UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September June 30, 2017 2021
OR
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 0-17706
QNB Corp.
(Exact Name of Registrant as Specified in Its Charter)
Pennsylvania |
| 23-2318082 |
(State or Other Jurisdiction of Incorporation or Organization) |
| (I.R.S. Employer Identification No.) |
15 North Third Street, P.O. Box 9005 Quakertown, PA |
| 18951-9005 |
(Address of Principal Executive Offices) |
| (Zip Code) |
(215) 538-5600
Registrant's Telephone Number, Including Area Code
Not Applicable
Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report.
Securities registered pursuant to Section 12(b) of the Act: None.
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
Common Stock | QNBC | N/A |
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☐ |
| Accelerated filer |
|
Non-accelerated filer |
|
| Smaller Reporting Company |
|
Emerging growth company | ☐ |
|
|
|
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
Class |
| Outstanding at |
Common Stock, par value $0.625 |
|
|
FORM 10-Q
QUARTER ENDED SEPTEMBERJune 30, 20172021
INDEX
|
| PART I - FINANCIAL INFORMATION |
|
|
|
|
|
|
|
ITEM 1. |
| CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) |
| PAGE |
|
|
|
|
|
|
| Consolidated Balance Sheets at |
| 3 |
|
|
|
|
|
|
|
| 4 | |
|
|
|
|
|
|
|
| 5 | |
|
|
|
|
|
|
|
| 6 | |
|
|
|
|
|
|
|
| 7 | |
|
|
|
|
|
|
|
| 8 | |
|
|
|
|
|
ITEM 2. |
| MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
|
|
|
|
|
|
|
ITEM 3. |
| 59 | ||
ITEM 4. | 59 | |||
ITEM 1. | 60 | |||
ITEM 1A. | 60 | |||
ITEM 2. | 60 | |||
ITEM 3. |
| 60 | ||
|
|
|
|
|
ITEM 4. |
|
| 60 | |
|
| |||
|
| |||
|
| |||
|
| |||
|
| |||
|
|
|
|
|
ITEM 5. |
|
|
| |
|
|
|
|
|
ITEM 6. |
|
|
| |
|
|
|
|
|
|
| |||
|
|
|
|
|
CERTIFICATIONS |
|
|
|
| (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.
3
CONSOLIDATED STATEMENTS OF INCOME
|
| (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.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
|
| (in thousands - unaudited) |
| |||||||||||||||||||||
Three months ended September 30, |
| 2017 |
|
| 2016 |
| ||||||||||||||||||
|
| Before tax amount |
|
| Tax expense (benefit) |
|
| Net of tax amount |
|
| Before tax amount |
|
| Tax expense (benefit) |
|
| Net of tax amount |
| ||||||
Net income |
| $ | 3,494 |
|
| $ | 940 |
|
| $ | 2,554 |
|
| $ | 3,113 |
|
| $ | 821 |
|
| $ | 2,292 |
|
Other comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized holding gains (losses) on securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding gains (losses) arising during the period |
|
| 96 |
|
|
| 33 |
|
|
| 63 |
|
|
| (875 | ) |
|
| (298 | ) |
|
| (577 | ) |
Reclassification adjustment for gains included in net income |
|
| (98 | ) |
|
| (33 | ) |
|
| (65 | ) |
|
| (316 | ) |
|
| (107 | ) |
|
| (209 | ) |
Other comprehensive loss |
|
| (2 | ) |
|
| - |
|
|
| (2 | ) |
|
| (1,191 | ) |
|
| (405 | ) |
|
| (786 | ) |
Total comprehensive income |
| $ | 3,492 |
|
| $ | 940 |
|
| $ | 2,552 |
|
| $ | 1,922 |
|
| $ | 416 |
|
| $ | 1,506 |
|
|
| (in thousands - unaudited) |
| |||||||||||||||||||||
|
| 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
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Nine months ended September 30, 2017 and 2016
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Accumulated |
|
|
|
|
|
|
|
|
| |
|
| Number of |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Other |
|
|
|
|
|
|
|
|
| ||
(unaudited) |
| Shares |
|
| Common |
|
|
|
|
|
| Retained |
|
| Comprehensive |
|
| Treasury |
|
|
|
|
| |||||
(in thousands, except share and per share data) |
| Outstanding |
|
| Stock |
|
| Surplus |
|
| Earnings |
|
| Income (Loss) |
|
| Stock |
|
| Total |
| |||||||
Balance, December 31, 2015 |
|
| 3,359,794 |
|
| $ | 2,203 |
|
| $ | 15,973 |
|
| $ | 75,289 |
|
| $ | (546 | ) |
| $ | (2,476 | ) |
| $ | 90,443 |
|
Net income |
|
|
|
|
|
| — |
|
|
| — |
|
|
| 6,655 |
|
|
| — |
|
|
| — |
|
|
| 6,655 |
|
Other comprehensive income, net of tax |
|
|
|
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 2,834 |
|
|
| — |
|
|
| 2,834 |
|
Cash dividends declared ($0.90 per share) |
|
|
|
|
|
| — |
|
|
| — |
|
|
| (3,045 | ) |
|
| — |
|
|
| — |
|
|
| (3,045 | ) |
Stock issued in connection with dividend reinvestment and stock purchase plan |
|
| 24,886 |
|
|
| 15 |
|
|
| 738 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 753 |
|
Stock issued for employee stock purchase plan |
|
| 1,540 |
|
|
| 1 |
|
|
| 40 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 41 |
|
Stock issued for options exercised |
|
| 13,868 |
|
|
| 9 |
|
|
| 234 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 243 |
|
Tax benefit of stock options exercised |
|
|
|
|
|
| — |
|
|
| 12 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 12 |
|
Stock-based compensation expense |
|
|
|
|
|
| — |
|
|
| 60 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 60 |
|
Balance, September 30, 2016 |
|
| 3,400,088 |
|
| $ | 2,228 |
|
| $ | 17,057 |
|
| $ | 78,899 |
|
| $ | 2,288 |
|
| $ | (2,476 | ) |
| $ | 97,996 |
|
The accompanying notes are an integral part of the consolidated financial statements.
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. |
|
|
|
|
|
|
|
|
|
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
| (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
7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements include the accounts of QNB Corp. and its wholly-owned subsidiary, QNB Bank (the “Bank”). The consolidated entity is referred to herein as “QNB” or the “Company”. All significant intercompany accounts and transactions are eliminated in the consolidated financial statements.
These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in QNB's 20162020 Annual Report incorporated in the Form 10-K. Operating results for the three and nine-month periodssix-month period ended SeptemberJune 30, 20172021 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 CompanyQNB has evaluated events and transactions occurring subsequent to the balance sheet date of SeptemberJune 30, 2017,2021 for items that should potentially be recognized or disclosed in these consolidated financial statements.
Recent COVID-19 Developments
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 PRONOUNCEMENTSUnder 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, RevenueSmall Business Administration additional time to process applications received by the application deadline.
Upon requests from Contractscustomers, 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 issuedno 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 expectsCOVID-19 Pandemic. Interest continues to be entitled in exchange for those goodsaccrued 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:
Equity investments with readily determinable fair values must be measured at fair value with changes in fair value recognized in net income.
Equity investments without readily determinable fair values must be measured at either fair value or at cost adjusted for changes in observable prices minus impairment. Changes in value under either of these methods would be recognized in net income.
Entities that record financial liabilities at fair value2021 due to a fair value option election must recognize changes in fair value in other comprehensive income if it is relatedCOVID-19. As of June 30, 2021, QNB had 0 remaining modifications on the commercial portfolio. As of June 30, 2021, QNB had modifications to instrument-specific credit risk.2 retail portfolio loans with an aggregate outstanding balance of $232,000; both loans had extended the initial deferment period. We will continue work with our borrowers during this difficult time.
Entities must assess whether a valuation allowance is required for deferred tax assets related to available-for-sale debt securities.9
8
QNB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
This ASU is effective for public companies for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. If QNB adopted this guidance on October 1, 2017 it would have resulted in a decrease in retained earnings of approximately $160,000 and a corresponding increase in accumulated other comprehensive loss to reflect the reclassificationThe full impact of the unrealized lossesCOVID-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 asto 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.
9
QNB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
On June 16, 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326)(“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.
To that end, the new guidance:
Eliminates the probable initial recognition threshold in current U.S. GAAP and, instead, reflects an organization’s current estimate of all expected credit losses over the contractual term of its financial assets
• | Eliminates the probable initial recognition threshold in current accounting principles generally accepted in the United States of America (“U.S. GAAP”) and, instead, reflects an organization’s current estimate of all expected credit losses over the contractual term of its financial assets |
Broadens the information an entity can consider when measuring credit losses to include forward-looking information
• | Broadens the information an entity can consider when measuring credit losses to include forward-looking information |
Increases usefulness of the financial statements by requiring timely inclusion of forecasted information in forming expectations of credit losses
• | Increases usefulness of the financial statements by requiring timely inclusion of forecasted information in forming expectations of credit losses |
Increases comparability of purchased financial assets with credit deterioration (PCD assets) with other purchased assets that do not have credit deterioration as well as originated assets because credit losses that are expected will be recorded through an allowance for credit losses for all assets
• | Increases comparability of purchased financial assets with credit deterioration (PCD assets) with other purchased assets that do not have credit deterioration as well as originated assets because credit losses that are expected will be recorded through an allowance for credit losses for all assets |
Increases users’ understanding of underwriting standards and credit quality trends by requiring additional information about credit quality indicators by year of origination (vintage)
• | Increases users’ understanding of underwriting standards and credit quality trends by requiring additional information about credit quality indicators by year of origination (vintage) |
For available-for-sale debt securities, aligns the income statement recognition of credit losses with the reporting period in which changes occur by recording credit losses (and subsequent changes in credit losses) through an allowance rather than a write down
• | For available-for-sale debt securities, aligns the income statement recognition of credit losses with the reporting period in which changes occur by recording credit losses (and subsequent changes in credit losses) through an allowance rather than a write down |
The new guidance affects organizations that hold financial assets and net investments in leases that are not accounted for at fair value with changes in fair value reported in net income. The new guidance affects loans, debt securities, trade receivables, net investments in leases, off-balance-sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash.
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 permitted2019, except for all organizationssmaller reporting companies, whose effective date is effective for fiscal years, and interim periods withinwith those fiscal years, beginning after December 15, 2018.2022. QNB is evaluatingcontinues 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 securitiesstatements 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 haveanticipates a material impact onchange to its consolidated financial statements as it already usesallowance for loan losses upon the earliest call date to amortize premiums on callable debt securities.eventual implementation of CECL.
3. STOCK-BASED COMPENSATION AND SHAREHOLDERS’ EQUITY
QNB sponsors stock-based compensation plans, administered by a Board Committee,committee (the “Committee”), under which both qualified and non-qualified stock options may be granted periodically to certain employees. Compensation cost has been measured using the fair value of an award on the grant date and is recognized over the service period, which is usually the vesting period.
Stock-based compensation expense was $21,000$43,000 and $18,000$32,000 for the three months ended SeptemberJune 30, 20172021 and 2016,2020, respectively. Stock-based compensation expense was $72,000$63,000 and $60,000$57,000 for the ninesix months ended SeptemberJune 30, 20172021 and 2016,2020, respectively. As of September
10
QNB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 20052015 Plan authorized the issuance of 200,000300,000 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 SeptemberJune 30, 2017,2021, there were 184,200148,200 options granted, 65,15012,300 options forfeited, 80,47520,825 options exercised, and 38,575119,400 options outstanding under this Plan. The 2005 Plan expired on March 15, 2015.
10
QNB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The 2015 Plan authorizes the issuance of 300,000 shares. The terms of the 2015 Plan are identical to the 2005 Plan. There were 48,500 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 issuessecurities with a term approximating the expected life of the option being valued. Historical information was the primary basis for the selection of the expected dividend yield, expected volatility and expected lives of the options.
The fair market value of options granted in the first ninesix months of 2017ended June 30, 2021 and 20162020 was $3.88$3.08 and $3.79,$2.42, respectively.
Stock option activity during the ninesix months ended SeptemberJune 30, 20172021 and 20162020 is as follows:
|
| Number of options |
|
| Weighted average exercise price |
|
| Weighted average remaining contractual term (in years) |
|
| Aggregate intrinsic value |
| ||||
Outstanding at December 31, 2016 |
|
| 73,950 |
|
| $ | 27.14 |
|
|
|
|
|
|
|
|
|
Granted |
|
| 25,000 |
|
|
| 37.60 |
|
|
|
|
|
|
|
|
|
Exercised |
|
| (11,775 | ) |
|
| 22.33 |
|
|
|
|
|
|
|
|
|
Forfeited |
|
| (100 | ) |
|
| 21.35 |
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2017 |
|
| 87,075 |
|
| $ | 30.80 |
|
|
| 2.87 |
|
| $ | 848 |
|
Exercisable at September 30, 2017 |
|
| 20,725 |
|
| $ | 24.39 |
|
|
| 0.93 |
|
| $ | 335 |
|
|
| Number of options |
|
| Weighted average exercise price |
|
| Weighted average remaining contractual term (in years) |
|
| Aggregate intrinsic value |
|
| 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 |
|
|
| 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 |
|
11
QNB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
4. EARNINGS PER SHARE & SHARE REPURCHASE PLAN
The following sets forth the computation of basic and diluted earnings per share:
|
| 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 25,000118,000 stock options that were anti-dilutive for the three and nine-monththree-month periods ended SeptemberJune 30, 2017,2021 and 2020, respectively. There were 0119,400 and 41,35098,150 stock options that were anti-dilutive for the three and nine-monthsix-month periods ended SeptemberJune 30, 2016.2021 and 2020, respectively. These stock options were not included in the above calculation.
TheQNB’s current stock repurchase plan was originally approved by the Board of Directors has authorizedon January 21, 2008, increased the repurchase ofamount on February 9, 2009 to 100,000 shares, and subsequently increased on April 29, 2021 up to 100,000200,000 shares of its common stock in the open market or privately negotiated transactions. The repurchase authorization does not bear ahas no termination date. There were no18,391 and 0 shares repurchased during the three or ninesix months ended SeptemberJune 30, 20172021 and 2016.2020, respectively. As of SeptemberJune 30, 2017, 57,8832021, 80,374 shares were repurchased under this authorization at an average price of $16.97$21.72 and a total cost of $982,000.
approximately $1,745,000.
