UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended SeptemberJune 30, 20172019
OR
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 0-17706
QNB Corp.
(Exact Name of Registrant as Specified in Its Charter)
Pennsylvania |
| 23-2318082 |
(State or Other Jurisdiction of Incorporation or Organization) |
| (I.R.S. Employer Identification No.) |
15 North Third Street, P.O. Box 9005 Quakertown, PA |
| 18951-9005 |
(Address of Principal Executive Offices) |
| (Zip Code) |
(215) 538-5600
Registrant's Telephone Number, Including Area Code
Not Applicable
Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report.
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☐ |
| Accelerated filer | ☒ |
Non-accelerated filer | ☐ |
| Smaller Reporting Company |
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Emerging growth company | ☐ |
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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 ☒
Securities registered pursuant to Section 12(b) of the Act: None.
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
QNBC | N/A |
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
Class |
| Outstanding at |
Common Stock, par value $0.625 |
|
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FORM 10-Q
QUARTER ENDED SEPTEMBERJUNE 30, 20172019
INDEX
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| PART I - FINANCIAL INFORMATION |
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ITEM 1. |
| CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) |
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| Consolidated Balance Sheets at |
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ITEM 2. |
| MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
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ITEM 3. |
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ITEM 4. |
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ITEM 1. |
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ITEM 1A. |
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ITEM 2. |
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ITEM 3. |
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ITEM 4. |
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ITEM 5. |
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ITEM 6. |
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CERTIFICATIONS |
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2
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| (in thousands, except share data) |
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| (in thousands, except share data) |
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| (current period unaudited) |
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| (current period unaudited) |
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| September 30, 2017 |
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| December 31, 2016 |
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| June 30, 2019 |
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| December 31, 2018 |
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Assets |
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Cash and due from banks |
| $ | 14,438 |
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| $ | 8,897 |
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| $ | 13,036 |
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| $ | 12,888 |
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Interest-bearing deposits in banks |
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| 11,590 |
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| 1,824 |
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| 1,032 |
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| 570 |
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Total cash and cash equivalents |
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| 26,028 |
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| 10,721 |
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| 14,068 |
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| 13,458 |
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Investment securities |
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Trading |
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| — |
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| 3,596 |
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Available-for-sale (amortized cost $400,041 and $396,168) |
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| 396,413 |
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| 390,475 |
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Restricted investment in bank stocks |
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| 578 |
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| 1,017 |
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Loans held-for-sale |
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| 115 |
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| 789 |
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Investments: |
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Available-for-sale (amortized cost $348,229 and $353,249) |
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| 347,728 |
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| 344,221 |
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Equity securities (cost of $6,985 and $10,079) |
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| 6,898 |
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| 9,421 |
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Restricted investment in stocks |
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| 1,872 |
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| 797 |
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Loans receivable |
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| 704,214 |
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| 633,079 |
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| 817,593 |
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| 785,448 |
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Allowance for loan losses |
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| (8,125 | ) |
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| (7,394 | ) |
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| (9,164 | ) |
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| (8,834 | ) |
Net loans |
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| 696,089 |
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| 625,685 |
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| 808,429 |
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| 776,614 |
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Bank-owned life insurance |
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| 10,811 |
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| 11,297 |
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| 11,330 |
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| 11,192 |
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Premises and equipment, net |
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| 8,546 |
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| 8,683 |
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| 12,249 |
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| 9,918 |
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Accrued interest receivable |
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| 3,616 |
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| 3,128 |
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| 3,962 |
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| 2,852 |
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Net deferred tax assets |
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| 4,741 |
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| 5,473 |
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| 1,528 |
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| 3,724 |
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Other assets |
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| 3,426 |
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| 2,277 |
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| 3,941 |
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| 3,255 |
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Total assets |
| $ | 1,150,363 |
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| $ | 1,063,141 |
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| $ | 1,212,005 |
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| $ | 1,175,452 |
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Liabilities |
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Deposits |
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Demand, non-interest bearing |
| $ | 122,696 |
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| $ | 119,010 |
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| $ | 149,591 |
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| $ | 128,615 |
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Interest-bearing demand |
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| 320,386 |
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| 255,754 |
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| 317,717 |
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| 304,652 |
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Money market |
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| 81,306 |
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| 74,762 |
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| 79,044 |
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| 78,781 |
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Savings |
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| 250,618 |
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| 238,247 |
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| 249,998 |
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| 279,762 |
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Time |
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| 127,430 |
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| 131,370 |
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| 123,131 |
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| 117,569 |
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Time of $100 or more |
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| 103,009 |
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| 94,212 |
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| 111,180 |
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| 106,219 |
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Total deposits |
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| 1,005,445 |
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| 913,355 |
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| 1,030,661 |
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| 1,015,598 |
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Short-term borrowings |
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| 40,176 |
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| 52,660 |
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| 59,048 |
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| 50,872 |
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Accrued interest payable |
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| 336 |
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| 335 |
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| 599 |
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| 449 |
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Other liabilities |
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| 3,894 |
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| 3,224 |
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| 5,819 |
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| 4,185 |
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Total liabilities |
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| 1,049,851 |
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| 969,574 |
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| 1,096,127 |
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| 1,071,104 |
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Shareholders' Equity |
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Common stock, par value $0.625 per share; |
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authorized 10,000,000 shares; 3,604,825 shares and 3,576,270 |
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shares issued; 3,440,256 and 3,411,701 shares outstanding |
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| 2,253 |
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| 2,235 |
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authorized 10,000,000 shares; 3,666,015 shares and 3,648,649 |
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shares issued; 3,501,446 and 3,484,080 shares outstanding |
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| 2,291 |
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| 2,280 |
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Surplus |
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| 18,369 |
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| 17,418 |
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| 20,607 |
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| 20,041 |
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Retained earnings |
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| 84,761 |
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| 80,147 |
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| 95,852 |
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| 91,635 |
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Accumulated other comprehensive loss, net of tax |
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| (2,395 | ) |
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| (3,757 | ) |
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| (396 | ) |
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| (7,132 | ) |
Treasury stock, at cost; 164,569 shares |
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| (2,476 | ) |
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| (2,476 | ) |
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| (2,476 | ) |
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| (2,476 | ) |
Total shareholders' equity |
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| 100,512 |
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| 93,567 |
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| 115,878 |
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| 104,348 |
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Total liabilities and shareholders' equity |
| $ | 1,150,363 |
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| $ | 1,063,141 |
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| $ | 1,212,005 |
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| $ | 1,175,452 |
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The accompanying notes are an integral part of the consolidated financial statements.
3
CONSOLIDATED STATEMENTS OF INCOME
|
| (in thousands, except per share data - unaudited) |
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| (in thousands, except per share data - unaudited) |
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| Three months ended September 30, |
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| Nine months ended September 30, |
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| Three months ended June 30, |
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| Six months ended June 30, |
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| 2017 |
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| 2016 |
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| 2017 |
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| 2016 |
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| 2019 |
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| 2018 |
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| 2019 |
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| 2018 |
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Interest income |
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Interest and fees on loans |
| $ | 7,722 |
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| $ | 6,376 |
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| $ | 21,909 |
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| $ | 19,060 |
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| $ | 9,637 |
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| $ | 8,512 |
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| $ | 18,860 |
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| $ | 16,939 |
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Interest and dividends on investment securities (AFS & HTM): |
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Interest and dividends on investment securities (Available-for-sale & Equity): |
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Taxable |
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| 1,558 |
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| 1,317 |
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| 4,672 |
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| 3,964 |
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| 1,660 |
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| 1,551 |
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| 3,274 |
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| 3,128 |
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Tax-exempt |
|
| 507 |
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| 478 |
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| 1,456 |
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| 1,483 |
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| 382 |
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| 461 |
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| 808 |
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| 944 |
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Interest on trading securities |
|
| — |
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| 36 |
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| 45 |
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| 106 |
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Interest on interest-bearing balances and other interest income |
|
| 43 |
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|
| 80 |
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| 76 |
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| 138 |
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|
| 33 |
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|
| 38 |
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|
| 59 |
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|
| 60 |
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Total interest income |
|
| 9,830 |
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|
| 8,287 |
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| 28,158 |
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| 24,751 |
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| 11,712 |
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|
| 10,562 |
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|
|
| 23,001 |
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|
| 21,071 |
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Interest expense |
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Interest on deposits |
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Interest-bearing demand |
|
| 351 |
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|
| 177 |
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|
|
| 753 |
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|
| 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 |
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|
|
| 1,127 |
|
|
| 1,122 |
|
|
| 479 |
|
|
| 379 |
|
|
|
| 898 |
|
|
| 757 |
|
Time of $100 or more |
|
| 357 |
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|
| 330 |
|
|
|
| 1,008 |
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|
| 967 |
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Time of $100,000 or more |
|
| 514 |
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|
| 415 |
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|
| 972 |
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| 814 |
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Interest on short-term borrowings |
|
| 61 |
|
|
| 36 |
|
|
| 193 |
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|
| 115 |
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|
| 196 |
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|
| 201 |
|
|
| 386 |
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|
| 380 |
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Total interest expense |
|
| 1,515 |
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|
| 1,202 |
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|
|
| 4,105 |
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|
| 3,526 |
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|
| 2,601 |
|
|
| 1,862 |
|
|
|
| 5,054 |
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|
| 3,580 |
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Net interest income |
|
| 8,315 |
|
|
| 7,085 |
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|
|
| 24,053 |
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|
| 21,225 |
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|
| 9,111 |
|
|
| 8,700 |
|
|
|
| 17,947 |
|
|
| 17,491 |
|
Provision for loan losses |
|
| 100 |
|
|
| — |
|
|
| 700 |
|
|
| 125 |
|
|
| 150 |
|
|
| 187 |
|
|
| 375 |
|
|
| 375 |
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Net interest income after provision for loan losses |
|
| 8,215 |
|
|
| 7,085 |
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|
|
| 23,353 |
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|
| 21,100 |
|
|
| 8,961 |
|
|
| 8,513 |
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|
|
| 17,572 |
|
|
| 17,116 |
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Non-interest income |
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Total other-than-temporary impairment loss on investment securities |
|
| (80 | ) |
|
| — |
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|
| (80 | ) |
|
| (192 | ) | ||||||||||||||||||
Less: Portion of loss recognized in other comprehensive income (before taxes) |
|
| — |
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|
| — |
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|
| — |
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|
| — |
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Net other-than temporary impairment losses on investment securities |
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| (80 | ) |
|
| — |
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|
| (80 | ) |
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| (192 | ) | ||||||||||||||||||
Net gain on sale of investment securities |
|
| 178 |
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|
| 316 |
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|
| 1,042 |
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|
| 842 |
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Net gain on investment securities |
|
| 98 |
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|
| 316 |
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|
| 962 |
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|
| 650 |
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Net (loss) gain on trading activities |
|
| — |
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| (39 | ) |
|
| 27 |
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|
| 47 |
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Net gain on sales of investments available-for-sale and equity securities |
|
| 584 |
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|
| 48 |
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|
| 590 |
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|
| 133 |
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Unrealized (loss) gain on investment equity securities |
|
| (405 | ) |
|
| 41 |
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|
| 571 |
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| (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.
