UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

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

For the quarterly period ended             SeptemberJune 30, 20162017            

OR

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

For the transition period from              to              

Commission file number 0-17706

 

QNB Corp.

(Exact Name of Registrant as Specified in Its Charter)

 

 

Pennsylvania

 

23-2318082

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

 

15 North Third Street, P.O. Box 9005 Quakertown, PA

 

18951-9005

(Address of Principal Executive Offices)

 

(Zip Code)

 

(215) 538-5600

Registrant's Telephone Number, Including Area Code

 

Not Applicable

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

 

 

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

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

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting 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 November 1, 2016July 31, 2017

Common Stock, par value $0.625

 

3,401,4883,433,240

 

 

 

 


 

QNB CORP. AND SUBSIDIARY

FORM 10-Q

QUARTER ENDED SEPTEMBERJUNE 30, 20162017

INDEX

 

 

 

PART I - FINANCIAL INFORMATION

 

 

 

 

 

 

 

ITEM 1.

 

CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

PAGE

 

 

 

 

 

 

 

Consolidated Balance Sheets at SeptemberJune 30, 20162017 and December 31, 20152016

 

3

 

 

 

 

 

 

 

Consolidated Statements of Income for the Three and NineSix Months Ended SeptemberJune 30, 20162017 and 20152016

 

4

 

 

 

 

 

 

 

Consolidated Statements of Comprehensive Income for the Three and NineSix Months Ended SeptemberJune 30, 20162017 and 20152016

 

65

 

 

 

 

 

 

 

Consolidated Statement of Shareholders’ Equity for the NineSix Months Ended SeptemberJune 30, 20162017 and 20152016

 

76

 

 

 

 

 

 

 

Consolidated Statements of Cash Flows for the NineSix Months Ended SeptemberJune 30, 20162017 and 20152016

 

87

 

 

 

 

 

 

 

Notes to Consolidated Financial Statements

 

98

 

 

 

 

 

ITEM 2.

 

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

4038

 

 

 

 

 

ITEM 3.

 

QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

 

6158

 

 

 

 

 

ITEM 4.

 

CONTROLS AND PROCEDURES

 

6158

 

 

 

 

 

 

 

PART II - OTHER INFORMATION

 

 

 

 

 

 

 

ITEM 1.

 

LEGAL PROCEEDINGS

 

6259

 

 

 

 

 

ITEM 1A.

 

RISK FACTORS

 

6259

 

 

 

 

 

ITEM 2.

 

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

6259

 

 

 

 

 

ITEM 3.

 

DEFAULTS UPON SENIOR SECURITIES

 

6259

 

 

 

 

 

ITEM 4.

 

MINE SAFETY DISCLOSURES

 

6259

 

 

 

 

 

ITEM 5.

 

OTHER INFORMATION

 

6259

 

 

 

 

 

ITEM 6.

 

EXHIBITS

 

6360

 

 

 

 

 

SIGNATURES

 

 

 

 

 

 

 

CERTIFICATIONS

 

 

 

 

 


QNB Corp. and Subsidiary

 

CONSOLIDATED BALANCE SHEETS

 

 

(in thousands, except share data)

 

 

(in thousands, except share data)

 

 

(current period unaudited)

 

 

(current period unaudited)

 

 

September 30,

2016

 

 

December 31,

2015

 

 

June 30, 2017

 

 

December 31,

2016

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

12,437

 

 

$

9,159

 

 

$

13,596

 

 

$

8,897

 

Interest-bearing deposits in banks

 

 

56,991

 

 

 

7,832

 

 

 

1,652

 

 

 

1,824

 

Total cash and cash equivalents

 

 

69,428

 

 

 

16,991

 

 

 

15,248

 

 

 

10,721

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Trading

 

 

4,312

 

 

 

4,189

 

 

 

-

 

 

 

3,596

 

Available-for-sale (amortized cost $365,367 and $362,742)

 

 

368,834

 

 

 

361,915

 

Held-to-maturity (fair value $147 and $151)

 

 

147

 

 

 

147

 

Available-for-sale (amortized cost $386,190 and $396,168)

 

 

382,564

 

 

 

390,475

 

Restricted investment in bank stocks

 

 

522

 

 

 

508

 

 

 

1,974

 

 

 

1,017

 

Loans held-for-sale

 

 

456

 

 

 

987

 

 

 

530

 

 

 

789

 

Loans receivable

 

 

608,231

 

 

 

615,270

 

 

 

695,213

 

 

 

633,079

 

Allowance for loan losses

 

 

(7,593

)

 

 

(7,554

)

 

 

(8,035

)

 

 

(7,394

)

Net loans

 

 

600,638

 

 

 

607,716

 

 

 

687,178

 

 

 

625,685

 

Bank-owned life insurance

 

 

11,206

 

 

 

10,978

 

 

 

10,736

 

 

 

11,297

 

Premises and equipment, net

 

 

8,777

 

 

 

9,257

 

 

 

8,521

 

 

 

8,683

 

Accrued interest receivable

 

 

2,573

 

 

 

2,562

 

 

 

2,506

 

 

 

3,128

 

Net deferred tax assets

 

 

2,334

 

 

 

3,673

 

 

 

4,639

 

 

 

5,473

 

Other assets

 

 

2,704

 

 

 

2,013

 

 

 

6,627

 

 

 

2,277

 

Total assets

 

$

1,071,931

 

 

$

1,020,936

 

 

$

1,120,523

 

 

$

1,063,141

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Demand, non-interest bearing

 

$

105,029

 

 

$

98,543

 

 

$

120,369

 

 

$

119,010

 

Interest-bearing demand

 

 

291,228

 

 

 

274,925

 

 

 

272,264

 

 

 

255,754

 

Money market

 

 

72,756

 

 

 

67,172

 

 

 

81,805

 

 

 

74,762

 

Savings

 

 

229,323

 

 

 

221,770

 

 

 

255,027

 

 

 

238,247

 

Time

 

 

132,128

 

 

 

135,251

 

 

 

127,970

 

 

 

131,370

 

Time of $100 or more

 

 

96,248

 

 

 

92,125

 

 

 

93,879

 

 

 

94,212

 

Total deposits

 

 

926,712

 

 

 

889,786

 

 

 

951,314

 

 

 

913,355

 

Short-term borrowings

 

 

41,179

 

 

 

37,163

 

 

 

66,907

 

 

 

52,660

 

Accrued interest payable

 

 

310

 

 

 

330

 

 

 

298

 

 

 

335

 

Other liabilities

 

 

5,734

 

 

 

3,214

 

 

 

3,254

 

 

 

3,224

 

Total liabilities

 

 

973,935

 

 

 

930,493

 

 

 

1,021,773

 

 

 

969,574

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders' Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock, par value $0.625 per share;

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

authorized 10,000,000 shares; 3,564,657 shares and 3,524,363

 

 

 

 

 

 

 

 

shares issued; 3,400,088 and 3,359,794 shares outstanding

 

 

2,228

 

 

 

2,203

 

authorized 10,000,000 shares; 3,597,809 shares and 3,576,270

 

 

 

 

 

 

 

 

shares issued; 3,433,240 and 3,411,701 shares outstanding

 

 

2,249

 

 

 

2,235

 

Surplus

 

 

17,057

 

 

 

15,973

 

 

 

18,099

 

 

 

17,418

 

Retained earnings

 

 

78,899

 

 

 

75,289

 

 

 

83,271

 

 

 

80,147

 

Accumulated other comprehensive income (loss), net of tax

 

 

2,288

 

 

 

(546

)

Accumulated other comprehensive loss, net of tax

 

 

(2,393

)

 

 

(3,757

)

Treasury stock, at cost; 164,569 shares

 

 

(2,476

)

 

 

(2,476

)

 

 

(2,476

)

 

 

(2,476

)

Total shareholders' equity

 

 

97,996

 

 

 

90,443

 

 

 

98,750

 

 

 

93,567

 

Total liabilities and shareholders' equity

 

$

1,071,931

 

 

$

1,020,936

 

 

$

1,120,523

 

 

$

1,063,141

 

 

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

 


QNB Corp. and Subsidiary

CONSOLIDATED STATEMENTS OF INCOME

 

(in thousands, except per share data - unaudited)

 

 

(in thousands, except per share data - unaudited)

 

 

Three months

ended September 30,

 

 

Nine months

ended September 30,

 

 

Three months

ended June 30,

 

 

 

Six months

ended June 30,

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

 

2017

 

 

2016

 

 

 

2017

 

 

2016

 

Interest income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest and fees on loans

 

$

6,376

 

 

$

6,302

 

 

$

19,060

 

 

$

18,148

 

 

$

7,115

 

 

$

6,332

 

 

$

14,187

 

 

$

12,684

 

Interest and dividends on investment securities (AFS & HTM):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

 

1,317

 

 

 

1,242

 

 

 

3,964

 

 

 

3,840

 

 

 

1,551

 

 

 

1,291

 

 

 

 

3,114

 

 

 

2,647

 

Tax-exempt

 

 

478

 

 

 

519

 

 

 

1,483

 

 

 

1,474

 

 

 

484

 

 

 

489

 

 

 

 

949

 

 

 

1,005

 

Interest on trading securities

 

 

36

 

 

 

43

 

 

 

106

 

 

 

124

 

 

 

16

 

 

 

30

 

 

 

45

 

 

 

70

 

Interest on interest-bearing balances and other interest income

 

 

80

 

 

 

32

 

 

 

138

 

 

 

105

 

 

 

26

 

 

 

42

 

 

 

33

 

 

 

58

 

Total interest income

 

 

8,287

 

 

 

8,138

 

 

 

24,751

 

 

 

23,691

 

 

 

9,192

 

 

 

8,184

 

 

 

 

18,328

 

 

 

16,464

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest on deposits

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing demand

 

 

177

 

 

 

170

 

 

 

492

 

 

 

490

 

 

 

228

 

 

 

163

 

 

 

 

402

 

 

 

315

 

Money market

 

 

48

 

 

 

40

 

 

 

142

 

 

 

114

 

 

 

76

 

 

 

47

 

 

 

 

128

 

 

 

94

 

Savings

 

 

233

 

 

 

204

 

 

 

688

 

 

 

600

 

 

 

278

 

 

 

229

 

 

 

 

537

 

 

 

455

 

Time

 

 

378

 

 

 

381

 

 

 

1,122

 

 

 

1,166

 

 

 

372

 

 

 

371

 

 

 

 

740

 

 

 

744

 

Time of $100 or more

 

 

330

 

 

 

300

 

 

 

967

 

 

 

890

 

 

 

328

 

 

 

319

 

 

 

 

651

 

 

 

637

 

Interest on short-term borrowings

 

 

36

 

 

 

28

 

 

 

115

 

 

 

87

 

 

 

52

 

 

 

36

 

 

 

132

 

 

 

79

 

Total interest expense

 

 

1,202

 

 

 

1,123

 

 

 

3,526

 

 

 

3,347

 

 

 

1,334

 

 

 

1,165

 

 

 

 

2,590

 

 

 

2,324

 

Net interest income

 

 

7,085

 

 

 

7,015

 

 

 

21,225

 

 

 

20,344

 

 

 

7,858

 

 

 

7,019

 

 

 

 

15,738

 

 

 

14,140

 

Provision for loan losses

 

 

 

 

 

 

 

 

125

 

 

 

60

 

 

 

300

 

 

 

 

 

 

600

 

 

