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

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically ~~and posted on its corporate Web site, if any,~~ every Interactive Data File required to be submitted ~~and posted~~ pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit ~~and post~~ such files). Yes ☒ No ☐

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

	(in thousands, except share data)						(in thousands, except share data)
	(current period unaudited)						(current period unaudited)
	September 30, 2017			December 31, 2016			June 30, 2021			December 31, 2020
Assets
Cash and due from banks	$	14,438		$	8,897		$	13,526		$	13,422
Interest-bearing deposits in banks		11,590			1,824			43,095			25,909
Total cash and cash equivalents		26,028			10,721			56,621			39,331

Investment securities
Trading		—			3,596
Available-for-sale (amortized cost $400,041 and $396,168)		396,413			390,475
Restricted investment in bank stocks		578			1,017
Investments:
Available-for-sale (amortized cost $546,852 and $428,495)								549,385			435,646
Equity securities (cost of $13,705 and $12,784)								15,445			12,849
Restricted investment in stocks								1,142			1,041
Loans held-for-sale		115			789			5,018			6,570
Loans receivable		704,214			633,079			920,923			920,042
Allowance for loan losses		(8,125	)		(7,394	)		(11,202	)		(10,826	)
Net loans		696,089			625,685			909,721			909,216
Bank-owned life insurance		10,811			11,297			11,331			11,791
Premises and equipment, net		8,546			8,683			17,292			15,404
Accrued interest receivable		3,616			3,128			4,208			4,825
Net deferred tax assets		4,741			5,473			500			66
Other assets		3,426			2,277			4,690			3,490
Total assets	$	1,150,363		$	1,063,141		$	1,575,353		$	1,440,229

Liabilities
Deposits
Demand, non-interest bearing	$	122,696		$	119,010		$	235,548		$	204,584
Interest-bearing demand		320,386			255,754			422,024			395,364
Money market		81,306			74,762			122,466			96,811
Savings		250,618			238,247			387,234			334,223
Time		127,430			131,370
Time of $100 or more		103,009			94,212
Time less than $100								98,719			107,582
Time $100 through $250								51,018			59,984
Time greater than $250								26,724			29,519
Total deposits		1,005,445			913,355			1,343,733			1,228,067
Short-term borrowings		40,176			52,660			75,021			58,838
Long-term debt								10,000			10,000
Accrued interest payable		336			335			240			350
Other liabilities		3,894			3,224			9,019			8,529
Total liabilities		1,049,851			969,574			1,438,013			1,305,784

Shareholders' Equity
Common stock, par value $0.625 per share;
authorized 10,000,000 shares; 3,604,825 shares and 3,576,270
shares issued; 3,440,256 and 3,411,701 shares outstanding		2,253			2,235
authorized 10,000,000 shares; 3,746,606 shares and 3,725,202
shares issued; 3,559,546 and 3,556,533 shares outstanding								2,342			2,328
Surplus		18,369			17,418			23,162			22,430
Retained earnings		84,761			80,147			113,074			106,644
Accumulated other comprehensive loss, net of tax		(2,395	)		(3,757	)
Treasury stock, at cost; 164,569 shares		(2,476	)		(2,476	)
Accumulated other comprehensive gain, net of tax								2,001			5,649
Treasury stock, at cost; 187,060 and 168,669 shares								(3,239	)		(2,606	)
Total shareholders' equity		100,512			93,567			137,340			134,445
Total liabilities and shareholders' equity	$	1,150,363		$	1,063,141		$	1,575,353		$	1,440,229

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

	(in thousands, except per share data - unaudited)													For the Three Months Ended June 30,				For the Six Months Ended June 30,
	Three months ended September 30,						Nine months ended September 30,
	2017			2016			2017			2016
(in thousands, except per share data - unaudited)														2021		2020		2021		2020
Interest income
Interest and fees on loans	$	7,722		$	6,376		$	21,909		$	19,060			$	9,436	$	8,958	$	19,447	$	18,334
Interest and dividends on investment securities (AFS & HTM):
Interest and dividends on available-for-sale & equity securities:
Taxable		1,558			1,317			4,672			3,964				1,482		1,404		2,796		2,969
Tax-exempt		507			478			1,456			1,483				434		348		820		698
Interest on trading securities		—			36			45			106
Interest on interest-bearing balances and other interest income		43			80			76			138				28		30		48		70
Total interest income		9,830			8,287			28,158			24,751				11,380		10,740		23,111		22,071

Interest expense
Interest on deposits
Interest-bearing demand		351			177			753			492				261		245		499		825
Money market		59			48			187			142				93		95		175		242
Savings		300			233			837			688				287		277		577		645
Time		387			378			1,127			1,122
Time of $100 or more		357			330			1,008			967
Time less than $100															231		409		510		872
Time of $100 through $250															111		253		256		582
Time greater than $250															67		138		153		310
Interest on short-term borrowings		61			36			193			115				73		50		128		142
Interest on long-term debt															39		39		78		56
Total interest expense		1,515			1,202			4,105			3,526				1,162		1,506		2,376		3,674
Net interest income		8,315			7,085			24,053			21,225				10,218		9,234		20,735		18,397
Provision for loan losses		100			—			700			125				183		250		458		750
Net interest income after provision for loan losses		8,215			7,085			23,353			21,100				10,035		8,984		20,277		17,647

Non-interest income
Total other-than-temporary impairment loss on investment securities		(80	)		—			(80	)		(192	)
Less: Portion of loss recognized in other comprehensive income (before taxes)		—			—			—			—
Net other-than temporary impairment losses on investment securities		(80	)		—			(80	)		(192	)
Net gain on sale of investment securities		178			316			1,042			842
Net gain on investment securities		98			316			962			650
Net (loss) gain on trading activities		—			(39	)		27			47
Net gain on sales and calls of available-for-sale and equity securities															294		169		636		169
Unrealized gain (loss) on investment equity securities															579		1,166		1,675		(1,774	)
Fees for services to customers		429			425			1,242			1,205				296		242		595		653
ATM and debit card		435			419			1,301			1,229				709		516		1,302		1,004
Retail brokerage and advisory		168			129			375			425				193		169		360		282
Bank-owned life insurance		70			73			261			217				73		69		336		137
Merchant		91			86			263			242				119		97		223		188
Net gain on sale of loans		65			143			316			263				120		365		472		446
Other		114			92			328			316				151		24		339		141
Total non-interest income		1,470			1,644			5,075			4,594				2,534		2,817		5,938		1,246

Non-interest expense
Salaries and employee benefits		3,514			3,072			9,837			9,114				4,342		3,985		8,359		8,057
Net occupancy		469			438			1,345			1,305				535		524		1,153		1,047
Furniture and equipment		475			437			1,360			1,302				670		656		1,340		1,331
Marketing		188			220			724			681				261		155		475		477
Third party services		379			440			1,180			1,246				594		503		1,082		957
Telephone, postage and supplies		201			189			600			549				176		194		374		389
State taxes		161			178			509			499				227		159		500		402
FDIC insurance premiums		156			162			431			489				211		142		382		279
Other		648			480			1,735			1,543				733		551		1,407		1,208
Total non-interest expense		6,191			5,616			17,721			16,728				7,749		6,869		15,072		14,147
Income before income taxes		3,494			3,113			10,707			8,966				4,820		4,932		11,143		4,746
Provision for income taxes		940			821			2,907			2,311				951		998		2,224		592
Net income	$	2,554		$	2,292		$	7,800		$	6,655			$	3,869	$	3,934	$	8,919	$	4,154
Earnings per share - basic	$	0.74		$	0.68		$	2.28		$	1.97			$	1.09	$	1.11	$	2.51	$	1.18
Earnings per share - diluted	$	0.74		$	0.67		$	2.27		$	1.96			$	1.09	$	1.11	$	2.51	$	1.18
Cash dividends per share	$	0.31		$	0.30		$	0.93		$	0.90			$	0.35	$	0.34	$	0.70	$	0.68
The accompanying notes are an integral part of the consolidated financial statements.													The accompanying notes are an integral part of the consolidated financial statements.

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

(in thousands - unaudited)

Three months ended September 30,

2017

2016

Before
tax
amount

Tax
expense
(benefit)

Net of
tax
amount

Before
tax
amount

Tax
expense
(benefit)

Net of
tax
amount

Net income

$
3,494

$
940

$
2,554

$
3,113

$
821

$
2,292

Other comprehensive income:

Net unrealized holding gains (losses) on securities:

Unrealized holding gains (losses) arising during
the period

96

33

63

(875
)

(298
)

(577
)
Reclassification adjustment for gains
included in net income

(98
)

(33
)

(65
)

(316
)

(107
)

(209
)
Other comprehensive loss

(2
)

-

(2
)

(1,191
)

(405
)

(786
)
Total comprehensive income

$
3,492

$
940

$
2,552

$
1,922

$
416

$
1,506

	(in thousands - unaudited)
	2021								2020
For the Three Months Ended June 30,	Before tax amount			Tax expense		Net of tax amount			Before tax amount			Tax expense		Net of tax amount
Net income	$	4,820		$	951	$	3,869		$	4,932		$	998	$	3,934
Other comprehensive income:
Net unrealized holding gains on available-for-sale securities:
Unrealized holding gains arising during the period		3,393			712		2,681			1,103			231		872
Reclassification adjustment for gains included in net income		(2	)		—		(2	)		(1	)		—		(1	)
Other comprehensive income		3,391			712		2,679			1,102			231		871
Total comprehensive income	$	8,211		$	1,663	$	6,548		$	6,034		$	1,229	$	4,805

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

For the Six Months Ended June 30,	2021									2020
	Before tax amount			Tax expense (benefit)			Net of tax amount			Before tax amount			Tax expense (benefit)		Net of tax amount
Net income	$	11,143		$	2,224		$	8,919		$	4,746		$	592	$	4,154
Other comprehensive (loss) income:
Net unrealized holding (losses) gains on available-for-sale securities:
Unrealized holding (losses) gains arising during the period		(4,613	)		(969	)		(3,644	)		6,915			1,452		5,463
Reclassification adjustment for gains included in net income		(5	)		(1	)		(4	)		(1	)		—		(1	)
Other comprehensive (loss) income		(4,618	)		(970	)		(3,648	)		6,914			1,452		5,462
Total comprehensive income	$	6,525		$	1,254		$	5,271		$	11,660		$	2,044	$	9,616

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

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

For the Three Months Ended June 30, 2021 and 2020																			For the Three Months Ended June 30, 2021 and 2020

										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, 2021																					3,559,169		$	2,335	$	22,781	$	110,451		$	(678	)	$	(2,893	)	$	131,996
Net income				—		—		7,800			—			—			7,800							—		—		3,869			—			—			3,869
Other comprehensive income, net of tax				—		—		—			1,362			—			1,362
Cash dividends declared ($0.93 per share)				—		—		(3,186	)		—			—			(3,186	)
Other comprehensive loss, net of tax																								—		—		—			2,679			—			2,679
Cash dividends declared ($0.35 per share)																								—		—		(1,246	)		—			—			(1,246	)
Stock issued in connection with dividend reinvestment and stock purchase plan		19,495		12		727		—			—			—			739				5,824			4		210		—			—			—			214
Stock issued for employee stock purchase plan		1,318		1		41		—			—			—			42				2,744			2		73		—			—			—			75
Stock issued for options exercised		7,742		5		111		—			—			—			116				1,500			1		55		—			—			—			56
Stock-based compensation expense				—		72		—			—			—			72							—		43		—			—			—			43
Balance, September 30, 2017		3,440,256	$	2,253	$	18,369	$	84,761		$	(2,395	)	$	(2,476	)	$	100,512
Treasury stock purchase																					(9,691	)		—		—		—			—			(346	)		(346	)
Balance, June 30, 2021																					3,559,546		$	2,342	$	23,162	$	113,074		$	2,001		$	(3,239	)	$	137,340


																														Accumulated
																				Number of										Other
(unaudited)																				Shares			Common				Retained			Comprehensive			Treasury
(in thousands, except share and per share data)																				Outstanding			Stock		Surplus		Earnings			Income			Stock			Total
Balance, April 1, 2020																					3,530,670		$	2,309	$	21,537	$	98,395		$	4,848		$	(2,476	)	$	124,613
Net income																								—		—		3,934			—			—			3,934
Other comprehensive income, net of tax																								—		—		—			871			—			871
Cash dividends declared ($0.34 per share)																								—		—		(1,202	)		—			—			(1,202	)
Stock issued in connection with dividend reinvestment and stock purchase plan																					8,668			6		234		—			—			—			240
Stock issued for employee stock purchase plan																					2,923			2		73		—			—			—			75
Stock issued for options exercised																					—			—		—		—			—			—			—
Stock-based compensation expense																								—		32		—			—			—			32
Balance, June 30, 2020																					3,542,261		$	2,317	$	21,876	$	101,127		$	5,719		$	(2,476	)	$	128,563

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

For the Six Months Ended June 30, 2021 and 2020

											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, 2021		3,556,533		$	2,328	$	22,430	$	106,644		$	5,649		$	(2,606	)	$	134,445
Net income					—		—		8,919			—			—			8,919
Other comprehensive loss, net of tax					—		—		—			(3,648	)		—			(3,648	)
Cash dividends declared ($0.70 per share)					—		—		(2,489	)		—			—			(2,489	)
Stock issued in connection with dividend reinvestment and stock purchase plan		12,143			8		413		—			—			—			421
Stock issued for employee stock purchase plan		2,744			2		73		—			—			—			75
Stock issued for options exercised		6,517			4		183		—			—			—			187
Stock-based compensation expense					—		63		—			—			—			63
Treasury stock purchase		(18,391	)		—		—		—			—			(633	)		(633	)
Balance, June 30, 2021		3,559,546		$	2,342	$	23,162	$	113,074		$	2,001		$	(3,239	)	$	137,340


											Accumulated
	Number of										Other
(unaudited)	Shares			Common				Retained			Comprehensive			Treasury
(in thousands, except share and per share data)	Outstanding			Stock		Surplus		Earnings			Income			Stock			Total
Balance, January 1, 2020		3,519,767		$	2,303	$	21,261	$	99,372		$	257		$	(2,476	)	$	120,717
Net income					—		—		4,154			—			—			4,154
Other comprehensive income, net of tax					—		—		—			5,462			—			5,462
Cash dividends declared ($0.68 per share)					—		—		(2,399	)		—			—			(2,399	)
Stock issued in connection with dividend reinvestment and stock purchase plan		16,450			10		450		—			—			—			460
Stock issued for employee stock purchase plan		2,923			2		73		—			—			—			75
Stock issued for options exercised		3,121			2		35		—			—			—			37
Stock-based compensation expense					—		57		—			—			—			57
Balance, June 30, 2020		3,542,261		$	2,317	$	21,876	$	101,127		$	5,719		$	(2,476	)	$	128,563

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

	(in thousands, unaudited)						(in thousands, unaudited)
Nine months ended September 30,	2017			2016
For the Six Months Ended June 30,							2021			2020
Operating Activities
Net income	$	7,800		$	6,655		$	8,919		$	4,154
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		607			668			919			999
Provision for loan losses		700			125			458			750
Net gain on investment securities available-for-sale		(962	)		(650	)
Net gain on sale of other real estate owned, repossessed assets and premises and equipment		(1	)		(2	)
Gain on sale of loan held for investment		(99	)		—
Net gain on calls and sales of debt and equity securities								(636	)		(169	)
Net unrealized (gain) loss on equity securities								(1,675	)		1,774
Net gain on sale of loans		(217	)		(263	)		(472	)		(446	)
Proceeds from sales of residential mortgages held-for-sale		6,867			7,188			13,124			10,193
Origination of residential mortgages held-for-sale		(5,976	)		(6,394	)		(10,597	)		(12,449	)
Income on bank-owned life insurance		(261	)		(217	)
Increase in cash surrender value of bank-owned life insurance								(336	)		(137	)
Stock-based compensation expense		72			60			63			57
Net decrease (increase) in trading securities		3,596			(123	)
Deferred income taxes		28			(121	)
Net increase in income taxes payable		205			141
Net increase in accrued interest receivable		(488	)		(11	)
Deferred income tax provision (benefit)								536			(511	)
Net (decrease) increase in income taxes payable								(139	)		392
Net increase (decrease) in accrued interest receivable								617			(904	)
Amortization of mortgage servicing rights and change in valuation allowance		65			59			63			112
Net amortization of premiums and discounts on investment securities		1,267			1,396			1,527			959
Net increase (decrease) in accrued interest payable		1			(20	)
Net decrease in accrued interest payable								(110	)		(458	)
Operating lease payments								(324	)		(324	)
Increase in other assets		(1,219	)		(775	)		(1,127	)		(645	)
Increase in other liabilities		464			329
Decrease in other liabilities								(38	)		(1,408	)
Net cash provided by operating activities		12,449			8,045			10,772			1,939
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								58,198			95,070
Proceeds from the sale of investments available-for-sale								—			6,931
Proceeds from the sale of equity securities								2,412			1,428
Purchases of investments available-for-sale								(176,992	)		(148,081	)
Purchases of equity securities								(2,702	)		(4,614	)
Proceeds from redemption of investment in restricted stock								—			1,495
Purchases of restricted stock								(101	)		(1,463	)
Net increase in loans								(1,466	)		(58,177	)
Net purchases of premises and equipment		(471	)		(188	)		(3,038	)		(345	)
Redemption of bank-owned life insurance		754			—
Proceeds from sales of other real estate owned and repossessed assets		2			2
Net cash (used in) provided by investing activities		(74,459	)		5,446
Redemption of Bank Owned Life Insurance investment								797			—
Net cash used in investing activities								(122,892	)		(107,756	)
Financing Activities
Net increase in non-interest bearing deposits		3,686			6,486			30,964			63,311
Net increase in interest-bearing deposits		88,404			30,440			84,702			82,017
Net (decrease) increase in short-term borrowings		(12,484	)		4,016
Tax benefit from exercise of stock options		—			12
Net increase in short-term borrowings								16,183			1,481
Increase in long-term debt								—			10,000
Cash dividends paid, net of reinvestment		(2,794	)		(2,662	)		(2,187	)		(2,109	)
Purchase of treasury shares								(633	)		—
Proceeds from issuance of common stock		505			654			381			282
Net cash provided by financing activities		77,317			38,946			129,410			154,982
Increase in cash and cash equivalents		15,307			52,437			17,290			49,165
Cash and cash equivalents at beginning of year		10,721			16,991			39,331			17,608
Cash and cash equivalents at end of period	$	26,028		$	69,428		$	56,621		$	66,773
Supplemental Cash Flow Disclosures
Interest paid	$	4,104		$	3,546		$	2,486		$	4,132
Income taxes paid		2,668			2,227
Net income taxes paid								1,826			712
Non-cash transactions:
Unsettled trades to sell securities		—			2,558
Unsettled trades to purchase securities								(1,085	)		(1,873	)
Right-of-use assets obtained in exchange for new operating lease liabilities								698			1,086
The accompanying notes are an integral part of the consolidated financial statements.

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

The accompanying unaudited consolidated financial statements include the accounts of QNB Corp. and its wholly-owned subsidiary, QNB Bank (the “Bank”). The consolidated entity is referred to herein as “QNB” or the “Company”. All significant intercompany accounts and transactions are eliminated in the consolidated financial statements.

These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in QNB's ~~2016~~2020 Annual Report incorporated in the Form 10-K. Operating results for the ~~three and nine-month periods~~six-month period ended ~~September~~June 30, ~~2017~~2021 are not necessarily indicative of the results that may be expected for the year ending December 31, ~~2017.~~2021.

The unaudited consolidated financial statements reflect all adjustments which, in the opinion of management, are necessary for a fair presentation of the results of operations for the period and are of a normal and recurring nature.

Tabular information, other than share and per share data, is presented in thousands of dollars.

In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities at the dates of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from such estimates.

~~The Company~~QNB has evaluated events and transactions occurring subsequent to the balance sheet date of ~~September~~June 30, ~~2017,~~2021 for items that should potentially be recognized or disclosed in these consolidated financial statements.

Currently all QNB office lobbies are opened with their normal operating hours and banking by appointment service remains available. Drive-ups are also operating under normal hours. QNB continues to follow any state mandates. Employees with remote access are encouraged to work from home. QNB has not incurred any significant disruptions to its business continuity.

~~2. RECENT ACCOUNTING PRONOUNCEMENTS~~Under the Economic Aid Act, the SBA and Department of the Treasury reopened the Paycheck Protection Program (“PPP”) to certain borrowers on January 11, 2021 and released the applications for first- and second-draw loans. QNB originated 315 new PPP loans for a total of $35,021,000 during the six months ended June 30, 2021. Second-draw customers made up 244 of these loans, or $32,240,000 and first-draw customers made up the remaining 71 loans, or $2,781,000. Additionally, 526 PPP loans, or $62,085,000, were forgiven during the six months ended June 30, 2021. QNB closed a total of 975 PPP loans totaling $117,496,000 of which 449 loans, totaling $54,627,000, were outstanding at June 30, 2021. QNB received origination fees from the SBA ranging from a flat fee of $2,500 per loan to 1 to 5 basis points of the loan origination balance which are recognized in interest income as a yield adjustment over the term of the loan.Funds were primarily being transferred into the borrowers’ deposit accounts, and disbursement on these PPP loan proceeds are being funded by cash held at the Federal Reserve and proceeds from calls and payments of investment securities. QNB had ample resources to cover disbursements through deposit growth and short-term Federal Home Loan Bank (“FHLB”) advances; therefore, participation in the Federal Reserve’s Paycheck Protection Program Liquidity Facility (“PPPLF”) was not necessary.

InOn March 30, 2021, the president signed into law the PPP Extension Act of 2021 (the “Act”), which extended the PPP application deadline from March 31, 2021 to May ~~2014,~~31, 2021. The PPP authorization was also extended through June 30, 2021 to provide the ~~Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09,~~ ~~Revenue~~Small Business Administration additional time to process applications received by the application deadline.

Upon requests from ~~Contracts~~customers, QNB has provided payment relief to those affected by the COVID-19 Pandemic. QNB has: offered an interest only payment option, granted in 90 day increments; has provided payment deferment for mortgage and consumer loans with ~~Customers~~ ~~(Topic 606). This ASU was issued~~no late fee during the deferment period; has granted foreclosure and motor vehicle repossession reprieve; and will not adversely impact credit reporting for customers who were granted relief on mortgage or consumer loans. None of these modifications are considered troubled-debt restructurings as the customers were not experiencing financial difficulty prior 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~~COVID-19 Pandemic. Interest continues to be ~~entitled in exchange for those goods~~accrued on all COVID-19 modifications during the deferment period. QNB modified a total 276 commercial loans, or ~~services. In addition, this update specifies the accounting for certain costs to obtain~~$187,936,000, and 49 retail loans, or ~~fulfill a contract with a customer~~$9,108,000, during 2020 and expands disclosure requirements for revenue recognition. This guidance does not apply to revenue associated with financial instruments, including loans, securities, and derivatives that are accounted for under other U.S. GAAP guidance. For that reason, we do not expect it to have a material impact on our consolidated results of operations for elements of the statement of income associated with financial instruments, including securities gains, interest income and interest expense. However, we do believe the new standard will result in new disclosure requirements. We are currently in the process of reviewing contracts to assess the impact of the new guidance on our service offerings that are in the scope of the guidance, included in non-interest income such as insurance commission fees, service charges, payment processing fees, trust services fees, and brokerage services fees. The Company is continuing to evaluate the effect of the new guidance on revenue sources other than financial instruments on our financial position and consolidated results of operations. The guidance is effective for the QNB’s financial statements beginning January 1, 2018. The Company expects to use the modified retrospective method for transition in which the cumulative effect will be recognized at the date of adoption with no restatement of comparative periods presented.