4
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
|
| (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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, |
| 2017 |
|
| 2016 |
| ||||||||||||||||||
|
| Before tax amount |
|
| Tax expense (benefit) |
|
| Net of tax amount |
|
| Before tax amount |
|
| Tax expense (benefit) |
|
| Net of tax amount |
| ||||||
Net income |
| $ | 10,707 |
|
| $ | 2,907 |
|
| $ | 7,800 |
|
| $ | 8,966 |
|
| $ | 2,311 |
|
| $ | 6,655 |
|
Other comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized holding gains on securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding gains arising during the period |
|
| 3,027 |
|
|
| 1,029 |
|
|
| 1,998 |
|
|
| 4,944 |
|
|
| 1,681 |
|
|
| 3,263 |
|
Reclassification adjustment for gains included in net income |
|
| (962 | ) |
|
| (326 | ) |
|
| (636 | ) |
|
| (650 | ) |
|
| (221 | ) |
|
| (429 | ) |
Other comprehensive income |
|
| 2,065 |
|
|
| 703 |
|
|
| 1,362 |
|
|
| 4,294 |
|
|
| 1,460 |
|
|
| 2,834 |
|
Total comprehensive income |
| $ | 12,772 |
|
| $ | 3,610 |
|
| $ | 9,162 |
|
| $ | 13,260 |
|
| $ | 3,771 |
|
| $ | 9,489 |
|
Tax rate of 21% for 2019 and 2018
The accompanying notes are an integral part of the consolidated financial statements
5
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Nine months
Three month ended SeptemberJune 30, 20172019 and 20162018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Accumulated |
|
|
|
|
|
|
|
|
| |
|
| Number of |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Other |
|
|
|
|
|
|
|
|
| ||
(unaudited) |
| Shares |
|
| Common |
|
|
|
|
|
| Retained |
|
| Comprehensive |
|
| Treasury |
|
|
|
|
| |||||
(in thousands, except share and per share data) |
| Outstanding |
|
| Stock |
|
| Surplus |
|
| Earnings |
|
| Income (Loss) |
|
| Stock |
|
| Total |
| |||||||
Balance, December 31, 2015 |
|
| 3,359,794 |
|
| $ | 2,203 |
|
| $ | 15,973 |
|
| $ | 75,289 |
|
| $ | (546 | ) |
| $ | (2,476 | ) |
| $ | 90,443 |
|
Net income |
|
|
|
|
|
| — |
|
|
| — |
|
|
| 6,655 |
|
|
| — |
|
|
| — |
|
|
| 6,655 |
|
Other comprehensive income, net of tax |
|
|
|
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 2,834 |
|
|
| — |
|
|
| 2,834 |
|
Cash dividends declared ($0.90 per share) |
|
|
|
|
|
| — |
|
|
| — |
|
|
| (3,045 | ) |
|
| — |
|
|
| — |
|
|
| (3,045 | ) |
Stock issued in connection with dividend reinvestment and stock purchase plan |
|
| 24,886 |
|
|
| 15 |
|
|
| 738 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 753 |
|
Stock issued for employee stock purchase plan |
|
| 1,540 |
|
|
| 1 |
|
|
| 40 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 41 |
|
Stock issued for options exercised |
|
| 13,868 |
|
|
| 9 |
|
|
| 234 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 243 |
|
Tax benefit of stock options exercised |
|
|
|
|
|
| — |
|
|
| 12 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 12 |
|
Stock-based compensation expense |
|
|
|
|
|
| — |
|
|
| 60 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 60 |
|
Balance, September 30, 2016 |
|
| 3,400,088 |
|
| $ | 2,228 |
|
| $ | 17,057 |
|
| $ | 78,899 |
|
| $ | 2,288 |
|
| $ | (2,476 | ) |
| $ | 97,996 |
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 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.
7
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
| (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
78
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements include the accounts of QNB Corp. and its wholly-owned subsidiary, QNB Bank (the “Bank”). The consolidated entity is referred to herein as “QNB” or the “Company”. All significant intercompany accounts and transactions are eliminated in the consolidated financial statements.
These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in QNB's 20162018 Annual Report incorporated in the Form 10-K. Operating results for the threethree- and nine-monthsix-month periods ended SeptemberJune 30, 20172019 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 CompanyQNB has evaluated events and transactions occurring subsequent to the balance sheet date of SeptemberJune 30, 2017,2019, for items that should potentially be recognized or disclosed in these consolidated financial statements.
2. RECENT ACCOUNTING PRONOUNCEMENTS
In May 2014, theQNB adopted Financial Accounting Standards Board (“FASB”)(FASB) issued Accounting StandardsStatement 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:
Equity investments with readily determinable fair values must be measured at fair value with changes in fair value recognized in net income.
Equity investments without readily determinable fair values must be measured at either fair value or at cost adjusted for changes in observable prices minus impairment. Changes in value under either of these methods would be recognized in net income.
Entities that record financial liabilities at fair value due to a fair value option election must recognize changes in fair value in other comprehensive income if it is related to instrument-specific credit risk.
Entities must assess whether a valuation allowance is required for deferred tax assets related to available-for-sale debt securities.
8
QNB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
This ASU is effective for public companies for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. If QNB adopted this guidance on October 1, 2017 it would have resulted in a decrease in retained earnings of approximately $160,000 and a corresponding increase in accumulated other comprehensive loss to reflect the reclassification of the unrealized losses as of September 30, 2017. There would have been no overall impact on shareholder’s equity as the equity securities held by QNB are currently recorded at fair value through accumulated other comprehensive income (loss).
Based on an evaluation of our deferred tax asset and considering the effect of the new guidance, management believes that deferred tax assets related to AFS debt securities are realizable and no valuation allowance would be required. Management believes the potential effect of using exit versus entry price is most relevant for fair value disclosures of loans, which considers the impact of credit risk on fair value. The Company expects to use the modified retrospective method for transition in which the cumulative effect will be recognized at the date of adoption with no restatement of comparative periods presented.
On February 25, 2016, the FASB issued ASU(ASU) 2016-02, Leases (Topic 842).effective January 1, 2019. This new standard on accounting for leases introducesintroduced 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. GAAPgenerally 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 evaluatingapplied 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 amendseffective date; and, for contracts which have remaining obligations as of the principal-versus agent implementation guidance and illustrationseffective 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 unitinitial value of accountthe 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 guidanceoperating 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 provisionsoperating 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.
9
QNB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 | % |
|
|
|
|
A maturity analysis of the operating lease liabilities and reconciliation of the undiscounted cash flows to the total operating lease liability is as follows:
|
| Operating Leases |
| |
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 |
|
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.
To that end, the new guidance:
Eliminates the probable initial recognition threshold in current U.S. GAAP and, instead, reflects an organization’s current estimate of all expected credit losses over the contractual term of its financial assets
Broadens the information an entity can consider when measuring credit losses to include forward-looking information
Increases usefulness of the financial statements by requiring timely inclusion of forecasted information in forming expectations of credit losses
Increases comparability of purchased financial assets with credit deterioration (PCD assets) with other purchased assets that do not have credit deterioration as well as originated assets because credit losses that are expected will be recorded through an allowance for credit losses for all assets
10
QNB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Increases users’ understanding of underwriting standards and credit quality trends by requiring additional information about credit quality indicators by year of origination (vintage)
• | Increases users’ understanding of underwriting standards and credit quality trends by requiring additional information about credit quality indicators by year of origination (vintage) |
For available-for-sale debt securities, aligns the income statement recognition of credit losses with the reporting period in which changes occur by recording credit losses (and subsequent changes in credit losses) through an allowance rather than a write down
The new guidance affects organizations that hold financial assets and net investments in leases that are not accounted for at fair value with changes in fair value reported in net income. The new guidance affects loans, debt securities, trade receivables, net investments in leases, off-balance-sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash.
For public business entities that are U.S. Securities and Exchange Commission (SEC) filers, the new guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early application will be permitted for all organizations for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. QNB is evaluating the impact of this new standard on its consolidated financial statements.
On March 30, 2017, the FASB issued 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.
3. STOCK-BASED COMPENSATION AND SHAREHOLDERS’ EQUITY
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 SeptemberJune 30, 20172019 and 2016,2018, respectively. Stock-based compensation expense was $72,000$60,000 and $60,000$58,000 for the ninesix months ended SeptemberJune 30, 20172019 and 2016,2018, respectively. As of SeptemberJune 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 SeptemberJune 30, 2017,2019, there were 184,200 options granted, 65,15065,850 options forfeited, 80,475103,950 options exercised, and 38,57514,400 options outstanding under this Plan. The 2005 Plan expired on March 15, 2015.
10
QNB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The 2015 Plan authorizes the issuance of 300,000 shares. The terms of the 2015 Plan are identical to the 2005 Plan. There were 48,50098,200 options granted, 2,600 options forfeited, 250 options exercised and 95,350 options outstanding under thisthe 2015 Plan as of SeptemberJune 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 issuessecurities 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:
|
| 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 |
|
|
| Number of options |
|
| Weighted average exercise price |
|
| Weighted average remaining contractual term (in years) |
|
| Aggregate intrinsic value |
| ||||
Outstanding at December 31, 2015 |
|
| 82,875 |
|
| $ | 24.33 |
|
|
|
|
|
|
|
|
|
Granted |
|
| 23,500 |
|
|
| 30.40 |
|
|
|
|
|
|
|
|
|
Exercised |
|
| (18,425 | ) |
|
| 20.70 |
|
|
|
|
|
|
|
|
|
Forfeited |
|
| (9,725 | ) |
|
| 25.61 |
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2016 |
|
| 78,225 |
|
| $ | 26.85 |
|
|
| 2.74 |
|
| $ | 560 |
|
Exercisable at September 30, 2016 |
|
| 23,100 |
|
| $ | 22.38 |
|
|
| 0.87 |
|
| $ | 268 |
|
11
QNB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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:
|
| Number of options |
|
| Weighted average exercise price |
|
| Weighted average remaining contractual term (in years) |
|
| Aggregate intrinsic value |
| ||||
Outstanding at December 31, 2018 |
|
| 95,075 |
|
| $ | 35.11 |
|
|
|
|
|
|
|
|
|
Granted |
|
| 24,700 |
|
|
| 38.15 |
|
|
|
|
|
|
|
|
|
Exercised |
|
| (8,525 | ) |
|
| 25.53 |
|
|
|
|
|
|
|
|
|
Forfeited |
|
| (1,500 | ) |
|
| 37.20 |
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2019 |
|
| 109,750 |
|
| $ | 36.51 |
|
|
| 2.84 |
|
| $ | 258 |
|
Exercisable at June 30, 2019 |
|
| 36,600 |
|
| $ | 29.95 |
|
|
| 1.22 |
|
| $ | 258 |
|
|
| Number of options |
|
| Weighted average exercise price |
|
| Weighted average remaining contractual term (in years) |
|
| Aggregate intrinsic value |
| ||||
Outstanding at December 31, 2017 |
|
| 85,525 |
|
| $ | 30.94 |
|
|
|
|
|
|
|
|
|
Granted |
|
| 25,000 |
|
|
| 43.60 |
|
|
|
|
|
|
|
|
|
Exercised |
|
| (10,000 | ) |
|
| 24.86 |
|
|
|
|
|
|
|
|
|
Forfeited |
|
| (1,600 | ) |
|
| 32.52 |
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2018 |
|
| 98,925 |
|
| $ | 34.73 |
|
|
| 2.99 |
|
| $ | 1,180 |
|
Exercisable at June 30, 2018 |
|
| 26,525 |
|
| $ | 27.46 |
|
|
| 1.14 |
|
| $ | 509 |
|
4. EARNINGS PER SHARE & SHARE REPURCHASE PLAN
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-monththree-month periods ended SeptemberJune 30, 2017,2019 and 2018, respectively. There were 073,150 and 41,35025,000 stock options that were anti-dilutive for the three and nine-monthsix-month periods ended SeptemberJune 30, 2016.2019 and 2018, respectively. These stock options were not included in the above calculation.
TheQNB’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 ninesix months ended SeptemberJune 30, 20172019 and 2016.2018. As of SeptemberJune 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.
