State and political subdivisions

—

—

—

—

—

—

Retail:

1-4 family residential mortgages

164

164

10

178

193

8

Home equity loans and lines

41

41

41

—

—

—

Consumer

—

—

—

—

—

—

Total

$
3,877

$
4,272

$
1,955

$
4,097

$
4,440

$
1,198

Total:

Commercial:

Commercial and industrial

$
4,586

$
5,197

$
1,759

$
5,134

$
5,674

$
696

Construction

3

3

—

224

234

—

Secured by commercial real estate

4,837

5,396

28

6,383

6,367

—

Secured by residential real estate

1,819

2,320

117

2,313

2,873

494

State and political subdivisions

—

—

—

—

—

—

Retail:

1-4 family residential mortgages

1,230

1,277

10

748

782

8

Home equity loans and lines

170

214

41

111

174

—

Consumer

92

96

—

93

95

—

Total

$
12,737

$
14,503

$
1,955

$
15,006

$
16,199

$
1,198

~~QNB CORP. AND SUBSIDIARY~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

The following table presents additional information in regard to the average recorded investment and interest income recognized on impaired loans for the nine-month periods ended September 30, 2017 and 2016.

Nine Months Ended September 30,

2017

2016

Average
recorded
investment

Interest income
recognized

Average
recorded
investment

Interest income
recognized

Commercial:

Commercial and industrial

$
4,809

$
11

$
4,288

$
50

Construction

61

2

412

15

Secured by commercial real estate

5,638

117

6,327

100

Secured by residential real estate

2,171

19

1,945

11

State and political subdivisions

—

—

—

—

Indirect lease financing

—

—

114

—

Retail:

1-4 family residential mortgages

1,020

10

572

8

Home equity loans and lines

115

1

134

1

Consumer

91

—

10

—

Total

$
13,905

$
160

$
13,802

$
185

8.9. FAIR VALUE MEASUREMENTS AND DISCLOSURES

~~Financial Accounting Standards Board (FASB)~~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).~~

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 ~~comparable transactions.~~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.

~~QNB CORP. AND SUBSIDIARY~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

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 ~~September~~June 30, ~~2017:~~2023:

September 30, 2017

Quoted prices
in active
markets
for identical
assets
(Level 1)

Significant
other
observable
input
(Level 2)

Significant
unobservable
inputs
(Level 3)

Balance at end
of period

Recurring fair value measurements

Securities available-for-sale

U.S. Government agency securities

—

$
73,037

—

$
73,037

State and municipal securities

—

79,897

—

79,897

U.S. Government agencies and sponsored enterprises (GSEs):

Mortgage-backed securities

—

148,856

—

148,856

Collateralized mortgage obligations (CMOs)

—

78,974

—

78,974

Pooled trust preferred securities

—

—

$
212

212

Corporate debt securities

—

8,074

—

8,074

Equity securities

$
7,363

—

—

7,363

Total securities available-for-sale

$
7,363

$
388,838

$
212

$
396,413

Total recurring fair value measurements

$
7,363

$
388,838

$
212

$
396,413

Nonrecurring fair value measurements

Impaired loans

$
—

$
—

$
1,922

$
1,922

Mortgage servicing rights

—

—

35

35

Total nonrecurring fair value measurements

$
—

$
—

$
1,957

$
1,957


June 30, 2023	Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)		Balance at end of period
Recurring fair value measurements
Available-for-sale securities:
U.S. Treasury securities	$	—	$	6,449	$	—	$	6,449
U.S. Government agency securities		—		87,878		—		87,878
State and municipal securities (1)		—		88,222		—		88,222
U.S. Government agencies and sponsored enterprises (GSEs):
Mortgage-backed securities (1)		—		244,557		—		244,557
Collateralized mortgage obligations (CMOs)		—		94,680		—		94,680
Corporate debt securities		—		5,903		52		5,955
Total debt securities available-for-sale		—		527,689		52		527,741
Equity securities		5,424		—		—		5,424
Total recurring fair value measurements	$	5,424	$	527,689	$	52	$	533,165

Nonrecurring fair value measurements*
Loans individually evaluated for impairment	$	—	$	—	$	652	$	652
Mortgage loans held-for-sale		—				566		566
Mortgage servicing rights		—		—		2		2
Total nonrecurring fair value measurements	$	—	$	—	$	1,220	$	1,220
*Impairment

(1) Includes derivatives designated as fair value heding instruments as discussed in Footnote 13


December 31, 2022	Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)		Balance at end of period
Recurring fair value measurements
Debt securities available-for-sale
U.S. Treasuries	$	—	$	301	$	—	$	301
U.S. Government agency securities		—		86,709		—		86,709
State and municipal securities		—		95,367		—		95,367
U.S. Government agencies and sponsored enterprises (GSEs):
Mortgage-backed securities		—		256,161		—		256,161
Collateralized mortgage obligations (CMOs)		—		101,672		—		101,672
Corporate debt securities		—		6,262		53		6,315
Total debt securities available-for-sale		—		546,472		53		546,525
Equity securities		12,056		—		—		12,056
Total recurring fair value measurements	$	12,056	$	546,472	$	53	$	558,581

Nonrecurring fair value measurements*
Impaired loans	$	—	$	—	$	3,928	$	3,928
Mortgage servicing rights		—		—		1		1
Total nonrecurring fair value measurements	$	—	$	—	$	3,929	$	3,929
*Impairment

There were no transfers in and out of Level 1, ~~and~~ Level 2, or Level 3 fair value measurements during the three or ~~nine~~six months ended ~~September~~June 30, ~~2017.~~2023. There were ~~also~~ no ~~transfers in or out of level 3 for the same period. 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- ~~and nine-month~~or six-month periods ended ~~September~~June 30, ~~2017.~~2023.

~~QNB CORP. AND SUBSIDIARY~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

The following table sets forth QNB’s financial assets measured at fair value on a recurring and nonrecurring basis, the fair value measurements by level within the fair value hierarchy as of December 31, 2016:

December 31, 2016

Quoted prices
in active
markets
for identical
assets
(Level 1)

Significant
other
observable
input
(Level 2)

Significant
unobservable
inputs
(Level 3)

Balance at end
of period

Recurring fair value measurements

Trading Securities

State and municipal securities

$
—

$
3,596

$
—

$
3,596

Securities available-for-sale

U.S. Government agency securities

—

$
76,650

—

$
76,650

State and municipal securities

—

72,295

—

72,295

U.S. Government agencies and sponsored enterprises (GSEs):

Mortgage-backed securities

—

145,301

—

145,301

Collateralized mortgage obligations (CMOs)

—

77,415

—

77,415

Pooled trust preferred securities

—

—

$
2,281

2,281

Corporate debt securities

—

8,030

—

8,030

Equity securities

$
8,503

—

—

8,503

Total securities available-for-sale

$
8,503

$
379,691

$
2,281

$
390,475

Total recurring fair value measurements

$
8,503

$
383,287

$
2,281

$
394,071

Nonrecurring fair value measurements

Impaired loans

$
—

$
—

$
2,899

$
2,899

Mortgage servicing rights

—

—

58

58

Total nonrecurring fair value measurements

$
—

$
—

$
2,957

$
2,957

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

June 30, 2023

Fair value

Valuation
techniques

Unobservable
inputs

Value or range
of values

Loans individually evaluated for impairment

358

Appraisal of collateral

(1)

Appraisal adjustments

(2)

-20% to -100%

Liquidation expenses

(3)

-10

Loans individually evaluated for impairment

294

Financial statement values for UCC collateral

Financial statement value discounts

(4)

-30% to -100%

Mortgage servicing rights

Discounted cash flow

Remaining term

2 to 28 years

Prepayment speeds

101% to 205%

Discount rate

12.0% to 12.5%

Quantitative information about Level 3 fair value measurements

December 31, 2022

Fair value

Valuation
techniques

Unobservable
inputs

Value or range
of values

Impaired loans

3,634

Appraisal of collateral

(1)

Appraisal adjustments

(2)

-15% to -100%

Liquidation expenses

(3)

-10

Impaired loans

294

Financial statement values for UCC collateral

Financial statement value discounts

(4)

-30% to -100%

Mortgage servicing rights

Discounted cash flow

Remaining term

2 to 28 years

Prepayment speeds

113% to 235%

Discount rate

12.0% to 12.5%

Quantitative information about Level 3 fair value measurements
September 30, 2017

Fair value

Valuation
techniques

Unobservable
input

Value or range
of values
Impaired loans

$
639

Appraisal of collateral
(1)

Appraisal adjustments
(2)

-15% to -80%

Liquidation expenses
(3)

-10%
Impaired loans

1,283

Financial statement values for UCC collateral

Financial statement value discounts
(5)

-25% to -60%
Mortgage servicing rights

35

Discounted cash flow

Remaining term

2 to 27 yrs

Discount rate

14% to 16%
(1)

Fair value is primarily determined through appraisals of the underlying collateral by independent parties, which generally includes various Level 3 inputs which are not always identifiable.

3130

~~QNB CORP. AND SUBSIDIARY~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

Quantitative information about Level 3 fair value measurements
December 31, 2016

Fair value

Valuation
techniques

Unobservable
input

Value or range
of values
Impaired loans

$
938

Appraisal of collateral
(1)

Appraisal adjustments
(2)

-10% to -80%

Liquidation expenses
(3)

-10%
Impaired loans

76

Used commercial vehicle and equipment guides

Guide value discounts
(4)

0% to -25%
Impaired loans

1,880

Financial statement values for UCC collateral

Financial statement value discounts
(5)

-20% to -50%
Impaired loans

5

Agreement of sale
(6)

Mortgage servicing rights

58

Discounted cash flow

Remaining term

2 to 27 yrs

Discount rate

14% to 16%
(2)

Appraisals may be adjusted by management for qualitative factors such as economic conditions and the age of the appraisal. The range is presented as a percent of the initial appraised value.

~~(1)~~

~~Fair value is primarily determined through appraisals of the underlying collateral by independent parties, which generally includes various level 3 inputs which are not always identifiable.~~

~~(2)~~

~~Appraisals may be adjusted by management for qualitative factors such as economic conditions and the age of the appraisal. The range is presented as a percent of the initial appraised value.~~

(3)

Appraisals and pending agreements of sale are adjusted by management for estimated liquidation expenses. The range is presented as a percent of the initial appraised value.

~~(3)~~

~~Appraisals and pending agreements of sale are adjusted by management for estimated liquidation expenses. The range is presented as a percent of the initial appraised value or sale price.~~

(4)

Values obtained from financial statements for UCC collateral (fixed assets and inventory) are discounted to estimated realizable liquidation value.

~~(4)~~

~~If lendable value (lower than wholesale) is utilized then no additional discounts are taken. If lendable value is not provided, additional discounts are applied.~~

~~(5)~~

~~Values obtained from financial statements for UCC collateral (fixed assets, accounts receivable, and inventory) are discounted to estimated realizable liquidation value.~~

~~(6)~~

~~Fair value is determined by the net amount due.~~

The following table presents additional information about the available-for-sale securities ~~available-for-sale~~ measured at fair value on a recurring basis and for which QNB utilized significant unobservable inputs (Level 3 inputs) to determine fair value for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2023 and ~~2016:~~2022:


	Fair value measurements using significant unobservable inputs (Level 3)						Fair value measurements using significant unobservable inputs (Level 3)
	2017			2016			2023			2022
Balance, January 1,	$	2,281		$	2,653		$	53		$	75
Payments received		(55	)		(312	)		(1	)		(21	)
Sale of securities		(2,026	)		—
Total gains or losses (realized/unrealized)
Included in earnings		(15	)		—			—			—
Included in other comprehensive income		27			(66	)
Included in other comprehensive (loss) income								—			1
Transfers in and/or out of Level 3		—			—			—			—
Balance, September 30,	$	212		$	2,275
Balance, June 30,							$	52		$	55

~~QNB CORP. AND SUBSIDIARY~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

The Level 3 securities consist of one collateralized debt obligation security, ~~(“PreTSL”),~~the PreTSL security, which is backed by trust preferred securities issued by banks. The market for this security at June 30, 2023 was not active and markets for similar securities also are not active. The new issue market is also inactive and there are currently very few market participants who are willing and or able to transact for these securities.

Given conditions in the debt markets today and the absence of observable transactions in the secondary and new issue markets, we determined:

•

The few observable transactions and market quotations that are available are not reliable for purposes of determining fair value at ~~September~~June 30, ~~2017;~~

2023;

•

An income valuation approach technique (present value technique) that maximizes the use of relevant observable inputs and minimizes the use of unobservable inputs will be equally or more representative of fair value than the market approach valuation technique used at prior measurement dates; and

•

~~Trust preferred securities~~The PreTSL will be classified within Level 3 of the fair value hierarchy because significant adjustments are required to determine fair value at the measurement date.

~~The Bank utilized a~~QNB used an independent third party to value this security using a discounted cash flow analysis. Based on management’s review of the ~~five~~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 ~~cash flows~~cashflows have been discounted using an estimated market discount rate based on the ~~30-year~~30-year swap rate. The 30-year ~~swap rate~~ is used as the reference rate since it is indicative of market expectation for ~~short term~~short-term rates in the future. This is consistent with the 30-year nature of the PreTSL ~~securities,~~security, which ~~are~~is priced using the 3-month LIBOR as a reference rate. The discount rate of ~~6.12%~~7.95% includes the risk-free rate, a credit component and a spread for illiquidity. ~~For a further discussion of PreTSL valuation see Note 6, Investment Securities.~~

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 ~~September~~June 30, ~~2017~~2023 and December 31, ~~2016:~~2022:

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 ~~- trading~~(including derivative instruments) (carried at fair value)~~, available for sale (carried at fair value)~~: The fair value of securities ~~are~~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 ~~bank~~ stocks (carried at cost): The fair value of stock in Atlantic Community Bankers Bank, ~~and~~ the Federal Home Loan Bank, VISA Class B 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~~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.

~~QNB CORP. AND SUBSIDIARY~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

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.

Impaired Loans (generally carried at fair value): Impaired loans are loans infor which the Company has measured impairment generally based on the fair value of the loan’s collateral. Fair value is generally determined based upon independent third-party appraisals of the properties, or discounted cash flows based upon the expected proceeds. These assets are included as Level 3 fair values, based upon the lowest level of input that is significant to the fair value measurements.

Mortgage Servicing Rights (carried at lower of cost or fair value): The fair value of mortgage servicing rights is based on a valuation model that calculates the present value of estimated net servicing income. The mortgage servicing rights are stratified into tranches based on predominant characteristics, such as interest rate, loan type and investor type. The valuation incorporates assumptions that market participants would use in estimating future net servicing income.

Deposit liabilities (carried at cost): The fair value of deposits with no stated maturity (e.g. demand deposits, interest-bearing demand accounts, money market accounts and savings accounts) are by definition, equal to the amount payable on demand at the reporting date (i.e. their carrying amounts). This approach to estimating fair value excludes the significant benefit that results from the low-cost funding provided by such deposit liabilities, as compared to alternative sources of funding. Deposits with a stated maturity (time deposits) have been valued using the present value of cash flows discounted at rates approximating the current market for similar deposits.

Short-term borrowings (carried at cost): The carrying amount of short-term borrowings approximates their fair values.

Long-term debt (carried at cost): Long-term debt has stated maturities and have been valued using the present value of cash flows discounted at rates approximating the current market for similar debt instruments.

Off-balance-sheet instruments (disclosed at cost): The fair values for ~~the Bank’s~~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.

~~QNB CORP. AND SUBSIDIARY~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

The estimated fair values and carrying amounts of the Company’s financial and off-balance sheet instruments are summarized as follows:

					Fair value measurements
September 30, 2017	Carrying amount		Fair value		Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
																Fair value measurements
June 30, 2023												Carrying amount		Fair value		Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
Financial assets
Cash and cash equivalents	$	26,028	$	26,028	$	26,028		—		—		$	34,824	$	34,824	$	34,824	$	—	$	—
Investment securities: Available-for-sale		396,413		396,413		7,363	$	388,838	$	212
Restricted investment in bank stocks		578		578		—		578		—
Loans held-for-sale		115		117		—		117		—
Investment securities:
Available-for-sale (1)													527,741		527,741		—		527,689		52
Equities													5,424		5,424		5,424		—		—
Restricted investment in stocks													2,730		2,730		—		2,730		—
Loans held for sale													810		812		—		812		—
Net loans		696,089		701,643		—		—		701,643			1,021,379		984,962		—		—		984,962
Mortgage servicing rights		483		567		—		—		567			445		622		—		—		622
Accrued interest receivable		3,616		3,616		—		3,616		—			3,721		3,721		—		3,721		—

Financial liabilities
Deposits with no stated maturities	$	775,006	$	775,006	$	775,006		—	$	—		$	1,174,438	$	1,174,438	$	1,174,438	$	—	$	—
Deposits with stated maturities		230,439		229,821		—	$	229,821		—			275,327		269,146		—		269,146		—
Short-term borrowings		40,176		40,176		40,176		—		—			90,845		90,845		90,845		—		—
Long-term debt													20,000		19,755		19,755		—		—
Accrued interest payable		336		336		—		336		—			1,966		1,966		—		1,966		—

Off-balance sheet instruments
Commitments to extend credit	$	—	$	—	$	—	$	—	$	—		$	—	$	—	$	—	$	—	$	—
Standby letters of credit		—		—		—		—		—			—		65		—		65		—

(1) Includes derivatives designated as fair value heding instruments as discussed in Footnote 13											(1) Includes derivatives designated as fair value heding instruments as discussed in Footnote 13

~~QNB CORP.~~


					Fair value measurements
December 31, 2022	Carrying amount		Fair value		Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
Financial assets
Cash and cash equivalents	$	15,899	$	15,899	$	15,899	$	—	$	—
Investment securities:
Available-for-sale		546,525		546,525		—		546,472		53
Equities		12,056		12,056		12,056		—		—
Restricted investment in stocks		5,193		5,193		—		5,193		—
Net loans		1,028,854		1,001,103		—		—		1,001,103
Mortgage servicing rights		469		638		—		—		638
Accrued interest receivable		5,038		5,038		—		5,038		—

Financial liabilities
Deposits with no stated maturities	$	1,242,920	$	1,242,920	$	1,242,920	$	—	$	—
Deposits with stated maturities		175,449		168,554		—		168,554		—
Short-term borrowings		161,327		161,327		161,327		—		—
Long-term debt		10,000		10,000		10,000		—		—
Accrued interest payable		467		467		—		467		—

Off-balance sheet instruments
Commitments to extend credit	$	—	$	—	$	—	$	—	$	—
Standby letters of credit		—		69		—		69		—

10. COMMITMENTS AND ~~SUBSIDIARY~~CONTINGENCIES

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~Financial Instruments with off-balance sheet risk:

~~(Unaudited)~~

Fair value measurements

December 31, 2016

Carrying
amount

Fair value

Quoted
prices in
active
markets for
identical
assets
(Level 1)

Significant
other
observable
inputs
(Level 2)

Significant
unobservable
inputs
(Level 3)

Financial assets

Cash and cash equivalents

$
10,721

$
10,721

$
10,721

—

—

Investment securities:

Trading

3,596

3,596

—

$
3,596

—

Available-for-sale

390,475

390,475

8,503

379,691

$
2,281

Restricted investment in bank stocks

1,017

1,017

—

1,017

—

Loans held-for-sale

789

789

—

789

—

Net loans

625,685

626,052

—

—

626,052

Mortgage servicing rights

498

579

—

—

579

Accrued interest receivable

3,128

3,128

—

3,128

—

Financial liabilities

Deposits with no stated maturities

$
687,773

$
687,773

$
687,773

—

$
—

Deposits with stated maturities

225,582

225,403

—

$
225,403

—

Short-term borrowings

52,660

52,660

52,660

—

—

Accrued interest payable

335

335

—

335

—

Off-balance sheet instruments

Commitments to extend credit

$
—

$
—

$
—

$
—

$
—

Standby letters of credit

—

—

—

—

—

~~9. OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS AND GUARANTEES~~

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.