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

This ASU is effective for public companies for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. If QNB adopted this guidance on October 1, 2017 it would have resulted in a decrease in retained earnings of approximately $160,000 and a corresponding increase in accumulated other comprehensive loss to reflect the reclassificationThe full impact of the ~~unrealized losses~~COVID-19 Pandemic is unknown and rapidly evolving. Uncertainties exist related to the duration of the COVID-19 Pandemic and its potential effects on QNB’s customers and prospects, including impacts on national and local economies, unemployment, maintaining a competent workforce, and disruptions in the supply chain. There are no assurances as ~~of September 30, 2017. There would have been no overall impact on shareholder’s equity as~~to how the ~~equity securities held by QNB are currently recorded at fair value through accumulated other comprehensive income (loss).~~COVID-19 Pandemic might affect QNB’s loan, investment and deposit portfolios.

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.2. RECENT ACCOUNTING PRONOUNCEMENTS

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

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

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

On June 16, 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326)(“CECL”). The new guidance requires organizations to measure all expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts.

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

On October 16, 2019, FASB adopted its August 15, 2019 proposal to delay the effective dates for certain smaller reporting companies for the implementation CECL. For public business entities that are U.S. Securities and Exchange Commission ~~(SEC)~~(“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~~2019, except for ~~all organizations~~smaller reporting companies, whose effective date is effective for fiscal years, and interim periods ~~within~~with those fiscal years, beginning after December 15, ~~2018.~~2022. QNB ~~is evaluating~~continues to evaluate 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~~statements 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. QNBcurrently does not ~~anticipate this new standard will have~~anticipates a material ~~impact on~~change to its ~~consolidated financial statements as it already uses~~allowance for loan losses upon the ~~earliest call date to amortize premiums on callable debt securities.~~eventual implementation of CECL.

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~~$43,000 and ~~$18,000~~$32,000 for the three months ended ~~September~~June 30, ~~2017~~2021 and ~~2016,~~2020, respectively. Stock-based compensation expense was ~~$72,000~~$63,000 and ~~$60,000~~$57,000 for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2021 and ~~2016,~~2020, respectively. As of ~~September~~

June 30, ~~2017,~~2021, there was approximately ~~$108,000~~$123,000 of unrecognized compensation cost related to unvested share-based compensation award grants that is expected to be recognized over the next ~~29 months.~~26 months.

Options are granted to certain employees at prices equal to the market value of the stock on the date the options are granted. The ~~2005~~2015 Plan authorized the issuance of ~~200,000~~300,000 shares. The time period during which any option is exercisable under the 2015 Plan is determined by the Committee but shall not commence before the expiration of six months after the date of grant or continue beyond the expiration of five years after the date the option is awarded. The granted options vest after a three-year period. As of ~~September~~June 30, ~~2017,~~2021, there were ~~184,200~~148,200 options granted, ~~65,150~~12,300 options forfeited, ~~80,475~~20,825 options exercised, and ~~38,575~~119,400 options outstanding under this Plan. ~~The 2005 Plan expired on March 15, 2015.~~

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

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

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

Nine months ended September 30,	2017			2016
For the Six Months Ended June 30,							2021			2020
Risk free interest rate		1.48	%		1.14	%		0.20	%		1.52	%
Dividend yield		3.19	%		3.78	%		4.17	%		3.60	%
Volatility		17.89	%		22.62	%		21.14	%		13.46	%
Expected life (years)		4.20			4.20			4.88			4.03

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

The fair market value of options granted in the ~~first nine~~six months ~~of 2017~~ended June 30, 2021 and ~~2016~~2020 was ~~$3.88~~$3.08 and ~~$3.79,~~$2.42, respectively.

Stock option activity during the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2021 and ~~2016~~2020 is as follows:

	Number of options			Weighted average exercise price		Weighted average remaining contractual term (in years)		Aggregate intrinsic value		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
Outstanding at December 31, 2020											116,550		$	37.42
Granted		23,500			30.40						25,000			32.50
Exercised		(18,425	)		20.70						(19,025	)		30.97
Forfeited		(9,725	)		25.61						(3,125	)		30.40
Outstanding at September 30, 2016		78,225		$	26.85		2.74	$	560
Exercisable at September 30, 2016		23,100		$	22.38		0.87	$	268
Outstanding at June 30, 2021											119,400		$	37.60		2.17	$	0
Exercisable at June 30, 2021											45,475		$	4.73		0.65	$	0

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

	Three months ended September 30,				Nine months ended September 30,				For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2017		2016		2017		2016		2021		2020		2021		2020
Numerator for basic and diluted earnings per share - net income	$	2,554	$	2,292	$	7,800	$	6,655	$	3,869	$	3,934	$	8,919	$	4,154
Denominator for basic earnings per share - weighted average shares outstanding		3,433,811		3,391,471		3,424,813		3,381,491		3,556,550		3,532,079		3,555,804		3,527,373
Effect of dilutive securities - employee stock options		18,771		12,568		16,393		9,238		693		—		—		1,018
Denominator for diluted earnings per share - adjusted weighted average shares outstanding		3,452,582		3,404,039		3,441,206		3,390,729		3,557,243		3,532,079		3,555,804		3,528,391
Earnings per share - basic	$	0.74	$	0.68	$	2.28	$	1.97	$	1.09	$	1.11	$	2.51	$	1.18
Earnings per share - diluted		0.74		0.67		2.27		1.96		1.09		1.11		2.51		1.18

There were 094,400 and ~~25,000~~118,000 stock options that were anti-dilutive for the ~~three and nine-month~~three-month periods ended ~~September~~June 30, ~~2017,~~2021 and 2020, respectively. There were 0119,400 and ~~41,350~~98,150 stock options that were anti-dilutive for the ~~three and nine-month~~six-month periods ended ~~September~~June 30, ~~2016.~~2021 and 2020, respectively. These stock options were not included in the above calculation.

~~The~~QNB’s current stock repurchase plan was originally approved by the Board of Directors ~~has authorized~~on January 21, 2008, increased the ~~repurchase of~~amount on February 9, 2009 to 100,000 shares, and subsequently increased on April 29, 2021 up to ~~100,000~~200,000 shares of its common stock in the open market or privately negotiated transactions. The repurchase authorization ~~does not bear a~~has no termination date. There were no18,391 and 0 shares repurchased during the ~~three or nine~~six months ended ~~September~~June 30, ~~2017~~2021 and ~~2016.~~2020, respectively. As of ~~September~~June 30, ~~2017, 57,883~~2021, 80,374 shares were repurchased under this authorization at an average price of ~~$16.97~~$21.72 and a total cost of ~~$982,000.~~

The following shows the components of accumulated other comprehensive ~~loss~~income (loss) at ~~September~~June 30, ~~2017~~2021 and December 31, ~~2016:~~2020:

The following tables present amounts reclassified out of accumulated other comprehensive income (loss) for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2021 and ~~2016:~~2020:

Three months ended September 30,	Amount reclassified from accumulated other comprehensive income
For the Three Months Ended June 30,								Amount reclassified from accumulated other comprehensive income
Details about accumulated other comprehensive income	2017			2016			Affected line item in statement of income	2021		2020		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	$	2	$	1	Net gain on sales of investments available-for-sale
Other-than-temporary impairment losses on investment securities		(80	)		-		Net other-than-temporary impairment losses on investment securities
Other-than-temporary impairment on investment securities									—		—	Net other-than-temporary impairment losses on investment securities
		98			316				2		1
Tax effect		(33	)		(107	)	Provision for income taxes		—		—	Provision for income taxes
Total reclass out of accumulated other comprehensive income, net of tax	$	65		$	209		Net of tax
Total reclassification out of accumulated other comprehensive income, net of tax								$	2	$	1	Net of tax

~~QNB engaged in trading activities for its own account, comprised~~Available-For-Sale Securities

The amortized cost and estimated fair values of ~~municipal~~investment securities ~~that were held principally for resale in the near term recorded~~available-for-sale 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~~June 30, 2021 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~~2020 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.as follows:

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

			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, 2020										value		gains		losses			cost
U.S. Government agency	$	76,650	$	36	$	(2,118	)	$	78,732	$	69,776	$	26	$	(246	)	$	69,996
State and municipal		72,295		614		(398	)		72,079		87,812		2,350		(45	)		85,507
U.S. Government agencies and sponsored enterprises (GSEs):
Mortgage-backed		145,301		561		(2,241	)		146,981		175,847		3,328		(24	)		172,543
Collateralized mortgage obligations (CMOs)		77,415		109		(1,846	)		79,152		94,948		1,751		(5	)		93,202
Pooled trust preferred		2,281		263		(891	)		2,909		70		—		(14	)		84
Corporate debt		8,030		16		(57	)		8,071		7,193		59		(29	)		7,163
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										$	435,646	$	7,514	$	(363	)	$	428,495

The amortized cost and estimated fair value of securities available-for-sale by contractual maturity at ~~September~~June 30, ~~2017~~2021 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, 2021					Fair value		Amortized cost
Due in one year or less	$	6,468	$	6,438	$	6,391	$	6,343
Due after one year through five years		216,727		218,589		328,734		326,189
Due after five years through ten years		140,465		142,030		121,665		122,199
Due after ten years		25,390		25,379		92,595		92,121
Equity securities		7,363		7,605
Total investment securities available-for-sale	$	396,413	$	400,041
Total investment debt securities available-for-sale					$	549,385	$	546,852

There were 0 investment sales for the three or six months ended June 30, 2021. Proceeds from sales of investment securities available-for-sale were approximately ~~$9,091,000 and $3,078,000~~$956,000 for the three months ended ~~September~~June 30, ~~2017 and 2016, respectively.~~2020. Proceeds from sales of investment securities available-for-sale were approximately ~~$33,711,000 and $31,892,000~~$6,931,000 for the ~~nine~~six months ended ~~September~~June 30, ~~2017 and 2016, respectively.~~2020.

At ~~September~~June 30, ~~2017~~2021 and December 31, ~~2016,~~2020, investment securities available-for-sale totaling approximately ~~$241,222,000~~$258,917,000 and ~~$166,628,000,~~$220,934,000, respectively, were pledged as collateral for repurchase agreements and deposits of public funds.

The following table presents information related to the Company’s gains and losses on the sales and calls of ~~equity and debt~~ securities available-for-sale, and losses recognized for the other-than-temporary impairment (“OTTI”) of these investments. Gains and losses on available-for-sale securities are computed on the specific identification method and included in non-interest income. Gross realized losses on ~~equity and~~ debt securities are net of other-than-temporary impairment charges:

The tax expense applicable to the net realized gains for both of the ~~quarters and nine-month~~three-month periods ended ~~September~~June 30, ~~2017~~2021 and ~~2016 were $33,000 and $107,000~~2020 was $0. The tax expense applicable to the net realized gains for the ~~quarter~~six-month periods ended June 30, 2021 and ~~$327,000~~2020 was $1,000 and ~~$221,000 year-to-date,~~$0, 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 NaN credit impairments were recognized on debt securities during ~~third quarter of 2017~~the three or ~~2016. The table presents a summary of the cumulative credit-related other-than-temporary impairment charges recognized as components of earnings for debt securities still held by QNB:~~

The following table indicates the length of time individual debt securities have been in a continuous unrealized loss position ~~at September~~as of June 30, ~~2017~~2021 and December 31, ~~2016:~~2020:


			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
September 30, 2017	securities		value		losses			value		losses			value		losses
June 30, 2021																		securities		value		losses			value		losses			value		losses
U.S. Government agency		52	$	49,541	$	(935	)	$	20,497	$	(502	)	$	70,038	$	(1,437	)		32	$	62,908	$	(1,084	)	$	—	$	—		$	62,908	$	(1,084	)
State and municipal		33		11,432		(98	)		2,964		(56	)		14,396		(154	)		70		44,351		(688	)		—		—		$	44,351	$	(688	)
U.S. Government agencies and sponsored enterprises (GSEs):																														$	—	$	—
Mortgage-backed		90		121,062		(1,306	)		7,891		(216	)		128,953		(1,522	)		37		121,209		(1,055	)		—		—		$	121,209	$	(1,055	)
Collateralized mortgage obligations (CMOs)		66		39,063		(529	)		34,064		(999	)		73,127		(1,528	)		14		26,879		(235	)		38		—		$	26,917	$	(235	)
Pooled trust preferred		1		—		—			212		(29	)		212		(29	)		1		—		—			72		(12	)	$	72	$	(12	)
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	)		154	$	255,347	$	(3,062	)	$	110	$	(12	)	$	255,457	$	(3,074	)


			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, 2020																		securities		value		losses			value		losses			value		losses
U.S. Government agency		55	$	72,626	$	(2,118	)	$	—	$	—		$	72,626	$	(2,118	)		19	$	37,754	$	(246	)	$	—	$	—		$	37,754	$	(246	)
State and municipal		70		29,280		(398	)		—		—			29,280		(398	)		11		6,821		(45	)		—		—			6,821		(45	)
U.S. Government agencies and sponsored enterprises (GSEs):
Mortgage-backed		88		123,087		(2,241	)		—		—			123,087		(2,241	)		4		8,626		(24	)		—		—			8,626		(24	)
Collateralized mortgage obligations (CMOs)		68		56,853		(1,269	)		15,426		(577	)		72,279		(1,846	)		3		3,262		(5	)		—		—			3,262		(5	)
Pooled trust preferred		5		—		—			1,952		(891	)		1,952		(891	)		1		—		—			70		(14	)		70		(14	)
Corporate debt		4		4,002		(57	)		—		—			4,002		(57	)		1		2,971		(29	)		—		—			2,971		(29	)
Equity		16		2,985		(268	)		888		(60	)		3,873		(328	)
Total		306	$	288,833	$	(6,351	)	$	18,266	$	(1,528	)	$	307,099	$	(7,879	)		39	$	59,434	$	(349	)	$	70	$	(14	)	$	59,504	$	(363	)

Management evaluates debt securities, which are comprised of U.S. Government agencies, state and municipalities, mortgage-backed securities, CMOs and corporate debt securities, for other-than-temporary impairment and considers the current economic conditions, the length of time and the extent to which the fair value has been less than cost, interest rates and the bond rating of each security. The unrealized losses at ~~September~~June 30, ~~2017~~2021 in U.S. Government agency securities, state and municipal securities, mortgage-backed securities, ~~CMOs~~ and ~~corporate debt securities~~CMOs are primarily the result of interest rate fluctuations. If held to maturity, these bonds will mature at par, and QNB will not realize a loss. The Company has the intent to hold the securities and does not believe it will be required to sell the securities before recovery occurs.

The Company’s investment in marketable equity securities primarily consists of investments in large cap stock companies. These equity securities are analyzed for impairment on an ongoing basis. Management believes these equity securities will recover in the foreseeable future. QNB evaluated the near-term prospects of the issuers in relation to the severity and duration of the impairment. Based on that evaluation and the Company’s ability and intent to hold those securities for a reasonable period of time sufficient for a forecasted recovery of fair value, the Company does not consider these equity securities to be other-than-temporarily impaired.

QNB holds ~~one~~1 pooled trust preferred security ~~PreTSL IV. As~~as of June 30, ~~2017, PreTSL IV was reclassified from impaired to~~2021. This security has a ~~performing asset: all capitalized interest has been repaid, no cashflows are being diverted to any senior tranche,~~total amortized cost of approximately $84,000 and ~~the bond has excess subordination, which represents cushion to absorb future defaults or deferrals.~~a fair value of $72,000. The pooled trust preferred security is available-for-sale and is carried at fair value.

The Company’s investment in marketable equity securities primarily consists of investments with readily determinable fair values in large cap stock companies. Changes in fair value is recorded in unrealized gain/(losses) in non-interest income.

At June 30, 2021 and December 31, 2020, the Company had $15,445,000 and $12,849,000, respectively, in equity securities recorded at fair value. The following ~~table provides additional information related to the pooled trust preferred security (PreTSL) as~~is a summary of ~~September 30, 2017:~~

~~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~~unrealized and realized gains and losses recognized in net income on sale of $15,000, included in non-interest income in the consolidated statement of income. Several years ago, QNB had recorded $1,152,000 in OTTI for four of these five these bonds, and subsequently applied any cashflow received to the balance of these non-performing, nonaccrual assets. Improvement in market prices for theseequity securities during the ~~second quarter 2017 reduced realized losses,~~three and six months ended June 30, 2021 and 2020:

Tax expense applicable to the ~~reduction of approximately $19,000,000 in risk-based assets required~~net gains recognized 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 ninethree months ended ~~September~~June 30, ~~2017~~2021 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~~2020 was $252,000 and ~~measured for OTTI within the scope of ASC 325 (formerly known as EITF 99-20),~~ ~~Recognition of Interest Income and Impairment on Purchased Beneficial Interests and Beneficial Interests That Continue to be Held by a Transferor in Securitized Financial Assets, and Amendments~~$386,000, repectively. Tax expense applicable 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~~net gains recognized for the financial performance ratios of the bond’s underlying issuers, as well as the bond’s structure (QNB holds the senior-most obligation of the trust for PreTSL IV), determining there is little likelihood of default. In determining whether a credit loss exists, QNB uses its best estimate of the present value of cash flows expected to be collected from the debt security and discounts them at the effective yield implicit in the security at the date of acquisition or the prospective yield for those securities with prior OTTI charges. Lack of liquidity in the market for trust preferred collateralized debt obligations contributedsix months ended June 30, 2021 was $666,000. Tax benefit applicable to the ~~temporary impairment~~net losses recognized for the six months ended June 30, 2020 was $464,000. Proceeds from sales of ~~this security. Although classified as available-for-sale,~~investment equity securities were approximately $1,185,000 and $1,421,000 for the ~~Company has~~three months ended June 30, 2021 and 2020, respectively. Proceeds from sales of investment equity securities were approximately $2,412,000 and $1,428,000 for the ~~intent to hold PreTSL IV~~six months ended June 30, 2021 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.~~ 2020, respectively.

Restricted investment in stocks includes Federal Home Loan Bank of Pittsburgh (“FHLB”) with a carrying cost of $1,130,000, 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, 2021. FHLB and ACBB stock was issued to the Bank as a requirement to facilitate the Bank’s participation in borrowing and other banking services. The 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 (1.6228 as of September 27, 2019), 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 stock does not have a readily determinable fair value.

These restricted investments are carried at cost and evaluated for OTTI periodically. As of June 30, 2021, there was 0 OTTI associated with these shares.

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off are stated at the principal amount outstanding, net of deferred loan fees and costs. Interest income is accrued on the principal amount outstanding. Loan origination and commitment fees and related direct costs are deferred and amortized to income over the term of the respective loan and loan commitment period as a yield adjustment.

Loans held-for-sale consists of residential mortgage loans that are carried at the lower of aggregate cost or fair value. Net unrealized losses, if any, are recognized through a valuation allowance charged to income. Gains and losses on residential mortgages held-for-sale are included in non-interest income.

QNB maintains an allowance for loan losses, which is intended to absorb probable known and inherent losses in the outstanding loan portfolio. The allowance is reduced by actual credit losses and is increased by the provision for loan losses and recoveries of previous losses. The provisions for loan losses are charged to earnings to bring the total allowance for loan losses to a level considered necessary by management.

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

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

An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.

Management emphasizes loan quality and close monitoring of potential problem credits. Credit risk identification and review processes are utilized in order to assess and monitor the degree of risk in the loan portfolio. QNB’s lending and credit administration staff are charged with reviewing the loan portfolio and identifying changes in the economy or in a borrower’s circumstances which may affect the ability to repay debt or the value of pledged collateral. A loan classification and review system exists that identifies those loans with a higher than normal risk of ~~uncollectibility.~~collectability. Each commercial loan is assigned a grade based upon an assessment of the borrower’s financial capacity to service the debt and the presence and value of collateral for the loan. An independent ~~loan review group tests~~firm reviews risk ~~assessments~~assessment and evaluates the adequacy of the allowance for loan losses. Management meets monthly to review the credit quality of the loan portfolio and quarterly to review the allowance for loan losses.

In addition, various regulatory agencies, as an integral part of their examination process, periodically review QNB’s 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.

Loans secured by commercial real estate include all loans collateralized at least in part by commercial real estate. These loans may not be for the ~~expressed~~express purpose of conducting commercial real estate transactions.

Overdrafts are reclassified as loans and are included in consumer loans above and total loans receivable on the ~~balance sheet.~~Consolidated Balance Sheets. At ~~September~~June 30, ~~2017~~2021 and December 31, ~~2016,~~2020 overdrafts were approximately ~~$184,000~~$91,000 and ~~$171,000,~~$258,000, respectively.

QNB generally lends in its trade area which is comprised of Quakertown and the surrounding communities. To a large extent, QNB makes loans collateralized at least in part by real estate. Its lending activities could be affected by changes in the general economy, the regional economy, or real estate values. Other than disclosed in the table above, at ~~September~~June 30, ~~2017,~~2021, there ~~were no concentrations~~was a concentration of loans ~~exceeding 10%~~to lessors of residential buildings and dwellings of 15.2% of total loans and to lessors of nonresidential buildings of 22.0% of total loans, compared with 14.9% and 19.6% of total loans, respectively, at December 31, 2020. These concentrations were primarily within the commercial real estate categories.

QNB continues to provide solutions to customers experiencing financial hardship caused by the COVID-19 Pandemic. As of June 30, 2021, QNB had 0 modifications to commercial portfolio and had modifications to approximately 0.1% of the June 30, 2021 retail portfolio, related to the COVID-19 Pandemic. NaN loan was modified two times and totaled $228,000 with deferred interest and or principal payments of six months. NaN loan was modified four times and totaled $4,000 with deferred interest and or principal payments between of 12 months. The following table illustrates the modified loans by major loan class and total deferral by number of months.

At June 30, 2021, QNB had 449 PPP loans totaling $54,627,000 reported in commercial and industrial loans. The PPP loans are 100% guaranteed by the SBA. QNB received origination fees from the SBA ranging from a flat fee of $2,500 to 1 to 5 basis points of the originated loan amount which are recognized in interest income as a yield adjustment over the term of the loan. At June 30, 2021 and December 31, 2020, net unearned (fees) costs included $1,669,000 and $1,909,000, respectively, in PPP loan origination fees net of costs.

The Company engages in a variety of lending activities, including commercial, residential real estate and consumer transactions. The Company focuses its lending activities on individuals, professionals and small to medium sized businesses. Risks associated with lending activities include economic conditions and changes in interest rates, which can adversely impact both the ability of borrowers to repay their loans and the value of the associated collateral.

Commercial and industrial loans, commercial real estate loans, construction loans and residential real estate loans with a business purpose are generally perceived as having more risk of default than residential real estate loans with a personal purpose and consumer loans. These types of loans involve larger loan balances to a single borrower or groups of related borrowers and are more susceptible to a risk of loss during a downturn in the business cycle. These loans may involve greater risk because the availability of funds to repay these loans depends on the successful operation of the borrower’s business. The assets financed are used within the business for its ongoing operation. Repayment of these kinds of loans generally comes from the cash flow of the business or the ongoing conversions of assets, such as accounts receivable and inventory, to cash. Typical collateral for commercial and industrial loans includes the borrower’s accounts receivable, inventory and machinery and equipment. Commercial real estate and residential real estate loans secured for a business purpose are originated primarily within the eastern Pennsylvania market area at conservative loan-to-value ratios and often backed by the individual guarantees of the borrowers or owners. Repayment of this kind of loan is dependent upon either the ongoing cash flow of the borrowing entity or the resale of or lease of the subject property. Commercial real estate loans may be affected to a greater extent than residential loans by adverse conditions in real estate markets or the economy because commercial real estate borrowers’ ability to repay their loans depends on successful development of their properties, as well as the factors affecting residential real estate borrowers.

