Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report.

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.

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.

	(in thousands, except share data)						(in thousands, except share data)
	(current period unaudited)						(current period unaudited)
	September 30, 2017			December 31, 2016			June 30, 2019			December 31, 2018
Assets
Cash and due from banks	$	14,438		$	8,897		$	13,036		$	12,888
Interest-bearing deposits in banks		11,590			1,824			1,032			570
Total cash and cash equivalents		26,028			10,721			14,068			13,458

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
Loans held-for-sale		115			789
Investments:
Available-for-sale (amortized cost $348,229 and $353,249)								347,728			344,221
Equity securities (cost of $6,985 and $10,079)								6,898			9,421
Restricted investment in stocks								1,872			797
Loans receivable		704,214			633,079			817,593			785,448
Allowance for loan losses		(8,125	)		(7,394	)		(9,164	)		(8,834	)
Net loans		696,089			625,685			808,429			776,614
Bank-owned life insurance		10,811			11,297			11,330			11,192
Premises and equipment, net		8,546			8,683			12,249			9,918
Accrued interest receivable		3,616			3,128			3,962			2,852
Net deferred tax assets		4,741			5,473			1,528			3,724
Other assets		3,426			2,277			3,941			3,255
Total assets	$	1,150,363		$	1,063,141		$	1,212,005		$	1,175,452

Liabilities
Deposits
Demand, non-interest bearing	$	122,696		$	119,010		$	149,591		$	128,615
Interest-bearing demand		320,386			255,754			317,717			304,652
Money market		81,306			74,762			79,044			78,781
Savings		250,618			238,247			249,998			279,762
Time		127,430			131,370			123,131			117,569
Time of $100 or more		103,009			94,212			111,180			106,219
Total deposits		1,005,445			913,355			1,030,661			1,015,598
Short-term borrowings		40,176			52,660			59,048			50,872
Accrued interest payable		336			335			599			449
Other liabilities		3,894			3,224			5,819			4,185
Total liabilities		1,049,851			969,574			1,096,127			1,071,104

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
authorized 10,000,000 shares; 3,666,015 shares and 3,648,649
shares issued; 3,501,446 and 3,484,080 shares outstanding								2,291			2,280
Surplus		18,369			17,418			20,607			20,041
Retained earnings		84,761			80,147			95,852			91,635
Accumulated other comprehensive loss, net of tax		(2,395	)		(3,757	)		(396	)		(7,132	)
Treasury stock, at cost; 164,569 shares		(2,476	)		(2,476	)		(2,476	)		(2,476	)
Total shareholders' equity		100,512			93,567			115,878			104,348
Total liabilities and shareholders' equity	$	1,150,363		$	1,063,141		$	1,212,005		$	1,175,452

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

	(in thousands, except per share data - unaudited)												(in thousands, except per share data - unaudited)
	Three months ended September 30,						Nine months ended September 30,						Three months ended June 30,					Six months ended June 30,
	2017			2016			2017			2016			2019			2018		2019		2018
Interest income
Interest and fees on loans	$	7,722		$	6,376		$	21,909		$	19,060		$	9,637		$	8,512	$	18,860	$	16,939
Interest and dividends on investment securities (AFS & HTM):
Interest and dividends on investment securities (Available-for-sale & Equity):
Taxable		1,558			1,317			4,672			3,964			1,660			1,551		3,274		3,128
Tax-exempt		507			478			1,456			1,483			382			461		808		944
Interest on trading securities		—			36			45			106
Interest on interest-bearing balances and other interest income		43			80			76			138			33			38		59		60
Total interest income		9,830			8,287			28,158			24,751			11,712			10,562		23,001		21,071

Interest expense
Interest on deposits
Interest-bearing demand		351			177			753			492			788			436		1,481		810
Money market		59			48			187			142			227			62		512		120
Savings		300			233			837			688			397			369		805		699
Time		387			378			1,127			1,122			479			379		898		757
Time of $100 or more		357			330			1,008			967
Time of $100,000 or more														514			415		972		814
Interest on short-term borrowings		61			36			193			115			196			201		386		380
Total interest expense		1,515			1,202			4,105			3,526			2,601			1,862		5,054		3,580
Net interest income		8,315			7,085			24,053			21,225			9,111			8,700		17,947		17,491
Provision for loan losses		100			—			700			125			150			187		375		375
Net interest income after provision for loan losses		8,215			7,085			23,353			21,100			8,961			8,513		17,572		17,116

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 of investments available-for-sale and equity securities														584			48		590		133
Unrealized (loss) gain on investment equity securities														(405	)		41		571		(205	)
Fees for services to customers		429			425			1,242			1,205			422			408		815		829
ATM and debit card		435			419			1,301			1,229			519			487		989		917
Retail brokerage and advisory		168			129			375			425			133			105		274		208
Bank-owned life insurance		70			73			261			217			70			69		138		137
Merchant		91			86			263			242			99			82		174		156
Net gain on sale of loans		65			143			316			263			28			37		49		44
Other		114			92			328			316			204			177		363		302
Total non-interest income		1,470			1,644			5,075			4,594			1,654			1,454		3,963		2,521

Non-interest expense
Salaries and employee benefits		3,514			3,072			9,837			9,114			3,790			3,627		7,571		6,972
Net occupancy		469			438			1,345			1,305			506			448		1,011		919
Furniture and equipment		475			437			1,360			1,302			591			563		1,148		1,050
Marketing		188			220			724			681			263			221		500		531
Third party services		379			440			1,180			1,246			446			506		886		916
Telephone, postage and supplies		201			189			600			549			152			173		351		354
State taxes		161			178			509			499			207			164		378		335
FDIC insurance premiums		156			162			431			489			135			146		265		321
Other		648			480			1,735			1,543			703			685		1,407		1,313
Total non-interest expense		6,191			5,616			17,721			16,728			6,793			6,533		13,517		12,711
Income before income taxes		3,494			3,113			10,707			8,966			3,822			3,434		8,018		6,926
Provision for income taxes		940			821			2,907			2,311			679			572		1,496		1,129
Net income	$	2,554		$	2,292		$	7,800		$	6,655		$	3,143		$	2,862	$	6,522	$	5,797
Earnings per share - basic	$	0.74		$	0.68		$	2.28		$	1.97		$	0.90		$	0.83	$	1.87	$	1.68
Earnings per share - diluted	$	0.74		$	0.67		$	2.27		$	1.96		$	0.90		$	0.82	$	1.86	$	1.67
Cash dividends per share	$	0.31		$	0.30		$	0.93		$	0.90		$	0.33		$	0.32	$	0.66	$	0.64

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

(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

	(in thousands - unaudited)
	2019						2018
Three months ended June 30,	Before tax amount		Tax expense (benefit)		Net of tax amount		Before tax amount			Tax expense (benefit)			Net of tax amount
Net income	$	3,822	$	679	$	3,143	$	3,434		$	572		$	2,862
Other comprehensive income (loss) :
Net unrealized holding gains (losses) on available-for-sale securities:
Unrealized holding gains (losses) arising during the period		4,097		861		3,236		(1,215	)		(255	)		(960	)
Reclassification adjustment for gains included in net income		—		—		—		(4	)		(1	)		(3	)
Other comprehensive income (loss)		4,097		861		3,236		(1,219	)		(256	)		(963	)
Total comprehensive income (loss)	$	7,919	$	1,540	$	6,379	$	2,215		$	316		$	1,899


Six months ended June 30,	2019						2018
	Before tax amount		Tax expense (benefit)		Net of tax amount		Before tax amount			Tax expense (benefit)			Net of tax amount
Net income	$	8,018	$	1,496	$	6,522	$	6,926		$	1,129		$	5,797
Other comprehensive income:
Net unrealized holding gains (losses) on available-for-sale securities:
Unrealized holding gains (losses) arising during the period		8,488		1,783		6,705		(6,263	)		(1,315	)		(4,948	)
Reclassification adjustment for losses (gains) included in net income		39		8		31		(3	)		(1	)		(2	)
Other comprehensive income (loss)		8,527		1,791		6,736		(6,266	)		(1,316	)		(4,950	)
Total comprehensive income (loss)	$	16,545	$	3,287	$	13,258	$	660		$	(187	)	$	847

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

										Accumulated																		Accumulated
	Number of									Other									Number of									Other
(unaudited)	Shares		Common				Retained			Comprehensive			Treasury						Shares		Common				Retained			Comprehensive			Treasury
(in thousands, except share and per share data)	Outstanding		Stock		Surplus		Earnings			Income (Loss)			Stock			Total			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
Balance, April 1, 2019																				3,493,935	$	2,286	$	20,319	$	93,863		$	(3,632	)	$	(2,476	)	$	110,360
Net income				—		—		7,800			—			—			7,800					—		—		3,143			—			—			3,143
Other comprehensive income, net of tax				—		—		—			1,362			—			1,362					—		—		—			3,236			—			3,236
Cash dividends declared ($0.93 per share)				—		—		(3,186	)		—			—			(3,186	)
Cash dividends declared ($0.33 per share)																						—		—		(1,154	)		—			—			(1,154	)
Stock issued in connection with dividend reinvestment and stock purchase plan		19,495		12		727		—			—			—			739			5,644		4		194		—			—			—			198
Stock issued for employee stock purchase plan		1,318		1		41		—			—			—			42			1,617		1		53		—			—			—			54
Stock issued for options exercised		7,742		5		111		—			—			—			116			250		—		8		—			—			—			8
Stock-based compensation expense				—		72		—			—			—			72					—		33		—			—			—			33
Balance, September 30, 2017		3,440,256	$	2,253	$	18,369	$	84,761		$	(2,395	)	$	(2,476	)	$	100,512
Balance, June 30, 2019																				3,501,446	$	2,291	$	20,607	$	95,852		$	(396	)	$	(2,476	)	$	115,878


																												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, April 1, 2018																				3,454,016	$	2,262	$	18,778	$	86,564		$	(8,624	)	$	(2,476	)	$	96,504
Net income																						—		—		2,862			—			—			2,862
Other comprehensive loss, net of tax																						—		—		—			(963	)		—			(963	)
Cash dividends declared ($0.32 per share)																						—		—		(1,107	)		—			—			(1,107	)
Stock issued in connection with dividend reinvestment and stock purchase plan																				9,934		6		423		—			—			—			429
Stock issued for employee stock purchase plan																				1,426		1		56		—			—			—			57
Stock issued for options exercised																				92		—		—		—			—			—			—
Stock-based compensation expense																						—		36		—			—			—			36
Balance, June 30, 2018																				3,465,468	$	2,269	$	19,293	$	88,319		$	(9,587	)	$	(2,476	)	$	97,818

Six months ended June 30, 2019 and 2018

										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, January 1, 2019		3,484,080	$	2,280	$	20,041	$	91,635		$	(7,132	)	$	(2,476	)	$	104,348
Net income				—		—		6,522			—			—			6,522
Other comprehensive income, net of tax				—		—		—			6,736			—			6,736
Cash dividends declared ($0.66 per share)				—		—		(2,305	)		—			—			(2,305	)
Stock issued in connection with dividend reinvestment and stock purchase plan		12,290		8		425		—			—			—			433
Stock issued for employee stock purchase plan		1,617		1		53		—			—			—			54
Stock issued for options exercised		3,459		2		28		—			—			—			30
Stock-based compensation expense				—		60		—			—			—			60
Balance, June 30, 2019		3,501,446	$	2,291	$	20,607	$	95,852		$	(396	)	$	(2,476	)	$	115,878


										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, January 1, 2018		3,448,108	$	2,258	$	18,691	$	84,183		$	(4,086	)	$	(2,476	)	$	98,570
Net income				—		—		5,797			—			—			5,797
Other comprehensive loss, net of tax				—		—		—			(4,950	)		—			(4,950	)
Cash dividends declared ($0.64 per share)				—		—		(2,212	)		—			—			(2,212	)
Equity securities fair value reclassification⁽¹⁾								(254	)		254						—
ASU 2018-02 stranded tax reclassification⁽²⁾								805			(805	)					—
Stock issued in connection with dividend reinvestment and stock purchase plan		9,934		6		423		—			—			—			429
Stock issued for employee stock purchase plan		1,426		1		56		—			—			—			57
Stock issued for options exercised		6,000		4		65		—			—			—			69
Stock-based compensation expense				—		58		—			—			—			58
Balance, June 30, 2018		3,465,468	$	2,269	$	19,293	$	88,319		$	(9,587	)	$	(2,476	)	$	97,818
(1) Refer to Note 1, ASU 2016-01
(2) Refer to Note 1, ASU 2018-02

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

	(in thousands, unaudited)						(in thousands, unaudited)
Nine months ended September 30,	2017			2016
Six months ended June 30,							2019			2018
Operating Activities
Net income	$	7,800		$	6,655		$	6,522		$	5,797
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		607			668			808			436
Provision for loan losses		700			125			375			375
Net gain on investment securities available-for-sale		(962	)		(650	)
Net gain on sales of debt and equity securities								(590	)		(133	)
Net unrealized (gain) loss on equity securities								(571	)		205
Net gain on sale of other real estate owned, repossessed assets and premises and equipment		(1	)		(2	)		(58	)		(1	)
Gain on sale of loan held for investment		(99	)		—
Net gain on sale of loans		(217	)		(263	)		(49	)		(44	)
Proceeds from sales of residential mortgages held-for-sale		6,867			7,188			1,864			1,949
Origination of residential mortgages held-for-sale		(5,976	)		(6,394	)		(1,815	)		(2,309	)
Income on bank-owned life insurance		(261	)		(217	)
Increase in cash surrender value of bank-owned life insurance								(138	)		(137	)
Stock-based compensation expense		72			60			60			58
Net decrease (increase) in trading securities		3,596			(123	)
Deferred income taxes		28			(121	)
Net increase in income taxes payable		205			141
Deferred income tax provision								405			110
Net increase (decrease) in income taxes payable								172			(294	)
Net increase in accrued interest receivable		(488	)		(11	)		(1,110	)		(28	)
Amortization of mortgage servicing rights and change in valuation allowance		65			59			25			31
Net amortization of premiums and discounts on investment securities		1,267			1,396			699			740
Net increase (decrease) in accrued interest payable		1			(20	)		150			(13	)
Operating lease payments								(282	)		—
Increase in other assets		(1,219	)		(775	)		(881	)		(388	)
Increase in other liabilities		464			329
Decrease in other liabilities								(591	)		(260	)
Net cash provided by operating activities		12,449			8,045			4,995			6,094
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			—
Proceeds from payments, maturities and calls of investments available-for-sale								21,419			22,380
Proceeds from the sale of investments available-for-sale								20,783			4,159
Proceeds from the sale of equity securities								4,520			1,390
Purchases of investments available-for-sale								(37,919	)		(3,166	)
Purchases of equity securities								(798	)		(6,090	)
Proceeds from redemption of investment in restricted stock								4,600			4,505
Purchases of restricted stock								(5,675	)		(5,672	)
Net increase in loans								(32,190	)		(46,627	)
Net purchases of premises and equipment		(471	)		(188	)		(634	)		(1,590	)
Redemption of bank-owned life insurance		754			—
Proceeds from sales of other real estate owned and repossessed assets		2			2			58			1
Net cash (used in) provided by investing activities		(74,459	)		5,446
Net cash used in investing activities								(25,836	)		(30,710	)
Financing Activities
Net increase in non-interest bearing deposits		3,686			6,486			20,976			6,270
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
Net decrease in interest-bearing deposits								(5,913	)		(14,492	)
Net increase in short-term borrowings								8,176			29,890
Cash dividends paid, net of reinvestment		(2,794	)		(2,662	)		(2,031	)		(1,927	)
Proceeds from issuance of common stock		505			654			243			270
Net cash provided by financing activities		77,317			38,946			21,451			20,011
Increase in cash and cash equivalents		15,307			52,437
Increase (decrease) in cash and cash equivalents								610			(4,605	)
Cash and cash equivalents at beginning of year		10,721			16,991			13,458			16,331
Cash and cash equivalents at end of period	$	26,028		$	69,428		$	14,068		$	11,726
Supplemental Cash Flow Disclosures
Interest paid	$	4,104		$	3,546		$	4,904		$	3,593
Income taxes paid		2,668			2,227			920			1,313
Non-cash transactions:
Unsettled trades to sell securities		—			2,558
Right-of-use assets obtained in exchange for new operating lease liabilities								501			—

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

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~~2018 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~~2019 are not necessarily indicative of the results that may be expected for the year ending December 31, ~~2017.~~2019.

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,~~2019, for items that should potentially be recognized or disclosed in these consolidated financial statements.

~~In May 2014, the~~QNB adopted Financial Accounting Standards Board ~~(“FASB”)~~(FASB) issued Accounting ~~Standards~~Statement 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 beginning January 1, 2018. 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:

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~~(ASU) 2016-02, Leases (Topic 842).effective January 1, 2019. This new standard on accounting for leases ~~introduces~~introduced 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~~generally accepted accounting principles in the United States (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~~applied the ~~impact of this~~ new standard to all new contracts initiated on ~~its consolidated financial statements.~~

~~On March 17, 2016,~~or after 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~~effective date; and, for contracts which have remaining obligations as of the ~~principal-versus agent implementation guidance and illustrations~~effective date. There was no adjustment needed to the opening balance of QNB’s retained earnings account at January 1, 2019. The discount rates used 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~~initial value of ~~account~~the right of use assets were based on the FHLB Amortizing Fixed Loan Rate for the remaining term of each lease at January 1, 2019. These rates ranged from 2.62% to 3.46%. QNB typically enters into lease agreements with an initial term of 5 to 10 years and subsequent additional optional terms in increments of 5 years. The lease agreements also contain termination options. None of the leases contain purchase options and none transfer the ownership of the leased asset. QNB has renewed one operating lease and entered into one new operating lease that both began during the second quarter of 2019. QNB also entered into an operating lease that it anticipates will begin during the fourth quarter of 2019.