A summary of the ~~Bank's~~Company's financial instrument commitments is as follows:


	September 30,		December 31,		June 30,		December 31,
	2017		2016		2023		2022
Commitments to extend credit and unused lines of credit	$	313,828	$	277,216	$	383,813	$	339,312
Standby letters of credit		16,651		16,490		20,738		19,512
Total financial instrument commitments	$	330,479	$	293,706	$	404,551	$	358,824

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require the payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. QNB evaluates each customer’s creditworthiness on a case-by-case basis.

Standby letters of credit are conditional commitments issued by the ~~Bank~~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 ~~Bank~~Company uses the same credit policies in

~~QNB CORP. AND SUBSIDIARY~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

making conditional obligations as it does for on-balance sheet instruments. ~~The majority of these standby~~Standby letters of credit of $11,545,000 will expire within one year ~~with the longest term being five years.~~. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending other loan commitments. The ~~Bank~~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 ~~September~~June 30, ~~2017~~2023 and December 31, ~~2016~~2022 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:

~~10.~~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. During the six months ended June 30, 2023, QNB renewed one lease and recorded an additional right-of-use asset in exchange for an operating lease liability of $369,000.

11. REGULATORY RESTRICTIONS

Dividends payable by ~~the Company~~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, ~~Corp.,~~ unless such loans are collateralized by specific obligations.

Both ~~the Company~~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, ~~both the Company and~~ the Bank must meet capital guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance-sheet items.

The capital amounts and classification are also subject to qualitative judgments by the regulators. Management believes, as of ~~September~~June 30, ~~2017,~~2023, that ~~the Company~~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, ~~the Company~~bank holding companies and ~~the Bank~~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

As of September 30, 2017

Amount

Ratio

Amount

Ratio

Amount

Ratio

Total risk-based capital (to risk-weighted assets):

Consolidated

$
110,939

12.86
%

$
69,031

8.00
%

$
86,289

10.00
%
Bank

101,980

12.13

67,258

8.00

84,073

10.00

Tier I capital (to risk-weighted assets):

Consolidated

102,741

11.91

51,773

6.00

51,773

6.00

Bank

93,782

11.16

50,420

6.00

67,227

8.00

Common equity tier 1 capital (to risk-weighted assets):

Consolidated

102,741

11.91

38,830

4.50

N/A

N/A

Bank

93,782

11.16

37,815

4.50

54,622

6.50

Tier I capital (to average assets):

Consolidated

102,741

9.04

45,452

4.00

N/A

N/A

Bank

93,782

8.32

45,088

4.00

56,359

5.00


	Capital levels
	Actual					Adequately capitalized					Well capitalized
June 30, 2023	Amount		Ratio			Amount		Ratio			Amount		Ratio
Total risk-based capital (to risk-weighted assets):
The Company	$	165,369		13.54	%	$	97,689		8.00	%	$	122,111		10.00	%
Bank		152,397		12.65			96,356	8.00				120,446	10.00

Tier 1 capital (to risk-weighted assets):
The Company	$	156,908		12.85			73,267	6.00				73,267	6.00
Bank		143,936		11.95			72,267	6.00				96,356	8.00

Common equity tier 1 capital (to risk-weighted assets):
The Company		156,908		12.85			54,950	4.50			N/A		N/A
Bank		143,936		11.95			54,200	4.50				78,290	6.50

Tier 1 capital (to average assets):
The Company		156,908		9.13			68,774	4.00			N/A		N/A
Bank		143,936		8.44			68,256	4.00				85,320	5.00


	Capital levels
	Actual					Adequately capitalized					Well capitalized
As of December 31, 2022	Amount		Ratio			Amount		Ratio			Amount		Ratio
Total risk-based capital (to risk-weighted assets):
The Company	$	162,725		13.19	%	$	98,701		8.00	%	$	123,376		10.00	%
Bank		149,908		12.52			95,796	8.00				119,746	10.00

Tier 1 capital (to risk-weighted assets):
The Company		152,077		12.33			74,025	6.00				74,025	6.00
Bank		139,260		11.63			71,847	6.00				95,896	8.00

Common equity tier 1 capital (to risk-weighted assets):
The Company		152,077		12.33			55,519	4.50			N/A		N/A
Bank		139,260		11.63			53,886	4.50				77,835	6.50

Tier 1 capital (to average assets):
The Company		152,077		8.75			69,507	4.00			N/A		N/A
Bank		139,260		8.07			69,009	4.00				86,261	5.00

12. REVENUE RECOGNITION FROM CONTRACTS WITH CUSTOMERS

The Company generally fully satisfies its performance obligations on its contracts with customers as services are rendered and the transaction prices are typically fixed; charged either on a periodic basis or based on activity. Because performance obligations are satisfied as services are rendered and the transaction prices are fixed, there is little judgment involved in applying Topic 606 that significantly affects the determination of the amount and timing of revenue from contracts with customers. The main types of revenue contracts included in non-interest income within the consolidated statements of operations are as follows:

•

Fees for services to customers—fees include service charges on deposits which are included as liabilities in the consolidated statement of financial position and consist of transaction-based fees, stop payment fees, Automated Clearing House (ACH) fees, account maintenance fees, and overdraft services fees for various retail and business checking customers. These fees are charged as earned on the day of the transaction or within the month of the service, with the exception of Enhanced Account Analysis Fees, which are calculated on the previous month’s activity and assessed on the following month. The Enhanced Account Analysis Fees are currently being accrued; the revenue is currently being recorded in the month it is earned. Service charges on deposits are withdrawn directly from the customer’s account balance.

•

ATM and debit card – fees are recognized at the time the transaction is executed as that is the point in time the Company fulfills the customer’s request.

•

Retail brokerage and advisory—fee income and related expenses are accrued monthly to properly record the revenues in the month they are earned. Advisory fees are collected in advance on a quarterly basis. These advisory fees are recorded in the first month of the quarter for which the service is being performed. Fees that are transaction based are recognized at the point in time that the transaction is executed (i.e. trade date).

•

Merchant – QNB ~~CORP. AND SUBSIDIARY~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

earns interchange fees from credit/debit cardholder transactions conducted through VISA/MasterCard payment networks. Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized monthly, concurrently with the transaction processing services provided to the cardholder within the month.

Capital levels

Actual

Adequately capitalized

Well capitalized

As of December 31, 2016

Amount

Ratio

Amount

Ratio

Amount

Ratio

Total risk-based capital (to risk-weighted assets):

Consolidated

$
104,820

12.75
%

$
65,777

8.00
%

$
82,221

10.00
%
Bank

96,478

12.10

63,792

8.00

79,740

10.00

Tier I capital (to risk-weighted assets):

Consolidated

97,320

11.84

49,333

6.00

49,333

6.00

Bank

89,025

11.16

47,844

6.00

63,792

8.00

Common equity tier 1 capital (to risk-weighted assets):

Consolidated

97,320

11.84

36,999

4.50

N/A

N/A

Bank

89,025

11.16

35,883

4.50

51,831

6.50

Tier I capital (to average assets):

Consolidated

97,320

9.16

42,479

4.00

N/A

N/A

Bank

89,025

8.45

42,144

4.00

52,680

5.00

•

Other—includes credit card fees, sales of checks to depositors, miscellaneous fees and gain/losses on sale of OREO.

•

Credit card fees are recognized monthly, concurrently with the transaction processing services provided to the cardholder within the month.

•

Sales of checks to depositors are commissions earned from a third-party who provides checks to QNB’s customers. There is a pre-paid incentive with the third party which is recognized over the term of the contract. Other commissions on the sales of checks are recorded weekly.

•

Miscellaneous fees, such as wire, cashier check and garnishment fees, are charged as earned on the day of the transaction.

3836

•

Gain (loss) on sales of OREO – QNB ~~CORP.~~records a gain or loss from the sale of OREO when control of the property transfers to the buyer, which generally occurs at the time of an executed deed. When QNB finances the sale of OREO to the buyer, QNB assesses whether the buyer is committed to perform their obligations under the contract and whether collectability of the transaction price is probable. Once these criteria are met, the OREO asset is derecognized and the gain or loss on sale is recorded upon the transfer of control of the property to the buyer. In determining the gain or loss on the sale, QNB adjusts the transaction prices and related gain (loss) on sale if a significant financing component is present.

13. DERIVATIVES AND ~~SUBSIDIARY~~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 Secued Overnight Financing Rate ("SOFR"). The effective and ineffective portions of changes in the fair value of each derivative financial instrument is reported in accumulated other comprehensive (loss) income, net of tax, and are reclassified to interest income as interest payments are made or received on the hedged portfolios. QNB assesses the effectiveness of each hedging relationship using a regression analysis of prior periodic changes in fair value of both the hedge and the hedged item. In the assessment of hedge effectiveness, QNB will consider the likelihood of the counterparty's compliance with the contractual terms of the hedging derivative that could require the counterparty to make payments (counterparty default risk). If the likelihood that the counterparty will not default ceases to be probable, the hedge may no longer be highly effective and hedge ineffectiveness due to counterparty payment risk will be assessed.

The following table presents the notional amounts of derivatives designated as fair value hedging instruments at June 30, 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. QNB did not have any derivatives designated as fair value hedging instruments at December 31, 2022.


	At June 30, 2023
	Interst Rate Swaps-Fair Value Hedges
Balance Sheet Classification	Notional Amount		Fair Value
Investment Securities Available-for-sale:
State and municipal securities	$	75,000	$	625
U.S. Government agencies and GSE mortgage backed securities		225,000		1,621
Total	$	300,000	$	2,246

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, 2023.


	For the Three Months Ended June 30,		For the Six Months Ended June 30,
Income Sheet Classification	2023		2023
Interest and dividends on available-for-sale and equity securities:
Taxable	$	180	$	180
Total	$	180	$	180

The following table presents amounts included in accumulated other comprehensive (loss) income for derivatives designated as fair value hedging instruments at June 30, 2023.


Balance Sheet Classification	At June 30, 2023
Accumulated other comprehensive loss, net of tax	$	1,774
Total	$	1,774

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, ~~and~~ including the risk factors identified in Item 1A of QNB’s ~~2016~~2022 Form 10-K, could affect the future financial results of ~~the Company and its subsidiary~~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:

•

Volatility in interest rates and shape of the yield curve;

•

Credit risk;

•

Liquidity risk;

•

Operating, legal and regulatory risks;

•

Economic, political and competitive forces affecting QNB’s ~~business; and~~

business, including the effects of inflation;

•

The effects of unforeseen external events, including acts of terrorism, natural disasters, and pandemics, including the COVID-19 Pandemic; and

•

The risk that the analysis of these risks and forces could be incorrect, and/or that the strategies developed to address them could be unsuccessful.

~~QNB CORP. AND SUBSIDIARY~~

~~MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL~~

~~CONDITION AND RESULTS OF OPERATIONS~~

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.

QNB uses the current statutory tax rate of 34% to value its deferred tax assets and liabilities. Proposed comprehensive tax reform, announced April 26, 2017, included a reduction in the U.S. corporate income tax rate to 15%. The U.S. House of Representatives recently published a summary of the Tax Cuts and Jobs Act which proposed a corporate tax rate of 20%. If corporate tax rates were reduced, management expects the Company would be required to record an initial charge against earnings to lower the carrying amount of its net deferred tax asset, and then, going forward, would record lower tax provisions. The proposal is at the beginning stages of negotiations and will need to be addressed by both houses of Congress. It is too early in the process to determine if any of the proposals are actionable. Accordingly, management cannot assess the effect a change in the corporate tax rate would have on Company's operating results or financial position.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The discussion and analysis of the financial condition and results of operations are based on the consolidated financial statements of QNB, which are prepared in accordance with U.S. generally accepted accounting principles ~~(GAAP)~~(U.S. GAAP) and predominant practices within the banking industry. The preparation of these consolidated financial statements requires QNB to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. QNB evaluates estimates on an on-going basis, including those related to the determination of the allowance for loan losses, the determination of the valuation of other real estate owned and foreclosed assets, other-than-temporary impairments on investment securities, the valuation of deferred tax assets, stock-based compensation and income taxes. QNB bases its estimates on historical experience and various other factors and assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Other-Than-Temporary Investment Security Impairment

Securities are evaluated periodically to determine whether a decline in their value is other-than-temporary. Management utilizes criteria such as the magnitude and duration of the decline, in addition to the reasons underlying the decline, to determine whether the loss in value is other-than-temporary. The term “other-than-temporary” is not intended to indicate that the decline is permanent, ~~but~~it indicates that the prospect for a near-term recovery of value is not necessarily favorable, or that there is a lack of evidence to support a realizable value equal to or greater than the carrying value of the investment. For equity securities that do not have readily-determinable fair values, once a decline in value is determined to be other-than-temporary, the value of the equity security is reduced and a corresponding charge to earnings is recognized. ~~As a result of prolonged declines in some equity securities’ fair values, $80,000 of other-than-temporary impairment charges~~There were ~~recorded during the third quarter and first nine months of 2017. There was $192,000 in~~no other-than-temporary impairment charges recorded during the ~~first nine~~three or six months ~~of 2016.~~ended June 30, 2023 and 2022, respectively.

The Company follows accounting guidance related to the recognition and presentation of other-than-temporary impairment that specifies (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 other-than-temporarily 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 other-than-temporary impairment of a debt security in earnings and the remaining portion in other comprehensive income. For held-to-maturity debt securities, the amount of an other-than-temporary impairment recorded in other comprehensive income for the noncredit portion of a previous other-than-temporary impairment is amortized prospectively over the remaining life of the security based on the timing of future estimated cash flows of the security. There were no credit-related other-than-temporary impairment charges in the ~~third quarters and nine~~three or six months ended ~~September~~June 30, ~~2017~~2023 or ~~2016.~~2022, respectively.

~~QNB CORP. AND SUBSIDIARY~~

~~MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL~~

~~CONDITION AND RESULTS OF OPERATIONS~~

Allowance for ~~Loan~~Credit Losses on Loans

The ~~determination of~~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 ~~involves a higher degree~~and increased by recoveries of ~~judgment and complexity than the Company’s other significant accounting policies.~~previous losses. The allowance for loan losses is calculated with the objective of maintaining a level believed by management to be sufficient to absorb probable known and inherent losses in the outstanding loan ~~portfolio. The allowance is reduced by actual~~portfolio; the provisions or reversals for credit ~~losses and is increased by the provision for loan losses and recoveries of previous losses. The provisions for loan~~ losses are charged to ~~earnings to bring the total allowance for loan losses to a level considered necessary by management.~~earnings.

The allowance for ~~loan~~credit losses is ~~based~~measured on ~~management’s continual review~~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 ~~evaluation of the loan portfolio.~~historical loss experienced. The level of the allowance is determined by assigning specific reserves to ~~individually identified problem credits and~~all non-accrual loans, except the homogeneous pool of student loans which are measured in the general ~~reserves to all other loans.~~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 ~~impaired~~non-accrual loans is determined by estimating the inherent loss on each credit after giving consideration to the value of underlying ~~collateral or present value of future estimated cash flows.~~collateral. The general ~~reserves are based on~~component is adjusted for qualitative factors. These qualitative risk factors include:

Concentrations: The Company adjusts historic loss for concentrations in the ~~composition and risk characteristics~~current portfolio that were not present during the down-turn of economic cycle.

Economic Forecast: The Company utilizes an entire economic cycle of data to determine loss rates by segment. This approach reflects an inherent reversion to the historical losses during life of the ~~loan portfolio, including~~loans within the ~~nature of the loan portfolio, credit concentration trends, delinquency~~pool considering prepayments and loss experience ~~as well as other qualitative factors such as current~~throughout an entire economic ~~trends.~~

cycle. However, the Company feels it is prudent to maintain a floor in its model to assure that there is enough reserve on hand to sustain any losses upon an upcoming recession.

Management emphasizes loan quality and close monitoring of potential problem credits. Credit risk identification and review processes are utilized to assess and monitor the degree of risk in the loan portfolio. QNB’s lending and credit administration staff are charged with reviewing the loan portfolio and identifying changes in the economy or in a borrower’s circumstances which may affect the ability to

repay debt or the value of pledged collateral. A loan classification and review system exists that identifies those loans with a ~~higher than normal~~higher-than-normal risk of collection. 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 loan review group tests risk assessments 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 QNB’s allowance for loan losses. Such agencies may require QNB to recognize additions to the allowance based on their judgments about 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 loan losses in accordance with U.S. GAAP. If circumstances differ substantially from the assumptions used in making determinations, future adjustments to the allowance for loan losses may be necessary and results of operations could be affected. Because future events affecting borrowers and collateral cannot be predicted with certainty, increases to the allowance may be necessary should the quality of any loans deteriorate as a result of the factors discussed above.

Foreclosed Assets

Assets acquired through, or in lieu of, loan foreclosure are held-for-sale and are initially recorded at fair value less cost to sell at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value less cost to sell. Revenue and expenses and changes in the valuation allowance are included in net expenses from foreclosed assets.

Stock-Based Compensation

QNB sponsors a stock-based compensation ~~plans,~~plan, administered by a Board committee, under which both qualified and non-qualified stock options may be granted periodically to certain employees. QNB accounts for all awards granted under stock-based compensation plans in accordance with ASC 718, Compensation-Stock ~~Compensation~~.Compensation. Compensation cost has been measured using the fair value of an award on the grant date and is recognized over the service period, which is usually the vesting period. The fair value of each option is amortized into compensation expense on a straight-line basis between the grant date for the option and each vesting date. QNB estimates the fair value of stock options on the date of the grant using the Black-Scholes option pricing model. The model requires the use of numerous assumptions, many of which are highly subjective in nature.