12
QNB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
5. COMPREHENSIVE INCOME (LOSS)
The following shows the components of accumulated other comprehensive lossincome (loss) at SeptemberJune 30, 20172019 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 | ) |
|
|
|
|
|
|
|
|
|
12
QNB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following tables present amounts reclassified out of accumulated other comprehensive income (loss) for the three and ninesix months ended SeptemberJune 30, 20172019 and 2016:2018:
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 June 30, |
| Amount reclassified from accumulated other comprehensive loss |
|
|
| |||||
Details about accumulated other comprehensive loss |
| 2019 |
|
| 2018 |
|
| Affected line item in statement of income | ||
Unrealized net holding gain on available-for-sale securities |
| $ | — |
|
| $ | 4 |
|
| Net gain on sale of investment securities |
Other-than-temporary impairment losses on investment securities |
|
| — |
|
|
| — |
|
| Net other-than-temporary impairment losses on investment securities |
|
|
| — |
|
|
| 4 |
|
|
|
Tax effect |
|
| — |
|
|
| (1 | ) |
| Provision for income taxes |
Total reclass out of accumulated other comprehensive income (loss), net of tax |
| $ | — |
|
| $ | 3 |
|
| Net of tax |
Six months ended June 30, |
| Amount reclassified from accumulated other comprehensive income |
|
|
| |||||
Details about accumulated other comprehensive income |
| 2019 |
|
| 2018 |
|
| Affected line item in statement of income | ||
Unrealized net holding (losses) gains on available-for-sale securities |
| $ | (39 | ) |
| $ | 3 |
|
| Net gain on sale of investment securities |
Other-than-temporary impairment losses on investment securities |
|
| — |
|
|
| — |
|
| Net other-than-temporary impairment losses on investment securities |
|
|
| (39 | ) |
|
| 3 |
|
|
|
Tax effect |
|
| 8 |
|
|
| (1 | ) |
| Provision for income taxes |
Total reclass out of accumulated other comprehensive income (loss), net of tax |
| $ | (31 | ) |
| $ | 2 |
|
| Net of tax |
Nine months ended September 30, |
| Amount reclassified from accumulated other comprehensive income |
|
|
| |||||
Details about accumulated other comprehensive income |
| 2017 |
|
| 2016 |
|
| Affected line item in statement of income | ||
Unrealized net holding gains on available-for-sale securities |
| $ | 1,042 |
|
| $ | 842 |
|
| Net gain on sale of investment securities |
Other-than-temporary impairment losses on investment securities |
|
| (80 | ) |
|
| (192 | ) |
| Net other-than-temporary impairment losses on investment securities |
|
|
| 962 |
|
|
| 650 |
|
|
|
Tax effect |
|
| (326 | ) |
|
| (221 | ) |
| Provision for income taxes |
Total reclass out of accumulated other comprehensive income, net of tax |
| $ | 636 |
|
| $ | 429 |
|
| Net of tax |
6. INVESTMENT SECURITIES
QNB engaged in trading activities for its own account, comprised of municipal securities that were held principally for resale in the near term recorded at fair value with changes in fair value recorded in non-interest income. During the second quarter 2017, QNB Bank redeemed the trading securities portfolio, as lack of market volatility and the interest rate environment resulted in declining performance of the portfolio. The net realized gains recorded for the nine months ended September 30, 2017 were $27,000. The net realized and unrealized losses recorded at December 31, 2016 were $40,000 and fair value was $3,596,000. Unrealized gains on trading activity related to trading securities held at December 31, 2016 totaled $69,000. Interest and dividends are included in interest income.
13
QNB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
6. INVESTMENT SECURITIES
Available-For-Sale Securities
The amortized cost and estimated fair values of investment securities available-for-sale at SeptemberJune 30, 20172019 and December 31, 20162018 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 SeptemberJune 30, 20172019 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.
14
QNB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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:
|
| 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, |
|
| Six months ended June 30, |
| ||||||||||
|
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
| ||||
Gross realized gains |
| $ | 16 |
|
| $ | 4 |
|
| $ | 36 |
|
| $ | 25 |
|
Gross realized losses |
|
| (16 | ) |
|
| — |
|
|
| (75 | ) |
|
| (22 | ) |
Other-than-temporary impairment |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Total net gains (losses) on AFS securities |
| $ | — |
|
| $ | 4 |
|
| $ | (39 | ) |
| $ | 3 |
|
The tax expense applicable to the net realized (losses)/gains for the quarters and nine-monththree-month periods ended SeptemberJune 30, 20172019 and 2016 were $33,0002018 was $0 and $107,000$1,000, respectively. The tax applicable to the net realized (losses)/gains for the quartersix-month periods ended June 30, 2019 and $327,0002018 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 quarterfirst 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 fortime individual debt securities still held by QNB:have been in a continuous unrealized loss position at June 30, 2019 and December 31, 2018:
Nine months ended September 30, |
| 2017 |
|
| 2016 |
| ||
Balance, beginning of period |
| $ | 1,153 |
|
| $ | 1,153 |
|
Reductions: sale, pooled trust preferred |
|
| (1,152 | ) |
|
| — |
|
Additions: |
|
|
|
|
|
|
|
|
Initial credit impairments |
|
| — |
|
|
| — |
|
Subsequent credit impairments |
|
| — |
|
|
| — |
|
Balance, end of period |
| $ | 1 |
|
| $ | 1,153 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Less than 12 months |
|
| 12 months or longer |
|
| Total |
| |||||||||||||||
|
| No. of |
|
| Fair |
|
| Unrealized |
|
| Fair |
|
| Unrealized |
|
| Fair |
|
| Unrealized |
| |||||||
June 30, 2019 |
| securities |
|
| value |
|
| losses |
|
| value |
|
| losses |
|
| value |
|
| losses |
| |||||||
U.S. Treasury |
|
| 2 |
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
U.S. Government agency |
|
| 35 |
|
|
| — |
|
|
| — |
|
|
| 47,769 |
|
|
| (226 | ) |
|
| 47,769 |
|
|
| (226 | ) |
State and municipal |
|
| 6 |
|
|
| 1,123 |
|
|
| (12 | ) |
|
| 1,308 |
|
|
| (14 | ) |
|
| 2,431 |
|
|
| (26 | ) |
U.S. Government agencies and sponsored enterprises (GSEs): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed |
|
| 93 |
|
|
| 7,100 |
|
|
| (35 | ) |
|
| 97,546 |
|
|
| (1,147 | ) |
|
| 104,646 |
|
|
| (1,182 | ) |
Collateralized mortgage obligations (CMOs) |
|
| 60 |
|
|
| — |
|
|
| — |
|
|
| 49,344 |
|
|
| (675 | ) |
|
| 49,344 |
|
|
| (675 | ) |
Pooled trust preferred |
|
| 1 |
|
|
| — |
|
|
| — |
|
|
| 108 |
|
|
| (13 | ) |
|
| 108 |
|
|
| (13 | ) |
Corporate debt |
|
| 4 |
|
|
| — |
|
|
| — |
|
|
| 4,006 |
|
|
| (12 | ) |
|
| 4,006 |
|
|
| (12 | ) |
Total |
|
| 201 |
|
| $ | 8,223 |
|
| $ | (47 | ) |
| $ | 200,081 |
|
| $ | (2,087 | ) |
| $ | 208,304 |
|
| $ | (2,134 | ) |
15
QNB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 |
| |||||||||||||||
|
| No. of |
|
| Fair |
|
| Unrealized |
|
| Fair |
|
| Unrealized |
|
| Fair |
|
| Unrealized |
| |||||||
September 30, 2017 |
| securities |
|
| value |
|
| losses |
|
| value |
|
| losses |
|
| value |
|
| losses |
| |||||||
U.S. Government agency |
|
| 52 |
|
| $ | 49,541 |
|
| $ | (935 | ) |
| $ | 20,497 |
|
| $ | (502 | ) |
| $ | 70,038 |
|
| $ | (1,437 | ) |
State and municipal |
|
| 33 |
|
|
| 11,432 |
|
|
| (98 | ) |
|
| 2,964 |
|
|
| (56 | ) |
|
| 14,396 |
|
|
| (154 | ) |
U.S. Government agencies and sponsored enterprises (GSEs): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed |
|
| 90 |
|
|
| 121,062 |
|
|
| (1,306 | ) |
|
| 7,891 |
|
|
| (216 | ) |
|
| 128,953 |
|
|
| (1,522 | ) |
Collateralized mortgage obligations (CMOs) |
|
| 66 |
|
|
| 39,063 |
|
|
| (529 | ) |
|
| 34,064 |
|
|
| (999 | ) |
|
| 73,127 |
|
|
| (1,528 | ) |
Pooled trust preferred |
|
| 1 |
|
|
| — |
|
|
| — |
|
|
| 212 |
|
|
| (29 | ) |
|
| 212 |
|
|
| (29 | ) |
Corporate debt |
|
| 3 |
|
|
| 3,022 |
|
|
| (10 | ) |
|
| — |
|
|
| — |
|
|
| 3,022 |
|
|
| (10 | ) |
Equity |
|
| 16 |
|
|
| 4,130 |
|
|
| (311 | ) |
|
| 309 |
|
|
| (38 | ) |
|
| 4,439 |
|
|
| (349 | ) |
Total |
|
| 261 |
|
| $ | 228,250 |
|
| $ | (3,189 | ) |
| $ | 65,937 |
|
| $ | (1,840 | ) |
| $ | 294,187 |
|
| $ | (5,029 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 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 SeptemberJune 30, 20172019 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.
Equity Securities
The Company’s investment in marketable equity securities primarily consists of investments with readily determinable fair values in large cap stock companies. TheseChanges 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 impairmentrecorded 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 induring the foreseeable future. QNB evaluated the near-term prospects of the issuers in relationthree and six months ended June 30, 2019 and 2018:
|
| Three months ended June 30, |
|
| Six months ended June 30, |
| ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
| ||||
Net gains (losses) recognized during the period on equity securities |
| $ | 179 |
|
| $ | 85 |
|
| $ | 1,200 |
|
| $ | (75 | ) |
Less: Net gains recognized during the period on equity securities sold during the period |
|
| 584 |
|
|
| 44 |
|
|
| 629 |
|
|
| 130 |
|
Net unrealized gains (losses) recognized during the reporting period on equity securities still held at the reporting date |
| $ | (405 | ) |
| $ | 41 |
|
| $ | 571 |
|
| $ | (205 | ) |
Tax expense applicable to the severitynet realized gains for the three months ended June 30, 2019 and durationJune 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 forsix months ended June 30, 2018 a reasonable periodbenefit of time sufficient for a forecasted recovery$22,000. Proceeds from sales of fair value, the Company does not consider theseinvestment equity securities to be other-than-temporarily impaired.
QNB holds one trust preferred security, PreTSL IV. As ofwere approximately $4,162,000 and $678,000 for the three months ended June 30, 2017, PreTSL IV was reclassified2019 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.
16
QNB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table provides additional information related7. 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.
Deal |
| Class |
|
| Book value |
|
| Fair value |
|
| Unrealized gains (losses) |
|
| Realized OTTI credit loss (YTD 2017) |
|
| Total recognized OTTI credit loss |
|
| Moody's /Fitch ratings |
| Current number of performing banks |
|
| Current number of performing insurance companies |
|
| Actual deferrals and defaults as a % of total collateral |
|
| Total performing collateral as a % of outstanding bonds |
| |||||||||
PreTSL IV |
| Mezzanine | * |
| $ | 241 |
|
| $ | 212 |
|
| $ | (29 | ) |
| $ | — |
|
| $ | (1 | ) |
| B1/BB |
|
| 5 |
|
|
| — |
|
|
| 18.0 | % |
|
| 142.7 | % |
Mezzanine* - only class of bonds still outstanding (represents the senior-most obligation of the trust)
In June 2017, QNB Bank sold five non-performing pooled trust preferred securities, with a $2,235,000 carrying value, recording a loss on sale of $15,000, included in non-interest income in the consolidated statement of income. Several years ago, QNB had recorded $1,152,000 in OTTI for four of these five these bonds,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 measuredevaluated for OTTI within the scopeperiodically. 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.