 

125

 

Net interest income after provision for loan losses

 

 

7,085

 

 

 

7,015

 

 

 

21,100

 

 

 

20,284

 

 

 

7,558

 

 

 

7,019

 

 

 

 

15,138

 

 

 

14,015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-interest income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total other-than-temporary impairment loss on investment securities

 

 

 

 

 

 

 

 

(192

)

 

 

 

 

 

 

 

 

(122

)

 

 

 

 

 

(192

)

Less: Portion of loss recognized in other comprehensive income (before taxes)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net other-than temporary impairment losses on investment securities

 

 

 

 

 

 

 

 

(192

)

 

 

 

 

 

 

 

 

(122

)

 

 

 

 

 

(192

)

Net gain on sale of investment securities

 

 

316

 

 

 

83

 

 

 

842

 

 

 

800

 

 

 

115

 

 

 

137

 

 

 

864

 

 

 

526

 

Net gain on investment securities

 

 

316

 

 

 

83

 

 

 

650

 

 

 

800

 

 

 

115

 

 

 

15

 

 

 

864

 

 

 

334

 

Net (loss) gain on trading activities

 

 

(39

)

 

 

36

 

 

 

47

 

 

 

17

 

Net gain on trading activities

 

 

10

 

 

 

52

 

 

 

27

 

 

 

86

 

Fees for services to customers

 

 

425

 

 

 

434

 

 

 

1,205

 

 

 

1,240

 

 

 

421

 

 

 

397

 

 

 

813

 

 

 

780

 

ATM and debit card

 

 

419

 

 

 

397

 

 

 

1,229

 

 

 

1,153

 

 

 

449

 

 

 

422

 

 

 

866

 

 

 

810

 

Retail brokerage and advisory

 

 

129

 

 

 

180

 

 

 

425

 

 

 

557

 

 

 

104

 

 

 

126

 

 

 

207

 

 

 

296

 

Bank-owned life insurance

 

 

73

 

 

 

73

 

 

 

217

 

 

 

215

 

 

 

120

 

 

 

73

 

 

 

191

 

 

 

144

 

Merchant

 

 

86

 

 

 

75

 

 

 

242

 

 

 

226

 

 

 

92

 

 

 

83

 

 

 

172

 

 

 

156

 

Net gain on sale of loans

 

 

143

 

 

 

120

 

 

 

263

 

 

 

302

 

 

 

201

 

 

 

71

 

 

 

 

251

 

 

 

120

 

Other

 

 

92

 

 

 

95

 

 

 

316

 

 

 

259

 

 

 

103

 

 

 

135

 

 

 

 

214

 

 

 

224

 

Total non-interest income

 

 

1,644

 

 

 

1,493

 

 

 

4,594

 

 

 

4,769

 

 

 

1,615

 

 

 

1,374

 

 

 

3,605

 

 

 

2,950

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-interest expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

3,072

 

 

 

2,911

 

 

 

9,114

 

 

 

8,960

 

 

 

3,237

 

 

 

2,988

 

 

 

6,323

 

 

 

6,042

 

Net occupancy

 

 

438

 

 

 

427

 

 

 

1,305

 

 

 

1,336

 

 

 

425

 

 

 

426

 

 

 

876

 

 

 

867

 

Furniture and equipment

 

 

437

 

 

 

424

 

 

 

1,302

 

 

 

1,285

 

 

 

456

 

 

 

440

 

 

 

885

 

 

 

865

 

Marketing

 

 

220

 

 

 

174

 

 

 

681

 

 

 

596

 

 

 

307

 

 

 

265

 

 

 

536

 

 

 

461

 

Third party services

 

 

440

 

 

 

389

 

 

 

1,246

 

 

 

1,235

 

 

 

407

 

 

 

403

 

 

 

801

 

 

 

806

 

Telephone, postage and supplies

 

 

189

 

 

 

182

 

 

 

549

 

 

 

551

 

 

 

199

 

 

 

174

 

 

 

399

 

 

 

360

 

State taxes

 

 

178

 

 

 

173

 

 

 

499

 

 

 

520

 

 

 

155

 

 

 

141

 

 

 

348

 

 

 

321

 

FDIC insurance premiums

 

 

162

 

 

 

162

 

 

 

489

 

 

 

479

 

 

 

134

 

 

 

157

 

 

 

 

275

 

 

 

327

 

Other

 

 

480

 

 

 

731

 

 

 

1,543

 

 

 

1,802

 

 

 

622

 

 

 

599

 

 

 

 

1,087

 

 

 

1,063

 

Total non-interest expense

 

 

5,616

 

 

 

5,573

 

 

 

16,728

 

 

 

16,764

 

 

 

5,942

 

 

 

5,593

 

 

 

11,530

 

 

 

11,112

 

Income before income taxes

 

 

3,113

 

 

 

2,935

 

 

 

8,966

 

 

 

8,289

 

 

 

3,231

 

 

 

2,800

 

 

 

 

7,213

 

 

 

5,853

 

Provision for income taxes

 

 

821

 

 

 

715

 

 

 

2,311

 

 

 

1,999

 

 

 

845

 

 

 

702

 

 

 

 

1,967

 

 

 

1,490

 

Net income

 

$

2,292

 

 

$

2,220

 

 

$

6,655

 

 

$

6,290

 

 

$

2,386

 

 

$

2,098

 

 

 

$

5,246

 

 

$

4,363

 

Earnings per share - basic

 

$

0.68

 

 

$

0.66

 

 

$

1.97

 

 

$

1.89

 

 

$

0.70

 

 

$

0.62

 

 

 

$

1.53

 

 

$

1.29

 

Earnings per share - diluted

 

$

0.67

 

 

$

0.66

 

 

$

1.96

 

 

$

1.88

 

 

$

0.69

 

 

$

0.62

 

 

$

1.53

 

 

$

1.29

 

Cash dividends per share

 

$

0.30

 

 

$

0.29

 

 

$

0.90

 

 

$

0.87

 

 

$

0.31

 

 

$

0.30

 

 

$

0.62

 

 

$

0.60

 


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


QNB Corp. and Subsidiary

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

 

 

(in thousands - unaudited)

 

Three months ended September 30,

 

2016

 

 

2015

 

 

 

Before

tax

amount

 

 

Tax

expense

(benefit)

 

 

Net of

tax

amount

 

 

Before

tax

amount

 

 

Tax

expense

(benefit)

 

 

Net of

tax

amount

 

Net income

 

$

3,113

 

 

$

821

 

 

$

2,292

 

 

$

2,935

 

 

$

715

 

 

$

2,220

 

Other comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net unrealized holding (losses) gains on securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized holding (losses) gains arising during the period

 

 

(875

)

 

 

(298

)

 

 

(577

)

 

 

1,547

 

 

 

526

 

 

 

1,021

 

Reclassification adjustment for gains included in net income

 

 

(316

)

 

 

(107

)

 

 

(209

)

 

 

(83

)

 

 

(29

)

 

 

(54

)

Other comprehensive (loss) income

 

 

(1,191

)

 

 

(405

)

 

 

(786

)

 

 

1,464

 

 

 

497

 

 

 

967

 

Total comprehensive income

 

$

1,922

 

 

$

416

 

 

$

1,506

 

 

$

4,399

 

 

$

1,212

 

 

$

3,187

 

 

 

(in thousands - unaudited)

 

Three months ended June 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

 

$

3,231

 

 

$

845

 

 

$

2,386

 

 

$

2,800

 

 

$

702

 

 

$

2,098

 

Other comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net unrealized holding gains on securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized holding gains arising during

     the period

 

 

1,682

 

 

 

572

 

 

 

1,110

 

 

 

1,333

 

 

 

453

 

 

 

880

 

Reclassification adjustment for gains

     included in net income

 

 

(115

)

 

 

(40

)

 

 

(75

)

 

 

(15

)

 

 

(5

)

 

 

(10

)

Other comprehensive income

 

 

1,567

 

 

 

532

 

 

 

1,035

 

 

 

1,318

 

 

 

448

 

 

 

870

 

Total comprehensive income

 

$

4,798

 

 

$

1,377

 

 

$

3,421

 

 

$

4,118

 

 

$

1,150

 

 

$

2,968

 

 

Nine months ended September 30,

 

2016

 

 

2015

 

Six months ended June 30,

 

2017

 

 

2016

 

 

Before

tax

amount

 

 

Tax

expense

(benefit)

 

 

Net of

tax

amount

 

 

Before

tax

amount

 

 

Tax

expense

(benefit)

 

 

Net of

tax

amount

 

 

Before

tax

amount

 

 

Tax

expense

(benefit)

 

 

Net of

tax

amount

 

 

Before

tax

amount

 

 

Tax

expense

(benefit)

 

 

Net of

tax

amount

 

Net income

 

$

8,966

 

 

$

2,311

 

 

$

6,655

 

 

$

8,289

 

 

$

1,999

 

 

$

6,290

 

 

$

7,213

 

 

$

1,967

 

 

$

5,246

 

 

$

5,853

 

 

$

1,490

 

 

$

4,363

 

Other comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net unrealized holding gains on securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized holding gains arising during the period

 

 

4,944

 

 

 

1,681

 

 

 

3,263

 

 

 

1,333

 

 

 

453

 

 

 

880

 

 

 

2,931

 

 

 

997

 

 

 

1,934

 

 

 

5,819

 

 

 

1,979

 

 

 

3,840

 

Reclassification adjustment for gains included in net income

 

 

(650

)

 

 

(221

)

 

 

(429

)

 

 

(800

)

 

 

(273

)

 

 

(527

)

 

 

(864

)

 

 

(294

)

 

 

(570

)

 

 

(334

)

 

 

(114

)

 

 

(220

)

Other comprehensive income

 

 

4,294

 

 

 

1,460

 

 

 

2,834

 

 

 

533

 

 

 

180

 

 

 

353

 

 

 

2,067

 

 

 

703

 

 

 

1,364

 

 

 

5,485

 

 

 

1,865

 

 

 

3,620

 

Total comprehensive income

 

$

13,260

 

 

$

3,771

 

 

$

9,489

 

 

$

8,822

 

 

$

2,179

 

 

$

6,643

 

 

$

9,280

 

 

$

2,670

 

 

$

6,610

 

 

$

11,338

 

 

$

3,355

 

 

$

7,983

 

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

 


QNB Corp. and Subsidiary

 

CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY

NineSix months ended SeptemberJune 30, 20162017 and 20152016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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, 2015

 

 

3,359,794

 

 

$

2,203

 

 

$

15,973

 

 

$

75,289

 

 

$

(546

)

 

$

(2,476

)

 

$

90,443

 

Balance, December 31, 2016

 

 

3,411,701

 

 

$

2,235

 

 

$

17,418

 

 

$

80,147

 

 

$

(3,757

)

 

$

(2,476

)

 

$

93,567

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

6,655

 

 

 

 

 

 

 

 

 

6,655

 

 

 

 

 

 

 

 

 

 

 

 

 

5,246

 

 

 

 

 

 

 

 

 

5,246

 

Other comprehensive income, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,834

 

 

 

 

 

 

2,834

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,364

 

 

 

 

 

 

1,364

 

Cash dividends declared ($0.90 per share)

 

 

 

 

 

 

 

 

 

 

 

 

(3,045

)

 

 

 

 

 

 

 

 

(3,045

)

Cash dividends declared ($0.62 per share)

 

 

 

 

 

 

 