Income Taxes

QNB accounts for income taxes under the asset/liability method in accordance with income tax accounting guidance, ASC 740, Income ~~Taxes~~.Taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the

~~QNB CORP. AND SUBSIDIARY~~

~~MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL~~

~~CONDITION AND RESULTS OF OPERATIONS~~

financial statement carrying amounts of existing assets and liabilities and their respective tax bases, as well as operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is established against deferred tax assets when, in the judgment of management, it is more likely than not that such deferred tax assets will not become available. Because the judgment about the level of future taxable income is dependent on matters that may, at least in part, be beyond QNB’s control, it is at least reasonably possible that management’s judgment about the need for a valuation allowance for deferred tax assets could change in the near term.

RESULTS OF OPERATIONS - OVERVIEW

QNB reported net income for the ~~third~~second quarter of ~~2017~~2023 of ~~$2,554,000,~~$1,887,000, or ~~$0.74~~$0.52 per share on a diluted basis, compared to net income of ~~$2,292,000,~~$3,349,000, or ~~$0.67~~$0.94 per share on a diluted basis, for the same period in ~~2016.~~2022. For the ~~nine-month~~six-month period ended ~~September~~June 30, ~~2017,~~2023, QNB reported net income of ~~$7,800,000,~~$6,005,000, or ~~$2.27~~$1.67 per share on a diluted basis, compared to net income of ~~$6,655,000,~~$7,059,000, or ~~$1.96~~$1.98 per share on a diluted basis, for the same period in ~~2016.~~2022. The Bank contributed $6,234,000 to net income for the six months ended June 30, 2023 compared to $7,790,000 for the same period 2022; and the holding company contributed negative $229,000 to net income for the six months ended June 30, 2023 compared to a negative $731,000 for the same period 2022. The results at the Bank were primarily due to net interest margin compression partly offset by the reversal for credit losses on loans of $1,596,000. The results at the holding company are due primarily to the change in the fair value of the equity securities included in the investment portfolio.

Net income expressed as an annualized rate of return on average assets and average shareholders’ equity was ~~0.89%~~0.44% and ~~9.90%~~4.82%, respectively, for the quarter ended ~~September~~June 30, ~~2017~~2023 compared with ~~0.86%~~0.79% and ~~9.57%~~9.28%, respectively, for the ~~same period in 2016.~~ quarter ended June 30, 2022.

For the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2023, the annualized rate of return on average assets and average shareholders’ equity was ~~0.94%~~0.70% and ~~10.37%~~7.78%, respectively, compared with ~~0.87%~~0.84% and ~~9.48%~~9.93%, for the same period in ~~2016.~~2022.

Total assets as of ~~September~~June 30, ~~2017~~2023 were ~~$1,150,363,000,~~$1,650,586,000, compared with ~~$1,063,141,000~~$1,668,497,000 at December 31, ~~2016.~~2022. Loans receivable at ~~September~~June 30, ~~2017~~2023 were ~~$704,214,000, compared with $633,079,000~~$1,029,744,000, a $9,641,000 decrease from $1,039,385,000 at December 31, ~~2016, an increase of $71,135,000, or 11.2%, with commercial lending as the largest contributor to the growth.~~2022. Total deposits of ~~$1,005,445,000~~$1,449,765,000 at ~~September~~June 30, ~~2017~~2023 increased ~~$92,090,000, or 10.1%,~~$31,396,000 compared with total deposits of ~~$913,355,000~~$1,418,369,000 at December 31, ~~2016.~~2022.

Results for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2023 include the following significant components:

•

Net interest income ~~increased $1,230,000,~~decreased $1,770,000, or ~~17.4%~~15.9%, to ~~$8,315,000~~$9,333,000 and ~~$2,828,000,~~decreased $2,089,000, or ~~13.3%~~9.6%, to ~~$24,053,000~~$19,750,000 for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2023, respectively.

•

Net interest margin on a tax-equivalent basis ~~increased 22~~decreased 46 basis points for the quarter and ~~ten~~31 basis points ~~year-to-date,~~for the six months ended June 30, 2023, at 2.27% and 2.41% to ~~3.15%~~compared to 2.73% and 2.72% for ~~both periods.~~

the same periods in June 30, 2022, respectively.

•

QNB recorded ~~$100,000~~$209,000 in its provision for ~~loan~~credit losses on loans for the quarter ~~and $700,000~~ended June 30, 2023, compared with no provision for the ~~nine~~same period in 2022. QNB reversed $1,596,000 in its provision for credit losses on loans for the six months ended ~~September~~June 30, ~~2017,~~2023, compared with ~~$125,000~~no provision for the ~~first nine months of 2016. There was no provision recorded~~same period in 2022.

•

Non-interest income increased $941,000, to $1,580,000 for the ~~third quarter of 2016.~~

~~Non-interest income decreased $174,000, or 10.6%, to $1,470,000 for the third~~second quarter and increased ~~$481,000, or 10.5%,~~$549,000, to ~~$5,075,000~~$2,799,000 for ~~year-to-date 2017,~~the six months ended June 30, 2023 compared with the same periods in ~~2016.~~

2022. Excluding realized and unrealized gains (losses) on securities, non-interest income increased $8,000, or 0.5%, to $1,634,000 for the quarter and increased $50,000, or 1.6%, to $3,261,000 for the six months ended June 30, 2023, compared with the same periods in 2022.

•

Non-interest expense increased ~~$575,000, or 10.2%,~~$746,000 to ~~$6,191,000~~$8,492,000 for the ~~third~~ quarter and ~~$993,000, or 5.9%,~~increased $1,133,000 to ~~$17,721,000~~$16,692,000 for ~~year-to-date 2017,~~the six months ended June 30, 2023 compared to the same periods in ~~2016.~~

2022.

•

Total non-performing loans were ~~$10,437,000,~~$8,827,000, or ~~1.48%~~0.86% of loans receivable at ~~September~~June 30, ~~2017,~~2023, compared ~~with $11,938,000,~~to $9,121,000, or ~~1.89%~~0.88% of loans receivable at December 31, ~~2016.~~2022. Loans on non-accrual status were ~~$9,078,000~~$4,794,000 at ~~September~~June 30, ~~2017~~2023 compared with ~~$10,119,000~~$4,820,000 at December 31, ~~2016.~~2022. Net loan recoveries for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2023 were ~~$31,000, or -0.01% annualized of average total loans,~~$494,000, compared with ~~net charge-offs of $86,000, or 0.02% annualized of average total loans~~$113,000 for the same period in ~~2016.~~

2022.

These items, as well as others, ~~will be~~are explained more thoroughly in the next sections.

NET INTEREST INCOME

QNB ~~Corp.~~ earns its net income primarily through ~~its subsidiary,~~ 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

~~QNB CORP. AND SUBSIDIARY~~

~~MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL~~

~~CONDITION AND RESULTS OF OPERATIONS~~

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~~three- and ~~nine-month~~six month periods ended ~~September~~June 30, ~~2017~~2023 and ~~2016.~~2022.


	Three months ended September 30,				Nine months ended September 30,				For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2017		2016		2017		2016		2023		2022		2023		2022
Total interest income	$	9,830	$	8,287	$	28,158	$	24,751	$	15,865	$	12,327	$	31,328	$	24,136
Total interest expense		1,515		1,202		4,105		3,526		6,532		1,224		11,578		2,297
Net interest income		8,315		7,085		24,053		21,225		9,333		11,103		19,750		21,839
Tax-equivalent adjustment		402		403		1,179		1,252		148		179		298		364
Net interest income (fully taxable-equivalent)	$	8,717	$	7,488	$	25,232	$	22,477	$	9,481	$	11,282	$	20,048	$	22,203

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 ~~(Fed)~~ 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~~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.

4342

~~QNB CORP. AND SUBSIDIARY~~

~~MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL~~

~~CONDITION AND RESULTS OF OPERATIONS~~

Average Balances, Rate, and Interest Income and Expense Summary (Tax-Equivalent Basis)

Three Months Ended

September 30, 2017

September 30, 2016

Average

Average

Average

Average

Balance

Rate

Interest

Balance

Rate

Interest

Assets

Trading securities

—

—

—

$
3,992

5.44
%

$
54

Investment securities (AFS & HTM):

U.S. Government agencies

$
74,469

1.80
%

$
335

60,860

1.88

286

State and municipal

78,236

3.93

768

71,905

4.03

724

Mortgage-backed and CMOs

221,513

2.04

1,127

197,462

1.95

963

Pooled trust preferred securities

242

3.61

2

3,091

0.23

2

Corporate debt securities

8,060

2.04

41

7,224

1.74

31

Equities

7,918

3.61

72

6,568

2.85

47

Total investment securities

390,438

2.40

2,345

347,110

2.37

2,053

Loans:

Commercial real estate

397,481

4.60

4,607

329,786

4.40

3,645

Residential real estate

52,833

3.90

516

45,606

3.94

449

Home equity loans

66,730

3.87

650

63,141

3.62

574

Commercial and industrial

135,791

4.74

1,621

111,058

4.32

1,206

Indirect lease financing

—

—

—

9,202

8.58

197

Consumer loans

6,685

5.65

95

4,626

5.21

61

Tax-exempt loans

35,328

3.97

354

39,226

3.75

370

Total loans, net of unearned income*

694,848

4.48

7,843

602,645

4.29

6,502

Other earning assets

13,411

1.31

44

62,778

0.51

81

Total earning assets

1,098,697

3.69

10,232

1,016,525

3.40

8,690

Cash and due from banks

15,946

16,378

Allowance for loan losses

(8,068
)

(7,630
)

Other assets

29,731

28,728

Total assets

$
1,136,306

$
1,054,001

Liabilities and Shareholders' Equity

Interest-bearing deposits:

Interest-bearing demand

$
173,544

0.21
%

94

$
157,179

0.20
%

80

Municipals

126,689

0.80

257

114,403

0.34

97

Money market

82,263

0.29

59

71,963

0.27

48

Savings

250,306

0.48

300

231,496

0.40

233

Time

129,272

1.19

387

133,296

1.13

378

Time of $100,000 or more

99,669

1.42

357

95,915

1.37

330

Total interest-bearing deposits

861,743

0.67

1,454

804,252

0.58

1,166

Short-term borrowings

43,678

0.56

61

38,506

0.37

36

Total interest-bearing liabilities

905,421

0.66

1,515

842,758

0.57

1,202

Non-interest-bearing deposits

124,269

112,114

Other liabilities

4,231

3,874

Shareholders' equity

102,385

95,255

Total liabilities and shareholders' equity

$
1,136,306

$
1,054,001

Net interest rate spread

3.03
%

2.83
%

Margin/net interest income

3.15
%

$
8,717

2.93
%

$
7,488


	For the Three Months Ended
	June 30, 2023								June 30, 2022
	Average			Average					Average			Average
	Balance			Rate			Interest		Balance			Rate			Interest
Assets
Investment securities (AFS & Equity):
U.S. Treasury securities	$	3,398			4.81	%	$	41	$	872			0.97	%	$	2
U.S. Government agencies		101,945			1.11			283		101,936			1.11		283
State and municipal		109,345			2.38			651		130,329			2.40		783
Mortgage-backed and CMOs		406,442			1.76			1,786		458,622			1.59			1,820
Corporate debt securities		6,625			4.42			73		6,688			4.36		73
Equities		8,355			4.65			97		12,409			3.22			100
Total investment securities		636,110			1.84			2,931		710,856			1.72			3,061
Loans:
Commercial real estate		696,223			4.72			8,201		621,225			4.07			6,307
Residential real estate		107,402			3.66			984		104,323			3.32			866
Home equity loans		57,601			6.44			925		54,421			3.73			506
Commercial and industrial		142,438			7.14			2,538		140,840			4.34			1,525
Consumer loans		3,918			7.22			70		4,621			5.14			59
Tax-exempt loans		19,742			3.50			172		19,343			3.39			163
Total loans, net of unearned income*		1,027,324			5.03			12,890		944,773			4.00			9,426
Other earning assets		11,555			6.69			192		4,045			1.93			19
Total earning assets		1,674,989			3.83			16,013		1,659,674			3.02			12,506
Cash and due from banks		13,547								13,716
Allowance for loan losses		(8,297	)							(11,266	)
Other assets		39,129								38,476
Total assets	$	1,719,368							$	1,700,600
Liabilities and Shareholders' Equity
Interest-bearing deposits:
Interest-bearing demand	$	305,067			0.43	%		325	$	348,518			0.20	%		174
Municipals		114,965			4.36			1,251		109,055			0.43			117
Money market		175,243			2.39			1,044		143,285			0.35			125
Savings		359,733			1.22			1,093		448,915			0.34			383
Time < $100		111,455			2.27			631		90,874			0.75			170
Time $100 through $250		109,462			3.49			953		46,204			0.67			77
Time > $250		38,005			2.82			267		25,489			0.70			45
Total interest-bearing deposits		1,213,930			1.84			5,564		1,212,340			0.36			1,091
Short-term borrowings		108,117			2.90			783		79,402			0.47			93
Long-term debt		16,813			4.35			185		10,000			1.57			40
Total interest-bearing liabilities		1,338,860			1.96			6,532		1,301,742			0.38			1,224
Non-interest-bearing deposits		213,308								246,581
Other liabilities		10,310								7,589
Shareholders' equity		156,890								144,688
Total liabilities and shareholders' equity	$	1,719,368							$	1,700,600
Net interest rate spread					1.87	%							2.64	%
Margin/net interest income					2.27	%	$	9,481					2.73	%	$	11,282


	For the Six Months Ended
	June 30, 2023								June 30, 2022
	Average			Average					Average			Average
	Balance			Rate			Interest		Balance			Rate			Interest
Assets
Investment securities (AFS & Equity):
U.S. Treasury securities	$	1,842			4.57	%	$	42	$	483			0.95	%	$	2
U.S. Government agencies		101,944			1.11			566		100,963			1.10			553
State and municipal		110,243			2.31			1,272		130,061			2.40			1,564
Mortgage-backed and CMOs		411,760			1.69			3,471		459,872			1.54			3,539
Corporate debt securities		6,631			4.41			146		6,694			4.35			146
Equities		10,215			3.91			198		12,412			3.21			198
Total investment securities		642,635			1.77			5,695		710,485			1.69			6,002
Loans:
Commercial real estate		688,959			4.63			15,803		609,508			4.06			12,264
Residential real estate		106,555			1.80			1,921		102,885			1.64			1,684
Home equity loans		57,126			6.34			1,795		54,519			3.55			959
Commercial and industrial		147,568			7.70			5,634		140,715			4.46			3,110
Consumer loans		4,003			6.97			138		4,678			5.10			118
Tax-exempt loans		20,164			3.49			349		19,455			3.40			328
Total loans, net of unearned income*		1,024,375			5.05			25,640		931,760			4.00			18,463
Other earning assets		9,290			6.32			291		5,359			1.34			35
Total earning assets		1,676,300			3.80			31,626		1,647,604			3.00			24,500
Cash and due from banks		13,216								13,401
Allowance for loan losses		(9,113	)							(11,236	)
Other assets		38,865								38,292
Total assets	$	1,719,268							$	1,688,061
Liabilities and Shareholders' Equity
Interest-bearing deposits:
Interest-bearing demand	$	311,306			0.41	%		627	$	343,435			0.19	%		320
Municipals		113,468			4.13			2,326		112,765			0.37			208
Money market		153,058			1.83			1,386		142,296			0.33			231
Savings		382,775			1.14			2,170		443,311			0.32			704
Time < $100		106,360			1.92			1,013		91,779			0.78			354
Time $100 through $250		103,570			3.27			1,680		47,363			0.69			162
Time > $250		32,894			2.39			390		25,231			0.70			87
Total interest-bearing deposits		1,203,431			1.61			9,592		1,206,180			0.35			2,066
Short-term borrowings		121,443			2.95			1,778		75,462			0.41			152
Long-term debt		11,354			3.64			208		10,000			1.57			79
Total interest-bearing liabilities		1,336,228			1.75			11,578		1,291,642			0.36			2,297
Non-interest-bearing deposits		217,604								245,346
Other liabilities		9,732								7,729
Shareholders' equity		155,704								143,344
Total liabilities and shareholders' equity	$	1,719,268							$	1,688,061
Net interest rate spread					2.05	%							2.64	%
Margin/net interest income					2.41	%	$	20,048					2.72	%	$	22,203

Tax-exempt securities and loans were adjusted to a tax-equivalent basis and are based on the marginal Federal corporate tax rate of ~~34 percent.~~21 percent for three and six months ended June 30, 2023 and 2022.

Non-accrual loans ~~and investment securities~~ are included in earning assets.

* Includes loans held-for-sale

~~QNB CORP. AND SUBSIDIARY~~

~~MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL~~

~~CONDITION AND RESULTS OF OPERATIONS~~

Nine Months Ended

September 30, 2017

September 30, 2016

Average

Average

Average

Average

Balance

Rate

Interest

Balance

Rate

Interest

Assets

Trading securities

$
1,587

5.72
%

$
68

$
3,919

5.47
%

$
161

Investment securities (AFS & HTM):

U.S. Government agencies

74,516

1.77

992

57,160

1.85

794

State and municipal

75,310

3.90

2,205

73,765

4.06

2,247

Mortgage-backed and CMOs

222,165

2.04

3,405

196,830

1.98

2,926

Pooled trust preferred securities

1,989

1.36

20

3,197

0.21

5

Corporate debt securities

8,064

1.98

120

8,160

1.77

108

Equities

7,231

3.40

184

7,192

3.28

177

Total investment securities

389,275

2.37

6,926

346,304

2.41

6,257

Loans:

Commercial real estate

386,958

4.58

13,257

327,225

4.43

10,854

Residential real estate

49,874

3.86

1,446

44,447

3.90

1,301

Home equity loans

66,315

3.83

1,901

62,557

3.72

1,740

Commercial and industrial

124,471

4.68

4,357

112,918

4.25

3,592

Indirect lease financing

—

—

—

9,844

8.88

656

Consumer loans

6,481

5.39

261

4,460

5.25

175

Tax-exempt loans

35,188

3.96

1,042

39,959

3.77

1,127

Total loans, net of unearned income*

669,287

4.45

22,264

601,410

4.32

19,445

Other earning assets

9,518

1.10

79

34,156

0.55

140

Total earning assets

1,069,667

3.67

29,337

985,789

3.52

26,003

Cash and due from banks

13,766

14,013

Allowance for loan losses

(7,761
)

(7,622
)

Other assets

29,169

28,683

Total assets

$
1,104,841

$
1,020,863

Liabilities and Shareholders' Equity

Interest-bearing deposits:

Interest-bearing demand

$
169,061

0.21
%

262

$
151,907

0.21
%

237

Municipals

102,207

0.64

491

98,777

0.35

255

Money market

84,389

0.30

187

70,556

0.27

142

Savings

248,325

0.45

837

228,894

0.40

688

Time

129,450

1.16

1,127

133,930

1.12

1,122

Time of $100,000 or more

96,659

1.39

1,008

94,462

1.37

967

Total interest-bearing deposits

830,091

0.63

3,912

778,526

0.59

3,411

Short-term borrowings

49,472

0.52

193

39,922

0.38

115

Total interest-bearing liabilities

879,563

0.62

4,105

818,448

0.58

3,526

Non-interest-bearing deposits

120,365

104,922

Other liabilities

4,381

3,756

Shareholders' equity

100,532

93,737

Total liabilities and shareholders' equity

$
1,104,841

$
1,020,863

Net interest rate spread

3.05
%

2.94
%

Margin/net interest income

3.15
%

$
25,232

3.05
%

$
22,477

~~Tax-exempt securities and loans were adjusted to a tax-equivalent basis and are based on the marginal Federal corporate tax rate of 34 percent.~~

~~Non-accrual loans and investment securities are included in earning assets.~~

* Includes loans held-for-sale

~~QNB CORP. AND SUBSIDIARY~~

~~MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL~~

~~CONDITION AND RESULTS OF OPERATIONS~~

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.