5. COMPREHENSIVE INCOME (LOSS)
The following shows the components of accumulated other comprehensive lossincome (loss) at SeptemberJune 30, 20172021 and December 31, 2016:2020:
|
| September 30, |
|
| December 31, |
| ||
|
| 2017 |
|
| 2016 |
| ||
Unrealized net holding losses on available-for-sale securities |
| $ | (3,599 | ) |
| $ | (5,446 | ) |
Unrealized losses on available-for-sale securities for which a portion of an other-than-temporary impairment loss has been recognized in earnings |
|
| (29 | ) |
|
| (247 | ) |
Accumulated other comprehensive loss |
|
| (3,628 | ) |
|
| (5,693 | ) |
Tax effect |
|
| 1,233 |
|
|
| 1,936 |
|
Accumulated other comprehensive loss, net of tax |
| $ | (2,395 | ) |
| $ | (3,757 | ) |
|
| June 30, |
|
| December 31, |
| ||
|
| 2021 |
|
| 2020 |
| ||
Unrealized net holding gains on available-for-sale securities |
| $ | 2,533 |
|
| $ | 7,151 |
|
Unrealized gains (losses) on available-for-sale securities for which a portion of an other-than-temporary impairment loss has been recognized in earnings |
|
| — |
|
|
| — |
|
Accumulated other income |
|
| 2,533 |
|
|
| 7,151 |
|
Tax effect |
|
| (532 | ) |
|
| (1,502 | ) |
Accumulated other comprehensive income, net of tax |
| $ | 2,001 |
|
| $ | 5,649 |
|
|
|
|
|
|
|
|
|
|
12
QNB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following tables present amounts reclassified out of accumulated other comprehensive income (loss) for the three and ninesix months ended SeptemberJune 30, 20172021 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 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, |
| Amount reclassified from accumulated other comprehensive income |
|
|
| |||||
Details about accumulated other comprehensive income |
| 2017 |
|
| 2016 |
|
| Affected line item in statement of income | ||
Unrealized net holding gains on available-for-sale securities |
| $ | 1,042 |
|
| $ | 842 |
|
| Net gain on sale of investment securities |
Other-than-temporary impairment losses on investment securities |
|
| (80 | ) |
|
| (192 | ) |
| Net other-than-temporary impairment losses on investment securities |
|
|
| 962 |
|
|
| 650 |
|
|
|
Tax effect |
|
| (326 | ) |
|
| (221 | ) |
| Provision for income taxes |
Total reclass out of accumulated other comprehensive income, net of tax |
| $ | 636 |
|
| $ | 429 |
|
| Net of tax |
For the Six Months Ended June 30, |
| Amount reclassified from accumulated other comprehensive income |
|
|
| |||||
Details about accumulated other comprehensive income (loss) |
| 2021 |
|
| 2020 |
|
| Affected line item in statement of income | ||
Unrealized net holding gains on available-for-sale securities |
| $ | 5 |
|
| $ | 1 |
|
| Net gain on sales of investments available-for-sale |
Other-than-temporary impairment on investment securities |
|
| — |
|
|
| — |
|
| Net other-than-temporary impairment losses on investment securities |
|
|
| 5 |
|
|
| 1 |
|
|
|
Tax effect |
|
| (1 | ) |
|
| — |
|
| Provision for income taxes |
Total reclassification out of accumulated other comprehensive income , net of tax |
| $ | 4 |
|
| $ | 1 |
|
| Net of tax |
6. INVESTMENT SECURITIES
QNB engaged in trading activities for its own account, comprisedAvailable-For-Sale Securities
The amortized cost and estimated fair values of municipalinvestment securities that were held principally for resale in the near term recordedavailable-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 volatilityJune 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, 20162020 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:
|
|
|
|
|
| Gross |
|
| Gross |
|
|
|
|
| ||
|
|
|
|
|
| unrealized |
|
| unrealized |
|
|
|
|
| ||
|
| Fair |
|
| holding |
|
| holding |
|
| Amortized |
| ||||
June 30, 2021 |
| value |
|
| gains |
|
| losses |
|
| cost |
| ||||
U.S. Government agency |
| $ | 68,879 |
|
| $ | 15 |
|
| $ | (1,084 | ) |
| $ | 69,948 |
|
State and municipal |
|
| 116,657 |
|
|
| 1,939 |
|
|
| (688 | ) |
|
| 115,406 |
|
U.S. Government agencies and sponsored enterprises (GSEs): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed |
|
| 265,793 |
|
|
| 2,204 |
|
|
| (1,055 | ) |
|
| 264,644 |
|
Collateralized mortgage obligations (CMOs) |
|
| 90,147 |
|
|
| 1,254 |
|
|
| (235 | ) |
|
| 89,128 |
|
Pooled trust preferred |
|
| 72 |
|
|
| — |
|
|
| (12 | ) |
|
| 84 |
|
Corporate debt |
|
| 7,837 |
|
|
| 195 |
|
|
| — |
|
|
| 7,642 |
|
Total investment debt securities available-for-sale |
| $ | 549,385 |
|
| $ | 5,607 |
|
| $ | (3,074 | ) |
| $ | 546,852 |
|
13
QNB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The amortized cost and estimated fair values of investment securities available-for-sale at September 30, 2017 and December 31, 2016 were as follows:
|
|
|
|
|
| Gross |
|
| Gross |
|
|
|
|
| ||
|
|
|
|
|
| unrealized |
|
| unrealized |
|
|
|
|
| ||
|
| Fair |
|
| holding |
|
| holding |
|
| Amortized |
| ||||
September 30, 2017 |
| value |
|
| gains |
|
| losses |
|
| cost |
| ||||
U.S. Government agency |
| $ | 73,037 |
|
| $ | 4 |
|
| $ | (1,437 | ) |
| $ | 74,470 |
|
State and municipal |
|
| 79,897 |
|
|
| 892 |
|
|
| (154 | ) |
|
| 79,159 |
|
U.S. Government agencies and sponsored enterprises (GSEs): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed |
|
| 148,856 |
|
|
| 320 |
|
|
| (1,522 | ) |
|
| 150,058 |
|
Collateralized mortgage obligations (CMOs) |
|
| 78,974 |
|
|
| 51 |
|
|
| (1,528 | ) |
|
| 80,451 |
|
Pooled trust preferred |
|
| 212 |
|
|
| — |
|
|
| (29 | ) |
|
| 241 |
|
Corporate debt |
|
| 8,074 |
|
|
| 27 |
|
|
| (10 | ) |
|
| 8,057 |
|
Equity |
|
| 7,363 |
|
|
| 107 |
|
|
| (349 | ) |
|
| 7,605 |
|
Total investment securities available-for-sale |
| $ | 396,413 |
|
| $ | 1,401 |
|
| $ | (5,029 | ) |
| $ | 400,041 |
|
|
|
|
|
|
| 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 SeptemberJune 30, 20172021 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 SeptemberJune 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 ninesix months ended SeptemberJune 30, 2017 and 2016, respectively.2020.
At SeptemberJune 30, 20172021 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.
14
QNB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table presents information related to the Company’s gains and losses on the sales and calls of equity and debt securities available-for-sale, and losses recognized for the other-than-temporary impairment (“OTTI”) of these investments. Gains and losses on available-for-sale securities are computed on the specific identification method and included in non-interest income. Gross realized losses on equity and debt securities are net of other-than-temporary impairment charges:
|
| Three months ended September 30, 2017 |
|
| Three months ended September 30, 2016 |
| ||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
| Other-than- |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Other-than- |
|
|
|
|
| ||
|
| Gross |
|
| Gross |
|
| temporary |
|
|
|
|
|
| Gross |
|
| Gross |
|
| temporary |
|
|
|
|
| ||||||
|
| realized |
|
| realized |
|
| impairment |
|
|
|
|
|
| realized |
|
| realized |
|
| impairment |
|
|
|
|
| ||||||
|
| gains |
|
| losses |
|
| losses |
|
| Net gains (losses) |
|
| gains |
|
| losses |
|
| losses |
|
| Net gains (losses) |
| ||||||||
Equity securities |
| $ | 164 |
|
| $ | — |
|
| $ | (80 | ) |
| $ | 84 |
|
| $ | 316 |
|
| $ | — |
|
| $ | — |
|
| $ | 316 |
|
Debt securities |
|
| 56 |
|
|
| (42 | ) |
|
| — |
|
|
| 14 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Total |
| $ | 220 |
|
| $ | (42 | ) |
| $ | (80 | ) |
| $ | 98 |
|
| $ | 316 |
|
| $ | — |
|
| $ | — |
|
| $ | 316 |
|
|
| For the Three Months Ended June 30, |
|
| For the Six Months Ended June 30, |
| ||||||||||
|
| 2021 |
|
| 2020 |
|
| 2021 |
|
| 2020 |
| ||||
Gross realized gains |
| $ | 2 |
|
| $ | 1 |
|
| $ | 5 |
|
| $ | 6 |
|
Gross realized losses |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (5 | ) |
Other-than-temporary impairment |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Total net gains (losses) on AFS securities |
| $ | 2 |
|
| $ | 1 |
|
| $ | 5 |
|
| $ | 1 |
|
|
| Nine months ended September 30, 2017 |
|
| Nine months ended September 30, 2016 |
| ||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
| Other-than- |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Other-than- |
|
|
|
|
| ||
|
| Gross |
|
| Gross |
|
| temporary |
|
|
|
|
|
| Gross |
|
| Gross |
|
| temporary |
|
|
|
|
| ||||||
|
| realized |
|
| realized |
|
| impairment |
|
|
|
|
|
| realized |
|
| realized |
|
| impairment |
|
|
|
|
| ||||||
|
| gains |
|
| losses |
|
| losses |
|
| Net gains |
|
| gains |
|
| losses |
|
| losses |
|
| Net gains |
| ||||||||
Equity securities |
| $ | 1,020 |
|
| $ | — |
|
| $ | (80 | ) |
| $ | 940 |
|
| $ | 734 |
|
| $ | — |
|
| $ | (192 | ) |
| $ | 542 |
|
Debt securities |
|
| 566 |
|
|
| (544 | ) |
|
| — |
|
|
| 22 |
|
|
| 181 |
|
|
| (73 | ) |
|
| — |
|
|
| 108 |
|
Total |
| $ | 1,586 |
|
| $ | (544 | ) |
| $ | (80 | ) |
| $ | 962 |
|
| $ | 915 |
|
| $ | (73 | ) |
| $ | (192 | ) |
| $ | 650 |
|
The tax expense applicable to the net realized gains for both of the quarters and nine-monththree-month periods ended SeptemberJune 30, 20172021 and 2016 were $33,000 and $107,0002020 was $0. The tax expense applicable to the net realized gains for the quartersix-month periods ended June 30, 2021 and $327,0002020 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
14
QNB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 2017the 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:
Nine months ended September 30, |
| 2017 |
|
| 2016 |
| ||
Balance, beginning of period |
| $ | 1,153 |
|
| $ | 1,153 |
|
Reductions: sale, pooled trust preferred |
|
| (1,152 | ) |
|
| — |
|
Additions: |
|
|
|
|
|
|
|
|
Initial credit impairments |
|
| — |
|
|
| — |
|
Subsequent credit impairments |
|
| — |
|
|
| — |
|
Balance, end of period |
| $ | 1 |
|
| $ | 1,153 |
|
15
QNB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
six months ended June 30, 2021 and 2020, respectively.
The following table indicates the length of time individual debt securities have been in a continuous unrealized loss position at Septemberas of June 30, 20172021 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 SeptemberJune 30, 20172021 in U.S. Government agency securities, state and municipal securities, mortgage-backed securities, CMOs and corporate debt securitiesCMOs 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 one1 pooled trust preferred security PreTSL IV. Asas of June 30, 2017, PreTSL IV was reclassified from impaired to2021. 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.
1615
QNB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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) asis a summary of September 30, 2017:
Deal |
| Class |
|
| Book value |
|
| Fair value |
|
| Unrealized gains (losses) |
|
| Realized OTTI credit loss (YTD 2017) |
|
| Total recognized OTTI credit loss |
|
| Moody's /Fitch ratings |
| Current number of performing banks |
|
| Current number of performing insurance companies |
|
| Actual deferrals and defaults as a % of total collateral |
|
| Total performing collateral as a % of outstanding bonds |
| |||||||||
PreTSL IV |
| Mezzanine | * |
| $ | 241 |
|
| $ | 212 |
|
| $ | (29 | ) |
| $ | — |
|
| $ | (1 | ) |
| B1/BB |
|
| 5 |
|
|
| — |
|
|
| 18.0 | % |
|
| 142.7 | % |
Mezzanine* - only class of bonds still outstanding (represents the senior-most obligation of the trust)
In June 2017, QNB Bank sold five non-performing pooled trust preferred securities, with a $2,235,000 carrying value, recording a lossunrealized 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:
|
| For the Three Months Ended June 30, |
|
| For the Six Months Ended June 30, |
| ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 2021 |
|
| 2020 |
|
| 2021 |
|
| 2020 |
| ||||
Net gains (loss) recognized during the period on equity securities |
| $ | 871 |
|
| $ | 1,334 |
|
| $ | 2,306 |
|
| $ | (1,606 | ) |
Less: Net gains recognized during the period on equity securities sold during the period |
|
| 292 |
|
|
| 168 |
|
|
| 631 |
|
|
| 168 |
|
Net unrealized gains (losses) recognized during the reporting period on equity securities still held at the reporting date |
| $ | 579 |
|
| $ | 1,166 |
|
| $ | 1,675 |
|
| $ | (1,774 | ) |
Tax expense applicable to the reduction of approximately $19,000,000 in risk-based assets requirednet 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 SeptemberJune 30, 20172021 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 AA2020 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 innet 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 impairmentnet 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 hasthree 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 IVsix 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.
7. RESTRICTED INVESTMENT IN STOCKS
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.
8. LOANS & ALLOWANCE FOR LOAN LOSSES
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off are stated at the principal amount outstanding, net of deferred loan fees and costs. Interest income is accrued on the principal amount outstanding. Loan origination and commitment fees and related direct costs are deferred and amortized to income over the term of the respective loan and loan commitment period as a yield adjustment.
Loans held-for-sale consists of residential mortgage loans that are carried at the lower of aggregate cost or fair value. Net unrealized losses, if any, are recognized through a valuation allowance charged to income. Gains and losses on residential mortgages held-for-sale are included in non-interest income.
16
QNB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
QNB maintains an allowance for loan losses, which is intended to absorb probable known and inherent losses in the outstanding loan portfolio. The allowance is reduced by actual credit losses and is increased by the provision for loan losses and recoveries of previous losses. The provisions for loan losses are charged to earnings to bring the total allowance for loan losses to a level considered necessary by management.
17
QNB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The allowance for loan losses is based on management’s continuing review and evaluation of the loan portfolio. The level of the allowance is determined by assigning specific reserves to individually identified problem credits and general reserves to all other loans. For such loans that are also classified as impaired, an allowance is established when the discounted cash flows (or collateral value) of the impaired loan is lower than the carrying value of that loan. The portion of the allowance that is allocated to internally criticized and non-accrual loans is determined by estimating the inherent loss on each credit after giving consideration to the value of underlying collateral. The general component covers pools of loans by loan class including commercial loans not considered impaired, as well as smaller balance homogeneous loans, such as residential real estate, home equity and other consumer loans. These pools of loans are evaluated for loss exposure based upon historical loss rates. These loss rates are based on a three-year history of charge-offs and are more heavily weighted for recent experience for each of these categories of loans, adjusted for qualitative factors. These qualitative risk factors include:
| 1. | Lending policies and procedures, including underwriting standards and collection, charge-off and recovery practices. |
| 2. | Effect of external factors, such as legal and regulatory requirements. |
| 3. | National, regional, and local economic and business conditions as well as the condition of various market segments, including the value of underlying collateral for collateral dependent loans. |
| 4. | Nature and volume of the portfolio including growth. |
| 5. | Experience, ability, and depth of lending management and staff. |
| 6. | Volume and severity of past due, classified and nonaccrual loans. |
| 7. | Quality of the Company’s loan review system, and the degree of oversight by the Company’s Board of Directors. |
| 8. | Existence and effect of any concentrations of credit and changes in the level of such concentrations. |
9. | The duration of the COVID-19 Pandemic, modifications and stimulus packages masking underlying credit issues |
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 testsfirm reviews risk assessmentsassessment and evaluates the adequacy of the allowance for loan losses. Management meets monthly to review the credit quality of the loan portfolio and quarterly to review the allowance for loan losses.