 

 

 

 

 

(2,122

)

 

 

 

 

 

 

 

 

(2,122

)

Stock issued in connection with dividend

reinvestment and stock purchase plan

 

 

24,886

 

 

 

15

 

 

 

738

 

 

 

 

 

 

 

 

 

 

 

 

753

 

 

 

13,579

 

 

 

9

 

 

 

503

 

 

 

 

 

 

 

 

 

 

 

 

512

 

Stock issued for employee stock purchase

plan

 

 

1,540

 

 

 

1

 

 

 

40

 

 

 

 

 

 

 

 

 

 

 

 

41

 

 

 

1,318

 

 

 

1

 

 

 

41

 

 

 

 

 

 

 

 

 

 

 

 

42

 

Stock issued for options exercised

 

 

13,868

 

 

 

9

 

 

 

234

 

 

 

 

 

 

 

 

 

 

 

 

243

 

 

 

6,642

 

 

 

4

 

 

 

86

 

 

 

 

 

 

 

 

 

 

 

 

90

 

Tax benefit of stock options exercised

 

 

 

 

 

 

 

 

 

12

 

 

 

 

 

 

 

 

 

 

 

 

12

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

 

60

 

 

 

 

 

 

 

 

 

 

 

 

60

 

 

 

 

 

 

 

 

 

 

51

 

 

 

 

 

 

 

 

 

 

 

 

51

 

Balance, September 30, 2016

 

 

3,400,088

 

 

$

2,228

 

 

$

17,057

 

 

$

78,899

 

 

$

2,288

 

 

$

(2,476

)

 

$

97,996

 

Balance, June 30, 2017

 

 

3,433,240

 

 

$

2,249

 

 

$

18,099

 

 

$

83,271

 

 

$

(2,393

)

 

$

(2,476

)

 

$

98,750

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

Stock

 

 

Total

 

 

Outstanding

 

 

Stock

 

 

Surplus

 

 

Earnings

 

 

Income (Loss)

 

 

Stock

 

 

Total

 

Balance, December 31, 2014

 

 

3,316,658

 

 

$

2,176

 

 

$

14,819

 

 

$

70,928

 

 

$

907

 

 

$

(2,476

)

 

$

86,354

 

Balance, December 31, 2015

 

 

3,359,794

 

 

$

2,203

 

 

$

15,973

 

 

$

75,289

 

 

$

(546

)

 

$

(2,476

)

 

$

90,443

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

6,290

 

 

 

 

 

 

 

 

 

6,290

 

 

 

 

 

 

 

 

 

 

 

 

 

4,363

 

 

 

 

 

 

 

 

 

4,363

 

Other comprehensive income, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

353

 

 

 

 

 

 

353

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,620

 

 

 

 

 

 

3,620

 

Cash dividends declared ($0.87 per share)

 

 

 

 

 

 

 

 

 

 

 

 

(2,901

)

 

 

 

 

 

 

 

 

(2,901

)

Cash dividends declared ($0.60 per share)

 

 

 

 

 

 

 

 

 

 

 

 

(2,027

)

 

 

 

 

 

 

 

 

(2,027

)

Stock issued in connection with dividend

reinvestment and stock purchase plan

 

 

23,796

 

 

 

15

 

 

 

652

 

 

 

 

 

 

 

 

 

 

 

 

667

 

 

 

16,314

 

 

 

10

 

 

 

467

 

 

 

 

 

 

 

 

 

 

 

 

477

 

Stock issued for employee stock purchase

plan

 

 

1,721

 

 

 

1

 

 

 

42

 

 

 

 

 

 

 

 

 

 

 

 

43

 

 

 

1,540

 

 

 

1

 

 

 

40

 

 

 

 

 

 

 

 

 

 

 

 

41

 

Stock issued for options exercised

 

 

8,302

 

 

 

5

 

 

 

101

 

 

 

 

 

 

 

 

 

 

 

 

106

 

 

 

13,552

 

 

 

8

 

 

 

228

 

 

 

 

 

 

 

 

 

 

 

 

236

 

Tax benefit of stock options exercised

 

 

 

 

 

 

 

 

 

20

 

 

 

 

 

 

 

 

 

 

 

 

20

 

 

 

 

 

 

 

 

 

 

12

 

 

 

 

 

 

 

 

 

 

 

 

12

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

 

64

 

 

 

 

 

 

 

 

 

 

 

 

64

 

 

 

 

 

 

 

 

 

 

42

 

 

 

 

 

 

 

 

 

 

 

 

42

 

Balance, September 30, 2015

 

 

3,350,477

 

 

$

2,197

 

 

$

15,698

 

 

$

74,317

 

 

$

1,260

 

 

$

(2,476

)

 

$

90,996

 

Balance, June 30, 2016

 

 

3,391,200

 

 

$

2,222

 

 

$

16,762

 

 

$

77,625

 

 

$

3,074

 

 

$

(2,476

)

 

$

97,207

 

 

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

 

 


QNB Corp. and Subsidiary

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

(in thousands, unaudited)

 

 

(in thousands, unaudited)

 

Nine months ended September 30,

 

2016

 

 

2015

 

Six months ended June 30,

 

2017

 

 

2016

 

Operating Activities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

6,655

 

 

$

6,290

 

 

$

5,246

 

 

$

4,363

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

668

 

 

 

769

 

 

 

403

 

 

 

449

 

Provision for loan losses

 

 

125

 

 

 

60

 

 

 

600

 

 

 

125

 

Net gain on investment securities available-for-sale

 

 

(650

)

 

 

(800

)

 

 

(864

)

 

 

(334

)

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

 

 

(2

)

 

 

17

 

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

 

 

(1

)

 

 

(1

)

Gain on sale of loan held for investment

 

 

(99

)

 

 

-

 

Net gain on sale of loans

 

 

(263

)

 

 

(302

)

 

 

(152

)

 

 

(120

)

Proceeds from sales of residential mortgages held-for-sale

 

 

7,188

 

 

 

9,595

 

 

 

4,675

 

 

 

3,556

 

Origination of residential mortgages held-for-sale

 

 

(6,394

)

 

 

(9,233

)

 

 

(4,264

)

 

 

(2,633

)

Income on bank-owned life insurance

 

 

(217

)

 

 

(215

)

 

 

(191

)

 

 

(144

)

Stock-based compensation expense

 

 

60

 

 

 

64

 

 

 

51

 

 

 

42

 

Net (increase) decrease in trading securities

 

 

(123

)

 

 

582

 

Deferred income tax provision

 

 

(121

)

 

 

66

 

Net increase in income taxes payable

 

 

141

 

 

 

17

 

Net (increase) decrease in accrued interest receivable

 

 

(11

)

 

 

13

 

Net decrease in trading securities

 

 

3,596

 

 

 

730

 

Deferred income taxes

 

 

130

 

 

 

(83

)

Net (decrease) increase in income taxes payable

 

 

(601

)

 

 

6

 

Net decrease in accrued interest receivable

 

 

622

 

 

 

186

 

Amortization of mortgage servicing rights and change in valuation allowance

 

 

59

 

 

 

53

 

 

 

47

 

 

 

36

 

Net amortization of premiums and discounts on investment securities

 

 

1,396

 

 

 

1,583

 

 

 

839

 

 

 

940

 

Net decrease in accrued interest payable

 

 

(20

)

 

 

(21

)

 

 

(37

)

 

 

 

Increase in other assets

 

 

(775

)

 

 

(364

)

 

 

(1,203

)

 

 

(493

)

Increase (decrease) in other liabilities

 

 

329

 

 

 

(908

)

 

 

36

 

 

 

(27

)

Net cash provided by operating activities

 

 

8,045

 

 

 

7,266

 

 

 

8,833

 

 

 

6,598

 

Investing Activities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

85,046

 

 

 

68,472

 

 

 

27,255

 

 

 

51,888

 

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

 

 

31,892

 

 

 

27,480

 

 

 

24,620

 

 

 

28,814

 

Purchases of investment securities available-for-sale

 

 

(118,245

)

 

 

(79,565

)

 

 

(44,470

)

 

 

(58,655

)

Proceeds from redemption of investment in restricted bank stock

 

 

1,482

 

 

 

1,318

 

 

 

2,977

 

 

 

1,482

 

Purchase of restricted bank stock

 

 

(1,496

)

 

 

(1,179

)

 

 

(3,934

)

 

 

(1,496

)

Net decrease (increase) in loans

 

 

6,953

 

 

 

(27,580

)

Net (increase) decrease in loans

 

 

(62,093

)

 

 

10,663

 

Proceeds from the sale of loan held for investment

 

 

99

 

 

 

 

Net purchases of premises and equipment

 

 

(188

)

 

 

(413

)

 

 

(241

)

 

 

(105

)

Redemption of bank-owned life insurance

 

 

752

 

 

 

 

Proceeds from sales of other real estate owned and repossessed assets

 

 

2

 

 

 

3,244

 

 

 

1

 

 

 

1

 

Net cash provided by (used in) investing activities

 

 

5,446

 

 

 

(8,223

)

Net cash (used in) provided by investing activities

 

 

(55,034

)

 

 

32,592

 

Financing Activities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net increase in non-interest bearing deposits

 

 

6,486

 

 

 

11,172

 

 

 

1,359

 

 

 

19,107

 

Net increase in interest-bearing deposits

 

 

30,440

 

 

 

45,910

 

Net increase (decrease) in interest-bearing deposits

 

 

36,600

 

 

 

(15,608

)

Net increase (decrease) in short-term borrowings

 

 

4,016

 

 

 

(2,601

)

 

 

14,247

 

 

 

(470

)

Tax benefit from exercise of stock options

 

 

12

 

 

 

20

 

 

 

 

 

 

12

 

Cash dividends paid, net of reinvestment

 

 

(2,662

)

 

 

(2,579

)

 

 

(1,858

)

 

 

(1,772

)

Proceeds from issuance of common stock

 

 

654

 

 

 

494

 

 

 

380

 

 

 

499

 

Net cash provided by financing activities

 

 

38,946

 

 

 

52,416

 

 

 

50,728

 

 

 

1,768

 

Increase in cash and cash equivalents

 

 

52,437

 

 

 

51,459

 

 

 

4,527

 

 

 

40,958

 

Cash and cash equivalents at beginning of year

 

 

16,991

 

 

 

16,991

 

 

 

10,721

 

 

 

16,991

 

Cash and cash equivalents at end of period

 

$

69,428

 

 

$

68,450

 

 

$

15,248

 

 

$

57,949

 

Supplemental Cash Flow Disclosures

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest paid

 

$

3,546

 

 

$

3,368

 

 

$

2,627

 

 

$

2,324

 

Income taxes paid

 

 

2,227

 

 

 

1,904

 

 

 

2,434

 

 

 

1,555

 

Non-cash transactions:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Transfer of loans to repossessed assets or other real estate owned

 

 

-

 

 

 

215

 

Unsettled trades to purchase securities

 

 

2,558

 

 

 

3,987

 

Unsettled trades to sell securities

 

 

(2,598

)

 

 

 

 

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

 

 

 

87


QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

1. BASIS OF PRESENTATION

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

These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in QNB's 20152016 Annual Report incorporated in the Form 10-K. Operating results for the three and nine monthsix-month periods ended SeptemberJune 30, 20162017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016.2017.

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

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

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

The Company has evaluated events and transactions occurring subsequent to the balance sheet date of SeptemberJune 30, 2016,2017, for items that should potentially be recognized or disclosed in these financial statements.