Three months ended

Nine months ended

September 30, 2017 compared

September 30, 2017 compared

to September 30, 2016

to September 30, 2016

Total

Due to change in:

Total

Due to change in:

Change

Volume

Rate

Change

Volume

Rate

Interest income:

Trading securities

$
(54
)

$
(54
)

$
—

$
(93
)

$
(96
)

$
3

Investment securities (AFS & HTM):

U.S. Government agencies

49

64

(15
)

198

241

(43
)
State and municipal

44

64

(20
)

(42
)

47

(89
)
Mortgage-backed and CMOs

164

118

46

479

377

102

Pooled trust preferred securities

—

(2
)

2

15

(2
)

17

Corporate debt securities

10

4

6

12

(1
)

13

Equities

25

10

15

7

1

6

Total Investment securities (AFS & HTM)

292

258

34

669

663

6

Loans:

Commercial real estate

962

761

201

2,403

1,970

433

Residential real estate

67

71

(4
)

145

160

(15
)
Home equity loans

76

35

41

161

103

58

Commercial and industrial

415

272

143

765

363

402

Indirect lease financing

(197
)

(197
)

—

(656
)

(656
)

—

Consumer loans

34

27

7

86

79

7

Tax-exempt loans

(16
)

(35
)

19

(85
)

(136
)

51

Total Loans

1,341

934

407

2,819

1,883

936

Other earning assets

(37
)

(64
)

27

(61
)

(101
)

40

Total interest income

1,542

1,074

468

3,334

2,349

985

Interest expense:

Interest-bearing deposits:

Interest-bearing demand

14

9

5

25

27

(2
)
Municipals

160

11

149

236

9

227

Money market

11

8

3

45

28

17

Savings

67

19

48

149

57

92

Time

9

(11
)

20

5

(39
)

44

Time of $100,000 or more

27

14

13

41

22

19

Total interest-bearing deposits

288

50

238

501

104

397

Short-term borrowings

25

4

21

78

27

51

Total interest expense

313

54

259

579

131

448

Net interest income

$
1,229

$
1,020

$
209

$
2,755

$
2,218

$
537


	For the Three Months Ended									For the Six Months Ended
	June 30, 2023 compared									June 30, 2023 compared
	to June 30, 2022									to June 30, 2022
	Total			Due to change in:						Total			Due to change in:
	Change			Volume			Rate			Change			Volume			Rate
Interest income:
Investment securities (AFS & Equity):
U.S. Treasury securities	$	39		$	6		$	33		$	40		$	7		$	33
U.S. Government agencies		—			—			—			13			5			8
State and municipal		(132	)		(127	)		(5	)		(292	)		(239	)		(53	)
Mortgage-backed and CMOs		(34	)		(206	)		172			(68	)		(370	)		302
Corporate debt securities		—			(1	)		1			—			(2	)		2
Equities		(3	)		(33	)		30			—			(35	)		35
Total Investment securities (AFS & Equity)		(130	)		(361	)		231			(307	)		(634	)		327
Loans:
Commercial real estate		1,894			762			1,132			3,539			1,599			1,940
Residential real estate		118			26			92			237			149			88
Home equity loans		419			30			389			836			46			790
Commercial and industrial		1,013			18			995			2,524			152			2,372
Consumer loans		11			(9	)		20			20			(17	)		37
Tax-exempt loans		9			4			5			21			12			9
Total Loans		3,464			831			2,633			7,177			1,941			5,236
Other earning assets		173			36			137			256			26			230
Total interest income		3,507			506			3,001			7,126			1,333			5,793
Interest expense:
Interest-bearing deposits:
Interest-bearing demand		151			(22	)		173			307			(30	)		337
Municipals		1,134			6			1,128			2,118			1			2,117
Money market		919			27			892			1,155			17			1,138
Savings		710			(76	)		786			1,466			(96	)		1,562
Time < $100		461			39			422			659			56			603
Time $100 through $250		876			105			771			1,518			191			1,327
Time > $250		222			22			200			303			26			277
Total interest-bearing deposits		4,473			101			4,372			7,526			165			7,361
Short-term borrowings		690			34			656			1,626			93			1,533
Long-term debt		145			27			118			129			11			118
Total interest expense		5,308			162			5,146			9,281			269			9,012
Net interest income	$	(1,801	)	$	344		$	(2,145	)	$	(2,155	)	$	1,064		$	(3,219	)

Net Interest Income and Net Interest Margin – Quarterly Comparison

Average earning assets for the ~~third~~second quarter of ~~2017~~2023 were ~~$1,098,697,000,~~$1,674,989,000, an increase of ~~$82,172,000,~~$15,315,000, or ~~8.1%~~0.9%, from the ~~third~~second quarter of ~~2016,~~2022, with average loans increasing ~~$92,203,000,~~$82,551,0000, or ~~15.3%~~8.7%, and average investment securities ~~increasing $39,336,000,~~decreasing $74,746,000, or ~~11.2%~~10.5%, over the same ~~period. Growth~~period in 2022. Cash generated from maturities and sales in the investment portfolio and an increase in borrowed funds of $35,528,000 supported loan ~~portfolio mitigates the impact of the low rate environment on net interest income and the net interest margin as loans generally earn a higher yield than investment securities.~~growth. Average loans as a percent of average earning assets ~~were 63.2%~~was 61.3% for the ~~third~~second quarter of ~~2017,~~2023, compared with ~~59.3%~~56.9% for the ~~third~~second quarter of ~~2016.~~2022. On the funding side, average deposits ~~increased $69,646,000,~~decreased $31,683,000, or ~~7.6%~~2.2%, to ~~$986,012,000~~$1,427,238,000 for the ~~third~~second quarter of ~~2017 with growth~~2023 primarily due to a decrease in all categories except for time deposits. Customers continue to reinvest funds into non-time deposits, as the yield in time deposits remains low and customers prefer to keep their funds liquid to capitalize on rising rates.non-interest bearing demand products. Average short-term borrowed funds, ~~for the third quarter of 2017 increased $5,172,000, to~~

~~QNB CORP. AND SUBSIDIARY~~

~~MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL~~

~~CONDITION AND RESULTS OF OPERATIONS~~

~~$43,678,000,~~ which consisted primarily of average commercial repurchase agreements, short-term Federal Reserve Bank ("FRB") borrowing and over-night FHLB borrowings, increased $28,715,000 to $108,117,000 during the second quarter of ~~$35,995,000 and average overnight borrowings of $7,683,000. For~~2023 compared to $79,402,000 for the same period in ~~2016, borrowings consisted solely of commercial repurchase agreements.~~2022.

The net interest margin for the ~~third~~second quarter of ~~2017 was 3.15% compared with 2.93% for~~2023 decreased 46 basis points to 2.27% from 2.73% or the same period in ~~2016. While competition~~2022. Competition for quality loans and deposits in our local market continues to exert pressure on the net interest ~~margin, three~~margin. The increases in

interest rates starting in March 2022 has compressed the ~~prime lending~~net interest margin as QNB had been liability sensitive; QNB entered into interest rate ~~since September 2016 have provided increased~~hedging derivatives during the second quarter of 2023 moving QNB to be asset sensitive. The net interest ~~income on variable rate~~margin is expected to improve as loans and ~~moderate competitive pricing pressure on deposits.~~ securities 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 ~~$1,542,000,~~$3,507,000, or ~~17.7%~~28.0%, to ~~$10,232,000~~$16,013,000 for the ~~third~~second quarter of ~~2017;~~2023; total interest expense increased ~~26.0%~~$5,308,000 to $1,515,000. Growth in earning assets is the primary contributor to the increase in interest income, with the increase in rates on variable-rate loans referenced above also contributing significantly. All categories of interest-bearing deposits experienced higher rates in the third quarter of 2017 compared to the third quarter of 2016, Rates increased 46 basis points for municipal deposits indexed to Fed Funds, while moderate competitive pricing pressure resulted in smaller rate increases in other deposit types.$6,532,000.

The yield on earning assets on a tax-equivalent basis increased ~~twenty-nine~~81 basis points ~~from 3.40%~~to 3.83% for the ~~third~~second quarter of ~~2016, to 3.69%~~2023, from 3.02% for the ~~third~~second quarter of ~~2017.~~2022. The cost of interest-bearing liabilities was ~~0.66%~~1.96% for the second quarter ~~ended September 30, 2017,~~of 2023, compared with ~~0.57%~~0.38% for the same period in ~~2016.~~2022.

Interest income on investment securities ~~(trading, available-for-sale~~(available-for-sale and ~~held-to-maturity) increased $238,000~~equity) decreased $130,000 when comparing the quarters ended ~~September~~June 30, ~~2017~~2023 and ~~2016.~~2022. The average yield on the investment portfolio was ~~2.40%~~1.84% for ~~both~~ the ~~third quarters~~second quarter of ~~2017 and 2016. Investment opportunities~~2023 compared with 1.72% for the same period in 2022.

The yield on U.S. Treasury securities was 4.81% for the ~~current rate environment provide a yield comparable~~second quarter of 2023 compared to 0.97% for the ~~overall portfolio yield.~~

same period in 2022. Income on U.S. Government agency securities ~~increased $49,000,~~remained flat as the ~~$13,609,000, or 22.4%, increase~~average balances increased $9,000 and the rate remained the same.

Interest income on municipal securities, which are primarily tax-exempt, decreased $132,000 due to a $20,984,000 decrease in average balances ~~contributed to an increase in interest income of $64,000. This was offset by~~and a ~~$15,000~~two basis-point decrease in ~~interest income due to an eight basis point decrease in the yield from 1.88% for the third quarter of 2016 to 1.80% for the same period in 2017.~~

Average tax-exempt municipal securities increased $6,331,000, contributing $64,000 to interest income, which was offset by a ten basis point reduction in average yield, resulting in a decrease of interest income of $20,000. QNB had purchased many municipal securities when rates were significantly higher. Many of these bonds have either reached maturity or their call dates and are being replaced with municipal bonds but the current yield on replacement bonds is well below the yield of the bonds being called or maturing.rate. Typically, QNB purchases municipal bonds with ~~10-15 year~~10- to 20-year maturities ~~with~~and may have call dates between ~~2-5~~2-10 years. ~~The yield on this portfolio is expected to continue to decline as additional higher yielding municipal bonds are expected to be called or mature during 2017.~~

Interest income on mortgage-backed securities and CMOs ~~increased $164,000 with a nine basis point increase in average yield, plus the $24,051,000 increase in~~decreased $34,000 while average balances ~~contributing the majority of increase.~~decreased $52,180,000 and yield increased 17 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 ~~when~~as interest rates ~~eventually~~ 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 increased 143 basis points as average balances decreased $4,054,000. Proceeds from sales of equities were reinvested in higher yielding treasury securities.

Income on loans increased ~~$1,341,000~~$3,464,000 to ~~$7,843,000~~$12,890,000 when comparing the ~~third~~second quarters of ~~2017~~2023 and ~~2016,~~2022, with ~~the strong growth~~a $82,551,000 increase in average balances contributing to an increase in interest income of ~~$934,000. The~~$831,000 and a 103-basis point increase in yield ~~on average loans for~~contributing to a $2,633,000 increase in interest income. Higher interest rates during the ~~third quarter of 2017 was 4.48%, 19 basis points higher than the 4.29% yield in third quarter of 2016. Despite increases in the Fed funds rate in December 2016, March 2017, and June 2017,~~repricing period were partially offset by competitive pressures ~~resulted in~~that compressed the yields on new ~~loans being originated at relatively low rates. Mitigating competitive pricing, variable rate loans have repriced higher as the prime rate increases went into effect.~~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. Average balances increased $67,695,000, or 20.5%, to $397,481,000 for the quarter ended September 30, 2017 compared with the same quarter in 2016, contributing $761,000 in increased interest income. The yieldIncome on commercial real estate loans increased ~~20 basis points~~$1,894,000 when comparing the second quarters of 2023 and 2022, primarily due to ~~4.60%~~increased average balances of $74,998,000, or 12.1%, and a 65-basis point increase in ~~2017, contributing $201,000~~rate from 4.07% in ~~increased interest income.~~2022 to 4.72% in 2023.

~~QNB CORP. AND SUBSIDIARY~~

~~MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL~~

~~CONDITION AND RESULTS OF OPERATIONS~~

Income on commercial and industrial loans increased ~~$415,000. Average balances increased $24,733,000, or 22.3%, to $135,791,000 for~~$1,013,000 when comparing the ~~third quarter~~second quarters of ~~2017 resulting in a $272,000 increase in income.~~2023 and 2022. The average yield on these loans increased 42280 basis points to ~~4.74%~~7.14% resulting in an increase in income of ~~$143,000.~~$995,000; average balances increased $1,598,000, to $142,438,000 for the second quarter of 2023 resulting in an $18,000 increase in interest income. Many of the loans in this category are indexed to the prime interest ~~rate, which increased by one quarter of one percent three times since September 2016.~~rate.

Tax-exempt loan income was ~~$354,000~~$172,000 for the ~~third~~second quarter of ~~2017, a decrease~~2023, an increase of ~~$16,000~~$9,000 from the same period in ~~2016. As with municipal marketable securities, many municipalities have refinanced existing loans. While QNB has been successful in winning some of these bids, average~~2022. Average balances ~~have decreased $3,898,000,~~increased $399,000, or ~~9.9%~~2.1%, to ~~$35,328,000~~$19,742,000 for the ~~third~~second quarter of ~~2017,~~2023, resulting in ~~a decrease~~an increase of ~~$35,000~~$4,000 in income. The yield on municipal loans ~~improved 22~~increased 11 basis points, to ~~3.97%~~3.50% for the ~~third~~second quarter of ~~2017,~~2023, compared with the same period in ~~2016,~~2022, resulting in an ~~additional $19,000~~increase of $5,000 in interest income.

~~In October 2016, QNB sold its interest in third-party originated indirect lease financing contracts. This portfolio provided $197,000 in interest income during the third quarter of 2016.~~

QNB desires to ~~become~~be the “local consumer lender of choice” ~~and to affect this QNB refocused~~, focusing its retail lending efforts ~~adding new~~on product offerings and ~~increasing~~ marketing and promotion. ~~The positive impact of this focus has been year-over-year growth in balances in all three categories of retail lending: residential mortgage, home equity and consumer loans. Average~~Interest income on residential mortgage loans secured by first lien 1-4 family increased $118,000 when comparing the second quarter of 2023 to the same period in 2022. Average residential ~~mortgages~~mortgage loan balances increased by ~~$7,227,000,~~$3,079,000, or ~~15.9%~~3.0%, to ~~$52,833,000~~$107,402,000 for the ~~third~~second quarter of ~~2017~~2023 compared to the same period in ~~2016. Over this same timeframe, the~~2022, which contributed a $26,000 increase in interest income. The average yield on the portfolio ~~decreased four~~increased 34 basis points and contributed an increase of $92,000 to ~~3.90% for~~interest income. QNB chose to retain certain mortgage loans instead of selling them in the ~~third quarter of 2017. The net result~~secondary market, as the yield on our originated mortgages was ~~a comparative increase in interest income of $67,000. Interest income for~~higher than comparable mortgage-backed securities. Average home equity loans increased ~~$76,000,~~during the 2023 period by $3,180,000 to

$57,601,000; interest income increased $419,000 as ~~a result of average balances increasing $3,589,000, or 5.7%, to $66,730,000 while~~ the average yield increased 25271 basis points to ~~3.87%~~6.44%. Average consumer loans increased $2,059,000, or 44.5%, to $6,685,000, led primarily by student loan average balances, which increased $1,738,000 from third quarter 2016 to third quarter 2017. When comparing these two periods, theThe yield on the consumer portfolio increased 44208 basis points to ~~5.65%;~~7.22% for the ~~combined result~~second quarter of 2023 and there was a ~~$34,000~~$703,000 decrease in average balances resulting in a net $11,000 increase in interest ~~income for consumer loans.~~income.

Earning assets are funded by deposits and borrowed funds. Interest expense increased ~~$313,000,~~$5,308,000, when comparing the ~~third~~second quarter of ~~2017~~2023 to the same period in ~~2016. The growth in average deposits continues to be centered~~2022. QNB experienced a decrease in accounts with greater liquidity ~~such as non-interest~~ and ~~interest-bearing demand, money market, and savings~~an increase in time deposits. Average non-interest-bearing demand accounts ~~increased $12,155,000, or 10.8%,~~decreased $33,273,000 to ~~$124,269,000~~$213,308,000 for the ~~third quarter.~~second quarter of 2023. QNB ~~has been successful in increasing business checking accounts as average balances in these accounts have increased by $10,435,000, or 11.5%,~~offered several new interest-bearing demand and money market products offering higher yields to ~~$100,983,000 when comparing~~retain large depositors and reduce the ~~quarters.~~reliance on higher-cost short-term borrowings. Average interest-bearing demand accounts ~~increased $16,365,000,~~decreased $43,451,000, or ~~10.4%~~12.5%, to ~~$173,544,000~~$305,067,000 for the ~~third~~second quarter of ~~2017. Interest~~2023; however interest expense on interest-bearing demand accounts increased ~~$14,000~~$151,000 to ~~$94,000~~$325,000 for the same period, as the average rate paid increased ~~one~~23 basis points to 0.43% for the second quarter of 2023. Average money market accounts increased $31,958,000, or 22.3%, to $175,243,000 for the second quarter of 2023 compared with the same period in 2022. Interest expense on money market accounts increased $919,000 to $1,044,000, and the average interest rate paid on money market accounts increased 204 basis point to ~~0.21%~~2.39% for the ~~third~~second quarter of ~~2017. Included~~2023. Most of the balances in this category ~~is QNB-Rewards checking, a higher-rate checking~~are in products that pay tiered rates based on account product that pays 1.10% on balances up to $25,000 and 0.30% for balances over $25,000. In order to receive the high rate a customer must receive an electronic statement, have one direct deposit or other ACH transaction and have at least 12 check card purchase transactions post and clear per statement cycle. For the third quarter of 2017, the average balance in this product was $51,323,000 and the related interest expense was $75,000 for an average yield of 0.58%. In comparison, the average balance of the QNB-Rewards accounts for the third quarter of 2016 was $45,125,000 with a related interest expense of $63,000 and an average rate paid of 0.55%. This product also generates fee income through the use of the check card. The average balance of other interest-bearing demand accounts included in this category increased from $112,054,000 for the third quarter of 2016 to $122,221,000 for the third quarter of 2017. The average rate paid on these balances was 0.06% for both periods.balances.