In addition, various regulatory agencies, as an integral part of their examination process, periodically review QNB’s allowance for loan losses. Such agencies may require QNB to recognize additions to the allowance based on their judgments using information available to them at the time of their examination.
Management believes that it uses the best information available to make determinations about the adequacy of the allowance and that it has established its existing allowance for loan losses in accordance with U.S. GAAP. If circumstances differ substantially from the assumptions used in making determinations, future adjustments to the allowance for loan losses may be necessary and results of operations could be affected. Because future events affecting borrowers and collateral cannot be predicted with certainty, there can be no assurance that increases to the allowance will not be necessary should the quality of any loans deteriorate as a result of the factors discussed above.
1817
QNB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Major classes of loans are as follows:
|
| June 30, |
|
| December 31, |
| ||
|
| 2021 |
|
| 2020 |
| ||
Commercial: |
|
|
|
|
|
|
|
|
Commercial and industrial |
| $ | 191,900 |
|
| $ | 227,431 |
|
Construction |
|
| 49,411 |
|
|
| 57,594 |
|
Secured by commercial real estate |
|
| 417,984 |
|
|
| 377,586 |
|
Secured by residential real estate |
|
| 80,412 |
|
|
| 81,897 |
|
State and political subdivisions |
|
| 24,085 |
|
|
| 25,302 |
|
Retail: |
|
|
|
|
|
|
|
|
1-4 family residential mortgages |
|
| 91,100 |
|
|
| 82,739 |
|
Home equity loans and lines |
|
| 62,978 |
|
|
| 63,943 |
|
Consumer |
|
| 4,945 |
|
|
| 5,364 |
|
Total loans |
|
| 922,815 |
|
|
| 921,856 |
|
Net unearned (fees) costs |
|
| (1,892 | ) |
|
| (1,814 | ) |
Loans receivable |
| $ | 920,923 |
|
| $ | 920,042 |
|
|
| 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 |
|
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 expressedexpress purpose of conducting commercial real estate transactions.
Overdrafts are reclassified as loans and are included in consumer loans above and total loans receivable on the balance sheet.Consolidated Balance Sheets. At SeptemberJune 30, 20172021 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 SeptemberJune 30, 2017,2021, there were no concentrationswas 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.
| 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 |
|
18
QNB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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.
19
QNB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Indirect lease financing receivables represent loans to small businesses that are collateralized by equipment. These loans tend to have higher risk characteristics but generally provide higher rates of return. These loans are originated by a third party and purchased by QNB based on criteria specified by QNB. In October 2016, the Company sold its interest in these third-party originated lease financing receivables.
The Company originates fixed-rate and adjustable-rate real estate-residential mortgage loans for personal purposes that are secured by first liens on the underlying 1-4 family residential properties. Credit risk exposure in this area of lending is minimized by the evaluation of the credit worthiness of the borrower, including debt-to-income ratios, credit scores and adherence to underwriting policies that emphasize conservative loan-to-value ratios of generally no more than 80%. Residential mortgage loans granted in excess of the 80% loan-to-value ratio criterion are generally insured by private mortgage insurance.
The real estate-home equity portfolio consists of fixed-rate home equity loans and variable-rate home equity lines of credit. Risks associated with loans secured by residential properties are generally lower than commercial loans and include general economic risks, such as the strength of the job market, employment stability and the strength of the housing market. Since most loans are secured by a primary or secondary residence, the borrower’s continued employment is the greatest risk to repayment.
The Company offers a variety of loans to individuals for personal and household purposes. Consumer loans are generally considered to have greater risk than first or second mortgages on real estate because they may be unsecured, or, if they are secured, the value of the collateral may be difficult to assess and is more likely to decrease in value than real estate. Credit risk in this portfolio is controlled by conservative underwriting standards that consider debt-to-income levels and the creditworthiness of the borrower and, if secured, collateral values.
The Company employs an eight (8) gradea ten-grade risk rating system related to the credit quality of commercial loans and loans to state and political subdivisions and indirect lease financing of which the first foursix categories are pass categories (credits not adversely rated). The following is a description of the internal risk ratings and the likelihood of loss related to each risk rating.
1 |
|
2 | Good - minimal risk |
19
QNB CORP. AND SUBSIDIARY
2 - Good - minimal riskNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3 - Acceptable - average risk(Unaudited)
4 - Watch List - greater than average risk
5 - Special Mention - potential weaknesses
6 - Substandard - well defined weaknesses
7 - Doubtful - full collection unlikely
8
3 | Acceptable - lower risk |
4 | Acceptable - average risk |
5 | Acceptable – higher risk |
6 | Pass watch |
7 | Special Mention - potential weaknesses |
8 | Substandard - well defined weaknesses |
9 | Doubtful - full collection unlikely |
10 | Loss - considered uncollectible |
The Company maintains a loan review system, which allows for a periodic review of our loan portfolio and the early identification of potential problem loans. Each loan officer assigns a rating to all loans in the portfolio at the time the loan is originated. Loans with risk ratings of one through threefive are reviewed annually based on the borrower’s fiscal year. Loans with risk ratings of foursix are reviewed every six to twelve months based on the dollar amount of the relationship with the borrower. Loans with risk ratings of fiveseven through eightten are reviewed at least quarterly, and as often as monthly, at management’s discretion. The Company also utilizes an outside loan review firm to review the portfolio on a semi-annual basis to provide the Board of Directors and senior management an independent review of the Bank’sCompany’s loan portfolio on an ongoing basis. These reviews are designed to recognize deteriorating credits in their earliest stages in an effort to reduce and control risk in the lending function as well as identifying potential shifts in the quality of the loan portfolio. The examinations by the outside loan review firm include the review of lending activities with respect to underwriting and processing new loans, monitoring the risk of existing loans and to provide timely follow-up and corrective action for loans showing signs of deterioration in quality. In addition, the outside firm reviews the methodology for the allowance for loan losses to determine compliance to policy and regulatory guidance.
20
QNB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following tables present the classes of the loan portfolio summarized by the aggregate pass rating and the classified ratings of special mention, substandard and doubtful within the Company’s internal risk rating system as of SeptemberJune 30, 20172021 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 |
|
20
QNB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For retail loans, the Company evaluates credit quality based on the performance of the individual credits. The following tables present the recorded investment in the retail classes of the loan portfolio based on payment activity as of SeptemberJune 30, 20172021 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 |
|
21
QNB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The performance and credit quality of the loan portfolio is also monitored by analyzing the age of the loans receivable as determined by the length of time a recorded payment is past due. The following table presents the classes of the loan portfolio summarized by the past due status as of SeptemberJune 30, 20172021 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 |
|
21
QNB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following tables disclose the recorded investment in loans receivable that are either on non-accrual status or past due 90 days or more and still accruing interest as of SeptemberJune 30, 20172021 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 |
|
December 31, 2020 |
| 90 days or more past due (still accruing) |
|
| Non-accrual |
| ||
Commercial: |
|
|
|
|
|
|
|
|
Commercial and industrial |
| $ | 0 |
|
| $ | 4,367 |
|
Construction |
|
| 0 |
|
|
| 0 |
|
Secured by commercial real estate |
|
| 0 |
|
|
| 2,905 |
|
Secured by residential real estate |
|
| 0 |
|
|
| 875 |
|
State and political subdivisions |
|
| 0 |
|
|
| 0 |
|
Retail: |
|
|
|
|
|
|
|
|
1-4 family residential mortgages |
|
| 0 |
|
|
| 636 |
|
Home equity loans and lines |
|
| 0 |
|
|
| 752 |
|
Consumer |
|
| 0 |
|
|
| 105 |
|
Total |
| $ | 0 |
|
| $ | 9,640 |
|
Activity in the allowance for loan losses for the three and six months ended June 30, 2021 and 2020 are as follows:
For the Three 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 |
| $ | 3,916 |
|
| $ | (285 | ) |
| $ | 0 |
|
| $ | 13 |
|
| $ | 3,644 |
|
Construction |
|
| 313 |
|
|
| (16 | ) |
|
| 0 |
|
|
| 0 |
|
|
| 297 |
|
Secured by commercial real estate |
|
| 4,094 |
|
|
| 145 |
|
|
| 0 |
|
|
| 0 |
|
|
| 4,239 |
|
Secured by residential real estate |
|
| 825 |
|
|
| 383 |
|
|
| (38 | ) |
|
| 2 |
|
|
| 1,172 |
|
State and political subdivisions |
|
| 86 |
|
|
| (2 | ) |
|
| 0 |
|
|
| 0 |
|
|
| 84 |
|
Retail: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1-4 family residential mortgages |
|
| 610 |
|
|
| (69 | ) |
|
| 0 |
|
|
| 0 |
|
|
| 541 |
|
Home equity loans and lines |
|
| 368 |
|
|
| 3 |
|
|
| (12 | ) |
|
| 2 |
|
|
| 361 |
|
Consumer |
|
| 263 |
|
|
| 294 |
|
|
| (65 | ) |
|
| 2 |
|
|
| 494 |
|
Unallocated |
|
| 640 |
|
|
| (270 | ) |
| N/A |
|
| N/A |
|
|
| 370 |
| ||
Total |
| $ | 11,115 |
|
| $ | 183 |
|
| $ | (115 | ) |
| $ | 19 |
|
| $ | 11,202 |
|
22
QNB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| 90 days or more past due (still accruing) |
|
| Non-accrual |
| |||
Commercial: |
|
|
|
|
|
|
|
|
Commercial and industrial |
| $ | — |
|
| $ | 4,798 |
|
Construction |
|
| — |
|
|
| — |
|
Secured by commercial real estate |
|
| — |
|
|
| 3,007 |
|
Secured by residential real estate |
|
| — |
|
|
| 1,866 |
|
State and political subdivisions |
|
| — |
|
|
| — |
|
Retail: |
|
|
|
|
|
|
|
|
1-4 family residential mortgages |
|
| — |
|
|
| 266 |
|
Home equity loans and lines |
|
| — |
|
|
| 89 |
|
Consumer |
|
| — |
|
|
| 93 |
|
Total |
| $ | — |
|
| $ | 10,119 |
|
Activity in the allowance for loan losses for the three months ended September 30, 2017 and 2016 are as follows:
Three months ended September 30, 2017 |
| Balance, beginning of period |
|
| Provision for (credit to) loan losses |
|
| Charge-offs |
|
| Recoveries |
|
| Balance, end of period |
| |||||||||||||||||||||||||
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 |
|
Three months ended September 30, 2016 |
| Balance, beginning of period |
|
| Provision for (credit to) loan losses |
|
| Charge-offs |
|
| Recoveries |
|
| Balance, end of period |
| |||||
Commercial: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial |
| $ | 1,350 |
|
| $ | (55 | ) |
|
| — |
|
| $ | 9 |
|
| $ | 1,304 |
|
Construction |
|
| 429 |
|
|
| (79 | ) |
|
| — |
|
|
| — |
|
|
| 350 |
|
Secured by commercial real estate |
|
| 2,231 |
|
|
| 233 |
|
|
| — |
|
|
| 2 |
|
|
| 2,466 |
|
Secured by residential real estate |
|
| 1,550 |
|
|
| (57 | ) |
|
| — |
|
|
| 50 |
|
|
| 1,543 |
|
State and political subdivisions |
|
| 204 |
|
|
| (64 | ) |
|
| — |
|
|
| — |
|
|
| 140 |
|
Indirect lease financing |
|
| 226 |
|
|
| (6 | ) |
|
| — |
|
|
| — |
|
|
| 220 |
|
Retail: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1-4 family residential mortgages |
|
| 298 |
|
|
| (20 | ) |
|
| — |
|
|
| — |
|
|
| 278 |
|
Home equity loans and lines |
|
| 343 |
|
|
| (7 | ) |
|
| — |
|
|
| 4 |
|
|
| 340 |
|
Consumer |
|
| 73 |
|
|
| 33 |
|
| $ | (29 | ) |
|
| 7 |
|
|
| 84 |
|
Unallocated |
|
| 846 |
|
|
| 22 |
|
| N/A |
|
| N/A |
|
|
| 868 |
| ||
Total |
| $ | 7,550 |
|
| $ | — |
|
| $ | (29 | ) |
| $ | 72 |
|
| $ | 7,593 |
|
Activity in the allowance for loan losses for the nine months ended September 30, 2017 and 2016 are as follows:
23
QNB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| Balance, beginning of period |
|
| Provision for (credit to) loan losses |
|
| Charge-offs |
|
| Recoveries |
|
| Balance, end of period |
| ||||||||||||||||||||||||||
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
23
QNB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for commercial loans and loans to state and political subdivisions and indirect lease financing loans by using either the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral if the loan is collateral dependent.
Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual consumer and residential mortgage loans for impairment disclosures, unless such loans are part of a larger relationship that is impaired or are classified as a troubled debt restructuring.restructuring or on non-accrual.
An allowance for loan losses is established for an impaired loan if its carrying value exceeds its estimated fair value. The estimated fair values of the majority of the Company’s impaired loans are measured based on the estimated fair value of the loan’s collateral.
For commercial loans secured by real estate, estimated fair values are determined primarily through third-party appraisals. When a real estate secured loan becomes impaired, a decision is made regarding whether an updated certified appraisal of the real estate is
24
QNB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
necessary. This decision is based on various considerations, including the age of the most recent appraisal, the loan-to-value ratio based on the original appraisal and the condition of the property. Appraised values are discounted to arrive at the estimated selling price of the collateral, which is considered to be the estimated fair value. The discounts also include estimated costs to sell the property.
For commercial loans secured by non-real estate collateral, such as accounts receivable, inventory and equipment, estimated fair values are determined based on the borrower’s financial statements, inventory reports, accounts receivable agings or equipment appraisals or invoices. Indications of value from these sources are generally discounted based on the age of the financial information or the quality of the assets.
From time to time, QNB may extend, restructure, or otherwise modify the terms of existing loans, on a case-by-case basis, to remain competitive and retain certain customers, as well as assist other customers that may be experiencing financial difficulties. A loan is considered to be a troubled debt restructuring (“TDR”) loan when the Company grants a concession to the borrower because of the borrower’s financial condition that it would not otherwise consider. Such concessions include the reduction of interest rates, forgiveness of principal or interest, or other modifications of interest rates to less than the current market rate for new obligations with similar risk. Loans classified as TDRs are considered non-performing and are also designated as impaired.
The concessions made for TDRs involve lowering the monthly payments on loans through periods of interest only payments, a reduction in interest rate below a market rate or an extension of the term of the loan without a corresponding adjustment to the risk premium reflected in the interest rate, or a combination of these three methods. The restructurings rarely result in the forgiveness of principal or accrued interest. If the borrower has demonstrated performance under the previous terms and our underwriting process shows the borrower has the capacity to continue to perform under the restructured terms, the loan will continue to accrue interest. Non-accruing restructured loans may be returned to accrual status when there has been a sustained period of repayment performance (generally six consecutive months of payments) and both principal and interest are deemed collectible. TDR loans that are in compliance with their modified terms and that yield a market rate may be removed from the TDR status after a period of performance.