The right-of-use assets under the ~~revenue standard’s principal-versus-agent guidance~~operating leases are included within “Premises 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 deferralequipment, net” and the ~~early adoption provisions~~operating lease liabilities are included with “Other liabilities” on the Consolidated Balance Sheets. All operating lease costs are included in ~~ASU 2015-14).~~non-interest expense within “Net occupancy” on the Consolidated Statements of Income. The following table summarized the quantitative attributes of QNB’s operating leases.

~~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.

A maturity analysis of the operating lease liabilities and reconciliation of the undiscounted cash flows to the total operating lease liability is as follows:

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 expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts.

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 ASU 2017-08,~~ ~~Premium Amortization on Purchased Callable Debt Securities~~. This ASU is intended to enhance the accounting for the amortization of premiums for purchased callable debt securities and will require premiums to be amortized to the earliest call date. For public companies, the ASU is effective for annual reporting periods beginning after December 15, 2018, including interim periods within those annual reporting periods. QNB does not anticipate this new standard will have a material impact on its consolidated financial statements as it already uses the earliest call date to amortize premiums on callable debt securities.

QNB sponsors stock-based compensation plans, 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~~$33,000 and ~~$18,000~~$36,000 for the three months ended ~~September~~June 30, ~~2017~~2019 and ~~2016,~~2018, respectively. Stock-based compensation expense was ~~$72,000~~$60,000 and ~~$60,000~~$58,000 for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 and ~~2016,~~2018, respectively. As of ~~September~~June 30, ~~2017,~~2019, there was approximately ~~$108,000~~$154,000 of unrecognized compensation cost related to unvested share-based compensation award grants that is expected to be recognized over the next 2932 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 Plan authorized the issuance of 200,000 shares. The time period during which any option is exercisable under the 2005 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. As of ~~September~~June 30, ~~2017,~~2019, there were 184,200 options granted, ~~65,150~~65,850 options forfeited, ~~80,475~~103,950 options exercised, and ~~38,575~~14,400 options outstanding under this Plan. The 2005 Plan expired on March 15, 2015.

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~~98,200 options granted, 2,600 options forfeited, 250 options exercised and 95,350 options outstanding under ~~this~~the 2015 Plan as of ~~September~~June 30, ~~2017. There were no options forfeited or exercised as of September 30, 2017.~~2019. 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.~~assumptions.

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
Six months ended June 30,							2019			2018
Risk free interest rate		1.48	%		1.14	%		2.52	%		2.15	%
Dividend yield		3.19	%		3.78	%		3.36	%		1.24	%
Volatility		17.89	%		22.62	%		16.44	%		18.12	%
Expected life (years)		4.20			4.20			4.17			4.20

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 months of 2017 and 2016 was $3.88 and $3.79, respectively.~~

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

The fair market value of options granted in the six months of 2019 and 2018 was $3.96 and $5.29, respectively.

Stock option activity during the six months ended June 30, 2019 and 2018 is as follows:

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

	Three months ended September 30,				Nine months ended September 30,				Three months ended June 30,				Six months ended June 30,
	2017		2016		2017		2016		2019		2018		2019		2018
Numerator for basic and diluted earnings per share - net income	$	2,554	$	2,292	$	7,800	$	6,655	$	3,143	$	2,862	$	6,522	$	5,797
Denominator for basic earnings per share - weighted average shares outstanding		3,433,811		3,391,471		3,424,813		3,381,491		3,494,620		3,460,360		3,490,724		3,456,467
Effect of dilutive securities - employee stock options		18,771		12,568		16,393		9,238		7,491		20,952		7,333		20,407
Denominator for diluted earnings per share - adjusted weighted average shares outstanding		3,452,582		3,404,039		3,441,206		3,390,729		3,502,111		3,481,312		3,498,057		3,476,874
Earnings per share - basic	$	0.74	$	0.68	$	2.28	$	1.97	$	0.90	$	0.83	$	1.87	$	1.68
Earnings per share - diluted		0.74		0.67		2.27		1.96		0.90		0.82		1.86		1.67

There were 073,150 and 25,000 stock options that were anti-dilutive for the ~~three and nine-month~~three-month periods ended ~~September~~June 30, ~~2017,~~2019 and 2018, respectively. There were 073,150 and ~~41,350~~25,000 stock options that were anti-dilutive for the ~~three and nine-month~~six-month periods ended ~~September~~June 30, ~~2016.~~2019 and 2018, respectively. These stock options were not included in the above calculation.

~~The~~QNB’s current stock repurchase plan was approved by the Board of Directors on January 21, 2008 and subsequently increased on February 9. 2009 and has authorized the repurchase of up to 100,000 shares of its common stock in open market or privately negotiated transactions. The repurchase authorization does not bear a termination date. There were no shares repurchased during the ~~three or nine~~six months ended ~~September~~June 30, ~~2017~~2019 and ~~2016.~~2018. As of ~~September~~June 30, ~~2017,~~2019, 57,883 shares were repurchased under this authorization at an average price of $16.97 and a total cost of $982,000.

The following shows the components of accumulated other comprehensive ~~loss~~income (loss) at ~~September~~June 30, ~~2017~~2019 and December 31, ~~2016:~~2018:

	September 30,			December 31,			June 30,			December 31,
	2017			2016			2019			2018
Unrealized net holding losses on available-for-sale securities	$	(3,599	)	$	(5,446	)	$	(501	)	$	(9,028	)
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	)		(501	)		(9,028	)
Tax effect		1,233			1,936			105			1,896
Accumulated other comprehensive loss, net of tax	$	(2,395	)	$	(3,757	)	$	(396	)	$	(7,132	)

The following tables present amounts reclassified out of accumulated other comprehensive income (loss) for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 and ~~2016:~~2018:

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.

The amortized cost and estimated fair values of investment securities available-for-sale at ~~September~~June 30, ~~2017~~2019 and December 31, ~~2016~~2018 were as follows:

			Gross		Gross							Gross		Gross
			unrealized		unrealized							unrealized		unrealized
	Fair		holding		holding			Amortized		Fair		holding		holding			Amortized
September 30, 2017	value		gains		losses			cost
June 30, 2019										value		gains		losses			cost
U.S. Treasury										$	3,467	$	—	$	—		$	3,467
U.S. Government agency	$	73,037	$	4	$	(1,437	)	$	74,470		67,773		8		(226	)		67,991
State and municipal		79,897		892		(154	)		79,159		53,587		704		(26	)		52,909
U.S. Government agencies and sponsored enterprises (GSEs):
Mortgage-backed		148,856		320		(1,522	)		150,058		136,652		453		(1,182	)		137,381
Collateralized mortgage obligations (CMOs)		78,974		51		(1,528	)		80,451		78,009		342		(675	)		78,342
Pooled trust preferred		212		—		(29	)		241		108		—		(13	)		121
Corporate debt		8,074		27		(10	)		8,057		8,132		126		(12	)		8,018
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										$	347,728	$	1,633	$	(2,134	)	$	348,229

			Gross		Gross							Gross		Gross
			unrealized		unrealized							unrealized		unrealized
	Fair		holding		holding			Amortized		Fair		holding		holding			Amortized
December 31, 2016	value		gains		losses			cost
December 31, 2018										value		gains		losses			cost
U.S. Government agency	$	76,650	$	36	$	(2,118	)	$	78,732	$	68,409	$	—	$	(2,072	)	$	70,481
State and municipal		72,295		614		(398	)		72,079		66,313		195		(464	)		66,582
U.S. Government agencies and sponsored enterprises (GSEs):
Mortgage-backed		145,301		561		(2,241	)		146,981		125,913		79		(4,251	)		130,085
Collateralized mortgage obligations (CMOs)		77,415		109		(1,846	)		79,152		75,491		87		(2,549	)		77,953
Pooled trust preferred		2,281		263		(891	)		2,909		116		—		(6	)		122
Corporate debt		8,030		16		(57	)		8,071		7,979		33		(80	)		8,026
Equity		8,503		587		(328	)		8,244
Total investment securities available-for-sale	$	390,475	$	2,186	$	(7,879	)	$	396,168
Total investment debt securities available-for-sale										$	344,221	$	394	$	(9,422	)	$	353,249

The amortized cost and estimated fair value of securities available-for-sale by contractual maturity at ~~September~~June 30, ~~2017~~2019 are shown in the following table. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Securities are assigned to categories based on contractual maturity except for 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, 2019					Fair value		Amortized cost
Due in one year or less	$	6,468	$	6,438	$	10,069	$	10,051
Due after one year through five years		216,727		218,589		270,673		271,831
Due after five years through ten years		140,465		142,030		41,475		41,297
Due after ten years		25,390		25,379		25,511		25,050
Equity securities		7,363		7,605
Total investment securities available-for-sale	$	396,413	$	400,041
Total investment debt securities available-for-sale					$	347,728	$	348,229

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

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

Proceeds from sales of investment securities available-for-sale were approximately $9,591,000 and $1,756,000 for the three months ended June 30, 2019 and 2018, respectively. Proceeds from sales of investment securities available-for-sale were approximately $20,783,000 and $4,159,000 for the six months ended June 30, 2019 and 2018, respectively.

At June 30, 2019 and December 31, 2018, investment securities available-for-sale totaling approximately $202,175,000 and $194,573,000, respectively, were pledged as collateral for repurchase agreements and deposits of public funds.

The following table presents information related to the Company’s gains and losses on the sales 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:

The tax expense applicable to the net realized (losses)/gains for the ~~quarters and nine-month~~three-month periods ended ~~September~~June 30, ~~2017~~2019 and ~~2016 were $33,000~~2018 was $0 and ~~$107,000~~$1,000, respectively. The tax applicable to the net realized (losses)/gains for the ~~quarter~~six-month periods ended June 30, 2019 and ~~$327,000~~2018 were a benefit of $8,000 and ~~$221,000 year-to-date,~~an expense of $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 whether we intend to sell or it is more likely than not that the Company 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 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 we will fully collect the carrying value of securities on which we have 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~~first six months ended June 30, 2019 and 2018, respectively.

The following table indicates the length of ~~2017 or 2016. The table presents a summary of the cumulative credit-related other-than-temporary impairment charges recognized as components of earnings for~~time individual debt securities ~~still held by QNB:~~have been in a continuous unrealized loss position at June 30, 2019 and December 31, 2018:

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


			Less than 12 months					12 months or longer					Total							Less than 12 months					12 months or longer					Total
	No. of		Fair		Unrealized			Fair		Unrealized			Fair		Unrealized			No. of		Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
December 31, 2016	securities		value		losses			value		losses			value		losses
December 31, 2018																		securities		value		losses			value		losses			value		losses
U.S. Government agency		55	$	72,626	$	(2,118	)	$	—	$	—		$	72,626	$	(2,118	)		51	$	—	$	—		$	68,409	$	(2,072	)	$	68,409	$	(2,072	)
State and municipal		70		29,280		(398	)		—		—			29,280		(398	)		81		21,657		(204	)		10,558		(260	)		32,215		(464	)
U.S. Government agencies and sponsored enterprises (GSEs):
Mortgage-backed		88		123,087		(2,241	)		—		—			123,087		(2,241	)		111		12,561		(91	)		108,802		(4,160	)		121,363		(4,251	)
Collateralized mortgage obligations (CMOs)		68		56,853		(1,269	)		15,426		(577	)		72,279		(1,846	)		73		433		(1	)		62,467		(2,548	)		62,900		(2,549	)
Pooled trust preferred		5		—		—			1,952		(891	)		1,952		(891	)		1		—		—			116		(6	)		116		(6	)
Corporate debt		4		4,002		(57	)		—		—			4,002		(57	)		4		—		—			3,947		(80	)		3,947		(80	)
Equity		16		2,985		(268	)		888		(60	)		3,873		(328	)
Total		306	$	288,833	$	(6,351	)	$	18,266	$	(1,528	)	$	307,099	$	(7,879	)		321	$	34,651	$	(296	)	$	254,299	$	(9,126	)	$	288,950	$	(9,422	)

Management evaluates debt securities, which are comprised of U.S Treasury securities, 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~~2019 in U.S. Treasury securities, U.S. Government agency securities, state and municipal securities, mortgage-backed securities, CMOs and corporate debt securities are primarily the result of interest rate fluctuations. If held to maturity, these bonds will mature at par, and QNB will not realize a loss. The Company 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, 2019. This security has a total amortized cost of approximately $121,000 and a fair value of $108,000. The pooled trust preferred security is available-for-sale and is carried at fair value.

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, 2019 and December 31, 2018, the Company had $6,898,000 and $9,421,000, 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 in~~during the ~~foreseeable future. QNB evaluated the near-term prospects of the issuers in relation~~three and six months ended June 30, 2019 and 2018:

Tax expense applicable to the ~~severity~~net realized gains for the three months ended June 30, 2019 and ~~duration~~June 30, 2018 was $52,000 and $25,000, respectively. Tax applicable to the net realized gains (losses) for the six months ended June 30, 2019 were an expense of $347,000 and for the ~~impairment. Based on that evaluation and the Company’s ability and intent to hold those securities for~~six months ended June 30, 2018 a ~~reasonable period~~benefit of ~~time sufficient for a forecasted recovery~~$22,000. Proceeds from sales of ~~fair value, the Company does not consider these~~investment equity securities ~~to be other-than-temporarily impaired.~~

~~QNB holds one trust preferred security, PreTSL IV. As of~~were approximately $4,162,000 and $678,000 for the three months ended June 30, ~~2017, PreTSL IV was reclassified~~2019 and 2018, respectively. Proceeds from ~~impaired to a performing asset: all capitalized interest has been repaid, no cashflows are being diverted to any senior tranche,~~sales of investment equity securities were approximately $4,520,000 and $1,390,000 for the ~~bond has excess subordination, which represents cushion to absorb future defaults or deferrals.~~six months ended June 30, 2019 and 2018, respectively.

~~The following table provides additional information related~~7. RESTRICTED INVESTMENT IN STOCKS

Restricted investment in stocks includes Federal Home Loan Bank of Pittsburgh (FHLB) with a carrying cost of $1,860,000, Atlantic Community Bankers Bank (ACBB) stock with a carrying cost of $12,000 and VISA Class B stock with a carrying cost of $0 at June 30, 2019. FHLB and ACBB stock was issued to the ~~pooled trust preferred security (PreTSL)~~Bank as a requirement to facilitate the Bank’s participation in borrowing and other banking services. 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 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 (1.6298 as of ~~September 30, 2017:~~June 28, 2018), 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 Class B. Due to the lack of orderly trades and public information of such trades, Visa Class B does not have a readily determinable fair value.

~~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,These restricted investments are carried at cost 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~~evaluated for OTTI ~~within the scope~~periodically. As 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), determiningJune 30, 2019, 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 securitieswas no OTTI associated 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. these shares.

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 maintains an allowance for loan losses, 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 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.

The allowance for loan losses is based on management’s continuing review and evaluation of the loan portfolio. The level of the allowance is determined by assigning specific reserves to individually identified problem credits and general reserves to all other loans. For such 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~~three year history of charge-offs and are more heavily weighted for recent experience for each of these categories of loans, adjusted for qualitative factors. These qualitative risk factors include:

Each factor is assigned a value to reflect improving, stable or declining conditions based on management’s best judgment using relevant information available at the time of the evaluation.

An unallocated component is maintained to cover uncertainties 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 general losses in the portfolio.

Management emphasizes loan quality and close monitoring of potential problem credits. Credit risk identification and review processes are utilized in order to assess and monitor the degree of risk in the loan portfolio. QNB’s lending and credit administration staff are charged with reviewing the loan portfolio and identifying changes in the economy or in a borrower’s circumstances which may affect the ability to repay debt or the value of pledged collateral. A loan classification and review system exists that identifies those loans with a higher than normal risk of uncollectibility. 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 allowance for loan losses. Such agencies may require QNB to recognize additions to the allowance based on their judgments using information available to them at the time of their examination.

Management believes that it uses the best information available to make determinations about the adequacy of the allowance and that it has established its existing 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, 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.

	September 30		December 31,		June 30,		December 31,
	2017		2016		2019		2018
Commercial:
Commercial and industrial	$	135,786	$	110,233	$	156,307	$	162,452
Construction		46,006		39,268		61,323		50,135
Secured by commercial real estate		278,602		255,188		329,900		308,590
Secured by residential real estate		69,772		68,731		71,153		68,581
State and political subdivisions		37,474		35,260		50,184		43,737
Retail:
1-4 family residential mortgages		53,849		47,124		67,008		67,453
Home equity loans and lines		75,685		71,525		74,781		77,475
Consumer		6,863		5,670		6,717		6,785
Total loans		704,037		632,999		817,373		785,208
Net unearned costs		177		80		220		240
Loans receivable	$	704,214	$	633,079	$	817,593	$	785,448

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 purpose of conducting commercial real estate transactions.

Overdrafts are reclassified as loans and are included in consumer loans above and total loans receivable on the ~~balance sheet.~~Consolidated Balance Sheets. At ~~September~~June 30, ~~2017~~2019 and December 31, ~~2016,~~2018, overdrafts were approximately ~~$184,000~~$132,000 and ~~$171,000,~~$183,000, respectively.

QNB generally lends in its trade area which is comprised of Quakertown and the surrounding communities. 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~~June 30, ~~2017,~~2019, there ~~were no concentrations~~was a concentration of loans ~~exceeding 10%~~to lessors of residential buildings and dwellings of 16.2% of total ~~loans.~~loans and to lessors of nonresidential buildings of 18.7% of total loans,

compared with 15.8% and 18.1% of total loans, respectively, at December 31, 2018. These concentrations were primarily within the commercial real estate categories.

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.

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% 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.

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.