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

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

The Company originates fixed-rate and adjustable-rate real estate-residential mortgage loans for personal purposes that are secured by first liens on the underlying 1-4 family residential properties. Credit risk exposure in this area of lending is minimized by the evaluation of the credit worthiness of the borrower, including debt-to-income ratios, credit scores and adherence to underwriting policies that emphasize conservative loan-to-value ratios of generally no more than 80%. Residential mortgage loans granted in excess of the 80% loan-to-value ratio criterion are generally insured by private mortgage insurance.

The real estate-home equity portfolio consists of fixed-rate home equity loans and variable-rate home equity lines of credit. Risks associated with loans secured by residential properties are generally lower than commercial loans and include general economic risks, such as the strength of the job market, employment stability and the strength of the housing market. Since most loans are secured by a primary or secondary residence, the borrower’s continued employment is the greatest risk to repayment.

The Company offers a variety of loans to individuals for personal and household purposes. Consumer loans are generally considered to have greater risk than first or second mortgages on real estate because they may be unsecured, or, if they are secured, the value of the collateral may be difficult to assess and is more likely to decrease in value than real estate. Credit risk in this portfolio is controlled by conservative underwriting standards that consider debt-to-income levels and the creditworthiness of the borrower and, if secured, collateral values.

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

The Company maintains a loan review system, which allows for a periodic review of our loan portfolio and the early identification of potential problem loans. Each loan officer assigns a rating to all loans in the portfolio at the time the loan is originated. Loans with risk ratings of one through ~~three~~five are reviewed annually based on the borrower’s fiscal year. Loans with risk ratings of ~~four~~six are reviewed every six to twelve months based on the dollar amount of the relationship with the borrower. Loans with risk ratings of ~~five~~seven through ~~eight~~ten are reviewed at least quarterly, and as often as monthly, at management’s discretion. The Company also utilizes an outside loan review firm to review the portfolio on a semi-annual basis to provide the Board of Directors and senior management an independent review of the ~~Bank’s~~Company’s loan portfolio on an ongoing basis. These reviews are designed to recognize deteriorating credits in their earliest stages in an effort to reduce and control risk in the lending function as well as identifying potential shifts in the quality of the loan portfolio. The examinations by the outside loan review firm include the review of lending activities with respect to underwriting and processing new loans, monitoring the risk of existing loans and to provide timely follow-up and corrective action for loans showing signs of deterioration in quality. In addition, the outside firm reviews the methodology for the allowance for loan losses to determine compliance to policy and regulatory guidance.

The following tables present the classes of the loan portfolio summarized by the aggregate pass rating and the classified ratings of special mention, substandard and doubtful within the Company’s internal risk rating system as of ~~September~~June 30, ~~2017~~2021 and December 31, ~~2016:~~2020:

September 30, 2017	Pass		Special mention		Substandard		Doubtful		Total
June 30, 2021											Pass		Special mention		Substandard		Doubtful		Total
Commercial:
Commercial and industrial	$	128,830	$	687	$	6,269	$	—	$	135,786	$	184,227	$	55	$	7,618	$	0	$	191,900
Construction		46,003		—		3		—		46,006		49,411		0		0		0		49,411
Secured by commercial real estate		264,271		4,592		9,739		—		278,602		401,540		2,889		13,555		0		417,984
Secured by residential real estate		67,494		225		2,053		—		69,772		79,052		0		1,360		0		80,412
State and political subdivisions		37,474		—		—		—		37,474		24,085		0		0		0		24,085
Total	$	544,072	$	5,504	$	18,064	$	—	$	567,640	$	738,315	$	2,944	$	22,533	$	0	$	763,792

December 31, 2016	Pass		Special mention		Substandard		Doubtful		Total
December 31, 2020											Pass		Special mention		Substandard		Doubtful		Total
Commercial:
Commercial and industrial	$	102,396	$	686	$	7,151	$	—	$	110,233	$	219,104	$	77	$	8,250	$	0	$	227,431
Construction		39,259		—		9		—		39,268		57,594		0		0		0		57,594
Secured by commercial real estate		238,290		5,185		11,713		—		255,188		361,393		3,914		12,279		0		377,586
Secured by residential real estate		65,169		231		3,331		—		68,731		80,233		0		1,664		0		81,897
State and political subdivisions		35,260		—		—		—		35,260		25,302		0		0		0		25,302
Total	$	480,374	$	6,102	$	22,204	$	—	$	508,680	$	743,626	$	3,991	$	22,193	$	0	$	769,810

For retail loans, the Company evaluates credit quality based on the performance of the individual credits. The following tables present the recorded investment in the retail classes of the loan portfolio based on payment activity as of ~~September~~June 30, ~~2017~~2021 and December 31, ~~2016:~~2020:

September 30, 2017	Performing			Non-performing		Total
June 30, 2021								Performing		Non-performing		Total
Retail:			��
1-4 family residential mortgages	$	52,957		$	892	$	53,849	$	90,352	$	748	$	91,100
Home equity loans and lines		75,536			149		75,685		62,239		739		62,978
Consumer		6,771			92		6,863		4,845		100		4,945
Total	$	135,264		$	1,133	$	136,397	$	157,436	$	1,587	$	159,023

December 31, 2016	Performing		Non-performing		Total
December 31, 2020							Performing		Non-performing		Total
Retail:
1-4 family residential mortgages	$	46,858	$	266	$	47,124	$	82,103	$	636	$	82,739
Home equity loans and lines		71,436		89		71,525		63,191		752		63,943
Consumer		5,577		93		5,670		5,259		105		5,364
Total	$	123,871	$	448	$	124,319	$	150,553	$	1,493	$	152,046

The performance and credit quality of the loan portfolio is also monitored by analyzing the age of the loans receivable as determined by the length of time a recorded payment is past due. The following table presents the classes of the loan portfolio summarized by the past due status as of ~~September~~June 30, ~~2017~~2021 and December 31, ~~2016:~~2020:

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, 2021													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	$	2,380	$	8	$	641	$	3,029	$	188,871	$	191,900
Construction		—		—		—		—		46,006		46,006		0		0		0		0		49,411		49,411
Secured by commercial real estate		—	$	44	$	716		760		277,842		278,602		0		0		0		0		417,984		417,984
Secured by residential real estate		55		2		153		210		69,562		69,772		0		0		197		197		80,215		80,412
State and political subdivisions		—		—		—		—		37,474		37,474		0		0		0		0		24,085		24,085
Retail:
1-4 family residential mortgages		—		—		506		506		53,343		53,849		0		0		132		132		90,968		91,100
Home equity loans and lines		134		—		122		256		75,429		75,685		0		39		31		70		62,908		62,978
Consumer		31		15		5		51		6,812		6,863		50		24		0		74		4,871		4,945
Total	$	394	$	61	$	1,502	$	1,957	$	702,080	$	704,037	$	2,430	$	71	$	1,001	$	3,502	$	919,313	$	922,815

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, 2020													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	$	2,392	$	31	$	1,157	$	3,580	$	223,851	$	227,431
Construction		214		—		—		214		39,054		39,268		0		0		0		0		57,594		57,594
Secured by commercial real estate		64	$	395	$	1,596		2,055		253,133		255,188		318		0		40		358		377,228		377,586
Secured by residential real estate		—		—		285		285		68,446		68,731		189		0		340		529		81,368		81,897
State and political subdivisions		—		—		—		—		35,260		35,260		0		0		0		0		25,302		25,302
Retail:
1-4 family residential mortgages		1,459		323		—		1,782		45,342		47,124		396		303		282		981		81,758		82,739
Home equity loans and lines		107		15		—		122		71,403		71,525		16		2		51		69		63,874		63,943
Consumer		14		2		—		16		5,654		5,670		178		5		0		183		5,181		5,364
Total	$	2,321	$	735	$	1,881	$	4,937	$	628,062	$	632,999	$	3,489	$	341	$	1,870	$	5,700	$	916,156	$	921,856

The following tables disclose the recorded investment in loans receivable that are either on non-accrual status or past due 90 days or more and still accruing interest as of ~~September~~June 30, ~~2017~~2021 and December 31, ~~2016:~~2020:

September 30, 2017	90 days or more past due (still accruing)		Non-accrual
June 30, 2021					90 days or more past due (still accruing)		Non-accrual
Commercial:
Commercial and industrial		—	$	4,360	$	0	$	3,598
Construction		—		—		0		0
Secured by commercial real estate		—		2,070		0		2,404
Secured by residential real estate		—		1,520		0		596
State and political subdivisions		—		—		0		0
Retail:
1-4 family residential mortgages		—		892		0		748
Home equity loans and lines		—		149		0		739
Consumer	$	5		87		0		100
Total	$	5	$	9,078	$	0	$	8,185

Activity in the allowance for loan losses for the three and six months ended June 30, 2021 and 2020 are as follows:

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

Three months ended September 30, 2017	Balance, beginning of period		Provision for (credit to) loan losses			Charge-offs			Recoveries		Balance, end of period
For the Three Months Ended June 30, 2020													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	$	4,657	$	(323	)	$	(72	)	$	8	$	4,270
Construction		516		13			—			—		529		286		1			0			0		287
Secured by commercial real estate		2,640		(267	)		—			2		2,375		3,286		125			0			12		3,423
Secured by residential real estate		1,200		(93	)		—			-		1,107		608		108			0			5		721
State and political subdivisions		123		8			—			—		131		134		(14	)		0			0		120
Retail:
1-4 family residential mortgages		439		(61	)		—			—		378		660		(74	)		0			0		586
Home equity loans and lines		319		61			—			3		383		333		(71	)		0			4		266
Consumer		78		30		$	(29	)		6		85		278		67			(102	)		25		268
Unallocated		543		(150	)	N/A			N/A			393		92		431		N/A			N/A			523
Total	$	8,035	$	100		$	(29	)	$	19	$	8,125	$	10,334	$	250		$	(174	)	$	54	$	10,464

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

Nine months ended September 30, 2017	Balance, beginning of period		Provision for (credit to) loan losses			Charge-offs			Recoveries		Balance, end of period
For the Six Months Ended June 30, 2021													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	$	4,050	$	(432	)	$	0		$	26	$	3,644
Construction		449		80			—			—		529		346		(49	)		0			0		297
Secured by commercial real estate		2,646		(277	)		—			6		2,375		3,736		503			0			0		4,239
Secured by residential real estate		1,760		(685	)	$	(3	)		35		1,107		871		326			(38	)		13		1,172
State and political subdivisions		123		8			—			—		131		89		(5	)		0			0		84
Retail:																								—
1-4 family residential mortgages		366		12			—			—		378		533		8			0			0		541
Home equity loans and lines		353		22			—			8		383		386		(17	)		(12	)		4		361
Consumer		76		52			(68	)		25		85		265		304			(97	)		22		494
Unallocated		162		231		N/A			N/A			393		550		(180	)	N/A			N/A			370
Total	$	7,394	$	700		$	(71	)	$	102	$	8,125	$	10,826	$	458		$	(147	)	$	65	$	11,202

Nine months ended September 30, 2016	Balance, beginning of period		Provision for (credit to) loan losses			Charge-offs			Recoveries		Balance, end of period
For the Six Months Ended June 30, 2020													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	$	4,689	$	(364	)	$	(72	)	$	17	$	4,270
Construction		286		64			—			—		350		590		(303	)		0			0		287
Secured by commercial real estate		2,411		49			—			6		2,466		2,519		892			0			12		3,423
Secured by residential real estate		1,812		(359	)		(20	)		110		1,543		629		68			0			24		721
State and political subdivisions		222		(82	)		—			—		140		115		5			0			0		120
Indirect lease financing		164		99			(52	)		9		220
Retail:
1-4 family residential mortgages		350		(72	)		—			—		278		549		37			0			0		586
Home equity loans and lines		428		(102	)		—			14		340		310		(49	)		0			5		266
Consumer		76		49			(62	)		21		84		230		197			(194	)		35		268
Unallocated		284		584		N/A			N/A			868		256		267		N/A			N/A			523
Total	$	7,554	$	125		$	(274	)	$	188	$	7,593	$	9,887	$	750		$	(266	)	$	93	$	10,464

As previously discussed, the Company maintains a loan review system, which includes a continuous review of the loan portfolio by internal and external parties to aid in the early identification of potential impaired loans. A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining

impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for commercial loans and loans to state and political subdivisions ~~and indirect lease financing loans~~ by using either the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral if the loan is collateral dependent.

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

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

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

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

For commercial loans secured by non-real estate collateral, such as accounts receivable, inventory and equipment, estimated fair values are determined based on the borrower’s financial statements, inventory reports, accounts receivable agings or equipment appraisals or invoices. Indications of value from these sources are generally discounted based on the age of the financial information or the quality of the assets.

From time to time, QNB may extend, restructure, or otherwise modify the terms of existing loans, on a case-by-case basis, to remain competitive and retain certain customers, as well as assist other customers that may be experiencing financial difficulties. A loan is considered to be a troubled debt restructuring (“TDR”) loan when the Company grants a concession to the borrower because of the borrower’s financial condition that it would not otherwise consider. Such concessions include the reduction of interest rates, forgiveness of principal or interest, or other modifications of interest rates to less than the current market rate for new obligations with similar risk. Loans classified as TDRs are considered non-performing and are also designated as impaired.

The concessions made for TDRs involve lowering the monthly payments on loans through periods of interest only payments, a reduction in interest rate below a market rate or an extension of the term of the loan without a corresponding adjustment to the risk premium reflected in the interest rate, or a combination of these three methods. The restructurings rarely result in the forgiveness of principal or accrued interest. If the borrower has demonstrated performance under the previous terms and our underwriting process shows the borrower has the capacity to continue to perform under the restructured terms, the loan will continue to accrue interest. Non-accruing restructured loans may be returned to accrual status when there has been a sustained period of repayment performance (generally six consecutive months of payments) and both principal and interest are deemed collectible. TDR loans that are in compliance with their modified terms and that yield a market rate may be removed from the TDR status after a period of performance.

Performing TDRs (not reported as non-accrual or past due 90 days or more and still accruing) totaled ~~$1,354,000~~$4,330,000 and ~~$1,819,000~~$4,469,000 as of ~~September~~June 30, ~~2017~~2021 and December 31, ~~2016,~~2020, respectively. Non-performing TDRs totaled ~~$3,120,000~~$753,000 and ~~$3,555,000~~$843,000 as of ~~September~~June 30, ~~2017~~2021 and December 31, ~~2016,~~2020, respectively. All TDRs are included in impaired loans.

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

	September 30, 2017				December 31, 2016				June 30, 2021				December 31, 2020
	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		—	$	1,462	$	—	$	2,008	$	—
TDRs with an allowance recorded		1,239	$	302		1,382	$	761		3,621		823		3,304		503
Total	$	4,474	$	302	$	5,374	$	761	$	5,083	$	823	$	5,312	$	503

There were no0 newly identified TDRs during the ~~nine~~three or six months ended ~~September~~June 30, ~~2017.~~2021. As of ~~September~~June 30, ~~2017, and December 31, 2016,~~2021, QNB had $41,000 in 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.~~restructurings and $14,000 commitments at December 31, 2020. There were ~~net~~0 charge-offs ~~of $3,000 and $0~~ during the ~~nine~~three or six months ended ~~September~~June 30, ~~2017~~2021 and ~~2016, respectively,~~2020, resulting from loans previously modified as TDRs.

~~The following tables present~~There were 0 loans ~~by loan class,~~ modified as TDRs during the three and nine months ended September 30, 2017 and 2016. The pre-modification and post-modification outstanding recorded investments disclosed in the tables below, represent carrying amounts immediately prior to the modification and as of the period end indicated.

~~There was one loan with an outstanding balance of $18,000 that was modified as a TDR~~ within 12 months prior to ~~September~~June 30, ~~2017~~2021 and 2020 for which there was a payment default (60 days or more past due) during the ~~nine~~six months ended ~~September~~June 30, ~~2017. There were no loans modified as TDRs within 12 months prior to September 30, 2016 for which there was a payment default during the nine months ended September 30, 2016.~~2021 and 2020.

The Company has ~~two consumer mortgage~~2 loans secured by residential real estate for which foreclosure proceedings are in process at ~~September~~June 30, ~~2017.~~2021. The total recorded investment is ~~$392,000.~~$178,000.

The following tables present the balance in the allowance for loan losses at ~~September~~June 30, ~~2017~~2021 and December 31, ~~2016~~2020 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, 2021													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	$	3,644	$	2,207	$	1,437	$	191,900	$	3,706	$	188,194
Construction		529		—		529		46,006		3		46,003		297		0		297		49,411		—		49,411
Secured by commercial real estate		2,375		28		2,347		278,602		4,837		273,765		4,239		363		3,876		417,984		5,735		412,249
Secured by residential real estate		1,107		117		990		69,772		1,819		67,953		1,172		425		747		80,412		1,738		78,674
State and political subdivisions		131		—		131		37,474		—		37,474		84		0		84		24,085		0		24,085
Retail:
1-4 family residential mortgages		378		10		368		53,849		1,230		52,619		541		—		541		91,100		922		90,178
Home equity loans and lines		383		41		342		75,685		170		75,515		361		105		256		62,978		750		62,228
Consumer		85		—		85		6,863		92		6,771		494		7		487		4,945		57		4,888
Unallocated		393	N/A		N/A		N/A		N/A		N/A			370	N/A		N/A		N/A		N/A		N/A
Total	$	8,125	$	1,955	$	5,777	$	704,037	$	12,737	$	691,300	$	11,202	$	3,107	$	7,725	$	922,815	$	12,908	$	909,907

The following table summarizes additional information, in regards to impaired loans by loan portfolio class, as of June 30, 2021 and December 31, 2020:

	Allowance for Loan Losses						Loans Receivable						June 30, 2021						December 31, 2020
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
													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	$	1,459	$	696	$	763	$	110,233	$	5,134	$	105,099	$	124	$	131			$	647	$	722
Construction		449		—		449		39,268		224		39,044		0		0				0		0
Secured by commercial real estate		2,646		—		2,646		255,188		6,383		248,805		2,510		2,867				3,018		3,671
Secured by residential real estate		1,760		494		1,266		68,731		2,313		66,418		844		918				1,417		1,608
State and political subdivisions		123		—		123		35,260		—		35,260
Retail:
1-4 family residential mortgages		366		8		358		47,124		748		46,376		922		1,019				813		894
Home equity loans and lines		353		—		353		71,525		111		71,414		571		622				537		577
Consumer		76		—		76		5,670		93		5,577		0		0				0		0
Unallocated		162	N/A		N/A		N/A		N/A		N/A
Total	$	7,394	$	1,198	$	6,034	$	632,999	$	15,006	$	617,993	$	4,971	$	5,557			$	6,432	$	7,472

With an allowance recorded:
Commercial:
Commercial and industrial													$	3,582	$	5,277	$	2,207	$	3,856	$	5,462	$	2,421
Construction														0		0		0		0		0		0
Secured by commercial real estate														3,225		3,364		363		3,305		3,418		432
Secured by residential real estate														894		999		425		634		642		73
Retail:
1-4 family residential mortgages														0		0		0		0		0		0
Home equity loans and lines														179		194		105		228		239		117
Consumer														57		71		7		61		73		7
Total													$	7,937	$	9,905	$	3,107	$	8,084	$	9,834	$	3,050

Total:
Commercial:
Commercial and industrial													$	3,706	$	5,408	$	2,207	$	4,503	$	6,184	$	2,421
Construction														0		0		0		0		0		0
Secured by commercial real estate														5,735		6,231		363		6,323		7,089		432
Secured by residential real estate														1,738		1,917		425		2,051		2,250		73
Retail:
1-4 family residential mortgages														922		1,019		0		813		894		0
Home equity loans and lines														750		816		105		765		816		117
Consumer														57		71		7		61		73		7
Total													$	12,908	$	15,462	$	3,107	$	14,516	$	17,306	$	3,050

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

September 30, 2017

December 31, 2016

Recorded
investment
(after
charge-offs)

Unpaid
principal
balance

Related
allowance

Recorded
investment
(after
charge-offs)

Unpaid
principal
balance

Related
allowance

With no specific allowance recorded:

Commercial:

Commercial and industrial

$
2,189

$
2,560

$
—

$
2,482

$
2,862

$
—

Construction

3

3

—

224

234

—

Secured by commercial real estate

4,748

5,304

—

6,383

6,367

—

Secured by residential real estate

633

982

—

1,046

1,438

—

State and political subdivisions

—

—

—

—

—

—

Retail:

1-4 family residential mortgages

1,066

1,113

—

570

589

—

Home equity loans and lines

129

173

—

111

174

—

Consumer

92

96

—

93

95

—

Total

$
8,860

$
10,231

$
—

$
10,909

$
11,759

$
—

With an allowance recorded:

Commercial:

Commercial and industrial

$
2,397

$
2,637

$
1,759

$
2,652

$
2,812

$
696

Construction

—

—

—

—

—

—

Secured by commercial real estate

89

92

28

—

—

—

Secured by residential real estate

1,186

1,338

117

1,267

1,435

494

State and political subdivisions

—

—

—

—

—

—

Retail:

1-4 family residential mortgages

164

164

10

178

193

8

Home equity loans and lines

41

41

41

—

—

—

Consumer

—

—

—

—

—

—

Total

$
3,877

$
4,272

$
1,955

$
4,097

$
4,440

$
1,198

Total:

Commercial:

Commercial and industrial

$
4,586

$
5,197

$
1,759

$
5,134

$
5,674

$
696

Construction

3

3

—

224

234

—

Secured by commercial real estate

4,837

5,396

28

6,383

6,367

—

Secured by residential real estate

1,819

2,320

117

2,313

2,873

494

State and political subdivisions

—

—

—

—

—

—

Retail:

1-4 family residential mortgages

1,230

1,277

10

748

782

8

Home equity loans and lines

170

214

41

111

174

—

Consumer

92

96

—

93

95

—

Total

$
12,737

$
14,503

$
1,955

$
15,006

$
16,199

$
1,198

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

Nine Months Ended September 30,	2017				2016
For the Six Months Ended June 30,									2021				2020
	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	$	3,940	$	2	$	5,543	$	3
Construction		61		2		412		15		0		0		0		0
Secured by commercial real estate		5,638		117		6,327		100		5,909		81		6,919		85
Secured by residential real estate		2,171		19		1,945		11		1,903		32		2,027		36
State and political subdivisions		—		—		—		—
Indirect lease financing		—		—		114		—
Retail:
1-4 family residential mortgages		1,020		10		572		8		899		3		862		6
Home equity loans and lines		115		1		134		1		750		0		628		0
Consumer		91		—		10		—		59		0		68		0
Total	$	13,905	$	160	$	13,802	$	185	$	13,460	$	118	$	16,047	$	130

~~Financial Accounting Standards Board (FASB)~~FASB ASC 820, Fair Value Measurements and Disclosures, defines fair value as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants (fair values are not adjusted for transaction costs). ASC 820 also establishes a framework (fair value hierarchy) for measuring fair value under U.S. GAAP and expands disclosures about fair value measurements.

ASC 820 establishes a fair value hierarchy that prioritizes the inputs to valuation methods used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are as follows:

An asset’s or liability’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.