7.8. LOANS & ALLOWANCE FOR LOAN LOSSES
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.
17
QNB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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-yearthree 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:
| 1. | Lending policies and procedures, including underwriting standards and collection, charge-off and recovery practices. |
| 2. | Effect of external factors, such as legal and regulatory requirements. |
| 3. | National, regional, and local economic and business conditions as well as the condition of various market segments, including the value of underlying collateral for collateral dependent loans. |
| 4. | Nature and volume of the portfolio including growth. |
| 5. | Experience, ability, and depth of lending management and staff. |
| 6. | Volume and severity of past due, classified and nonaccrual loans. |
| 7. | Quality of the Company’s loan review system, and the degree of oversight by the Company’s Board of Directors. |
| 8. | Existence and effect of any concentrations of credit and changes in the level of such concentrations. |
17
QNB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 testsfirm reviews risk assessmentsassessment 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.
18
QNB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Major classes of loans are as follows:
|
| 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 SeptemberJune 30, 20172019 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 SeptemberJune 30, 2017,2019, there were no concentrationswas 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,
18
QNB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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.
19
QNB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Indirect lease financing receivables represent loans to small businesses that are collateralized by equipment. These loans tend to have higher risk characteristics but generally provide higher rates of return. These loans are originated by a third party and purchased by QNB based on criteria specified by QNB. In October 2016, the Company sold its interest in these third-party originated lease financing receivables.
The Company originates fixed-rate and adjustable-rate real estate-residential mortgage loans for personal purposes that are secured by first liens on the underlying 1-4 family residential properties. Credit risk exposure in this area of lending is minimized by the evaluation of the credit worthiness of the borrower, including debt-to-income ratios, credit scores and adherence to underwriting policies that emphasize conservative loan-to-value ratios of generally no more than 80%. Residential mortgage loans granted in excess of the 80% 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) gradea 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 foursix categories are pass categories (credits not adversely rated). The following is a description of the internal risk ratings and the likelihood of loss related to each risk rating.
1 |
|
2 | - Good - minimal risk |
3 | - Acceptable - lower risk |
4 | - Acceptable - average risk |
19
QNB CORP. AND SUBSIDIARY
2 - Good - minimal riskNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3 - Acceptable - average risk(Unaudited)
4 - Watch List - greater than average risk
5 - Special Mention - potential weaknesses
6 | - Pass watch |
7 | - Special Mention - potential weaknesses |
8 | - Substandard - well defined weaknesses |
9 | - Doubtful - full collection unlikely |
10 |
|
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 threefive are reviewed annually based on the borrower’s fiscal year. Loans with risk ratings of foursix are reviewed every six to twelve months based on the dollar amount of the relationship with the borrower. Loans with risk ratings of fiveseven through eightten 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’sCompany’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.
20
QNB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following tables present the classes of the loan portfolio summarized by the aggregate pass rating and the classified ratings of special mention, substandard and doubtful within the Company’s internal risk rating system as of SeptemberJune 30, 20172019 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 |
|
20
QNB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 SeptemberJune 30, 20172019 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 |
|
21
QNB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 SeptemberJune 30, 20172019 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 |
|
21
QNB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 SeptemberJune 30, 20172019 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 |
|
December 31, 2018 |
| 90 days or more past due (still accruing) |
|
| Non-accrual |
| ||
Commercial: |
|
|
|
|
|
|
|
|
Commercial and industrial |
| $ | — |
|
| $ | 3,179 |
|
Construction |
|
| — |
|
|
| — |
|
Secured by commercial real estate |
|
| — |
|
|
| 1,965 |
|
Secured by residential real estate |
|
| — |
|
|
| 1,102 |
|
State and political subdivisions |
|
| — |
|
|
| — |
|
Retail: |
|
|
|
|
|
|
|
|
1-4 family residential mortgages |
|
| — |
|
|
| 940 |
|
Home equity loans and lines |
|
| — |
|
|
| 166 |
|
Consumer |
|
| — |
|
|
| 126 |
|
Total |
| $ | — |
|
| $ | 7,478 |
|
Activity in the allowance for loan losses for the three and six months ended June 30, 2019 and 2018 are as follows:
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 |
|
22
QNB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| 90 days or more past due (still accruing) |
|
| Non-accrual |
| |||
Commercial: |
|
|
|
|
|
|
|
|
Commercial and industrial |
| $ | — |
|
| $ | 4,798 |
|
Construction |
|
| — |
|
|
| — |
|
Secured by commercial real estate |
|
| — |
|
|
| 3,007 |
|
Secured by residential real estate |
|
| — |
|
|
| 1,866 |
|
State and political subdivisions |
|
| — |
|
|
| — |
|
Retail: |
|
|
|
|
|
|
|
|
1-4 family residential mortgages |
|
| — |
|
|
| 266 |
|
Home equity loans and lines |
|
| — |
|
|
| 89 |
|
Consumer |
|
| — |
|
|
| 93 |
|
Total |
| $ | — |
|
| $ | 10,119 |
|
Activity in the allowance for loan losses for the three months ended September 30, 2017 and 2016 are as follows:
Three months ended September 30, 2017 |
| Balance, beginning of period |
|
| Provision for (credit to) loan losses |
|
| Charge-offs |
|
| Recoveries |
|
| Balance, end of period |
| |||||||||||||||||||||||||
| 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:
23
QNB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| Balance, beginning of period |
|
| Provision for (credit to) loan losses |
|
| Charge-offs |
|
| Recoveries |
|
| Balance, end of period |
| ||||||
Commercial: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial |
| $ | 1,459 |
|
| $ | 1,257 |
|
|
| — |
|
| $ | 28 |
|
| $ | 2,744 |
|
Construction |
|
| 449 |
|
|
| 80 |
|
|
| — |
|
|
| — |
|
|
| 529 |
|
Secured by commercial real estate |
|
| 2,646 |
|
|
| (277 | ) |
|
| — |
|
|
| 6 |
|
|
| 2,375 |
|
Secured by residential real estate |
|
| 1,760 |
|
|
| (685 | ) |
| $ | (3 | ) |
|
| 35 |
|
|
| 1,107 |
|
State and political subdivisions |
|
| 123 |
|
|
| 8 |
|
|
| — |
|
|
| — |
|
|
| 131 |
|
Retail: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1-4 family residential mortgages |
|
| 366 |
|
|
| 12 |
|
|
| — |
|
|
| — |
|
|
| 378 |
|
Home equity loans and lines |
|
| 353 |
|
|
| 22 |
|
|
| — |
|
|
| 8 |
|
|
| 383 |
|
Consumer |
|
| 76 |
|
|
| 52 |
|
|
| (68 | ) |
|
| 25 |
|
|
| 85 |
|
Unallocated |
|
| 162 |
|
|
| 231 |
|
| N/A |
|
| N/A |
|
|
| 393 |
| ||
Total |
| $ | 7,394 |
|
| $ | 700 |
|
| $ | (71 | ) |
| $ | 102 |
|
| $ | 8,125 |
|
Nine months ended September 30, 2016 |
| Balance, beginning of period |
|
| Provision for (credit to) loan losses |
|
| Charge-offs |
|
| Recoveries |
|
| Balance, end of period |
| |||||||||||||||||||||||||
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
23
QNB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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
24
QNB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
necessary. This decision is based on various considerations, including the age of the most recent appraisal, the loan-to-value ratio based on the original appraisal and the condition of the property. Appraised values are discounted to arrive at the estimated selling price of the collateral, which is considered to be the estimated fair value. The discounts also include estimated costs to sell the property.
For commercial loans secured by non-real estate collateral, such as accounts receivable, inventory and equipment, estimated fair values are determined based on the borrower’s financial statements, inventory reports, accounts receivable agings or equipment appraisals or invoices. Indications of value from these sources are generally discounted based on the age of the financial information or the quality of the assets.
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 SeptemberJune 30, 20172019 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 SeptemberJune 30, 20172019 and December 31, 2016,2018, respectively. All TDRs are included in impaired loans.
24
QNB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 TDRsTDR during the ninesix months ended SeptemberJune 30, 2017.2019. As of SeptemberJune 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 ninethree and six months ended SeptemberJune 30, 20172019, and 2016, respectively,no charge-offs during the three and six months ended June 30, 2018, resulting from loans previously modified as TDRs.
25
QNB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following tables present loans, by loan class, modified as TDRs during the three and ninesix months ended SeptemberJune 30, 20172019 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.
Three months ended September 30, |
| 2017 |
|
| 2016 |
| ||||||||||||||||||
|
| Number of contracts |
|
| Pre-modification outstanding recorded investment |
|
| Post-modification outstanding recorded investment |
|
| Number of contracts |
|
| Pre-modification outstanding recorded investment |
|
| Post-modification outstanding recorded investment |
| ||||||
Retail: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer |
|
| — |
|
| $ | — |
|
| $ | — |
|
|
| 1 |
|
| $ | 96 |
|
| $ | 95 |
|
Three months ended June 30, |
| 2019 |
|
| 2018 |
| ||||||||||||||||||
|
| Number of contracts |
|
| Pre-modification outstanding recorded investment |
|
| Post-modification outstanding recorded investment |
|
| Number of contracts |
|
| Pre-modification outstanding recorded investment |
|
| Post-modification outstanding recorded investment |
| ||||||
Retail: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity loans and lines |
|
| — |
|
| $ | — |
|
| $ | — |
|
|
| — |
|
| $ | — |
|
| $ | — |
|
Total |
|
| — |
|
| $ | — |
|
| $ | — |
|
|
| — |
|
| $ | — |
|
| $ | — |
|
Nine months ended September 30, |
| 2017 |
|
| 2016 |
| ||||||||||||||||||
|
| Number of contracts |
|
| Pre-modification outstanding recorded investment |
|
| Post-modification outstanding recorded investment |
|
| Number of contracts |
|
| Pre-modification outstanding recorded investment |
|
| Post-modification outstanding recorded investment |
| ||||||
Commercial: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial |
|
| — |
|
| $ | — |
|
| $ | — |
|
|
| 6 |
|
| $ | 1,074 |
|
| $ | 1,033 |
|
Secured by residential real estate |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 4 |
|
|
| 524 |
|
|
| 503 |
|
Retail: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 1 |
|
|
| 96 |
|
|
| 95 |
|
Total |
|
| — |
|
| $ | — |
|
| $ | — |
|
|
| 11 |
|
| $ | 1,694 |
|
| $ | 1,631 |
|
Six months ended June 30, |
| 2019 |
|
| 2018 |
| ||||||||||||||||||
|
| Number of contracts |
|
| Pre-modification outstanding recorded investment |
|
| Post-modification outstanding recorded investment |
|
| Number of contracts |
|
| Pre-modification outstanding recorded investment |
|
| Post-modification outstanding recorded investment |
| ||||||
Retail: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity loans and lines |
|
| — |
|
| $ | — |
|
| $ | — |
|
|
| 1 |
|
| $ | 47 |
|
| $ | 47 |
|
Total |
|
| — |
|
| $ | — |
|
| $ | — |
|
|
| 1 |
|
| $ | 47 |
|
| $ | 47 |
|
There was one loan with an outstanding balance of $18,000 that waswere no loans modified as a TDRTDRs within 12 months prior to SeptemberJune 30, 20172019 and 2018 for which there was a payment default (60 days or more past due) during the ninesix months ended SeptemberJune 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 consumerfive mortgage loans secured by residential real estate for which foreclosure proceedings are in process at SeptemberJune 30, 2017.2019. The total recorded investment is $392,000.$662,000.