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~~2019 and December 31, ~~2016:~~2018:

September 30, 2017	Pass		Special mention		Substandard		Doubtful		Total
June 30, 2019											Pass		Special mention		Substandard		Doubtful		Total
Commercial:
Commercial and industrial	$	128,830	$	687	$	6,269	$	—	$	135,786	$	152,617	$	—	$	3,690	$	—	$	156,307
Construction		46,003		—		3		—		46,006		61,323		—		—		—		61,323
Secured by commercial real estate		264,271		4,592		9,739		—		278,602		322,077		505		7,318		—		329,900
Secured by residential real estate		67,494		225		2,053		—		69,772		69,589		—		1,564		—		71,153
State and political subdivisions		37,474		—		—		—		37,474		50,184		—		—		—		50,184
Total	$	544,072	$	5,504	$	18,064	$	—	$	567,640	$	655,790	$	505	$	12,572	$	—	$	668,867

December 31, 2016	Pass		Special mention		Substandard		Doubtful		Total
December 31, 2018											Pass		Special mention		Substandard		Doubtful		Total
Commercial:
Commercial and industrial	$	102,396	$	686	$	7,151	$	—	$	110,233	$	155,219	$	82	$	7,151	$	—	$	162,452
Construction		39,259		—		9		—		39,268		50,135	—		—			—		50,135
Secured by commercial real estate		238,290		5,185		11,713		—		255,188		297,713		1,259		9,618		—		308,590
Secured by residential real estate		65,169		231		3,331		—		68,731		66,838		173		1,570		—		68,581
State and political subdivisions		35,260		—		—		—		35,260		43,737	—		—			—		43,737
Total	$	480,374	$	6,102	$	22,204	$	—	$	508,680	$	613,642	$	1,514	$	18,339	$	—	$	633,495

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~~2019 and December 31, ~~2016:~~2018:

September 30, 2017	Performing			Non-performing		Total
June 30, 2019								Performing		Non-performing		Total
Retail:			��
1-4 family residential mortgages	$	52,957		$	892	$	53,849	$	66,441	$	567	$	67,008
Home equity loans and lines		75,536			149		75,685		74,555		226		74,781
Consumer		6,771			92		6,863		6,613		104		6,717
Total	$	135,264		$	1,133	$	136,397	$	147,609	$	897	$	148,506

December 31, 2016	Performing		Non-performing		Total
December 31, 2018							Performing			Non-performing		Total
Retail:
1-4 family residential mortgages	$	46,858	$	266	$	47,124	$	66,513		$	940	$	67,453
Home equity loans and lines		71,436		89		71,525		77,309			166		77,475
Consumer		5,577		93		5,670		6,659	��		126		6,785
Total	$	123,871	$	448	$	124,319	$	150,481		$	1,232	$	151,713

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~~2019 and December 31, ~~2016:~~2018:

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, 2019													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	$	87	$	205	$	2,126	$	2,418	$	153,889	$	156,307
Construction		—		—		—		—		46,006		46,006		—		—		—		—		61,323		61,323
Secured by commercial real estate		—	$	44	$	716		760		277,842		278,602		366		309		1,811		2,486		327,414		329,900
Secured by residential real estate		55		2		153		210		69,562		69,772		—		168		399		567		70,586		71,153
State and political subdivisions		—		—		—		—		37,474		37,474		—		—		—		—		50,184		50,184
Retail:
1-4 family residential mortgages		—		—		506		506		53,343		53,849		—		393		455		848		66,160		67,008
Home equity loans and lines		134		—		122		256		75,429		75,685		157		70		137		364		74,417		74,781
Consumer		31		15		5		51		6,812		6,863		23		29		—		52		6,665		6,717
Total	$	394	$	61	$	1,502	$	1,957	$	702,080	$	704,037	$	633	$	1,174	$	4,928	$	6,735	$	810,638	$	817,373

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, 2018													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	$	94	$	141	$	1,372	$	1,607	$	160,845	$	162,452
Construction		214		—		—		214		39,054		39,268		—		—		—		—		50,135		50,135
Secured by commercial real estate		64	$	395	$	1,596		2,055		253,133		255,188		305		1,029		638		1,972		306,618		308,590
Secured by residential real estate		—		—		285		285		68,446		68,731		24		352		291		667		67,914		68,581
State and political subdivisions		—		—		—		—		35,260		35,260		—		—		—		—		43,737		43,737
Retail:
1-4 family residential mortgages		1,459		323		—		1,782		45,342		47,124		544		245		476		1,265		66,188		67,453
Home equity loans and lines		107		15		—		122		71,403		71,525		82		205		61		348		77,127		77,475
Consumer		14		2		—		16		5,654		5,670		23		35		24		82		6,703		6,785
Total	$	2,321	$	735	$	1,881	$	4,937	$	628,062	$	632,999	$	1,072	$	2,007	$	2,862	$	5,941	$	779,267	$	785,208

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~~June 30, ~~2017~~2019 and December 31, ~~2016:~~2018:

September 30, 2017	90 days or more past due (still accruing)		Non-accrual
June 30, 2019					90 days or more past due (still accruing)		Non-accrual
Commercial:
Commercial and industrial		—	$	4,360	$	—	$	3,598
Construction		—		—		—		—
Secured by commercial real estate		—		2,070		—		2,057
Secured by residential real estate		—		1,520		—		1,116
State and political subdivisions		—		—		—		—
Retail:
1-4 family residential mortgages		—		892		—		567
Home equity loans and lines		—		149		—		226
Consumer	$	5		87		—		104
Total	$	5	$	9,078	$	—	$	7,668

Activity in the allowance for loan losses for the three and six months ended June 30, 2019 and 2018 are as follows:

~~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
Three months ended June 30, 2018													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	$	2,829	$	4		$	—		$	7	$	2,840
Construction		516		13			—			—		529		557		16			—			—		573
Secured by commercial real estate		2,640		(267	)		—			2		2,375		2,431		278			—			1		2,710
Secured by residential real estate		1,200		(93	)		—			-		1,107		835		(72	)		—			18		781
State and political subdivisions		123		8			—			—		131		121		69			—			—		190
Retail:
1-4 family residential mortgages		439		(61	)		—			—		378		512		(3	)		—			—		509
Home equity loans and lines		319		61			—			3		383		381		(27	)		(44	)		1		311
Consumer		78		30		$	(29	)		6		85		61		21			(23	)		8		67
Unallocated		543		(150	)	N/A			N/A			393		310		(99	)	N/A			N/A			211
Total	$	8,035	$	100		$	(29	)	$	19	$	8,125	$	8,037	$	187		$	(67	)	$	35	$	8,192

Three months ended September 30, 2016	Balance, beginning of period		Provision for (credit to) loan losses			Charge-offs			Recoveries		Balance, end of period
Six months ended June 30, 2019													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	$	3,092	$	192		$	—		$	18	$	3,302
Construction		429		(79	)		—			—		350		551		124			—			—		675
Secured by commercial real estate		2,231		233			—			2		2,466		2,824		89			—			—		2,913
Secured by residential real estate		1,550		(57	)		—			50		1,543		754		(59	)		(36	)		63		722
State and political subdivisions		204		(64	)		—			—		140		153		48			—			—		201
Indirect lease financing		226		(6	)		—			—		220
Retail:																								—
1-4 family residential mortgages		298		(20	)		—			—		278		497		(64	)		—			—		433
Home equity loans and lines		343		(7	)		—			4		340		338		(38	)		(17	)		11		294
Consumer		73		33		$	(29	)		7		84		164		108			(102	)		18		188
Unallocated		846		22		N/A			N/A			868		461		(25	)	N/A			N/A			436
Total	$	7,550	$	—		$	(29	)	$	72	$	7,593	$	8,834	$	375		$	(155	)	$	110	$	9,164

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

Nine months ended September 30, 2016	Balance, beginning of period		Provision for (credit to) loan losses			Charge-offs			Recoveries		Balance, end of period
Six months ended June 30, 2018													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	$	2,711	$	107		$	—		$	22	$	2,840
Construction		286		64			—			—		350		563		10			—			—		573
Secured by commercial real estate		2,411		49			—			6		2,466		2,410		298			—			2		2,710
Secured by residential real estate		1,812		(359	)		(20	)		110		1,543		816		(55	)		—			20		781
State and political subdivisions		222		(82	)		—			—		140		114		76			—			—		190
Indirect lease financing		164		99			(52	)		9		220
Retail:
1-4 family residential mortgages		350		(72	)		—			—		278		444		65			—			—		509
Home equity loans and lines		428		(102	)		—			14		340		357		(7	)		(44	)		5		311
Consumer		76		49			(62	)		21		84		57		39			(49	)		20		67
Unallocated		284		584		N/A			N/A			868		369		(158	)	N/A			N/A			211
Total	$	7,554	$	125		$	(274	)	$	188	$	7,593	$	7,841	$	375		$	(93	)	$	69	$	8,192

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 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 is measured on a loan by loan basis for commercial loans and 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.~~restructuring or on non-accrual.

An allowance for loan losses is established for an impaired loan if its carrying value exceeds its estimated fair value. The estimated fair values of the majority of the Company’s impaired 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

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.

From time to time, QNB may extend, restructure, or otherwise modify 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 experiencing financial difficulties. A loan is considered to be a troubled debt restructuring (“TDR”) loan when the Company grants a concession to the borrower because of the borrower’s financial condition that it would not otherwise consider. 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 classified as TDRs are considered non-performing and are also designated as impaired.

The concessions made for TDRs 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.

Performing TDRs (not reported as non-accrual or past due 90 days or more and still accruing) totaled ~~$1,354,000~~$2,009,000 and ~~$1,819,000~~$2,160,000 as of ~~September~~June 30, ~~2017~~2019 and December 31, ~~2016,~~2018, respectively. Non-performing TDRs totaled ~~$3,120,000~~$1,210,000 and ~~$3,555,000~~$1,317,000 as of ~~September~~June 30, ~~2017~~2019 and December 31, ~~2016,~~2018, respectively. All TDRs are included in impaired loans.

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				June 30, 2019				December 31, 2018
	Unpaid principal balance		Related allowance		Unpaid principal balance		Related allowance		Unpaid principal balance		Related allowance		Unpaid principal balance		Related allowance

TDRs with no specific allowance recorded	$	3,235		—	$	3,992		—	$	2,825	$	—	$	2,513	$	—
TDRs with an allowance recorded		1,239	$	302		1,382	$	761		394		387		964		411
Total	$	4,474	$	302	$	5,374	$	761	$	3,219	$	387	$	3,477	$	411

There were no newly identified ~~TDRs~~TDR during the ~~nine~~six months ended ~~September~~June 30, ~~2017.~~2019. As of ~~September~~June 30, ~~2017,~~2019 and December 31, ~~2016,~~2018, QNB had no commitments ~~of $5,000 and $30,000, respectively,~~ to lend additional funds to customers with loans whose terms have been modified in troubled debt restructurings. There were $5,000 in net charge-offs ~~of $3,000 and $0~~ during the ~~nine~~three and six months ended ~~September~~June 30, ~~2017~~2019, and ~~2016, respectively,~~no charge-offs during the three and six months ended June 30, 2018, resulting from loans previously modified as TDRs.

The following tables present loans, by loan class, modified as TDRs during the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 and ~~2016.~~2018. 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.

There ~~was one loan with an outstanding balance of $18,000 that was~~were no loans modified as ~~a TDR~~TDRs within 12 months prior to ~~September~~June 30, ~~2017~~2019 and 2018 for which there was a payment default (60 days or more past due) during the ~~nine~~six months ended ~~September~~June 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.~~2019 and 2018.

The Company has ~~two consumer~~five mortgage loans secured by residential real estate for which foreclosure proceedings are in process at ~~September~~June 30, ~~2017.~~2019. The total recorded investment is ~~$392,000.~~$662,000.

The following tables present the balance in the allowance for loan losses at ~~September~~June 30, ~~2017~~2019 and December 31, ~~2016~~2018 disaggregated ~~based~~ 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 ~~based~~ on the basis of the Company’s impairment methodology:

	Allowance for Loan Losses						Loans Receivable						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
June 30, 2019													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	$	3,302	$	1,952	$	1,350	$	156,307	$	3,598	$	152,709
Construction		529		—		529		46,006		3		46,003		675		—		675		61,323		—		61,323
Secured by commercial real estate		2,375		28		2,347		278,602		4,837		273,765		2,913		139		2,774		329,900		3,476		326,424
Secured by residential real estate		1,107		117		990		69,772		1,819		67,953		722		72		650		71,153		1,733		69,420
State and political subdivisions		131		—		131		37,474		—		37,474		201		—		201		50,184		—		50,184
Retail:
1-4 family residential mortgages		378		10		368		53,849		1,230		52,619		433		3		430		67,008		892		66,116
Home equity loans and lines		383		41		342		75,685		170		75,515		294		—		294		74,781		165		74,616
Consumer		85		—		85		6,863		92		6,771		188		—		188		6,717		73		6,644
Unallocated		393	N/A		N/A		N/A		N/A		N/A			436	N/A		N/A		N/A		N/A		N/A
Total	$	8,125	$	1,955	$	5,777	$	704,037	$	12,737	$	691,300	$	9,164	$	2,166	$	6,562	$	817,373	$	9,937	$	807,436

	Allowance for Loan Losses						Loans Receivable						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
December 31, 2018													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	$	3,092	$	1,461	$	1,631	$	162,452	$	7,128	$	155,324
Construction		449		—		449		39,268		224		39,044		551		—		551		50,135		—		50,135
Secured by commercial real estate		2,646		—		2,646		255,188		6,383		248,805		2,824		101		2,723		308,590		6,083		302,507
Secured by residential real estate		1,760		494		1,266		68,731		2,313		66,418		754		97		657		68,581		1,740		66,841
State and political subdivisions		123		—		123		35,260		—		35,260		153		—		153		43,737		—		43,737
Retail:
1-4 family residential mortgages		366		8		358		47,124		748		46,376		497		—		497		67,453		1,268		66,185
Home equity loans and lines		353		—		353		71,525		111		71,414		338		5		333		77,475		186		77,289
Consumer		76		—		76		5,670		93		5,577		164		—		164		6,785		77		6,708
Unallocated		162	N/A		N/A		N/A		N/A		N/A			461	N/A		N/A		N/A		N/A		N/A
Total	$	7,394	$	1,198	$	6,034	$	632,999	$	15,006	$	617,993	$	8,834	$	1,664	$	6,709	$	785,208	$	16,482	$	768,726

The following table ~~summarizes~~summarize additional information, in ~~regard~~regards to impaired loans by loan portfolio class, as of ~~September~~June 30, ~~2017~~2019 and December 31, ~~2016:~~2018:

	September 30, 2017						December 31, 2016						June 30, 2019						December 31, 2018
	Recorded investment (after charge-offs)		Unpaid principal balance		Related allowance		Recorded investment (after charge-offs)		Unpaid principal balance		Related allowance		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	$	—	$	681	$	822			$	4,243	$	4,525
Construction		3		3		—		224		234		—		—		—				—		—
Secured by commercial real estate		4,748		5,304		—		6,383		6,367		—		2,194		2,827				5,012		5,577
Secured by residential real estate		633		982		—		1,046		1,438		—		1,462		1,639				1,023		1,140
State and political subdivisions		—		—		—		—		—		—
Retail:
1-4 family residential mortgages		1,066		1,113		—		570		589		—		735		763				1,268		1,357
Home equity loans and lines		129		173		—		111		174		—		165		271				140		190
Consumer		92		96		—		93		95		—		73		82				77		84
Total	$	8,860	$	10,231	$	—	$	10,909	$	11,759	$	—	$	5,310	$	6,404			$	11,763	$	12,873

With an allowance recorded:
Commercial:
Commercial and industrial	$	2,397	$	2,637	$	1,759	$	2,652	$	2,812	$	696	$	2,917	$	4,247	$	1,952	$	2,885	$	4,128	$	1,461
Construction		—		—		—		—		—		—		—		—		—		—		—		—
Secured by commercial real estate		89		92		28		—		—		—		1,282		1,311		139		1,071		1,095		101
Secured by residential real estate		1,186		1,338		117		1,267		1,435		494		271		311		72		717		773		97
State and political subdivisions		—		—		—		—		—		—
Retail:
1-4 family residential mortgages		164		164		10		178		193		8		157		162		3		—		—		—
Home equity loans and lines		41		41		41		—		—		—		—		—		—		46		46		5
Consumer		—		—		—		—		—		—		—		—		—		—		—		—
Total	$	3,877	$	4,272	$	1,955	$	4,097	$	4,440	$	1,198	$	4,627	$	6,031	$	2,166	$	4,719	$	6,042	$	1,664

Total:
Commercial:
Commercial and industrial	$	4,586	$	5,197	$	1,759	$	5,134	$	5,674	$	696	$	3,598	$	5,069	$	1,952	$	7,128	$	8,653	$	1,461
Construction		3		3		—		224		234		—		—		—		—		—		—		—
Secured by commercial real estate		4,837		5,396		28		6,383		6,367		—		3,476		4,138		139		6,083		6,672		101
Secured by residential real estate		1,819		2,320		117		2,313		2,873		494		1,733		1,950		72		1,740		1,913		97
State and political subdivisions		—		—		—		—		—		—
Retail:
1-4 family residential mortgages		1,230		1,277		10		748		782		8		892		925		3		1,268		1,357		—
Home equity loans and lines		170		214		41		111		174		—		165		271		—		186		236		5
Consumer		92		96		—		93		95		—		73		82		—		77		84		—
Total	$	12,737	$	14,503	$	1,955	$	15,006	$	16,199	$	1,198	$	9,937	$	12,435	$	2,166	$	16,482	$	18,915	$	1,664

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

Nine Months Ended September 30,	2017				2016
Six Months Ended June 30,									2019				2018
	Average recorded investment		Interest income recognized		Average recorded investment		Interest income recognized		Average recorded investment		Interest income recognized		Average recorded investment		Interest income recognized
Commercial:
Commercial and industrial	$	4,809	$	11	$	4,288	$	50	$	3,953	$	4	$	6,208	$	121
Construction		61		2		412		15		—		—		—		—
Secured by commercial real estate		5,638		117		6,327		100		4,855		68		3,752		49
Secured by residential real estate		2,171		19		1,945		11		1,746		20		1,696		9
State and political subdivisions		—		—		—		—
Indirect lease financing		—		—		114		—
Retail:
1-4 family residential mortgages		1,020		10		572		8		1,101		6		1,222		6
Home equity loans and lines		115		1		134		1		156		—		186		1
Consumer		91		—		10		—		75		—		83		—
Total	$	13,905	$	160	$	13,802	$	185	$	11,886	$	98	$	13,147	$	186

~~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:

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.