The measurement of fair value should be consistent with one of the following valuation techniques: market approach, income approach, and/or cost approach. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities (including a business). For example, valuation techniques consistent with the market approach often use market multiples derived from a set of ~~comparable transactions.~~comparables. Multiples might lie in ranges with a different multiple for each comparable. The selection of where within the range the appropriate multiple falls requires judgment, considering factors specific to the measurement (qualitative and quantitative). Valuation techniques consistent with the market approach include matrix pricing. Matrix pricing is a mathematical technique used principally to value debt securities without relying exclusively on quoted prices for the specific securities, but rather by relying on the security’s relationship to other benchmark quoted securities.

The following table sets forth QNB’s financial assets measured at fair value on a recurring and nonrecurring basis and the fair value measurements by level within the fair value hierarchy as of ~~September~~June 30, ~~2017:~~2021:

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, 2021									Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)		Balance at end of period
Recurring fair value measurements
Securities available-for-sale
Available-for-sale securities:
U.S. Government agency securities		—	$	73,037		—	$	73,037	$	—	$	68,879	$	—	$	68,879
State and municipal securities		—		79,897		—		79,897		—		116,657		—		116,657
U.S. Government agencies and sponsored enterprises (GSEs):
Mortgage-backed securities		—		148,856		—		148,856		—		265,793		—		265,793
Collateralized mortgage obligations (CMOs)		—		78,974		—		78,974		—		90,147		—		90,147
Pooled trust preferred securities		—		—	$	212		212		—		—		72		72
Corporate debt securities		—		8,074		—		8,074		—		7,837		—		7,837
Total debt securities available-for-sale										—		549,313		72		549,385
Equity securities	$	7,363		—		—		7,363		15,445		—		—		15,445
Total securities available-for-sale	$	7,363	$	388,838	$	212	$	396,413
Total recurring fair value measurements	$	7,363	$	388,838	$	212	$	396,413	$	15,445	$	549,313	$	72	$	564,830

Nonrecurring fair value measurements
Nonrecurring fair value measurements*
Impaired loans	$	—	$	—	$	1,922	$	1,922	$	—	$	—	$	4,830	$	4,830
Mortgage servicing rights		—		—		35		35		—		—		119		119
Total nonrecurring fair value measurements	$	—	$	—	$	1,957	$	1,957	$	—	$	—	$	4,949	$	4,949
*Impairment

There were no transfers in and out of Level 1, ~~and~~ Level 2, or Level 3 fair value measurements during the three or ~~nine~~six months ended ~~September~~June 30, ~~2017.~~2021. There were ~~also no transfers in or out of level 3 for the same period. There were no~~0 losses included in earnings attributable to the change in unrealized gains or losses relating to the available-for-sale securities above with fair value measurements utilizing significant unobservable inputs for the three- ~~and nine-month periods~~or six-month period ended ~~September~~June 30, ~~2017.~~2021.

The following table sets forth QNB’s financial assets measured at fair value on a recurring and nonrecurring basis, showing the fair value measurements by level within the fair value hierarchy, as of December 31, ~~2016:~~2020:

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, 2020									Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)		Balance at end of period
Recurring fair value measurements
Trading Securities
State and municipal securities	$	—	$	3,596	$	—	$	3,596

Securities available-for-sale
Debt securities available-for-sale
U.S. Government agency securities		—	$	76,650		—	$	76,650	$	—	$	69,776	$	—	$	69,776
State and municipal securities		—		72,295		—		72,295		—		87,812		—		87,812
U.S. Government agencies and sponsored enterprises (GSEs):
Mortgage-backed securities		—		145,301		—		145,301		—		175,847		—		175,847
Collateralized mortgage obligations (CMOs)		—		77,415		—		77,415		—		94,948		—		94,948
Pooled trust preferred securities		—		—	$	2,281		2,281		—		—		70		70
Corporate debt securities		—		8,030		—		8,030		—		7,193		—		7,193
Total debt securities available-for-sale										—		435,576		70		435,646
Equity securities	$	8,503		—		—		8,503		12,849		—		—		12,849
Total securities available-for-sale	$	8,503	$	379,691	$	2,281	$	390,475
Total recurring fair value measurements	$	8,503	$	383,287	$	2,281	$	394,071	$	12,849	$	435,576	$	70	$	448,495

Nonrecurring fair value measurements
Nonrecurring fair value measurements*
Impaired loans	$	—	$	—	$	2,899	$	2,899	$	—	$	—	$	5,034	$	5,034
Mortgage servicing rights		—		—		58		58		—		—		291		291
Total nonrecurring fair value measurements	$	—	$	—	$	2,957	$	2,957	$	—	$	—	$	5,325	$	5,325
*Impairment

The following table presents additional quantitative information about assets measured at fair value on a nonrecurring basis and for which QNB has utilized Level 3 inputs to determine fair value:

Quantitative information about Level 3 fair value measurements

September 30, 2017

Fair value

Valuation

techniques

Unobservable

input

Value or range

of values

June 30, 2021

Fair value

Valuation

techniques

Unobservable

inputs

Value or range

of values

Impaired loans

639

Appraisal of collateral

(1)

Appraisal adjustments

(2)

-15% to -80%

4,513

Appraisal of collateral

(1)

Appraisal adjustments

(2)

-15% to -20%

Liquidation expenses

(3)

-10%

Liquidation expenses

(3)

-10

Impaired loans

1,283

Financial statement values for UCC collateral

Financial statement value discounts

(5)

-25% to -60%

317

Financial statement values for UCC collateral

Financial statement value discounts

(4)

-30% to -100%

Mortgage servicing rights

Discounted cash flow

Remaining term

2 to 27 yrs

119

Discounted cash flow

Remaining term

3 to 30 years

Discount rate

14% to 16%

Prepayment speeds

198% to 325%

Discount rate

12.0% to 12.5%

The following table presents additional information about the available-for-sale securities ~~available-for-sale~~ measured at fair value on a recurring basis and for which QNB utilized significant unobservable inputs (Level 3 inputs) to determine fair value for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2021 and ~~2016:~~2020:

	Fair value measurements using significant unobservable inputs (Level 3)						Fair value measurements using significant unobservable inputs (Level 3)
	2017			2016			2021		2020
Balance, January 1,	$	2,281		$	2,653		$	70	$	79
Payments received		(55	)		(312	)		0		0
Sale of securities		(2,026	)		—
Total gains or losses (realized/unrealized)
Included in earnings		(15	)		—			0		0
Included in other comprehensive income		27			(66	)
Included in other comprehensive (loss) income								2		(12	)
Transfers in and/or out of Level 3		—			—			0		0
Balance, September 30,	$	212		$	2,275
Balance, June 30,							$	72	$	67

The Level 3 securities consist of ~~one~~1 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, 2021 was not active and markets for similar securities also are not active. The new issue market is also inactive and there are currently very few market participants who are willing and or able to transact for these securities.

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

~~The Bank utilized a~~an independent third party to value this security using a discounted cash flow analysis. Based on management’s review of the ~~five~~bond’s 3 underlying issuers, there are no0 expected credit losses or prepayments; cashflows used were contractual based on the Bloomberg YA screen. The assumed ~~cash flows~~cashflows have been discounted using an estimated market discount rate based on the 30-year swap rate. The 30-year ~~swap rate~~ is used as the reference rate since it is indicative of market expectation for ~~short term~~short-term rates in the future. This is consistent with the 30-year nature of the PreTSL ~~securities,~~security, which ~~are~~is priced using the 3-month LIBOR as a reference rate. The discount rate of ~~6.12%~~5.88% includes the risk-free rate, a credit component and a spread for illiquidity. ~~For a further discussion of PreTSL valuation see Note 6, Investment Securities.~~

The following information should not be interpreted as an estimate of the fair value of the entire Company since a fair value calculation is only provided for a limited portion of QNB’s assets and liabilities. Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between QNB’s disclosures and those of other companies may not be meaningful.

The following methods and assumptions were used to estimate the fair values of each major classification of financial instrument and non-financial asset at ~~September~~June 30, ~~2017~~2021 and December 31, ~~2016:~~2020:

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

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

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

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

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

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

Off-balance-sheet instruments (disclosed at cost): The fair values for ~~the Bank’s~~QNB’s off-balance sheet instruments (lending commitments and letters of credit) are based on fees currently charged in the market to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing.

Management uses its best judgment in estimating the fair value of the Company’s financial instruments; however, there are inherent weaknesses in any estimation technique. Therefore, for substantially all financial instruments, the fair value estimates herein are not necessarily indicative of the amounts the Company could have realized in sales transaction on the dates indicated. The estimated fair value amounts have been measured as of the respective period ends and have not been re-evaluated or updated for purposes of these financial statements subsequent to those respective dates. As such, the estimated fair values of these financial instruments subsequent to the respective reporting dates may be different than the amounts reported at each period end.

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

					Fair value measurements										Fair value measurements
September 30, 2017	Carrying amount		Fair value		Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
June 30, 2021											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		—		—	$	56,621	$	56,621	$	56,621	$	—	$	—
Investment securities: Available-for-sale		396,413		396,413		7,363	$	388,838	$	212
Restricted investment in bank stocks		578		578		—		578		—
Investment securities:
Equities												15,445		15,445		15,445		—		—
Available-for-sale												549,385		549,385		—		549,313		72
Restricted investment in stocks												1,142		1,142		—		1,142		—

Loans held-for-sale		115		117		—		117		—		5,018		5,139		—		5,139		—
Net loans		696,089		701,643		—		—		701,643		909,721		914,744		—		—		914,744
Mortgage servicing rights		483		567		—		—		567		566		629		—		—		629
Accrued interest receivable		3,616		3,616		—		3,616		—		4,208		4,208		—		4,208		—

Financial liabilities
Deposits with no stated maturities	$	775,006	$	775,006	$	775,006		—	$	—	$	1,167,272	$	1,167,272	$	1,167,272	$	—	$	—
Deposits with stated maturities		230,439		229,821		—	$	229,821		—		176,461		178,616		—		178,616		—
Short-term borrowings		40,176		40,176		40,176		—		—		75,021		75,021		75,021		—		—
Long-term debt												10,000		10,206		10,206		—		—
Accrued interest payable		336		336		—		336		—		240		240		—		240		—

Off-balance sheet instruments
Commitments to extend credit	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Standby letters of credit		—		—		—		—		—		—		—		—		56		—

					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, 2020											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		—		—	$	39,331	$	39,331	$	39,331	$	—	$	—
Investment securities:
Trading		3,596		3,596		—	$	3,596		—
Equities												12,849		12,849		12,849		—		—
Available-for-sale		390,475		390,475		8,503		379,691	$	2,281		435,646		435,646		—		435,576		70
Restricted investment in bank stocks		1,017		1,017		—		1,017		—
Restricted investment in stocks												1,041		1,041		—		1,041		—
Loans held-for-sale		789		789		—		789		—		6,570		6,886		—		6,886		—
Net loans		625,685		626,052		—		—		626,052		909,216		915,726		—		—		915,726
Mortgage servicing rights		498		579		—		—		579		533		568		—		—		568
Accrued interest receivable		3,128		3,128		—		3,128		—		4,825		4,825		—		4,825		—

Financial liabilities
Deposits with no stated maturities	$	687,773	$	687,773	$	687,773		—	$	—	$	1,030,982	$	1,030,982	$	1,030,982	$	—	$	—
Deposits with stated maturities		225,582		225,403		—	$	225,403		—		197,085		199,127		—		199,127		—
Short-term borrowings		52,660		52,660		52,660		—		—		58,838		58,838		58,838		—		—
Long-term debt												10,000		10,269		10,269		—		—
Accrued interest payable		335		335		—		335		—		350		350		—		350		—

Off-balance sheet instruments
Commitments to extend credit	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Standby letters of credit		—		—		—		—		—		—		88		—		88		—

~~9. OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS~~10. COMMITMENTS AND ~~GUARANTEES~~CONTINGENCIES

In the normal course of business there are various legal proceedings, commitments, and contingent liabilities which are not reflected in the consolidated financial statements. Management does not anticipate any material losses as a result of these transactions and activities. They include, among other things, commitments to extend credit and standby letters of credit. The maximum exposure to credit loss, which represents the possibility of sustaining a loss due to the failure of the other parties to a financial instrument to perform according to the terms of the contract, is represented by the contractual amount of these instruments. QNB uses the same lending standards and policies in making credit commitments as it does for on-balance sheet instruments. The activity is controlled through credit approvals, control limits, and monitoring procedures.

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

	September 30,		December 31,		June 30,		December 31,
	2017		2016		2021		2020
Commitments to extend credit and unused lines of credit	$	313,828	$	277,216	$	338,841	$	296,537
Standby letters of credit		16,651		16,490		22,657		22,567
Total financial instrument commitments	$	330,479	$	293,706	$	361,498	$	319,104

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

Standby letters of credit are conditional commitments issued by the ~~Bank~~Company to guarantee the financial or performance obligation of a customer to a third party. QNB’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for standby letters of credit is represented by the contractual amount of those instruments. The ~~Bank~~Company uses the same credit policies in

making conditional obligations as it does for on-balance sheet instruments. ~~The majority of these standby~~Standby letters of credit of $20,017,000 will expire within one ~~year with the longest term being five years.~~year. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending other loan commitments. The ~~Bank~~Company requires collateral and personal guarantees supporting these letters of credit as deemed necessary. Management believes that the proceeds obtained through a liquidation of such collateral and the enforcement of personal guarantees would be sufficient to cover the maximum potential amount of future payments required under the corresponding guarantees. The amount of the liability as of ~~September~~June 30, ~~2017~~2021 and December 31, ~~2016~~2020 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.~~QNB has committed to various operating leases for several of their branch and office facilities. Some of these leases include specific provisions relating to rent increases. Some of the leases contain renewal options to extend the initial terms of the lease for periods ranging from five to ten years and certain leases allow for multiple extensions. During the six months ended June 30, 2021, QNB renewed one lease and recorded an additional right-of-use asset in exchange for an operating lease liability of $698,000.

During the six months ended June 30, 2021, QNB purchased the underlying assets of one lease which had a right-of-use asset of $945,000 and an operating liability of $952,000.

Dividends payable by ~~the Company~~QNB and the Bank are subject to various limitations imposed by statutes, regulations and policies adopted by bank regulatory agencies. Under Federal and Pennsylvania banking law, the Bank is subject to certain restrictions on the amount of dividends that it may declare without prior regulatory approval. Under Federal Reserve regulations, the Bank is limited as to the amount it may lend affiliates, including QNB, ~~Corp.,~~ unless such loans are collateralized by specific obligations.

Both the ~~Company~~QNB and the Bank are subject to regulatory capital requirements administered by Federal banking agencies. Failure to meet minimum capital requirements can initiate actions by regulators that could have an effect on the financial statements. Under the framework for prompt corrective action, ~~both the Company and~~ the Bank must meet capital guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance-sheet items.

The capital amounts and classification are also subject to qualitative judgments by the regulators. Management believes, as of ~~September~~June 30, ~~2017,~~2021, 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~~bank holding companies and ~~the Bank~~insured depository institutions must maintain minimum ratios as set forth in the following table below.

The Company and the Bank’s actual capital amounts and ratios are presented as follows:

	Capital levels															Capital levels
	Actual					Adequately capitalized					Well capitalized					Actual					Adequately capitalized					Well capitalized
As of September 30, 2017	Amount		Ratio			Amount		Ratio			Amount		Ratio
June 30, 2021																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																$	146,624		13.84	%	$	84,751		8.00	%	$	105,939		10.00	%
Bank		101,980	12.13				67,258	8.00				84,073	10.00				131,499		12.97			81,093	8.00				101,366	10.00

Tier I capital (to risk-weighted assets):
Consolidated		102,741	11.91				51,773	6.00				51,773	6.00
The Company																$	135,331		12.77			63,563	6.00				63,563	6.00
Bank		93,782	11.16				50,420	6.00				67,227	8.00				120,206		11.86			60,820	6.00				81,093	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																	135,331		12.77			47,672	4.50			N/A		N/A
Bank		93,782	11.16				37,815	4.50				54,622	6.50				120,206		11.86			45,615	4.50				65,888	6.50

Tier I capital (to average assets):
Consolidated		102,741	9.04				45,452	4.00			N/A		N/A
The Company																	135,331		8.58			63,096	4.00			N/A		N/A
Bank		93,782	8.32				45,088	4.00				56,359	5.00				120,206		7.69			62,495	4.00				78,119	5.00

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

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

QNB Corp. is a bank holding company headquartered in Quakertown, Pennsylvania. QNB Corp., through its wholly-owned subsidiary, the Bank, has been serving the residents and businesses of upper Bucks, northern Montgomery and southern Lehigh counties in Pennsylvania since 1877. Due to its limited geographic area, growth is pursued through expansion of existing customer relationships and building new relationships by stressing a consistent high level of service at all points of contact. The Bank is a locally managed community bank that provides a full range of commercial and retail banking and retail brokerage services. The consolidated entity is referred to herein as “QNB” or the “Company”.

Tabular information presented throughout management’s discussion and analysis, other than share and per share data, is presented in thousands of dollars.

In addition to historical information, this document contains forward-looking statements. Forward-looking statements are typically identified by words or phrases such as “believe,” “expect,” “anticipate,” “intend,” “estimate,” “project” and variations of such words and similar expressions, or future or conditional verbs such as “will,” “would,” “should,” “could,” “may” or similar expressions. The U.S. Private Securities Litigation Reform Act of 1995 provides a safe harbor in regard to the inclusion of forward-looking statements in this document and documents incorporated by reference.

Shareholders should note that many factors, some of which are discussed elsewhere in this document and in the documents that are incorporated by reference, and including the risk factors identified in Item 1A of QNB’s ~~2016~~2020 Form 10-K, could affect the future financial results of ~~the Company~~QNB Corp. and its subsidiary and could cause those results to differ materially from those expressed in the forward-looking statements contained or incorporated by reference in this document. These factors include, but are not limited, to the following:

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

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

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

Securities are evaluated periodically to determine whether a decline in their value is other-than-temporary. Management utilizes criteria such as the magnitude and duration of the decline, in addition to the reasons underlying the decline, to determine whether the loss in value is other-than-temporary. The term “other-than-temporary” is not intended to indicate that the decline is permanent, ~~but~~it indicates that the prospect for a near-term recovery of value is not necessarily favorable, or that there is a lack of evidence to support a realizable value equal to or greater than the carrying value of the investment. For equity securities that do not have readily-determinable fair values, once a decline in value is determined to be other-than-temporary, the value of the equity security is reduced and a corresponding charge to earnings is recognized. ~~As a result of prolonged declines in some equity securities’ fair values, $80,000 of other-than-temporary impairment charges~~There were ~~recorded during the third quarter and first nine months of 2017. There was $192,000 in~~no other-than-temporary impairment charges recorded during the ~~first nine~~three or six months ~~of 2016.~~ended June 30, 2021 and 2020, respectively.

The Company follows accounting guidance related to the recognition and presentation of other-than-temporary impairment that specifies (a) if a company does not have the intent to sell a debt security prior to recovery and (b) it is more likely than not that it will not have to sell the debt security prior to recovery, the security would not be considered other-than-temporarily impaired unless there is a credit loss. When an entity does not intend to sell the security, and it is more likely than not the entity will not have to sell the security before recovery of its cost basis, it will recognize the credit component of an other-than-temporary impairment of a debt security in earnings and the remaining portion in other comprehensive income. For held-to-maturity debt securities, the amount of an other-than-temporary impairment recorded in other comprehensive income for the noncredit portion of a previous other-than-temporary impairment is amortized prospectively over the remaining life of the security based on the timing of future estimated cash flows of the security. There were no credit-related other-than-temporary impairment charges in the ~~third quarters and nine~~three or six months ended ~~September~~June 30, ~~2017~~2021 or ~~2016.~~2020, respectively.

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

The allowance for loan losses is based on management’s continual review and evaluation of the loan portfolio. The level of the allowance is determined by assigning specific reserves to individually identified problem credits and general reserves to all other loans. The portion of the allowance that is allocated to impaired loans is determined by estimating the inherent loss on each credit after giving consideration to the value of underlying collateral or present value of future estimated cash flows. The general reserves are based on the composition and risk characteristics of the loan portfolio, including the nature of the loan portfolio, credit concentration trends, delinquency and loss experience, as well as other qualitative factors such as current economic trends.

Management emphasizes loan quality and close monitoring of potential problem credits. Credit risk identification and review processes are utilized to assess and monitor the degree of risk in the loan portfolio. QNB’s lending and credit administration staff are charged with reviewing the loan portfolio and identifying changes in the economy or in a borrower’s circumstances which may affect the ability to repay debt or the value of pledged collateral. A loan classification and review system exists that identifies those loans with a higher than normal risk of collection. Each commercial loan is assigned a grade based upon an assessment of the borrower’s financial capacity to service the debt and the presence and value of collateral for the loan. An independent loan review group tests risk assessments and evaluates the adequacy of the allowance for loan losses. Management meets monthly to review the credit quality of the loan portfolio and quarterly to review the allowance for loan losses.

In addition, various regulatory agencies, as an integral part of their examination process, periodically review QNB’s allowance for loan losses. Such agencies may require QNB to recognize additions to the allowance based on their judgments about information available to them at the time of their examination.

Management believes that it uses the best information available to make determinations about the adequacy of the allowance and that it has established its existing allowance for loan losses in accordance with U.S. GAAP. If circumstances differ substantially from the assumptions used in making determinations, future adjustments to the allowance for loan losses may be necessary and results of operations could be affected. Because future events affecting borrowers and collateral cannot be predicted with certainty, increases to the allowance may be necessary should the quality of any loans deteriorate as a result of the factors discussed above.

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

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

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

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

QNB reported net income for the ~~third~~second quarter of ~~2017~~2021 of ~~$2,554,000,~~$3,869,000, or ~~$0.74~~$1.09 per share on a diluted basis, compared to net income of ~~$2,292,000,~~$3,934,000, or ~~$0.67~~$1.11 per share on a diluted basis, for the same period in ~~2016.~~2020. For the ~~nine-month~~six-month period ended ~~September~~June 30, ~~2017,~~2021, QNB reported net income of ~~$7,800,000,~~$8,919,000, or ~~$2.27~~$2.51 per share on a diluted basis, compared to net income of ~~$6,655,000,~~$4,154,000, or ~~$1.96~~$1.18 per share on a diluted basis, for the same period in ~~2016.~~2020. The Bank contributed $7,341,000 to net income for the six months ended June 30, 2021 compared to $5,336,000 for the same period 2020; and the holding company contributed $1,578,000 to net income for the six months ended June 30, 2021 compared to a net loss of $1,182,000 for the same period 2020. The results at the holding company are due primarily to the change in the fair value of the equity portfolio.

Net income expressed as an annualized rate of return on average assets and average shareholders’ equity was ~~0.89%~~0.98% and ~~9.90%~~11.53%, respectively, for the quarter ended ~~September~~June 30, ~~2017~~2021 compared with ~~0.86%~~1.19% and ~~9.57%~~12.78%, respectively, for the ~~same period in 2016.~~quarter ended June 30, 2020. For the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2021, the annualized rate of return on average assets and average shareholders’ equity was ~~0.94%~~1.18% and ~~10.37%~~13.57%, respectively, compared with ~~0.87%~~0.66% and ~~9.48%~~6.81%, for the same period in ~~2016.~~2020.