Performing TDRs (not reported as non-accrual or past due 90 days or more and still accruing) totaled $1,354,000$4,330,000 and $1,819,000$4,469,000 as of SeptemberJune 30, 20172021 and December 31, 2016,2020, respectively. Non-performing TDRs totaled $3,120,000$753,000 and $3,555,000$843,000 as of SeptemberJune 30, 20172021 and December 31, 2016,2020, respectively. All TDRs are included in impaired loans.
24
QNB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table illustrates the specific reserve for loan losses allocated to loans modified as TDRs. These specific reserves are included in the allowance for loan losses for loans individually evaluated for impairment.
|
| September 30, 2017 |
|
| December 31, 2016 |
|
| June 30, 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 ninethree or six months ended SeptemberJune 30, 2017.2021. As of SeptemberJune 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 net0 charge-offs of $3,000 and $0 during the ninethree or six months ended SeptemberJune 30, 20172021 and 2016, respectively,2020, resulting from loans previously modified as TDRs.
25
QNB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following tables presentThere 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.
Three months ended September 30, |
| 2017 |
|
| 2016 |
| ||||||||||||||||||
|
| Number of contracts |
|
| Pre-modification outstanding recorded investment |
|
| Post-modification outstanding recorded investment |
|
| Number of contracts |
|
| Pre-modification outstanding recorded investment |
|
| Post-modification outstanding recorded investment |
| ||||||
Retail: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer |
|
| — |
|
| $ | — |
|
| $ | — |
|
|
| 1 |
|
| $ | 96 |
|
| $ | 95 |
|
Nine months ended September 30, |
| 2017 |
|
| 2016 |
| ||||||||||||||||||
|
| Number of contracts |
|
| Pre-modification outstanding recorded investment |
|
| Post-modification outstanding recorded investment |
|
| Number of contracts |
|
| Pre-modification outstanding recorded investment |
|
| Post-modification outstanding recorded investment |
| ||||||
Commercial: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial |
|
| — |
|
| $ | — |
|
| $ | — |
|
|
| 6 |
|
| $ | 1,074 |
|
| $ | 1,033 |
|
Secured by residential real estate |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 4 |
|
|
| 524 |
|
|
| 503 |
|
Retail: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 1 |
|
|
| 96 |
|
|
| 95 |
|
Total |
|
| — |
|
| $ | — |
|
| $ | — |
|
|
| 11 |
|
| $ | 1,694 |
|
| $ | 1,631 |
|
There was one loan with an outstanding balance of $18,000 that was modified as a TDR within 12 months prior to SeptemberJune 30, 20172021 and 2020 for which there was a payment default (60 days or more past due) during the ninesix months ended SeptemberJune 30, 2017. There were no loans modified as TDRs within 12 months prior to September 30, 2016 for which there was a payment default during the nine months ended September 30, 2016.2021 and 2020.
The Company has two consumer mortgage2 loans secured by residential real estate for which foreclosure proceedings are in process at SeptemberJune 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 SeptemberJune 30, 20172021 and December 31, 20162020 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 |
|
25
QNB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
|
| Allowance for Loan Losses |
|
| Loans Receivable |
| ||||||||||||||||||
December 31, 2020 |
| 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 |
| $ | 4,050 |
|
| $ | 2,421 |
|
| $ | 1,629 |
|
| $ | 227,431 |
|
| $ | 4,503 |
|
| $ | 222,928 |
|
Construction |
|
| 346 |
|
|
| 0 |
|
|
| 346 |
|
|
| 57,594 |
|
|
| — |
|
|
| 57,594 |
|
Secured by commercial real estate |
|
| 3,736 |
|
|
| 432 |
|
|
| 3,304 |
|
|
| 377,586 |
|
|
| 6,323 |
|
|
| 371,263 |
|
Secured by residential real estate |
|
| 871 |
|
|
| 73 |
|
|
| 798 |
|
|
| 81,897 |
|
|
| 2,051 |
|
|
| 79,846 |
|
State and political subdivisions |
|
| 89 |
|
|
| 0 |
|
|
| 89 |
|
|
| 25,302 |
| �� |
| 0 |
|
|
| 25,302 |
|
Retail: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1-4 family residential mortgages |
|
| 533 |
|
|
| — |
|
|
| 533 |
|
|
| 82,739 |
|
|
| 813 |
|
|
| 81,926 |
|
Home equity loans and lines |
|
| 386 |
|
|
| 117 |
|
|
| 269 |
|
|
| 63,943 |
|
|
| 765 |
|
|
| 63,178 |
|
Consumer |
|
| 265 |
|
|
| 7 |
|
|
| 258 |
|
|
| 5,364 |
|
|
| 61 |
|
|
| 5,303 |
|
Unallocated |
|
| 550 |
|
| N/A |
|
| N/A |
|
| N/A |
|
| N/A |
|
| N/A |
| |||||
Total |
| $ | 10,826 |
|
| $ | 3,050 |
|
| $ | 7,226 |
|
| $ | 921,856 |
|
| $ | 14,516 |
|
| $ | 907,340 |
|
26
QNB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 |
|
27
QNB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table summarizes additional information in regard to impaired loans by loan portfolio class as of September 30, 2017 and December 31, 2016:
|
| September 30, 2017 |
|
| December 31, 2016 |
| ||||||||||||||||||
|
| Recorded investment (after charge-offs) |
|
| Unpaid principal balance |
|
| Related allowance |
|
| Recorded investment (after charge-offs) |
|
| Unpaid principal balance |
|
| Related allowance |
| ||||||
With no specific allowance recorded: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial |
| $ | 2,189 |
|
| $ | 2,560 |
|
| $ | — |
|
| $ | 2,482 |
|
| $ | 2,862 |
|
| $ | — |
|
Construction |
|
| 3 |
|
|
| 3 |
|
|
| — |
|
|
| 224 |
|
|
| 234 |
|
|
| — |
|
Secured by commercial real estate |
|
| 4,748 |
|
|
| 5,304 |
|
|
| — |
|
|
| 6,383 |
|
|
| 6,367 |
|
|
| — |
|
Secured by residential real estate |
|
| 633 |
|
|
| 982 |
|
|
| — |
|
|
| 1,046 |
|
|
| 1,438 |
|
|
| — |
|
State and political subdivisions |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Retail: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1-4 family residential mortgages |
|
| 1,066 |
|
|
| 1,113 |
|
|
| — |
|
|
| 570 |
|
|
| 589 |
|
|
| — |
|
Home equity loans and lines |
|
| 129 |
|
|
| 173 |
|
|
| — |
|
|
| 111 |
|
|
| 174 |
|
|
| — |
|
Consumer |
|
| 92 |
|
|
| 96 |
|
|
| — |
|
|
| 93 |
|
|
| 95 |
|
|
| — |
|
Total |
| $ | 8,860 |
|
| $ | 10,231 |
|
| $ | — |
|
| $ | 10,909 |
|
| $ | 11,759 |
|
| $ | — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With an allowance recorded: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial |
| $ | 2,397 |
|
| $ | 2,637 |
|
| $ | 1,759 |
|
| $ | 2,652 |
|
| $ | 2,812 |
|
| $ | 696 |
|
Construction |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Secured by commercial real estate |
|
| 89 |
|
|
| 92 |
|
|
| 28 |
|
|
| — |
|
|
| — |
|
|
| — |
|
Secured by residential real estate |
|
| 1,186 |
|
|
| 1,338 |
|
|
| 117 |
|
|
| 1,267 |
|
|
| 1,435 |
|
|
| 494 |
|
State and political subdivisions |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Retail: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1-4 family residential mortgages |
|
| 164 |
|
|
| 164 |
|
|
| 10 |
|
|
| 178 |
|
|
| 193 |
|
|
| 8 |
|
Home equity loans and lines |
|
| 41 |
|
|
| 41 |
|
|
| 41 |
|
|
| — |
|
|
| — |
|
|
| — |
|
Consumer |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Total |
| $ | 3,877 |
|
| $ | 4,272 |
|
| $ | 1,955 |
|
| $ | 4,097 |
|
| $ | 4,440 |
|
| $ | 1,198 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial |
| $ | 4,586 |
|
| $ | 5,197 |
|
| $ | 1,759 |
|
| $ | 5,134 |
|
| $ | 5,674 |
|
| $ | 696 |
|
Construction |
|
| 3 |
|
|
| 3 |
|
|
| — |
|
|
| 224 |
|
|
| 234 |
|
|
| — |
|
Secured by commercial real estate |
|
| 4,837 |
|
|
| 5,396 |
|
|
| 28 |
|
|
| 6,383 |
|
|
| 6,367 |
|
|
| — |
|
Secured by residential real estate |
|
| 1,819 |
|
|
| 2,320 |
|
|
| 117 |
|
|
| 2,313 |
|
|
| 2,873 |
|
|
| 494 |
|
State and political subdivisions |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Retail: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1-4 family residential mortgages |
|
| 1,230 |
|
|
| 1,277 |
|
|
| 10 |
|
|
| 748 |
|
|
| 782 |
|
|
| 8 |
|
Home equity loans and lines |
|
| 170 |
|
|
| 214 |
|
|
| 41 |
|
|
| 111 |
|
|
| 174 |
|
|
| — |
|
Consumer |
|
| 92 |
|
|
| 96 |
|
|
| — |
|
|
| 93 |
|
|
| 95 |
|
|
| — |
|
Total |
| $ | 12,737 |
|
| $ | 14,503 |
|
| $ | 1,955 |
|
| $ | 15,006 |
|
| $ | 16,199 |
|
| $ | 1,198 |
|
28
QNB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table presents additional information in regard toregarding the average recorded investment and interest income recognized on impaired loans for the nine-month periods ended September 30, 2017 and 2016.loans:
Nine Months Ended September 30, |
| 2017 |
|
| 2016 |
| ||||||||||||||||||||||||||
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 |
|
8.9. FAIR VALUE MEASUREMENTS AND DISCLOSURES
Financial Accounting Standards Board (FASB)FASB ASC 820, Fair Value Measurements and Disclosures, defines fair value as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants (fair values are not adjusted for transaction costs). ASC 820 also establishes a framework (fair value hierarchy) for measuring fair value under U.S. GAAP and expands disclosures about fair value measurements.
ASC 820 establishes a fair value hierarchy that prioritizes the inputs to valuation methods used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are as follows:
| Level 1: | Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. |
| Level 2: | Quoted prices in markets that are not active, or inputs that are observable either directly or indirectly, for substantially the full term of the asset or liability. |
| Level 3: | Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported with little or no market activity). |
An asset’s or liability’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.
The measurement of fair value should be consistent with one of the following valuation techniques: market approach, income approach, and/or cost approach. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities (including a business). For example, valuation techniques consistent with the market approach often use market multiples derived from a set of comparable transactions.comparables. Multiples might lie in ranges with a different multiple for each comparable. The selection of where within the range the appropriate multiple falls requires judgment, considering factors specific to the measurement (qualitative and quantitative). Valuation techniques consistent with the market approach include matrix pricing. Matrix pricing is a mathematical technique used principally to value debt securities without relying exclusively on quoted prices for the specific securities, but rather by relying on the security’s relationship to other benchmark quoted securities.
2928
QNB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table sets forth QNB’s financial assets measured at fair value on a recurring and nonrecurring basis and the fair value measurements by level within the fair value hierarchy as of SeptemberJune 30, 2017:2021:
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 ninesix months ended SeptemberJune 30, 2017.2021. There were also no transfers in or out of level 3 for the same period. There were no0 losses included in earnings attributable to the change in unrealized gains or losses relating to the available-for-sale securities above with fair value measurements utilizing significant unobservable inputs for the three- and nine-month periodsor six-month period ended SeptemberJune 30, 2017.2021.
3029
QNB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table sets forth QNB’s financial assets measured at fair value on a recurring and nonrecurring basis, 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 |
| 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 |
|
| 35 |
|
| 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% |
|
|
| Quantitative information about Level 3 fair value measurements |
| |||||||||||
December 31, 2020 |
| Fair value |
|
| Valuation techniques |
|
| Unobservable inputs |
|
| Value or range of values |
| ||
Impaired loans |
| $ | 4,754 |
|
| Appraisal of collateral | (1) |
| Appraisal adjustments | (2) |
| -10% to -30% |
| |
|
|
|
|
|
|
|
|
| Liquidation expenses | (3) |
|
| -10 | % |
Impaired loans |
|
| 280 |
|
| Financial statement values for UCC collateral |
|
| Financial statement value discounts | (4) |
| -87.5% to -100% |
| |
Mortgage servicing rights |
|
| 291 |
|
| Discounted cash flow |
|
| Remaining term |
|
| 2 to 30 years |
| |
|
|
|
|
|
|
|
|
| Prepayment speeds |
|
| 243% to 320% |
| |
|
|
|
|
|
|
|
|
| Discount rate |
|
| 12.0% to 13.0% |
|
3130
QNB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| Quantitative information about Level 3 fair value measurements | |||||||||||
December 31, 2016 |
| Fair value |
|
| Valuation techniques |
|
| Unobservable input |
|
| Value or range of values | |
Impaired loans |
| $ | 938 |
|
| Appraisal of collateral | (1) |
| Appraisal adjustments | (2) |
| -10% to -80% |
|
|
|
|
|
|
|
|
| Liquidation expenses | (3) |
| -10% |
Impaired loans |
|
| 76 |
|
| Used commercial vehicle and equipment guides |
|
| Guide value discounts | (4) |
| 0% to -25% |
Impaired loans |
|
| 1,880 |
|
| Financial statement values for UCC collateral |
|
| Financial statement value discounts | (5) |
| -20% to -50% |
Impaired loans |
|
| 5 |
|
| Agreement of sale | (6) |
|
|
|
|
|
Mortgage servicing rights |
|
| 58 |
|
| Discounted cash flow |
|
| Remaining term |
|
| 2 to 27 yrs |
|
|
|
|
|
|
|
|
| Discount rate |
|
| 14% to 16% |
(1) | Fair value is primarily determined through appraisals of the underlying collateral by independent parties, which generally includes various |
(2) | Appraisals may be adjusted by management for qualitative factors such as economic conditions and the age of the appraisal. The range is presented as a percent of the initial appraised value. |
(3) | Appraisals and pending agreements of sale are adjusted by management for estimated liquidation expenses. The range is presented as a percent of the initial appraised |
(4) |
|
| Values obtained from financial statements for UCC collateral (fixed assets |
|
|
The following table presents additional information about the available-for-sale securities available-for-sale measured at fair value on a recurring basis and for which QNB utilized significant unobservable inputs (Level 3 inputs) to determine fair value for the ninesix months ended SeptemberJune 30, 20172021 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 |
|
32
QNB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The Level 3 securities consist of one1 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 few observable transactions and market quotations that are available are not reliable for purposes of determining fair value at September 30, 2017;
• | The few observable transactions and market quotations that are available are not reliable for purposes of determining fair value at June 30, 2021; |
• | An income valuation approach technique (present value technique) that maximizes the use of relevant observable inputs and minimizes the use of unobservable inputs will be equally or more representative of fair value than the market approach valuation technique used at prior measurement dates; and |
• | The PreTSL will be classified within Level 3 of the fair value hierarchy because significant adjustments are required to determine fair value at the measurement date. |
QNB used at prior measurement dates; and
Trust preferred securities will be classified within Level 3 of the fair value hierarchy because significant adjustments are required to determine fair value at the measurement date.