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:~~2019:

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
June 30, 2019									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
Equity securities									$	6,898	$	—	$	—	$	6,898
Available-for-sale securities:
U.S. Treasury securities										—		3,467		—		3,467
U.S. Government agency securities		—	$	73,037		—	$	73,037		—		67,773		—		67,773
State and municipal securities		—		79,897		—		79,897		—		53,587		—		53,587
U.S. Government agencies and sponsored enterprises (GSEs):
Mortgage-backed securities		—		148,856		—		148,856		—		136,652		—		136,652
Collateralized mortgage obligations (CMOs)		—		78,974		—		78,974		—		78,009		—		78,009
Pooled trust preferred securities		—		—	$	212		212		—		—		108		108
Corporate debt securities		—		8,074		—		8,074		—		8,132		—		8,132
Equity securities	$	7,363		—		—		7,363
Total securities available-for-sale	$	7,363	$	388,838	$	212	$	396,413
Total debt securities available-for-sale										—		347,620		108		347,728
Total recurring fair value measurements	$	7,363	$	388,838	$	212	$	396,413	$	6,898	$	347,620	$	108	$	354,626

Nonrecurring fair value measurements
Impaired loans	$	—	$	—	$	1,922	$	1,922	$	—	$	—	$	2,461	$	2,461
Mortgage servicing rights		—		—		35		35		—		—		8		8
Total nonrecurring fair value measurements	$	—	$	—	$	1,957	$	1,957	$	—	$	—	$	2,469	$	2,469

There were no transfers in and out of Level 1 and Level 2 fair value measurements during the three or ~~nine~~six months ended ~~September~~June 30, ~~2017.~~2019. 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 periods~~or six-month period ended ~~September~~June 30, ~~2017.~~2019.

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:~~2018:

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
December 31, 2018									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
Equity securities									$	9,421	$	—	$	—	$	9,421
Debt securities available-for-sale
U.S. Government agency securities		—	$	76,650		—	$	76,650		—		68,409		—		68,409
State and municipal securities		—		72,295		—		72,295		—		66,313		—		66,313
U.S. Government agencies and sponsored enterprises (GSEs):
Mortgage-backed securities		—		145,301		—		145,301		—		125,913		—		125,913
Collateralized mortgage obligations (CMOs)		—		77,415		—		77,415		—		75,491		—		75,491
Pooled trust preferred securities		—		—	$	2,281		2,281		—		—		116		116
Corporate debt securities		—		8,030		—		8,030		—		7,979		—		7,979
Equity securities	$	8,503		—		—		8,503
Total securities available-for-sale	$	8,503	$	379,691	$	2,281	$	390,475
Total debt securities available-for-sale										—		344,105		116		344,221
Total recurring fair value measurements	$	8,503	$	383,287	$	2,281	$	394,071	$	9,421	$	344,105	$	116	$	353,642

Nonrecurring fair value measurements
Impaired loans	$	—	$	—	$	2,899	$	2,899	$	—	$	—	$	3,055	$	3,055
Mortgage servicing rights		—		—		58		58		—		—		5		5
Total nonrecurring fair value measurements	$	—	$	—	$	2,957	$	2,957	$	—	$	—	$	3,060	$	3,060

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

September 30, 2017

Fair value

Valuation

techniques

Unobservable

input

Value or range

of values

June 30, 2019

Fair value

Valuation

techniques

Unobservable

input

Value or range

of values

Impaired loans

639

Appraisal of collateral

(1)

Appraisal adjustments

(2)

-15% to -80%

1,927

Appraisal of collateral

(1)

Appraisal adjustments

(2)

-10.0% to -25.0%

Liquidation expenses

(3)

-10%

Liquidation expenses

(3)

-10.0

Impaired loans

1,283

Financial statement values for UCC collateral

Financial statement value discounts

(5)

-25% to -60%

534

Financial statement values for UCC collateral

Financial statement value discounts

(5)

-30.0% to -100.0%

Mortgage servicing rights

Discounted cash flow

Remaining term

2 to 27 yrs

Discounted cash flow

Remaining term

1 - 26 years

Discount rate

14% to 16%

Discount rate

12.0% to 12.5%

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~~2019 and ~~2016:~~2018:

	Fair value measurements using significant unobservable inputs (Level 3)						Fair value measurements using significant unobservable inputs (Level 3)
	2017			2016			2019			2018
Balance, January 1,	$	2,281		$	2,653		$	116		$	215
Payments received		(55	)		(312	)		(1	)		(119	)
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								(7	)		22
Transfers in and/or out of Level 3		—			—			—			—
Balance, September 30,	$	212		$	2,275
Balance, June 30,							$	108		$	118

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, 2019 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 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 four 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 anand estimated market discount rate based on the 30-year swap rate. The 30-year ~~swap rate~~ is used as the reference rate since it is indicative of market expectation for ~~short term~~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%~~5.81% 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~~2019 and December 31, ~~2016:~~2018:

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 (carried at fair value), available for sale~~ (carried at fair value): The fair value of securities are 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.

Restricted investment in ~~bank~~ stocks (carried at cost): The fair value of stock in Atlantic Community Bankers Bank, ~~and~~ the Federal Home Loan Bank and VISA Class B is the carrying amount, based on redemption provisions, and considers the limited marketability of and restrictions on such securities.

~~Loans Held-for-Sale (carried at lower of cost or fair value)~~: The fair value of loans held for sale is determined, when possible, using quoted secondary market prices. If no such quoted prices exist, the fair value of a loan is determined using quoted prices for a similar loan or loans, adjusted for the specific attributes of that loan.

Loans Receivable (carried at cost): The fair values of loans are estimated using discounted cash flow analyses, using market rates at the balance sheet date that reflect the liquidity, credit and interest rate-risk inherent in the loans. Projected future cash flows are calculated based upon contractual maturity or call dates, projected repayments and prepayments of principal. Generally, for variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values.

Impaired Loans (generally carried at fair value): Impaired loans are loans, in 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.

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.

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

					Fair value measurements										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)
June 30, 2019											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		—		—	$	14,068	$	14,068	$	14,068	$	—	$	—
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:
Equities												6,898		6,898		6,898		—		—
Available-for-sale												347,728		347,728		—		347,620		108
Restricted investment in stocks												1,872		1,872		—		1,872		—
Net loans		696,089		701,643		—		—		701,643		808,429		824,020		—		—		824,020
Mortgage servicing rights		483		567		—		—		567		440		556		—		—		556
Accrued interest receivable		3,616		3,616		—		3,616		—		3,962		3,962		—		3,962		—

Financial liabilities
Deposits with no stated maturities	$	775,006	$	775,006	$	775,006		—	$	—	$	796,350	$	796,350	$	796,350	$	—	$	—
Deposits with stated maturities		230,439		229,821		—	$	229,821		—		234,311		234,083		—		234,083		—
Short-term borrowings		40,176		40,176		40,176		—		—		59,048		59,048		59,048		—		—
Accrued interest payable		336		336		—		336		—		599		599		—		599		—

Off-balance sheet instruments
Commitments to extend credit	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Standby letters of credit		—		—		—		—		—		—		60		—		60		—

					Fair value measurements										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)
December 31, 2018											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		—		—	$	13,458	$	13,458	$	13,458	$	—	$	—
Investment securities:
Trading		3,596		3,596		—	$	3,596		—
Equities												9,421		9,421		9,421		—		—
Available-for-sale		390,475		390,475		8,503		379,691	$	2,281		344,221		344,221		—		344,105		116
Restricted investment in bank stocks		1,017		1,017		—		1,017		—
Loans held-for-sale		789		789		—		789		—
Restricted investment in stocks												797		797		—		797		—
Net loans		625,685		626,052		—		—		626,052		776,614		771,685		—		—		771,685
Mortgage servicing rights		498		579		—		—		579		451		604		—		—		604
Accrued interest receivable		3,128		3,128		—		3,128		—		2,852		2,852		—		2,852		—

Financial liabilities
Deposits with no stated maturities	$	687,773	$	687,773	$	687,773		—	$	—	$	791,810	$	791,810	$	791,810	$	—	$	—
Deposits with stated maturities		225,582		225,403		—	$	225,403		—		223,788		220,876		—		220,876		—
Short-term borrowings		52,660		52,660		52,660		—		—		50,872		50,872		50,872		—		—
Accrued interest payable		335		335		—		335		—		449		449		—		449		—

Off-balance sheet instruments
Commitments to extend credit	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Standby letters of credit		—		—		—		—		—		—		31		—		31		—

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		2019		2018
Commitments to extend credit and unused lines of credit	$	313,828	$	277,216	$	282,695	$	266,021
Standby letters of credit		16,651		16,490		16,815		17,269
Total financial instrument commitments	$	330,479	$	293,706	$	299,510	$	283,290

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 making conditional obligations as it does for on-balance sheet instruments. Standby letters of credit of $15,746,000 will expire

~~making conditional obligations as it does for on-balance sheet instruments. The majority of these standby letters of credit expire~~ within one ~~year with the longest term being five years.~~year. 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~~2019 and December 31, ~~2016~~2018 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.

Dividends payable by ~~the Company~~QNB Corp. 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 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,~~2019, that the Company 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 and the Bank 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															Capital levels
	Actual					Adequately capitalized					Well capitalized					Actual					Adequately capitalized					Well capitalized
As of September 30, 2017	Amount		Ratio			Amount		Ratio			Amount		Ratio
As of June 30, 2019																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	%
The Company																$	125,490		13.42	%	$	74,826		8.00	%	$	93,533		10.00	%
Bank		101,980	12.13				67,258	8.00				84,073	10.00				114,572		12.53			73,163	8.00				91,454	10.00

Tier I capital (to risk-weighted assets):
Consolidated		102,741	11.91				51,773	6.00				51,773	6.00
The Company																	116,253		12.43			56,120	6.00				56,120	6.00
Bank		93,782	11.16				50,420	6.00				67,227	8.00				105,335		11.52			54,872	6.00				73,163	8.00

Common equity tier 1 capital (to risk-weighted assets):
Consolidated		102,741	11.91				38,830	4.50			N/A		N/A
The Company																	116,253		12.43			42,090	4.50			N/A		N/A
Bank		93,782	11.16				37,815	4.50				54,622	6.50				105,335		11.52			41,154	4.50				59,445	6.50

Tier I capital (to average assets):
Consolidated		102,741	9.04				45,452	4.00			N/A		N/A
The Company																	116,253		9.67			48,095	4.00			N/A		N/A
Bank		93,782	8.32				45,088	4.00				56,359	5.00				105,335		8.84			47,667	4.00				59,584	5.00

	Capital levels															Capital levels
	Actual					Adequately capitalized					Well capitalized					Actual				Adequately capitalized					Well capitalized
As of December 31, 2016	Amount		Ratio			Amount		Ratio			Amount		Ratio
As of December 31, 2018																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	%
The Company																$	120,379	13.21%		$	72,910		8.00	%	$	91,137		10.00	%
Bank		96,478	12.10				63,792	8.00				79,740	10.00				110,508		12.52		70,619	8.00				88,273	10.00

Tier I capital (to risk-weighted assets):
Consolidated		97,320	11.84				49,333	6.00				49,333	6.00
The Company																	111,472		12.23		54,682	6.00				54,682	6.00
Bank		89,025	11.16				47,844	6.00				63,792	8.00				101,601		11.51		52,964	6.00				70,619	8.00

Common equity tier 1 capital (to risk-weighted assets):
Consolidated		97,320	11.84				36,999	4.50			N/A		N/A
The Company																	111,472		12.23		41,012	4.50			N/A		N/A
Bank		89,025	11.16				35,883	4.50				51,831	6.50				101,601		11.51		39,723	4.50				57,378	6.50

Tier I capital (to average assets):
Consolidated		97,320	9.16				42,479	4.00			N/A		N/A
The Company																	111,472		9.40		47,458	4.00			N/A		N/A
Bank		89,025	8.45				42,144	4.00				52,680	5.00				101,601		8.64		47,045	4.00				58,807	5.00

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:

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.

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 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~~2018 Form 10-K, could affect the future financial results of ~~the Company~~QNB Corp. and its subsidiary and could cause those results to differ materially from those expressed in the forward-looking statements contained or incorporated by reference in this document. These factors include, but are not limited, to the following:

QNB cautions that these forward-looking statements are subject to numerous assumptions, risks and uncertainties, all of which change over time, and QNB assumes no duty to update forward-looking statements. Management cautions readers not to place undue reliance on any forward-looking statements. These statements speak only as of the date of this report on Form 10-Q, even if subsequently made available by QNB on its website or otherwise, and they advise readers that various factors, including those described above, could affect QNB’s financial performance and could cause actual results or circumstances for future periods to differ materially from those anticipated or projected. Except as required by law, QNB does not undertake, and specifically disclaims any obligation, to publicly release any revisions to any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements.

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.

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.

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, 2019 and 2018, 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~~2019 or ~~2016.~~2018, respectively.

The determination of the allowance for loan losses involves a higher degree of judgment and complexity than the Company’s other significant accounting policies. 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 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.

The allowance for loan losses is based on management’s continual review and evaluation of the loan portfolio. The level of the allowance is determined by assigning specific reserves to individually identified problem credits and general reserves to all other loans. The portion of the allowance that is allocated to impaired 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. The general reserves are based on the composition and risk characteristics of the loan portfolio, including the nature of the loan portfolio, credit concentration trends, delinquency and loss experience, as well as other qualitative factors such as current economic trends.

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 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.

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.

QNB sponsors stock-based compensation plans, 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 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.

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

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

QNB reported net income for the ~~third~~second quarter of ~~2017~~2019 of ~~$2,554,000,~~$3,143,000, or ~~$0.74~~$0.90 per share on a diluted basis, compared to net income of ~~$2,292,000,~~$2,862,000, or ~~$0.67~~$0.82 per share on a diluted basis, for the same period in ~~2016.~~2018. For the ~~nine-month~~six-month period ended ~~September~~June 30, ~~2017,~~2019, QNB reported net income of ~~$7,800,000,~~$6,522,000, or ~~$2.27~~$1.86 per share on a diluted basis, compared to net income of ~~$6,655,000,~~$5,797,000, or ~~$1.96~~$1.67 per share on a diluted basis, for the same period in ~~2016.~~2018.

Net income expressed as an annualized rate of return on average assets and average shareholders’ equity was ~~0.89%~~1.05% and ~~9.90%~~10.91%, respectively, for the quarter ended ~~September~~June 30, ~~2017~~2019 compared with ~~0.86%~~0.98% and ~~9.57%~~10.70%, respectively, for the ~~same period in 2016.~~quarter ended June 30, 2018. For the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2019, the annualized rate of return on average assets and average shareholders’ equity was ~~0.94%~~1.10% and ~~10.37%~~11.49%, respectively, compared with ~~0.87%~~1.00% and ~~9.48%~~11.02%, for the same period in ~~2016.~~2018.

Total assets as of ~~September~~June 30, ~~2017~~2019 were ~~$1,150,363,000,~~$1,212,005,000, compared with ~~$1,063,141,000~~$1,175,452,000 at December 31, ~~2016.~~2018. Loans receivable at ~~September~~June 30, ~~2017~~2019 were ~~$704,214,000,~~$817,593,000, compared with ~~$633,079,000~~$785,448,000 at December 31, ~~2016,~~2018, an increase of ~~$71,135,000,~~$32,145,000, or ~~11.2%~~4.1%, with commercial lending as the largest contributor to the growth. Total deposits of ~~$1,005,445,000~~$1,030,661,000 at ~~September~~June 30, ~~2017~~2019 increased ~~$92,090,000,~~$15,063,000, or ~~10.1%~~1.5%, compared with total deposits of ~~$913,355,000~~$1,015,598,000 at December 31, ~~2016.~~2018.

Results for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 include the following significant components:

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

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

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~~2019 and ~~2016.~~2018.

	Three months ended September 30,				Nine months ended September 30,				Three months ended June 30,				Six months ended June 30,
	2017		2016		2017		2016		2019		2018		2019		2018
Total interest income	$	9,830	$	8,287	$	28,158	$	24,751	$	11,712	$	10,562	$	23,001	$	21,071
Total interest expense		1,515		1,202		4,105		3,526		2,601		1,862		5,054		3,580
Net interest income		8,315		7,085		24,053		21,225		9,111		8,700		17,947		17,491
Tax-equivalent adjustment		402		403		1,179		1,252		196		201		393		402
Net interest income (fully taxable-equivalent)	$	8,717	$	7,488	$	25,232	$	22,477	$	9,307	$	8,901	$	18,340	$	17,893

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 deposits.

For purposes of this discussion, interest income and the average yield earned on loans and investment securities are adjusted to a tax-equivalent basis as detailed in the tables that appear above. This adjustment to interest income is made for analysis purposes only. Interest income is increased by the amount of savings of Federal income taxes, which QNB realizes by investing in certain tax-exempt state and municipal securities and by making loans to certain tax-exempt organizations. In this way, the ultimate economic impact of earnings from various assets can be more easily compared.

The net interest rate spread is the difference between average rates received on earning assets and average rates paid on interest-bearing liabilities, while the net interest rate margin, which includes interest-free sources of funds, is net interest income expressed as a percentage of average interest-earning assets. The Asset/Liability and Investment Management Committee works to manage and maximize the net interest margin for the Company.