Total assets as of ~~September~~June 30, ~~2017~~2021 were ~~$1,150,363,000,~~$1,575,353,000, compared with ~~$1,063,141,000~~$1,440,229,000 at December 31, ~~2016.~~ 2020. Loans receivable at ~~September~~June 30, ~~2017~~2021 were ~~$704,214,000,~~$920,923,000, compared with ~~$633,079,000~~$920,042,000 at December 31, ~~2016,~~2020, an increase of ~~$71,135,000, or 11.2%,~~$881,000 with ~~commercial~~retail lending as the largest contributor to the growth. QNB participates in the Small Business Administration’s (“SBA”) Paycheck Protection Program (“PPP”). In 2020, the Bank originated $82,475,000 in PPP loans, enabling 660 businesses to maintain their payrolls and stay in operation. Of this first round of funding, 506 loans have been forgiven in full and $59,981,000 in balances have been forgiven. The Bank originated 315 PPP loans, or $35,021,000 during the second round of funding which started in January 2021. Twenty loans have been forgiven in full and $2,104,000 in balances have been forgiven. Excluding PPP loans net of deferred fees at June 30, 2021 and December 31, 2020, loans would have increased $19,018,000, or 2.2%, since year-end 2020. Total deposits of ~~$1,005,445,000~~$1,343,733,000 at ~~September~~June 30, ~~2017~~2021 increased ~~$92,090,000,~~$115,666,000, or ~~10.1%~~9.4%, compared with total deposits of ~~$913,355,000~~$1,228,067,000 at December 31, ~~2016.~~2020. Most of the PPP loans proceeds were deposited to deposit accounts at the Bank.

Results for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2021 include the following significant components:

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

QNB ~~Corp.~~ earns its net income primarily through ~~its subsidiary,~~ the Bank. Net interest income, or the spread between the interest, dividends and fees earned on loans and investment securities and the expense incurred on deposits and other interest-bearing liabilities, is the primary source of operating income for QNB. Management seeks to achieve sustainable and consistent earnings

growth while maintaining adequate levels of capital and liquidity and limiting its exposure to credit and interest rate risk levels approved by the Board of Directors.

The following table presents the adjustment to convert net interest income to net interest income on a fully taxable-equivalent basis for the ~~three~~three- and ~~nine-month~~six-month periods ended ~~September~~June 30, ~~2017~~2021 and ~~2016.~~2020.

	Three months ended September 30,				Nine months ended September 30,				For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2017		2016		2017		2016		2021		2020		2021		2020
Total interest income	$	9,830	$	8,287	$	28,158	$	24,751	$	11,380	$	10,740	$	23,111	$	22,071
Total interest expense		1,515		1,202		4,105		3,526		1,162		1,506		2,376		3,674
Net interest income		8,315		7,085		24,053		21,225		10,218		9,234		20,735		18,397
Tax-equivalent adjustment		402		403		1,179		1,252		174		177		338		353
Net interest income (fully taxable-equivalent)	$	8,717	$	7,488	$	25,232	$	22,477	$	10,392	$	9,411	$	21,073	$	18,750

Net interest income is the primary source of operating income for QNB. Net interest income is interest income, dividends, and fees on earning assets, less interest expense incurred for funding sources. Earning assets primarily include loans, investment securities, interest bearing balances at the Federal Reserve Bank (Fed) and Federal funds sold. Sources used to fund these assets include deposits and borrowed funds. Net interest income is affected by changes in interest rates, the volume and mix of earning assets and interest-bearing liabilities, and the amount of earning assets funded by ~~non-interest bearing~~non-interest-bearing deposits.

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

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

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

	For the Three Months Ended
	June 30, 2021								June 30, 2020
	Average			Average					Average				Average
	Balance			Rate			Interest		Balance				Rate			Interest
Assets
Investment securities (AFS & Equity):
U.S. Government agencies	$	70,179			1.03	%	$	181	$	47,378				1.50	%	$	177
State and municipal		107,664			2.50			672		62,348				3.23			504
Mortgage-backed and CMOs		321,682			1.25			1,008		227,516				1.77			1,007
Pooled trust preferred securities		84			2.50			—		85				3.17			1
Corporate debt securities		7,592			3.99			75		7,542				3.62			68
Equities		15,003			2.86			107		12,308				3.25			99
Total investment securities		522,204			1.57			2,043		357,177				2.08			1,856
Loans:
Commercial real estate		543,901			4.11			5,580		476,687				4.48			5,310
Residential real estate		96,748			3.45			835		74,134				3.85			715
Home equity loans		57,696			3.16			454		62,121				3.91			604
Commercial and industrial		216,327			4.32			2,333		211,822				3.76			1,979
Consumer loans		5,217			5.02			65		6,058				5.33			80
Tax-exempt loans		24,342			3.52			214		38,564				3.57			342
Total loans, net of unearned income*		944,231			4.03			9,481		869,386				4.18			9,030
Other earning assets		57,185			0.20			29		55,980				0.22			31
Total earning assets		1,523,620			3.04			11,553		1,282,543				3.42			10,917
Cash and due from banks		26,055								16,254
Allowance for loan losses		(11,162	)							(10,393	)
Other assets		38,904								37,575
Total assets	$	1,577,417							$	1,325,979
Liabilities and Shareholders' Equity
Interest-bearing deposits:
Interest-bearing demand	$	304,302			0.22	%		167	$	253,009				0.23	%		146
Municipals		114,951			0.32			93		106,952				0.37			99
Money market		119,911			0.31			94		90,121				0.42			95
Savings		383,734			0.30			287		283,885				0.39			277
Time < $100		99,850			0.93			231		114,269				1.44			409
Time $100 through $250		52,284			0.85			111		64,587				1.58			253
Time > $250		27,295			0.97			66		32,560				1.70			138
Total interest-bearing deposits		1,102,327			0.38			1,049		945,383				0.60			1,417
Short-term borrowings		76,806			0.38			73		50,281				0.39			50
Long-term debt		10,000			1.55			39		10,000				1.57			39
Total interest-bearing liabilities		1,189,133			0.39			1,161		1,005,664				0.60			1,506
Non-interest-bearing deposits		243,171								187,352		��
Other liabilities		10,519								9,148
Shareholders' equity		134,594								123,815
Total liabilities and shareholders' equity	$	1,577,417							$	1,325,979
Net interest rate spread					2.65	%								2.82	%
Margin/net interest income					2.74	%	$	10,392						2.95	%	$	9,411

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

	Three Months Ended																For the Six Months Ended
	September 30, 2017								September 30, 2016								June 30, 2021								June 30, 2020
	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. Government agencies	$	74,469			1.80	%	$	335		60,860			1.88			286	$	70,204			1.02	%	$	359	$	51,770			1.69	%	$	438
State and municipal		78,236			3.93			768		71,905			4.03			724		100,732			2.54			1,280		58,396			3.32			971
Mortgage-backed and CMOs		221,513			2.04			1,127		197,462			1.95			963		292,472			1.28			1,865		222,268			1.92			2,132
Pooled trust preferred securities		242			3.61			2		3,091			0.23			2		84			2.51			1		85			3.66			2
Corporate debt securities		8,060			2.04			41		7,224			1.74			31		7,376			3.86			142		7,775			3.63			141
Equities		7,918			3.61			72		6,568			2.85			47		14,086			3.05			213		11,830			3.25			191
Total investment securities		390,438			2.40			2,345		347,110			2.37			2,053		484,954			1.59			3,860		352,124			2.20			3,875
Loans:
Commercial real estate		397,481			4.60			4,607		329,786			4.40			3,645		537,323			4.23			11,260		477,417			4.62			10,971
Residential real estate		52,833			3.90			516		45,606			3.94			449		92,650			3.51			1,610		71,996			3.90			1,405
Home equity loans		66,730			3.87			650		63,141			3.62			574		58,214			3.31			956		63,172			4.05			1,271
Commercial and industrial		135,791			4.74			1,621		111,058			4.32			1,206		222,298			4.67			5,147		188,496			4.24			3,979
Indirect lease financing		—			—			—		9,202			8.58			197
Consumer loans		6,685			5.65			95		4,626			5.21			61		5,275			4.96			130		6,249			5.45			169
Tax-exempt loans		35,328			3.97			354		39,226			3.75			370		24,706			3.55			435		38,284			3.59			683
Total loans, net of unearned income*		694,848			4.48			7,843		602,645			4.29			6,502		940,466			4.19			19,538		845,614			4.39			18,478
Other earning assets		13,411			1.31			44		62,778			0.51			81		42,953			0.23			49		33,720			0.42			71
Total earning assets		1,098,697			3.69			10,232		1,016,525			3.40			8,690		1,468,373			3.22			23,447		1,231,458			3.66			22,424
Cash and due from banks		15,946								16,378								26,447								15,012
Allowance for loan losses		(8,068	)							(7,630	)							(11,049	)							(10,172	)
Other assets		29,731								28,728								38,480								37,429
Total assets	$	1,136,306							$	1,054,001							$	1,522,251							$	1,273,727

Liabilities and Shareholders' Equity
Interest-bearing deposits:
Interest-bearing demand	$	173,544			0.21	%		94	$	157,179			0.20	%		80	$	293,078			0.22	%		315	$	239,658			0.32	%		377
Municipals		126,689			0.80			257		114,403			0.34			97		113,757			0.32			183		106,339			0.85			448
Money market		82,263			0.29			59		71,963			0.27			48		112,773			0.31			175		84,844			0.57			242
Savings		250,306			0.48			300		231,496			0.40			233		368,958			0.32			577		267,665			0.48			645
Time		129,272			1.19			387		133,296			1.13			378
Time of $100,000 or more		99,669			1.42			357		95,915			1.37			330
Time < $100																		101,809			1.01			510		116,595			1.50			872
Time $100 through $250																		53,875			0.96			256		69,679			1.68			582
Time > $250																		28,339			1.09			152		35,510			1.76			310
Total interest-bearing deposits		861,743			0.67			1,454		804,252			0.58			1,166		1,072,589			0.41			2,168		920,290			0.76			3,476
Short-term borrowings		43,678			0.56			61		38,506			0.37			36		67,498			0.38			128		48,982			0.58			142
Long-term debt																		10,000			1.56			78		7,115			1.57			56
Total interest-bearing liabilities		905,421			0.66			1,515		842,758			0.57			1,202		1,150,087			0.42			2,374		976,387			0.76			3,674
Non-interest-bearing deposits		124,269								112,114								229,806								164,875
Other liabilities		4,231								3,874								9,813								9,716
Shareholders' equity		102,385								95,255								132,545								122,749
Total liabilities and shareholders' equity	$	1,136,306							$	1,054,001							$	1,522,251							$	1,273,727
Net interest rate spread					3.03	%							2.83	%							2.80	%							2.90	%
Margin/net interest income					3.15	%	$	8,717					2.93	%	$	7,488					2.89	%	$	21,073					3.06	%	$	18,750

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, 2021 and 2020.

Nine Months Ended

September 30, 2017

September 30, 2016

Average

Average

Average

Average

Balance

Rate

Interest

Balance

Rate

Interest

Assets

Trading securities

$
1,587

5.72
%

$
68

$
3,919

5.47
%

$
161

Investment securities (AFS & HTM):

U.S. Government agencies

74,516

1.77

992

57,160

1.85

794

State and municipal

75,310

3.90

2,205

73,765

4.06

2,247

Mortgage-backed and CMOs

222,165

2.04

3,405

196,830

1.98

2,926

Pooled trust preferred securities

1,989

1.36

20

3,197

0.21

5

Corporate debt securities

8,064

1.98

120

8,160

1.77

108

Equities

7,231

3.40

184

7,192

3.28

177

Total investment securities

389,275

2.37

6,926

346,304

2.41

6,257

Loans:

Commercial real estate

386,958

4.58

13,257

327,225

4.43

10,854

Residential real estate

49,874

3.86

1,446

44,447

3.90

1,301

Home equity loans

66,315

3.83

1,901

62,557

3.72

1,740

Commercial and industrial

124,471

4.68

4,357

112,918

4.25

3,592

Indirect lease financing

—

—

—

9,844

8.88

656

Consumer loans

6,481

5.39

261

4,460

5.25

175

Tax-exempt loans

35,188

3.96

1,042

39,959

3.77

1,127

Total loans, net of unearned income*

669,287

4.45

22,264

601,410

4.32

19,445

Other earning assets

9,518

1.10

79

34,156

0.55

140

Total earning assets

1,069,667

3.67

29,337

985,789

3.52

26,003

Cash and due from banks

13,766

14,013

Allowance for loan losses

(7,761
)

(7,622
)

Other assets

29,169

28,683

Total assets

$
1,104,841

$
1,020,863

Liabilities and Shareholders' Equity

Interest-bearing deposits:

Interest-bearing demand

$
169,061

0.21
%

262

$
151,907

0.21
%

237

Municipals

102,207

0.64

491

98,777

0.35

255

Money market

84,389

0.30

187

70,556

0.27

142

Savings

248,325

0.45

837

228,894

0.40

688

Time

129,450

1.16

1,127

133,930

1.12

1,122

Time of $100,000 or more

96,659

1.39

1,008

94,462

1.37

967

Total interest-bearing deposits

830,091

0.63

3,912

778,526

0.59

3,411

Short-term borrowings

49,472

0.52

193

39,922

0.38

115

Total interest-bearing liabilities

879,563

0.62

4,105

818,448

0.58

3,526

Non-interest-bearing deposits

120,365

104,922

Other liabilities

4,381

3,756

Shareholders' equity

100,532

93,737

Total liabilities and shareholders' equity

$
1,104,841

$
1,020,863

Net interest rate spread

3.05
%

2.94
%

Margin/net interest income

3.15
%

$
25,232

3.05
%

$
22,477

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

Rate/Volume Analysis. The following table shows the fully taxable equivalent effect of changes in volumes and rates on interest income and interest expense. Changes in net interest income that could not be specifically identified as either a rate or volume change were allocated to changes in volume.

	Three months ended									Nine months ended									For the Three Months Ended									For the Six Months Ended
	September 30, 2017 compared									September 30, 2017 compared									June 30, 2021 compared									June 30, 2021 compared
	to September 30, 2016									to September 30, 2016									to June 30, 2020									to June 30, 2020
	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. Government agencies		49			64			(15	)		198			241			(43	)	$	4		$	87		$	(83	)	$	(79	)	$	392		$	(471	)
State and municipal		44			64			(20	)		(42	)		47			(89	)		168			366			(198	)		309			1,099			(790	)
Mortgage-backed and CMOs		164			118			46			479			377			102			1			417			(416	)		(267	)		1,616			(1,883	)
Pooled trust preferred securities		—			(2	)		2			15			(2	)		17			(1	)		(1	)		—			(1	)		—			(1	)
Corporate debt securities		10			4			6			12			(1	)		13			7			—			7			1			(16	)		17
Equities		25			10			15			7			1			6			8			22			(14	)		22			36			(14	)
Total Investment securities (AFS & HTM)		292			258			34			669			663			6
Total Investment securities (AFS & Equity)																				187			891			(704	)		(15	)		3,127			(3,142	)
Loans:
Commercial real estate		962			761			201			2,403			1,970			433			270			766			(496	)		289			1,342			(1,053	)
Residential real estate		67			71			(4	)		145			160			(15	)		120			217			(97	)		205			(1,235	)		1,440
Home equity loans		76			35			41			161			103			58			(150	)		(42	)		(108	)		(315	)		(103	)		(212	)
Commercial and industrial		415			272			143			765			363			402			354			47			307			1,168			700			468
Indirect lease financing		(197	)		(197	)		—			(656	)		(656	)		—
Consumer loans		34			27			7			86			79			7			(15	)		(11	)		(4	)		(39	)		(26	)		(13	)
Tax-exempt loans		(16	)		(35	)		19			(85	)		(136	)		51			(128	)		(125	)		(3	)		(248	)		(243	)		(5	)
Total Loans		1,341			934			407			2,819			1,883			936			451			852			(401	)		1,060			435			625
Other earning assets		(37	)		(64	)		27			(61	)		(101	)		40			(2	)		1			(3	)		(22	)		19			(41	)
Total interest income		1,542			1,074			468			3,334			2,349			985			636			1,744			(1,108	)		1,023			3,581			(2,558	)
Interest expense:
Interest-bearing deposits:
Interest-bearing demand		14			9			5			25			27			(2	)		21			30			(9	)		(62	)		83			(145	)
Municipals		160			11			149			236			9			227			(6	)		8			(14	)		(265	)		30			(295	)
Money market		11			8			3			45			28			17			(1	)		32			(33	)		(67	)		78			(145	)
Savings		67			19			48			149			57			92			10			99			(89	)		(68	)		241			(309	)
Time		9			(11	)		20			5			(39	)		44
Time of $100,000 or more		27			14			13			41			22			19
Time < $100																				(178	)		(51	)		(127	)		(362	)		(113	)		(249	)
Time $100 through $250																				(142	)		(48	)		(94	)		(326	)		(133	)		(193	)
Time > $250																				(72	)		(22	)		(50	)		(158	)		(64	)		(94	)
Total interest-bearing deposits		288			50			238			501			104			397			(368	)		48			(416	)		(1,308	)		122			(1,430	)
Short-term borrowings		25			4			21			78			27			51			23			25			(2	)		(14	)		52			(66	)
Long-term debt																				—			-			—			22			22			—
Total interest expense		313			54			259			579			131			448			(345	)		73			(418	)		(1,300	)		196			(1,496	)
Net interest income	$	1,229		$	1,020		$	209		$	2,755		$	2,218		$	537		$	981		$	1,671		$	(690	)	$	2,323		$	3,385		$	(1,062	)

Average earning assets for the ~~third~~second quarter of ~~2017~~2021 were ~~$1,098,697,000,~~$1,523,620,000, an increase of ~~$82,172,000,~~$241,077,000, or ~~8.1%~~18.8%, from the ~~third~~second quarter of ~~2016,~~2020, with average loans increasing ~~$92,203,000,~~$74,845,000, or ~~15.3%~~8.6%, and average investment securities increasing ~~$39,336,000,~~$165,027,000, or ~~11.2%~~46.2%, over the same ~~period. Growth~~period in 2020. Excess cash from deposit growth was deployed to the ~~loan~~securities portfolio, ~~mitigates the impact of the low rate environment on net interest income and the net interest margin as loans generally earn~~which earns a ~~higher~~better yield than ~~investment securities.~~Fed Funds or deposits at the Federal Reserve Bank. Average loans as a percent of average earning assets ~~were 63.2%~~was 62.0% for the ~~third~~second quarter of ~~2017,~~2021, compared with ~~59.3%~~67.8% for the ~~third~~second quarter of ~~2016.~~2020. On the funding side, average deposits increased $69,646,000, or 7.6%, to $986,012,000 for the third quarter of 2017 with growth in all categories except for time deposits. Customers continue to reinvest funds into non-time deposits, as the yield in time deposits remains low and customers prefer to keep their funds liquid to capitalize on rising rates. Average borrowed funds for the third quarter of 2017 increased $5,172,000, to

$~~43,678,000,~~212,763,000, or 18.8%, to $1,345,498,000 for the second quarter of 2021 primarily due to growth in non-interest-bearing and interest-bearing demand, money market and savings deposits. Customers continue to reinvest funds into more liquid accounts. Average short-term borrowed funds, which consisted entirely of average commercial repurchase agreements, increased $26,525,000 to $76,806,000 during the second quarter of ~~$35,995,000 and average overnight borrowings of $7,683,000. For~~2021 compared to $50,281,000 for the same period in ~~2016, borrowings consisted solely of commercial repurchase agreements.~~2020.

The net interest margin for the ~~third~~second quarter of ~~2017 was 3.15% compared with 2.93%~~2021 decreased 17 basis points to 2.74% from 2.95% for the same period in ~~2016.~~2020. While competition for quality loans in our local market continues to exert pressure on the net interest margin, ~~three increases~~the decline in ~~the prime lending rate since September 2016 have provided increased~~ interest ~~income on variable rate loans,~~rates starting in March 2020 resulted in significantly lower bond yields and ~~moderate competitive pricing pressure on deposits.~~ prepayments and calls of existing higher-yielding, seasoned investments.

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,~~$636,000, or ~~17.7%~~5.8%, to ~~$10,232,000~~$11,553,000 for the ~~third~~second quarter of ~~2017;~~2021; total interest expense ~~increased 26.0%~~decreased $345,000, or 22.9%, to ~~$1,515,000. Growth in earning assets is the primary contributor to the increase in interest income, with the increase~~$1,161,000. Decreases in rates on ~~variable-rate loans referenced above also contributing significantly.~~earning assets were offset by $527,000 of net deferred origination fees and costs recorded as income on forgiven PPP loans. All categories of interest-bearing deposits experienced ~~higher~~lower rates in the ~~third~~second quarter of ~~2017~~2021 compared to the ~~third~~second quarter of ~~2016, Rates increased 46 basis points for municipal deposits indexed to Fed Funds, while moderate competitive pricing pressure resulted in smaller rate increases in other deposit types.~~

The yield on earning assets on a tax-equivalent basis ~~increased twenty-nine~~decreased 38 basis points from ~~3.40%~~3.42% for the ~~third~~second quarter of ~~2016,~~2020, to ~~3.69%~~3.04% for the ~~third~~second quarter of ~~2017.~~2021. The cost of interest-bearing liabilities was ~~0.66%~~0.39% for the second quarter ended ~~September~~June 30, ~~2017,~~2021, compared with ~~0.57%~~0.60% for the same period in ~~2016.~~2020.

Interest income on investment securities ~~(trading, available-for-sale~~(available-for-sale and ~~held-to-maturity)~~equity) increased ~~$238,000~~$187,000 when comparing the quarters ended ~~September~~June 30, ~~2017~~2021 and ~~2016.~~2020. The average yield on the investment portfolio was ~~2.40%~~1.57% for ~~both~~ the ~~third quarters~~second quarter of ~~2017 and 2016. Investment opportunities in~~2021 compared with 2.08% for the ~~current rate environment provide a yield comparable to the overall portfolio yield.~~second quarter of 2020.

Income on U.S. Government agency securities increased ~~$49,000,~~$4,000 as the ~~$13,609,000, or 22.4%,~~average balances increased $22,801,000 and the rate decreased 47 basis points.

Interest income on municipal securities, which are primarily tax-exempt, increased due to a $45,316,000 increase in average balances, ~~contributed to an increase in interest income of $64,000. This was~~partially offset by a ~~$15,000~~73 basis-point decrease in ~~interest income due to an eight basis point decrease in~~rates. Proceeds from matured, called securities and proceeds from deposits were invested back into the ~~yield from 1.88% for the third quarter of 2016 to 1.80% for the same period in 2017.~~

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

Interest income on mortgage-backed securities and CMOs increased ~~$164,000 with a nine basis point increase in average yield, plus the $24,051,000 increase in~~$1,000 while average balances ~~contributing the majority of increase.~~increased $94,166,000 and yield declined 52-basis points. This portfolio generally provides higher yields relative to agency bonds and also provides monthly cash flow which can be used for liquidity purposes or can be reinvested ~~when~~as interest rates ~~eventually~~ increase. Since most of these securities were purchased at a premium, any prepayments result in a shorter amortization period of this premium and therefore a reduction in income.