 

 

2. RECENT ACCOUNTING PRONOUNCEMENTS

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606). This ASU was issued to help improve comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets. The ASU’s core principle is that a company will recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, this update specifies the accounting for certain costs to obtain or fulfill a contract with a customer and expands disclosure requirements for revenue recognition. This guidance does not apply to revenue associated with financial instruments, including loans, securities, and derivatives that are accounted for under other U.S. GAAP guidance. For that reason, we do not expect it to have a material impact on our consolidated results of operations for elements of the statement of income associated with financial instruments, including securities gains, interest income and interest expense. However, we do believe the new standard will result in new disclosure requirements. We are currently in the process of reviewing contracts to assess the impact of the new guidance on our service offerings that are in the scope of the guidance, included in non-interest income such as insurance commission fees, service charges, payment processing fees, trust services fees, and brokerage services fees. The Company is continuing to evaluate the effect of the new guidance on revenue sources other than financial instruments on our financial position and consolidated results of operations. The guidance is effective for the QNB’s financial statements beginning January 1, 2018. The guidance allows an entity to apply the new standard either retrospectively or through a cumulative effect adjustment as of January 1, 2018.

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

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

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

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

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

8


QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

This ASU is effective for public companies for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. If QNB had adopted this guidance on June 30, 2017 it would have resulted in a decrease in net income of approximately $116,000. There would have been no impact on shareholder’s equity as the equity securities held by QNB are currently recorded at fair value through accumulated other comprehensive income (loss).

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 15, 2016, the FASB issued ASU 2016-07, Investments – Equity Method and Joint Ventures (Topic 323), Simplifying the Transition to the Equity Method of Accounting. This ASU simplifies the equity method of accounting by eliminating the requirement to retrospectively apply the equity method to an investment that subsequently qualifies for such accounting as a result of an increase in the level of ownership interest or degree of influence.  The ASU further requires that unrealized holding gains or losses in accumulated other comprehensive income related to an  available-for-sale security that becomes eligible for the equity method be recognized in earnings as of the date on which the investment qualifies for the equity method. The guidance in the ASU is effective for all entities for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years; early adoption is permitted for all entities. QNB does not anticipate the adoption of this guidance will have a material impact 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

9


QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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 is evaluatingadopted this new standard but doeseffective January 1, 2017. It did not anticipate the adoption of this guidance will have a material impact on its consolidated financial statements; however, the most significant impact relates to how tax benefits related to stock option exercises are recorded in the financial statements.

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

To that end, the new guidance:

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

Broadens the information an entity can consider when measuring credit losses to include forward-looking information

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

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

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

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

The new guidance affects organizations that hold financial assets and net investments in leases that are not accounted for at fair value with changes in fair value reported in net income.  The new guidance affects loans, debt securities, trade receivables, net investments

9


QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

in leases, off-balance-sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash.

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

On March 30, 2017, the FASB issued ASU 2017-08, Premium Amortization on Purchased Callable Debt Securities. This ASU is intended to enhance the accounting for the amortization of premiums for purchased callable debt securities and will require premiums to be amortized to the earliest call date. For public companies, the ASU is effective for annual reporting periods beginning after December 15, 2018, including interim periods within those annual reporting periods. QNB does not anticipate this new standard will have a material impact on its consolidated financial statements as it already uses the earliest call date to amortize premiums on callable debt securities.

 

 

3. STOCK-BASED COMPENSATION AND SHAREHOLDERS’ EQUITY

QNB sponsors stock-based compensation plans, administered by a Board Committee, 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 $18,000$33,000 and $26,000 for both the three months ended SeptemberJune 30, 2017 and 2016, and 2015.respectively. Stock-based compensation expense was $60,000$51,000 and $64,000$42,000 for the ninesix months ended SeptemberJune 30, 20162017 and 2015,2016, respectively. As of SeptemberJune 30, 2016,2017, there was approximately $102,000$129,000 of unrecognized compensation cost related to unvested share-based compensation award grants that is expected to be recognized over the next 2932 months.

Options are granted to certain employees at prices equal to the market value of the stock on the date the options are granted. The 19982005 Plan authorized the issuance of 220,500200,000 shares. The time period during which any option is exercisable under the 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 tenfive years after the date the option is awarded. The granted options vest after a three-year period. As of SeptemberJune 30, 2016, there were 225,058 options granted, 60,244 options forfeited, 164,814 options exercised and no remaining options outstanding under this Plan. The 1998 Plan expired on March 10, 2008.

10


QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The 2005 Plan authorized the issuance of 200,000 shares. The terms of the 2005 Plan are identical to the 1998 Plan, except options expire five years after the grant date. As of September 30, 2016,2017, there were 184,200 options granted, 65,05065,150 options forfeited, 64,42579,375 options exercised, and 54,72539,675 options outstanding under this Plan. The 2005 Plan expired on March 15, 2015.

The 2015 Plan authorizes the issuance of 300,000 shares. The terms of the 2015 Plan are identical to the 2005 Plan. There were 23,50048,500 options granted and outstanding under this Plan as of SeptemberJune 30, 2016.2017. There were no options forfeited or exercised as of SeptemberJune 30, 2016.2017. 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,

 

2016

 

 

2015

 

Six months ended June 30,

 

2017

 

 

2016

 

Risk free interest rate

 

 

1.14

%

 

 

1.06

%

 

 

1.48

%

 

 

1.14

%

Dividend yield

 

 

3.78

%

 

 

3.86

%

 

 

3.19

%

 

 

3.78

%

Volatility

 

 

22.62

%

 

 

26.74

%

 

 

17.89

%

 

 

22.62

%

Expected life (years)

 

 

4.20

 

 

 

5.00

 

 

 

4.20

 

 

 

4.20

 

 

The risk-free interest rate was selected based upon yields of U.S. Treasury issues 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 2017 and 2016 was $3.88 and 2015 was $3.79, and $4.38, respectively.

Stock option activity during the nine months ended September 30, 2016 and 2015 is as follows:

 

 

Number

of options

 

 

Weighted

average

exercise

price

 

 

Weighted

average

remaining

contractual term

(in years)

 

 

Aggregate

intrinsic value

 

Outstanding at December 31, 2015

 

 

82,875

 

 

$

24.33

 

 

 

 

 

 

 

 

 

Granted

 

 

23,500

 

 

 

30.40

 

 

 

 

 

 

 

 

 

Exercised

 

 

(18,425

)

 

 

20.70

 

 

 

 

 

 

 

 

 

Forfeited

 

 

(9,725

)

 

 

25.61

 

 

 

 

 

 

 

 

 

Outstanding at September 30, 2016

 

 

78,225

 

 

$

26.85

 

 

 

2.74

 

 

$

560

 

Exercisable at September 30, 2016

 

 

23,100

 

 

$

22.38

 

 

 

0.87

 

 

$

268

 

 

 

Number

of options

 

 

Weighted

average

exercise

price

 

 

Weighted

average

remaining

contractual term

(in years)

 

 

Aggregate

intrinsic value

 

Outstanding at December 31, 2014

 

 

88,375

 

 

$

23.27

 

 

 

 

 

 

 

 

 

Granted

 

 

21,000

 

 

 

29.25

 

 

 

 

 

 

 

 

 

Exercised

 

 

(12,150

)

 

 

17.81

 

 

 

 

 

 

 

 

 

Forfeited

 

 

(12,650

)

 

 

31.87

 

 

 

 

 

 

 

 

 

Outstanding at September 30, 2015

 

 

84,575

 

 

$

24.25

 

 

 

2.50

 

 

$

444

 

Exercisable at September 30, 2015

 

 

30,375

 

 

$

20.87

 

 

 

0.89

 

 

$

262

 

1110


QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

Stock option activity during the six months ended June 30, 2017 and 2016 is as follows:

 

 

Number

of options

 

 

Weighted

average

exercise

price

 

 

Weighted

average

remaining

contractual term

(in years)

 

 

Aggregate

intrinsic value

 

Outstanding at December 31, 2016

 

 

73,950

 

 

$

27.14

 

 

 

 

 

 

 

 

 

Granted

 

 

25,000

 

 

 

37.60

 

 

 

 

 

 

 

 

 

Exercised

 

 

(10,675

)

 

 

22.24

 

 

 

 

 

 

 

 

 

Forfeited

 

 

(100

)

 

 

21.35

 

 

 

 

 

 

 

 

 

Outstanding at June 30, 2017

 

 

88,175

 

 

$

30.71

 

 

 

3.09

 

 

$

849

 

Exercisable at June 30, 2017

 

 

21,825

 

 

$

24.33

 

 

 

1.15

 

 

$

349

 

 

 

Number

of options

 

 

Weighted

average

exercise

price

 

 

Weighted

average

remaining

contractual term

(in years)

 

 

Aggregate

intrinsic value

 

Outstanding at December 31, 2015

 

 

82,875

 

 

$

24.33

 

 

 

 

 

 

 

 

 

Granted

 

 

23,500

 

 

 

30.40

 

 

 

 

 

 

 

 

 

Exercised

 

 

(17,980

)

 

 

20.66

 

 

 

 

 

 

 

 

 

Forfeited

 

 

(9,725

)

 

 

25.61

 

 

 

 

 

 

 

 

 

Outstanding at June 30, 2016

 

 

78,670

 

 

$

26.82

 

 

 

2.99

 

 

$

407

 

Exercisable at June 30, 2016

 

 

23,545

 

 

$

22.38

 

 

 

1.12

 

 

$

226

 

4. EARNINGS PER SHARE & SHARE REPURCHASE PLAN

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

 

 

Three months

ended June 30,

 

 

Six months

ended June 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Numerator for basic and diluted earnings per share - net income

 

$

2,386

 

 

$

2,098

 

 

$

5,246

 

 

$

4,363

 

Denominator for basic earnings per share - weighted average

    shares outstanding

 

 

3,425,356

 

 

 

3,383,109

 

 

 

3,420,239

 

 

 

3,376,445

 

Effect of dilutive securities - employee stock options

 

 

17,852

 

 

 

8,766

 

 

 

16,027

 

 

 

8,389

 

Denominator for diluted earnings per share - adjusted

   weighted average shares outstanding

 

 

3,443,208

 

 

 

3,391,875

 

 

 

3,436,266

 

 

 

3,384,834

 

Earnings per share - basic

 

$

0.70

 

 

$

0.62

 

 

$

1.53

 

 

$

1.29

 

Earnings per share - diluted

 

 

0.69

 

 

 

0.62

 

 

 

1.53

 

 

 

1.29

 

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

The Board of Directors has authorized the repurchase of up to 100,000 shares of its common stock in open market or privately negotiated transactions. The repurchase authorization does not bear a termination date. There were no shares repurchased during the ninethree or six months ended SeptemberJune 30, 20162017 and 2015.2016. As of SeptemberJune 30, 2016,2017, 57,883 shares were repurchased under this authorization at an average price of $16.97 and a total cost of $982,000.