The Bank utilized aan independent third party to value this security using a discounted cash flow analysis. Based on management’s review of the fivebond’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 flowscashflows 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 termshort-term rates in the future. This is consistent with the 30-year nature of the PreTSL securities,security, which areis priced using the 3-month LIBOR as a reference rate. The discount rate of 6.12%5.88% 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.
31
QNB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following information should not be interpreted as an estimate of the fair value of the entire Company since a fair value calculation is only provided for a limited portion of QNB’s assets and liabilities. Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between QNB’s disclosures and those of other companies may not be meaningful.
The following methods and assumptions were used to estimate the fair values of each major classification of financial instrument and non-financial asset at SeptemberJune 30, 20172021 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-SaleHeld for Sale (carried at lower of cost or fair value): The fair value of loans held for sale is determined, when possible, using quoted secondary market prices. If no such quoted prices exist, the fair value of a loan is determined using quoted prices for a similar loan or loans, adjusted for the specific attributes of that loan.
33
QNB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Loans Receivable (carried at cost): The fair values of loans are estimated using discounted cash flow analyses, using market rates at the balance sheet date that reflect the liquidity, credit and interest rate-risk inherent in the loans. Projected future cash flows are calculated based upon contractual maturity or call dates, projected repayments and prepayments of principal. Generally, for variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values.
Impaired Loans (generally carried at fair value): Impaired loans are loans 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.
32
QNB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Long-term debt (carried at cost): Long-term debt has stated maturities and have been valued using the present value of cash flows discounted at rates approximating the current market for similar debt instruments.
Off-balance-sheet instruments (disclosed at cost): The fair values for the Bank’sQNB’s off-balance sheet instruments (lending commitments and letters of credit) are based on fees currently charged in the market to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing.
Management uses its best judgment in estimating the fair value of the Company’s financial instruments; however, there are inherent weaknesses in any estimation technique. Therefore, for substantially all financial instruments, the fair value estimates herein are not necessarily indicative of the amounts the Company could have realized in sales transaction on the dates indicated. The estimated fair value amounts have been measured as of the respective period ends and have not been re-evaluated or updated for purposes of these financial statements subsequent to those respective dates. As such, the estimated fair values of these financial instruments subsequent to the respective reporting dates may be different than the amounts reported at each period end.
34
QNB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The estimated fair values and carrying amounts of the Company’s financial and off-balance sheet instruments are summarized as follows:
|
|
|
|
|
|
|
|
|
| Fair value measurements |
|
|
|
|
|
|
|
|
|
| Fair value measurements |
| ||||||||||||||||||
September 30, 2017 |
| Carrying amount |
|
| Fair value |
|
| Quoted prices in active markets for identical assets (Level 1) |
|
| Significant other observable inputs (Level 2) |
|
| Significant unobservable inputs (Level 3) |
| |||||||||||||||||||||||||
June 30, 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 |
|
|
| — |
|
3533
QNB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
|
|
|
|
|
|
|
|
| Fair value measurements |
|
|
|
|
|
|
|
|
|
| Fair value measurements |
| |||||||||||||||||||
December 31, 2016 |
| Carrying amount |
|
| Fair value |
|
| Quoted prices in active markets for identical assets (Level 1) |
|
| Significant other observable inputs (Level 2) |
|
| Significant unobservable inputs (Level 3) |
| |||||||||||||||||||||||||
December 31, 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 INSTRUMENTS10. COMMITMENTS AND GUARANTEESCONTINGENCIES
Financial Instruments with off-balance sheet risk:
In the normal course of business there are various legal proceedings, commitments, and contingent liabilities which are not reflected in the consolidated financial statements. Management does not anticipate any material losses as a result of these transactions and activities. They include, among other things, commitments to extend credit and standby letters of credit. The maximum exposure to credit loss, which represents the possibility of sustaining a loss due to the failure of the other parties to a financial instrument to perform according to the terms of the contract, is represented by the contractual amount of these instruments. QNB uses the same lending standards and policies in making credit commitments as it does for on-balance sheet instruments. The activity is controlled through credit approvals, control limits, and monitoring procedures.
A summary of the Bank'sCompany'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.
QNB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Standby letters of credit are conditional commitments issued by the BankCompany to guarantee the financial or performance obligation of a customer to a third party. QNB’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for standby letters of credit is represented by the contractual amount of those instruments. The BankCompany uses the same credit policies in
36
QNB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
making conditional obligations as it does for on-balance sheet instruments. The majority of these standbyStandby 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 BankCompany requires collateral and personal guarantees supporting these letters of credit as deemed necessary. Management believes that the proceeds obtained through a liquidation of such collateral and the enforcement of personal guarantees would be sufficient to cover the maximum potential amount of future payments required under the corresponding guarantees. The amount of the liability as of SeptemberJune 30, 20172021 and December 31, 20162020 for guarantees under standby letters of credit issued is not material.
The amount of collateral obtained for letters of credit and commitments to extend credit is based on management’s credit evaluation of the customer. Collateral varies, but may include real estate, accounts receivable, marketable securities, pledged deposits, inventory or equipment.
Other commitments:
10.QNB has committed to various operating leases for several of their branch and office facilities. Some of these leases include specific provisions relating to rent increases. Some of the leases contain renewal options to extend the initial terms of the lease for periods ranging from five to ten years and certain leases allow for multiple extensions. During the six months ended June 30, 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.
11. REGULATORY RESTRICTIONS
Dividends payable by the CompanyQNB 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 CompanyQNB and the Bank are subject to regulatory capital requirements administered by Federal banking agencies. Failure to meet minimum capital requirements can initiate actions by regulators that could have an effect on the financial statements. Under the framework for prompt corrective action, both the Company and the Bank must meet capital guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance-sheet items.
The capital amounts and classification are also subject to qualitative judgments by the regulators. Management believes, as of SeptemberJune 30, 2017,2021, 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 Companybank holding companies and the Bankinsured depository institutions must maintain minimum ratios as set forth in the following table below.
35
QNB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 |
|
37
|
| Capital levels |
| |||||||||||||||||||||
|
| Actual |
|
| Adequately capitalized |
|
| Well capitalized |
| |||||||||||||||
As of December 31, 2020 |
| Amount |
|
| Ratio |
|
| Amount |
|
| Ratio |
|
| Amount |
|
| Ratio |
| ||||||
Total risk-based capital (to risk-weighted assets): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company |
| $ | 139,705 |
|
|
| 13.95 | % |
| $ | 80,125 |
|
|
| 8.00 | % |
| $ | 100,156 |
|
|
| 10.00 | % |
Bank |
|
| 126,687 |
|
|
| 13.15 |
|
|
| 77,047 |
|
| 8.00 |
|
|
| 96,308 |
|
| 10.00 |
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier I capital (to risk-weighted assets): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company |
|
| 128,788 |
|
|
| 12.86 |
|
|
| 60,094 |
|
| 6.00 |
|
|
| 60,094 |
|
| 6.00 |
| ||
Bank |
|
| 115,770 |
|
|
| 12.02 |
|
|
| 57,785 |
|
| 6.00 |
|
|
| 77,047 |
|
| 8.00 |
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common equity tier 1 capital (to risk-weighted assets): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company |
|
| 128,788 |
|
|
| 12.86 |
|
|
| 45,070 |
|
| 4.50 |
|
| N/A |
|
| N/A |
| |||
Bank |
|
| 115,770 |
|
|
| 12.02 |
|
|
| 43,339 |
|
| 4.50 |
|
|
| 62,600 |
|
| 6.50 |
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier I capital (to average assets): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company |
|
| 128,788 |
|
|
| 9.07 |
|
|
| 56,776 |
|
| 4.00 |
|
| N/A |
|
| N/A |
| |||
Bank |
|
| 115,770 |
|
|
| 8.23 |
|
|
| 56,286 |
|
| 4.00 |
|
|
| 70,357 |
|
| 5.00 |
|
36
QNB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
12. REVENUE RECOGNITION FROM CONTRACTS WITH CUSTOMERS
The Company generally fully satisfies its performance obligations on its contracts with customers as services are rendered and the transaction prices are typically fixed; charged either on a periodic basis or based on activity. Because performance obligations are satisfied as services are rendered and the transaction prices are fixed, there is little judgment involved in applying Topic 606 that significantly affects the determination of the amount and timing of revenue from contracts with customers. The main types of revenue contracts included in non-interest income within the consolidated statements of operations are as follows:
| Capital levels |
| ||||||||||||||||||||||
|
| Actual |
|
| Adequately capitalized |
|
| Well capitalized |
| |||||||||||||||
As of December 31, 2016 |
| Amount |
|
| Ratio |
|
| Amount |
|
| Ratio |
|
| Amount |
|
| Ratio |
| ||||||
Total risk-based capital (to risk-weighted assets): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
| $ | 104,820 |
|
|
| 12.75 | % |
| $ | 65,777 |
|
|
| 8.00 | % |
| $ | 82,221 |
|
|
| 10.00 | % |
Bank |
|
| 96,478 |
|
| 12.10 |
|
|
| 63,792 |
|
| 8.00 |
|
|
| 79,740 |
|
| 10.00 |
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier I capital (to risk-weighted assets): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
| 97,320 |
|
| 11.84 |
|
|
| 49,333 |
|
| 6.00 |
|
|
| 49,333 |
|
| 6.00 |
| |||
Bank |
|
| 89,025 |
|
| 11.16 |
|
|
| 47,844 |
|
| 6.00 |
|
|
| 63,792 |
|
| 8.00 |
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common equity tier 1 capital (to risk-weighted assets): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
| 97,320 |
|
| 11.84 |
|
|
| 36,999 |
|
| 4.50 |
|
| N/A |
|
| N/A |
| ||||
Bank |
|
| 89,025 |
|
| 11.16 |
|
|
| 35,883 |
|
| 4.50 |
|
|
| 51,831 |
|
| 6.50 |
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier I capital (to average assets): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
| 97,320 |
|
| 9.16 |
|
|
| 42,479 |
|
| 4.00 |
|
| N/A |
|
| N/A |
| ||||
Bank |
|
| 89,025 |
|
| 8.45 |
|
|
| 42,144 |
|
| 4.00 |
|
|
| 52,680 |
|
| 5.00 |
|
• | Fees for services to customers—fees include service charges on deposits which are included as liabilities in the consolidated statement of financial position and consist of transaction-based fees, stop payment fees, Automated Clearing House (ACH) fees, account maintenance fees, and overdraft services fees for various retail and business checking customers. These fees are charged as earned on the day of the transaction or within the month of the service, with the exception of Enhanced Account Analysis Fees, which are calculated on the previous month’s activity and assessed on the following month. The Enhanced Account Analysis Fees are currently being accrued; the revenue is currently being recorded in the month it is earned. Service charges on deposits are withdrawn directly from the customer’s account balance. |
• | ATM and debit card – fees are recognized at the time the transaction is executed as that is the point in time the Company fulfills the customer’s request. |
• | Retail brokerage and advisory—fee income and related expenses are accrued monthly to properly record the revenues in the month they are earned. Advisory fees are collected in advance on a quarterly basis. These advisory fees are recorded in the first month of the quarter for which the service is being performed. Fees that are transaction based are recognized at the point in time that the transaction is executed (i.e. trade date). |
• | Merchant – QNB earns interchange fees from credit/debit cardholder transactions conducted through VISA/MasterCard payment networks. Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized monthly, concurrently with the transaction processing services provided to the cardholder within the month. |
• | Other—includes credit card fees, sales of checks to depositors, miscellaneous fees and gain/losses on sale of OREO. |
• | Credit card fees are recognized monthly, concurrently with the transaction processing services provided to the cardholder within the month. |
• | Sales of checks to depositors are commissions earned from a third-party who provides checks to QNB’s customers. There is a pre-paid incentive with the third party which is recognized over the term of the contract. Other commissions on the sales of checks are recorded weekly. |
• | Miscellaneous fees, such as wire, cashier check and garnishment fees, are charged as earned on the day of the transaction. |
• | Gain (loss) on sales of OREO – QNB records a gain or loss from the sale of OREO when control of the property transfers to the buyer, which generally occurs at the time of an executed deed. When the QNB finances the sale of OREO to the buyer, QNB assesses whether the buyer is committed to perform their obligations under the contract and whether collectability of the transaction price is probable. Once these criteria are met, the OREO asset is derecognized and the gain or loss on sale is recorded upon the transfer of control of the property to the buyer. In determining the gain or loss on the sale, QNB adjusts the transaction prices and related gain (loss) on sale if a significant financing component is present. |
38
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
QNB Corp. is a bank holding company headquartered in Quakertown, Pennsylvania. QNB Corp., through its wholly-owned subsidiary, the Bank, has been serving the residents and businesses of upper Bucks, northern Montgomery and southern Lehigh counties in Pennsylvania since 1877. Due to its limited geographic area, growth is pursued through expansion of existing customer relationships and building new relationships by stressing a consistent high level of service at all points of contact. The Bank is a locally managed community bank that provides a full range of commercial and retail banking and retail brokerage services. The consolidated entity is referred to herein as “QNB” or the “Company”.
Tabular information presented throughout management’s discussion and analysis, other than share and per share data, is presented in thousands of dollars.
FORWARD-LOOKING STATEMENTS
In addition to historical information, this document contains forward-looking statements. Forward-looking statements are typically identified by words or phrases such as “believe,” “expect,” “anticipate,” “intend,” “estimate,” “project” and variations of such words and similar expressions, or future or conditional verbs such as “will,” “would,” “should,” “could,” “may” or similar expressions. The U.S. Private Securities Litigation Reform Act of 1995 provides a safe harbor in regard to the inclusion of forward-looking statements in this document and documents incorporated by reference.
Shareholders should note that many factors, some of which are discussed elsewhere in this document and in the documents that are incorporated by reference, and including the risk factors identified in Item 1A of QNB’s 20162020 Form 10-K, could affect the future financial results of the CompanyQNB Corp. and its subsidiary and could cause those results to differ materially from those expressed in the forward-looking statements contained or incorporated by reference in this document. These factors include, but are not limited, to the following:
Volatility in interest rates and shape of the yield curve;
• | Volatility in interest rates and shape of the yield curve; |
Credit risk;
• | Credit risk; |
Liquidity risk;
• | Liquidity risk; |
Operating, legal and regulatory risks;
• | Operating, legal and regulatory risks; |
Economic, political and competitive forces affecting QNB’s business; and
• | Economic, political and competitive forces affecting QNB’s business; |
• | The effects of unforeseen external events, including acts of terrorism, natural disasters, and pandemics, including the COVID-19 Pandemic; and |
The risk that the analysis of these risks and forces could be incorrect, and/or that the strategies developed to address them could be unsuccessful.
• | The risk that the analysis of these risks and forces could be incorrect, and/or that the strategies developed to address them could be unsuccessful. |
39
QNB CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
QNB cautions that these forward-looking statements are subject to numerous assumptions, risks and uncertainties, all of which change over time, and QNB assumes no duty to update forward-looking statements. Management cautions readers not to place undue reliance on any forward-looking statements. These statements speak only as of the date of this report on Form 10-Q, even if subsequently made available by QNB on its website or otherwise, and they advise readers that various factors, including those described above, could affect QNB’s financial performance and could cause actual results or circumstances for future periods to differ materially from those anticipated or projected. Except as required by law, QNB does not undertake, and specifically disclaims any obligation, to publicly release any revisions to any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements.