Income on loans increased ~~$1,341,000~~$451,000 to ~~$7,843,000~~$9,481,000 when comparing the ~~third~~second quarters of ~~2017~~2021 and ~~2016,~~2020, with ~~the strong~~an 8.6% growth in average balances contributing an increase in interest income of ~~$934,000.~~$852,000. The yield on ~~average~~ loans, ~~for~~at 4.03%, was 15 basis points lower than the ~~third~~second quarter of ~~2017 was 4.48%, 19 basis points higher than the 4.29% yield~~2020, contributing to a $401,000 decrease in ~~third quarter of 2016. Despite increases in the Fed funds rate in December 2016, March 2017, and June 2017,~~interest income. Falling interest rates as well as competitive pressures ~~resulted in~~compressed the yields on new loans being ~~originated at relatively low rates. Mitigating competitive pricing, variable rate loans have repriced higher as the prime rate increases went into effect.~~originated.

The largest category of the loan portfolio is commercial real estate loans. This category of loans includes commercial purpose loans secured by either commercial properties such as office buildings, factories, warehouses, hotels and restaurants, medical facilities and retail establishments, or residential real estate, usually the residence of the business owner. The category also includes construction and land development loans. Average balances increased $67,695,000, or 20.5%, to $397,481,000 for the quarter ended September 30, 2017 compared with the same quarter in 2016, contributing $761,000 in increased interest income. The yieldIncome on commercial real estate loans increased 20$270,000 when comparing the second quarters of 2021 and 2020, primarily due to increased average balances of $67,214,000, or 14.1%, offset in part by a 37-basis point decrease in rate from 4.48% in 2020 to 4.11% in 2021.

Income on commercial and industrial loans increased $354,000 when comparing the second quarters of 2021 and 2020. The average yield on these loans increased 56 basis points to ~~4.60%~~4.32% resulting in ~~2017, contributing $201,000~~an increase in income of $307,000; average balances increased $4,505,000, to $216,327,000 for the second quarter of 2021 resulting in an $47,000 increase in interest income. Many of the loans in this category are indexed to the prime interest rate, which decreased a total of 150 basis points in March 2020. Included in this category are the PPP loans which contributed $2,591,000 of the net volume increase. The PPP loans yield one percent to the customer, however QNB received origination fees from the SBA ranging from a flat fee of $2,500 to one to five basis points. The

~~Income~~accretion of SBA origination fees is accelerated upon forgiveness of the loan. The yield on ~~commercial and industrial~~PPP loans ~~increased $415,000. Average balances increased $24,733,000, or 22.3%, to $135,791,000~~was 5.68% for the ~~third~~second quarter of ~~2017 resulting~~2021 compared with 2.87% for the same period in a $272,000 increase in income. The average yield on these loans increased 42 basis points to 4.74% resulting in an increase in income of $143,000. Many of the loans in this category are indexed to the prime interest rate, which increased by one quarter of one percent three times since September 2016.2020.

Tax-exempt loan income was ~~$354,000~~$214,000 for the ~~third~~second quarter of ~~2017,~~2021, a decrease of ~~$16,000~~$128,000, or 37.4%, from the same period in ~~2016. As with municipal marketable securities, many municipalities have refinanced existing loans. While QNB has been successful in winning some of these bids, average~~2020. Average balances ~~have~~ decreased ~~$3,898,000,~~$14,222,000, or ~~9.9%~~36.9%, to ~~$35,328,000~~$24,342,000 for the ~~third~~second quarter of ~~2017,~~2021, resulting in a decrease of ~~$35,000~~$125,000 in income. The yield on municipal loans ~~improved 22~~decreased five basis points, to ~~3.97%~~3.52% for the ~~third~~second quarter of ~~2017,~~2021, compared with the same period in ~~2016,~~2020, resulting in ~~an additional $19,000~~a decrease of $3,000 in interest income.

~~In October 2016, QNB sold its interest~~ The decrease in ~~third-party originated indirect lease financing contracts. This portfolio provided $197,000 in interest income~~volume during ~~the third quarter~~2021 was a result of ~~2016.~~municipal loans being refinanced as bonds.

QNB desires to ~~become~~be the “local consumer lender of choice” ~~and to affect this QNB refocused~~, focusing its retail lending efforts ~~adding new~~on product offerings and ~~increasing~~ marketing and promotion. ~~The positive impact of this focus has been year-over-year growth in balances in all three categories of retail lending: residential mortgage, home equity and consumer loans. Average~~Interest income on residential mortgage loans secured by ~~first~~second lien 1-4 family increased $120,000 when comparing the second quarter of 2021 to the same period in 2020. Average residential ~~mortgages~~mortgage loan balances increased by ~~$7,227,000,~~$22,614,000, or ~~15.9%~~30.5%, to ~~$52,833,000~~$96,748,000 for the ~~third~~second quarter of ~~2017~~2021 compared to the same period in ~~2016. Over this same timeframe,~~2020, which contributed a $217,000 increase in interest income. However, the average yield on the portfolio decreased ~~four~~40 basis points to ~~3.90%~~3.45% for the ~~third~~second quarter of ~~2017. The net result~~2021, which resulted in a $97,000 decrease in interest income. QNB chose to retain certain mortgage loans instead of selling them in the secondary market, as the yield on our originated mortgages was higher than comparable mortgage backed securities. Average home equity loans decreased by $4,425,000, or 7.1%, to $57,696,000 and the average yield decreased 75 basis points to 3.16% resulting in a ~~comparative increase~~combined decrease in interest income of ~~$67,000. Interest income for home equity loans increased $76,000, as a result of average balances increasing $3,589,000, or 5.7%, to $66,730,000 while~~$150,000. The yield on the ~~average yield increased 25~~consumer portfolio decreased 31 basis points to ~~3.87%. Average consumer loans increased $2,059,000, or 44.5%, to $6,685,000, led primarily by student loan~~5.02% for the second quarter of 2021 and there was a $841,000 decrease in average balances ~~which increased $1,738,000 from third quarter 2016 to third quarter 2017. When comparing these two periods, the yield on the portfolio increased 44 basis points to 5.65%; the~~resulting in a combined ~~result was a $34,000 increase~~$15,000 decrease in interest ~~income for consumer loans.~~income.

Earning assets are funded by deposits and borrowed funds. Interest expense ~~increased $313,000,~~decreased $345,000, when comparing the ~~third~~second quarter of ~~2017~~2021 to the same period in ~~2016.~~2020. The growth in average deposits continues to be centered in accounts with greater ~~liquidity, such as non-interest and interest-bearing demand, money market, and savings deposits.~~liquidity. Average non-interest-bearing demand accounts increased ~~$12,155,000,~~$55,819,000, or ~~10.8%~~29.8%, to ~~$124,269,000~~$243,171,000 for the third quarter. QNB has been successful in increasing 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.second quarter of 2021. Average interest-bearing demand accounts increased ~~$16,365,000,~~$51,293,000, or ~~10.4%~~20.3%, to ~~$173,544,000~~$304,302,000 for the ~~third~~second quarter of ~~2017.~~2021. Interest expense on interest-bearing demand accounts increased ~~$14,000~~$21,000 to ~~$94,000~~$167,000 for the same period, as the average rate paid ~~increased~~decreased one basis ~~point~~points to ~~0.21%~~0.22% for the ~~third~~second quarter ~~of 2017.~~2021. Included in this category is QNB-Rewards checking, a higher-rate checking account product that pays ~~1.10%~~1.00% on balances up to $25,000 and ~~0.30%~~0.15% for balances over $25,000. In order to receive the high rate a customer must receive an electronic statement, have one direct deposit or other ACH transaction and have at least 12 check card purchase transactions post and clear per statement cycle. For the ~~third~~second quarter of ~~2017,~~2021, the average balance in this product was ~~$51,323,000~~$97,863,000 and the related interest expense was ~~$75,000~~$97,000 for an average yield of ~~0.58%~~0.40%. In comparison, the average balance of the QNB-Rewards accounts for the ~~third~~second quarter of ~~2016~~2020 was ~~$45,125,000 with a~~$75,705,000 and the related interest expense ~~of $63,000 and~~was $74,000 for an average ~~rate paid~~yield of ~~0.55%~~0.39%. 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~~decreased $1,000 to ~~$257,000~~$93,000 for the ~~third~~second quarter of ~~2017.~~2021. The ~~average balance of municipal interest-bearing demand accounts increased $12,286,000, or 10.7%, to $126,689,000, with the~~ average interest rate paid on ~~these~~municipal interest-bearing demand accounts ~~increasing 46~~decreased five basis points to ~~0.80%~~0.32% for the ~~third~~second quarter of ~~2017.~~2021 and average balances increased $7,999,000, or 7.5%, to $114,951,000. Many of these accounts are indexed to the Federal funds rate with rate ~~floors between 0.25% and 0.50%,~~floors; therefore, the ~~increases~~150-basis point decrease in the Federal funds rate in March 2020 affected the yield of these deposits. Municipal deposits are seasonal in nature and are received during the second and third ~~quarter~~quarters as tax receipts are collected and are withdrawn over the course of the ~~next~~ year.

Average money market accounts increased ~~$10,300,000,~~$29,790,000, or ~~14.3%~~33.1%, to ~~$82,263,000~~$119,911,000 for the ~~third~~second quarter of ~~2017~~2021 compared with the same period in ~~2016.~~2020. Interest expense on money market accounts ~~increased~~decreased $11,000 to ~~$59,000, while~~$94,000, and the average interest rate paid on money market accounts ~~increased two~~decreased 11 basis points to ~~0.29%~~0.31% for the ~~third~~second quarter of ~~2017 compared with the same period in 2016.~~2021. Most of the balances in this category are in a product that pays a tiered rate based on account balances.

Interest expense on savings accounts increased ~~$67,000~~$10,000 when comparing the ~~third~~second quarter of ~~2017~~2021 to the ~~third~~second quarter of ~~2016, and the~~2020. The average interest rate ~~increased eight~~paid on savings accounts decreased nine basis points to ~~0.48%.~~0.30% for the second quarter of 2021. When comparing these same periods, average savings ~~account balances~~accounts increased ~~$18,810,000,~~$99,849,000, or ~~8.1%~~35.2%, to ~~$250,306,000~~$383,734,000 for the ~~third~~second quarter of ~~2017 with both~~2021 primarily due to increases in the ~~statement savings and~~ e-Savings ~~products accounting for the growth in savings balances.~~product. QNB’s online e-Savings product is the largest category of savings deposits, with average balances for the ~~third~~second quarter of ~~2017 at $181,706,000. This product has grown successfully since its introduction~~2021 of $286,817,000 compared to $203,370,000 in the ~~third quarter~~same period of ~~2009.~~2020. The average yield paid on these accounts was ~~0.60%~~0.36% for the ~~third~~second quarter of ~~2017~~2021 and ~~0.50%~~0.49% for the same period in ~~2016.~~2020. 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,~~$16,402,000 when comparing the ~~third~~second quarter of ~~2017~~2021 average to the same period in ~~2016.~~2020. Many of the Bank’s maturing time deposits throughout 2020 and into 2021 were deposited to these liquid interest-bearing accounts.

Interest expense on time deposits totaled ~~$744,000 and $708,000~~$408,000 for the ~~third quarters~~second quarter of ~~2017 and 2016, respectively.~~2021 compared to $800,000 in 2020. Average total time deposits decreased ~~slightly from $229,211,000~~$31,987,000 to $179,429,000 for the ~~third quarter 2016 to $228,941,000 for the third~~second quarter of ~~2017.~~ 2021. As with fixed-rate loans and investment securities, ~~time~~these deposits reprice over time and, therefore, have less of an immediate impact on costs in either a rising or falling rate environment, however, the maturity and repricing characteristics of time deposits tend to be shorter. The average rate paid on total time deposits ~~increased six~~decreased 61 basis points from 1.52% to ~~1.29%~~0.91% when comparing the ~~third~~second quarter of ~~2017~~2020 to the same period in ~~2016.~~2021.

Approximately ~~$99,509,000,~~$103,358,000, or ~~43.2%~~59%, of time deposits at ~~September~~June 30, ~~2017~~2021 will mature over the next 12 months. The average rate paid on these time deposits is approximately ~~0.81%~~0.69%. 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~~were comprised solely of sweep accounts structured as repurchase agreements with our commercial customers at June 30, 2021 and ~~overnight FHLB borrowings.~~June 30, 2020. Interest expense on short-term borrowings increased ~~$25,000~~$23,000 for the ~~third~~second quarter of ~~2017~~2021 to ~~$61,000~~$73,000 when compared to the same period in ~~2016.~~2020. When comparing these same periods, average balances increased ~~from $38,506,000~~$26,525,000 to ~~$43,678,000, due~~$76,806,000. During 2020, QNB borrowed long-term debt of $10,000,000 to ~~an increase~~lock in ~~average FHLB~~borrowing at a lower yield than short-term borrowings ~~of $7,681,000, while the average rate paid increased 19 basis points to 0.56% for the third quarter of 2017.~~at that time.

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

For the ~~nine-month~~six-month period ~~ended September~~ending June 30, ~~2017~~2021, average earning assets increased ~~$83,878,000,~~$236,915,000, or ~~8.5%~~19.2%, to ~~$1,069,667,000,~~$1,468,373,000, with average loans increasing ~~11.3%~~11.2% and average investment securities increasing ~~11.6%~~37.7%. Average total deposits increased ~~$67,008,000,~~$217,230,000, or ~~7.6%~~20.0%, to ~~$950,456,000~~$1,302,395,000 for the ~~nine-month~~six-month period ended ~~September~~June 30, ~~2017~~2021 compared to the same period in ~~2016.~~2020. The net interest margin on a tax-equivalent basis was ~~3.15%~~2.89% for the ~~nine-month~~six-month period ended ~~September~~June 30, ~~2017,~~2021, a ~~ten basis~~17-basis point ~~increase~~decrease from the same period in ~~2016.~~2020.

Total interest income on a tax-equivalent basis increased ~~$3,334,000,~~$1,023,000, or ~~12.8%~~4.6%, to $23,447,000 from ~~$26,003,000 to $29,337,000,~~$22,424,000, when comparing the ~~nine-month~~six-month periods ended ~~September~~June 30, ~~2016~~2021 and ~~September~~June 30, ~~2017,~~2020 due to ~~the additional interest income generated from the growth~~an increase in ~~earning assets combined with the impact of improved yields on some of those assets.~~volume. Interest income increased ~~$2,349,000~~$3,581,000 as a result of volume ~~increases,~~ and ~~$985,000~~decreased $2,558,000 as a result of ~~better~~lower yields. The analysis of the ~~nine-month~~six-month comparison periods is similar to what was described in the quarterly analysis.

The yield on earning assets ~~increased~~decreased from ~~3.52%~~3.66% to ~~3.67%~~3.22% for the ~~nine-month~~six-month periods with the yield on loans ~~up 13~~down 20 basis points to ~~4.45%~~4.19%. QNB continues to experience pressure on yields due to historically low levels of interest rates over the past several years and competitive pressures on loan pricing. The yield on investments ~~including trading securities,~~ decreased ~~five~~61 basis points from ~~2.44%~~2.20% to ~~2.39%~~1.59% when comparing the ~~nine-month~~six-month periods.

Total interest expense ~~increased $579,000~~decreased $1,300,000 for the ~~nine-month~~six-month period ended ~~September~~June 30, ~~2017~~2021 compared with the same period in ~~2016. Deposit rates account for $397,00 of the increase~~2020, attributable to ~~municipal deposits rates, which are correlated to changes~~a decrease in ~~the Fed Funds target rate, and eSavings and time deposit~~ rates. The average rate paid on interest bearing deposits ~~increased four~~decreased 35 basis ~~point~~points to ~~0.63%~~0.41% for the ~~nine-month~~six-month period ended ~~September~~June 30, ~~2017~~2021 versus the same period in ~~2016.~~2020. QNB ~~Bank~~ funded growth in loans with net proceeds primarily from growth in deposits; QNB was therefore able to reduce its short-term cash needs ~~with increased overnight Federal Home Loan Bank~~resulting in decreased FHLB borrowings in the ~~first three quarters of 2017~~six months ended June 30, 2021 compared with the same period in ~~2016,~~2020. The average balance of total short-term FHLB borrowings decreased $3,491,000 and the related interest decreased $34,000. The remainder of the short-term borrowings comprise of sweep accounts structured as repurchase agreements with our commercial customers; these repo average balances increased $22,007,000, or 48.4%, and the average borrowing rate ~~increased 14~~on the repos decreased ten basis points ~~which contributed $51,000 to the~~resulting in a net increase in interest ~~expense.~~

~~Deposit balance increases and higher borrowings contributed $131,000~~expense of $20,000. Average long-term debt was $10,000,000 for the six months ended June 30, 2021, compared to ~~interest expense.~~$7,115,000 for the same period in 2020. The yield on interest-bearing liabilities ~~rose four~~decreased 34 basis points to ~~0.62%~~0.42% for the ~~nine~~six months ended ~~September~~June 30, ~~2017, compared to the same period in 2016.~~2021.

The provision for loan losses represents management's determination of the amount necessary to be charged to operations to bring the allowance for loan losses to a level that represents management’s best estimate of the known and inherent losses in the existing loan portfolio. Management believes that it uses the best information available to make determinations about the adequacy of the allowance and that it has established its existing allowance for loan losses in accordance with U.S. ~~generally accepted accounting principles (GAAP).~~GAAP. The determination of an appropriate level for the allowance for loan losses is based upon an analysis of the risks inherent in QNB’s loan portfolio. Management, in determining the allowance for loan losses, makes significant estimates and assumptions. Since the allowance for loan losses is dependent, to a great extent, on conditions that may be beyond QNB’s control, it is at least reasonably possible that management’s estimates of the allowance for loan losses and actual results could differ. In addition, various regulatory agencies, as an integral part of their examination process, periodically review QNB’s allowance for losses on loans. Such agencies may require QNB to recognize

changes to the allowance based on their judgments about information available to them at the time of their examination. Actual loan losses, net of recoveries, serve to reduce the allowance.

Management closely monitors the quality of its loan portfolio and performs a quarterly analysis of the appropriateness of the allowance for loan losses. This analysis considers several relevant factors ~~including:~~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~~$183,000 and ~~$700,000~~$458,000 in provision for loan losses in the ~~third quarter~~three and ~~first nine~~six months ~~of 2017,~~ended June 30, 2021, respectively, compared with ~~no provision~~$250,000 and $750,000 for the same periods in ~~the third quarter and $125,000 year-to-date in 2016.~~2020. QNB's allowance for loan losses of ~~$8,125,000~~$11,202,000 represents ~~1.15%~~1.22% of loans receivable at ~~September~~June 30, ~~2017~~2021 compared with an allowance for loan losses of ~~$7,394,000,~~$10,826,000, or ~~1.17%~~1.18% of loans receivable, at December 31, ~~2016,~~2020, and ~~$7,593,000,~~$10,464,000, or ~~1.25%~~1.19% of loans receivable, at ~~September~~June 30, ~~2016.~~2020. Management believes the allowance for loan losses at ~~September~~June 30, ~~2017~~2021 is adequate as of that date based on its analysis of known and inherent losses in the portfolio. Excluding PPP loans, the allowance level stated as a percent of loans receivable was 1.29% at June 30, 2021, 1.27% at December 31, 2020 was 1.31% at June 30, 2020.

Net charge-offs were ~~$10,000~~$96,000 and ~~net recoveries were $31,000, respectively,~~$82,000 for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2021 compared ~~with net loan recoveries of $43,000 and~~to net charge-offs of ~~$86,000, respectively,~~$120,000 and $173,000 for the same period in 2020. Charge-offs of approximately $147,000 during the six months ended June 30, 2021 consisted primarily of student loans of $72,000, home equity lines of $12,000, commercial loans secured by residential real estate of $38,000 and overdrafts of $15,000. These were offset by $65,000 in recoveries comprising $47,000 in repayments from borrowers of previously charged-off credits, and $18,000 related to overdraft recoveries. Annualized net recoveries as a percentage of average loans receivable were 0.04% and 0.02% for the three and six months ended June 30, 2021 compared with annualized net charge-offs as a percentage of average loans receivable of 0.06% and 0.04% for the same periods in ~~2016.~~ 2020.

Non-performing assets ~~of $10,437,000~~were $12,515,000 at ~~September~~June 30, ~~2017 compares favorably with $14,219,000~~2021 compared to $14,109,000 as of December 31, ~~2016~~2020 and ~~$11,811,000 as of September~~$15,060,000 at June 30, 2016. Prior to June 2017, this category comprised non-performing loans and trust preferred securities. In June 2017, QNB Bank sold five non-performing pooled trust preferred securities, with a $2,235,000 carrying value. The remaining trust preferred security, which had a carrying balance of $212,000 at September 30, 2017, was returned to accruing status. Non-accrual pooled trust preferred securities were carried at fair value of $2,281,000, and $2,275,000 at December 31, 2016 and September 30, 2016, respectively.

2020. 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%~~1.36% of loans receivable at ~~September~~June 30, ~~2017~~2021 compared with ~~$11,938,000, or 1.89%~~1.53% of loans receivable at December 31, ~~2016,~~2020 and ~~$9,536,000, or 1.57%~~1.71% of loans receivable at ~~September~~June 30, ~~2016.~~2020. In cases where there is a collateral shortfall on non-accrual loans, specific impairment reserves have been established based on updated collateral values even if the borrower continues to pay in accordance with the terms of the agreement. At ~~September~~June 30, ~~2017, $7,507,000,~~2021, $4,841,000, or approximately ~~82%~~59% of the loans classified as non-accrual are current or past due less than 30 days. ~~Loans~~Commercial loans classified as substandard or doubtful ~~within the Company’s risk rating system~~ totaled ~~$18,064,000, a reduction~~$22,533,000, an increase of ~~$4,140,000~~$340,000, or 1.5%, from the ~~$22,204,000~~$22,193,000 reported at December 31, ~~2016~~2020 and ~~a $4,101,000 decline~~an increase of 8,265,000, or 57.9%, from the ~~$22,165,000~~$14,268,000 reported at ~~September~~June 30, ~~2016.~~2020. The increase in classified loans since June 2020 is due to the downgrade of four large commercial credits, partially offset by repayments on existing substandard loans.

QNB had ~~$5,000 in~~no loans past due 90 days or more and still accruing interest at ~~September~~June 30, ~~2017, and no loans past due 90 days or more and still accruing at~~2021, December 31, ~~2016. This compares with $150,000 at September~~2020, or June 30, ~~2016.~~2020. Total loans 30 days or more past due, which includes non-accrual loans by actual number of days delinquent, represented ~~0.28%~~0.38% of loans receivable at ~~September~~June 30, ~~2017~~2021 compared with ~~0.78%~~0.62% at December 31, ~~2016~~2020 and ~~0.70%~~0.33% at ~~September~~June 30, ~~2016.~~ 2020.

Troubled debt restructured loans, not classified as non-accrual loans or loans past due 90 days or more and accruing, were ~~$1,354,000~~$4,330,000 at ~~September~~June 30, ~~2017,~~2021, compared with ~~$1,819,000~~$4,469,000 at December 31, ~~2016,~~2020, and ~~$1,149,000~~$4,705,000 at ~~September~~June 30, ~~2016.~~2020. There were no

newly identified troubled debt ~~restructures in~~restructurings during the ~~nine~~three or six months ended ~~September~~June 30, ~~2017.~~2021. QNB had no other real estate owned or repossessed assets ~~as of September~~at June 30, ~~2017,~~2021, December 31, ~~2016,~~2020, or ~~September~~June 30, ~~2016.~~ 2020.