Interest expense on municipal interest-bearing demand accounts increased ~~$160,000~~$1,134,000 to ~~$257,000~~$1,251,000 for the ~~third~~second quarter of ~~2017.~~2023. The average ~~balance of~~interest rate paid on municipal interest-bearing demand accounts increased ~~$12,286,000, or 10.7%, to $126,689,000, with the average interest rate paid on these accounts increasing 46~~393 basis points to ~~0.80%~~4.36% for the ~~third~~second quarter of ~~2017.~~2023 over the same quarter of 2022, and average balances increased $5,910,000, or 5.4%, to $114,965,000. Many of these accounts are indexed to the Federal funds rate with rate ~~floors between 0.25% and 0.50%, therefore the increases in the Federal funds rate affected the yield of these deposits.~~floors. Municipal deposits are seasonal in nature and are received during the second and third ~~quarter~~quarters as tax receipts are collected and are withdrawn over the course of the ~~next~~ year.

Average money market accounts increased $10,300,000, or 14.3%, to $82,263,000 for the third quarter of 2017 compared with the same period in 2016. Interest expense on money market accounts increased $11,000 to $59,000, while the average interest rate paid on money market accounts increased two basis points to 0.29% for the third quarter of 2017 compared with the same period in 2016. Most of balances in this category are in a product that pays a tiered rate based on account balances.

~~QNB CORP. AND SUBSIDIARY~~

~~MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL~~

~~CONDITION AND RESULTS OF OPERATIONS~~

Interest expense on savings accounts increased ~~$67,000~~$710,000 when comparing the ~~third~~second quarter of ~~2017~~2023 to the ~~third~~same quarter of ~~2016, and the~~2022. The average interest rate paid on savings accounts increased ~~eight~~88 basis points to ~~0.48%.~~1.22% for the second quarter of 2023. When comparing these same periods, average savings ~~account balances increased $18,810,000,~~accounts decreased $89,182,000, or ~~8.1%~~19.9%, to ~~$250,306,000~~$359,733,000 for the ~~third~~second quarter of ~~2017 with both~~2023 primarily due to decreases in the ~~statement savings and~~ e-Savings ~~products accounting for the growth in savings balances.~~product. QNB’s online e-Savings product is the largest category of savings deposits, with average balances for the ~~third~~second quarter of ~~2017 at $181,706,000. This product has grown successfully since its introduction~~2023 of $263,717,000 compared to $340,646,000 in the ~~third quarter~~same period of ~~2009.~~2022. The average yield paid on these accounts was ~~0.60%~~1.58% for the ~~third~~second quarter of ~~2017~~2023 and ~~0.50%~~0.41% for the same period in ~~2016.~~2022. 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 ~~increased $5,542,000, to $68,600,000 in average balances,~~decreased $901,000 when comparing the ~~third~~second quarter of ~~2017 average~~2023 to the same period in ~~2016.~~2022.

~~Total interest~~Interest expense on time deposits totaled ~~$744,000 and $708,000~~$1,851,000 for the ~~third quarters~~second quarter of ~~2017 and 2016, respectively.~~2023 compared to $292,000 in 2022. Average total time deposits ~~decreased slightly from $229,211,000~~increased $96,355,000 to $258,922,000 for the ~~third quarter 2016 to $228,941,000 for the third~~second quarter of ~~2017.~~2023. As with fixed-rate loans and investment securities, ~~time~~these deposits reprice over time and, therefore, have less of an immediate impact on costs in either a rising or falling rate ~~environment,~~environment; however, the maturity and repricing characteristics of time deposits tend to be shorter. The average rate paid on total time deposits increased ~~six~~215 basis points from 0.72% to ~~1.29%~~2.87% when comparing the ~~third~~second quarter of ~~2017~~2023 to the same period in ~~2016.~~2022.

Approximately ~~$99,509,000,~~$171,738,000, or ~~43.2%~~62%, of time deposits at ~~September~~June 30, ~~2017~~2023 will mature over the next 12 months. The average rate paid on these time deposits is approximately ~~0.81%~~2.44%. The yield on the time deposit portfolio may change ~~slightly~~ in the next quarter as short-term time deposits ~~reprice. However,~~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 ~~longer-term~~ time deposits.

Short-term borrowings are primarily comprised of sweep accounts structured as repurchase agreements with our commercial customers at June 30, 2023 and June 30, 2022. At June 30, 2023, short-term borrowing also included overnight FHLB ~~borrowings.~~borrowing and FRB borrowing. Interest expense on short-term borrowings increased ~~$25,000~~$690,000 for the ~~third~~second quarter of ~~2017~~2023 to ~~$61,000~~$783,000 when compared to the same period in ~~2016.~~2022. When comparing these same periods, average balances increased ~~from $38,506,000~~$28,715,000 to ~~$43,678,000, due to an increase in average FHLB borrowings of $7,681,000, while the average rate paid~~$108,117,000. The yield on customer repos increased 1999 basis points ~~to 0.56%~~ for the ~~third~~second quarter of ~~2017.~~2023 to 1.33%. The yield on the short-term FHLB borrowing was 5.21% for the second quarter of 2023. 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. Average balances of the FRB borrowing of $50,000,000 are included in short-term borrowings. During 2020, QNB borrowed long-term debt of $10,000,000 to lock in borrowing at a lower yield than short-term borrowings at that time; this borrowing matured during the first quarter of 2023. During the second quarter of 2023, QNB borrowed long-term debt of $20,000,000 to lock in borrowing at a lower yield than short-term borrowings.

~~Nine Month~~Net Interest Income and Net Interest Margin – Six-Month Comparison

For the ~~nine-month~~six-month period ~~ended September~~ending June 30, ~~2017~~2023, average earning assets increased ~~$83,878,000,~~$28,696,000, or ~~8.5%~~1.7%, to ~~$1,069,667,000,~~$1,676,300,000, with average loans increasing ~~11.3% and~~9.9% slightly offset by a decrease in average investment securities ~~increasing 11.6%~~of 9.5%. Average total deposits ~~increased $67,008,000,~~decreased $30,491,000, or ~~7.6%~~2.1%, to ~~$950,456,000~~$1,421,035,000 for the ~~nine-month~~six-month period ended ~~September~~June 30, ~~2017~~2023 compared to the same period in ~~2016.~~2022. The net

interest margin on a tax-equivalent basis was ~~3.15%~~2.41% for the ~~nine-month~~six-month period ended ~~September~~June 30, ~~2017,~~2023, a ~~ten basis~~31-basis point ~~increase~~decrease from the same period in ~~2016.~~2022.

Total interest income on a tax-equivalent basis increased ~~$3,334,000,~~$7,126,000, or ~~12.8%~~29.1%, to $31,626,000 from ~~$26,003,000 to $29,337,000,~~$24,500,000, when comparing the ~~nine-month~~six-month periods ended ~~September~~June 30, ~~2016~~2023 and ~~September~~June 30, ~~2017,~~2022 due to ~~the additional interest income generated from the growth~~an increase in ~~earning assets combined with the impact of improved yields~~volume and rate on ~~some of those assets.~~loans. Interest income on loans increased ~~$2,349,000~~$1,852,000 as a result of volume ~~increases,~~ and ~~$985,000~~increased $5,325,000 as a result of ~~better~~ yields. The yield on investments increased eight basis points from 1.69% to 1.77% when comparing the six-month periods. The analysis of the ~~nine-month~~six-month comparison periods is similar to what was described in the quarterly analysis.

The yield on earning assets increased from ~~3.52%~~3.00% to ~~3.67%~~3.80% for the ~~nine-month~~six-month periods with the yield on loans up 1380 basis ~~points to 4.45%.~~points. QNB continues to experience pressure on yields due to ~~historically low levels of interest rates over the past several years and~~ competitive pressures on loan pricing. ~~The yield on investments, including trading securities, decreased five basis points from 2.44% to 2.39% when comparing the nine-month periods.~~

Total interest expense increased ~~$579,000~~$9,281,000 for the ~~nine-month~~six-month period ended ~~September~~June 30, ~~2017~~2023 compared with the same period in ~~2016. Deposit rates account for $397,00 of the increase~~2022, attributable to ~~municipal deposits rates, which are correlated to changes~~increases in ~~the Fed Funds target rate, and eSavings and time deposit~~ rates. The average rate paid on interest bearing deposits increased ~~four~~126 basis ~~point~~points to ~~0.63%~~1.61% for the ~~nine-month~~six-month period ended ~~September~~June 30, ~~2017~~2023 versus the same period in ~~2016. QNB Bank funded~~2022. The average balance of total short-term ~~cash needs with~~borrowings increased $45,981,000 primarily due to overnight Federal Home Loan Bank borrowings in the first three quarters of 2017 compared with the same period in 2016, and the borrowing rate increased 14 basis points, which contributed $51,000 to the increase in interest expense.

~~QNB CORP. AND SUBSIDIARY~~

~~MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL~~

~~CONDITION AND RESULTS OF OPERATIONS~~

~~Deposit balance increases and higher borrowings contributed $131,000 to interest expense.~~FHLB borrowing. The yield on interest-bearing liabilities ~~rose four~~increased 139 basis points to ~~0.62%~~1.75% for the ~~nine~~six months ended ~~September~~June 30, ~~2017, compared to the same period in 2016.~~2023. QNB invested proceeds from maturities of investment securities and growth borrowings into loans.

PROVISION FOR ~~LOAN~~CREDIT LOSSES, ALLOWANCE FOR CREDIT LOSSES ON LOANS AND ALLOWANCE FOR ~~LOAN~~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 ~~loan~~credit losses represents management's determination of the amount necessary to be charged to operations to bring the allowance for ~~loan~~credit losses on loans and the allowance for credit losses on unused commitments to ~~a level~~amounts that ~~represents management’s best estimate of the known~~are intended to absorb historical loss experience, current conditions and ~~inherent losses~~reasonable and supportable forecasts, in the ~~existing~~outstanding loan ~~portfolio.~~portfolio and the unused commitments. Management believes that it uses the best information available to make determinations about the adequacy of ~~the allowance~~these allowances and that it has established its existing ~~allowance~~allowances for credit losses on loan ~~losses~~and on unused commitments in accordance with U.S. ~~generally accepted accounting principles (GAAP).~~GAAP. The determination of an appropriate level for the allowance for ~~loan~~credit losses ison loans and the allowance for credit losses on unused commitments are based upon an analysis of the risks inherent in QNB’s loan portfolio. ~~Management, in determining the allowance for loan losses, makes significant estimates and assumptions.~~

Since the allowance for ~~loan~~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 ~~estimates of the allowance for loan losses~~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.

Management closely monitors the quality of its loan portfolio and performs a quarterly analysis of the appropriateness of the allowance for loan losses. This analysis considers several relevant factors including: specific impairment reserves, historical loan loss experience, general economic conditions, levels of and trends in delinquent and non-performing loans, levels of classified loans, trends in the growth rate of loans and concentrations of credit.

Based on this analysis, QNB recorded ~~$100,000 and $700,000 in~~a reversal of $1,571,000 for the six months ended June 30, 2023, through the allowance for credit losses on loans, compared to no provision for ~~loan~~the same period in 2022. QNB recorded $25,000 for the allowance for credit losses for unused commitments in he six months ended June 30, 2023 compared to none for the ~~third quarter and first nine months of 2017, respectively, compared with no provision~~same period in ~~the third quarter and $125,000 year-to-date in 2016.~~ 2022.

QNB's allowance for ~~loan~~credit losses on loans of ~~$8,125,000~~$8,365,000 represents ~~1.15%~~0.81% of loans receivable at ~~September~~June 30, ~~2017~~2023 compared with an allowance for loan losses of ~~$7,394,000,~~$10,531,000, or ~~1.17%~~1.01% of loans receivable, at December 31, ~~2016,~~2022, and ~~$7,593,000,~~$11,297,000, or ~~1.25% of loans receivable~~1.17%, at ~~September~~June 30, ~~2016.~~2022. Management believes the allowance for ~~loan~~credit losses on loans at ~~September~~June 30, ~~2017~~2023 is adequate as of that date based on its analysis of ~~known~~historical loss experience, current conditions and ~~inherent losses~~reasonable and supportable forecasts in the portfolio.

Net charge-offs were ~~$10,000 and net recoveries were $31,000, respectively,~~$38,000 for the three ~~and nine~~ months ended ~~September~~June 30, ~~2017,~~2023 compared ~~with~~to net ~~loan~~ recoveries of $66,000 for the three months ended June 30, 2022. Charge-offs consisted of a $40,000 commercial loan and overdrafts of $20,000. Recoveries of approximately $22,000 during the three months ended June 30, 2023 consisted of $17,000 in repayments from borrowers of previously charged-off credits and overdrafts recoveries of $5,000. Annualized net charge-offs as a percentage of average loans receivable were 0.01% for the three months ended June 30, 2023, compared to annualized net recoveries of 0.03% for the three months ended June 30, 2022.

Net recoveries were $494,000 for the six months ended June 30, 2023 compared to net recoveries of $113,000 for the six months ended June 30, 2022. Charge-offs of approximately $138,000 during the six months ended June 30, 2023 consisted primarily of a commercial loan of $40,000, student loans of $43,000, a consumer loan of $3,000 and overdrafts of $52,000. These were offset by $652,000 in recoveries comprising $617,000 in repayments from borrowers of previously charged-off credits, and $15,000 related to overdraft recoveries. Annualized net recoveries as a percentage of average loans receivable were 0.10% for the six months ended June 30, 2023, compared to annualized net charge-offs of ~~$86,000, respectively,~~0.02% for the ~~same periods in 2016.~~ six months ended June 30, 2023.

Non-performing assets ~~of $10,437,000~~were $8,827,000 at ~~September~~June 30, ~~2017 compares favorably with $14,219,000~~2023 compared to $9,121,000 as of December 31, ~~2016~~2022 and ~~$11,811,000 as of September~~$11,394,000 at June 30, 2016. Prior to June 2017, this category comprised non-performing loans and trust preferred securities. In June 2017, QNB Bank sold five non-performing pooled trust preferred securities, with a $2,235,000 carrying value. The remaining trust preferred security, which had a carrying balance of $212,000 at September 30, 2017, was returned to accruing status. Non-accrual pooled trust preferred securities were carried at fair value of $2,281,000, and $2,275,000 at December 31, 2016 and September 30, 2016, respectively.

2022. 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 ~~$10,437,000, or 1.48%~~0.86% of loans receivable at ~~September~~June 30, ~~2017 compared with $11,938,000, or 1.89%~~2023, 0.88% at December 31, 2022, and 1.18% of loans receivable at ~~December 31, 2016, and $9,536,000, or 1.57% of loans receivable at September~~June 30, ~~2016.~~2022. 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 ~~September~~June 30, ~~2017, $7,507,000,~~2023, $4,147,000, or approximately ~~82%~~86%, of the loans classified as non-accrual are current or past due less than 30 days. ~~Loans~~Commercial loans classified as substandard or doubtful ~~within the Company’s risk rating system~~ totaled ~~$18,064,000, a reduction~~$14,806,000, an increase of ~~$4,140,000~~$1,122,000 from the ~~$22,204,000~~$13,684,000 reported at December 31, ~~2016~~2022 and a ~~$4,101,000 decline~~decrease of $4,030,000, or 21.4%, from the ~~$22,165,000~~$18,836,000 reported at ~~September~~June 30, ~~2016.~~2022. The increase in classified loans since December 31, 2022 is primarily due to one large commercial relationship; the decrease since June 30, 2022 is primarily due to repayments and pay-offs on existing substandard loans.

QNB had ~~$5,000 in~~no loans past due 90 days or more and still accruing interest at ~~September~~June 30, ~~2017, and no loans past due 90 days or more and still accruing at~~2023, December 31, ~~2016. This compares with $150,000 at September~~2022, or June 30, ~~2016.~~2022. Total loans 30 days or more past due, which includes non-accrual loans by actual number of days delinquent, represented ~~0.28%~~0.94% of loans receivable at ~~September~~June 30, ~~2017~~2023 compared with ~~0.78%~~0.23% at December 31, ~~2016~~2022, and ~~0.70%~~0.33% at ~~September~~June 30, ~~2016.~~ 2022.

Troubled debt restructured loans, not classified as non-accrual loans or loans past due 90 days or more and accruing, were ~~$1,354,000~~$4,033,000 at ~~September~~June 30, ~~2017,~~2023, compared with ~~$1,819,000~~$4,301,000 at December 31, ~~2016,~~2022, and ~~$1,149,000~~$4,309,000 at ~~September~~June 30, ~~2016.~~2022. There were no

~~QNB CORP. AND SUBSIDIARY~~

~~MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL~~

~~CONDITION AND RESULTS OF OPERATIONS~~

~~newly identified~~ troubled debt ~~restructures in~~modifications identified during the ~~nine~~six months ended ~~September~~June 30, ~~2017.~~2023. QNB had no other real estate owned or repossessed assets ~~as of September~~at June 30, ~~2017,~~2023, December 31, ~~2016,~~2022 or ~~September~~June 30, ~~2016.~~ 2022.

A loan is considered impaired, based on current information and events, if it is probable that QNB will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and shortfalls on a case-by-case basis, taking into consideration all the circumstances surrounding the loan and the borrower, including length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a ~~loan by loan~~loan-by-loan basis for ~~commercial~~all non-accrual loans, except student loans, by either the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral if the loan is collateral dependent.