 

 

5. EARNINGS PER SHARE11


QNB CORP. AND SUBSIDIARY

The following sets forth the computation of basic and diluted earnings per share:NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

Three months

ended September 30,

 

 

Nine months

ended September 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Numerator for basic and diluted earnings per share - net

   income

 

$

2,292

 

 

$

2,220

 

 

$

6,655

 

 

$

6,290

 

Denominator for basic earnings per share - weighted average

    shares outstanding

 

 

3,391,471

 

 

 

3,343,011

 

 

 

3,381,491

 

 

 

3,332,650

 

Effect of dilutive securities - employee stock options

 

 

12,568

 

 

 

13,778

 

 

 

9,238

 

 

 

12,980

 

Denominator for diluted earnings per share - adjusted

   weighted average shares outstanding

 

 

3,404,039

 

 

 

3,356,789

 

 

 

3,390,729

 

 

 

3,345,630

 

Earnings per share - basic

 

$

0.68

 

 

$

0.66

 

 

$

1.97

 

 

$

1.89

 

Earnings per share - diluted

 

 

0.67

 

 

 

0.66

 

 

 

1.96

 

 

 

1.88

 

There were no stock options that were anti-dilutive for the three-month period ended September 30, 2016, and 41,350 anti-dilutive options for the nine months ended September 30, 2016. There were 21,000 stock options that were anti-dilutive for both the three and nine-month periods ended September 30, 2015. These stock options were not included in the above calculation.(Unaudited)

 

 

6.

5. COMPREHENSIVE INCOME (LOSS)

The following shows the components of accumulated other comprehensive income (loss)loss at SeptemberJune 30, 20162017 and December 31, 2015:2016:

 

 

 

September 30,

 

 

December 31,

 

 

 

2016

 

 

2015

 

Unrealized net holding gains (losses) on available-for-sale

   securities

 

$

3,780

 

 

$

(568

)

Unrealized losses on available-for-sale securities for which a

   portion of an other-than-temporary impairment loss has been

   recognized in earnings

 

 

(313

)

 

 

(259

)

Accumulated other comprehensive income (loss)

 

 

3,467

 

 

 

(827

)

Tax effect

 

 

(1,179

)

 

 

281

 

Accumulated other comprehensive income (loss), net of tax

 

$

2,288

 

 

$

(546

)

 

 

June 30,

 

 

December 31,

 

 

 

2017

 

 

2016

 

Unrealized net holding losses on available-for-sale

   securities

 

$

(3,596

)

 

$

(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

 

 

(30

)

 

 

(247

)

Accumulated other comprehensive loss

 

 

(3,626

)

 

 

(5,693

)

Tax effect

 

 

1,233

 

 

 

1,936

 

Accumulated other comprehensive loss, net of tax

 

$

(2,393

)

 

$

(3,757

)

 

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

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

Unrealized net holding gains on available-for-sale

   securities

 

$

115

 

 

$

137

 

 

Net gain on sale of investment

   securities

Other-than-temporary impairment losses on

     investment securities

 

 

 

 

 

(122

)

 

Net other-than-temporary

     impairment losses on

     investment securities

 

 

 

115

 

 

 

15

 

 

 

Tax effect

 

 

(40

)

 

 

(5

)

 

Provision for income taxes

Total reclass out of accumulated other comprehensive

    income, net of tax

 

$

75

 

 

$

10

 

 

Net of tax

Six 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

Unrealized net holding gains on available-for-sale

   securities

 

$

864

 

 

$

526

 

 

Net gain on sale of investment

   securities

Other-than-temporary impairment losses on

     investment securities

 

 

 

 

 

(192

)

 

Net other-than-temporary impairment

     losses on investment securities

 

 

 

864

 

 

 

334

 

 

 

Tax effect

 

 

(294

)

 

 

(114

)

 

Provision for income taxes

Total reclass out of accumulated other comprehensive

    income, net of tax

 

$

570

 

 

$

220

 

 

Net of tax

6. INVESTMENT SECURITIES

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

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 nine months ended September 30, 2016 and 2015:

Three months ended September 30,

 

Amount reclassified from

accumulated other

comprehensive income

 

 

 

Details about accumulated other comprehensive income

 

2016

 

 

2015

 

 

Affected line item in statement of income

Unrealized net holding gains on available-for-sale

   securities

 

$

316

 

 

$

83

 

 

Net gain on sale of investment

   securities

Tax effect

 

 

(108

)

 

 

(28

)

 

Provision for income taxes

Total reclass out of accumulated other comprehensive

    income, net of tax

 

$

208

 

 

$

55

 

 

Net of tax

Nine months ended September 30,

 

Amount reclassified from

accumulated other

comprehensive income

 

 

 

Details about accumulated other comprehensive income

 

2016

 

 

2015

 

 

Affected line item in statement of income

Unrealized net holding gains on available-for-sale

   securities

 

$

842

 

 

$

800

 

 

Net gain on sale of investment

   securities

Other-than-temporary impairment losses on

     investment securities

 

 

(192

)

 

 

-

 

 

Net other-than-temporary impairment

     losses on investment securities

 

 

 

650

 

 

 

800

 

 

 

Tax effect

 

 

(221

)

 

 

(273

)

 

Provision for income taxes

Total reclass out of accumulated other comprehensive

    income, net of tax

 

$

429

 

 

$

527

 

 

Net of tax

7. INVESTMENT SECURITIES

QNB engages in trading activities for its own account. Municipal securities that are held principally for resale in the near term are recorded in the trading account at fair value with changes in fair value recorded in non-interest income. There were net realized and unrealized losses of $39,000 recorded for the three months ended September 30, 2016, which compares to net realized and unrealized gains of $36,000 recorded for the three months ended September 30, 2015. There were net realized and unrealized gains of $47,000 and $17,000 recorded for the nine months ended September 30, 2016 and 2015, respectively. Unrealized gains on trading activity related to trading securities still held at September 30, 2016 and December 31, 2015 totaled $13,000 and $31,000, respectively. Interest and dividends are included in interest income.

Trading securities, at fair value, at September 30, 2016 and December 31, 2015 were as follows:

 

 

September 30,

 

 

December 31,

 

 

 

2016

 

 

2015

 

State and municipal securities

 

$

4,312

 

 

$

4,189

 

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 SeptemberJune 30, 20162017 and December 31, 20152016 were as follows:

 

 

 

 

 

 

Gross

 

 

Gross

 

 

 

 

 

 

 

 

 

 

Gross

 

 

Gross

 

 

 

 

 

 

 

 

 

 

unrealized

 

 

unrealized

 

 

 

 

 

 

 

 

 

 

unrealized

 

 

unrealized

 

 

 

 

 

 

Fair

 

 

holding

 

 

holding

 

 

Amortized

 

 

Fair

 

 

holding

 

 

holding

 

 

Amortized

 

September 30, 2016

 

value

 

 

gains

 

 

losses

 

 

cost

 

June 30, 2017

 

value

 

 

gains

 

 

losses

 

 

cost

 

U.S. Government agency

 

$

65,812

 

 

$

167

 

 

$

(98

)

 

$

65,743

 

 

$

72,938

 

 

$

11

 

 

$

(1,541

)

 

$

74,468

 

State and municipal

 

 

73,560

 

 

 

1,701

 

 

 

(37

)

 

 

71,896

 

 

 

78,687

 

 

 

940

 

 

 

(133

)

 

 

77,880

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed

 

 

132,746

 

 

 

2,277

 

 

 

(11

)

 

 

130,480

 

 

 

141,358

 

 

 

379

 

 

 

(1,681

)

 

 

142,660

 

Collateralized mortgage obligations (CMOs)

 

 

79,264

 

 

 

422

 

 

 

(298

)

 

 

79,140

 

 

 

73,765

 

 

 

62

 

 

 

(1,469

)

 

 

75,172

 

Pooled trust preferred

 

 

2,275

 

 

 

246

 

 

 

(950

)

 

 

2,979

 

 

 

212

 

 

 

-

 

 

 

(30

)

 

 

242

 

Corporate debt

 

 

7,112

 

 

 

50

 

 

 

(8

)

 

 

7,070

 

 

 

8,074

 

 

 

31

 

 

 

(19

)

 

 

8,062

 

Equity

 

 

8,065

 

 

 

338

 

 

 

(332

)

 

 

8,059

 

 

 

7,530

 

 

 

151

 

 

 

(327

)

 

 

7,706

 

Total investment securities available-for-sale

 

$

368,834

 

 

$

5,201

 

 

$

(1,734

)

 

$

365,367

 

 

$

382,564

 

 

$

1,574

 

 

$

(5,200

)

 

$

386,190

 

 

 

 

 

 

 

Gross

 

 

Gross

 

 

 

 

 

 

 

 

 

 

Gross

 

 

Gross

 

 

 

 

 

 

 

 

 

 

unrealized

 

 

unrealized

 

 

 

 

 

 

 

 

 

 

unrealized

 

 

unrealized

 

 

 

 

 

 

Fair

 

 

holding

 

 

holding

 

 

Amortized

 

 

Fair

 

 

holding

 

 

holding

 

 

Amortized

 

December 31, 2015

 

value

 

 

gains

 

 

losses

 

 

cost

 

December 31, 2016

 

value

 

 

gains

 

 

losses

 

 

cost

 

U.S. Government agency

 

$

61,779

 

 

$

88

 

 

$

(490

)

 

$

62,181

 

 

$

76,650

 

 

$

36

 

 

$

(2,118

)

 

$

78,732

 

State and municipal

 

 

78,954

 

 

 

1,554

 

 

 

(31

)

 

 

77,431

 

 

 

72,295

 

 

 

614

 

 

 

(398

)

 

 

72,079

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed

 

 

136,681

 

 

 

944

 

 

 

(920

)

 

 

136,657

 

 

 

145,301

 

 

 

561

 

 

 

(2,241

)

 

 

146,981

 

Collateralized mortgage obligations (CMOs)

 

 

65,610

 

 

 

178

 

 

 

(1,178

)

 

 

66,610

 

 

 

77,415

 

 

 

109

 

 

 

(1,846

)

 

 

79,152

 

Pooled trust preferred

 

 

2,653

 

 

 

259

 

 

 

(897

)

 

 

3,291

 

 

 

2,281

 

 

 

263

 

 

 

(891

)

 

 

2,909

 

Corporate debt

 

 

9,004

 

 

 

15

 

 

 

(95

)

 

 

9,084

 

 

 

8,030

 

 

 

16

 

 

 

(57

)

 

 

8,071

 

Equity

 

 

7,234

 

 

 

516

 

 

 

(770

)

 

 

7,488

 

 

 

8,503

 

 

 

587

 

 

 

(328

)

 

 

8,244

 

Total investment securities available-for-sale

 

$

361,915

 

 

$

3,554

 

 

$

(4,381

)

 

$

362,742

 

 

$

390,475

 

 

$

2,186

 

 

$

(7,879

)

 

$

396,168

 

 

The amortized cost and estimated fair value of securities available-for-sale by contractual maturity at SeptemberJune 30, 20162017 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

 

 

 

 

 

 

Amortized

 

September 30, 2016

 

Fair value

 

 

cost

 

June 30, 2017

 

Fair value

 

 

cost

 

Due in one year or less

 

$

6,140

 

 

$

6,085

 

 

$

7,111

 

 

$

7,069

 

Due after one year through five years

 

 

240,710

 

 

 

237,900

 

 

 

205,142

 

 

 

206,788

 

Due after five years through ten years

 

 

101,608

 

 

 

100,465

 

 

 

140,510

 

 

 

142,352

 

Due after ten years

 

 

12,311

 

 

 

12,858

 

 

 

22,271

 

 

 

22,275

 

Equity securities

 

 

8,065

 

 

 

8,059

 

 

 

7,530

 

 

 

7,706

 

Total investment securities available-for-sale

 

$

368,834

 

 

$

365,367

 

 

$

382,564

 

 

$

386,190

 

 

For the three months ended September 30, 2016 and 2015, proceeds from sales of investment securities available-for-sale were approximately $3,078,000 and $685,000. Proceeds from sales of investment securities available-for-sale were approximately $31,892,000$10,624,000 and $27,480,000$4,198,000 for the ninethree months ended SeptemberJune 30, 2017 and 2016, respectively.  Proceeds from sales of investment securities available-for-sale were approximately $24,620,000 and 2015,$28,814,000 for the six months ended June 30, 2017 and 2016 respectively.