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

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

	September 30,			December 31,			September 30,			June 30,			December 31,			June 30,
	2017			2016			2016			2021			2020			2020
Non-accrual loans	$	9,078		$	10,119		$	8,237		$	8,185		$	9,640		$	10,355
Loans past due 90 days or more and still accruing interest		5			—			150			—			—			—
Troubled debt restructured loans (not already included above)		1,354			1,819			1,149			4,330			4,469			4,705
Total non-performing loans		10,437			11,938			9,536			12,515			14,109			15,060
Non-accrual investment securities		—			2,281			2,275
Total non-performing assets	$	10,437		$	14,219		$	11,811		$	12,515		$	14,109		$	15,060

Total loans (excluding loans held-for-sale):
Average total loans (YTD)	$	669,073		$	604,757		$	601,143		$	935,750		$	868,461		$	844,132
Total loans		704,214			633,079			608,231			920,923			920,042			873,620

Allowance for loan losses		8,125			7,394			7,593			11,202			10,826			10,464

Allowance for loan losses to:
Non-performing loans		77.85	%		61.94	%		79.63	%		89.51	%		76.73	%		69.48	%
Total loans (excluding held-for-sale)		1.15	%		1.17	%		1.25	%		1.22	%		1.18	%		1.19	%
Average total loans		1.21	%		1.22	%		1.26	%
Average total loans (excluding held-for-sale)											1.20	%		1.25	%		1.24	%

Non-performing loans / total loans (excluding held-for-sale)		1.48	%		1.89	%		1.57	%		1.36	%		1.53	%		1.71	%
Non-performing assets / total assets		0.91	%		1.34	%		1.10	%		0.79	%		0.98	%		1.08	%

An analysis of net loan ~~(recoveries)~~ charge-offs for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2021 compared to ~~2016~~2020 is as follows:

	Three months ended September 30,						Nine months ended September 30,						For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2017			2016			2017			2016			2021			2020			2021			2020
Net (recoveries) charge-offs	$	10		$	(43	)	$	(31	)	$	86
Net charge-offs													$	96		$	120		$	82		$	173

Net annualized (recoveries) charge-offs to:
Net annualized charge-offs to:
Total loans		0.01	%		(0.03	%)		(0.01	%)		0.02	%		0.04	%		0.05	%		0.02	%		0.04	%
Average total loans excluding held-for-sale		0.01	%		(0.03	%)		(0.01	%)		0.02	%		0.04	%		0.06	%		0.02	%		0.04	%
Allowance for loan losses		0.53	%		(2.26	%)		(0.50	%)		1.52	%		3.44	%		4.61	%		1.48	%		3.32	%

At June 30, 2021 and December 31, 2020, the recorded investment in loans for which impairment has been identified totaled $12,908,000 and $14,516,000 of which $4,971,000 and $6,432,000, respectively, required no specific allowance for loan loss. The recorded investment in impaired loans requiring an allowance for loan losses was $7,937,000 and $8,084,000 at June 30, 2021 and December 31, 2020, respectively, and the related allowance for loan losses associated with these loans was $3,107,000 and $3,050,000, respectively. Most of the loans that have been identified as impaired are collateral-dependent. See Note 8 to the Notes to Consolidated Financial Statements for additional detail of impaired loans.

Total non-interest income for the second quarter of 2021 was $2,534,000, a decrease of $283,000, compared to $2,817,000 for the second quarter of 2020. Excluding net realized and unrealized gains (losses) on equity securities for both periods, total non-interest income was $1,663,000 and $1,483,000 for the quarters ended June 30, 2021 and 2020, respectively, an increase of $180,000 or 12.1%.

During the second quarter of 2021, unrealized gains on investment equity securities of $579,000 were recorded compared to $1,166,000 in the same period of 2020. The unrealized gains for the three months ended June 30, 2021 and 2020 resulted from the change in the fair value of the equities portfolio, the performance of which was consistent with the overall performance of the U.S. stock market for the periods. The equities portfolio comprises blue-chip large-capitalized stocks, providing a taxable equivalent dividend yield of 3.05%. The estimated cumulative contribution (realized and unrealized net gains (losses), plus dividends) of the equity portfolio to earnings per share from January 1, 2011 through June 30, 2021 is $2.34 per diluted share. Details of the equity portfolio’s contribution to net income is detailed in the following table.

At September 30, 2017 and December 31, 2016, the recorded investment in loans for which impairment has been identified totaled $12,737,000 and $15,006,000 of which $8,860,000 and $10,909,000, respectively, required no specific allowance for loan loss. The recorded investment in impaired loans requiring an allowance for loan losses was $3,877,000 and $4,097,000 at September 30, 2017 and December 31, 2016, respectively, and the related allowance for loan losses associated with these loans was $1,955,000 and $1,198,000, respectively. Most of the loans that have been identified as impaired are collateral-dependent. See Note 7 to the Notes to Consolidated Financial Statements for additional detail of impaired loans.

Non-Interest Income Comparison

Three months

Change from

Nine months

Change from

ended September 30,

prior year

ended September 30,

prior year

2017

2016

Amount

Percent

2017

2016

Amount

Percent

Net gain on investment securities

$
98

$
316

$
(218
)

-69.0
%

$
962

$
650

$
312

48.0
%
Net (loss) gain on trading activity

-

(39
)

39

-100.0
%

27

47

(20
)

-42.6
%
Fees for services to customers

429

425

4

0.9
%

1,242

1,205

37

3.1
%
ATM and debit card

435

419

16

3.8
%

1,301

1,229

72

5.9
%
Retail brokerage and advisory

168

129

39

30.2
%

375

425

(50
)

-11.8
%
Bank-owned life insurance

70

73

(3
)

-4.1
%

261

217

44

20.3
%
Merchant

91

86

5

5.8
%

263

242

21

8.7
%
Net gain on sale of loans

65

143

(78
)

-54.5
%

316

263

53

20.2
%
Other

114

92

22

23.9
%

328

316

12

3.8
%
Total

$
1,470

$
1,644

$
(174
)

-10.6
%

$
5,075

$
4,594

$
481

10.5
%

Net Income (Expense) on Equity Securities
	For the Year Ended December 31,																			For the Six Months Ended June 30,
		2015			2016			2017			2018			2019			2020			2021			2020

Equity Securities:
Tax-equivalent dividends*		$	244		$	233		$	249		$	300		$	274		$	392		$	213		$	191
Net gain (loss) on sales			691			758			1,557			(79	)		1,781			585			631			168
OTTI			(55	)		(192	)		(80	)	N/A			N/A			N/A			N/A			N/A
Unrealized (loss) gain		N/A			N/A			N/A				(336	)		770			(47	)		1,675			(1,774	)
Tax-equivalent income before tax			880			799			1,726			(115	)		2,825			930			2,519			(1,415	)
Tax expense (benefit)*			357			324			700			(33	)		816			269			728			(409	)
Net income		$	523		$	475		$	1,026		$	(82	)	$	2,009		$	661		$	1,791		$	(1,006	)

Earnings per share - basic		$	0.16		$	0.14		$	0.30		$	(0.02	)	$	0.57		$	0.19		$	0.50		$	(0.29	)
Earnings per share - diluted		$	0.16		$	0.14		$	0.30		$	(0.02	)	$	0.57		$	0.19		$	0.50		$	(0.29	)
Tax-equivalent yield*			3.35	%		3.13	%		3.49	%		3.08	%		3.31	%		3.54	%		3.05	%		3.25	%

*Based on Federal tax rates of 34% for the 2015 and 2016 periods and 21% for all 2017, 2018, 2019, 2020 and 2021 periods.

Total non-interest income for the third quarter of 2017 was $1,470,000, a decrease of $174,000, compared to $1,644,000 for the third quarter of 2016. Excluding net gains on investment securities, trading activities and sale of loans for both periods, total non-interest income was $1,307,000 and $1,224,000 for the third quarters of 2017 and 2016, respectively, an increase of $83,000, or 6.8%.

Net gain on sale of investment securities, which are primarily derived from sale of equities, decreased $218,000 as market conditions in the equities market for the quarter ended September 30, 2017 versus the same period in 2016 resulted in fewer opportunities for sales.

QNB originates residential mortgage loans for sale in the secondary market. Net gain on sale of loans decreased $245,000 when comparing the second quarter of 2021 to the second quarter of 2020. 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~~$4,019,000 and ~~$3,632,000~~$7,695,000 for the ~~third~~second quarters of ~~2017~~2021 and ~~2016,~~2020, respectively.

~~These decreases were offset in part by~~Fees for services to customers increased $54,000 to $296,000 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 2021, due primarily to ~~increased letter of credit income;~~an increase in net overdraft income. ATM and debit card income ~~up $16,000, or 3.8%,~~increased $193,000 to $435,000 attributable to increases card-based transactions and expansion of retail and business households; and a net loss on trading securities of $39,000 during 2016. QNB redeemed the trading portfolio during$709,000 for the second quarter of ~~2017.~~2021, compared to the same period in 2020, due primarily to debit card interchange fee income.

QNB provides securities and advisory services under the name QNB Financial Services. Retail brokerage and advisory fees increased for the second quarter of 2021 compared to the same period in 2020. Advisory fees increased $11,000 for the second quarter of 2021 compared with the same period in 2020, while transactional fees increased $13,000 when comparing second quarters of 2021 and 2020.

~~Nine-Month~~Merchant income increased by $22,000 to $119,000 for the second quarter of 2021, compared to the same period in 2020. Other non-interest income increased $127,000. Mortgage servicing income increased $64,000 when comparing the two quarters primarily due to an increase in the fair value of servicing rights. There was an increase in title company income of $23,000 due to the increased volume of mortgage originations and an increase in letter of credit fees of $26,000.

Total non-interest income for the ~~nine-month~~six-month periods ended ~~September~~June 30, ~~2017~~2021 and ~~2016~~2020 was ~~$5,075,000~~$5,938,000 and ~~$4,594,000,~~$1,246,000, respectively, an increase of ~~$481,000, or 10.5%.~~$4,692,000. Excluding ~~net gains~~realized and unrealized gain and losses on ~~investment~~equity securities ~~trading activities and loans~~ for both periods, total non-interest income was ~~$3,770,000~~$3,632,000 and ~~$3,634,000,~~$2,852,000, respectively, an increase of ~~$136,000.~~

Net investment securities gains increased ~~$312,000~~$469,000 to ~~$962,000~~$636,000 for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2021 compared to ~~$650,000~~$169,000 for the comparable ~~nine~~six months in ~~2016.~~2020. Market conditions in the equities market for the six months ended June 30, 2020 versus the same period in 2021 resulted in greater opportunities for profitable sales in 2021. QNB recorded ~~$80,000~~realized gains of ~~other-than-temporary impairment charges~~$631,000 compared to gains of $168,000 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~~securities for the ~~first nine~~six months ~~of 2016.~~ended June 30, 2021 and 2020, respectively.

ATM and debit card income, merchant 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 gain on note sale during second quarter 2017, net~~Net gains on ~~the sale~~sales of loans ~~decreased $46,000~~increased to ~~$217,000,~~$26,000 from $446,000, when comparing the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2021 to the same period in ~~2016.~~2020. Proceeds from the sale of residential mortgages were ~~$6,867,000~~$13,124,000 and ~~$7,188,000~~$10,193,000 for the ~~nine-month~~six-month periods ended ~~September~~June 30, ~~2017~~2021 and ~~2016,~~2020, respectively.

ATM and debit card and merchant income increased $298,000 and $35,000, respectively, for the first six months of 2021 compared to 2020, for reasons detailed in the quarterly comparison.

Retail brokerage and advisory ~~income was $375,000~~fees increased $78,000, or 27.7%, to $360,000 for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2021 compared ~~with $425,000 for~~to the same period in 2016, a decrease of $50,000, or 11.8%. While assets under management have grown to $121,000,000 at September 30, 2017, recent asset growth has been in products with more trailing income than up-front income. 2020; advisory fees increased $70,000 and transaction-based fees increased $8,000.

Bank-owned life insurance income includes a life insurance benefit claim of $193,000. Other non-interest income decreased $198,000. Mortgage servicing income increased $69,000 when comparing the two periods primarily due to an increase in the fair value of servicing rights. There was an increase in title company income of $61,000 due to the increased volume of mortgage originations and an increase in letter of credit fees of $50,000.

Non-Interest Expense Comparison
	Three months				Change from						Nine months				Change from
	ended September 30,				prior year						ended September 30,				prior year						For the Three Months Ended June 30,				Change from prior year						For the Six Months Ended June 30,				Change from prior year
	2017		2016		Amount			Percent			2017		2016		Amount			Percent			2021		2020		Amount			Percent			2021		2020		Amount			Percent
Salaries and employee benefits	$	3,514	$	3,072	$	442			14.4	%	$	9,837	$	9,114	$	723			7.9	%	$	4,342	$	3,985	$	357			9.0	%	$	8,359	$	8,057	$	302			3.7	%
Net occupancy		469		438		31			7.1	%		1,345		1,305		40			3.1	%		535		524		11			2.1			1,153		1,047		106			10.1
Furniture and equipment		475		437		38			8.7	%		1,360		1,302		58			4.5	%		670		656		14			2.1			1,340		1,331		9			0.7
Marketing		188		220		(32	)		-14.5	%		724		681		43			6.3	%		261		155		106			68.4			475		477		(2	)		(0.4	)
Third-party services		379		440		(61	)		-13.9	%		1,180		1,246		(66	)		-5.3	%		594		503		91			18.1			1,082		957		125			13.1
Telephone, postage and supplies		201		189		12			6.3	%		600		549		51			9.3	%		176		194		(18	)		(9.3	)		374		389		(15	)		(3.9	)
State taxes		161		178		(17	)		-9.6	%		509		499		10			2.0	%		227		159		68			42.8			500		402		98			24.4
FDIC insurance premiums		156		162		(6	)		-3.7	%		431		489		(58	)		-11.9	%		211		142		69			48.6			382		279		103			36.9
Other		648		480		168			35.0	%		1,735		1,543		192			12.4	%		733		551		182			33.0			1,407		1,208		199			16.5
Total	$	6,191	$	5,616	$	575			10.2	%	$	17,721	$	16,728	$	993			5.9	%	$	7,749	$	6,869	$	880			12.8	%	$	15,072	$	14,147	$	925			6.5	%

Total non-interest expense was ~~$6,191,000~~$7,749,000 for the ~~third~~second quarter of ~~2017,~~2021, an increase of ~~$575,000,~~$880,000, or ~~10.2%~~12.8%, compared to the ~~third~~second quarter of ~~2016.~~

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,~~$357,000, or ~~14.4%~~9.0%, to ~~$3,514,000~~$4,342,000 when comparing the two quarters. Salary expense and related payroll taxes increased ~~$366,000~~$470,000 to ~~$2,979,000, or 14.0%,~~$3,665,000 during the ~~third~~second quarter of ~~2017~~2021 compared to the same period in ~~2016, attributable to a $171,000 increase in employee salaries and $139,000 increase in bonus accrual. Benefits expense increased $76,000, or 16.6%,~~2020 due ~~primarily~~ to increased ~~medical insurance claims~~bonus accruals of $246,000 and ~~retirement plan expense, offset in part by~~lower contra loan origination deferred costs of $127,000. Medical and dental premiums, net of employee contributions decreased ~~post-retirement life insurance benefit cost,~~$137,000 to $362,000 when comparing the two ~~periods.~~quarters due to a decrease in medical claims.

Net occupancy and furniture and equipment ~~expense~~expenses combined increased ~~$69,000,~~$25,000, or ~~7.9%~~2.1%, ~~to $944,000 for~~when comparing the ~~third quarter 2017,~~second quarters of 2021 and 2020. This is due primarily to increased building repairs and software maintenance expense.Marketing expense ~~decreased $32,000,~~increased $106,000, or ~~14.5%~~68.4%, to ~~$188,000~~$261,000 for the quarter ended ~~September~~June 30, ~~2017 compared with the same period in 2016,~~2021, due to ~~fewer advertising campaigns~~resuming events in ~~2017.~~2021 that had been cancelled in 2020 as a result of the COVID-19 Pandemic.

Third party services are comprised of professional services, including legal, accounting, auditing and consulting services, as well as fees paid to outside vendors for support services of day-to-day operations. These support services include correspondent banking services, IT services, statement printing and mailing, investment security safekeeping and supply management services. Third party services ~~decreased $61,000~~expense increased $91,000 when comparing the two periods, due primarily to ~~decreased legal services and other third-party~~decreases in fees paid to outside vendors for support services. ~~Telephone and postage and supplies expenses~~State taxes increased ~~$12,000, or 6.3%,~~$68,000 due to ~~increased data line capacity, and costs related to debit chip card conversion and the~~an increase in ~~new deposits and loans. The $17,000 decrease in state taxes is due to a~~bank shares tax ~~credit accrual, related to a charitable donation the Bank made during the quarter. State taxes are based on the Bank’s equity and the Bank is subject to a higher~~

~~rate in effect for 2017.~~expense. FDIC insurance premiums ~~decreased $6,000, or 3.7%,~~increased $69,000 due to ~~the change~~capital and asset growth.

Other non-interest expense increased $182,000, or 33.0%, primarily due to Checkcard expense and increased travel and entertainment resulting from events resuming in ~~the FDIC insurance premium calculation, implemented starting~~2021 that were cancelled in ~~late 2016. The increase in other expenses is attributable to higher third-party processing and check card expense, offset in part by a reduction in foreclosure expense.~~2020.

Total non-interest expense was ~~$17,721,000~~$15,072,000 for the ~~nine-month~~six-month period ended ~~September~~June 30, ~~2017,~~2021, an increase of ~~$993,000,~~$925,000, or ~~5.9%~~6.5%, compared to the ~~same period in 2016.~~six months ended June 30, 2020.

Salaries and benefits expense increased ~~$723,000~~$302,000 to ~~$9,837,000~~$8,359,000 for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2021 compared to the same period in ~~2016.~~2020, for the same reasons described in the quarter comparison. Salary and related payroll tax expense increased ~~$595,000, to $8,118,000,~~$467,000, or ~~7.9%~~7.0%, during the ~~period. Incentive bonus~~period, to $7,093,000 while medical and ~~related payroll tax accrual increased $151,000, when comparing the two periods. Benefits expense~~dental premiums, net of employee contributions, decreased ~~$22,000,~~$214,000, to ~~$1,333,000, related to decreased medical premium and post-retirement life insurance expense.~~$643,000.

Net occupancy and furniture and equipment expense increased ~~$98,000~~$115,000, or 4.8%, to ~~$2,705,000,~~$2,493,000, and third-party services increased $125,000, or 13.1%, to $1,082,000 for the six months ended June 30, 2021, for the same reasons described in the quarter comparison.

~~Marketing expense~~FDIC insurance premiums increased ~~$43,000, or 6.3%, to $724,000 for the nine months ended September 30, 2017 attributable to~~$105,000 and state taxes increased ~~donations and sales promotions.~~

~~Telephone, postage and supplies expenses increased in the first nine months of 2017 compared to 2016,~~$98,000, 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~~Other non-interest expense increased ~~$192,000, for~~due to the reasons described above in the quarter comparison.

QNB utilizes an asset and liability approach for financial accounting and reporting of income taxes. As of ~~September~~June 30, ~~2017,~~2021, QNB’s net deferred tax asset was ~~$4,741,000.~~$500,000. The primary components ~~comprise~~of deferred taxes are deferred tax assets of ~~$2,762,000 relating~~which $2,273,000 relates to the allowance for loan ~~losses, $1,234,000 related to unrealized losses on available for sale securities, $486,000 related to non-accrual interest income.~~losses. As of December 31, ~~2016,~~2020, QNB’s net deferred tax asset was ~~$5,473,000.~~$66,000 of which $2,273,000 was related to the allowance for loan losses. The ~~sale~~increase in the balance of net deferred tax assets when comparing June 30, 2021 to December 31, 2020 is due to the increase in unrealized gains on equity securities at June 30, 2021 compared to December 31, 2020, contributing to $499,000 of the trust preferred bonds with prior OTTI charges during the second quarter 2017 resulted in a $392,000 reduction in the deferred tax asset. The remaining balance difference is primarily the result of a $702,000 decline due to decreased 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.increase.

The realizability of deferred tax assets is dependent upon a variety of factors, including the generation of future taxable income, the existence of taxes paid and recoverable, the reversal of deferred tax liabilities and tax planning strategies. Based upon these and other factors, management believes it is more likely than not that QNB will realize the benefits of these remaining deferred tax assets.

Applicable income tax expense was ~~$940,000~~$951,000 for the quarter and ~~$2,907,000~~$2,224,000 for the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2021, compared ~~with $821,000~~to $998,000 for the quarter and ~~$2,311,000, respectively, in 2016.~~$592,000 for the six months ended June 30, 2020. The effective tax rate for ~~the third~~second quarter and ~~year-to-date 2017~~six-month period ended June 30, 2021 was ~~26.9%~~19.7% and ~~27.2%~~20.0%, respectively, compared with ~~26.4%~~20.2% and ~~25.8%~~12.5%, respectively, for the same period in ~~2016. This~~2020. The increase in the effective tax rate ~~in 2017~~for the six months ended June 30, 2021 is due to the ~~decreased~~state income tax benefit at the parent company related to higher equity gains in 2021 compared to 2020 on the equities portfolio, and to the proportion of ~~tax-free~~tax-exempt net interest income to ~~total~~ income ~~primarily municipal securities and municipal loan interest income.~~before taxes.

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.~~2021. 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 2021, which could result in a lower net interest margin and a decline in net interest income.

QNB’s primary business is accepting deposits and making loans to meet the credit needs of the communities it serves. Loans are the most significant component of earning assets and growth in loans to small businesses and residents of these communities has been a primary focus of QNB. Inherent within the lending function is the evaluation and acceptance of credit risk and interest rate risk. QNB

manages credit risk associated with its lending activities through portfolio diversification, underwriting policies and procedures and loan monitoring practices. QNB is committed to make credit available to its customers.

Total assets at ~~September~~June 30, ~~2017~~2021 were ~~$1,150,363,000~~$1,575,353,000 compared with ~~$1,063,141,000~~$1,440,229,000 at December 31, ~~2016.~~2020. Cash and cash equivalents increased ~~$15,307,000~~$17,290,000 from ~~$10,721,000~~$39,331,000 at December 31, ~~2016~~2020 to ~~$26,028,000~~$56,621,000 at ~~September~~June 30, ~~2017.~~

~~During the second quarter 2017, QNB Bank redeemed the trading securities portfolio, as lack of market volatility and the interest rate environment resulted~~2021, due primarily to increases 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 statusdeposits during the ~~second quarter 2017 and represents the senior-most obligation of the trust. There was no credit-related other-than-temporary impairment charge during the quarter or nine~~six months ended ~~September~~June 30, 2017 or 2016. Future valuations could require recording additional other-than-temporary impairment charges through earnings. For additional detail on these securities see Note 6 Investment Securities and Note 8 Fair Value Measurements and Disclosures.2021.

~~Aside from the redemptions detailed above, the composition of the investment portfolio is essentially unchanged since December 31, 2016.~~ The fixed-income securities portfolio represents a significant portion of QNB’s earning assets and is also a primary tool in liquidity and asset/liability management. QNB actively manages its fixed income portfolio to take advantage of changes in the shape of the yield curve and changes in spread relationships in different sectors and for liquidity purposes. Management continually reviews strategies that will result in an increase in the yield or improvement in the structure of the investment portfolio, including monitoring credit and concentration risk in the portfolio.