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

	Three Months Ended																Three Months Ended
	September 30, 2017								September 30, 2016								June 30, 2019								June 30, 2018
	Average			Average					Average			Average					Average			Average					Average			Average
	Balance			Rate			Interest		Balance			Rate			Interest		Balance			Rate			Interest		Balance			Rate			Interest
Assets
Trading securities		—			—			—	$	3,992			5.44	%	$	54
Investment securities (AFS & HTM):
Investment securities (AFS & Equity):
U.S. Treasury																	$	1,935			2.51	%	$	12	$	—			0.00	%	$	—
U.S. Government agencies	$	74,469			1.80	%	$	335		60,860			1.88			286		71,972			1.83			329		72,476			1.79			324
State and municipal		78,236			3.93			768		71,905			4.03			724		53,791			3.60			484		71,528			3.26			584
Mortgage-backed and CMOs		221,513			2.04			1,127		197,462			1.95			963		213,688			2.22			1,186		212,076			2.12			1,124
Pooled trust preferred securities		242			3.61			2		3,091			0.23			2		122			4.95			1		123			4.53			2
Corporate debt securities		8,060			2.04			41		7,224			1.74			31		8,020			3.76			75		6,538			2.39			39
Equities		7,918			3.61			72		6,568			2.85			47		8,308			3.16			65		10,109			2.87			72
Total investment securities		390,438			2.40			2,345		347,110			2.37			2,053		357,836			2.41			2,152		372,850			2.30			2,145
Loans:
Commercial real estate		397,481			4.60			4,607		329,786			4.40			3,645		460,836			4.85			5,575		427,120			4.61			4,904
Residential real estate		52,833			3.90			516		45,606			3.94			449		67,168			3.98			669		60,830			3.82			580
Home equity loans		66,730			3.87			650		63,141			3.62			574		68,254			4.72			803		66,298			4.46			736
Commercial and industrial		135,791			4.74			1,621		111,058			4.32			1,206		154,000			5.63			2,161		155,505			4.98			1,930
Indirect lease financing		—			—			—		9,202			8.58			197
Consumer loans		6,685			5.65			95		4,626			5.21			61		6,886			6.06			104		7,105			5.95			106
Tax-exempt loans		35,328			3.97			354		39,226			3.75			370		48,429			3.41			411		40,686			3.21			325
Total loans, net of unearned income*		694,848			4.48			7,843		602,645			4.29			6,502		805,573			4.84			9,723		757,544			4.54			8,581
Other earning assets		13,411			1.31			44		62,778			0.51			81		2,945			4.51			33		2,890			5.12			37
Total earning assets		1,098,697			3.69			10,232		1,016,525			3.40			8,690		1,166,354			4.10			11,908		1,133,284			3.81			10,763
Cash and due from banks		15,946								16,378								12,815								11,657
Allowance for loan losses		(8,068	)							(7,630	)							(9,107	)							(8,103	)
Other assets		29,731								28,728								32,344								29,545
Total assets	$	1,136,306							$	1,054,001							$	1,202,406							$	1,166,383

Liabilities and Shareholders' Equity
Interest-bearing deposits:
Interest-bearing demand	$	173,544			0.21	%		94	$	157,179			0.20	%		80	$	213,308			0.48	%		258	$	186,532			0.23	%		108
Municipals		126,689			0.80			257		114,403			0.34			97		104,912			2.03			530		99,001			1.33			328
Money market		82,263			0.29			59		71,963			0.27			48		93,890			0.97			227		77,903			0.32			62
Savings		250,306			0.48			300		231,496			0.40			233		241,445			0.66			397		263,365			0.56			369
Time		129,272			1.19			387		133,296			1.13			378		121,752			1.58			479		121,392			1.25			379
Time of $100,000 or more		99,669			1.42			357		95,915			1.37			330		107,585			1.91			514		105,353			1.58			415
Total interest-bearing deposits		861,743			0.67			1,454		804,252			0.58			1,166		882,892			1.09			2,405		853,546			0.78			1,661
Short-term borrowings		43,678			0.56			61		38,506			0.37			36		57,907			1.36			196		67,841			1.19			201
Total interest-bearing liabilities		905,421			0.66			1,515		842,758			0.57			1,202		940,799			1.11			2,601		921,387			0.81			1,862
Non-interest-bearing deposits		124,269								112,114								139,033								133,454
Other liabilities		4,231								3,874								7,023								4,241
Shareholders' equity		102,385								95,255								115,551								107,301
Total liabilities and shareholders' equity	$	1,136,306							$	1,054,001							$	1,202,406							$	1,166,383
Net interest rate spread					3.03	%							2.83	%							2.99	%							3.00	%
Margin/net interest income					3.15	%	$	8,717					2.93	%	$	7,488					3.20	%	$	9,307					3.15	%	$	8,901

	Six Months Ended
	June 30, 2019								June 30, 2018
	Average			Average					Average			Average
	Balance			Rate			Interest		Balance			Rate			Interest
Assets
Investment securities (AFS & Equity):
U.S. Treasury	$	973			2.51	%	$	12	$	—			0.00	%	$	—
U.S. Government agencies		71,231			1.81			646		72,475			1.79			649
State and municipal		58,475			3.50			1,024		73,127			3.27			1,196
Mortgage-backed and CMOs		211,205			2.21			2,339		215,753			2.11			2,274
Pooled trust preferred securities		122			5.04			3		179			4.07			4
Corporate debt securities		8,022			3.77			151		7,290			2.30			84
Equities		9,203			3.06			139		9,231			2.91			133
Total investment securities		359,231			2.40			4,314		378,055			2.30			4,340
Loans:					—
Commercial real estate		452,524			4.82			10,822		424,032			4.65			9,768
Residential real estate		67,350			3.95			1,329		58,958			3.84			1,132
Home equity loans		68,805			4.73			1,613		66,253			4.35			1,430
Commercial and industrial		156,417			5.52			4,283		155,068			5.08			3,904
Consumer loans		6,901			6.13			210		7,010			5.89			205
Tax-exempt loans		45,720			3.37			763		39,567			3.23			634
Total loans, net of unearned income*		797,717			4.81			19,020		750,888			4.59			17,073
Other earning assets		2,595			4.66			60		4,223			2.86			60
Total earning assets		1,159,543			4.07			23,394		1,133,166			3.82			21,473
Cash and due from banks		12,235								11,486
Allowance for loan losses		(9,011	)							(8,086	)
Other assets		32,165								28,790
Total assets	$	1,194,932							$	1,165,356

Liabilities and Shareholders' Equity
Interest-bearing deposits:
Interest-bearing demand	$	210,876			0.47	%		490	$	183,323			0.22	%		203
Municipals		98,965			2.02			991		100,775			1.21			607
Money market		100,736			1.03			512		79,938			0.30			120
Savings		244,612			0.66			805		261,266			0.54			699
Time		119,567			1.51			898		122,641			1.25			757
Time of $100,000 or more		105,473			1.86			972		106,555			1.54			814
Total interest-bearing deposits		880,229			1.07			4,668		854,498			0.76			3,200
Short-term borrowings		58,542			1.33			386		69,637			1.10			380
Total interest-bearing liabilities		938,771			1.09			5,054		924,135			0.78			3,580
Non-interest-bearing deposits		134,802								130,835
Other liabilities		6,925								4,313
Shareholders' equity		114,434								106,073
Total liabilities and shareholders' equity	$	1,194,932							$	1,165,356
Net interest rate spread					2.98	%							3.04	%
Margin/net interest income					3.19	%	$	18,340					3.18	%	$	17,893

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, 2019 and 2018.

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.~~

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									Three months ended									Six months ended
	September 30, 2017 compared									September 30, 2017 compared									June 30, 2019 compared									June 30, 2019 compared
	to September 30, 2016									to September 30, 2016									to June 30, 2018									to June 30, 2018
	Total			Due to change in:						Total			Due to change in:						Total			Due to change in:						Total			Due to change in:
	Change			Volume			Rate			Change			Volume			Rate			Change			Volume			Rate			Change			Volume			Rate
Interest income:
Trading securities	$	(54	)	$	(54	)	$	—		$	(93	)	$	(96	)	$	3
Investment securities (AFS & HTM):
Investment securities (AFS & Equity):
U.S. Treasury																			$	12		$	—		$	12		$	12		$	—		$	12
U.S. Government agencies		49			64			(15	)		198			241			(43	)		5			(1	)		6			(3	)		(11	)		8
State and municipal		44			64			(20	)		(42	)		47			(89	)		(100	)		(145	)		45			(172	)		(240	)		68
Mortgage-backed and CMOs		164			118			46			479			377			102			62			9			53			65			(48	)		113
Pooled trust preferred securities		—			(2	)		2			15			(2	)		17			(1	)		(1	)		—			(1	)		(2	)		1
Corporate debt securities		10			4			6			12			(1	)		13			36			9			27			67			8			59
Equities		25			10			15			7			1			6			(7	)		(13	)		6			6			—			6
Total Investment securities (AFS & HTM)		292			258			34			669			663			6
Total Investment securities (AFS & Equity)																				7			(142	)		149			(26	)		(293	)		267
Loans:
Commercial real estate		962			761			201			2,403			1,970			433			671			387			284			1,054			656			398
Residential real estate		67			71			(4	)		145			160			(15	)		89			61			28			197			162			35
Home equity loans		76			35			41			161			103			58			67			22			45			183			55			128
Commercial and industrial		415			272			143			765			363			402			231			(21	)		252			379			31			348
Indirect lease financing		(197	)		(197	)		—			(656	)		(656	)		—
Consumer loans		34			27			7			86			79			7			(2	)		(4	)		2			5			(3	)		8
Tax-exempt loans		(16	)		(35	)		19			(85	)		(136	)		51			86			62			24			129			99			30
Total Loans		1,341			934			407			2,819			1,883			936			1,142			507			635			1,947			1,000			947
Other earning assets		(37	)		(64	)		27			(61	)		(101	)		40			(4	)		—			(4	)		—			(23	)		23
Total interest income		1,542			1,074			468			3,334			2,349			985			1,145			365			780			1,921			684			1,237
Interest expense:
Interest-bearing deposits:
Interest-bearing demand		14			9			5			25			27			(2	)		150			16			134			287			31			256
Municipals		160			11			149			236			9			227			202			19			183			384			(12	)		396
Money market		11			8			3			45			28			17			165			12			153			392			30			362
Savings		67			19			48			149			57			92			28			(31	)		59			106			(44	)		150
Time		9			(11	)		20			5			(39	)		44			100			2			98			141			(18	)		159
Time of $100,000 or more		27			14			13			41			22			19			99			9			90			158			(9	)		167
Total interest-bearing deposits		288			50			238			501			104			397			744			27			717			1,468			(22	)		1,490
Short-term borrowings		25			4			21			78			27			51			(5	)		(29	)		24			6			(61	)		67
Total interest expense		313			54			259			579			131			448			739			(2	)		741			1,474			(83	)		1,557
Net interest income	$	1,229		$	1,020		$	209		$	2,755		$	2,218		$	537		$	406		$	367		$	39		$	447		$	767		$	(320	)

Average earning assets for the ~~third~~second quarter of ~~2017~~2019 were ~~$1,098,697,000,~~$1,166,354,000, an increase of ~~$82,172,000,~~$33,070,000, or ~~8.1%~~2.9%, from the ~~third~~second quarter of ~~2016,~~2018, with average loans increasing ~~$92,203,000,~~$48,029,000, or ~~15.3%~~6.3%, and average investment securities ~~increasing $39,336,000,~~decreasing $15,014,000, or ~~11.2%~~4.0%, over the same period. Growth in the loan portfolio ~~mitigates the impact of the low rate environment on net~~supports interest income and the net interest margin as loans generally earn a higher yield than investment securities. Average loans as a percent of average earning assets were ~~63.2%~~69.1% for the ~~third~~second quarter of ~~2017,~~2019, compared with ~~59.3%~~66.8% for the ~~third~~second quarter of ~~2016.~~2018. On the funding side, average deposits increased ~~$69,646,000,~~$34,925,000, or ~~7.6%~~3.5%, to ~~$986,012,000~~$1,021,925,000 for the ~~third~~second quarter of ~~2017 with~~2019 primarily due to growth in ~~all categories except for time deposits.~~interest bearing demand and money market accounts. 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. Average borrowed funds for the ~~third~~second quarter of ~~2017 increased $5,172,000,~~2019 decreased $9,934,000, to $57,907,000, which consisted of average commercial repurchase agreements of $39,311,000 and average overnight borrowings of

$~~43,678,000, which~~18,596,000. For the same period in 2018, borrowings consisted of average commercial repurchase agreements of ~~$35,995,000~~$37,484,000 and average overnight borrowings of ~~$7,683,000. For the same period in 2016, borrowings consisted solely of commercial repurchase agreements.~~$30,357,000.

The net interest margin for the ~~third~~second quarter of ~~2017~~2019 was ~~3.15%~~3.20% compared ~~with 2.93%~~to 3.15%, for the same period in ~~2016.~~2018. While competition for quality loans in our local market continues to exert pressure on the net interest margin, ~~three~~ increases in the prime ~~lending~~ rate ~~since September 2016~~during 2018 have provided increased interest income ~~on variable rate loans,~~ and ~~moderate~~ competitive pricing pressure on deposits.

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,~~$1,145,000, or ~~17.7%~~10.6%, to ~~$10,232,000~~$11,908,000 for the ~~third~~second quarter of ~~2017;~~2019; total interest expense increased ~~26.0%~~$739,000, or 39.7%, to ~~$1,515,000. Growth~~$2,601,000. Increased yield on earnings assets and growth in earning assets ~~is the primary contributor~~contributed to the increase in interest ~~income, with the increase in rates on variable-rate loans referenced above also contributing significantly.~~income. All categories of interest-bearing deposits experienced higher rates in the ~~third~~second quarter of ~~2017~~2019 compared to ~~the third~~second quarter of ~~2016, Rates increased 46 basis points~~2018, due to rate increases for municipal deposits indexed to Fed Funds, ~~while moderate competitive pricing pressure resulted~~and a 10-basis point rate increase to the eSavings and Rewards checking products and a five- to ten-basis point increase in ~~smaller rate increases in other deposit types.~~

The yield on earning assets on a tax-equivalent basis increased ~~twenty-nine~~29 basis points from ~~3.40%~~3.81% for the ~~third~~second quarter of ~~2016,~~2018, to ~~3.69%~~4.10% for the ~~third~~second quarter of ~~2017.~~2019. The cost of interest-bearing liabilities was ~~0.66%~~1.11% for the second quarter ended ~~September~~June 30, ~~2017,~~2019, compared with ~~0.57%~~0.81% for the same period in ~~2016.~~2018.

Interest income on investment securities ~~(trading, available-for-sale~~(available-for-sale and ~~held-to-maturity)~~equity) increased ~~$238,000~~$7,000 when comparing the quarters ended ~~September~~June 30, ~~2017~~2019 and ~~2016.~~2018. The average yield on the investment portfolio was ~~2.40%~~2.41% for ~~both~~ the ~~third quarters~~second quarter of ~~2017~~2019 compared with 2.30% for the second quarter of 2018. Proceeds from sales, payments, calls and ~~2016. Investment opportunities~~maturities, net of purchases, were utilized to grow the loan portfolio at higher yields than the investment portfolio with any excess funds reinvested in ~~the current rate environment provide a yield comparable~~higher yielding investments.

Income on U.S. Treasury securities increased $12,000, due to ~~the overall portfolio yield.~~

volume as proceeds from sales of equities were invested in U.S. Treasuries. Income on U.S. Government agency securities increased ~~$49,000,~~$5,000 as the ~~$13,609,000, or 22.4%, increase~~rate increased four-basis points.

Interest income on tax-exempt municipal securities declined due to a $17,737,000 decrease in average ~~balances contributed to an increase in interest income of $64,000.~~balances. This was partially offset by a ~~$15,000 decrease~~34-basis point increase in ~~interest income due to an eight basis point decrease in the yield~~yield. Proceeds from ~~1.88% for the third quarter of 2016 to 1.80% for the same period in 2017.~~

~~Average tax-exempt~~matured, called and sold municipal securities ~~increased $6,331,000, contributing $64,000 to interest income, which was offset by a ten basis point reduction~~were invested in ~~average yield, resulting in a decrease of interest income of $20,000. QNB had purchased many~~slightly higher yielding 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~~used to grow the ~~current yield on replacement bonds is well below the yield of the bonds being called or maturing.~~loan portfolio. Typically, QNB purchases municipal bonds with 10-15 year maturities with call dates between 2-5 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~~$62,000 with a ~~nine basis~~ten-basis point increase in average yield ~~plus the $24,051,000~~and a $1,612,000 increase in average ~~balances contributing the majority of increase.~~balances. 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.

Interest income on corporate debt securities increased $36,000 due to an increase in rate of 137 basis points and an increase in volume of $1,482,000.

Income on loans increased ~~$1,341,000~~$1,142,000 to ~~$7,843,000~~$9,723,000 when comparing the ~~third~~second quarters of ~~2017~~2019 and ~~2016,~~2018, with ~~the strong~~a 6.3% growth in average balances contributing an increase in interest income of ~~$934,000.~~$507,000. The yield on ~~average~~ loans, ~~for the third quarter of 2017~~at 4.84%, was ~~4.48%, 19~~30 basis points higher than the ~~4.29% yield in third~~second quarter of ~~2016.~~2018, contributing to a $635,000 increase in interest income. Despite increases in the ~~Fed funds~~prime rate in June, September and December ~~2016, March 2017, and June 2017,~~of 2018, competitive pressures ~~resulted in~~compressed the yields on new loans being ~~originated at relatively low rates.~~originated. Mitigating competitive pricing, variable rate loans have repriced ~~higher as the prime rate increases went into effect.~~higher.

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, medical facilities and retail establishments, or residential real estate, usually the residence of the business owner. The category also includes construction and land development loans. Income on commercial real estate loans increased $671,000 when comparing the second quarters of 2019 and 2018, primarily due to the 7.9% increase in average balances. Average balances increased ~~$67,695,000, or 20.5%,~~$33,716,000, to ~~$397,481,000~~$460,836,000 for the quarter ended ~~September~~June 30, ~~2017~~2019 compared with the same quarter in ~~2016, contributing $761,000 in increased interest income.~~2018. The yield on commercial real estate loans increased 2024 basis points from 4.61% in 2018 to 4.85% in 2019.