At SeptemberJune 30, 20162017 and December 31, 2015,2016, investment securities available-for-sale totaling approximately $215,013,000$171,738,000 and $197,149,000,$166,628,000, respectively, were pledged as collateral for repurchase agreements and deposits of public funds.

1413


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 of equity and debt securities, 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, 2016

 

 

Three months ended September 30, 2015

 

 

Three months ended June 30, 2017

 

 

Three months ended June 30, 2016

 

 

 

 

 

 

 

 

 

 

Other-than-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other-than-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other-than-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other-than-

 

 

 

 

 

 

Gross

 

 

Gross

 

 

temporary

 

 

 

 

 

 

Gross

 

 

Gross

 

 

temporary

 

 

 

 

 

 

Gross

 

 

Gross

 

 

temporary

 

 

 

 

 

 

Gross

 

 

Gross

 

 

temporary

 

 

 

 

 

 

realized

 

 

realized

 

 

impairment

 

 

 

 

 

 

realized

 

 

realized

 

 

impairment

 

 

 

 

 

 

realized

 

 

realized

 

 

impairment

 

 

 

 

 

 

realized

 

 

realized

 

 

impairment

 

 

 

 

 

 

gains

 

 

losses

 

 

losses

 

 

Net gains

 

 

gains

 

 

losses

 

 

losses

 

 

Net gains

 

 

gains

 

 

losses

 

 

losses

 

 

Net gains (losses)

 

 

gains

 

 

losses

 

 

losses

 

 

Net gains (losses)

 

Equity securities

 

$

316

 

 

$

 

 

$

 

 

$

316

 

 

$

83

 

 

$

 

 

$

 

 

$

83

 

 

$

131

 

 

$

 

 

$

 

 

$

131

 

 

$

36

 

 

$

 

 

$

(122

)

 

$

(86

)

Debt securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

431

 

 

 

(447

)

 

 

 

 

 

(16

)

 

 

101

 

 

 

 

 

 

 

 

 

101

 

Total

 

$

316

 

 

$

 

 

$

 

 

$

316

 

 

$

83

 

 

$

 

 

$

 

 

$

83

 

 

$

562

 

 

$

(447

)

 

$

 

 

$

115

 

 

$

137

 

 

$

 

 

$

(122

)

 

$

15

 

 

 

Nine months ended September 30, 2016

 

 

Nine months ended September 30, 2015

 

 

Six months ended June 30, 2017

 

 

Six months ended June 30, 2016

 

 

 

 

 

 

 

 

 

 

Other-than-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other-than-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other-than-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other-than-

 

 

 

 

 

 

Gross

 

 

Gross

 

 

temporary

 

 

 

 

 

 

Gross

 

 

Gross

 

 

temporary

 

 

 

 

 

 

Gross

 

 

Gross

 

 

temporary

 

 

 

 

 

 

Gross

 

 

Gross

 

 

temporary

 

 

 

 

 

 

realized

 

 

realized

 

 

impairment

 

 

 

 

 

 

realized

 

 

realized

 

 

impairment

 

 

 

 

 

 

realized

 

 

realized

 

 

impairment

 

 

 

 

 

 

realized

 

 

realized

 

 

impairment

 

 

 

 

 

 

gains

 

 

losses

 

 

losses

 

 

Net gains

 

 

gains

 

 

losses

 

 

losses

 

 

Net gains

 

 

gains

 

 

losses

 

 

losses

 

 

Net gains

 

 

gains

 

 

losses

 

 

losses

 

 

Net gains

 

Equity securities

 

$

734

 

 

$

 

 

$

(192

)

 

$

542

 

 

$

713

 

 

$

(23

)

 

$

 

 

$

690

 

 

$

856

 

 

$

 

 

$

 

 

$

856

 

 

$

417

 

 

$

 

 

$

(192

)

 

$

225

 

Debt securities

 

 

181

 

 

 

(73

)

 

 

 

 

 

108

 

 

 

154

 

 

 

(44

)

 

 

 

 

 

110

 

 

 

509

 

 

 

(501

)

 

 

 

 

 

8

 

 

 

182

 

 

 

(73

)

 

 

 

 

 

109

 

Total

 

$

915

 

 

$

(73

)

 

$

(192

)

 

$

650

 

 

$

867

 

 

$

(67

)

 

$

 

 

$

800

 

 

$

1,365

 

 

$

(501

)

 

$

 

 

$

864

 

 

$

599

 

 

$

(73

)

 

$

(192

)

 

$

334

 

 

The tax expense applicable to the net realized gains for the quarters and nine-monthsix-month periods ended SeptemberJune 30, 2017 and 2016 were $40,000 and 2015 were $107,000 and $29,000$5,000 for the quarter and $221,000$294,000 and $273,000$114,000 year-to-date, respectively.

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

The following table presents a roll forward of the credit loss component recognized in earnings. The credit loss component of the amortized cost represents the difference between the present value of expected future cash flows and the amortized cost basis of the security prior to considering credit losses. The beginning balance represents the credit loss component for debt securities for which OTTI occurred prior to the beginning of the year. Credit-impaired debt securities must be presented in two components based upon whether the current period is the first time the debt security was credit-impaired (initial credit impairment) or is not the first time the debt security was credit-impaired (subsequent credit impairments). No credit impairments were recognized on debt securities in the first nine monthsduring second quarter of 20162017 or 2015.2016. 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,

 

2016

 

 

2015

 

Six months ended June 30,

 

2017

 

 

2016

 

Balance, beginning of period

 

$

1,153

 

 

$

1,153

 

 

$

1,153

 

 

$

1,153

 

Reductions: sale, pooled trust preferred

 

 

(1,152

)

 

 

 

Additions:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Initial credit impairments

 

 

 

 

 

 

 

 

 

 

 

 

Subsequent credit impairments

 

 

 

 

 

 

 

 

 

 

 

 

Balance, end of period

 

$

1,153

 

 

$

1,153

 

 

$

1

 

 

$

1,153

 

1514


QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

 

The amortized cost and estimated fair values of investment securities held-to-maturity at September 30, 2016 and December 31, 2015 were as follows:

Held-To-Maturity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2016

 

 

December 31, 2015

 

 

 

 

 

 

 

Gross

 

 

Gross

 

 

 

 

 

 

 

 

 

 

Gross

 

 

Gross

 

 

 

 

 

 

 

 

 

 

 

unrealized

 

 

unrealized

 

 

 

 

 

 

 

 

 

 

unrealized

 

 

unrealized

 

 

 

 

 

 

 

Amortized

 

 

holding

 

 

holding

 

 

Fair

 

 

Amortized

 

 

holding

 

 

holding

 

 

Fair

 

 

 

cost

 

 

gains

 

 

losses

 

 

value

 

 

cost

 

 

gains

 

 

losses

 

 

value

 

State and municipal

   securities

 

$

147

 

 

$

 

 

$

 

 

$

147

 

 

$

147

 

 

$

4

 

 

$

 

 

$

151

 

The amortized cost and estimated fair value of securities held-to-maturity by contractual maturity at September 30, 2016 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.

 

 

 

 

 

 

Amortized

 

September 30, 2016

 

Fair value

 

 

cost

 

Due in one year or less

 

$

147

 

 

$

147

 

Due after one year through five years

 

 

 

 

 

 

Due after five years through ten years

 

 

 

 

 

 

Due after ten years

 

 

 

 

 

 

Total investment securities held-to-maturity

 

$

147

 

 

$

147

 

There were no sales of investment securities classified as held-to-maturity during the three and nine months ended September 30, 2016 or 2015.

The following table indicates the length of time individual securities have been in a continuous unrealized loss position at SeptemberJune 30, 20162017 and December 31, 2015:2016:

 

September 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less than 12 months

 

 

12 months or longer

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

No. of

 

 

Fair

 

 

Unrealized

 

 

Fair

 

 

Unrealized

 

 

Fair

 

 

Unrealized

 

 

 

 

 

 

Less than 12 months

 

 

12 months or longer

 

 

Total

 

 

securities

 

 

value

 

 

losses

 

 

value

 

 

losses

 

 

value

 

 

losses

 

 

No. of

 

 

Fair

 

 

Unrealized

 

 

Fair

 

 

Unrealized

 

 

Fair

 

 

Unrealized

 

June 30, 2017

 

securities

 

 

value

 

 

losses

 

 

value

 

 

losses

 

 

value

 

 

losses

 

U.S. Government agency

 

 

15

 

 

$

20,918

 

 

$

(98

)

 

$

 

 

$

 

 

$

20,918

 

 

$

(98

)

 

 

52

 

 

$

69,935

 

 

$

(1,541

)

 

$

 

 

$

 

 

$

69,935

 

 

$

(1,541

)

State and municipal

 

 

11

 

 

 

3,796

 

 

 

(37

)

 

 

 

 

 

 

 

 

3,796

 

 

 

(37

)

 

 

25

 

 

 

10,312

 

 

 

(113

)

 

 

518

 

 

 

(20

)

 

 

10,830

 

 

 

(133

)

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed

 

 

6

 

 

 

9,222

 

 

 

(11

)

 

 

 

 

 

 

 

 

9,222

 

 

 

(11

)

 

 

90

 

 

 

126,077

 

 

 

(1,681

)

 

 

 

 

 

 

 

 

126,077

 

 

 

(1,681

)

Collateralized mortgage obligations (CMOs)

 

 

38

 

 

 

27,179

 

 

 

(100

)

 

 

15,823

 

 

 

(198

)

 

 

43,002

 

 

 

(298

)

 

 

65

 

 

 

53,910

 

 

 

(1,013

)

 

 

14,000

 

 

 

(456

)

 

 

67,910

 

 

 

(1,469

)

Pooled trust preferred

 

 

5

 

 

 

 

 

 

 

 

 

1,938

 

 

 

(950

)

 

 

1,938

 

 

 

(950

)

 

 

1

 

 

 

 

 

 

 

 

 

212

 

 

 

(30

)

 

 

212

 

 

 

(30

)

Corporate debt

 

 

1

 

 

 

 

 

 

 

 

 

1,003

 

 

 

(8

)

 

 

1,003

 

 

 

(8

)

 

 

3

 

 

 

3,016

 

 

 

(19

)

 

 

 

 

 

 

 

 

3,016

 

 

 

(19

)

Equity

 

 

18

 

 

 

3,259

 

 

 

(240

)

 

 

1,065

 

 

 

(92

)

 

 

4,324

 

 

 

(332

)

 

 

13

 

 

 

2,962

 

 

 

(276

)

 

 

498

 

 

 

(51

)

 

 

3,460

 

 

 

(327

)

Total

 

 

94

 

 

$

64,374

 

 

$

(486

)

 

$

19,829

 

 

$

(1,248

)

 

$

84,203

 

 

$

(1,734

)

 

 

249

 

 