38
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
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The discussion and analysis of the financial condition and results of operations are based on the consolidated financial statements of QNB, which are prepared in accordance with U.S. generally accepted accounting principles (GAAP)(U.S. GAAP) and predominant practices within the banking industry. The preparation of these consolidated financial statements requires QNB to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. QNB evaluates estimates on an on-going basis, including those related to the determination of the allowance for loan losses, the determination of the valuation of other real estate owned and foreclosed assets, other-than-temporary impairments on investment securities, the valuation of deferred tax assets, stock-based compensation and income taxes. QNB bases its estimates on historical experience and various other factors and assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Other-Than-Temporary Investment Security Impairment
Securities are evaluated periodically to determine whether a decline in their value is other-than-temporary. Management utilizes criteria such as the magnitude and duration of the decline, in addition to the reasons underlying the decline, to determine whether the loss in value is other-than-temporary. The term “other-than-temporary” is not intended to indicate that the decline is permanent, butit indicates that the prospect for a near-term recovery of value is not necessarily favorable, or that there is a lack of evidence to support a realizable value equal to or greater than the carrying value of the investment. For equity securities that do not have readily-determinable fair values, once a decline in value is determined to be other-than-temporary, the value of the equity security is reduced and a corresponding charge to earnings is recognized. As a result of prolonged declines in some equity securities’ fair values, $80,000 of other-than-temporary impairment chargesThere were recorded during the third quarter and first nine months of 2017. There was $192,000 inno other-than-temporary impairment charges recorded during the first ninethree or six months of 2016.ended June 30, 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 ninethree or six months ended SeptemberJune 30, 20172021 or 2016.2020, respectively.
40
QNB CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The determination of the allowance for loan losses involves a higher degree of judgment and complexity than the Company’s other significant accounting policies. The allowance for loan losses is calculated with the objective of maintaining a level believed by management to be sufficient to absorb probable known and inherent losses in the outstanding loan portfolio. The allowance is reduced by actual credit losses and is increased by the provision for loan losses and recoveries of previous losses. The provisions for loan losses are charged to earnings to bring the total allowance for loan losses to a level considered necessary by management.
The allowance for loan losses is based on management’s continual review and evaluation of the loan portfolio. The level of the allowance is determined by assigning specific reserves to individually identified problem credits and general reserves to all other loans. The portion of the allowance that is allocated to impaired loans is determined by estimating the inherent loss on each credit after giving consideration to the value of underlying collateral or present value of future estimated cash flows. The general reserves are based on the composition and risk characteristics of the loan portfolio, including the nature of the loan portfolio, credit concentration trends, delinquency and loss experience, as well as other qualitative factors such as current economic trends.
Management emphasizes loan quality and close monitoring of potential problem credits. Credit risk identification and review processes are utilized to assess and monitor the degree of risk in the loan portfolio. QNB’s lending and credit administration staff are charged with reviewing the loan portfolio and identifying changes in the economy or in a borrower’s circumstances which may affect the ability to repay debt or the value of pledged collateral. A loan classification and review system exists that identifies those loans with a higher than normal risk of collection. Each commercial loan is assigned a grade based upon an assessment of the borrower’s financial capacity to service the debt and the presence and value of collateral for the loan. An independent loan review group tests risk assessments and evaluates the adequacy of the allowance for loan losses. Management meets monthly to review the credit quality of the loan portfolio and quarterly to review the allowance for loan losses.
39
QNB CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
In addition, various regulatory agencies, as an integral part of their examination process, periodically review QNB’s allowance for loan losses. Such agencies may require QNB to recognize additions to the allowance based on their judgments about information available to them at the time of their examination.
Management believes that it uses the best information available to make determinations about the adequacy of the allowance and that it has established its existing allowance for loan losses in accordance with U.S. GAAP. If circumstances differ substantially from the assumptions used in making determinations, future adjustments to the allowance for loan losses may be necessary and results of operations could be affected. Because future events affecting borrowers and collateral cannot be predicted with certainty, increases to the allowance may be necessary should the quality of any loans deteriorate as a result of the factors discussed above.
Foreclosed Assets
Assets acquired through, or in lieu of, loan foreclosure are held-for-sale and are initially recorded at fair value less cost to sell at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value less cost to sell. Revenue and expenses and changes in the valuation allowance are included in net expenses from foreclosed assets.
Stock-Based Compensation
QNB sponsors stock-based compensation plans, administered by a Board committee, under which both qualified and non-qualified stock options may be granted periodically to certain employees. QNB accounts for all awards granted under stock-based compensation plans in accordance with ASC 718, Compensation-Stock Compensation. Compensation cost has been measured using the fair value of an award on the grant date and is recognized over the service period, which is usually the vesting period. The fair value of each option is amortized into compensation expense on a straight-line basis between the grant date for the option and each vesting date. QNB estimates the fair value of stock options on the date of the grant using the Black-Scholes option pricing model. The model requires the use of numerous assumptions, many of which are highly subjective in nature.
Income Taxes
QNB accounts for income taxes under the asset/liability method in accordance with income tax accounting guidance, ASC 740, Income Taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the
41
QNB CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
financial statement carrying amounts of existing assets and liabilities and their respective tax bases, as well as operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is established against deferred tax assets when, in the judgment of management, it is more likely than not that such deferred tax assets will not become available. Because the judgment about the level of future taxable income is dependent on matters that may, at least in part, be beyond QNB’s control, it is at least reasonably possible that management’s judgment about the need for a valuation allowance for deferred tax assets could change in the near term.
RESULTS OF OPERATIONS - OVERVIEW
QNB reported net income for the thirdsecond quarter of 20172021 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-monthsix-month period ended SeptemberJune 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 SeptemberJune 30, 20172021 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 ninesix months ended SeptemberJune 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.
40
QNB CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Total assets as of SeptemberJune 30, 20172021 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 SeptemberJune 30, 20172021 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 commercialretail 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 SeptemberJune 30, 20172021 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 ninesix months ended SeptemberJune 30, 20172021 include the following significant components:
Net interest income increased $1,230,000, or 17.4%, to $8,315,000 and $2,828,000, or 13.3%, to $24,053,000 for the three and nine months ended September 30, 2017, respectively.
• | Net interest income increased $984,000, or 10.7%, to $10,218,000 and $2.338,000, or 12.7%, to $20,735,000 for the three and six months ended June 30, 2021, respectively. |
Net interest margin on a tax-equivalent basis increased 22 basis points for the quarter and ten basis points year-to-date, to 3.15% for both periods.
• | Net interest margin on a tax-equivalent basis decreased 21 basis points for the quarter and 17 basis points for year-to-date, to 2.74% and 2.89%, respectively. |
QNB recorded $100,000 in provision for loan losses for the quarter and $700,000 for the nine months ended September 30, 2017, compared with $125,000 for the first nine months of 2016. There was no provision recorded for the third quarter of 2016.
• | QNB recorded $183,000 in provision for loan losses for the quarter and $458,000 for the six months ended June 30, 2021, compared with $250,000 and $750,000 for the same periods in 2020, respectively. |
Non-interest income decreased $174,000, or 10.6%, to $1,470,000 for the third quarter and increased $481,000, or 10.5%, to $5,075,000 for year-to-date 2017, compared with the same periods in 2016.
• | Non-interest income decreased $283,000, to $2,534,000 for the second quarter and increased $4,692,000 for the six months ended June 30, 2021 compared with the same periods in 2020. Excluding realized and unrealized gains (losses) on equity securities, non-interest income increased $180,000, or 12.1%, to $1,663,000 for the quarter and $780,000, or 27.3%, to $3,632,000 for the six months ended June 30, 2021 compared with the same periods in 2020. |
Non-interest expense increased $575,000, or 10.2%, to $6,191,000 for the third quarter and $993,000, or 5.9%, to $17,721,000 for year-to-date 2017, compared to the same periods in 2016.
• | Non-interest expense increased $880,000, or 12.8%, to $7,749,000 for the quarter and $925,000, or 6.5%, to $15,072,000 for the six months ended June 30, 2021 compared to the same periods in 2020. |
Total non-performing loans were $10,437,000, or 1.48% of loans receivable at September 30, 2017, compared with $11,938,000, or 1.89% of loans receivable at December 31, 2016. Loans on non-accrual status were $9,078,000 at September 30, 2017 compared with $10,119,000 at December 31, 2016. Net recoveries for the nine months ended September 30, 2017 were $31,000, or -0.01% annualized of average total loans, compared with net charge-offs of $86,000, or 0.02% annualized of average total loans for the same period in 2016.
• | Total non-performing loans were $12,515,000, or 1.36% of loans receivable at June 30, 2021, compared to $14,109,000, or 1.53% of loans receivable at December 31, 2020. Loans on non-accrual status were $8,185,000 at June 30, 2021 compared with $9,640,000 at December 31, 2020. Net loan charge-offs for the six months ended June 30, 2021 were $82,000, compared with $173,000 in charge-offs for the same period in 2020. |
These items, as well as others, will beare explained more thoroughly in the next sections.
NET INTEREST INCOME
QNB Corp. earns its net income primarily through its subsidiary, the Bank. Net interest income, or the spread between the interest, dividends and fees earned on loans and investment securities and the expense incurred on deposits and other interest-bearing liabilities, is the primary source of operating income for QNB. Management seeks to achieve sustainable and consistent earnings
42
QNB CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
growth while maintaining adequate levels of capital and liquidity and limiting its exposure to credit and interest rate risk levels approved by the Board of Directors.
The following table presents the adjustment to convert net interest income to net interest income on a fully taxable-equivalent basis for the threethree- and nine-monthsix-month periods ended SeptemberJune 30, 20172021 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 bearingnon-interest-bearing deposits.
41
QNB CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
For purposes of this discussion, interest income and the average yield earned on loans and investment securities are adjusted to a tax-equivalent basis as detailed in the tables that appear above. This adjustment to interest income is made for analysis purposes only. Interest income is increased by the amount of savings of Federal income taxes, which QNB realizes by investing in certain tax-exempt state and municipal securities and by making loans to certain tax-exempt organizations. In this way, the ultimate economic impact of earnings from various assets can be more easily compared.
The net interest rate spread is the difference between average rates received on earning assets and average rates paid on interest-bearing liabilities, while the net interest rate margin, which includes interest-free sources of funds, is net interest income expressed as a percentage of average interest-earning assets. The Asset/Liability and Investment Management Committee works to manage and maximize the net interest margin for the Company.
42
QNB CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Average Balances, Rate, and Interest Income and Expense Summary (Tax-Equivalent Basis)
|
| 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 |
|
43
QNB CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Average Balances, Rate, and Interest Income and Expense Summary (Tax-Equivalent Basis)
|
| Three Months Ended |
|
| 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.
Non-accrual loans and investment securities are included in earning assets.
* Includes loans held-for-sale
44
QNB CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
| Nine Months Ended |
| ||||||||||||||||||||||
|
| September 30, 2017 |
|
| September 30, 2016 |
| ||||||||||||||||||
|
| Average |
|
| Average |
|
|
|
|
|
| Average |
|
| Average |
|
|
|
|
| ||||
|
| Balance |
|
| Rate |
|
| Interest |
|
| Balance |
|
| Rate |
|
| Interest |
| ||||||
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading securities |
| $ | 1,587 |
|
|
| 5.72 | % |
| $ | 68 |
|
| $ | 3,919 |
|
|
| 5.47 | % |
| $ | 161 |
|
Investment securities (AFS & HTM): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government agencies |
|
| 74,516 |
|
|
| 1.77 |
|
|
| 992 |
|
|
| 57,160 |
|
|
| 1.85 |
|
|
| 794 |
|
State and municipal |
|
| 75,310 |
|
|
| 3.90 |
|
|
| 2,205 |
|
|
| 73,765 |
|
|
| 4.06 |
|
|
| 2,247 |
|
Mortgage-backed and CMOs |
|
| 222,165 |
|
|
| 2.04 |
|
|
| 3,405 |
|
|
| 196,830 |
|
|
| 1.98 |
|
|
| 2,926 |
|
Pooled trust preferred securities |
|
| 1,989 |
|
|
| 1.36 |
|
|
| 20 |
|
|
| 3,197 |
|
|
| 0.21 |
|
|
| 5 |
|
Corporate debt securities |
|
| 8,064 |
|
|
| 1.98 |
|
|
| 120 |
|
|
| 8,160 |
|
|
| 1.77 |
|
|
| 108 |
|
Equities |
|
| 7,231 |
|
|
| 3.40 |
|
|
| 184 |
|
|
| 7,192 |
|
|
| 3.28 |
|
|
| 177 |
|
Total investment securities |
|
| 389,275 |
|
|
| 2.37 |
|
|
| 6,926 |
|
|
| 346,304 |
|
|
| 2.41 |
|
|
| 6,257 |
|
Loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate |
|
| 386,958 |
|
|
| 4.58 |
|
|
| 13,257 |
|
|
| 327,225 |
|
|
| 4.43 |
|
|
| 10,854 |
|
Residential real estate |
|
| 49,874 |
|
|
| 3.86 |
|
|
| 1,446 |
|
|
| 44,447 |
|
|
| 3.90 |
|
|
| 1,301 |
|
Home equity loans |
|
| 66,315 |
|
|
| 3.83 |
|
|
| 1,901 |
|
|
| 62,557 |
|
|
| 3.72 |
|
|
| 1,740 |
|
Commercial and industrial |
|
| 124,471 |
|
|
| 4.68 |
|
|
| 4,357 |
|
|
| 112,918 |
|
|
| 4.25 |
|
|
| 3,592 |
|
Indirect lease financing |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 9,844 |
|
|
| 8.88 |
|
|
| 656 |
|
Consumer loans |
|
| 6,481 |
|
|
| 5.39 |
|
|
| 261 |
|
|
| 4,460 |
|
|
| 5.25 |
|
|
| 175 |
|
Tax-exempt loans |
|
| 35,188 |
|
|
| 3.96 |
|
|
| 1,042 |
|
|
| 39,959 |
|
|
| 3.77 |
|
|
| 1,127 |
|
Total loans, net of unearned income* |
|
| 669,287 |
|
|
| 4.45 |
|
|
| 22,264 |
|
|
| 601,410 |
|
|
| 4.32 |
|
|
| 19,445 |
|
Other earning assets |
|
| 9,518 |
|
|
| 1.10 |
|
|
| 79 |
|
|
| 34,156 |
|
|
| 0.55 |
|
|
| 140 |
|
Total earning assets |
|
| 1,069,667 |
|
|
| 3.67 |
|
|
| 29,337 |
|
|
| 985,789 |
|
|
| 3.52 |
|
|
| 26,003 |
|
Cash and due from banks |
|
| 13,766 |
|
|
|
|
|
|
|
|
|
|
| 14,013 |
|
|
|
|
|
|
|
|
|
Allowance for loan losses |
|
| (7,761 | ) |
|
|
|
|
|
|
|
|
|
| (7,622 | ) |
|
|
|
|
|
|
|
|
Other assets |
|
| 29,169 |
|
|
|
|
|
|
|
|
|
|
| 28,683 |
|
|
|
|
|
|
|
|
|
Total assets |
| $ | 1,104,841 |
|
|
|
|
|
|
|
|
|
| $ | 1,020,863 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders' Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing demand |
| $ | 169,061 |
|
|
| 0.21 | % |
|
| 262 |
|
| $ | 151,907 |
|
|
| 0.21 | % |
|
| 237 |
|
Municipals |
|
| 102,207 |
|
|
| 0.64 |
|
|
| 491 |
|
|
| 98,777 |
|
|
| 0.35 |
|
|
| 255 |
|
Money market |
|
| 84,389 |
|
|
| 0.30 |
|
|
| 187 |
|
|
| 70,556 |
|
|
| 0.27 |
|
|
| 142 |
|
Savings |
|
| 248,325 |
|
|
| 0.45 |
|
|
| 837 |
|
|
| 228,894 |
|
|
| 0.40 |
|
|
| 688 |
|
Time |
|
| 129,450 |
|
|
| 1.16 |
|
|
| 1,127 |
|
|
| 133,930 |
|
|
| 1.12 |
|
|
| 1,122 |
|
Time of $100,000 or more |
|
| 96,659 |
|
|
| 1.39 |
|
|
| 1,008 |
|
|
| 94,462 |
|
|
| 1.37 |
|
|
| 967 |
|
Total interest-bearing deposits |
|
| 830,091 |
|
|
| 0.63 |
|
|
| 3,912 |
|
|
| 778,526 |
|
|
| 0.59 |
|
|
| 3,411 |
|
Short-term borrowings |
|
| 49,472 |
|
|
| 0.52 |
|
|
| 193 |
|
|
| 39,922 |
|
|
| 0.38 |
|
|
| 115 |
|
Total interest-bearing liabilities |
|
| 879,563 |
|
|
| 0.62 |
|
|
| 4,105 |
|
|
| 818,448 |
|
|
| 0.58 |
|
|
| 3,526 |
|
Non-interest-bearing deposits |
|
| 120,365 |
|
|
|
|
|
|
|
|
|
|
| 104,922 |
|
|
|
|
|
|
|
|
|
Other liabilities |
|
| 4,381 |
|
|
|
|
|
|
|
|
|
|
| 3,756 |
|
|
|
|
|
|
|
|
|
Shareholders' equity |
|
| 100,532 |
|
|
|
|
|
|
|
|
|
|
| 93,737 |
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders' equity |
| $ | 1,104,841 |
|
|
|
|
|
|
|
|
|
| $ | 1,020,863 |
|
|
|
|
|
|
|
|
|
Net interest rate spread |
|
|
|
|
|
| 3.05 | % |
|
|
|
|
|
|
|
|
|
| 2.94 | % |
|
|
|
|
Margin/net interest income |
|
|
|
|
|
| 3.15 | % |
| $ | 25,232 |
|
|
|
|
|
|
| 3.05 | % |
| $ | 22,477 |
|
Tax-exempt securities and loans were adjusted to a tax-equivalent basis and are based on the marginal Federal corporate tax rate of 34 percent.