Income on commercial and industrial loans increased $231,000 when comparing the second quarters of 2019 and 2018. The average yield on these loans increased 66 basis points to ~~4.60%~~5.63% resulting in ~~2017, contributing $201,000~~an increase in ~~increased interest income.~~income of $252,000; this was partially offset by a

~~Income on commercial and industrial loans increased $415,000. Average~~decrease in average balances ~~increased $24,733,000,~~of $1,505,000, or ~~22.3%~~1.0%, to ~~$135,791,000~~$154,000,000 for the ~~third~~second quarter of ~~2017~~2019 resulting in a ~~$272,000 increase~~$21,000 decrease in income. ~~The average yield on these loans increased 42 basis points to 4.74% resulting in an increase in income of $143,000.~~ Many of the loans in this category are indexed to the prime interest rate, which increased by ~~one quarter of one percent three times~~50 basis points since ~~September 2016.~~June 30, 2018.

Tax-exempt loan income was ~~$354,000~~$411,000 for the ~~third~~second quarter of ~~2017, a decrease~~2019, an increase of ~~$16,000~~$86,000 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~~2018. Average balances ~~have decreased $3,898,000,~~increased $7,743,000, or ~~9.9%~~19.0%, to ~~$35,328,000~~$48,429,000 for the ~~third~~second quarter of ~~2017,~~2019, resulting in ~~a decrease~~an increase of ~~$35,000~~$62,000 in income. The yield on municipal loans ~~improved 22~~increased 20 basis points, to ~~3.97%~~3.41% for the ~~third~~second quarter of ~~2017,~~2019, compared with the same period in ~~2016,~~2018, resulting in an ~~additional $19,000~~increase of $24,000 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 the “local consumer lender of choice” and to ~~affect~~effect this QNB refocused its retail lending efforts, adding new 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~~overall retail lending: residential mortgage, home equity and consumer loans. Average residential mortgage loans secured by first lien 1-4 family residential mortgages increased by ~~$7,227,000,~~$6,338,000, or ~~15.9%~~10.4%, to ~~$52,833,000~~$67,168,000 for the ~~third~~second quarter of ~~2017~~2019 compared to the same period in ~~2016.~~2018. Over this same timeframe, the average yield on the portfolio ~~decreased four~~increased 16 basis points to ~~3.90%~~3.98% for the ~~third~~second quarter of ~~2017.~~2019. The ~~net~~combined result was an increase in interest income of $89,000. Average home equity loans increased by $1,956,000, or 3.0%, to $68,254,000 and the average yield increased 26 basis points to 4.72% resulting in a ~~comparative~~combined increase in interest income of $67,000. ~~Interest income for home equity loans~~The yield on the consumer portfolio increased ~~$76,000, as a result of average balances increasing $3,589,000, or 5.7%, to $66,730,000 while the average yield increased 25~~11 basis points to ~~3.87%. Average consumer loans increased $2,059,000, or 44.5%, to $6,685,000, led primarily~~6.06% for the second quarter of 2019 offset by ~~student loan~~a slight decrease in average balances ~~which increased $1,738,000 from third quarter 2016 to third quarter 2017. When comparing these two periods, the yield on the portfolio increased 44 basis points to 5.65%; the~~resulting in a combined ~~result was a $34,000 increase~~$2,000 decrease in interest ~~income for consumer loans.~~income.

Earning assets are funded by deposits and borrowed funds. Interest expense increased ~~$313,000,~~$739,000, when comparing the ~~third~~second quarter of ~~2017~~2019 to the same period in ~~2016.~~2018. The growth in average deposits continues to be centered in accounts with greater liquidity, such as non-interest and interest-bearing demand, and money market ~~and savings~~ deposits. Average non-interest-bearing demand accounts increased ~~$12,155,000,~~$5,579,000, or ~~10.8%~~4.2%, to ~~$124,269,000~~$139,033,000 for the ~~third quarter.~~second quarter of 2019. QNB has been successful in increasing both personal and business checking ~~accounts as average balances in these accounts have increased by $10,435,000, or 11.5%, to $100,983,000 when comparing the quarters.~~accounts. Average interest-bearing demand accounts increased ~~$16,365,000,~~$26,776,000, or ~~10.4%~~14.4%, to ~~$173,544,000~~$213,308,000 for the ~~third~~second quarter of ~~2017.~~2019. Interest expense on interest-bearing demand accounts increased ~~$14,000~~$150,000 to ~~$94,000~~$258,000 for the same period, as the average rate paid increased ~~one~~25 basis ~~point~~points to ~~0.21%~~0.48% for the ~~third~~second quarter of ~~2017.~~2019. Included in this category is QNB-Rewards checking, a higher-rate checking account product that pays ~~1.10%~~1.35% on balances up to $25,000 and ~~0.30%~~0.40% 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~~second quarter of ~~2017,~~2019, the average balance in this product was ~~$51,323,000~~$60,519,000 and the related interest expense was ~~$75,000~~$101,000 for an average yield of ~~0.58%~~0.67%. In comparison, the average balance of the QNB-Rewards accounts for the ~~third~~second quarter of ~~2016~~2018 was ~~$45,125,000~~$56,627,000 with a related interest expense of ~~$63,000~~$85,000 and an average rate paid of ~~0.55%~~0.60%. 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.

Interest expense on municipal interest-bearing demand accounts increased ~~$160,000~~$202,000 to ~~$257,000~~$530,000 for the ~~third~~second quarter of ~~2017.~~2019. 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~~70 basis points to ~~0.80%~~2.03% for the ~~third~~second quarter of ~~2017.~~2019 and average balances increased $5,911,000, or 6.0%, to $104,912,000. 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. 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,~~$15,987,000, or ~~14.3%~~20.5%, to ~~$82,263,000~~$93,890,000 for the ~~third~~second quarter of ~~2017~~2019 compared with the same period in ~~2016.~~2018. Interest expense on money market accounts increased ~~$11,000~~$165,000 to ~~$59,000, while~~$227,000, and the average interest rate paid on money market accounts increased ~~two~~65 basis points to ~~0.29%~~0.97% for the ~~third~~second quarter of ~~2017 compared with the same period in 2016.~~2019. Most of the balances in this category are in a product that pays a tiered rate based on account balances.

48Interest expense on savings accounts increased $28,000 when comparing the second quarter of 2019 to the second quarter of 2018, and the average rate increased 10 basis points to 0.66% when comparing both periods. When comparing these same periods, average savings accounts decreased $21,920,000, or 8.3%, to $241,445,000 for the second quarter of 2019 primarily due to decreases in the e-Savings product. QNB’s online e-Savings product is the largest category of savings deposits, with average balances for the second quarter of 2019 of $170,291,000 compared to $190,063,000 in the same period of 2018. The average yield paid on these accounts was 0.86% for the second quarter of 2019 and 0.71% for the same period in 2018. Traditional statement savings accounts, passbook savings and club accounts are also included in the savings category and average balances in these types of savings accounts decreased $2,148,000 when comparing the second quarter of 2019 average to the same period in 2018.

Interest expense on savings accounts increased $67,000 when comparing the third quarter of 2017 to the third quarter of 2016, and the average rate increased eight basis points to 0.48%. When comparing these same periods, average savings account balances increased $18,810,000, or 8.1%, to $250,306,000 for the third quarter of 2017 with both the statement savings and e-Savings products accounting for the growth in savings balances. QNB’s online e-Savings product is the largest category of savings deposits, with average balances for the third quarter of 2017 at $181,706,000. This product has grown successfully since its introduction in the third quarter of 2009. The average yield paid on these accounts was 0.60% for the third quarter of 2017 and 0.50% for the same period in 2016. 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, when comparing the third quarter of 2017 average to the same period in 2016.

~~Total interest expense on~~ time deposits totaled ~~$744,000 and $708,000~~$993,000 for the ~~third quarters~~second quarter of ~~2017 and 2016, respectively.~~2019 compared to $794,000 in 2018. Average total time deposits ~~decreased slightly from $229,211,000~~increased $2,592,000 to $229,337,000 for the ~~third quarter 2016 to $228,941,000 for the third~~second quarter of ~~2017.~~ 2019. 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, however, the maturity and repricing characteristics of time deposits tend to be shorter. The average rate paid on total time deposits increased ~~six~~34 basis points from 1.40% to ~~1.29%~~1.74% when comparing the ~~third~~second quarter of ~~2017~~2018 to the same period in ~~2016.~~2019.

Approximately ~~$99,509,000,~~$130,351,000, or ~~43.2%~~56%, of time deposits at ~~September~~June 30, ~~2017~~2019 will mature over the next 12 months. The average rate paid on these time deposits is approximately ~~0.81%~~1.69%. The yield on the time deposit portfolio may change slightly in the next quarter as short-term time deposits reprice. However, given the short-term nature of these deposits, interest expense may increase if short-term time deposit rates were to increase suddenly or if customers select higher paying ~~longer-term~~ time deposits.

Short-term borrowings are primarily comprised of sweep accounts structured as repurchase agreements with our commercial customers and overnight FHLB borrowings. Interest expense on short-term borrowings ~~increased $25,000~~decreased $5,000 for the ~~third~~second quarter of ~~2017~~2019 to ~~$61,000~~$196,000 when compared to the same period in ~~2016.~~2018. When comparing these same periods, average balances ~~increased~~decreased from ~~$38,506,000~~$67,841,000 to ~~$43,678,000,~~$57,907,000 due to ~~an increase~~a decrease in average FHLB borrowings of ~~$7,681,000, while the~~$11,761,000, with a 63-basis point increase in rate, and an increase in repurchase agreement average balances of $1,827,000, with a rate ~~paid increased 19~~increase of 24 basis ~~points to 0.56% for the third quarter of 2017.~~points.

~~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~~2019 average earning assets increased ~~$83,878,000,~~$26,377,000, or ~~8.5%~~2.3%, to ~~$1,069,667,000,~~$1,159,543,000, with average loans increasing ~~11.3%~~6.2% and average investment securities ~~increasing 11.6%~~decreasing 5.0%. Average total deposits increased ~~$67,008,000,~~$29,698,000, or ~~7.6%~~3.0%, to ~~$950,456,000~~$1,015,031,000 for the ~~nine-month~~six-month period ended ~~September~~June 30, ~~2017~~2019 compared to the same period in ~~2016.~~2018. The net interest margin on a tax-equivalent basis was ~~3.15%~~3.19% for the ~~nine-month~~six-month period ended ~~September~~June 30, ~~2017,~~2019, a ~~ten basis~~one-basis point increase from the same period in ~~2016.~~2018.

Total interest income on a tax-equivalent basis increased ~~$3,334,000,~~$1,921,000, or ~~12.8%~~8.9%, from ~~$26,003,000~~$21,473,000 to ~~$29,337,000,~~$23,394,000, when comparing the ~~nine-month~~six-month periods ended ~~September~~June 30, ~~2016~~2018 and ~~September~~June 30, ~~2017,~~2019 due to the additional interest income generated from the growth in earning assets combined with the impact of improved yields on ~~some of~~ those assets. Interest income increased ~~$2,349,000~~$684,000 as a result of volume increases, and ~~$985,000~~$1,237,000 as a result of better yields. 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%~~3.82% to ~~3.67%~~4.07% for the ~~nine-month~~six-month periods with the yield on loans up 1322 basis points to ~~4.45%~~4.81%. 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~~increased 10 basis points from ~~2.44%~~2.30% to ~~2.39%~~2.40% when comparing the ~~nine-month~~six-month periods.

Total interest expense increased ~~$579,000~~$1,474,000 for the ~~nine-month~~six-month period ended ~~September~~June 30, ~~2017~~2019 compared with the same period in ~~2016. Deposit rates account for $397,00 of the increase~~2018, attributable to the shift of deposits into higher-earning interest-bearing DDA, as well as rate increases in the eSavings, Rewards checking, and municipal deposits, ~~rates,~~ which are correlated to changes in the Fed Funds target ~~rate, and eSavings and time deposit rates.~~rate. The average rate paid on interest bearing deposits increased ~~four~~31 basis ~~point~~points to ~~0.63%~~1.07% for the ~~nine-month~~six-month period ended ~~September~~June 30, ~~2017~~2019 versus the ~~same period~~first half of 2018. QNB funded growth in ~~2016.~~loans with net proceeds from investments and growth in deposits; QNB ~~Bank funded~~was therefore able to reduce its short-term cash needs ~~with increased overnight~~resulting in decreased Federal Home Loan Bank borrowings in the first ~~three quarters~~half of ~~2017~~2019 compared with the same period in ~~2016, and~~2018. The average balance of total short-term borrowing decreased $11,095,000 whereas the average borrowing rate increased 1423 basis points ~~which contributed $51,000 to the~~resulting in a net increase in interest ~~expense.~~

~~Deposit balance increases and higher borrowings contributed $131,000 to interest expense.~~expense of $6,000. The yield on interest-bearing liabilities rose ~~four~~31 basis points to ~~0.62%~~1.09% for the ~~nine months ended September 30, 2017, compared to the same period in 2016.~~first half of 2019.

The provision for loan losses represents management's determination of the amount necessary to be charged to operations to bring the allowance for loan losses to a level that represents management’s best estimate of the known and inherent losses in the existing loan portfolio. 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. ~~generally accepted accounting principles (GAAP).~~GAAP. The determination of an appropriate level for the allowance for loan losses is 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 losses 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 and actual results could differ. In addition, various regulatory agencies, as an integral part of their examination process, periodically review QNB’s allowance for 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~~$150,000 and ~~$700,000~~$375,000 in provision for loan losses in the ~~third quarter~~three and ~~first nine~~six months ~~of 2017,~~ended June 30, 2019, respectively, compared with ~~no provision~~$187,000 and $375,000 for the same periods in ~~the third quarter and $125,000 year-to-date in 2016.~~2018. QNB's allowance for loan losses of ~~$8,125,000~~$9,164,000 represents ~~1.15%~~1.12% of loans receivable at ~~September~~June 30, ~~2017~~2019 compared with an allowance for loan losses of ~~$7,394,000,~~$8,834,000, or ~~1.17%~~1.12% of loans receivable, at December 31, ~~2016,~~2018, and ~~$7,593,000,~~$8,192,000, or ~~1.25%~~1.05% of loans receivable at ~~September~~June 30, ~~2016.~~2018. Management believes the allowance for loan losses at ~~September~~June 30, ~~2017~~2019 is adequate as of that date based on its analysis of known and inherent losses in the portfolio.

Net charge-offs were ~~$10,000~~$1,000 and ~~net recoveries were $31,000, respectively,~~$45,000 compared for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017, compared with net loan recoveries of $43,000 and~~2019, respectively, to net charge-offs of ~~$86,000, respectively,~~$32,000 and $24,000 for the same periods in ~~2016.~~ 2018. Charge-offs of approximately $155,000 during the six months ended June 30, 2019 consisted of commercial loans secured by residential real estate of $36,000, overdraft charge-offs of $40,000, a home equity line of $16,000, student loans of $57,000 and other consumer loans of $6,000. These were partially offset by $110,000 in recoveries comprising $94,000 in repayments from borrowers of previously charged-off credits, and $16,000 related to overdraft recoveries. Annualized net charge-offs as a percentage of average loans receivable were 0% and 0.01% for the three and six months ended June 30, 2019, respectively, compared with annualized charge-offs as a percentage of average loans receivable were 0.02% and 0.01% for the same period in 2018, respectively.

Non-performing assets ~~of $10,437,000~~were $9,677,000 at ~~September~~June 30, ~~2017 compares favorably with $14,219,000~~2019 compared to $9,638,000 as of December 31, ~~2016~~2018 and ~~$11,811,000~~$7,987,000 as of ~~September~~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.

2018. 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%~~1.18% of loans receivable at ~~September~~June 30, ~~2017~~2019 compared with ~~$11,938,000, or 1.89%~~1.23% of loans receivable at December 31, ~~2016,~~2018 and ~~$9,536,000, or 1.57% of loans receivable~~1.02% at ~~September~~June 30, ~~2016.~~2018. 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,~~2019, $2,172,000, or approximately ~~82%~~28% of the loans classified as non-accrual are current or past due less than 30 days. Loans classified as substandard or doubtful ~~within the Company’s risk rating system~~ totaled ~~$18,064,000,~~$12,572,000, a ~~reduction~~decrease of ~~$4,140,000~~$5,767,000, or 31.4%, from the ~~$22,204,000~~$18,339,000 reported at December 31, ~~2016~~2018 and a ~~$4,101,000 decline~~decrease of $5,627,000, or 30.9, from the ~~$22,165,000~~$18,199,000 reported at ~~September~~June 30, ~~2016.~~2018.

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~~2019 or ~~more and still accruing at~~ December 31, ~~2016. This compares with $150,000~~2018, and $23,000 at ~~September~~June 30, ~~2016.~~2018. Total loans 30 days or more past due, which includes non-accrual loans by actual number of days delinquent, represented ~~0.28%~~0.82% of loans receivable at ~~September~~June 30, ~~2017~~2019 compared with ~~0.78%~~0.76% at December 31, ~~2016~~2018 and ~~0.70%~~0.59% at ~~September~~June 30, ~~2016.~~2018.

Troubled debt restructured loans, not classified as non-accrual loans or loans past due 90 days or more and accruing, were ~~$1,354,000~~$2,009,000 at ~~September~~June 30, ~~2017,~~2019, compared with ~~$1,819,000~~$2,160,000 at December 31, ~~2016,~~2018, and ~~$1,149,000~~$1,233,000 at ~~September~~June 30, ~~2016.~~2018. There were no

newly identified troubled debt ~~restructures~~restructuring in the ~~nine~~six months ended ~~September~~June 30, ~~2017.~~2019. QNB had no other real estate owned or repossessed assets as of ~~September~~June 30, ~~2017,~~2019, December 31, ~~2016,~~2018, or ~~September~~June 30, ~~2016.~~2018.

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 basis for commercial loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral, if the loan is collateral dependent.