25
QNB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following tables present the balance in the allowance for loan losses at SeptemberJune 30, 20172019 and December 31, 20162018 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 |
|
26
QNB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| 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 |
|
2726
QNB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table summarizessummarize additional information, in regardregards to impaired loans by loan portfolio class, as of SeptemberJune 30, 20172019 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 |
|
2827
QNB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table presents additional information in regard toregarding 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 |
|
8.9. FAIR VALUE MEASUREMENTS AND DISCLOSURES
Financial Accounting Standards Board (FASB)FASB ASC 820, Fair Value Measurements and Disclosures, defines fair value as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants (fair values are not adjusted for transaction costs). ASC 820 also establishes a framework (fair value hierarchy) for measuring fair value under U.S. GAAP and expands disclosures about fair value measurements.
ASC 820 establishes a fair value hierarchy that prioritizes the inputs to valuation methods used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are as follows:
| Level 1: | Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. |
| Level 2: | Quoted prices in markets that are not active, or inputs that are observable either directly or indirectly, for substantially the full term of the asset or liability. |
| Level 3: | Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported with little or no market activity). |
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.
2928
QNB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table sets forth QNB’s financial assets measured at fair value on a recurring and nonrecurring basis and the fair value measurements by level within the fair value hierarchy as of SeptemberJune 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 ninesix months ended SeptemberJune 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 periodsor six-month period ended SeptemberJune 30, 2017.2019.
3029
QNB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table sets forth QNB’s financial assets measured at fair value on a recurring and nonrecurring basis, the fair value measurements by level within the fair value hierarchy as of December 31, 2016:2018:
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 |
| 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 |
|
| 35 |
|
| Discounted cash flow |
|
| Remaining term |
|
| 2 to 27 yrs |
|
| 8 |
|
| Discounted cash flow |
|
| Remaining term |
|
| 1 - 26 years |
| |
|
|
|
|
|
|
|
|
| Discount rate |
|
| 14% to 16% |
|
|
|
|
|
|
|
| Discount rate |
|
| 12.0% to 12.5% |
|
|
| Quantitative information about Level 3 fair value measurements |
| |||||||||||
December 31, 2018 |
| Fair value |
|
| Valuation techniques |
|
| Unobservable input |
|
| Value or range of values |
| ||
Impaired loans |
| $ | 1,632 |
|
| Appraisal of collateral | (1) |
| Appraisal adjustments | (2) |
| -20.0% to -90.0% |
| |
|
|
|
|
|
|
|
|
| Liquidation expenses | (3) |
|
| -10.0 | % |
Impaired loans |
|
| 1,415 |
|
| Financial statement values for UCC collateral |
|
| Financial statement value discounts | (5) |
| -25.0% to -100.0% |
| |
Impaired loans |
|
| 8 |
|
| Used commercial vehicle guides |
|
| Guide value discounts | (4) |
| -10% |
| |
Mortgage servicing rights |
|
| 5 |
|
| Discounted cash flow |
|
| Remaining term |
|
| 2 to 26 years |
| |
|
|
|
|
|
|
|
|
| Discount rate |
|
| 12.0% to 12.5% |
|
3130
QNB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| Quantitative information about Level 3 fair value measurements | |||||||||||
December 31, 2016 |
| Fair value |
|
| Valuation techniques |
|
| Unobservable input |
|
| Value or range of values | |
Impaired loans |
| $ | 938 |
|
| Appraisal of collateral | (1) |
| Appraisal adjustments | (2) |
| -10% to -80% |
|
|
|
|
|
|
|
|
| Liquidation expenses | (3) |
| -10% |
Impaired loans |
|
| 76 |
|
| Used commercial vehicle and equipment guides |
|
| Guide value discounts | (4) |
| 0% to -25% |
Impaired loans |
|
| 1,880 |
|
| Financial statement values for UCC collateral |
|
| Financial statement value discounts | (5) |
| -20% to -50% |
Impaired loans |
|
| 5 |
|
| Agreement of sale | (6) |
|
|
|
|
|
Mortgage servicing rights |
|
| 58 |
|
| Discounted cash flow |
|
| Remaining term |
|
| 2 to 27 yrs |
|
|
|
|
|
|
|
|
| Discount rate |
|
| 14% to 16% |
(1) | Fair value is primarily determined through appraisals of the underlying collateral by independent parties, which generally includes various level 3 inputs which are not always identifiable. |
(2) | Appraisals may be adjusted by management for qualitative factors such as economic conditions and the age of the appraisal. The range is presented as a percent of the initial appraised value. |
(3) | Appraisals and pending agreements of sale are adjusted by management for estimated liquidation expenses. The range is presented as a percent of the initial appraised |
(4) | If lendable value (lower than wholesale) is utilized then no additional discounts are taken. If lendable value is not provided, additional discounts are applied. |
(5) | Values obtained from financial statements for UCC collateral (fixed assets |
|
|
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 ninesix months ended SeptemberJune 30, 20172019 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 |
|
32
QNB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The Level 3 securities consist of one collateralized debt obligation security, (“PreTSL”),the PreTSL security, which is backed by trust preferred securities issued by banks. The market for this security at June 30, 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 few observable transactions and market quotations that are available are not reliable for purposes of determining fair value at SeptemberJune 30, 2017;2019;
An income valuation approach technique (present value technique) that maximizes the use of relevant observable inputs and minimizes the use of unobservable inputs will be equally or more representative of fair value than the market approach valuation technique used at prior measurement dates; and
Trust preferred securitiesThe PreTSL will be classified within Level 3 of the fair value hierarchy because significant adjustments are required to determine fair value at the measurement date.
The Bank utilized aQNB used an independent third party to value this security using a discounted cash flow analysis. Based on management’s review of the fivebond’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 flowscashflows 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 termshort-term rates in the future. This is consistent with the 30-year nature of the PreTSL securities,security, which areis 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.
31
QNB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 SeptemberJune 30, 20172019 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.
33
QNB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Loans Receivable (carried at cost): The fair values of loans are estimated using discounted cash flow analyses, using market rates at the balance sheet date that reflect the liquidity, credit and interest rate-risk inherent in the loans. Projected future cash flows are calculated based upon contractual maturity or call dates, projected repayments and prepayments of principal. Generally, for variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values.
Impaired Loans (generally carried at fair value): Impaired loans are loans, 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’sQNB’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.
32
QNB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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.
34
QNB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The estimated fair values and carrying amounts of the Company’s financial and off-balance sheet instruments are summarized as follows:
|
|
|
|
|
|
|
|
|
| Fair value measurements |
|
|
|
|
|
|
|
|
|
| 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 |
|
|
| — |
|
3533
QNB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
|
|
|
|
|
|
|
|
| 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 |
|
|
| — |
|
9.10. OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS AND GUARANTEES
In the normal course of business there are various legal proceedings, commitments, and contingent liabilities which are not reflected in the consolidated financial statements. Management does not anticipate any material losses as a result of these transactions and activities. They include, among other things, commitments to extend credit and standby letters of credit. The maximum exposure to credit loss, which represents the possibility of sustaining a loss due to the failure of the other parties to a financial instrument to perform according to the terms of the contract, is represented by the contractual amount of these instruments. QNB uses the same lending standards and policies in making credit commitments as it does for on-balance sheet instruments. The activity is controlled through credit approvals, control limits, and monitoring procedures.
A summary of the Bank'sCompany'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 BankCompany 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 BankCompany 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
3634
QNB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
making conditional obligations as it does for on-balance sheet instruments. The majority of these standby 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 BankCompany 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 SeptemberJune 30, 20172019 and December 31, 20162018 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.
10.11. REGULATORY RESTRICTIONS
Dividends payable by the CompanyQNB 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 SeptemberJune 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 |
|
3735
QNB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| 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 |
|
12. REVENUE RECOGNITION FROM CONTRACTS WITH CUSTOMERS
The Company generally fully satisfies its performance obligations on its contracts with customers as services are rendered and the transaction prices are typically fixed; charged either on a periodic basis or based on activity. Because performance obligations are satisfied as services are rendered and the transaction prices are fixed, there is little judgment involved in applying Topic 606 that significantly affects the determination of the amount and timing of revenue from contracts with customers. The main types of revenue contracts included in non-interest income within the consolidated statements of operations are as follows:
Fees for services to customers—fees include service charges on deposits which are included as liabilities in the consolidated statement of financial position and consist of transaction-based fees, stop payment fees, Automated Clearing House (ACH) fees, account maintenance fees, and overdraft services fees for various retail and business checking customers. These fees are charged as earned on the day of the transaction or within the month of the service, with the exception of Enhanced Account Analysis Fees, which are calculated on the previous month’s activity and assessed on the following month. The Enhanced Account Analysis Fees are currently being accrued; the revenue is currently being recorded in the month it is earned. Service charges on deposits are withdrawn directly from the customer’s account balance.
ATM and debit card – fees are recognized at the time the transaction is executed as that is the point in time the Company fulfills the customer’s request.
Retail brokerage and advisory—fee income and related expenses are accrued monthly to properly record the revenues in the month they are earned. Advisory fees are collected in advance on a quarterly basis. These advisory fees are recorded in the first month of the quarter for which the service is being performed. Fees that are transaction based are recognized at the point in time that the transaction is executed (i.e. trade date).
Merchant – QNB earns interchange fees from credit/debit cardholder transactions conducted through VISA/MasterCard payment networks. Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized monthly, concurrently with the transaction processing services provided to the cardholder within the month.
36
QNB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
• | Other—includes credit card fees, sales of checks to depositors, miscellaneous fees and gain/losses on sale of OREO. |
Credit card fees are recognized monthly, concurrently with the transaction processing services provided to the cardholder within the month.
Sales of checks to depositors are commissions earned from a third-party who provides checks to QNB’s customers. There is a pre-paid incentive with the third party which is recognized over the term of the contract. Other commissions on the sales of checks are recorded weekly.
Miscellaneous fees, such as wire, cashier check and garnishment fees, are charged as earned on the day of the transaction.
Gain (loss) on sales of OREO – QNB records a gain or loss from the sale of OREO when control of the property transfers to the buyer, which generally occurs at the time of an executed deed. When the QNB finances the sale of OREO to the buyer, QNB assesses whether the buyer is committed to perform their obligations under the contract and whether collectability of the transaction price is probable. Once these criteria are met, the OREO asset is derecognized and the gain or loss on sale is recorded upon the transfer of control of the property to the buyer. In determining the gain or loss on the sale, QNB adjusts the transaction prices and related gain (loss) on sale if a significant financing component is present.
3837
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
QNB Corp. is a bank holding company headquartered in Quakertown, Pennsylvania. QNB Corp., through its wholly-owned subsidiary, the Bank, has been serving the residents and businesses of upper Bucks, northern Montgomery and southern Lehigh counties in Pennsylvania since 1877. Due to its limited geographic area, growth is pursued through expansion of existing customer relationships and building new relationships by stressing a consistent high level of service at all points of contact. The Bank is a locally managed community bank that provides a full range of commercial and retail banking and retail brokerage services. The consolidated entity is referred to herein as “QNB” or the “Company”.
Tabular information presented throughout management’s discussion and analysis, other than share and per share data, is presented in thousands of dollars.
FORWARD-LOOKING STATEMENTS
In addition to historical information, this document contains forward-looking statements. Forward-looking statements are typically identified by words or phrases such as “believe,” “expect,” “anticipate,” “intend,” “estimate,” “project” and variations of such words and similar expressions, or future or conditional verbs such as “will,” “would,” “should,” “could,” “may” or similar expressions. The U.S. Private Securities Litigation Reform Act of 1995 provides 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 20162018 Form 10-K, could affect the future financial results of the CompanyQNB 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:
Volatility in interest rates and shape of the yield curve;
Credit risk;
Liquidity risk;
Operating, legal and regulatory risks;
Economic, political and competitive forces affecting QNB’s business; and
The risk that the analysis of these risks and forces could be incorrect, and/or that the strategies developed to address them could be unsuccessful.