The following table shows detailed information and ratios pertaining to the Company’s loan and asset quality:


	September 30,			December 31,			September 30,			June 30,			December 31,			June 30,
	2017			2016			2016			2023			2022			2022
Non-accrual loans	$	9,078		$	10,119		$	8,237		$	4,794		$	4,820		$	7,085
Loans past due 90 days or more and still accruing interest		5			—			150			—			—			—
Troubled debt restructured loans (not already included above)		1,354			1,819			1,149			4,033			4,301			4,309
Total non-performing loans		10,437			11,938			9,536			8,827			9,121			11,394
Non-accrual investment securities		—			2,281			2,275
Total non-performing assets	$	10,437		$	14,219		$	11,811		$	8,827		$	9,121		$	11,394

Total loans (excluding loans held-for-sale):
Average total loans (YTD)	$	669,073		$	604,757		$	601,143		$	1,024,088		$	967,438		$	931,760
Total loans		704,214			633,079			608,231			1,029,744			1,039,385			963,414

Allowance for loan losses		8,125			7,394			7,593
Allowance for credit losses on loans											8,365			10,531			11,297

Allowance for loan losses to:
Non-performing loans		77.85	%		61.94	%		79.63	%		94.77	%		115.46	%		99.15	%
Total loans (excluding held-for-sale)		1.15	%		1.17	%		1.25	%		0.81	%		1.01	%		1.17	%
Average total loans		1.21	%		1.22	%		1.26	%
Average total loans (excluding held-for-sale)											0.82	%		1.09	%		1.21	%

Non-performing loans / total loans (excluding held-for-sale)		1.48	%		1.89	%		1.57	%		0.86	%		0.88	%		1.18	%
Non-performing assets / total assets		0.91	%		1.34	%		1.10	%		0.53	%		0.55	%		0.69	%

An analysis of net loan charge-offs (recoveries) ~~charge-offs~~ for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2023 compared to ~~2016~~2022 is as follows:


	Three months ended September 30,						Nine months ended September 30,						For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2017			2016			2017			2016			2023			2022			2023			2022
Net (recoveries) charge-offs	$	10		$	(43	)	$	(31	)	$	86		$	38		$	(66	)	$	(494	)	$	(113	)

Net annualized (recoveries) charge-offs to:
Total loans		0.01	%		(0.03	%)		(0.01	%)		0.02	%		0.01	%		(0.03	%)		-0.10	%		(0.02	%)
Average total loans excluding held-for-sale		0.01	%		(0.03	%)		(0.01	%)		0.02	%		0.01	%		(0.03	%)		-0.10	%		(0.02	%)
Allowance for loan losses		0.53	%		(2.26	%)		(0.50	%)		1.52	%		1.82	%		(2.34	%)		-11.91	%		(2.02	%)

~~QNB CORP. AND SUBSIDIARY~~

~~MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL~~

~~CONDITION AND RESULTS OF OPERATIONS~~

At ~~September~~June 30, ~~2017~~2023 and December 31, ~~2016,~~2022, the recorded investment in loans for which impairment has been identified totaled ~~$12,737,000~~$4,794,000 and ~~$15,006,000~~$9,567,000 of which ~~$8,860,000~~$3,692,000 and ~~$10,909,000,~~$4,943,000, respectively, required no specific allowance for loan loss. The recorded investment in impaired loans requiring an allowance for loan losses was ~~$3,877,000~~$1,102,000 and ~~$4,097,000~~$4,624,000 at ~~September~~June 30, ~~2017~~2023 and December 31, ~~2016,~~2022, respectively, and the related allowance for loan losses associated with these loans was ~~$1,955,000~~$450,000 and ~~$1,198,000,~~$696,000, respectively. Most of the loans that have been identified as impaired are collateral-dependent. See Note 78 to the Notes to Consolidated Financial Statements for additional detail of impaired loans.

NON-INTEREST INCOME


Non-Interest Income Comparison
	Three months					Change from						Nine months				Change from						For the Three Months Ended June 30,						Change from prior year						For the Six Months Ended June 30,						Change from prior year
	ended September 30,					prior year						ended September 30,				prior year						2023			2022			Amount			Percent			2023			2022			Amount			Percent
	2017		2016			Amount			Percent			2017		2016		Amount			Percent
Net gain on investment securities	$	98	$	316		$	(218	)		-69.0	%	$	962	$	650	$	312			48.0	%
Net (loss) gain on trading activity		-		(39	)		39			-100.0	%		27		47		(20	)		-42.6	%
Net gain on sales of investment securities																						$	519		$	457		$	62			13.6	%	$	54		$	493		$	(439	)		-89.0	%
Unrealized gain (loss) on investment equity securities																							(573	)		(1,446	)		873			(60.4	)		(516	)		(1,454	)		938			(64.5	)
Fees for services to customers		429		425			4			0.9	%		1,242		1,205		37			3.1	%		414			403			11			2.7			816			787			29			3.7
ATM and debit card		435		419			16			3.8	%		1,301		1,229		72			5.9	%		704			705			(1	)		(0.1	)		1,363			1,346			17			1.3
Retail brokerage and advisory		168		129			39			30.2	%		375		425		(50	)		-11.8	%		202			205			(3	)		(1.5	)		436			410			26			6.3
Bank-owned life insurance		70		73			(3	)		-4.1	%		261		217		44			20.3	%		78			75			3			4.0			164			156			8			5.1
Merchant		91		86			5			5.8	%		263		242		21			8.7	%		106			109			(3	)		(2.8	)		199			204			(5	)		(2.5	)
Net gain on sale of loans		65		143			(78	)		-54.5	%		316		263		53			20.2	%		(5	)		—			(5	)	N/M				1			—			1		N/M
Other		114		92			22			23.9	%		328		316		12			3.8	%		135			131			4			3.1			282			308			(26	)		(8.4	)
Total	$	1,470	$	1,644		$	(174	)		-10.6	%	$	5,075	$	4,594	$	481			10.5	%	$	1,580		$	639		$	941			147.3	%	$	2,799		$	2,250		$	549			24.4	%

Quarter to Quarter Comparison

Total non-interest income for the ~~third~~second quarter of ~~2017~~2023 was $1,470,000, a decrease of $174,000, compared to $1,644,000 for the third quarter of 2016. Excluding net gains on investment securities, trading activities and sale of loans for both periods, total non-interest income was $1,307,000 and $1,224,000 for the third quarters of 2017 and 2016, respectively,$1,580,000, an increase of ~~$83,000,~~$941,000, compared to $639,000 for the second quarter of 2022. Excluding realized and unrealized gains (losses) on securities, non-interest income increased $8,000, or ~~6.8%.~~

~~Net gain on sale of investment securities, which are primarily derived from sale of equities, decreased $218,000 as market conditions in the equities market~~0.5%, to $1,634,000 for the quarter ended ~~September~~June 30, ~~2017 versus~~2023 compared with the same period in 2022.

During the second quarter of 2023, unrealized losses on investment equity securities of $573,000 were recorded compared to losses of $1,446,000 in the same period of 2022. The unrealized losses and gains for the three months ended June 30, 2023 and 2022 resulted from the change in the fair value of the equities included in the investment portfolio. The equities portfolio comprises blue-chip large-capitalized stocks, providing a year-to-date taxable equivalent dividend yield of 4.65%. The estimated cumulative contribution (realized and unrealized net gains (losses), plus dividends) of the equity portfolio to earnings per share from January 1, 2011 through June 30, 2023 is $2.14 per diluted share. Details of the equity portfolio’s contribution to net income since January 1, 2016 ~~resulted~~is detailed in ~~fewer opportunities for sales.~~the following table.


Net Income (Expense) on Equity Securities
	For the Year Ended December 31,																						For the Six Months Ended June 30,
		2016			2017			2018			2019			2020			2021			2022			2023			2022

Equity Securities:
Tax-equivalent dividends*		$	233		$	249		$	300		$	274		$	392		$	437		$	399		$	198		$	198
Net gain (loss) on sales			758			1,557			(79	)		1,781			585			1,788			405			311			489
OTTI			(192	)		(80	)	N/A			N/A			N/A			N/A			N/A			N/A			N/A
Unrealized (loss) gain		N/A			N/A				(336	)		770			(47	)		926			(1,026	)		(516	)		(1,454	)
Tax-equivalent income before tax			799			1,726			(115	)		2,825			930			3,151			(222	)		(7	)		(767	)
Tax expense (benefit)*			324			700			(33	)		816			269			910			(64	)		(2	)		(222	)
Net income		$	475		$	1,026		$	(82	)	$	2,009		$	661		$	2,241		$	(158	)	$	(5	)	$	(545	)

Earnings per share - basic		$	0.14		$	0.30		$	(0.02	)	$	0.57		$	0.19		$	0.63		$	(0.04	)	$	(0.00	)	$	(0.15	)
Earnings per share - diluted		$	0.14		$	0.30		$	(0.02	)	$	0.57		$	0.19		$	0.63		$	(0.04	)	$	(0.00	)	$	(0.15	)
Tax-equivalent yield*			3.13	%		3.49	%		3.08	%		3.31	%		3.54	%		3.02	%		3.32	%		3.91	%		3.21	%

*Based on Federal tax rates of 34% for the 2016 period and 21% for the 2017, 2018, 2019, 2020, 2021, 2022 and 2023 periods.

QNB originates residential mortgage loans for sale in the secondary market. Net losses on sale of loans was $5,000 for second quarter of 2023, which includes a negative lower-cost of market adjustment on loans held for sale of $5,000; there were no sales in the second quarter of 2023 or 2022. The net gain on residential mortgage sales is directly related to the volume of mortgages sold and the timing of the sales relative to the interest rate environment. Residential mortgage loans ~~originated~~to be sold are identified at origination.

Fees for ~~resale decreased $78,000, due~~services to ~~decreased mortgage activity~~customers increased $11,000 to $414,000 for the ~~third~~second quarter ~~2017,~~ of 2023, due primarily to an increase in net overdraft income. ATM and debit card income decreased $1,000 to $704,000 for the second quarter of 2023, compared to the same period in 2022.

QNB provides securities and advisory services under the name QNB Financial Services. Retail brokerage and advisory fees decreased for the second quarter of 2023 compared to the same period in 2022. Advisory fees decreased $3,000 for the second quarter of 2023

compared with the same period in ~~2016.~~ 2022 due to a decrease in the value of assets under management, while transactional fees remained flat.

Merchant fees decreased $3,000 for the second quarter of 2023 compared with the same period in 2022. Other non-interest income increased $4,000. There were increases in credit card income of $7,000 and letter of credit fees of $5,000; partially offset by broker-dealer conversion fees recorded in 2022.

Six-Month Comparison

Total non-interest income for the six-month periods ended June 30, 2023 and 2022 was $2,799,000 and $2,250,000, respectively, an increase of $549,000. Excluding realized and unrealized gain and losses on securities, total non-interest income was $3,261,000 and $3,211,000, respectively, an increase of $50,000, or 1.6%.

Net investment securities gains decreased $439,000 to $54,000 for the six months ended June 30, 2023 compared to $493,000 for the comparable six months in 2022. Market conditions in the equities market for the six months ended June 30, 2023 versus the same period in 2022 resulted in greater opportunities for profitable sales in 2022; these were partly offset by losses on debt securities. QNB recorded realized gains of $311,000 compared to gains of $489,000 on equity securities for the six months ended June 30, 2023 and 2022, respectively. Losses on sales of debt securities were $257,000 as QNB sold securities to lower its market risk in a rising rate environment.

Net gains on sales of loans for the six months ended June 30, 2023 were $1,000 and included a lower-of-cost-or-market adjustment on loans held for sale of a negative $5,000; there were no loan sales in the 2022 period. Proceeds from the sale of residential mortgages were ~~$2,192,000 and $3,632,000~~$388,000 for the ~~third quarters of 2017 and 2016, respectively.~~six-month period ended June 30, 2023.

These decreases were offset in part by the following increases in non-interest income; retail brokerage and advisory income, which increased $39,000 to $168,000, attributable to the growth in assets under management; other non-interest income, which increased $22,000, or 23.9%, due primarily to increased letter of credit income; ATM and debit card income, up $16,000, or 3.8%, to $435,000 attributable to increases card-based transactions and expansion of retail and business households; and a net loss on trading securities of $39,000 during 2016. QNB redeemed the trading portfolio during the second quarter of 2017.

~~Nine-Month Comparison~~

Total non-interest income for the nine-month periods ended September 30, 2017 and 2016 was $5,075,000 and $4,594,000, respectively, an increase of $481,000, or 10.5%. Excluding net gains on investment securities, trading activities and loans for both periods total non-interest income was $3,770,000 and $3,634,000, an increase of $136,000.

Net investment securities gains increased $312,000 to $962,000 for the nine months ended September 30, 2017 compared to $650,000 for the comparable nine months in 2016. QNB recorded $80,000 of other-than-temporary impairment charges on an equity security, as a result of a prolonged decline in its fair value. There was $192,000 in other-than-temporary impairment charges recorded during the first nine months of 2016.

~~QNB CORP. AND SUBSIDIARY~~

~~MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL~~

~~CONDITION AND RESULTS OF OPERATIONS~~

~~ATM and debit card income, merchant income and fees~~Fees for services to customers increased $29,000 to $816,000 for the first ~~nine~~six months of ~~2017~~2022, due primarily to an increase in net overdraft income. ATM and debit card increased $17,000 for the first six months of 2023 compared to ~~2016,~~2022, for reasons detailed in the quarterly comparison. ~~The increase in bank-owned life insurance income,~~

Retail brokerage and advisory fees increased $26,000, or 6.3%, to ~~$261,000 includes a life insurance benefit of $51,000, recorded during~~$436,000 for the ~~second quarter 2017.~~

~~Excluding the $99,000 gain on note sale during second quarter 2017, net gains on the sale of loans decreased $46,000 to $217,000, when comparing the nine~~six months ended ~~September~~June 30, ~~2017~~2023 compared to the same period in ~~2016. Proceeds from~~2022; advisory fees decreased $13,000 and transaction-based fees increased $39,000.

Merchant income decreased $5,000. Other non-interest income decreased $26,000. Mortgage servicing income decreased $13,000 when comparing the ~~sale~~two six-month periods primarily due payoff on the serviced portfolio. There was a decrease in title company income of ~~residential mortgages were $6,867,000~~$21,000 and ~~$7,188,000~~$22,000 in broker-dealer conversion fees in 2022; partly offset by a $14,000 increase in credit card income for the ~~nine-month periods ended September 30, 2017 and 2016, respectively.~~first six months of 2023 compared to 2022.

Retail brokerage and advisory income was $375,000 for the nine months ended September 30, 2017 compared with $425,000 for the same period in 2016, a decrease of $50,000, or 11.8%. While assets under management have grown to $121,000,000 at September 30, 2017, recent asset growth has been in products with more trailing income than up-front income.

NON-INTEREST EXPENSE


Non-Interest Expense Comparison
	Three months				Change from						Nine months				Change from
	ended September 30,				prior year						ended September 30,				prior year						For the Three Months Ended June 30,				Change from prior year						For the Six Months Ended June 30,				Change from prior year
	2017		2016		Amount			Percent			2017		2016		Amount			Percent			2023		2022		Amount			Percent			2023		2022		Amount			Percent
Salaries and employee benefits	$	3,514	$	3,072	$	442			14.4	%	$	9,837	$	9,114	$	723			7.9	%	$	4,775	$	4,205	$	570			13.6	%	$	9,338	$	8,471	$	867			10.2	%
Net occupancy		469		438		31			7.1	%		1,345		1,305		40			3.1	%		549		550		(1	)		(0.2	)		1,089		1,128		(39	)		(3.5	)
Furniture and equipment		475		437		38			8.7	%		1,360		1,302		58			4.5	%		918		724		194			26.8			1,755		1,411		344			24.4
Marketing		188		220		(32	)		-14.5	%		724		681		43			6.3	%		259		297		(38	)		(12.8	)		462		491		(29	)		(5.9	)
Third-party services		379		440		(61	)		-13.9	%		1,180		1,246		(66	)		-5.3	%		636		590		46			7.8			1,245		1,257		(12	)		(1.0	)
Telephone, postage and supplies		201		189		12			6.3	%		600		549		51			9.3	%		133		174		(41	)		(23.6	)		300		368		(68	)		(18.5	)
State taxes		161		178		(17	)		-9.6	%		509		499		10			2.0	%		60		188		(128	)		(68.1	)		184		460		(276	)		(60.0	)
FDIC insurance premiums		156		162		(6	)		-3.7	%		431		489		(58	)		-11.9	%		296		180		116			64.4			471		397		74			18.6
Other		648		480		168			35.0	%		1,735		1,543		192			12.4	%		866		838		28			3.3			1,848		1,576		272			17.3
Total	$	6,191	$	5,616	$	575			10.2	%	$	17,721	$	16,728	$	993			5.9	%	$	8,492	$	7,746	$	746			9.6	%	$	16,692	$	15,559	$	1,133			7.3	%

Quarter to Quarter Comparison

Total non-interest expense was ~~$6,191,000~~$8,492,000 for the ~~third~~second quarter of ~~2017,~~2023, an increase of ~~$575,000, or 10.2%,~~$746,000 compared to the ~~third~~second quarter of ~~2016.~~2022.

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 ~~$442,000,~~$570,000, or ~~14.4%~~13.6%, to ~~$3,514,000~~$4,775,000 when comparing the two quarters. Salary expense and related payroll taxes increased ~~$366,000~~$443,000 to ~~$2,979,000, or 14.0%,~~$3,979,000 during the ~~third~~second quarter of ~~2017~~2023 compared to the same period in ~~2016, attributable~~2022 due to ~~a $171,000 increase in~~pay increases and filling open positions. Medical and dental premiums, net of employee ~~salaries and $139,000 increase in bonus accrual. Benefits expense~~contributions, increased ~~$76,000, or 16.6%, due primarily to increased medical insurance claims and retirement plan expense, offset in part by decreased post-retirement life insurance benefit cost,~~$52,000 when comparing the two ~~periods.~~quarters due to timing of medical claims. Retirement and post-retirement costs increased $71,000.

Net occupancy and furniture and equipment ~~expense~~expenses combined increased ~~$69,000,~~$193,000, or ~~7.9%~~15.1%, ~~to $944,000 for~~when comparing the ~~third quarter 2017,~~second quarters of 2023 and 2022. This is due primarily to increased software maintenance expense. Marketing expense decreased ~~$32,000,~~$38,000, or ~~14.5%~~12.8%, to ~~$188,000~~$259,000 for the quarter ended ~~September~~June 30, ~~2017 compared with the same period in 2016,~~2023, due to ~~fewer advertising campaigns in 2017.~~timing of promotions and community support donations.

~~Third party~~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 ~~decreased $61,000 when comparing the two periods,~~expense increased $46,000 primarily due to legal fees. State taxes decreased ~~legal services and other third-party services. Telephone and postage and supplies expenses increased $12,000,~~$128,000, or ~~6.3%~~68.1%, due to lower banks shares tax as there was a decline in capital from year-end 2021 to year-end 2022. FDIC insurance premiums increased ~~data line capacity, and costs related~~$116,000 due to ~~debit chip card conversion and the~~an increase in ~~new deposits and loans. The $17,000 decrease in state taxes is~~the assessment rate.

Other non-interest expense increased $28,000, or 3.3%, due to a ~~tax credit accrual, related to a charitable donation the Bank made during the quarter. State taxes are based on the Bank’s equity and the Bank is subject to a higher~~

~~QNB CORP. AND SUBSIDIARY~~

~~MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL~~

~~CONDITION AND RESULTS OF OPERATIONS~~

~~rate in effect for 2017. FDIC insurance premiums decreased $6,000, or 3.7%, due to the change in the FDIC insurance premium calculation, implemented starting in late 2016. The~~$22,000 increase in ~~other expenses is attributable to higher third-party processing~~business development costs and ~~check card expense,~~an increase in director fees of $13,000; partly offset ~~in part~~ by a ~~reduction~~decrease in ~~foreclosure expense.~~checkcard expense of $12,000.