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			2019			2018			2018
Non-accrual loans	$	9,078		$	10,119		$	8,237		$	7,668		$	7,478		$	6,731
Loans past due 90 days or more and still accruing interest		5			—			150			—			—			23
Troubled debt restructured loans (not already included above)		1,354			1,819			1,149			2,009			2,160			1,233
Total non-performing loans		10,437			11,938			9,536			9,677			9,638			7,987
Non-accrual investment securities		—			2,281			2,275
Total non-performing assets	$	10,437		$	14,219		$	11,811		$	9,677		$	9,638		$	7,987

Total loans (excluding loans held-for-sale):
Average total loans (YTD)	$	669,073		$	604,757		$	601,143		$	797,681		$	766,692		$	750,828
Total loans		704,214			633,079			608,231			817,593			785,448			779,886

Allowance for loan losses		8,125			7,394			7,593			9,164			8,834			8,192

Allowance for loan losses to:
Non-performing loans		77.85	%		61.94	%		79.63	%		94.70	%		91.66	%		102.57	%
Total loans (excluding held-for-sale)		1.15	%		1.17	%		1.25	%		1.12	%		1.12	%		1.05	%
Average total loans		1.21	%		1.22	%		1.26	%		1.15	%		1.15	%		1.09	%

Non-performing loans / total loans (excluding held-for-sale)		1.48	%		1.89	%		1.57	%		1.18	%		1.23	%		1.02	%
Non-performing assets / total assets		0.91	%		1.34	%		1.10	%		0.80	%		0.82	%		0.68	%

An analysis of net loan ~~(recoveries) charge-offs~~recoveries for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 compared to ~~2016~~2018 is as follows:

	Three months ended September 30,						Nine months ended September 30,						Three months ended June 30,						Six months ended June 30,
	2017			2016			2017			2016			2019			2018			2019			2018
Net (recoveries) charge-offs	$	10		$	(43	)	$	(31	)	$	86
Net charge-offs/(recoveries)													$	1		$	32		$	45		$	24

Net annualized (recoveries) charge-offs to:
Net annualized charge-offs/(recoveries) to:
Total loans		0.01	%		(0.03	%)		(0.01	%)		0.02	%		0.00	%		0.02	%		0.01	%		0.01	%
Average total loans excluding held-for-sale		0.01	%		(0.03	%)		(0.01	%)		0.02	%		0.00	%		0.02	%		0.01	%		0.01	%
Allowance for loan losses		0.53	%		(2.26	%)		(0.50	%)		1.52	%		0.04	%		1.57	%		0.99	%		0.59	%

At ~~September~~June 30, ~~2017~~2019 and December 31, ~~2016,~~2018, the recorded investment in loans for which impairment has been identified totaled ~~$12,737,000~~$9,937,000 and ~~$15,006,000~~$16,482,000 of which ~~$8,860,000~~$5,310,000 and ~~$10,909,000,~~$11,763,000, respectively, required no specific allowance for loan loss. The recorded investment in impaired loans requiring an allowance for loan losses was ~~$3,877,000~~$4,627,000 and ~~$4,097,000~~$4,719,000 at ~~September~~June 30, ~~2017~~2019 and December 31, ~~2016,~~2018, respectively, and the related allowance for loan losses associated with these loans was ~~$1,955,000~~$2,166,000 and ~~$1,198,000,~~$1,664,000, 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 Comparison
	Three months					Change from						Nine months				Change from						Three months					Change from						Six months					Change from
	ended September 30,					prior year						ended September 30,				prior year						ended June 30,					prior year						ended June 30,					prior year
	2017		2016			Amount			Percent			2017		2016		Amount			Percent			2019			2018		Amount			Percent			2019		2018			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																						$	584		$	48	$	536		N/M			$	590	$	133		$	457		N/M
Unrealized (loss) gain on investment equity securities																							(405	)		41		(446	)	N/M				571		(205	)		776		N/M
Fees for services to customers		429		425			4			0.9	%		1,242		1,205		37			3.1	%		422			408		14			3.4	%		815		829			(14	)		-1.7	%
ATM and debit card		435		419			16			3.8	%		1,301		1,229		72			5.9	%		519			487		32			6.6			989		917			72			7.9
Retail brokerage and advisory		168		129			39			30.2	%		375		425		(50	)		-11.8	%		133			105		28			26.7			274		208			66			31.7
Bank-owned life insurance		70		73			(3	)		-4.1	%		261		217		44			20.3	%		70			69		1			1.4			138		137			1			0.7
Merchant		91		86			5			5.8	%		263		242		21			8.7	%		99			82		17			20.7			174		156			18			11.5
Net gain on sale of loans		65		143			(78	)		-54.5	%		316		263		53			20.2	%		28			37		(9	)		(24.3	)		49		44			5			11.4
Other		114		92			22			23.9	%		328		316		12			3.8	%		204			177		27			15.3			363		302			61			20.2
Total	$	1,470	$	1,644		$	(174	)		-10.6	%	$	5,075	$	4,594	$	481			10.5	%	$	1,654		$	1,454	$	200			13.8	%	$	3,963	$	2,521		$	1,442			57.2	%

Total non-interest income for the ~~third~~second quarter of ~~2017~~2019 was ~~$1,470,000, a decrease~~$1,654,000, an increase of ~~$174,000,~~$200,000, compared to ~~$1,644,000~~$1,454,000 for the ~~third~~second quarter of ~~2016.~~2018. Excluding net gains and net unrealized gains (losses) on investment securities ~~trading activities~~ and the gain on sale of loans for both periods, total non-interest income was ~~$1,307,000~~$1,447,000 and ~~$1,224,000~~$1,328,000 for the ~~third~~ quarters ~~of 2017~~ended June 30, 2019 and ~~2016, respectively, an increase of $83,000, or 6.8%.~~2018, respectively.

Net ~~gain~~gains on ~~sale of~~sales investment securities ~~which~~increased $536,000 from $48,000 in second quarter of 2018 to $584,000 in second quarter of 2019. Gain on investments are primarily derived from sale of ~~equities, decreased $218,000 as market conditions in the equities market~~equity securities. Net gains on sales of equity securities were $584,000 for the second quarter ~~ended September 30, 2017 versus~~of 2019 compared to $44,000 for the same period in ~~2016 resulted~~2018. During the second quarter of 2019, unrealized losses of $405,000 were recorded compared to unrealized gains of $41,000 in ~~fewer opportunities for sales.~~

QNB originates residential mortgage loans for sale in the secondary market. Net gain on sale of loans decreased $9,000 when comparing the two periods. 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 for resale decreased $78,000, due~~ to ~~decreased mortgage activity for the third quarter 2017, compared with the same period in 2016.~~ be sold are identified at origination. Proceeds from the sale of residential mortgages were ~~$2,192,000~~$1,189,000 and ~~$3,632,000~~$1,344,000 for the ~~third~~second quarters of ~~2017~~2019 and ~~2016,~~2018, respectively.

~~These decreases were offset in part by~~Fees for services to customers increased $14,000, or 3.4%, to $422,000 for 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%,second quarter of 2019, due primarily to ~~increased letter of credit income;~~an increase in net overdraft income. ATM and debit card income ~~up $16,000,~~increased $32,000, or ~~3.8%~~6.6%, to ~~$435,000 attributable~~$519,000 for the second quarter of 2019, compared to the same period in 2018, due to increases in card-based transactions and expansion of ~~retail~~checking account households.

QNB provides securities and ~~business households;~~advisory services under the name QNB Financial Services. Retail brokerage and ~~a net loss on trading securities of $39,000 during 2016. QNB redeemed the trading portfolio during~~advisory fees increased $28,000, or 26.7%, to $133,000 for the second quarter of ~~2017.~~2019 compared to the same period in 2018. During 2018, there was a transition to move toward advanced advisory fees based on assets under management in lieu of fees per transaction. Advisory fees increased $32,000, or 41.6% comparing second quarters of 2019 and 2018, partially offset by a decline in transaction-based fees of $4,000.

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.

~~ATM and debit card~~Other non-interest income ~~merchant~~increased $27,000, or 15.3%. Other non-interest income and fees for services to customers increased for the first nine months of 2017 compared to 2016, for reasons detailed in the quarterly comparison. The increase in bank-owned life insurance income, to $261,000 includes a ~~life insurance benefit of $51,000, recorded during the second quarter 2017.~~

~~Excluding the $99,000~~$58,000 deferred gain ~~on note sale during second quarter 2017, net gains~~ on the sale of a bank-financed other real estate owned property and $18,000 broker-dealer conversion cost reimbursement in the second quarter of 2019. Other non-interest income for the second quarter of 2018 included a sales tax refund of $53,000.

Total non-interest income for the six-month periods ended June 30, 2019 and 2018 was $3,963,000 and $2,521,000, respectively, an increase of $1,442,000, or 57.2%. Excluding net gains and unrealized gain and losses on investment securities and loans ~~decreased $46,000~~for both periods total non-interest income was $2,753,000 and $2,549,000, respectively, an increase of $204,000.

Net investment securities gains increased $457,000 to ~~$217,000,~~$590,000 for the six months ended June 30, 2019 compared to $133,000 for the comparable six months in 2018. Market conditions in the equities market for the six months ended June 30, 2019 versus the same period in 2018 resulted in greater opportunities for profitable sales. Under ASU 2016-01, QNB recorded unrealized gains of $571,000 compared to unrealized losses of $205,000 on equity securities for the six months ended June 30, 2019 and 2018, respectively.

Net gains on sales of loans increased to $49,000 from $44,000, when comparing the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 to the same period in ~~2016.~~2018. Proceeds from the sale of residential mortgages were ~~$6,867,000~~$1,864,000 and ~~$7,188,000~~$1,949,000 for the ~~nine-month~~six-month periods ended ~~September~~June 30, ~~2017~~2019 and ~~2016,~~2018, respectively.

ATM and debit card and merchant income increased $72,000 and $18,000, respectively, for the first six months of 2019 compared to 2018, for reasons detailed in the quarterly comparison.

Retail brokerage and advisory ~~income was $375,000~~increased $66,000, or 31.7%, to $274,000 for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 compared ~~with $425,000 for~~to the same period in ~~2016,~~2018; advisory fees increased $86,000, or 58.9% partially offset by a ~~decrease~~decline in transaction-based fees of ~~$50,000,~~$20,000.

Other non-interest income increased $61,000, or ~~11.8%~~20.2%. ~~While assets under management have grown to $121,000,000 at September 30, 2017, recent asset growth has been~~Other non-interest income included a $58,000 deferred gain on the sale of a bank-financed other real estate owned property and $47,000 broker-dealer conversion cost reimbursement in ~~products with more trailing~~the second quarter of 2019. Other non-interest income ~~than up-front income.~~ for the second quarter of 2018 included a sales tax refund of $53,000.

Non-Interest Expense Comparison
	Three months				Change from						Nine months				Change from						Three months				Change from						Six months				Change from
	ended September 30,				prior year						ended September 30,				prior year						ended June 30,				prior year						ended June 30,				prior year
	2017		2016		Amount			Percent			2017		2016		Amount			Percent			2019		2018		Amount			Percent			2019		2018		Amount			Percent
Salaries and employee benefits	$	3,514	$	3,072	$	442			14.4	%	$	9,837	$	9,114	$	723			7.9	%	$	3,790	$	3,627	$	163			4.5	%	$	7,571	$	6,972	$	599			8.6	%
Net occupancy		469		438		31			7.1	%		1,345		1,305		40			3.1	%		506		448		58			12.9			1,011		919		92			10.0
Furniture and equipment		475		437		38			8.7	%		1,360		1,302		58			4.5	%		591		563		28			5.0			1,148		1,050		98			9.3
Marketing		188		220		(32	)		-14.5	%		724		681		43			6.3	%		263		221		42			19.0			500		531		(31	)		(5.8	)
Third-party services		379		440		(61	)		-13.9	%		1,180		1,246		(66	)		-5.3	%		446		506		(60	)		(11.9	)		886		916		(30	)		(3.3	)
Telephone, postage and supplies		201		189		12			6.3	%		600		549		51			9.3	%		152		173		(21	)		(12.1	)		351		354		(3	)		(0.8	)
State taxes		161		178		(17	)		-9.6	%		509		499		10			2.0	%		207		164		43			26.2			378		335		43			12.8
FDIC insurance premiums		156		162		(6	)		-3.7	%		431		489		(58	)		-11.9	%		135		146		(11	)		(7.5	)		265		321		(56	)		(17.4	)
Other		648		480		168			35.0	%		1,735		1,543		192			12.4	%		703		685		18			2.6			1,407		1,313		94			7.2
Total	$	6,191	$	5,616	$	575			10.2	%	$	17,721	$	16,728	$	993			5.9	%	$	6,793	$	6,533	$	260			4.0	%	$	13,517	$	12,711	$	806			6.3	%

Total non-interest expense was ~~$6,191,000~~$6,793,000 for the ~~third~~second quarter of ~~2017,~~2019, an increase of ~~$575,000,~~$260,000, or ~~10.2%~~4.0%, compared to the ~~third~~second quarter of ~~2016.~~2018.

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,~~$163,000, or ~~14.4%~~4.5%, to ~~$3,514,000~~$3,790,000 when comparing the two quarters. Salary expense and related payroll taxes increased ~~$366,000~~

$288,000, or 9.6%, to ~~$2,979,000, or 14.0%,~~$3,277,000 during the ~~third~~second quarter ~~of 2017~~2019 compared to the same period in ~~2016, attributable~~2018. Medical premiums, net of employee contributions decreased $161,000 to $223,000 when comparing the two quarters due to a ~~$171,000 increase~~reduction in ~~employee salaries and $139,000 increase in bonus accrual. Benefits expense increased $76,000, or 16.6%, due primarily to increased~~ medical ~~insurance claims and retirement~~claims. Retirement plan expense ~~offset in part by decreased~~and post-retirement life insurance benefit ~~cost, when comparing~~expense increased $27,000, and $14,000, respectively during the ~~two periods.~~same period.

Net occupancy and furniture and equipment ~~expense~~expenses increased ~~$69,000,~~$58,000, or ~~7.9%~~12.9%, ~~to $944,000 for the third quarter 2017,~~and $28,000, or 5.0%, respectively. This is due primarily to increased rent, building repairs and maintenance, ~~expense.~~depreciation of furniture and equipment and software maintenance expense of $19,000, $42,000, $36,000, and $25,000, respectively, offset in part by decreased software amortization, and equipment maintenance expense of $7,000 and $23,000, respectively, when comparing the two periods. Marketing expense ~~decreased $32,000,~~increased $42,000, or ~~14.5%~~19.0%, to ~~$188,000~~$263,000 for the quarter ended ~~September~~June 30, ~~2017 compared with the same period in 2016,~~2019 due to ~~fewer advertising campaigns in 2017.~~the timing of sponsorships and donations.

Third party services are comprised of professional services, including legal, accounting, auditing and consulting services, as well as fees paid to outside vendors for support services of day-to-day operations. These support services include correspondent banking services, IT services, statement printing and mailing, investment security safekeeping and supply management services. Third party services expense decreased ~~$61,000~~$60,000 when comparing the two periods, due primarily to ~~decreased legal services and other third-party services.~~reduced consulting fees. Telephone and postage and supplies expenses ~~increased $12,000,~~decreased $21,000, or ~~6.3%~~12.1%, due to usage. State taxes increased ~~data line capacity, and costs related to debit chip card conversion and the increase in new deposits and loans. The $17,000 decrease in state taxes is~~$43,000 due to atiming of 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~~

~~rate~~credits received in ~~effect for 2017.~~2019 versus 2019. FDIC insurance premiums decreased ~~$6,000,~~$11,000, or ~~3.7%, due~~7.5%. The FDIC assessment had included an assessment to pay the ~~change~~interest on FICO bonds since the 1990’s. FICO bonds were issued in the ~~FDIC insurance premium calculation, implemented starting~~late 1980’s to recapitalize the former Federal Savings & Loan Insurance Corporation. The last of these bonds will mature in ~~late 2016. The increase in other expenses is attributable to higher third-party processing~~September 2019 and ~~check card expense, offset in part by a reduction in foreclosure expense.~~the last FICO assessment was collected on the March 29, 2019 assessment invoice.

Total non-interest expense was ~~$17,721,000~~$13,517,000 for the ~~nine-month~~six-month period ended ~~September~~June 30, ~~2017,~~2019, an increase of ~~$993,000,~~$806,000, or ~~5.9%~~6.3%, compared to the six months ended June 30, 2018.

Salaries and benefits expense increased $599,000 to $7,571,000 for the six months ended June 30, 2019 compared to the same period in ~~2016.~~

~~Salaries and benefits expense increased $723,000 to $9,837,000~~2018, for the ~~nine months ended September 30, 2017 compared to~~same reasons described in the ~~same period in 2016.~~quarter comparison. Salary and related payroll tax expense increased ~~$595,000, to $8,118,000,~~$563,000, or ~~7.9%~~9.6%, during the ~~period. Incentive bonus and related payroll tax accrual increased $151,000, when comparing the two periods. Benefits expense~~period, to $6,403,000 while medical premiums, net of employee contributions, decreased ~~$22,000,~~$26,000, to ~~$1,333,000, related to decreased medical premium and post-retirement life insurance expense.~~

Net occupancy and furniture and equipment expense increased ~~$98,000~~$190,000, or 9.6%, to ~~$2,705,000,~~$2,159,000, and third-party services decreased $30,000, or 3.3%, to $886,000 for the six months ended June 30, 2019, for the same reasons described in the quarter comparison.

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

Telephone, postage and supplies expenses ~~increased~~decreased slightly in the first ~~nine~~six months of ~~2017~~2019 compared to ~~2016,~~2018, FDIC insurance premiums decreased $56,000 and marketing decreased $31,000, due to the reasons described in the quarter comparison. ~~Third party services expense decreased $66,000 for the nine months ended September 30, 2017 when compared to the same period in 2016.~~

State taxes rose slightly, due to increased equity for the Bank. FDIC insurance expense decreased $58,000 and other non-interest expense increased $192,000, for the reasons described in the quarter comparison.