39
QNB CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
QNB cautions that these forward-looking statements are subject to numerous assumptions, risks and uncertainties, all of which change over time, and QNB assumes no duty to update forward-looking statements. Management cautions readers not to place undue reliance on any forward-looking statements. These statements speak only as of the date of this report on Form 10-Q, even if subsequently made available by QNB on its website or otherwise, and they advise readers that various factors, including those described above, could affect QNB’s financial performance and could cause actual results or circumstances for future periods to differ materially from those anticipated or projected. Except as required by law, QNB does not undertake, and specifically disclaims any obligation, to publicly release any revisions to any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements.
QNB uses the current statutory tax rate of 34% to value its deferred tax assets and liabilities. Proposed comprehensive tax reform, announced April 26, 2017, included a reduction in the U.S. corporate income tax rate to 15%. The U.S. House of Representatives recently published a summary of the Tax Cuts and Jobs Act which proposed a corporate tax rate of 20%. If corporate tax rates were reduced, management expects the Company would be required to record an initial charge against earnings to lower the carrying amount of its net deferred tax asset, and then, going forward, would record lower tax provisions. The proposal is at the beginning stages of negotiations and will need to be addressed by both houses of Congress. It is too early in the process to determine if any of the proposals are actionable. Accordingly, management cannot assess the effect a change in the corporate tax rate would have on Company's operating results or financial position.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The discussion and analysis of the financial condition and results of operations are based on the consolidated financial statements of QNB, which are prepared in accordance with U.S. generally accepted accounting principles (GAAP)(U.S. GAAP) and predominant practices within the banking industry. The preparation of these consolidated financial statements requires QNB to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. QNB evaluates estimates on an on-going basis, including those related to the determination of the allowance for loan losses, the determination of the valuation of other real estate owned and foreclosed assets, other-than-temporary impairments on investment securities, the valuation of deferred tax assets, stock-based compensation and income taxes. QNB bases its estimates on historical experience and various other factors and assumptions that are believed to be reasonable under the circumstances, the results of which
38
QNB CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Other-Than-Temporary Investment Security Impairment
Securities are evaluated periodically to determine whether a decline in their value is other-than-temporary. Management utilizes criteria such as the magnitude and duration of the decline, in addition to the reasons underlying the decline, to determine whether the loss in value is other-than-temporary. The term “other-than-temporary” is not intended to indicate that the decline is permanent, butit 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 chargesThere were recorded during the third quarter and first nine months of 2017. There was $192,000 inno other-than-temporary impairment charges recorded during the first ninethree 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 ninethree or six months ended SeptemberJune 30, 20172019 or 2016.2018, respectively.
40
QNB CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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.
39
QNB CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Assets acquired through, or in lieu of, loan foreclosure are held-for-sale and are initially recorded at fair value less cost to sell at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value less cost to sell. Revenue and expenses and changes in the valuation allowance are included in net expenses from foreclosed assets.
Stock-Based Compensation
QNB sponsors 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.
Income Taxes
QNB accounts for income taxes under the asset/liability method in accordance with income tax accounting guidance, ASC 740, Income Taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the
41
QNB CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
financial statement carrying amounts of existing assets and liabilities and their respective tax bases, as well as operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is established against deferred tax assets when, in the judgment of management, it is more likely than not that such deferred tax assets will not become available. Because the judgment about the level of future taxable income is dependent on matters that may, at least in part, be beyond QNB’s control, it is at least reasonably possible that management’s judgment about the need for a valuation allowance for deferred tax assets could change in the near term.
RESULTS OF OPERATIONS - OVERVIEW
QNB reported net income for the thirdsecond quarter of 20172019 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-monthsix-month period ended SeptemberJune 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 SeptemberJune 30, 20172019 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 ninesix months ended SeptemberJune 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 SeptemberJune 30, 20172019 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 SeptemberJune 30, 20172019 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 SeptemberJune 30, 20172019 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 ninesix months ended SeptemberJune 30, 20172019 include the following significant components:
Net interest income increased $1,230,000,$411,000, or 17.4%4.7%, to $8,315,000$9,111,000 and $2,828,000,$456,000, or 13.3%2.6%, to $24,053,000$17,947,000 for the three and ninesix months ended SeptemberJune 30, 2017,2019, respectively.
Net interest margin on a tax-equivalent basis increased 22five basis points for the quarter and tenone basis pointspoint year-to-date, to 3.15% for both periods.3.20% and 3.19%, respectively.
QNB recorded $100,000$150,000 in provision for loan losses for the quarter and $700,000$375,000 for the ninesix months ended SeptemberJune 30, 2017,2019, compared with $125,000$187,000 and $375,000 for the first nine months of 2016. There was no provision recorded for the third quarter of 2016.
Non-interest income decreased $174,000, or 10.6%, to $1,470,000 for the third quarter and increased $481,000, or 10.5%, to $5,075,000 for year-to-date 2017, compared with the same periods in 2016.2018, respectively.
40
QNB CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
• | Non-interest income increased $200,000, or 13.8%, to $1,654,000 for the second quarter and $1,442,000, or 57.2%, for the six months ended June 30, 2019 compared with the same periods in 2018. |
Non-interest expense increased $575,000,$260,000, or 10.2%4.0%, to $6,191,000$6,793,000 for the thirdsecond quarter and $993,000,$806,000, or 5.9%6.3%, to $17,721,000$13,517,000 for year-to-date 2017,the six months ended June 30, 2019, compared to the same periods in 2016.2018.
Total non-performing loans were $10,437,000,$9,677,000, or 1.48%1.18% of loans receivable at SeptemberJune 30, 2017,2019, compared with $11,938,000,to $9,638,000, or 1.89%1.23% of loans receivable at December 31, 2016.2018. Loans on non-accrual status were $9,078,000$7,668,000 at SeptemberJune 30, 20172019 compared with $10,119,000$7,478,000 at December 31, 2016.2018. Net recoveriescharge-offs for the ninesix months ended SeptemberJune 30, 20172019 were $31,000, or -0.01% annualized of average total loans,$45,000, compared with net charge-offs of $86,000, or 0.02% annualized of average total loans$24,000 for the same period in 2016.2018.
These items, as well as others, will be explained more thoroughly in the next sections.
NET INTEREST INCOME
QNB Corp. earns its net income primarily through its subsidiary, the Bank. Net interest income, or the spread between the interest, dividends and fees earned on loans and investment securities and the expense incurred on deposits and other interest-bearing liabilities, is the primary source of operating income for QNB. Management seeks to achieve sustainable and consistent earnings
42
QNB CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
growth while maintaining adequate levels of capital and liquidity and limiting its exposure to credit and interest rate risk levels approved by the Board of Directors.
The following table presents the adjustment to convert net interest income to net interest income on a fully taxable-equivalent basis for the threethree- and nine-monthsix-month periods ended SeptemberJune 30, 20172019 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.
4341
QNB CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Average Balances, Rate, and Interest Income and Expense Summary (Tax-Equivalent Basis)
|
| Three Months Ended |
|
| 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 |
|
42
QNB CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
|
| 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.
Non-accrual loans and investment securities are included in earning assets.
* Includes loans held-for-sale
44
QNB CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
| Nine Months Ended |
| ||||||||||||||||||||||
|
| September 30, 2017 |
|
| September 30, 2016 |
| ||||||||||||||||||
|
| Average |
|
| Average |
|
|
|
|
|
| Average |
|
| Average |
|
|
|
|
| ||||
|
| Balance |
|
| Rate |
|
| Interest |
|
| Balance |
|
| Rate |
|
| Interest |
| ||||||
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading securities |
| $ | 1,587 |
|
|
| 5.72 | % |
| $ | 68 |
|
| $ | 3,919 |
|
|
| 5.47 | % |
| $ | 161 |
|
Investment securities (AFS & HTM): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government agencies |
|
| 74,516 |
|
|
| 1.77 |
|
|
| 992 |
|
|
| 57,160 |
|
|
| 1.85 |
|
|
| 794 |
|
State and municipal |
|
| 75,310 |
|
|
| 3.90 |
|
|
| 2,205 |
|
|
| 73,765 |
|
|
| 4.06 |
|
|
| 2,247 |
|
Mortgage-backed and CMOs |
|
| 222,165 |
|
|
| 2.04 |
|
|
| 3,405 |
|
|
| 196,830 |
|
|
| 1.98 |
|
|
| 2,926 |
|
Pooled trust preferred securities |
|
| 1,989 |
|
|
| 1.36 |
|
|
| 20 |
|
|
| 3,197 |
|
|
| 0.21 |
|
|
| 5 |
|
Corporate debt securities |
|
| 8,064 |
|
|
| 1.98 |
|
|
| 120 |
|
|
| 8,160 |
|
|
| 1.77 |
|
|
| 108 |
|
Equities |
|
| 7,231 |
|
|
| 3.40 |
|
|
| 184 |
|
|
| 7,192 |
|
|
| 3.28 |
|
|
| 177 |
|
Total investment securities |
|
| 389,275 |
|
|
| 2.37 |
|
|
| 6,926 |
|
|
| 346,304 |
|
|
| 2.41 |
|
|
| 6,257 |
|
Loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate |
|
| 386,958 |
|
|
| 4.58 |
|
|
| 13,257 |
|
|
| 327,225 |
|
|
| 4.43 |
|
|
| 10,854 |
|
Residential real estate |
|
| 49,874 |
|
|
| 3.86 |
|
|
| 1,446 |
|
|
| 44,447 |
|
|
| 3.90 |
|
|
| 1,301 |
|
Home equity loans |
|
| 66,315 |
|
|
| 3.83 |
|
|
| 1,901 |
|
|
| 62,557 |
|
|
| 3.72 |
|
|
| 1,740 |
|
Commercial and industrial |
|
| 124,471 |
|
|
| 4.68 |
|
|
| 4,357 |
|
|
| 112,918 |
|
|
| 4.25 |
|
|
| 3,592 |
|
Indirect lease financing |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 9,844 |
|
|
| 8.88 |
|
|
| 656 |
|
Consumer loans |
|
| 6,481 |
|
|
| 5.39 |
|
|
| 261 |
|
|
| 4,460 |
|
|
| 5.25 |
|
|
| 175 |
|
Tax-exempt loans |
|
| 35,188 |
|
|
| 3.96 |
|
|
| 1,042 |
|
|
| 39,959 |
|
|
| 3.77 |
|
|
| 1,127 |
|
Total loans, net of unearned income* |
|
| 669,287 |
|
|
| 4.45 |
|
|
| 22,264 |
|
|
| 601,410 |
|
|
| 4.32 |
|
|
| 19,445 |
|
Other earning assets |
|
| 9,518 |
|
|
| 1.10 |
|
|
| 79 |
|
|
| 34,156 |
|
|
| 0.55 |
|
|
| 140 |
|
Total earning assets |
|
| 1,069,667 |
|
|
| 3.67 |
|
|
| 29,337 |
|
|
| 985,789 |
|
|
| 3.52 |
|
|
| 26,003 |
|
Cash and due from banks |
|
| 13,766 |
|
|
|
|
|
|
|
|
|
|
| 14,013 |
|
|
|
|
|
|
|
|
|
Allowance for loan losses |
|
| (7,761 | ) |
|
|
|
|
|
|
|
|
|
| (7,622 | ) |
|
|
|
|
|
|
|
|
Other assets |
|
| 29,169 |
|
|
|
|
|
|
|
|
|
|
| 28,683 |
|
|
|
|
|
|
|
|
|
Total assets |
| $ | 1,104,841 |
|
|
|
|
|
|
|
|
|
| $ | 1,020,863 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders' Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing demand |
| $ | 169,061 |
|
|
| 0.21 | % |
|
| 262 |
|
| $ | 151,907 |
|
|
| 0.21 | % |
|
| 237 |
|
Municipals |
|
| 102,207 |
|
|
| 0.64 |
|
|
| 491 |
|
|
| 98,777 |
|
|
| 0.35 |
|
|
| 255 |
|
Money market |
|
| 84,389 |
|
|
| 0.30 |
|
|
| 187 |
|
|
| 70,556 |
|
|
| 0.27 |
|
|
| 142 |
|
Savings |
|
| 248,325 |
|
|
| 0.45 |
|
|
| 837 |
|
|
| 228,894 |
|
|
| 0.40 |
|
|
| 688 |
|
Time |
|
| 129,450 |
|
|
| 1.16 |
|
|
| 1,127 |
|
|
| 133,930 |
|
|
| 1.12 |
|
|
| 1,122 |
|
Time of $100,000 or more |
|
| 96,659 |
|
|
| 1.39 |
|
|
| 1,008 |
|
|
| 94,462 |
|
|
| 1.37 |
|
|
| 967 |
|
Total interest-bearing deposits |
|
| 830,091 |
|
|
| 0.63 |
|
|
| 3,912 |
|
|
| 778,526 |
|
|
| 0.59 |
|
|
| 3,411 |
|
Short-term borrowings |
|
| 49,472 |
|
|
| 0.52 |
|
|
| 193 |
|
|
| 39,922 |
|
|
| 0.38 |
|
|
| 115 |
|
Total interest-bearing liabilities |
|
| 879,563 |
|
|
| 0.62 |
|
|
| 4,105 |
|
|
| 818,448 |
|
|
| 0.58 |
|
|
| 3,526 |
|
Non-interest-bearing deposits |
|
| 120,365 |
|
|
|
|
|
|
|
|
|
|
| 104,922 |
|
|
|
|
|
|
|
|
|
Other liabilities |
|
| 4,381 |
|
|
|
|
|
|
|
|
|
|
| 3,756 |
|
|
|
|
|
|
|
|
|
Shareholders' equity |
|
| 100,532 |
|
|
|
|
|
|
|
|
|
|
| 93,737 |
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders' equity |
| $ | 1,104,841 |
|
|
|
|
|
|
|
|
|
| $ | 1,020,863 |
|
|
|
|
|
|
|
|
|
Net interest rate spread |
|
|
|
|
|
| 3.05 | % |
|
|
|
|
|
|
|
|
|
| 2.94 | % |
|
|
|
|
Margin/net interest income |
|
|
|
|
|
| 3.15 | % |
| $ | 25,232 |
|
|
|
|
|
|
| 3.05 | % |
| $ | 22,477 |
|
Tax-exempt securities and loans were adjusted to a tax-equivalent basis and are based on the marginal Federal corporate tax rate of 34 percent.