Loans receivable grew ~~$71,135,000, or 11.2%,~~$881,000 with commercial loans ~~increasing $58,960,000, or 11.6%,~~decreasing $6,018,000 to ~~$567,640,000~~$763,792,000 at ~~September~~June 30, ~~2017,~~2021, compared with ~~$508,680,000~~$769,810,000 at year-end ~~2016.~~2020. Commercial loans include the PPP loans; excluding PPP loans, commercial loans increased $12,176,000. Retail loan balances ~~grew $12,078,000, or 9.7%, to $136,397,000, when~~increased $6,977,000 comparing ~~September~~June 30, ~~2017~~2021 to December 31, ~~2016.~~2020. Under the CARES Act, QNB ~~has experienced growth~~continues to provide solutions to customers experiencing financial hardship caused by the COVID-19 Pandemic. As of June 30, 2021, QNB had no modifications to commercial portfolio and had modifications to two retail loans with an outstanding balance of $231,000, related to the COVID-19 Pandemic. At June 30, 2021, QNB had 449 PPP loans totaling $54,627,000 reported in ~~part due~~commercial and industrial loans. In 2020, the Bank originated $82,475,000 in PPP loans, enabling 660 businesses to ~~market disruption created by bank mergers~~maintain their payrolls and stay in ~~its footprint throughout 2016~~operation. Of this first round of funding, 506 loans have been forgiven in full and ~~2017.~~$59,981,000 in balances have been forgiven. The Bank originated 315 PPP loans, or $35,021,000, during the second round of funding which started in January 2021. Second-draw customers made up 244 of these loans, or $32,021,000 and one-draw customers made of the remaining 71 loans, or $2,781,000. Of this second round of funding, 20 loans have been forgiven in full and $2,104,000 in balances have been forgiven. Excluding PPP loans net of deferred fees at June 30, 2021 and at December 31, 2020, loans receivable would have increased $19,018,000, or 2.2%, since year-end 2020.

~~Deposit growth was led by savings balances, which increased $12,371,000,~~Deposits grew $115,666,000, or ~~5.2%~~9.4%, ~~to $250,618,000~~ from December 31, ~~2016~~2020 to ~~September~~June 30, ~~2017.~~2021. Non-interest-bearing demand deposits increased $30,964,000, or 15.1%, with balances of $235,548,000 at June 30, 2021 compared with $204,584,000 at year-end 2020. Interest-bearing demand balances, excluding municipal deposits, ~~grew $10,889,000,~~increased $27,647,000, or ~~6.7%~~9.9%, to ~~$173,876,000.~~$306,810,000, with increases in most personal checking products and in the business checking product. The $53,011,000 increase in savings and $25,655,000 increase in money markets was partially offset by the decline in time deposits as balances were moved to more liquid accounts. Total time deposits declined $20,624,000 from December 31, 2020 to June 30, 2021. Municipal deposit balances ~~increased $53,743,000~~decreased $987,000, to ~~$146,510,000.~~$115,214,000. Municipal deposits can be volatile depending on the timing of deposits and withdrawals, and the cash flow needs of the school districts or municipalities. Municipal deposits increase as tax money is received from the local school districts during second and third quarters and it is anticipated that these funds will flow out for the subsequent twelve months as the schools use the funds for operations. These deposits provide incremental income as they are invested in short-term investment securities but will further reduce the net interest margin as the spread earned is significantly less than the current net interest margin. Money market balances grew $6,544,000, or 8.8%, to $81,306,000 and non-interest bearing demand balances increased $3,686,000 to $122,696,000 at September 30, 2017, due primarily to increased business deposits. Time deposits increased $4,857,000 from December 31, 2016 to September 30, 2017. It is anticipated that total deposits will decrease in the fourth quarter 2017, as tax money received from the local school districts peaks during September, then flows out for the subsequent twelve months as the schools use the funds for operations.

Short-term borrowings ~~decreased 23.7%~~increased 27.5%, from ~~$52,660,000~~$58,838,000 at December 31, ~~2016~~2020 to ~~$40,176,000~~$75,021,000 at ~~September~~June 30, ~~2017.~~2021. Commercial sweep accounts ~~decreased $5,163,000, as~~comprised the entire balance of the short-term borrowing in both periods and increased $16,183,000; these funds may be volatile based on businesses’ receipt and disbursement of ~~funds.~~funds and is offset by business non-interest-bearing demand accounts. There were no overnight borrowings from FHLB at ~~September~~June 30, ~~2017, compared with $7,321,000~~2021 or December 31, 2020. In 2020, QNB borrowed long-term debt from the FHLB of $10,000,000 to lock in a rate at ~~year-end 2016.~~a low yield.

Liquidity represents an institution’s ability to generate cash or otherwise obtain funds at reasonable rates to satisfy demand for loans and deposit withdrawals. QNB attempts to manage its mix of cash and interest-bearing balances, Federal funds sold and investment securities to match the volatility, seasonality, interest sensitivity and growth trends of its loans and deposits. The Company manages its liquidity risk by measuring and monitoring its liquidity sources and estimated funding needs. Liquidity is provided from asset sources through repayments and maturities of loans and investment securities. The portfolio of investment securities classified as available for sale and QNB's policy of selling certain residential mortgage originations in the secondary market also provide sources of liquidity. Core deposits and cash management repurchase agreements have historically been the most significant funding source for

QNB. These deposits and repurchase agreements are generated from a base of consumers, businesses and public funds primarily located in the Company’s market area.

Additional sources of liquidity are provided by the Bank’s membership in the FHLB. ~~During three quarters of 2017, QNB borrowed from the FHLB to fund short-term liquidity needs.~~ At ~~September~~June 30, ~~2017,~~2021, the Bank had a maximum borrowing capacity with the FHLB of approximately ~~$286,951,000,~~$309,738,000, which is net of the $10,000,000 in long-term borrowings and a $350,000 letter of ~~credit at September 30, 2017.~~credit. The maximum borrowing depends upon qualifying collateral assets and ~~QNB’s~~the Bank’s asset quality and capital adequacy. In addition, the Bank maintains unsecured Federal funds lines with ~~three~~five correspondent banks totaling ~~$46,000,000.~~$101,000,000. At ~~September~~June 30, ~~2017,~~2021 there were no outstanding borrowings under ~~the FHLB line or~~ these ~~Federal funds~~ lines. Future availability under these lines is subject to the policies of the granting banks and may be withdrawn.

Liquid sources of funds, including cash, ~~trading~~available-for-sale and ~~available-for-sale~~equity investment securities, and loans held-for-sale have increased ~~$16,975,000~~$132,073,000 since December 31, ~~2016,~~2020, totaling ~~$422,556,000~~$626,469,000 at ~~September~~June 30, ~~2017. Cashflow from payments, calls and sales of securities have~~2021. Growth in deposits since year-end 2020 has been used ~~since year-end 2016~~ to fund ~~loans.~~loans, excess cash was invested in debt securities, primarily amortizing securities, and to cover operating expenses. 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~~$258,917,000 and ~~$166,628,000~~$220,934,000 of available-for-sale debt securities at ~~September~~June 30, ~~2017~~2021 and December 31, ~~2016,~~2020, respectively, were pledged as collateral for repurchase agreements and deposits of public funds. The level of pledged securities ~~depends upon~~corresponds with the ~~level of~~ municipal ~~deposits~~deposit and repurchase agreement balances.

QNB is a member of the Certificate of Deposit Account Registry Services (CDARS) program offered by the Promontory Interfinancial Network, LLC. CDARS is a funding and liquidity management tool used by banks to access funds and manage their balance sheet. It enables financial institutions to provide customers with full FDIC insurance on time deposits over $250,000 that are placed in the program. QNB also has available Insured Cash Sweep (ICS), another program through Promontory Interfinancial Network, LLC, which is a product similar to CDARS, but one that provides liquidity like a money market or savings account.

A strong capital position is fundamental to support continued growth and profitability and to serve the needs of depositors. QNB's shareholders' equity at ~~September~~June 30, ~~2017~~2021 was ~~$100,512,000,~~$137,340,000, or ~~8.74%~~8.72% of total assets, compared with shareholders' equity of ~~$93,567,000,~~$134,445,000, or ~~8.80%~~9.33% of total assets, at December 31, ~~2016.~~2020. Shareholders’ equity at ~~September~~June 30, ~~2017 and~~2021 included a positive adjustment of $2,001,000 compared to a positive adjustment of $5,649,000 at December 31, ~~2016 included a negative adjustment of $2,395,000 and $3,757,000, respectively,~~2020, related to unrealized holding ~~losses,~~gains, net of taxes, on investment securities available-for-sale. Without these adjustments, shareholders' equity to total assets would have been ~~8.93%~~8.60% and ~~9.12%~~8.98% at ~~September~~June 30, ~~2017~~2021 and December 31, ~~2016,~~2020, respectively.

Average shareholders' equity and average total assets were ~~$100,532,000~~$132,545,000 and ~~$1,104,841,000~~$1,522,251,000 for the ~~first nine~~six months ~~of 2017,~~ended June 30, 2021, an increase of ~~6.4%~~8.0% and ~~7.1%~~19.5%, respectively, from the averages for the ~~year~~six months ended ~~December 31, 2016.~~June 30, 2020. The ratio of average total equity to average total assets was ~~9.10%~~8.71% for ~~nine~~the six months ended ~~September~~June 30, ~~2017~~2021 compared to ~~9.16%~~9.64% for ~~all 2016.~~the same period in 2020.

Retained earnings at ~~September~~June 30, ~~2017~~2021 were impacted by ~~nine~~six months of net income totaling ~~$7,800,000 partially~~$8,919,000 offset by dividends declared and paid of ~~$3,186,000~~$2,489,000 for the ~~same~~six-month period. QNB offers a Dividend Reinvestment and Stock Purchase Plan (the “Plan”) to provide participants a convenient and economical method for investing cash dividends paid on the Company’s common stock in additional shares at a discount. The Plan also allows participants to make additional cash purchases of ~~stock at a discount.~~stock. Stock purchases under the Plan contributed ~~$739,000 and $753,000~~$421,000 to capital during the ~~nine~~six months ended ~~September~~June 30, ~~2017 and 2016, respectively.~~2021.

The Board of Directors has authorized the repurchase of up to ~~100,000~~200,000 shares of ~~its~~QNB common stock in open market or privately negotiated transactions. The repurchase authorization does not bear a termination date. As of ~~September~~June 30, ~~2017, 57,883~~2021, 80,374 shares ~~were~~have been repurchased ~~under this~~since the initial authorization at an average price of ~~$16.97~~$21.72 and a total cost of ~~$982,000. There have been no additional shares repurchased under the plan since the first quarter of 2009.~~$1,745,000.

QNB ~~and the Bank are~~is subject to various regulatory capital requirements as issued by Federal regulatory authorities. Regulatory capital is defined in terms of Tier 1 capital and Tier 2.2 capital. Risk-based capital ratios are expressed as a percentage of risk-weighted assets. Risk-weighted assets are determined by assigning various weights to all assets and off-balance sheet arrangements, such as letters of credit and loan commitments, based on associated risk. The final rules implementing the Basel Committee on Banking Supervision’s capital guidelines for U.S. banks (“Basel III”) became effective for QNB on January 1, 2015, with full compliance with all the of final rule’s requirements phased in over a multi-year schedule, to be fully phased-in by January 1, 2019.

Under the final rules, minimum requirements increased for both the quantity and quality of capital. The rules included a new common equity Tier 1 capital to risk-weighted assets minimum ratio of 4.5%, raised the minimum ratio of Tier 1 capital to risk-weighted assets from 4.0% to 6.0%, required a minimum ratio of Total Capital to risk-weighted assets of 8.0%, and required a minimum Tier 1 leverage ratio of 4.0%. A new capital conservation buffer, comprised of common equity Tier 1 capital, is also established above the regulatory minimum capital requirements. This capital conservation buffer was phased in beginning January 1, 2016, at 0.625% of risk-weighted assets and will increase 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.

The required minimum Common equity Tier 1 capital to risk-weighted assets ratio is 4.5%, the required minimum ratio of Tier 1 capital to risk-weighted assets is 6.0%, the required minimum ratio of Total Capital to risk-weighted assets is 8.0%, and the required minimum Tier 1 leverage ratio is 4.0%. A capital conservation buffer of 2.5% of risk-weighted assets also applies to avoid limitations on certain capital distributions.

~~There was little change in~~At June 30, 2021, common equity Tier I, Tier I capital, and total regulatory capital ratios ~~between~~were fairly level with December 31, ~~2016 and September 30, 2017.~~2020. The Company remains well-capitalized by all applicable regulatory requirements as of ~~September~~June 30, ~~2017.~~2021.

Market risk reflects the risk of economic loss resulting from changes in interest rates and market prices. QNB’s primary market risk exposure is interest rate risk and liquidity risk. QNB’s liquidity position was discussed in a prior section.

QNB’s largest source of revenue is net interest income, which is subject to changes in market interest rates. Interest rate risk management seeks to minimize the effect of interest rate changes on net interest margins and interest rate spreads and to provide growth in net interest income through periods of changing interest rates. QNB’s Asset/Liability and Investment Management Committee (ALCO) is responsible for managing interest rate risk and for evaluating the impact of changing interest rate conditions on net interest income.

QNB uses computer simulation analysis to measure the sensitivity of projected earnings to changes in interest rates. Simulation considers current balance sheet volumes and the scheduled repricing dates, instrument level optionality, and maturities of assets and liabilities. It incorporates assumptions for growth, changes in the mix of assets and liabilities, prepayments, and average rates earned and paid. Based on this information, management uses the model to project net interest income under multiple interest rate scenarios.

A balance sheet is considered liability sensitive when its liabilities (deposits and borrowings) reprice faster or than its earning assets (loans and securities). A liability sensitive balance sheet will produce relatively less net interest income when interest rates rise and more net interest income when they decline. Based on our simulation analysis, management believes QNB’s interest sensitivity position at ~~September~~June 30, ~~2017~~2021 is liability sensitive. Management expects that market interest rates ~~may gradually increase in~~will remain level over the next 12 months, based on the economic environment and policy of the Board of Governors of the Federal Reserve System.

The following table shows the estimated impact of changes in interest rates on net interest income as of ~~September~~June 30, ~~2017~~2021 and ~~2016~~2020 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				2021			2020
+300			-7.98	%		-6.73	%			-1.89	%		-2.96	%
+200			-5.16	%		-4.09	%			-4.14	%		-0.65	%
+100			-2.38	%		-1.78	%			2.47	%		0.67	%
-100			-5.25	%	*N/A					-11.10	%		-4.96	%

Computations of future effects of hypothetical interest rate changes are based on numerous assumptions and should not be relied upon as indicative of actual results. Assets and liabilities may react differently than projected to changes in market interest rates. The interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while rates on other types of assets and liabilities may lag changes in market interest rates. Interest rate shifts may not be parallel.

Changes in interest rates can cause substantial changes in the ~~level~~amount of prepayments ~~from~~of loans and mortgage-backed securities, which may in turn affect QNB’s interest rate sensitivity position. Additionally, credit risk may rise if an interest rate increase adversely affects the ability of borrowers to service their debt.

QNB is not subject to foreign currency exchange or commodity price risk. At ~~September~~June 30, ~~2017~~2021, QNB did not have any hedging transactions in place such as interest rate swaps, caps or floors.

ITEM 3. QUANTITATIVE AND ~~QUALITATI~~VEQUALITATIVE DISCLOSURE ABOUT MARKET ~~RISK.~~RISK

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

We maintain a system of controls and procedures designed to provide reasonable assurance as to the reliability of the consolidated financial statements and other disclosures included in this report, as well as to safeguard assets from unauthorized use or disposition. We evaluated the effectiveness of the design and operation of our disclosure controls and procedures under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective as of the end of the period covered by this report. No changes were made to our internal control over financial reporting during the fiscal quarter covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

There were no material changes to the Risk Factors described in Item 1A in QNB’s Annual Report on Form 10-K for the period ended December 31, ~~2016.~~2020.

QNB ~~did not repurchase any~~repurchased 9,691 shares of its common stock during the quarter ended ~~September~~June 30, ~~2017.~~2021. The following provides certain information relating to QNB's stock repurchase plan.

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.

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

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

Class		Outstanding at ~~October 31, 2017~~July 30, 2021
Common Stock, par value $0.625		~~3,440,356~~3,555,546

	PART I - FINANCIAL INFORMATION

ITEM 1.	CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)	PAGE

	Consolidated Balance Sheets at ~~September~~June 30, ~~2017~~2021 and December 31, ~~2016~~2020	3

	Consolidated Statements of Income for the Three and ~~Nine~~Six Months Ended ~~September~~June 30, ~~2017~~2021 and ~~2016~~2020	4

	Consolidated Statements of Comprehensive Income (Loss) for the Three and ~~Nine~~Six Months Ended ~~September~~June 30, ~~2017~~2021 and ~~2016~~2020	5

	Consolidated Statement of Shareholders’ Equity for the ~~Nine~~Three and Six Months Ended ~~September~~June 30, ~~2017~~2021 and ~~2016~~2020	6

	Consolidated Statements of Cash Flows for the ~~Nine~~Six Months Ended ~~September~~June 30, ~~2017~~2021 and ~~2016~~2020	7

	Notes to Consolidated Financial Statements	8

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

ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK	59

ITEM 4.	CONTROLS AND PROCEDURES	59

	PART II - OTHER INFORMATION

ITEM 1.	LEGAL PROCEEDINGS	60

ITEM 1A.	RISK FACTORS	60

ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	60

ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	60

ITEM 4.	~~CONTROLS AND PROCEDURES~~MINE SAFETY DISCLOSURES	60

	~~PART II - OTHER INFORMATION~~

~~ITEM 1.~~	~~LEGAL PROCEEDINGS~~	61

~~ITEM 1A.~~	~~RISK FACTORS~~	61

~~ITEM 2.~~	~~UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS~~	61

~~ITEM 3.~~	~~DEFAULTS UPON SENIOR SECURITIES~~	61

~~ITEM 4.~~	~~MINE SAFETY DISCLOSURES~~	61

ITEM 5.	OTHER INFORMATION	6160

ITEM 6.	EXHIBITS	6261

SIGNATURES

CERTIFICATIONS

	Number of options			Weighted average exercise price		Weighted average remaining contractual term (in years)		Aggregate intrinsic value
Outstanding at December 31, 2019		103,350		$	36.96
Granted		25,000			36.50
Exercised		(9,550	)		29.39
Forfeited		—			—
Outstanding at June 30, 2020		118,800		$	37.47		2.71	$	0
Exercisable at June 30, 2020		44,600		$	34.27		1.17	$	0

	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

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

	June 30, 2021
	Total Number of Months Deferred
	0-3 Months		4-6 Months		7-9 Months		10-12 Months		13+ Months		Total
Commercial:
Commercial and industrial	$	—	$	—	$	—	$	—	$	—	$	—
Construction		—		—		—		—		—		—
Secured by commercial real estate		—		—		—		—		—		—
Secured by residential real estate		—		—		—		—		—		—
State and political subdivisions		—		—		—		—		—		—
Retail:												—
1-4 family residential mortgages		—		228		—		—		—		228
Home equity loans and lines		—		—		—		—		—		—
Consumer		—		—		—		4				4
Total COVID-19 Modified Loans	$	—	$	228	$	—	$	4	$	—	$	232

Non-Interest Income Comparison
	For the Three Months Ended June 30,				Change from prior year						For the Six Months Ended June 30,					Change from prior year
	2021		2020		Amount			Percent			2021		2021			Amount			Percent
Net gain on sales of investment securities	$	294	$	169	$	125			74.0	%	$	636	$	169		$	467			276.3	%
Unrealized gain (loss) on investment equity securities		579		1,166		(587	)		(50.3	)		1,675		(1,774	)		3,449			(194.4	)
Fees for services to customers		296		242		54			22.3			595		653			(58	)		(8.9	)
ATM and debit card		709		516		193			37.4			1,302		1,004			298			29.7
Retail brokerage and advisory		193		169		24			14.2			360		282			78			27.7
Bank-owned life insurance		73		69		4			5.8			336		137			199			145.3
Merchant		119		97		22			22.7			223		188			35			18.6
Net gain on sale of loans		120		365		(245	)		(67.1	)		472		446			26			5.8
Other		151		24		127		N/M				339		141			198			140.4
Total	$	2,534	$	2,817	$	(283	)		-10.0	%	$	5,938	$	1,246		$	4,692			376.6	%

	September 30,			December 31,
Capital Analysis	2017			2016
Regulatory Capital
Shareholders' equity	$	100,512		$	93,567
Net unrealized securities losses, net of tax		2,395			3,757
Net unrealized losses on available-for-sale equity securities, net of tax		(160	)		—
Disallowed intangible assets		(6	)		(4	)
Common equity tier I capital		102,741			97,320

Tier I capital		102,741			97,320
Allowable portion: Allowance for loan losses and reserve for unfunded commitments		8,198			7,453
Unrealized gains on equity securities, net of tax		—			47
Total regulatory capital	$	110,939		$	104,820
Risk-weighted assets	$	862,891		$	822,210
Quarterly average assets for leverage capital purposes	$	1,136,300		$	1,061,976

	September 30,			December 31,
Capital Ratios	2017			2016
Common equity tier I capital / risk-weighted assets		11.91	%		11.84	%
Tier I capital / risk-weighted assets		11.91	%		11.84	%
Total regulatory capital / risk-weighted assets		12.86	%		12.75	%
Tier I capital / average assets (leverage ratio)		9.04	%		9.16	%

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

April 1, 2021 through April 30, 2021		4,000	$	35.00		4,000		125,317
May 1, 2021 through May 31, 2021		2,691		35.65		2,691		122,626
June 1, 2021 through June 30, 2021		3,000		36.88		3,000		119,626
Total		9,691	$	35.76		9,691		119,626


	Exhibit 3.1		Articles of Incorporation of Registrant, as amended. (Incorporated by reference to Exhibit 3(i) of Registrant’s Annual Report on Form 10-K, SEC File No. 0-17706, filed with the Commission on March 13, ~~2015).~~2015.)

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

Exhibit 31.1		Section 302 Certification of Chief Executive Officer

Exhibit 31.2	~~Exhibit 31.1~~	Section 302 Certification of Chief ~~Executive~~Financial Officer

Exhibit 32.1	~~Exhibit 31.2~~	Section ~~302~~906 Certification of Chief ~~Financial~~Executive Officer

	Exhibit ~~32.1~~	~~Section 906 Certification of Chief Executive Officer~~
32.2
	~~Exhibit 32.2~~	Section 906 Certification of Chief Financial Officer


No.		Description
~~101.INS~~		XBRL Instance Document.*
101.SCH		~~XBRL~~iXBRL Taxonomy Extension Schema Document.*
101.CAL		~~XBRL~~iXBRL Taxonomy Extension Calculation Linkbase Document.*
101.LAB		~~XBRL~~iXBRL Taxonomy Extension Label Linkbase Document.*
101.PRE		~~XBRL~~iXBRL Taxonomy Extension Presentation Linkbase Document.*
101.DEF		~~XBRL~~iXBRL Taxonomy Extension Definitions Linkbase Document.*
104		Cover Page Interactive Data File (formatted as inline iXBRL and contained in Exhibit 101)

	QNB Corp.

Date: ~~November 8, 2017~~ August 9, 2021	By:	/s/ David W. Freeman
		David W. Freeman
		Chief Executive Officer

Date: ~~November 8, 2017~~ August 9, 2021	By:	/s/ Janice McCracken Erkes
		Janice McCracken Erkes
		Chief Financial Officer

Date: ~~November 8, 2017~~ August 9, 2021	By:	/s/ ~~Phillip N. Geiger~~Mary E. Liddle
		~~Phillip N. Geiger~~Mary E. Liddle
		Chief Accounting Officer, QNB Bank