Six-Month Comparison

~~Nine-Month Comparison~~

Total non-interest expense was ~~$17,721,000~~$16,692,000 for the ~~nine-month~~six-month period ended ~~September~~June 30, ~~2017,~~2023, an increase of ~~$993,000,~~$1,133,000, or ~~5.9%~~7.3%, compared to the six months ended June 30, 2022.

Salaries and benefits expense increased $867,000 to $9,338,000 for the six months ended June 30, 2023 compared to the same period in ~~2016.~~

~~Salaries and benefits expense increased $723,000 to $9,837,000 for the nine months ended September 30, 2017 compared to the same period in 2016.~~2022. Salary and related payroll tax expense increased ~~$595,000, to $8,118,000, or 7.9%,~~$803,000 during the ~~period. Incentive bonus~~period, to $7,946,000 and ~~related payroll tax accrual increased $151,000, when comparing the two periods. Benefits expense decreased $22,000, to $1,333,000, related to decreased medical premium~~retirement and post-retirement ~~life insurance expense.~~costs increased $71,000.

Net occupancy and furniture and equipment expense increased ~~$98,000 to $2,705,000, for the same reasons described in the quarter comparison.~~

~~Marketing expense increased $43,000,~~$305,000, or ~~6.3%~~12.0%, to ~~$724,000 for the nine months ended September 30, 2017 attributable to increased donations and sales promotions.~~

~~Telephone, postage and supplies expenses increased in the first nine months of 2017 compared to 2016,~~$2,844,000, due to the reasons described in the quarter to quarter comparison. ~~Third party~~Third-party services ~~expense~~ decreased ~~$66,000~~$12,000, or 1.0%, to $1,245,000 for the ~~nine~~six months ended ~~September~~June 30, ~~2017 when compared to the same period in 2016.~~ 2022.

~~State taxes rose slightly, due to increased equity for the Bank.~~ 53

FDIC insurance ~~expense~~premiums increased $74,000 and state taxes decreased ~~$58,000 and other non-interest expense increased $192,000, for~~$276,000, due to the reasons described in the quarter to quarter comparison.

Other non-interest expense increased 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 ~~September~~June 30, ~~2017,~~2023, QNB’s net deferred tax asset was ~~$4,741,000.~~$21,418,000. The primary components ~~comprise~~of deferred taxes are deferred tax assets of ~~$2,762,000 relating~~which $20,066,000 relates to investment securities fair value adjustments and $1,757,000 relates to the allowance for ~~loan losses, $1,234,000 related to unrealized~~credit losses on ~~available for sale securities, $486,000 related to non-accrual interest income.~~loans. As of December 31, ~~2016,~~2022, QNB’s net deferred tax asset was ~~$5,473,000.~~$23,077,000 of which $21,565,000 related to investment securities fair value adjustments and $2,212,000 was related to the allowance for loan losses. The ~~sale of the trust preferred bonds with prior OTTI charges during the second quarter 2017 resulted in a $392,000 reduction~~decrease in the balance of net deferred tax ~~asset. The remaining balance difference~~assets when comparing June 30, 2023 to December 31, 2022 is ~~primarily the result of a $702,000 decline~~ due to ~~decreased~~the improvement in unrealized losses on available for sale securities at ~~September~~June 30, ~~2017,~~2023 compared ~~with~~to December 31, ~~2016, which was offset in part by a $248,000 increase related to additional loan provisions and a $131,000 increase related to additional bonus compensation accrual, recorded in 2017, respectively.~~2022, contributing $899,000 of the decrease.

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 ~~$940,000~~$325,000 for the quarter and ~~$2,907,000~~$1,448,000 for the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2023, compared ~~with $821,000~~to $647,000 for the quarter and ~~$2,311,000, respectively, in 2016.~~$1,471,000 for the six months ended June 30, 2022, respectively. The effective tax rate for the ~~third~~second quarter and ~~year-to-date 2017~~six-month period ended June 30, 2023 was ~~26.9%~~14.7% and ~~27.2%~~19.4%, respectively, compared with ~~26.4%~~16.2% and ~~25.8%~~17.2%, respectively, for the same period in ~~2016. This~~2022. The increase in the effective tax rate ~~in 2017~~for the six months ended June 30, 2023 is due to the ~~decreased~~state income tax at the parent company and there was a lower proportion of ~~tax-free~~tax-exempt net interest income to ~~total~~ income ~~primarily municipal securities and municipal loan interest income.~~before taxes for 2023 over 2022.

~~QNB CORP. AND SUBSIDIARY~~

~~MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL~~

~~CONDITION AND RESULTS OF OPERATIONS~~

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 ~~2017.~~2023. It is also anticipated that the rate competition for attracting and retaining deposits may increase ~~through year-end 2017 and into 2018 as short-term interest rates increase,~~in the remainder of 2023, 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 ~~September~~June 30, ~~2017~~2023 were ~~$1,150,363,000~~$1,650,586,000 compared with ~~$1,063,141,000~~$1,668,497,000 at December 31, ~~2016.~~2022. Cash and cash equivalents increased ~~$15,307,000~~$18,925,000 from ~~$10,721,000~~$15,899,000 at December 31, ~~2016~~2022 to ~~$26,028,000~~$34,824,000 at ~~September~~June 30, ~~2017.~~2023.

During the second quarter 2017, QNB Bank redeemed the trading securities portfolio, as lack of market volatility and the interest rate environment resulted in declining performance of the portfolio, since its inception in 2014. The fair value of the trading portfolio was $3,596,000 at December 31, 2016.

In June 2017, QNB Bank sold five non-performing pooled trust preferred securities, with a $2,235,000 carrying value, recording a loss on sale of $15,000. Several years ago, QNB had recorded OTTI for four of these five bonds, and subsequently written them down by applying any cashflow received to reducing the balance of these non-performing assets. Recent improvement in market prices for these securities reduced realized losses, and the reduction of approximately $19,000,000 in risk-based assets related to these bonds drove the decision to sell them. These securities are CDOs in the form of pooled trust preferred securities and are comprised mainly of securities issued by banks or bank holding companies, and to a lesser degree, insurance companies. QNB owned the mezzanine tranches of these securities. These securities are structured so that the senior and mezzanine tranches are protected from defaults by over-collateralization and cash flow default protection provided by subordinated tranches. The trust preferred security the Bank continues to hold with a carrying balance of $212,000 at September 30, 2017, was returned to accrual status during the second quarter 2017 and represents the senior-most obligation of the trust. There was no credit-related other-than-temporary impairment charge during the quarter or nine months ended September 30, 2017 or 2016. Future valuations could require recording additional other-than-temporary impairment charges through earnings. For additional detail on these securities see Note 6 Investment Securities and Note 8 Fair Value Measurements and Disclosures.

~~Aside from the redemptions detailed above, the composition of the investment portfolio is essentially unchanged since December 31, 2016.~~ 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 $18,784,000, due to maturities and prepayments of $21,937,000 and sales of $9,081,000; partly offset by improvement in the fair value mark of $6,527,000.

Loans receivable ~~grew $71,135,000, or 11.2%,~~decreased $9,641,000 with commercial loans ~~increasing $58,960,000, or 11.6%,~~decreasing $8,295,000 to ~~$567,640,000~~$863,250,000 at ~~September~~June 30, ~~2017,~~2023, compared with ~~$508,680,000~~$871,545,000 at year-end ~~2016. Retail loan balances~~2022.

Deposits grew $12,078,000, or 9.7%, to $136,397,000, when comparing September 30, 2017 to December 31, 2016. QNB has experienced growth in part due to market disruption created by bank mergers in its footprint throughout 2016 and 2017.

~~Deposit growth was led by savings balances, which increased $12,371,000, or 5.2%, to $250,618,000~~$31,396,000 from December 31, ~~2016~~2022 to ~~September~~June 30, ~~2017.~~2023. Non-interest-bearing demand deposits decreased $19,453,000, with balances of $212,396,000 at June 30, 2023 compared with $213,849,000 at year-end 2022. Interest-bearing demand balances, excluding municipal deposits, ~~grew $10,889,000,~~decreased $9,692,000, or ~~6.7%~~2.9%, to ~~$173,876,000.~~$324,894,000, with decreases in personal interest-bearing checking products as customers used funds to paydown higher-yielding loans or moving funds to high-yielding products. The $60,975,000 increase in money market accounts was primarily to a new premium money market product offered to both personal and business customers. The $90,367,000 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 new premium money market accounts. Total time deposits increased $99,878,000

from December 31, 2022 to June 30, 2023 as customers took advantage of higher-yields time deposits, moving from lower-yielding products. Municipal deposit balances ~~increased $53,743,000~~decreased $9,945,000, to ~~$146,510,000.~~$108,396,000, during the first six months of 2023. Municipal deposits can be volatile depending on the timing of deposits and withdrawals, and the cash flow needs of the school districts or municipalities. ~~These~~Municipal deposits provide incremental income as they are invested in short-term investment securities but will further reduce the net interest margin as the spread earned is significantly less than the current net interest margin. Money market balances grew $6,544,000, or 8.8%, to $81,306,000 and non-interest bearing demand balances increased $3,686,000 to $122,696,000 at September 30, 2017, due primarily to increased business deposits. Time deposits increased $4,857,000 from December 31, 2016 to September 30, 2017. It is anticipated that total deposits will decrease in the fourth quarter 2017,increase as tax money is received from the local school districts ~~peaks~~ during ~~September, then flows~~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.

~~QNB CORP. AND SUBSIDIARY~~

~~MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL~~

~~CONDITION AND RESULTS OF OPERATIONS~~

Short-term borrowings decreased ~~23.7%~~43.7%, from ~~$52,660,000~~$161,327,000 at December 31, ~~2016~~2022 to ~~$40,176,000~~$90,845,000 at ~~September~~June 30, ~~2017.~~2023. Commercial sweep accounts decreased ~~$5,163,000, as~~$28,464,000; these funds may be volatile based on businesses’ receipt and disbursement of ~~funds.~~funds and is offset by business non-interest-bearing demand accounts. There were no$92,018,000 in overnight borrowings from FHLB at ~~September~~December 31, 2022, and none at June 30, ~~2017, compared with $7,321,000~~2023; however, 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. During the six months ended June 2023, QNB borrowed long-term debt from the FHLB of $20,000,000 to lock in a low yield. In 2020, QNB borrowed long-term debt from the FHLB of $10,000,000 to lock in a rate at ~~year-end 2016.~~a low yield; this debt matured during the first three months of 2023.

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. ~~During three quarters of 2017, QNB borrowed from the FHLB to fund short-term liquidity needs.~~ At ~~September~~June 30, ~~2017,~~2023 the Bank had a maximum borrowing ~~capacity~~availability with the FHLB of approximately ~~$286,951,000,~~$391,167,000, which is net of long-term borrowing outstanding of $20,000,000, a $283,000 letter of credit ~~at September 30, 2017.~~and accrued interest payable. The maximum borrowing depends upon qualifying collateral assets and ~~QNB’s~~the Bank’s asset quality and capital adequacy. In addition, the Bank maintains unsecured Federal funds lines with ~~three~~six correspondent banks totaling ~~$46,000,000.~~$91,000,000. At ~~September~~June 30, ~~2017,~~2023 there were no outstanding borrowings under ~~the FHLB line or~~ these ~~Federal funds~~ lines. Future availability under these lines is subject to the policies of the granting banks and may be withdrawn. Additional funding is available at the FRB Discount Window under its Bank Term Funding Program; QNB had $50,000,000 in outstandings at June 30, 2023.

Liquid sources of funds, including cash, ~~trading~~available-for-sale and ~~available-for-sale~~equity investment securities, and loans held-for-sale ~~increased $16,975,000~~have decreased $5,681,000 since December 31, ~~2016,~~2022, totaling ~~$422,556,000~~$568,799,000 at ~~September~~June 30, ~~2017. Cashflow from payments, calls~~2023. The reduction in the liquid sources of funds is primarily due to maturities and sales of ~~securities have been used since year-end 2016 to fund loans.~~available-for-sale securities. Growth in deposits provided cash flows of $31,396,000, net proceeds from available-for-sale investment activities provided $21,937,000, net proceeds from long-term debt provided $10,000,000 in net proceeds and net payments on loans provided $10,135,000 in net proceeds; combined the proceeds enabled the net paydown on short-term borrowings and long-term debt of $70,482,000. 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, ~~even in a rising rate environment,~~ as municipal bonds are called or mature and cash flow on mortgage-backed and CMO securities continues to be steady. ~~As interest rates rise, the cash flow available from the investment portfolio may decrease.~~

Approximately ~~$241,222,000~~$267,557,000 and ~~$166,628,000~~$237,645,000 of available-for-sale debt securities at ~~September~~June 30, ~~2017~~2023 and December 31, ~~2016,~~2022, respectively, were pledged as collateral for repurchase agreements and deposits of public ~~funds.~~funds and the FRB short-term borrowing. The level of pledged securities ~~depends upon~~corresponds with the ~~level of~~ municipal ~~deposits~~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 ~~September~~June 30, ~~2017~~2023 was ~~$100,512,000,~~$80,945,000, or ~~8.74%~~4.90% of total assets, compared with shareholders' equity of ~~$93,567,000,~~$70,958,000, or ~~8.80%~~4.25% of total assets, at December 31, ~~2016.~~2022. Shareholders’ equity at ~~September~~June 30, ~~2017 and December 31, 2016~~2023 included a negative adjustment of ~~$2,395,000 and $3,757,000, respectively,~~$75,971,000

compared to a negative adjustment of $81,127,000 at December 31, 2022, related to net unrealized holding losses, net of taxes, on investment securities ~~available-for-sale.~~available-for-sale and gains on fair value hedges, net of tax. Without these adjustments, shareholders' equity to total assets would have been ~~8.93%~~9.09% and ~~9.12%~~8.68% at ~~September~~June 30, ~~2017~~2023 and December 31, ~~2016,~~2022, respectively.

Average shareholders' equity and average total assets were ~~$100,532,000~~$155,704,000 and ~~$1,104,841,000~~$1,719,268,000 for the ~~first nine~~six months ~~of 2017,~~ended June 30, 2023, an increase of ~~6.4%~~1.8% and ~~7.1%~~8.6%, respectively, from the averages for the ~~year~~six months ended ~~December 31, 2016.~~June 30, 2022. The ratio of average total equity to average total assets was ~~9.10%~~9.06% for ~~nine~~the six months ended ~~September~~June 30, ~~2017~~2023 compared to ~~9.16%~~8.49% for ~~all 2016.~~ the same period in 2022.

~~QNB CORP. AND SUBSIDIARY~~

~~MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL~~

~~CONDITION AND RESULTS OF OPERATIONS~~

Retained earnings at ~~September~~June 30, ~~2017~~2023 were impacted by ~~nine~~six months of net income totaling ~~$7,800,000 partially~~$6,005,000 and the cumulative effect of a change in accounting policy of $857,0000, offset by dividends declared and paid of ~~$3,186,000~~$2,560,000 for the ~~same~~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 at a discount.~~shares. The Plan also allows participants to make additional cash purchases of ~~stock at a discount.~~stock. Stock purchases under the Plan contributed ~~$739,000 and $753,000~~$451,000 to capital during the ~~nine~~six months ended ~~September~~June 30, ~~2017 and 2016, respectively.~~2023.

The Board of Directors has authorized the repurchase of up to ~~100,000~~200,000 shares of ~~its~~QNB common stock in open market or privately negotiated transactions. The repurchase authorization does not bear a termination date. As of ~~September~~June 30, ~~2017, 57,883~~2023, 102,000 shares ~~were~~have been repurchased ~~under this~~since the initial authorization at an average price of ~~$16.97~~$24.93 and a total cost of ~~$982,000. There have been no additional shares repurchased under the plan since the first quarter of 2009.~~$2,543,000.

QNB ~~and the Bank are~~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 2.2 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 final rules implementing the Basel Committee on Banking Supervision’s capital guidelines for U.S. banks (“Basel III”) became effective for QNB on January 1, 2015, with full compliance with all the of final rule’s requirements phased in over a multi-year schedule, to be fully phased-in by January 1, 2019.

~~Under the final rules,~~required minimum ~~requirements increased for both the quantity and quality of capital. The rules included a new common~~Common equity Tier 1 capital to risk-weighted assets ~~minimum~~ ratio ofis 4.5%, ~~raised~~ the required minimum ratio of Tier 1 capital to risk-weighted assets ~~from 4.0% to~~is 6.0%, the required a minimum ratio of Total Capital to risk-weighted assets ofis 8.0%, and the required a minimum Tier 1 leverage ratio ofis 4.0%. A ~~new~~ capital conservation buffer ~~comprised~~ of ~~common equity Tier 1 capital, is also established above the regulatory minimum capital requirements. This capital conservation buffer was phased in beginning January 1, 2016, at 0.625%~~2.5% of risk-weighted assets ~~and will increase each subsequent year by an additional 0.625% until reaching its final level of 2.5%~~also applies to avoid limitations on ~~January 1, 2019. Strict eligibility criteria for regulatory~~certain capital instruments were also implemented. The final rules also revised the definition and calculation of Tier 1 capital, Total Capital, and risk-weighted assets. QNB continues to monitor the effect of these new rules on the business, operations and capital levels of the Company and the Bank.distributions.

The following table sets forth consolidated information for ~~QNB Corp.~~QNB:


	September 30,			December 31,			June 30,			December 31,
Capital Analysis	2017			2016			2023			2022
Regulatory Capital
Shareholders' equity	$	100,512		$	93,567		$	80,945		$	70,958
Net unrealized securities losses, net of tax		2,395			3,757			75,971			81,127
Net unrealized losses on available-for-sale equity securities, net of tax		(160	)		—
Deferred tax assets on net operating loss								—			—
Disallowed intangible assets		(6	)		(4	)		(8	)		(8	)
Common equity tier I capital		102,741			97,320			156,908			152,077

Tier I capital		102,741			97,320
Tier 1 capital								156,908			152,077
Allowable portion: Allowance for loan losses and reserve for unfunded commitments		8,198			7,453			8,461			10,648
Unrealized gains on equity securities, net of tax		—			47
Total regulatory capital	$	110,939		$	104,820		$	165,369		$	162,725
Risk-weighted assets	$	862,891		$	822,210		$	1,221,112		$	1,233,758
Quarterly average assets for leverage capital purposes	$	1,136,300		$	1,061,976		$	1,719,360		$	1,737,671


	June 30,			December 31,
Capital Ratios	2023			2022
Common equity tier I capital / risk-weighted assets		12.85	%		12.33	%
Tier 1 capital / risk-weighted assets		12.85			12.33
Total regulatory capital / risk-weighted assets		13.54			13.19
Tier 1 capital / average assets (leverage ratio)		9.13			8.75

~~QNB CORP. AND SUBSIDIARY~~

~~MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL~~

~~CONDITION AND RESULTS OF OPERATIONS~~

September 30,

December 31,

Capital Ratios

2017

2016

Common equity tier I capital / risk-weighted assets

11.91
%

11.84
%
Tier I capital / risk-weighted assets

11.91
%

11.84
%
Total regulatory capital / risk-weighted assets

12.86
%

12.75
%
Tier I capital / average assets (leverage ratio)

9.04
%

9.16
%

~~There was little change in~~At June 30, 2023, common equity Tier 1, Tier 1 capital, and total regulatory capital ratios ~~between~~improved since December 31, ~~2016 and September 30, 2017.~~2022. The Company remains well-capitalized by all applicable regulatory requirements as of ~~September~~June 30, ~~2017.~~2023.