Non-accrual loans and investment securities are included in earning assets.
* Includes loans held-for-sale
4543
QNB CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Rate/Volume Analysis. The following table shows the fully taxable equivalent effect of changes in volumes and rates on interest income and interest expense. Changes in net interest income that could not be specifically identified as either a rate or volume change were allocated to changes in volume.
|
| Three months ended |
|
| Nine months ended |
|
| 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 | ) |
Net Interest Income and Net Interest Margin – Quarterly Comparison
Average earning assets for the thirdsecond quarter of 20172019 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 thirdsecond 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 netsupports 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 thirdsecond quarter of 2017,2019, compared with 59.3%66.8% for the thirdsecond 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 thirdsecond quarter of 2017 with2019 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 thirdsecond 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
4644
QNB CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
$43,678,000, which18,596,000. 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 thirdsecond quarter of 20172019 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 2016during 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 thirdsecond 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 contributorcontributed 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 thirdsecond quarter of 20172019 compared to the thirdsecond quarter of 2016, Rates increased 46 basis points2018, due to rate increases for municipal deposits indexed to Fed Funds, while moderate competitive pricing pressure resultedand 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 top tiers of the Money Market product since June 30, 2018.
The yield on earning assets on a tax-equivalent basis increased twenty-nine29 basis points from 3.40%3.81% for the thirdsecond quarter of 2016,2018, to 3.69%4.10% for the thirdsecond quarter of 2017.2019. The cost of interest-bearing liabilities was 0.66%1.11% for the second quarter ended SeptemberJune 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 SeptemberJune 30, 20172019 and 2016.2018. The average yield on the investment portfolio was 2.40%2.41% for both the third quarterssecond quarter of 20172019 compared with 2.30% for the second quarter of 2018. Proceeds from sales, payments, calls and 2016. Investment opportunitiesmaturities, 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 comparablehigher 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%, increaserate 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 decrease34-basis point increase in interest income due to an eight basis point decrease in the yieldyield. Proceeds from 1.88% for the third quarter of 2016 to 1.80% for the same period in 2017.
Average tax-exemptmatured, called and sold municipal securities increased $6,331,000, contributing $64,000 to interest income, which was offset by a ten basis point reductionwere invested in average yield, resulting in a decrease of interest income of $20,000. QNB had purchased manyslightly 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 butused 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 basisten-basis point increase in average yield plus the $24,051,000and 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 whenas 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 thirdsecond quarters of 20172019 and 2016,2018, with the stronga 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 2017at 4.84%, was 4.48%, 1930 basis points higher than the 4.29% yield in thirdsecond quarter of 2016.2018, contributing to a $635,000 increase in interest income. Despite increases in the Fed fundsprime rate in June, September and December 2016, March 2017, and June 2017,of 2018, competitive pressures resulted incompressed 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 SeptemberJune 30, 20172019 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 $201,000an increase in increased interest income.income of $252,000; this was partially offset by a
4745
QNB CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Income on commercial and industrial loans increased $415,000. Averagedecrease 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 thirdsecond quarter of 20172019 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 times50 basis points since September 2016.June 30, 2018.
Tax-exempt loan income was $354,000$411,000 for the thirdsecond quarter of 2017, a decrease2019, 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, average2018. 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 thirdsecond quarter of 2017,2019, resulting in a decreasean increase of $35,000$62,000 in income. The yield on municipal loans improved 22increased 20 basis points, to 3.97%3.41% for the thirdsecond quarter of 2017,2019, compared with the same period in 2016,2018, resulting in an additional $19,000increase 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 affecteffect 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 ofoverall 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 thirdsecond quarter of 20172019 compared to the same period in 2016.2018. Over this same timeframe, the average yield on the portfolio decreased fourincreased 16 basis points to 3.90%3.98% for the thirdsecond quarter of 2017.2019. The netcombined 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 comparativecombined increase in interest income of $67,000. Interest income for home equity loansThe 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 2511 basis points to 3.87%. Average consumer loans increased $2,059,000, or 44.5%, to $6,685,000, led primarily6.06% for the second quarter of 2019 offset by student loana 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%; theresulting 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 thirdsecond quarter of 20172019 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 thirdsecond 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 one25 basis pointpoints to 0.21%0.48% for the thirdsecond 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 thirdsecond 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 thirdsecond quarter of 20162018 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 thirdsecond quarter of 2017.2019. The average balance ofinterest 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 4670 basis points to 0.80%2.03% for the thirdsecond 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 quarterquarters 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 thirdsecond quarter of 20172019 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 two65 basis points to 0.29%0.97% for the thirdsecond 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.
46
QNB CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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 quarterssecond quarter of 2017 and 2016, respectively.2019 compared to $794,000 in 2018. Average total time deposits decreased slightly from $229,211,000increased $2,592,000 to $229,337,000 for the third quarter 2016 to $228,941,000 for the thirdsecond quarter of 2017. 2019. As with fixed-rate loans and investment securities, timethese 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 six34 basis points from 1.40% to 1.29%1.74% when comparing the thirdsecond quarter of 20172018 to the same period in 2016.2019.
Approximately $99,509,000,$130,351,000, or 43.2%56%, of time deposits at SeptemberJune 30, 20172019 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 $25,000decreased $5,000 for the thirdsecond quarter of 20172019 to $61,000$196,000 when compared to the same period in 2016.2018. When comparing these same periods, average balances increaseddecreased from $38,506,000$67,841,000 to $43,678,000,$57,907,000 due to an increasea 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 19increase of 24 basis points to 0.56% for the third quarter of 2017.points.
Nine MonthNet Interest Income and Net Interest Margin – Six-Month Comparison
For the nine-monthsix-month period ended Septemberending June 30, 20172019 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-monthsix-month period ended SeptemberJune 30, 20172019 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-monthsix-month period ended SeptemberJune 30, 2017,2019, a ten basisone-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-monthsix-month periods ended SeptemberJune 30, 20162018 and SeptemberJune 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-monthsix-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-monthsix-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 fiveincreased 10 basis points from 2.44%2.30% to 2.39%2.40% when comparing the nine-monthsix-month periods.
Total interest expense increased $579,000$1,474,000 for the nine-monthsix-month period ended SeptemberJune 30, 20172019 compared with the same period in 2016. Deposit rates account for $397,00 of the increase2018, 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 four31 basis pointpoints to 0.63%1.07% for the nine-monthsix-month period ended SeptemberJune 30, 20172019 versus the same periodfirst half of 2018. QNB funded growth in 2016.loans with net proceeds from investments and growth in deposits; QNB Bank fundedwas therefore able to reduce its short-term cash needs with increased overnightresulting in decreased Federal Home Loan Bank borrowings in the first three quartershalf of 20172019 compared with the same period in 2016, and2018. 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 theresulting in a net increase in interest expense.
49
QNB CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Deposit balance increases and higher borrowings contributed $131,000 to interest expense.expense of $6,000. The yield on interest-bearing liabilities rose four31 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.
PROVISION FOR LOAN LOSSES AND ALLOWANCE FOR LOAN LOSSES
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
47
QNB CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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 quarterthree and first ninesix 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 SeptemberJune 30, 20172019 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 SeptemberJune 30, 2016.2018. Management believes the allowance for loan losses at SeptemberJune 30, 20172019 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 ninesix months ended SeptemberJune 30, 2017, compared with net loan recoveries of $43,000 and2019, 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 $10,437,000were $9,677,000 at SeptemberJune 30, 2017 compares favorably with $14,219,0002019 compared to $9,638,000 as of December 31, 20162018 and $11,811,000$7,987,000 as of SeptemberJune 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 SeptemberJune 30, 20172019 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 receivable1.02% at SeptemberJune 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 SeptemberJune 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 reductiondecrease of $4,140,000$5,767,000, or 31.4%, from the $22,204,000$18,339,000 reported at December 31, 20162018 and a $4,101,000 declinedecrease of $5,627,000, or 30.9, from the $22,165,000$18,199,000 reported at SeptemberJune 30, 2016.2018.
QNB had $5,000 inno loans past due 90 days or more and still accruing interest at SeptemberJune 30, 2017, and no loans past due 90 days2019 or more and still accruing at December 31, 2016. This compares with $150,0002018, and $23,000 at SeptemberJune 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 SeptemberJune 30, 20172019 compared with 0.78%0.76% at December 31, 20162018 and 0.70%0.59% at SeptemberJune 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 SeptemberJune 30, 2017,2019, compared with $1,819,000$2,160,000 at December 31, 2016,2018, and $1,149,000$1,233,000 at SeptemberJune 30, 2016.2018. There were no
50
QNB CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
newly identified troubled debt restructuresrestructuring in the ninesix months ended SeptemberJune 30, 2017.2019. QNB had no other real estate owned or repossessed assets as of SeptemberJune 30, 2017,2019, December 31, 2016,2018, or SeptemberJune 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.