Non-accrual loans and investment securities are included in earning assets.
* Includes loans held-for-sale
45
QNB CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Rate/Volume Analysis. The following table shows the fully taxable equivalent effect of changes in volumes and rates on interest income and interest expense. Changes in net interest income that could not be specifically identified as either a rate or volume change were allocated to changes in volume.
|
| Three months ended |
|
| Nine months ended |
|
| 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 | ) |
Net Interest Income and Net Interest Margin – Quarterly Comparison
Average earning assets for the thirdsecond quarter of 20172021 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 thirdsecond 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. Growthperiod in 2020. Excess cash from deposit growth was deployed to the loansecurities portfolio, mitigates the impact of the low rate environment on net interest income and the net interest margin as loans generally earnwhich earns a higherbetter 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 thirdsecond quarter of 2017,2021, compared with 59.3%67.8% for the thirdsecond 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
4645
QNB CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
$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. For2021 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 thirdsecond 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 increasesthe 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 thirdsecond 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 higherlower rates in the thirdsecond quarter of 20172021 compared to the thirdsecond 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.
2020.
The yield on earning assets on a tax-equivalent basis increased twenty-ninedecreased 38 basis points from 3.40%3.42% for the thirdsecond quarter of 2016,2020, to 3.69%3.04% for the thirdsecond quarter of 2017.2021. The cost of interest-bearing liabilities was 0.66%0.39% for the second quarter ended SeptemberJune 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 SeptemberJune 30, 20172021 and 2016.2020. The average yield on the investment portfolio was 2.40%1.57% for both the third quarterssecond quarter of 2017 and 2016. Investment opportunities in2021 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 waspartially offset by a $15,00073 basis-point decrease in interest income due to an eight basis point decrease inrates. 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-exemptU.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 year10-20-year maturities withand may have call dates between 2-52-10 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 whenas interest rates eventually increase. Since most of these securities were purchased at a premium, any prepayments result in a shorter amortization period of this premium and therefore a reduction in income.
Income on loans increased $1,341,000$451,000 to $7,843,000$9,481,000 when comparing the thirdsecond quarters of 20172021 and 2016,2020, with the strongan 8.6% growth in average balances contributing an increase in interest income of $934,000.$852,000. The yield on average loans, forat 4.03%, was 15 basis points lower than the thirdsecond quarter of 2017 was 4.48%, 19 basis points higher than the 4.29% yield2020, 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 incompressed 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 $201,000an 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
4746
QNB CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Incomeaccretion of SBA origination fees is accelerated upon forgiveness of the loan. The yield on commercial and industrialPPP loans increased $415,000. Average balances increased $24,733,000, or 22.3%, to $135,791,000was 5.68% for the thirdsecond quarter of 2017 resulting2021 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 thirdsecond 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, average2020. Average balances have decreased $3,898,000,$14,222,000, or 9.9%36.9%, to $35,328,000$24,342,000 for the thirdsecond quarter of 2017,2021, resulting in a decrease of $35,000$125,000 in income. The yield on municipal loans improved 22decreased five basis points, to 3.97%3.52% for the thirdsecond quarter of 2017,2021, compared with the same period in 2016,2020, resulting in an additional $19,000a 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 incomevolume during the third quarter2021 was a result of 2016.municipal loans being refinanced as bonds.
QNB desires to becomebe the “local consumer lender of choice” and to affect this QNB refocused, focusing its retail lending efforts adding newon 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. AverageInterest income on residential mortgage loans secured by firstsecond lien 1-4 family increased $120,000 when comparing the second quarter of 2021 to the same period in 2020. Average residential mortgagesmortgage loan balances increased by $7,227,000,$22,614,000, or 15.9%30.5%, to $52,833,000$96,748,000 for the thirdsecond quarter of 20172021 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 four40 basis points to 3.90%3.45% for the thirdsecond quarter of 2017. The net result2021, 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 increasecombined 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 25consumer 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 loan5.02% 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%; theresulting 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 thirdsecond quarter of 20172021 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 thirdsecond 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 increaseddecreased one basis pointpoints to 0.21%0.22% for the thirdsecond 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 thirdsecond 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 thirdsecond quarter of 20162020 was $45,125,000 with a$75,705,000 and the related interest expense of $63,000 andwas $74,000 for an average rate paidyield 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 $160,000decreased $1,000 to $257,000$93,000 for the thirdsecond 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 thesemunicipal interest-bearing demand accounts increasing 46decreased five basis points to 0.80%0.32% for the thirdsecond 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 increases150-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 quarterquarters 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 thirdsecond quarter of 20172021 compared with the same period in 2016.2020. Interest expense on money market accounts increaseddecreased $11,000 to $59,000, while$94,000, and the average interest rate paid on money market accounts increased twodecreased 11 basis points to 0.29%0.31% for the thirdsecond 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.
48
QNB CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Interest expense on savings accounts increased $67,000$10,000 when comparing the thirdsecond quarter of 20172021 to the thirdsecond quarter of 2016, and the2020. The average interest rate increased eightpaid 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 balancesaccounts increased $18,810,000,$99,849,000, or 8.1%35.2%, to $250,306,000$383,734,000 for the thirdsecond quarter of 2017 with both2021 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 thirdsecond quarter of 2017 at $181,706,000. This product has grown successfully since its introduction2021 of $286,817,000 compared to $203,370,000 in the third quartersame period of 2009.2020. The average yield paid on these accounts was 0.60%0.36% for the thirdsecond quarter of 20172021 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 thirdsecond quarter of 20172021 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.
Total interest47
QNB CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Interest expense on time deposits totaled $744,000 and $708,000$408,000 for the third quarterssecond 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 thirdsecond quarter of 2017. 2021. As with fixed-rate loans and investment securities, timethese deposits reprice over time and, therefore, have less of an immediate impact on costs in either a rising or falling rate environment, however, the maturity and repricing characteristics of time deposits tend to be shorter. The average rate paid on total time deposits increased sixdecreased 61 basis points from 1.52% to 1.29%0.91% when comparing the thirdsecond quarter of 20172020 to the same period in 2016.2021.
Approximately $99,509,000,$103,358,000, or 43.2%59%, of time deposits at SeptemberJune 30, 20172021 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 arewere 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 thirdsecond quarter of 20172021 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 increaselock in average FHLBborrowing 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 MonthNet Interest Income and Net Interest Margin – Six-Month Comparison
For the nine-monthsix-month period ended Septemberending June 30, 20172021, 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-monthsix-month period ended SeptemberJune 30, 20172021 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-monthsix-month period ended SeptemberJune 30, 2017,2021, a ten basis17-basis point increasedecrease 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-monthsix-month periods ended SeptemberJune 30, 20162021 and SeptemberJune 30, 2017,2020 due to the additional interest income generated from the growthan 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 $985,000decreased $2,558,000 as a result of betterlower yields. The analysis of the nine-monthsix-month comparison periods is similar to what was described in the quarterly analysis.
The yield on earning assets increaseddecreased from 3.52%3.66% to 3.67%3.22% for the nine-monthsix-month periods with the yield on loans up 13down 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 five61 basis points from 2.44%2.20% to 2.39%1.59% when comparing the nine-monthsix-month periods.
Total interest expense increased $579,000decreased $1,300,000 for the nine-monthsix-month period ended SeptemberJune 30, 20172021 compared with the same period in 2016. Deposit rates account for $397,00 of the increase2020, attributable to municipal deposits rates, which are correlated to changesa decrease in the Fed Funds target rate, and eSavings and time deposit rates. The average rate paid on interest bearing deposits increased fourdecreased 35 basis pointpoints to 0.63%0.41% for the nine-monthsix-month period ended SeptemberJune 30, 20172021 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 Bankresulting in decreased FHLB borrowings in the first three quarters of 2017six 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 14on the repos decreased ten basis points which contributed $51,000 to theresulting in a net increase in interest expense.
49
QNB CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Deposit balance increases and higher borrowings contributed $131,000expense 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 fourdecreased 34 basis points to 0.62%0.42% for the ninesix months ended SeptemberJune 30, 2017, compared to the same period in 2016.2021.
PROVISION FOR LOAN LOSSES AND ALLOWANCE FOR LOAN LOSSES
The provision for loan losses represents management's determination of the amount necessary to be charged to operations to bring the allowance for loan losses to a level that represents management’s best estimate of the known and inherent losses in the existing loan portfolio. Management believes that it uses the best information available to make determinations about the adequacy of the allowance and that it has established its existing allowance for loan losses in accordance with U.S. generally accepted accounting principles (GAAP).GAAP. The determination of an appropriate level for the allowance for loan losses is based upon an analysis of the risks inherent in QNB’s loan portfolio. Management, in determining the allowance for loan losses, makes significant estimates and assumptions. Since the allowance for loan losses is dependent, to a great extent, on conditions that may be beyond QNB’s control, it is at least reasonably possible that management’s 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
48
QNB CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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 quarterthree and first ninesix 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 SeptemberJune 30, 20172021 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 SeptemberJune 30, 2016.2020. Management believes the allowance for loan losses at SeptemberJune 30, 20172021 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 ninesix months ended SeptemberJune 30, 2017,2021 compared with net loan recoveries of $43,000 andto 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 $10,437,000were $12,515,000 at SeptemberJune 30, 2017 compares favorably with $14,219,0002021 compared to $14,109,000 as of December 31, 20162020 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 SeptemberJune 30, 20172021 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 SeptemberJune 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 SeptemberJune 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. LoansCommercial 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, 20162020 and a $4,101,000 declinean increase of 8,265,000, or 57.9%, from the $22,165,000$14,268,000 reported at SeptemberJune 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 inno loans past due 90 days or more and still accruing interest at SeptemberJune 30, 2017, and no loans past due 90 days or more and still accruing at2021, December 31, 2016. This compares with $150,000 at September2020, 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 SeptemberJune 30, 20172021 compared with 0.78%0.62% at December 31, 20162020 and 0.70%0.33% at SeptemberJune 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 SeptemberJune 30, 2017,2021, compared with $1,819,000$4,469,000 at December 31, 2016,2020, and $1,149,000$4,705,000 at SeptemberJune 30, 2016.2020. There were no
50
QNB CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
newly identified troubled debt restructures inrestructurings during the ninethree or six months ended SeptemberJune 30, 2017.2021. QNB had no other real estate owned or repossessed assets as of Septemberat June 30, 2017,2021, December 31, 2016,2020, or SeptemberJune 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.
49
QNB CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following table shows detailed information and ratios pertaining to the Company’s loan and asset quality:
|
| September 30, |
|
| December 31, |
|
| September 30, |
|
| June 30, |
|
| December 31, |
|
| June 30, |
| ||||||
|
| 2017 |
|
| 2016 |
|
| 2016 |
|
| 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 ninesix months ended SeptemberJune 30, 20172021 compared to 20162020 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 | % |
50
QNB CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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.
NON-INTEREST INCOME
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 | % |
Quarter to Quarter Comparison
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.
51
QNB CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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
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. |
|
Quarter to Quarter Comparison
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 thirdsecond quarters of 20172021 and 2016,2020, respectively.
These decreases were offset in part byFees 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-MonthMerchant 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.
Six-Month Comparison
Total non-interest income for the nine-monthsix-month periods ended SeptemberJune 30, 20172021 and 20162020 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 gainsrealized and unrealized gain and losses on investmentequity 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.
$780,000, or 27.3%.
Net investment securities gains increased $312,000$469,000 to $962,000$636,000 for the ninesix months ended SeptemberJune 30, 20172021 compared to $650,000$169,000 for the comparable ninesix 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 $80,000realized 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 duringsecurities for the first ninesix months of 2016.ended June 30, 2021 and 2020, respectively.
52
QNB CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
ATM and debit card income, merchant income and fees 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, netNet gains on the salesales of loans decreased $46,000increased to $217,000,$26,000 from $446,000, when comparing the ninesix months ended SeptemberJune 30, 20172021 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-monthsix-month periods ended SeptemberJune 30, 20172021 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 $375,000fees increased $78,000, or 27.7%, to $360,000 for the ninesix months ended SeptemberJune 30, 20172021 compared with $425,000 forto 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
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 | % |
Quarter to Quarter Comparison
Total non-interest expense was $6,191,000$7,749,000 for the thirdsecond quarter of 2017,2021, an increase of $575,000,$880,000, or 10.2%12.8%, compared to the thirdsecond quarter of 2016.
2020.