QNB utilizes an asset and liability approach for financial accounting and reporting of income taxes. As of ~~September~~June 30, ~~2017,~~2019, QNB’s net deferred tax asset was ~~$4,741,000.~~$1,528,000. The primary components ~~comprise~~of deferred taxes are deferred tax assets of ~~$2,762,000~~$1,924,000 relating to the allowance for loan losses ~~$1,234,000~~and $105,000 related to unrealized losses on available for sale ~~securities, $486,000 related to non-accrual interest income.~~securities. As of December 31, ~~2016,~~2018, QNB’s net deferred tax asset was ~~$5,473,000.~~$3,724,000. 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, 2019 to December 31, 2018 is ~~primarily the result of a $702,000 decline~~ due to ~~decreased~~lower unrealized losses on available for sale securities at September 30, 2017, compared with 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.securities.

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~~$679,000 for the quarter and ~~$2,907,000~~$1,496,000 for the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2019, compared ~~with $821,000~~to $572,000 and ~~$2,311,000, respectively,~~$1,129,000 for the same periods in ~~2016.~~2018. The effective tax rate for ~~the third~~second quarter and year-to-date ~~2017~~2019 was ~~26.9%~~17.8% and ~~27.2%~~18.7%, respectively, compared with ~~26.4%~~16.7% and ~~25.8%, respectively,~~16.3% for the same periods in ~~2016. This~~2018. The increase in ~~the~~ effective tax rate in ~~2017~~2019 is due to the ~~decreased proportion of tax-free~~state income tax provision at the parent company related to ~~total income, primarily municipal securities~~the increase in realized gains on the equities portfolio and ~~municipal loan~~the reduction in tax-exempt net interest income.

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.~~2019. 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,~~continue in 2019, 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~~2019 were ~~$1,150,363,000~~$1,212,005,000 compared with ~~$1,063,141,000~~$1,175,452,000 at December 31, ~~2016.~~2018. Cash and cash equivalents increased ~~$15,307,000~~$610,000 from ~~$10,721,000~~$13,458,000 at December 31, ~~2016~~2018 to ~~$26,028,000~~$14,068,000 at ~~September~~June 30, ~~2017.~~

~~During the second quarter 2017, QNB Bank redeemed the trading~~2019, due primarily to growth in deposit balances and paydowns of amortizing mortgage-backed 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~~six months ended ~~September~~June 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.2019.

~~Aside from the redemptions detailed above, the~~The composition of the investment portfolio is essentially unchanged since December 31, ~~2016.~~2018; however, QNB traded out lower-yielding municipal bonds for higher yielding mortgage-backed bonds. 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. QNB owns one CDO in the form of a pooled trust preferred security, with a fair value of $108,000. PreTSL IV represents the senior-most obligation of the trust.

Loans receivable grew ~~$71,135,000,~~$32,145,000, or ~~11.2%~~4.1%, with commercial loans increasing ~~$58,960,000,~~$35,372,000, or ~~11.6%~~5.6%, to ~~$567,640,000~~$668,867,000 at ~~September~~June 30, ~~2017,~~2019, compared with ~~$508,680,000~~$633,495,000 at year-end ~~2016.~~2018. Retail loan balances ~~grew $12,078,000, or 9.7%, to $136,397,000, when~~at $148,506,000 declined $3,207,000 comparing ~~September~~June 30, ~~2017~~2019 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.~~2018.

~~Deposit growth was led by savings balances, which increased $12,371,000,~~Deposits grew $15,063,000, or ~~5.2%~~1.5%, ~~to $250,618,000~~ from December 31, ~~2016~~2018 to ~~September~~June 30, ~~2017.~~2019. Non-interest-bearing demand deposits grew $20,976,000, or 16.3%, to $149,591,000 at June 30, 2019 compared with $128,615,000 at year-end 2018, primarily due to growth in business deposits and is partially offset by decreases in commercial sweep accounts in short-term borrowings. Interest-bearing demand balances, excluding municipal deposits, grew ~~$10,889,000,~~$5,837,000, or ~~6.7%~~2.8%, to ~~$173,876,000.~~$216,788,000, with the commercial checking product providing the majority of the growth. The $29,764,000 decline in savings was partially offset by growth in time deposits as balances were moved to higher-yielding accounts. Total time deposits increased $10,523,000 from December 31, 2018 to June 30, 2019. Municipal deposit balances increased ~~$53,743,000~~$7,228,000, or 7.7%, to ~~$146,510,000.~~$100,929,000. Municipal deposits can be volatile depending on the timing of deposits and withdrawals, and the cash flow needs of the school districts or municipalities. It is anticipated that total deposits will decrease as tax money received from the local school districts during second and third quarters flows out for the subsequent twelve months as the schools use the funds for operations. These 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, as tax money received from the local school districts peaks during September, then flows out for the subsequent twelve months as the schools use the funds for operations.

Short-term borrowings ~~decreased 23.7%~~increased 16.1%, from ~~$52,660,000~~$50,872,000 at December 31, ~~2016~~2018 to ~~$40,176,000~~$59,048,000 at ~~September~~June 30, ~~2017.~~2019. Commercial sweep accounts decreased ~~$5,163,000,~~$7,683,000, as these funds may be volatile based on businesses’ receipt and disbursement of ~~funds. There were no overnight~~funds and is offset by increases in business non-interest-bearing demand accounts. Overnight borrowings ~~at September 30, 2017, compared with $7,321,000 at year-end 2016.~~from FHLB increased $15,859,000 to $19,724,000 supporting loan growth.

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,~~2019, the Bank had a maximum borrowing capacity with the FHLB of approximately ~~$286,951,000,~~$308,720,000, net of the $19,724,000 in overnight borrowings and a $350,000 letter of credit at ~~September~~June 30, ~~2017.~~2019. 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 correspondent banks totaling ~~$46,000,000.~~$51,000,000. At ~~September~~June 30, ~~2017,~~ there were no outstanding borrowings under these lines. During the six months ended June 30, 2019, the Bank borrowed from the FHLB ~~line or these Federal funds lines.~~to fund short-term liquidity needs. Future availability under these lines is subject to the policies of the granting banks and may be withdrawn.

Liquid sources of funds, including cash, ~~trading~~available-for-sale and ~~available-for-sale~~equity investment securities, and loans held-for-sale have increased ~~$16,975,000~~$1,594,000 since December 31, ~~2016,~~2018, totaling ~~$422,556,000~~$368,694,000 at ~~September~~June 30, ~~2017. Cashflow from payments, calls and sales of securities have been used~~2019. Growth in deposits since year-end ~~2016~~2018 has been used to fund loans. 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~~$202,175,000 and ~~$166,628,000~~$194,573,000 of available-for-sale debt securities at ~~September~~June 30, ~~2017~~2019 and December 31, ~~2016,~~2018, respectively, were pledged as collateral for repurchase agreements and deposits of public funds. 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.

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~~2019 was ~~$100,512,000,~~$115,878,000, or ~~8.74%~~9.56% of total assets, compared with shareholders' equity of ~~$93,567,000,~~$104,348,000, or ~~8.80%~~8.88% of total assets, at December 31, ~~2016.~~2018. Shareholders’ equity at ~~September~~June 30, ~~2017~~2019 and December 31, ~~2016~~2018 included a negative adjustment of ~~$2,395,000~~$396,000 and ~~$3,757,000,~~$7,132,000, respectively, related to unrealized holding losses, net of taxes, on investment securities available-for-sale. Without these adjustments, shareholders' equity to total assets would have been ~~8.93%~~9.59% and ~~9.12%~~9.43% at ~~September~~June 30, ~~2017~~2019 and December 31, ~~2016,~~2018, respectively.

Average shareholders' equity and average total assets were ~~$100,532,000~~$114,434,000 and ~~$1,104,841,000~~$1,194,932,000 for the ~~first nine~~six months ~~of 2017,~~ended June 30, 2019, an increase of ~~6.4%~~7.9% and ~~7.1%~~2.5%, respectively, from the averages for the ~~year~~six months ended ~~December 31, 2016.~~June 30, 2018. The ratio of average total equity to average total assets was 9.58% for the six months ended June 30, 2019 compared to 9.10% for ~~nine months ended September 30, 2017 compared to 9.16% for all 2016.~~the same period in 2018.

Retained earnings at ~~September~~June 30, ~~2017~~2019 were impacted by ~~nine~~six months of net income totaling ~~$7,800,000~~$6,522,000 partially offset by dividends declared and paid of ~~$3,186,000~~$2,305,000 for the same 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. The Plan also allows participants to make additional cash purchases of stock at a discount. Stock purchases under the Plan contributed ~~$739,000 and $753,000~~$433,000 to capital during the ~~nine~~six months ended ~~September~~June 30, ~~2017 and 2016, respectively.~~2019.

The Board of Directors has authorized the repurchase of up to 100,000 shares of its common stock in open market or privately negotiated transactions. The repurchase authorization does not bear a termination date. As of ~~September~~June 30, ~~2017,~~2019, 57,883 shares were repurchased under this authorization at an average price of $16.97 and a total cost of $982,000. There have been no additional shares repurchased under the plan since the first quarter of 2009.

QNB and the Bank are 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”)~~(Basel III) became effective for QNB on January 1, 2015, with full compliance with all of the of final rule’s requirements phased in over a multi-year schedule, ~~to be~~and were fully phased-in by January 1, 2019.

Under the final rules, minimum requirements increased for both the quantity and quality of capital. The rules included a new common equity Tier 1 capital to risk-weighted assets minimum ratio of 4.5%, raised the minimum ratio of Tier 1 capital to risk-weighted assets from 4.0% to 6.0%, required a minimum ratio of Total Capital to risk-weighted assets of 8.0%, and required a minimum Tier 1 leverage ratio of 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% of risk-weighted assets, and ~~will increase~~increased each subsequent year by an additional 0.625% until reaching its final level of 2.5% on January 1, 2019. Strict eligibility criteria for regulatory 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.~~Bank have sufficient capital to meet minimum regulatory capital requirements plus the fully phased-in capital conservation buffer.

	September 30,			December 31,			June 30,			December 31,
Capital Analysis	2017			2016			2019			2018
Regulatory Capital
Shareholders' equity	$	100,512		$	93,567		$	115,878		$	104,348
Net unrealized securities losses, net of tax		2,395			3,757			396			7,132
Net unrealized losses on available-for-sale equity securities, net of tax		(160	)		—
Deferred tax assets on net operating loss								(13	)		—
Disallowed intangible assets		(6	)		(4	)		(8	)		(8	)
Common equity tier I capital		102,741			97,320			116,253			111,472

Tier I capital		102,741			97,320			116,253			111,472
Allowable portion: Allowance for loan losses and reserve for unfunded commitments		8,198			7,453			9,237			8,907
Unrealized gains on equity securities, net of tax		—			47
Total regulatory capital	$	110,939		$	104,820		$	125,490		$	120,379
Risk-weighted assets	$	862,891		$	822,210		$	935,331		$	911,374
Quarterly average assets for leverage capital purposes	$	1,136,300		$	1,061,976		$	1,202,385		$	1,186,448

	September 30,			December 31,			June 30,			December 31,
Capital Ratios	2017			2016			2019			2018
Common equity tier I capital / risk-weighted assets		11.91	%		11.84	%		12.43	%		12.23	%
Tier I capital / risk-weighted assets		11.91	%		11.84	%		12.43	%		12.23	%
Total regulatory capital / risk-weighted assets		12.86	%		12.75	%		13.42	%		13.21	%
Tier I capital / average assets (leverage ratio)		9.04	%		9.16	%		9.67	%		9.40	%

~~There was little change in~~At June 30, 2019, common equity Tier I, Tier I capital, and total regulatory capital ratios ~~between~~increased from December 31, ~~2016~~2018, due to increased regulatory capital and ~~September 30, 2017.~~improved credit quality. The Company remains well-capitalized by all applicable regulatory requirements as of ~~September~~June 30, ~~2017.~~2019.

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 liability sensitive when its liabilities (deposits and borrowings) reprice faster or than its earning assets (loans and securities). A liability sensitive balance sheet will produce relatively less net interest income when interest rates rise and more net interest income when they decline. Based on our simulation analysis, management believes QNB’s interest sensitivity position at ~~September~~June 30, ~~2017~~2019 is liability sensitive. Management expects that market interest decline rates ~~may gradually increase~~will in 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~~2019 and ~~2016~~2018 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				2019			2018
+300			-7.98	%		-6.73	%			-3.56	%		-10.08	%
+200			-5.16	%		-4.09	%			-1.98	%		-6.60	%
+100			-2.38	%		-1.78	%			-0.58	%		-3.15	%
-100			-5.25	%	*N/A					-3.30	%		-0.02	%
-200										-10.14	%		-7.98	%

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.

QNB is not subject to foreign currency exchange or commodity price risk. At ~~September~~June 30, ~~2017~~2019, QNB did not have any hedging transactions in place such as interest rate swaps, caps or floors.

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

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 covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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.~~2018.

QNB did not repurchase any shares of its common stock during the quarter ended ~~September~~June 30, ~~2017.~~2019. The following provides certain information relating to QNB's stock repurchase plan.

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.

15 North Third Street, P.O. Box 9005 Quakertown, PA		18951-9005
(Address of Principal Executive Offices)		(Zip Code)

Large accelerated filer	☐	Accelerated filer	☒
Non-accelerated filer	☐	Smaller Reporting Company	☐☒
Emerging growth company	☐

Class		Outstanding at ~~October 31, 2017~~August 1, 2019
Common Stock, par value $0.625		~~3,440,356~~3,501,446

	PART I - FINANCIAL INFORMATION

ITEM 1.	CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)	PAGE

	Consolidated Balance Sheets at ~~September~~June 30, ~~2017~~2019 and December 31, ~~2016~~2018	3

	Consolidated Statements of Income for the Three and ~~Nine~~Six Months Ended ~~September~~June 30, ~~2017~~2019 and ~~2016~~2018	4

	Consolidated Statements of Comprehensive Income (Loss) for the Three and ~~Nine~~Six Months Ended ~~September~~June 30, ~~2017~~2019 and ~~2016~~2018	5

	Consolidated Statement of Shareholders’ Equity for the ~~Nine~~Three and Six Months Ended ~~September~~June 30, ~~2017~~2019 and ~~2016~~2018	6

	Consolidated Statements of Cash Flows for the ~~Nine~~Six Months Ended ~~September~~June 30, ~~2017~~2019 and ~~2016~~2018	78

	Notes to Consolidated Financial Statements	89

ITEM 2.	MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	3938

ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK	6057

ITEM 4.	CONTROLS AND PROCEDURES	6057

	PART II - OTHER INFORMATION

ITEM 1.	LEGAL PROCEEDINGS	6158

ITEM 1A.	RISK FACTORS	6158

ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	6158

ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	6158

ITEM 4.	MINE SAFETY DISCLOSURES	6158

ITEM 5.	OTHER INFORMATION	6158

ITEM 6.	EXHIBITS	6259

SIGNATURES

CERTIFICATIONS

For the six months ended	June 30, 2019

Lease cost:
Operating lease cost	$	281
Total lease cost	$	281

Other information:
Cash paid for amounts included in the measurement of lease liabilities:
Operating cashflows from operating leases	$	(282	)
Total cash paid for amounts included in the measurement of lease liabilities	$	(282	)

At implementation of new accounting guidance:
Right-of-use assets recorded for operating lease liabilities	$	2,005

Right-of-use assets obtained in exchange for new operating lease liabilities	$	501

Weighted average remaining lease term:
Operating leases	7.8 years

Weighted average discount rate:
Operating leases		3.16	%

	(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

	Operating Leases
July 2019 thru June 2020	$	500
July 2020 thru June 2021		397
July 2021 thru June 2022		371
July 2022 thru June 2023		357
July 2023 thru June 2024		284
July 2024 and thereafter		999
Total undiscounted cashflows		2,908
Total discount on cashflows		(399	)
Total lease liabilities	$	2,509

	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
Granted		25,000			37.60
Exercised		(11,775	)		22.33
Forfeited		(100	)		21.35
Outstanding at September 30, 2017		87,075		$	30.80		2.87	$	848
Exercisable at September 30, 2017		20,725		$	24.39		0.93	$	335

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

	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

Three months ended June 30, 2019	Balance, beginning of period		Provision for (credit to) loan losses			Charge-offs			Recoveries		Balance, end of period
Commercial:
Commercial and industrial	$	3,083	$	208		$	—		$	11	$	3,302
Construction		602		73			—			—		675
Secured by commercial real estate		2,829		84			—			—		2,913
Secured by residential real estate		743		(58	)		(5	)		42		722
State and political subdivisions		190		11			—			—		201
Retail:
1-4 family residential mortgages		500		(67	)		—			—		433
Home equity loans and lines		341		(56	)		(1	)		10		294
Consumer		166		80			(67	)		9		188
Unallocated		561		(125	)	N/A			N/A			436
Total	$	9,015	$	150		$	(73	)	$	72	$	9,164

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

~~July~~April 1, ~~2017~~2019 through ~~July 31, 2017~~April 30, 2019		—		—		—		42,117
~~August~~May 1, ~~2017~~2019 through ~~August~~May 31, ~~2017~~2019		—		—		—		42,117
~~September~~June 1, ~~2017~~2019 through ~~September~~June 30, ~~2017~~2019		—		—		—		42,117
Total		—		—		—		42,117


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 13, 2015).

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

Exhibit 31.1	~~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 Certification of Chief Executive Officer

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


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

	QNB Corp.

Date: ~~November 8, 2017~~August 7, 2019	By:	/s/ David W. Freeman
		David W. Freeman
		Chief Executive Officer

Date: ~~November 8, 2017~~August 7, 2019	By:	/s/ Janice McCracken Erkes
		Janice McCracken Erkes
		Chief Financial Officer

Date: ~~November 8, 2017~~August 7, 2019	By:	/s/ ~~Phillip N. Geiger~~Mary E. Liddle
		~~Phillip N. Geiger~~Mary E. Liddle
		Chief Accounting Officer, QNB Bank