48
QNB CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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-offsrecoveries for the three and ninesix months ended SeptemberJune 30, 20172019 compared to 20162018 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 | % |
5149
QNB CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
At SeptemberJune 30, 20172019 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 SeptemberJune 30, 20172019 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
Non-Interest Income Comparison |
|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
| 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 | % |
Quarter to Quarter Comparison
Total non-interest income for the thirdsecond quarter of 20172019 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 thirdsecond 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 2017ended June 30, 2019 and 2016, respectively, an increase of $83,000, or 6.8%.2018, respectively.
Net gaingains on sale ofsales investment securities whichincreased $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 marketequity securities. Net gains on sales of equity securities were $584,000 for the second quarter ended September 30, 2017 versusof 2019 compared to $44,000 for the same period in 2016 resulted2018. 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.
the same period of 2018.
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 thirdsecond quarters of 20172019 and 2016,2018, respectively.
These decreases were offset in part byFees 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 retailchecking 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 duringadvisory 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.
Nine-Month Comparison
Total non-interest income for the nine-month periods ended September 30, 2017 and 2016 was $5,075,000 and $4,594,000, respectively, an increase of $481,000, or 10.5%. Excluding net gains on investment securities, trading activities and loans for both periods total non-interest income was $3,770,000 and $3,634,000, an increase of $136,000.
Net investment securities gains increased $312,000 to $962,000 for the nine months ended September 30, 2017 compared to $650,000 for the comparable nine months in 2016. QNB recorded $80,000 of other-than-temporary impairment charges on an equity security, as a result of a prolonged decline in its fair value. There was $192,000 in other-than-temporary impairment charges recorded during the first nine months of 2016.
5250
QNB CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
ATM and debit cardOther non-interest income merchantincreased $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.
Six-Month Comparison
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 $46,000for 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 ninesix months ended SeptemberJune 30, 20172019 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-monthsix-month periods ended SeptemberJune 30, 20172019 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 $375,000increased $66,000, or 31.7%, to $274,000 for the ninesix months ended SeptemberJune 30, 20172019 compared with $425,000 forto the same period in 2016,2018; advisory fees increased $86,000, or 58.9% partially offset by a decreasedecline 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 beenOther 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 trailingthe 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
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 | % |
Quarter to Quarter Comparison
Total non-interest expense was $6,191,000$6,793,000 for the thirdsecond quarter of 2017,2019, an increase of $575,000,$260,000, or 10.2%4.0%, compared to the thirdsecond 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
51
QNB CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
$288,000, or 9.6%, to $2,979,000, or 14.0%,$3,277,000 during the thirdsecond quarter of 20172019 compared to the same period in 2016, attributable2018. Medical premiums, net of employee contributions decreased $161,000 to $223,000 when comparing the two quarters due to a $171,000 increasereduction 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 retirementclaims. Retirement plan expense offset in part by decreasedand post-retirement life insurance benefit cost, when comparingexpense increased $27,000, and $14,000, respectively during the two periods.same period.
Net occupancy and furniture and equipment expenseexpenses 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 SeptemberJune 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
53
QNB CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
ratecredits received in effect for 2017.2019 versus 2019. FDIC insurance premiums decreased $6,000,$11,000, or 3.7%, due7.5%. The FDIC assessment had included an assessment to pay the changeinterest on FICO bonds since the 1990’s. FICO bonds were issued in the FDIC insurance premium calculation, implemented startinglate 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 processingSeptember 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.
Nine-MonthSix-Month Comparison
Total non-interest expense was $17,721,000$13,517,000 for the nine-monthsix-month period ended SeptemberJune 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 $9,837,0002018, for the nine months ended September 30, 2017 compared tosame 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 expenseperiod, 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.
$607,000.
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 increaseddecreased slightly in the first ninesix months of 20172019 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.
INCOME TAXES
QNB utilizes an asset and liability approach for financial accounting and reporting of income taxes. As of SeptemberJune 30, 2017,2019, QNB’s net deferred tax asset was $4,741,000.$1,528,000. The primary components compriseof deferred taxes are deferred tax assets of $2,762,000$1,924,000 relating to the allowance for loan losses $1,234,000and $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 reductiondecrease in the balance of net deferred tax asset. The remaining balance differenceassets when comparing June 30, 2019 to December 31, 2018 is primarily the result of a $702,000 decline due to decreasedlower 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.
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 a significant initial charge against earnings to lower the carrying amount of its net deferred tax asset, and then, going forward, would record lower tax provisions.
Applicable income tax expense was $940,000$679,000 for the quarter and $2,907,000$1,496,000 for the ninesix months ended SeptemberJune 30, 2017,2019, compared with $821,000to $572,000 and $2,311,000, respectively,$1,129,000 for the same periods in 2016.2018. The effective tax rate for the thirdsecond quarter and year-to-date 20172019 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. This2018. The increase in the effective tax rate in 20172019 is due to the decreased proportion of tax-freestate income tax provision at the parent company related to total income, primarily municipal securitiesthe increase in realized gains on the equities portfolio and municipal loanthe reduction in tax-exempt net interest income.
5452
QNB CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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 SeptemberJune 30, 20172019 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, 20162018 to $26,028,000$14,068,000 at SeptemberJune 30, 2017.
During the second quarter 2017, QNB Bank redeemed the trading2019, 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 ninesix months ended SeptemberJune 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, theThe 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 SeptemberJune 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, whenat $148,506,000 declined $3,207,000 comparing SeptemberJune 30, 20172019 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, 20162018 to SeptemberJune 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.
55
QNB CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Short-term borrowings decreased 23.7%increased 16.1%, from $52,660,000$50,872,000 at December 31, 20162018 to $40,176,000$59,048,000 at SeptemberJune 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 overnightfunds 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
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
53
QNB CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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 SeptemberJune 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 SeptemberJune 30, 2017.2019. The maximum borrowing depends upon qualifying collateral assets and QNB’sthe 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 SeptemberJune 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, tradingavailable-for-sale and available-for-saleequity 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 SeptemberJune 30, 2017. Cashflow from payments, calls and sales of securities have been used2019. Growth in deposits since year-end 20162018 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 SeptemberJune 30, 20172019 and December 31, 2016,2018, respectively, were pledged as collateral for repurchase agreements and deposits of public funds. The level of pledged securities depends uponcorresponds with the level of municipal depositsdeposit and repurchase agreement balances.
QNB is a member of the Certificate of Deposit Account Registry Services (CDARS) program offered by the Promontory Interfinancial Network, LLC. CDARS is a funding and liquidity management tool used by banks to access funds and manage their balance sheet. It enables financial institutions to provide customers with full FDIC insurance on time deposits over $250,000 that are placed in the program. QNB also has available Insured Cash Sweep (ICS), another program through Promontory Interfinancial Network, LLC, which is a product similar to CDARS, but one that provides liquidity like a money market or savings account.
CAPITAL ADEQUACY
A strong capital position is fundamental to support continued growth and profitability and to serve the needs of depositors. QNB's shareholders' equity at SeptemberJune 30, 20172019 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 SeptemberJune 30, 20172019 and December 31, 20162018 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 SeptemberJune 30, 20172019 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 ninesix 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 yearsix 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.
56
QNB CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Retained earnings at SeptemberJune 30, 20172019 were impacted by ninesix 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 ninesix months ended SeptemberJune 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 SeptemberJune 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
54
QNB CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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 beand 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 increaseincreased 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.
The following table sets forth consolidated information for QNB Corp.QNB:
|
| 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 |
|
57
QNB CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
| 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 inAt June 30, 2019, common equity Tier I, Tier I capital, and total regulatory capital ratios betweenincreased from December 31, 20162018, due to increased regulatory capital and September 30, 2017.improved credit quality. The Company remains well-capitalized by all applicable regulatory requirements as of SeptemberJune 30, 2017.2019.
MARKET RISK MANAGEMENT
Market risk reflects the risk of economic loss resulting from changes in interest rates and market prices. QNB’s primary market risk exposure is interest rate risk and liquidity risk. QNB’s liquidity position was discussed in a prior section.
QNB’s largest source of revenue is net interest income, which is subject to changes in market interest rates. Interest rate risk management seeks to minimize the effect of interest rate changes on net interest margins and interest rate spreads and to provide growth in net interest income through periods of changing interest rates. QNB’s Asset/Liability and Investment Management Committee (ALCO) is responsible for managing interest rate risk and for evaluating the impact of changing interest rate conditions on net interest income.
55
QNB CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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 SeptemberJune 30, 20172019 is liability sensitive. Management expects that market interest decline rates may gradually increasewill 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 SeptemberJune 30, 20172019 and 20162018 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 | % |
* Certain short-term interest rates are below 1%
Computations of future effects of hypothetical interest rate changes are based on numerous assumptions and should not be relied upon as indicative of actual results. Assets and liabilities may react differently than projected to changes in market interest rates. The interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while rates on other types of assets and liabilities may lag changes in market interest rates. Interest rate shifts may not be parallel.
Changes in interest rates can cause substantial changes in the levelamount of prepayments fromof 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.
58
QNB CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
QNB is not subject to foreign currency exchange or commodity price risk. At SeptemberJune 30, 20172019, QNB did not have any hedging transactions in place such as interest rate swaps, caps or floors.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
The information required in response to this item is set forth in Item 2, above.
ITEM 4. CONTROLS AND PROCEDURES
We maintain a system of controls and procedures designed to provide reasonable assurance as to the reliability of the consolidated financial statements and other disclosures included in this report, as well as to safeguard assets from unauthorized use or disposition. We evaluated the effectiveness of the design and operation of our disclosure controls and procedures under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective as of the end of the period covered by this report. No changes were made to our internal control over financial reporting during the fiscal quarter covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
SEPTEMBERJune 30, 20172019
No material proceedings.
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.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
QNB did not repurchase any shares of its common stock during the quarter ended SeptemberJune 30, 2017.2019. The following provides certain information relating to QNB's stock repurchase plan.
Period |
| Total Number of Shares Purchased |
|
| Average Price Paid per Share |
|
| Total Number of Shares Purchased as Part of Publicly Announced Plan |
|
| Maximum Number of Shares that may yet be Purchased Under the Plan |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 42,117 |
|
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 42,117 |
|
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 42,117 |
|
Total |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 42,117 |
|
(1) | Transactions are reported as of settlement dates. |
(2) | QNB’s current stock repurchase plan was approved by its Board of Directors and announced on January 24, 2008 and subsequently increased on February 9, 2009. |
(3) | The total number of shares approved for repurchase under QNB’s current stock repurchase plan is 100,000. |
(4) | QNB’s current stock repurchase plan has no expiration date. |
(5) | QNB has no stock repurchase plan that it has determined to terminate or under which it does not intend to make further purchases. |
Item 3. Default Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
None.
None.
Exhibit 3.1 |
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Exhibit 3.2 |
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Exhibit 31.1 |
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Exhibit 31.2 |
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Exhibit 32.1 |
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Exhibit 32.2 |
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The following Exhibits are being furnished* as part of this report:
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.* |
| * | These interactive data files are being furnished as part of this Quarterly Report, and, in accordance with Rule 402 of Regulation S-T, shall not be deemed filed for purposes of Section 11 or 12 of the Securities Act of 1933, as amended, or Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability under those sections. |
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
| QNB Corp. | ||
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Date: | By: |
| /s/ David W. Freeman |
|
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| David W. Freeman |
|
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| Chief Executive Officer |
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Date: | By: |
| /s/ Janice McCracken Erkes |
|
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| Janice McCracken Erkes |
|
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| Chief Financial Officer |
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Date: | By: |
| /s/ |
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| Chief Accounting Officer, QNB Bank |