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 or than its earning assets ~~(loans~~(investments securities and ~~securities)~~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 ~~September~~June 30, ~~2017~~2023 is ~~liability~~asset sensitive. Management expects that market interest rates may ~~gradually~~ increase inover 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 ~~September~~June 30, ~~2017~~2023 and ~~2016~~2022 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	Estimated Change in Net Interest Income							Estimated Change in Net Interest Income
Changes in Interest rates		September 30,							June 30,
(in basis points)		2017			2016				2023			2022
+300			-7.98	%		-6.73	%			10.68	%		-6.47	%
+200			-5.16	%		-4.09	%			7.19	%		-4.26	%
+100			-2.38	%		-1.78	%			3.67	%		-2.12	%
-100			-5.25	%	*N/A					-3.88	%		0.17	%
-200										-8.95	%		-4.87	%
-300										-15.56	%		-12.83	%

* Certain short-term interest rates are below 1%

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 ~~level~~amount of prepayments ~~from~~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, 2023, QNB had two derivatives designated as fair value hedging instruments, these interest rate swaps had a notional value of $300,000,000.

~~QNB CORP. AND SUBSIDIARY~~

~~MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL~~

~~CONDITION AND RESULTS OF OPERATIONS~~

QNB is not subject to foreign currency exchange or commodity price risk. ~~At September 30, 2017 QNB did not have any hedging transactions in place such as interest rate swaps, caps or floors.~~

~~ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.~~

~~The information required in response to this item is set forth in Item 2, above.~~

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 ~~fiscal quarter~~six month period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

QNB CORP. AND SUBSIDIARY

PART II. OTHER INFORMATION

~~SEPTEMBER~~June 30, ~~2017~~2023

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, ~~2016.~~2023.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

QNB did not repurchase ~~any~~ shares of its common stock during the quarter ended ~~September~~June 30, ~~2017.~~2023. The following provides certain information relating to QNB's stock repurchase plan.


Period	Total Number of Shares Purchased			Average Price Paid per Share			Total Number of Shares Purchased as Part of Publicly Announced Plan				Maximum Number of Shares that may yet be Purchased Under the Plan

April 1, 2023 through April 30, 2023		~~Total Number of~~ ~~Shares Purchased~~—		~~Average Price~~$	~~Paid per Share~~—		~~Total Number of~~ ~~Shares~~ ~~Purchased as~~ ~~Part of Publicly~~ ~~Announced~~ ~~Plan~~			—	~~Maximum~~	~~Number of~~	~~Shares that~~	~~may yet be~~ ~~Purchased~~ ~~Under the Plan~~98,000
May 1, 2023 through May 31, 2023		—			—			—					98,000
~~July~~June 1, ~~2017~~2023 through ~~July 31, 2017~~June 30, 2023			—			—			—				~~42,117~~98,000
~~August 1, 2017 through August 31, 2017~~Total			—		$	—	—		—		—				~~42,117~~
~~September 1, 2017 through September 30, 2017~~		—			—			—				~~42,117~~
~~Total~~		—			—			—				~~42,117~~98,000

(1)

Transactions are reported as of trade dates.

(2)

QNB’s current stock repurchase plan was approved by its Board of Directors and announced on January 24, 2008, increased on February 9, 2009 and subsequently increased on April 27, 2021.

(3)

The total number of shares approved for repurchase under QNB’s current stock repurchase plan is 200,000.

(4)

QNB’s current stock repurchase plan has no expiration date.

(5)

QNB has no stock repurchase plan that it has determined to terminate or under which it does not intend to make further purchases.

~~(1)~~

~~Transactions are reported as of settlement dates.~~

~~(2)~~

~~QNB’s current stock repurchase plan was approved by its Board of Directors and announced on January 24, 2008 and subsequently increased on February 9, 2009.~~

~~(3)~~

~~The total number of shares approved for repurchase under QNB’s current stock repurchase plan is 100,000.~~

~~(4)~~

~~QNB’s current stock repurchase plan has no expiration date.~~

~~(5)~~

~~QNB has no stock repurchase plan that it has determined to terminate or under which it does not intend to make further purchases.~~

Item 3. Default Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

None.

Item 5. Other Information

None.

Item 6. Exhibits


Exhibit 3.1	~~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 ~~March~~September 13, ~~2015).~~2015.)

Exhibit 3.2	~~Exhibit 3.2~~	~~Bylaws~~By-laws of Registrant, as ~~amended.~~amended January 26, 2021. (Incorporated by reference to Exhibit ~~3(ii)~~3.1 of ~~Registrant’s Annual~~the Registrant's Report on Form ~~10-K,~~8-K, SEC File No. 0-17706, filed with the Commission on ~~March 13, 2015)~~January 27, 2021.)

Exhibit 10.10		QNB Corp. 2023 Non-Employee Director Compensation Plan. (Incorporaated by reference to Appendix A to QNB Corp.'s proxy stsatement, filed April 11, 2023)

Exhibit 31.1		Section 302 Certification of Chief Executive Officer

Exhibit 31.2	~~Exhibit 31.2~~	Section 302 Certification of Chief Financial Officer

Exhibit 32.1	~~Exhibit 32.1~~	Section ~~906~~1350 Certification of Chief Executive Officer

Exhibit 32.2	~~Exhibit 32.2~~	Section ~~906~~1350 Certification of Chief Financial Officer

The following Exhibits are being furnished* as part of this report:


No.		Description
~~101.INS~~		XBRL Instance Document.*
101.SCH		~~XBRL~~iXBRL Taxonomy Extension Schema Document.*
101.CAL		~~XBRL~~iXBRL Taxonomy Extension Calculation Linkbase Document.*
101.LAB		~~XBRL~~iXBRL Taxonomy Extension Label Linkbase Document.*
101.PRE		~~XBRL~~iXBRL Taxonomy Extension Presentation Linkbase Document.*
101.DEF		~~XBRL~~iXBRL Taxonomy Extension Definitions Linkbase Document.*
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.

~~SIGNATURES~~* 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.

SIGNATURES

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.


	QNB Corp.

Date: ~~November 8, 2017~~ August 7, 2023	By:	/s/ David W. Freeman
		David W. Freeman
		Chief Executive Officer

Date: ~~November 8, 2017~~ August 7, 2023	By:	/s/ ~~Janice McCracken Erkes~~Jeffrey Lehocky
		~~Janice McCracken Erkes~~Jeffrey Lehocky
		Chief Financial Officer

Date: ~~November 8, 2017~~ August 7, 2023	By:	/s/ ~~Phillip N. Geiger~~Mary E. Liddle
		~~Phillip N. Geiger~~Mary E. Liddle
		Chief Accounting Officer, QNB Bank

	(in thousands - unaudited)
Three months ended September 30,	2017									2016
	Before tax amount			Tax expense (benefit)			Net of tax amount			Before tax amount			Tax expense (benefit)			Net of tax amount
Net income	$	3,494		$	940		$	2,554		$	3,113		$	821		$	2,292
Other comprehensive income:
Net unrealized holding gains (losses) on securities:
Unrealized holding gains (losses) arising during the period		96			33			63			(875	)		(298	)		(577	)
Reclassification adjustment for gains included in net income		(98	)		(33	)		(65	)		(316	)		(107	)		(209	)
Other comprehensive loss		(2	)		-			(2	)		(1,191	)		(405	)		(786	)
Total comprehensive income	$	3,492		$	940		$	2,552		$	1,922		$	416		$	1,506

	Three months ended September 30, 2017										Three months ended September 30, 2016
						Other-than-									Other-than-
	Gross		Gross			temporary					Gross		Gross		temporary
	realized		realized			impairment					realized		realized		impairment
	gains		losses			losses			Net gains (losses)		gains		losses		losses		Net gains (losses)
Equity securities	$	164	$	—		$	(80	)	$	84	$	316	$	—	$	—	$	316
Debt securities		56		(42	)		—			14		—		—		—		—
Total	$	220	$	(42	)	$	(80	)	$	98	$	316	$	—	$	—	$	316

	Nine months ended September 30, 2017										Nine months ended September 30, 2016
						Other-than-										Other-than-
	Gross		Gross			temporary					Gross		Gross			temporary
	realized		realized			impairment					realized		realized			impairment
	gains		losses			losses			Net gains		gains		losses			losses			Net gains
Equity securities	$	1,020	$	—		$	(80	)	$	940	$	734	$	—		$	(192	)	$	542
Debt securities		566		(544	)		—			22		181		(73	)		—			108
Total	$	1,586	$	(544	)	$	(80	)	$	962	$	915	$	(73	)	$	(192	)	$	650

	September 30		December 31,
	2017		2016
Commercial:
Commercial and industrial	$	135,786	$	110,233
Construction		46,006		39,268
Secured by commercial real estate		278,602		255,188
Secured by residential real estate		69,772		68,731
State and political subdivisions		37,474		35,260
Retail:
1-4 family residential mortgages		53,849		47,124
Home equity loans and lines		75,685		71,525
Consumer		6,863		5,670
Total loans		704,037		632,999
Net unearned costs		177		80
Loans receivable	$	704,214	$	633,079

September 30, 2017	90 days or more past due (still accruing)		Non-accrual
Commercial:
Commercial and industrial		—	$	4,360
Construction		—		—
Secured by commercial real estate		—		2,070
Secured by residential real estate		—		1,520
State and political subdivisions		—		—
Retail:
1-4 family residential mortgages		—		892
Home equity loans and lines		—		149
Consumer	$	5		87
Total	$	5	$	9,078

September 30, 2017	Quoted prices in active markets for identical assets (Level 1)		Significant other observable input (Level 2)		Significant unobservable inputs (Level 3)		Balance at end of period
Recurring fair value measurements
Securities available-for-sale
U.S. Government agency securities		—	$	73,037		—	$	73,037
State and municipal securities		—		79,897		—		79,897
U.S. Government agencies and sponsored enterprises (GSEs):
Mortgage-backed securities		—		148,856		—		148,856
Collateralized mortgage obligations (CMOs)		—		78,974		—		78,974
Pooled trust preferred securities		—		—	$	212		212
Corporate debt securities		—		8,074		—		8,074
Equity securities	$	7,363		—		—		7,363
Total securities available-for-sale	$	7,363	$	388,838	$	212	$	396,413
Total recurring fair value measurements	$	7,363	$	388,838	$	212	$	396,413

Nonrecurring fair value measurements
Impaired loans	$	—	$	—	$	1,922	$	1,922
Mortgage servicing rights		—		—		35		35
Total nonrecurring fair value measurements	$	—	$	—	$	1,957	$	1,957

	Three Months Ended
	September 30, 2017								September 30, 2016
	Average			Average					Average			Average
	Balance			Rate			Interest		Balance			Rate			Interest
Assets
Trading securities		—			—			—	$	3,992			5.44	%	$	54
Investment securities (AFS & HTM):
U.S. Government agencies	$	74,469			1.80	%	$	335		60,860			1.88			286
State and municipal		78,236			3.93			768		71,905			4.03			724
Mortgage-backed and CMOs		221,513			2.04			1,127		197,462			1.95			963
Pooled trust preferred securities		242			3.61			2		3,091			0.23			2
Corporate debt securities		8,060			2.04			41		7,224			1.74			31
Equities		7,918			3.61			72		6,568			2.85			47
Total investment securities		390,438			2.40			2,345		347,110			2.37			2,053
Loans:
Commercial real estate		397,481			4.60			4,607		329,786			4.40			3,645
Residential real estate		52,833			3.90			516		45,606			3.94			449
Home equity loans		66,730			3.87			650		63,141			3.62			574
Commercial and industrial		135,791			4.74			1,621		111,058			4.32			1,206
Indirect lease financing		—			—			—		9,202			8.58			197
Consumer loans		6,685			5.65			95		4,626			5.21			61
Tax-exempt loans		35,328			3.97			354		39,226			3.75			370
Total loans, net of unearned income*		694,848			4.48			7,843		602,645			4.29			6,502
Other earning assets		13,411			1.31			44		62,778			0.51			81
Total earning assets		1,098,697			3.69			10,232		1,016,525			3.40			8,690
Cash and due from banks		15,946								16,378
Allowance for loan losses		(8,068	)							(7,630	)
Other assets		29,731								28,728
Total assets	$	1,136,306							$	1,054,001

Liabilities and Shareholders' Equity
Interest-bearing deposits:
Interest-bearing demand	$	173,544			0.21	%		94	$	157,179			0.20	%		80
Municipals		126,689			0.80			257		114,403			0.34			97
Money market		82,263			0.29			59		71,963			0.27			48
Savings		250,306			0.48			300		231,496			0.40			233
Time		129,272			1.19			387		133,296			1.13			378
Time of $100,000 or more		99,669			1.42			357		95,915			1.37			330
Total interest-bearing deposits		861,743			0.67			1,454		804,252			0.58			1,166
Short-term borrowings		43,678			0.56			61		38,506			0.37			36
Total interest-bearing liabilities		905,421			0.66			1,515		842,758			0.57			1,202
Non-interest-bearing deposits		124,269								112,114
Other liabilities		4,231								3,874
Shareholders' equity		102,385								95,255
Total liabilities and shareholders' equity	$	1,136,306							$	1,054,001
Net interest rate spread					3.03	%							2.83	%
Margin/net interest income					3.15	%	$	8,717					2.93	%	$	7,488

	Nine Months Ended
	September 30, 2017								September 30, 2016
	Average			Average					Average			Average
	Balance			Rate			Interest		Balance			Rate			Interest
Assets
Trading securities	$	1,587			5.72	%	$	68	$	3,919			5.47	%	$	161
Investment securities (AFS & HTM):
U.S. Government agencies		74,516			1.77			992		57,160			1.85			794
State and municipal		75,310			3.90			2,205		73,765			4.06			2,247
Mortgage-backed and CMOs		222,165			2.04			3,405		196,830			1.98			2,926
Pooled trust preferred securities		1,989			1.36			20		3,197			0.21			5
Corporate debt securities		8,064			1.98			120		8,160			1.77			108
Equities		7,231			3.40			184		7,192			3.28			177
Total investment securities		389,275			2.37			6,926		346,304			2.41			6,257
Loans:
Commercial real estate		386,958			4.58			13,257		327,225			4.43			10,854
Residential real estate		49,874			3.86			1,446		44,447			3.90			1,301
Home equity loans		66,315			3.83			1,901		62,557			3.72			1,740
Commercial and industrial		124,471			4.68			4,357		112,918			4.25			3,592
Indirect lease financing		—			—			—		9,844			8.88			656
Consumer loans		6,481			5.39			261		4,460			5.25			175
Tax-exempt loans		35,188			3.96			1,042		39,959			3.77			1,127
Total loans, net of unearned income*		669,287			4.45			22,264		601,410			4.32			19,445
Other earning assets		9,518			1.10			79		34,156			0.55			140
Total earning assets		1,069,667			3.67			29,337		985,789			3.52			26,003
Cash and due from banks		13,766								14,013
Allowance for loan losses		(7,761	)							(7,622	)
Other assets		29,169								28,683
Total assets	$	1,104,841							$	1,020,863

Liabilities and Shareholders' Equity
Interest-bearing deposits:
Interest-bearing demand	$	169,061			0.21	%		262	$	151,907			0.21	%		237
Municipals		102,207			0.64			491		98,777			0.35			255
Money market		84,389			0.30			187		70,556			0.27			142
Savings		248,325			0.45			837		228,894			0.40			688
Time		129,450			1.16			1,127		133,930			1.12			1,122
Time of $100,000 or more		96,659			1.39			1,008		94,462			1.37			967
Total interest-bearing deposits		830,091			0.63			3,912		778,526			0.59			3,411
Short-term borrowings		49,472			0.52			193		39,922			0.38			115
Total interest-bearing liabilities		879,563			0.62			4,105		818,448			0.58			3,526
Non-interest-bearing deposits		120,365								104,922
Other liabilities		4,381								3,756
Shareholders' equity		100,532								93,737
Total liabilities and shareholders' equity	$	1,104,841							$	1,020,863
Net interest rate spread					3.05	%							2.94	%
Margin/net interest income					3.15	%	$	25,232					3.05	%	$	22,477

	Three months ended									Nine months ended
	September 30, 2017 compared									September 30, 2017 compared
	to September 30, 2016									to September 30, 2016
	Total			Due to change in:						Total			Due to change in:
	Change			Volume			Rate			Change			Volume			Rate
Interest income:
Trading securities	$	(54	)	$	(54	)	$	—		$	(93	)	$	(96	)	$	3
Investment securities (AFS & HTM):
U.S. Government agencies		49			64			(15	)		198			241			(43	)
State and municipal		44			64			(20	)		(42	)		47			(89	)
Mortgage-backed and CMOs		164			118			46			479			377			102
Pooled trust preferred securities		—			(2	)		2			15			(2	)		17
Corporate debt securities		10			4			6			12			(1	)		13
Equities		25			10			15			7			1			6
Total Investment securities (AFS & HTM)		292			258			34			669			663			6
Loans:
Commercial real estate		962			761			201			2,403			1,970			433
Residential real estate		67			71			(4	)		145			160			(15	)
Home equity loans		76			35			41			161			103			58
Commercial and industrial		415			272			143			765			363			402
Indirect lease financing		(197	)		(197	)		—			(656	)		(656	)		—
Consumer loans		34			27			7			86			79			7
Tax-exempt loans		(16	)		(35	)		19			(85	)		(136	)		51
Total Loans		1,341			934			407			2,819			1,883			936
Other earning assets		(37	)		(64	)		27			(61	)		(101	)		40
Total interest income		1,542			1,074			468			3,334			2,349			985
Interest expense:
Interest-bearing deposits:
Interest-bearing demand		14			9			5			25			27			(2	)
Municipals		160			11			149			236			9			227
Money market		11			8			3			45			28			17
Savings		67			19			48			149			57			92
Time		9			(11	)		20			5			(39	)		44
Time of $100,000 or more		27			14			13			41			22			19
Total interest-bearing deposits		288			50			238			501			104			397
Short-term borrowings		25			4			21			78			27			51
Total interest expense		313			54			259			579			131			448
Net interest income	$	1,229		$	1,020		$	209		$	2,755		$	2,218		$	537