$

266,212

 

 

$

(4,643

)

 

$

15,228

 

 

$

(557

)

 

$

281,440

 

 

$

(5,200

)

 

16


QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

December 31, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less than 12 months

 

 

12 months or longer

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

No. of

 

 

Fair

 

 

Unrealized

 

 

Fair

 

 

Unrealized

 

 

Fair

 

 

Unrealized

 

 

 

 

 

 

Less than 12 months

 

 

12 months or longer

 

 

Total

 

 

securities

 

 

value

 

 

losses

 

 

value

 

 

losses

 

 

value

 

 

losses

 

 

No. of

 

 

Fair

 

 

Unrealized

 

 

Fair

 

 

Unrealized

 

 

Fair

 

 

Unrealized

 

December 31, 2016

 

securities

 

 

value

 

 

losses

 

 

value

 

 

losses

 

 

value

 

 

losses

 

U.S. Government agency

 

 

32

 

 

$

40,949

 

 

$

(418

)

 

$

4,426

 

 

$

(72

)

 

$

45,375

 

 

$

(490

)

 

 

55

 

 

$

72,626

 

 

$

(2,118

)

 

$

 

 

$

 

 

$

72,626

 

 

$

(2,118

)

State and municipal

 

 

20

 

 

 

6,646

 

 

 

(19

)

 

 

1,555

 

 

 

(12

)

 

 

8,201

 

 

 

(31

)

 

 

70

 

 

 

29,280

 

 

 

(398

)

 

 

 

 

 

 

 

 

29,280

 

 

 

(398

)

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed

 

 

62

 

 

 

90,796

 

 

 

(871

)

 

 

1,403

 

 

 

(49

)

 

 

92,199

 

 

 

(920

)

 

 

88

 

 

 

123,087

 

 

 

(2,241

)

 

 

 

 

 

 

 

 

123,087

 

 

 

(2,241

)

Collateralized mortgage obligations (CMOs)

 

 

49

 

 

 

28,372

 

 

 

(261

)

 

 

26,354

 

 

 

(917

)

 

 

54,726

 

 

 

(1,178

)

 

 

68

 

 

 

56,853

 

 

 

(1,269

)

 

 

15,426

 

 

 

(577

)

 

 

72,279

 

 

 

(1,846

)

Pooled trust preferred

 

 

5

 

 

 

 

 

 

 

 

 

2,193

 

 

 

(897

)

 

 

2,193

 

 

 

(897

)

 

 

5

 

 

 

 

 

 

 

 

 

1,952

 

 

 

(891

)

 

 

1,952

 

 

 

(891

)

Corporate debt

 

 

6

 

 

 

5,988

 

 

 

(95

)

 

 

 

 

 

 

 

 

5,988

 

 

 

(95

)

 

 

4

 

 

 

4,002

 

 

 

(57

)

 

 

 

 

 

 

 

 

4,002

 

 

 

(57

)

Equity

 

 

19

 

 

 

4,035

 

 

 

(695

)

 

 

193

 

 

 

(75

)

 

 

4,228

 

 

 

(770

)

 

 

16

 

 

 

2,985

 

 

 

(268

)

 

 

888

 

 

 

(60

)

 

 

3,873

 

 

 

(328

)

Total

 

 

193

 

 

$

176,786

 

 

$

(2,359

)

 

$

36,124

 

 

$

(2,022

)

 

$

212,910

 

 

$

(4,381

)

 

 

306

 

 

$

288,833

 

 

$

(6,351

)

 

$

18,266

 

 

$

(1,528

)

 

$

307,099

 

 

$

(7,879

)

 

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, 20162017 in U.S. Government agency securities, state and municipal securities, mortgage-backed securities, CMOs and corporate debt securities are primarily the result of interest rate fluctuations. If held to maturity, these bonds will mature at par, and QNB will not realize a loss. The Company has the intent to hold the securities and does not believe it will be required to sell the securities before recovery occurs.

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 six pooledone trust preferred securities assecurity, PreTSL IV.  As of SeptemberJune 30, 2016. These securities have a total amortized cost of approximately $2,979,0002017, PreTSL IV is no longer considered impaired:  all capitalized interest has been repaid, no cashflows are being diverted to any senior tranche, and a fair value of $2,275,000. Five of the six securities have been in an unrealized loss position for more than twelve months. All of the pooled trust preferred securities are available-for-sale securities and are carried at fair value.bond has excess subordination, which represents cushion to absorb future defaults or deferrals.

15


QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table provides additional information related to the pooled trust preferred securities (PreTSLs)security (PreTSL) as of SeptemberJune 30, 2016:2017:

 

Deal

 

Class

 

 

Book

value

 

 

Fair

value

 

 

Unrealized

gains (losses)

 

 

Realized

OTTI

credit

loss

(YTD 2016)

 

 

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

*

 

$

243

 

 

$

188

 

 

$

(55

)

 

$

 

 

$

(1

)

 

B1/BB

 

 

5

 

 

 

 

 

 

18.0

%

 

 

141.2

%

PreTSL XVII

 

Mezzanine

 

 

 

606

 

 

 

456

 

 

 

(150

)

 

 

 

 

 

(222

)

 

C/CC

 

 

34

 

 

 

5

 

 

 

21.6

 

 

 

99.7

 

PreTSL XIX

 

Mezzanine

 

 

 

874

 

 

 

483

 

 

 

(391

)

 

 

 

 

 

 

 

Caa1/CC

 

 

41

 

 

 

12

 

 

 

7.7

 

 

 

102.0

 

PreTSL XXV

 

Mezzanine

 

 

 

766

 

 

 

488

 

 

 

(279

)

 

 

 

 

 

(222

)

 

Ca/C

 

 

44

 

 

 

5

 

 

 

27.0

 

 

 

89.3

 

PreTSL XXVI

 

Mezzanine

 

 

 

399

 

 

 

323

 

 

 

(75

)

 

 

 

 

 

(270

)

 

Caa3/C

 

 

45

 

 

 

7

 

 

 

18.0

 

 

 

97.4

 

PreTSL XXVI

 

Mezzanine

 

 

 

91

 

 

 

337

 

 

 

246

 

 

 

 

 

 

(438

)

 

Caa3/C

 

 

45

 

 

 

7

 

 

 

18.0

 

 

 

97.4

 

 

 

 

 

 

$

2,979

 

 

$

2,275

 

 

$

(704

)

 

$

 

 

$

(1,153

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

*

 

$

242

 

 

$

212

 

 

$

(30

)

 

$

 

 

$

(1

)

 

B1/BB

 

 

5

 

 

 

 

 

 

18.0

%

 

 

141.6

%

 

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

On January 14, 2014, Regulators released a final rule authorizing retention ofIn June 2017, QNB Bank sold five non-performing pooled trust preferred securities, backed primarily by bank-issued trust preferred securities whichwith a $2,235,000 carrying value, recording a loss on sale of $15,000, included in non-interest income in the PreTSLs held by QNB. Dueconsolidated 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 uncertainty invoked between the original release of the Volcker Rule and the final rule, there was a noticeable increase in trading activity. However, we believe mostbalance of these trades occurred under distress and do not represent trades madenon-performing, nonaccrual assets. Improvement in an orderly market. Despite the trades that took place as discussed

17


QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

previously, the market prices for these securities at September 30, 2016 was not active and markets for similar securities also are not active. The new issue market is also inactiveduring the second quarter 2017 reduced realized losses, and the market valuesreduction of approximately $19,000,000 in risk-based assets required for these securities are depressed relativebonds drove the decision to historical levels. Lack of liquidity in the market for trust preferred collateralizedredeem these debt obligations, credit rating downgrades and market uncertainties related to the financial industry are all factors contributing to the temporary impairment of these securities. Although these securities are classified as available-for-sale, the Company has the intent to hold the securities and does not believe it will be required to sell the securities before recovery occurs. As illustrated in the previous table, these securities are comprised mainly of securities issued by banks, and to a lesser degree, insurance companies. QNB owns the mezzanine tranches of these securities, except for PreTSL IV which represents the senior-most obligation of the trust.

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 threequarter and ninesix months ended SeptemberJune 30, 20162017 and 2015,2016, no other-than-temporary impairment charges representing credit impairment were recognized on our pooled trust preferred collateralized debt obligations. A discounted cash flow analysis provides the best estimate of credit related OTTI for these securities. Additional information related to this analysis follows.

All of the pooled trust preferred collateralized debt obligations held by QNB arePreTSL IV is rated lower than AA and are measured for OTTI within the scope of ASC 325 (formerly known as EITF 99-20), Recognition of Interest Income and Impairment on Purchased Beneficial Interests and Beneficial Interests That Continue to be Held by a Transferor in Securitized Financial Assets, and Amendments to the Impairment Guidance of EITF Issue No. 99-20 (formerly known as EITF 99-20-1). In addition to discounted cash-flows, QNB performs a discounted cash flow analysis on allconsiders trends in the financial performance ratios of its impaired debt securities to determine if the amortized cost basisbond’s underlying issuers, as well as the bond’s structure (QNB holds the senior-most obligation of an impaired security will be recovered.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.  The discounted cash flow analysis is consideredLack of liquidity in the market for trust preferred collateralized debt obligations contributed to be the primary evidence when determining whether credit related other-than-temporarytemporary impairment exists.

Results of a discounted cash flow test are significantly affected by other variables suchthis security. Although classified as available-for-sale, the estimate of future cash flows (including prepayments), credit worthiness ofCompany has the underlying banksintent to hold PreTSL IV and insurance companies and determination of probability and severity of default of the underlying collateral. The following provides additional information for each of these variables:

Estimate of Future Cash Flows – Cash flows are constructed in an INTEXcalc valuation model. INTEX is a proprietary cash flow model recognized as the industry standard for analyzing all types of structured debt products. It includes each deal’s structural features updated with trustee information, including asset-by-asset detail, asdoes not believe it becomes available. The modeled cash flows are then used to determine if all the scheduled principal and interest payments of the investments will be returned. For purposes of the cash flow analysis, relatively modest rates of prepayment of 1% were forecasted. In additionrequired to the base prepayment assumption, due to the enactment of the Dodd-Frank Act’s revised Tier 1 capital treatment, additional prepayment analysis was performed. Trust preferred securities issued by banks with more than $15 billion in total assets at December 31, 2009 were identified. The current credit rating of these institutions was reviewed andsell it was assumed that any U.S. bank holding company with an investment grade credit rating and any foreign banking organization would prepay their issuance as soon as possible. For those institutions rated below investment grade we assumed that any holding company that could refinance for a cost savings of more than 2% when compared to the approximate cost of long-term funding given their rating and marketplace interest rates, will refinance as soon as possible. For issuers not impacted by the Tier 1 regulatory capital legislation enacted by the Dodd-Frank Act, the issuers that have shown a recent history of prepayment of both floating rate and fixed rate issues were identified and it was assumed these issuers will prepay as soon as possible.

Credit Analysis – A quarterly credit evaluation is performed for the companies comprising the collateral across the various pooled trust preferred securities. This credit evaluation considers any available evidence and focuses on capitalization, asset quality, profitability, liquidity, stock price performance, whether the institution has received TARP funding, whether the TARP funding was redeemed or resold through a Treasury Department auction at a premium or discount, and whether the institution has shown the ability to generate additional capital either internally or externally.