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 thirdsecond quarter of 20172021 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 claimsbonus accruals of $246,000 and retirement plan expense, offset in part bylower 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 expenseexpenses combined increased $69,000,$25,000, or 7.9%2.1%, to $944,000 forwhen 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 SeptemberJune 30, 2017 compared with the same period in 2016,2021, due to fewer advertising campaignsresuming events in 2017.2021 that had been cancelled in 2020 as a result of the COVID-19 Pandemic.
QNB CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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 $61,000expense increased $91,000 when comparing the two periods, due primarily to decreased legal services and other third-partydecreases in fees paid to outside vendors for support services. Telephone and postage and supplies expensesState taxes increased $12,000, or 6.3%,$68,000 due to increased data line capacity, and costs related to debit chip card conversion and thean increase in new deposits and loans. The $17,000 decrease in state taxes is due to abank 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
53
QNB CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
rate in effect for 2017.expense. FDIC insurance premiums decreased $6,000, or 3.7%,increased $69,000 due to the changecapital 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 starting2021 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.
Six-Month Comparison
Nine-Month Comparison
Total non-interest expense was $17,721,000$15,072,000 for the nine-monthsix-month period ended SeptemberJune 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 ninesix months ended SeptemberJune 30, 20172021 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 bonusperiod, to $7,093,000 while medical and related payroll tax accrual increased $151,000, when comparing the two periods. Benefits expensedental 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 expenseFDIC 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 otherOther non-interest expense increased $192,000, fordue to the reasons described above in the quarter comparison.
INCOME TAXES
QNB utilizes an asset and liability approach for financial accounting and reporting of income taxes. As of SeptemberJune 30, 2017,2021, QNB’s net deferred tax asset was $4,741,000.$500,000. The primary components compriseof deferred taxes are deferred tax assets of $2,762,000 relatingwhich $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 saleincrease 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.
QNB uses the current statutory tax rate of 34% to value its deferred tax assets and liabilities. Proposed comprehensive tax reform, announced April 26, 2017, included a reduction in the U.S. corporate income tax rate to 15%. The U.S. House of Representatives recently published a summary of the Tax Cuts and Jobs Act, which proposed a corporate tax rate of 20%. If corporate tax rates were reduced, management expects the Company would be required to record a significant initial charge against earnings to lower the carrying amount of its net deferred tax asset, and then, going forward, would record lower tax provisions.
Applicable income tax expense was $940,000$951,000 for the quarter and $2,907,000$2,224,000 for the ninesix months ended SeptemberJune 30, 2017,2021, compared with $821,000to $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 thirdsecond quarter and year-to-date 2017six-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. This2020. The increase in the effective tax rate in 2017for the six months ended June 30, 2021 is due to the decreasedstate 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-freetax-exempt net interest income to total income primarily municipal securities and municipal loan interest income.before taxes.
54
QNB CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Financial service organizations are challenged to demonstrate they can generate sustainable and consistent earnings growth in a dynamic operating environment. Rate competition for quality loans is anticipated to continue through 2017.2021. 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
54
QNB CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
manages credit risk associated with its lending activities through portfolio diversification, underwriting policies and procedures and loan monitoring practices. QNB is committed to make credit available to its customers.
Total assets at SeptemberJune 30, 20172021 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, 20162020 to $26,028,000$56,621,000 at SeptemberJune 30, 2017.
During the second quarter 2017, QNB Bank redeemed the trading securities portfolio, as lack of market volatility and the interest rate environment resulted2021, 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 ninesix months ended SeptemberJune 30, 2017 or 2016. Future valuations could require recording additional other-than-temporary impairment charges through earnings. For additional detail on these securities see Note 6 Investment Securities and Note 8 Fair Value Measurements and Disclosures.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 SeptemberJune 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, whenincreased $6,977,000 comparing SeptemberJune 30, 20172021 to December 31, 2016.2020. Under the CARES Act, QNB has experienced growthcontinues 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 duecommercial and industrial loans. In 2020, the Bank originated $82,475,000 in PPP loans, enabling 660 businesses to market disruption created by bank mergersmaintain their payrolls and stay in its footprint throughout 2016operation. 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, 20162020 to SeptemberJune 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 $53,743,000decreased $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.
55
QNB CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Short-term borrowings decreased 23.7%increased 27.5%, from $52,660,000$58,838,000 at December 31, 20162020 to $40,176,000$75,021,000 at SeptemberJune 30, 2017.2021. Commercial sweep accounts decreased $5,163,000, ascomprised 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 SeptemberJune 30, 2017, compared with $7,321,0002021 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
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
55
QNB CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
QNB. These deposits and repurchase agreements are generated from a base of consumers, businesses and public funds primarily located in the Company’s market area.
Additional sources of liquidity are provided by the Bank’s membership in the FHLB. During three quarters of 2017, QNB borrowed from the FHLB to fund short-term liquidity needs. At SeptemberJune 30, 2017,2021, 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’sthe Bank’s asset quality and capital adequacy. In addition, the Bank maintains unsecured Federal funds lines with threefive correspondent banks totaling $46,000,000.$101,000,000. At SeptemberJune 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, tradingavailable-for-sale and available-for-saleequity 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 SeptemberJune 30, 2017. Cashflow from payments, calls and sales of securities have2021. 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 SeptemberJune 30, 20172021 and December 31, 2016,2020, respectively, were pledged as collateral for repurchase agreements and deposits of public funds. The level of pledged securities depends uponcorresponds with the level of municipal depositsdeposit and repurchase agreement balances.
QNB is a member of the Certificate of Deposit Account Registry Services (CDARS) program offered by the Promontory Interfinancial Network, LLC. CDARS is a funding and liquidity management tool used by banks to access funds and manage their balance sheet. It enables financial institutions to provide customers with full FDIC insurance on time deposits over $250,000 that are placed in the program. QNB also has available Insured Cash Sweep (ICS), another program through Promontory Interfinancial Network, LLC, which is a product similar to CDARS, but one that provides liquidity like a money market or savings account.
CAPITAL ADEQUACY
A strong capital position is fundamental to support continued growth and profitability and to serve the needs of depositors. QNB's shareholders' equity at SeptemberJune 30, 20172021 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 SeptemberJune 30, 2017 and2021 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 SeptemberJune 30, 20172021 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 ninesix 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 yearsix months ended December 31, 2016.June 30, 2020. The ratio of average total equity to average total assets was 9.10%8.71% for ninethe six months ended SeptemberJune 30, 20172021 compared to 9.16%9.64% for all 2016.the same period in 2020.
56
QNB CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Retained earnings at SeptemberJune 30, 20172021 were impacted by ninesix 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 samesix-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 ninesix months ended SeptemberJune 30, 2017 and 2016, respectively.2021.
The Board of Directors has authorized the repurchase of up to 100,000200,000 shares of itsQNB common stock in open market or privately negotiated transactions. The repurchase authorization does not bear a termination date. As of SeptemberJune 30, 2017, 57,8832021, 80,374 shares werehave been repurchased under thissince 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 areis 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 following table sets forth consolidated information for QNB Corp.
|
| 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 |
|
5756
QNB CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The required minimum Common equity Tier 1 capital to risk-weighted assets ratio is 4.5%, the required minimum ratio of Tier 1 capital to risk-weighted assets is 6.0%, the required minimum ratio of Total Capital to risk-weighted assets is 8.0%, and the required minimum Tier 1 leverage ratio is 4.0%. A capital conservation buffer of 2.5% of risk-weighted assets also applies to avoid limitations on certain capital distributions.
The following table sets forth consolidated information for QNB:
| 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 | % |
|
| June 30, |
|
| December 31, |
| ||
Capital Analysis |
| 2021 |
|
| 2020 |
| ||
Regulatory Capital |
|
|
|
|
|
|
|
|
Shareholders' equity |
| $ | 137,340 |
|
| $ | 134,445 |
|
Net unrealized securities losses, net of tax |
|
| (2,001 | ) |
|
| (5,649 | ) |
Deferred tax assets on net operating loss |
|
| — |
|
|
| — |
|
Disallowed intangible assets |
|
| (8 | ) |
|
| (8 | ) |
Common equity tier I capital |
|
| 135,331 |
|
|
| 128,788 |
|
|
|
|
|
|
|
|
|
|
Tier I capital |
|
| 135,331 |
|
|
| 128,788 |
|
Allowable portion: Allowance for loan losses and reserve for unfunded commitments |
|
| — |
|
|
| 10,917 |
|
Total regulatory capital |
| $ | 135,331 |
|
| $ | 139,705 |
|
Risk-weighted assets |
| $ | 1,059,385 |
|
| $ | 1,001,561 |
|
Quarterly average assets for leverage capital purposes |
| $ | 1,577,409 |
|
| $ | 1,419,404 |
|
|
| June 30, |
|
| December 31, |
| ||
Capital Ratios |
| 2021 |
|
| 2020 |
| ||
Common equity tier I capital / risk-weighted assets |
|
| 12.77 | % |
|
| 12.86 | % |
Tier I capital / risk-weighted assets |
|
| 12.77 |
|
|
| 12.86 |
|
Total regulatory capital / risk-weighted assets |
|
| 13.84 |
|
|
| 13.95 |
|
Tier I capital / average assets (leverage ratio) |
|
| 8.58 |
|
|
| 9.07 |
|
There was little change inAt June 30, 2021, common equity Tier I, Tier I capital, and total regulatory capital ratios betweenwere fairly level with December 31, 2016 and September 30, 2017.2020. The Company remains well-capitalized by all applicable regulatory requirements as of SeptemberJune 30, 2017.2021.
MARKET RISK MANAGEMENT
Market risk reflects the risk of economic loss resulting from changes in interest rates and market prices. QNB’s primary market risk exposure is interest rate risk and liquidity risk. QNB’s liquidity position was discussed in a prior section.
QNB’s largest source of revenue is net interest income, which is subject to changes in market interest rates. Interest rate risk management seeks to minimize the effect of interest rate changes on net interest margins and interest rate spreads and to provide growth in net interest income through periods of changing interest rates. QNB’s Asset/Liability and Investment Management Committee (ALCO) is responsible for managing interest rate risk and for evaluating the impact of changing interest rate conditions on net interest income.
QNB uses computer simulation analysis to measure the sensitivity of projected earnings to changes in interest rates. Simulation considers current balance sheet volumes and the scheduled repricing dates, instrument level optionality, and maturities of assets and liabilities. It incorporates assumptions for growth, changes in the mix of assets and liabilities, prepayments, and average rates earned and paid. Based on this information, management uses the model to project net interest income under multiple interest rate scenarios.
A balance sheet is considered liability sensitive when its liabilities (deposits and borrowings) reprice faster or than its earning assets (loans and securities). A liability sensitive balance sheet will produce relatively less net interest income when interest rates rise and more net interest income when they decline. Based on our simulation analysis, management believes QNB’s interest sensitivity position at SeptemberJune 30, 20172021 is liability sensitive. Management expects that market interest rates may gradually increase inwill remain level over the next 12 months, based on the economic environment and policy of the Board of Governors of the Federal Reserve System.
57
QNB CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following table shows the estimated impact of changes in interest rates on net interest income as of SeptemberJune 30, 20172021 and 20162020 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 | % |
* Certain short-term interest rates are below 1%
Computations of future effects of hypothetical interest rate changes are based on numerous assumptions and should not be relied upon as indicative of actual results. Assets and liabilities may react differently than projected to changes in market interest rates. The interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while rates on other types of assets and liabilities may lag changes in market interest rates. Interest rate shifts may not be parallel.
Changes in interest rates can cause substantial changes in the levelamount of prepayments fromof loans and mortgage-backed securities, which may in turn affect QNB’s interest rate sensitivity position. Additionally, credit risk may rise if an interest rate increase adversely affects the ability of borrowers to service their debt.
58
QNB CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
QNB is not subject to foreign currency exchange or commodity price risk. At SeptemberJune 30, 20172021, QNB did not have any hedging transactions in place such as interest rate swaps, caps or floors.
ITEM 3. QUANTITATIVE AND QUALITATIVEQUALITATIVE DISCLOSURE ABOUT MARKET RISK.RISK
The information required in response to this item is set forth in Item 2, above.
ITEM 4. CONTROLS AND PROCEDURES
We maintain a system of controls and procedures designed to provide reasonable assurance as to the reliability of the consolidated financial statements and other disclosures included in this report, as well as to safeguard assets from unauthorized use or disposition. We evaluated the effectiveness of the design and operation of our disclosure controls and procedures under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective as of the end of the period covered by this report. No changes were made to our internal control over financial reporting during the fiscal quarter covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
QNB CORP. AND SUBSIDIARY
SEPTEMBERJune 30, 20172021
No material proceedings.
There were no material changes to the Risk Factors described in Item 1A in QNB’s Annual Report on Form 10-K for the period ended December 31, 2016.2020.
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds
QNB did not repurchase anyrepurchased 9,691 shares of its common stock during the quarter ended SeptemberJune 30, 2017.2021. The following provides certain information relating to QNB's stock repurchase plan.
|
|
|
|
| ||||||||||||
|
|
|
|
| ||||||||||||
|
|
|
|
| ||||||||||||
|
|
|
|
| ||||||||||||
|
|
|
|
|
Period |
| Total Number of Shares Purchased |
|
| Average Price Paid per Share |
|
| Total Number of Shares Purchased as Part of Publicly Announced Plan |
|
| Maximum Number of Shares that may yet be Purchased Under the Plan |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 1, 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 |
|
(1) | Transactions are reported as of |
(2) | QNB’s current stock repurchase plan was approved by its Board of Directors and announced on January 24, 2008, increased on February 9, 2009 and subsequently increased on |
(3) | The total number of shares approved for repurchase under QNB’s current stock repurchase plan is |
(4) | QNB’s current stock repurchase plan has no expiration date. |
(5) | QNB has no stock repurchase plan that it has determined to terminate or under which it does not intend to make further purchases. |
Item 3.Default Upon Senior Securities
None.
Item 4.Mine Safety Disclosures
None.
None.
Item 6. Exhibits
Exhibit 3.1 | |||
|
|
| |
Exhibit 3.2 | |||
Exhibit 31.1 | |||
|
|
| |
Exhibit 31.2 |
| Section 302 Certification of Chief | |
|
|
| |
Exhibit 32.1 |
| Section | |
|
|
| |
Exhibit | |||
32.2 |
| ||
| |||
|
|
| |
|
|
|
The following Exhibits are being furnished* as part of this report:
No. |
| Description |
|
|
|
101.SCH |
|
|
101.CAL |
|
|
101.LAB |
|
|
101.PRE |
|
|
101.DEF |
|
|
104 |
| Cover Page Interactive Data File (formatted as inline iXBRL and contained in Exhibit 101) |
| * | These interactive data files are being furnished as part of this Quarterly Report, and, in accordance with Rule 402 of Regulation S-T, shall not be deemed filed for purposes of Section 11 or 12 of the Securities Act of 1933, as amended, or Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability under those sections. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
| QNB Corp. | ||
|
|
|
|
Date: | By: |
| /s/ David W. Freeman |
|
|
| David W. Freeman |
|
|
| Chief Executive Officer |
|
|
|
|
Date: | By: |
| /s/ Janice McCracken Erkes |
|
|
| Janice McCracken Erkes |
|
|
| Chief Financial Officer |
|
|
|
|
Date: | By: |
| /s/ |
|
|
|
|
|
|
| Chief Accounting Officer, QNB Bank |