Probability of Default – A near-term probability of default is determined for each issuer based on its financial condition and is used to calculate the expected impact of future deferrals and defaults on the expected cash flows. Each issuer in the collateral pool is assigned a near-term probability of default based on individual performance and financial characteristics. Various studies suggest that the rate of bank failures between 1934 and 2015 were approximately 0.37%. Thus, in addition to

18


QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

the specific bank default assumptions used for the near term, for future defaults on the individual banks in the analysis for 2016 and beyond the rate used is calculated based on historic default averages and factoring that number based on a comparison of key financial ratios of active individual issuers without a short-term probability of default compared to all FDIC insured banks.  Default factors used in the cash flow analysis range from 0.25% to 0.51%.

Severity of Loss – In addition to the probability of default discussed above, a severity of loss (projected recovery) is determined in all cases. In the current analysis, the severity of loss ranges from 0% to 100% depending on the estimated credit worthiness of the individual issuer. Based on information from various published studies, a 95% severity of loss was utilized for defaults projected in 2016 and thereafter.

Based upon the analysis performed by management as of September 30, 2016, it is probable that we will collect all contractual principal and interest payments on one of our six pooled trust preferred securities, PreTSL XIX. The expected principal shortfall on the remaining pooled trust preferred securities has resulted in credit related other-than-temporary impairment charges in previous years. All of these pooled trust preferred securities held bybefore recovery occurs.  QNB could be subject to additional write-downs in the future if additional deferrals and defaults occur.

         

 

8.

7. LOANS & ALLOWANCE FOR LOAN LOSSES

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

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

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

16


QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

1.

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

 

2.

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

 

3.

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

 

4.

Nature and volume of the portfolio including growth.

 

5.

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

 

6.

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

 

7.

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

 

8.

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

19


QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

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

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

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

17


QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Major classes of loans are as follows:

 

 

September 30,

 

 

December 31,

 

 

June 30

 

 

December 31,

 

 

2016

 

 

2015

 

 

2017

 

 

2016

 

Commercial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

110,892

 

 

$

124,397

 

 

$

140,218

 

 

$

110,233

 

Construction

 

 

32,133

 

 

 

27,372

 

 

 

44,823

 

 

 

39,268

 

Secured by commercial real estate

 

 

233,430

 

 

 

235,171

 

 

 

276,738

 

 

 

255,188

 

Secured by residential real estate

 

 

65,671

 

 

 

63,164

 

 

 

68,704

 

 

 

68,731

 

State and political subdivisions

 

 

35,033

 

 

 

40,285

 

 

 

35,259

 

 

 

35,260

 

Indirect lease financing

 

 

8,707

 

 

 

10,371

 

Retail:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential mortgages

 

 

46,544

 

 

 

42,833

 

 

 

51,138

 

 

 

47,124

 

Home equity loans and lines

 

 

70,408

 

 

 

67,384

 

 

 

71,791

 

 

 

71,525

 

Consumer

 

 

5,306

 

 

 

4,286

 

 

 

6,394

 

 

 

5,670

 

Total loans

 

 

608,124

 

 

 

615,263

 

 

 

695,065

 

 

 

632,999

 

Net unearned costs

 

 

107

 

 

 

7

 

 

 

148

 

 

 

80

 

Loans receivable

 

$

608,231

 

 

$

615,270

 

 

$

695,213

 

 

$

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 expressed purpose of conducting commercial real estate transactions.

Overdrafts are reclassified as loans and are included in consumer loans above and total loans on the balance sheet. At SeptemberJune 30, 20162017 and December 31, 2015,2016, overdrafts were approximately $172,000$100,000 and $203,000,$171,000, 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

20


QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

regional economy, or real estate values. Other than disclosed in the table above, at SeptemberJune 30, 2016,2017, there were no concentrations of loans exceeding 10% of total loans.

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

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

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

18


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. The criteria include minimum credit scores ofIn October 2016, the borrower, term of theCompany sold its interest in these third-party originated lease type and age of equipment financed and geographic area. The geographic area primarily represents states contiguous to Pennsylvania. QNB is not the lessor and does not service these loans.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.

21


QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

1 - Excellent - no apparent risk

2 - Good - minimal risk

3 - Acceptable - average risk

4 - Watch List - greater than average risk

5 - Special Mention - potential weaknesses

6 - Substandard - well defined weaknesses

7 - Doubtful - full collection unlikely

8 - Loss - considered uncollectible

The Company maintains a loan review system, which allows for a periodic review of our loan portfolio and the early identification of potential problem loans. Each loan officer assigns a rating to all loans in the portfolio at the time the loan is originated. Loans with risk ratings of one through three are reviewed annually based on the borrower’s fiscal year. Loans with risk ratings of four are reviewed every six to twelve months based on the dollar amount of the relationship with the borrower. Loans with risk ratings of five through eight are reviewed at least quarterly, and as often as monthly, at management’s discretion. The Company also utilizes an outside loan review firm to review the portfolio on a semi-annual basis to provide the Board of Directors and senior management an independent review of the Bank’s 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.

19


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, 20162017 and December 31, 2015:2016:

 

September 30, 2016

 

Pass

 

 

Special

mention

 

 

Substandard

 

 

Doubtful

 

 

Total

 

June 30, 2017

 

Pass

 

 

Special

mention

 

 

Substandard

 

 

Doubtful

 

 

Total

 

Commercial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

102,130

 

 

$

700

 

 

$

8,062

 

 

$

 

 

$

110,892

 

 

$

132,360

 

 

$

3,153

 

 

$

4,705

 

 

$

 

 

$

140,218

 

Construction

 

 

32,122

 

 

 

 

 

 

11

 

 

 

 

 

 

32,133

 

 

 

44,819

 

 

 

 

 

 

4

 

 

 

 

 

 

44,823

 

Secured by commercial real estate

 

 

218,404

 

 

 

3,504

 

 

 

11,522

 

 

 

 

 

 

233,430

 

 

 

261,754

 

 

 

4,630

 

 

 

10,354

 

 

 

 

 

 

276,738

 

Secured by residential real estate

 

 

63,004

 

 

 

233

 

 

 

2,434

 

 

 

 

 

 

65,671

 

 

 

65,984

 

 

 

227

 

 

 

2,493

 

 

 

 

 

 

68,704

 

State and political subdivisions

 

 

35,033

 

 

 

 

 

 

 

 

 

 

 

 

35,033

 

 

 

35,259

 

 

 

 

 

 

 

 

 

 

 

 

35,259

 

Indirect lease financing

 

 

8,571

 

 

 

 

 

 

136

 

 

 

 

 

 

8,707

 

 

$

459,264

 

 

$

4,437

 

 

$

22,165

 

 

$

 

 

$

485,866

 

Total

 

$

540,176

 

 

$

8,010

 

 

$

17,556

 

 

$

 

 

$

565,742

 

 

December 31, 2015

 

Pass

 

 

Special

mention

 

 

Substandard

 

 

Doubtful

 

 

Total

 

December 31, 2016

 

Pass

 

 

Special

mention

 

 

Substandard

 

 

Doubtful

 

 

Total

 

Commercial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

117,246

 

 

 

 

 

$

7,151

 

 

$

 

 

$

124,397

 

 

$

102,396

 

 

$

686

 

 

$

7,151

 

 

$

 

 

$

110,233

 

Construction

 

 

27,355

 

 

 

 

 

 

17

 

 

 

 

 

 

27,372

 

 

 

39,259

 

 

 

 

 

 

9

 

 

 

 

 

 

39,268

 

Secured by commercial real estate

 

 

218,958

 

 

$

361

 

 

 

15,852

 

 

 

 

 

 

235,171

 

 

 

238,290

 

 

 

5,185

 

 

 

11,713

 

 

 

 

 

 

255,188

 

Secured by residential real estate

 

 

60,286

 

 

 

34

 

 

 

2,844

 

 

 

 

 

 

63,164

 

 

 

65,169

 

 

 

231

 

 

 

3,331

 

 

 

 

 

 

68,731

 

State and political subdivisions

 

 

39,027

 

 

 

 

 

 

1,258

 

 

 

 

 

 

40,285

 

 

 

35,260

 

 

 

 

 

 

 

 

 

 

 

 

35,260

 

Indirect lease financing

 

 

10,168

 

 

 

 

 

 

203

 

 

 

 

 

 

10,371

 

 

$

473,040

 

 

$

395

 

 

$

27,325

 

 

$

 

 

$

500,760

 

Total

 

$

480,374

 

 

$

6,102

 

 

$

22,204

 

 

$

 

 

$

508,680

 

 

22


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, 20162017 and December 31, 2015:2016:

 

September 30, 2016

 

Performing

 

 

Non-performing

 

 

Total

 

June 30, 2017

 

Performing

 

 

Non-performing

 

 

Total

 

Retail:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential mortgages

 

$

46,274

 

 

$

270

 

 

$

46,544

 

 

$

50,264

 

 

$

874

 

 

$

51,138

 

Home equity loans and lines

 

 

70,312

 

 

 

96

 

 

 

70,408

 

 

 

71,679

 

 

 

112

 

 

 

71,791

 

Consumer

 

 

5,211

 

 

 

95

 

 

 

5,306

 

 

 

6,305

 

 

 

89

 

 

 

6,394

 

 

$

121,797

 

 

$

461

 

 

$

122,258

 

Total

 

$

128,248

 

 

$

1,075

 

 

$

129,323

 

 

December 31, 2015

 

Performing

 

 

Non-performing

 

 

Total

 

December 31, 2016

 

Performing

 

 

Non-performing

 

 

Total

 

Retail:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential mortgages

 

$

42,546

 

 

$

287

 

 

$

42,833

 

 

$

46,858

 

 

$

266

 

 

$

47,124

 

Home equity loans and lines

 

 

67,257

 

 

 

127

 

 

 

67,384

 

 

 

71,436

 

 

 

89

 

 

 

71,525

 

Consumer

 

 

4,286

 

 

 

 

 

 

4,286

 

 

 

5,577

 

 

 

93

 

 

 

5,670

 

 

$

114,089

 

 

$

414

 

 

$

114,503

 

Total

 

$

123,871

 

 

$

448

 

 

$

124,319

 

20


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, 20162017 and December 31, 2015:2016:

 

September 30, 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

 

June 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

 

Commercial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

15

 

 

 

 

 

 

 

 

$

15

 

 

$

110,877

 

 

$

110,892

 

 

$

73

 

 

 

 

 

 

 

 

$

73

 

 

$

140,145

 

 

$

140,218

 

Construction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

32,133

 

 

 

32,133

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

44,823

 

 

 

44,823

 

Secured by commercial real estate

 

 

962

 

 

$

1,226

 

 

$

861

 

 

 

3,049

 

 

 

230,381

 

 

 

233,430

 

 

 

59

 

 

 

 

 

$

775

 

 

 

834

 

 

 

275,904

 

 

 

276,738

 

Secured by residential real estate

 

 

92

 

 

 

 

 

 

327

 

 

 

419

 

 

 

65,252

 

 

 

65,671

 

 

 

218

 

 

$

204

 

 

 

155

 

 

 

577

 

 

 

68,127

 

 

 

68,704

 

State and political subdivisions

 

 

 

 

 

 

 

 

 

 

 

 

 

 

35,033

 

 

 

35,033

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

35,259

 

 

 

35,259

 

Indirect lease financing

 

 

134

 

 

 

133

 

 

 

282

 

 

 

549

 

 

 

8,158

 

 

 

8,707

 

Retail:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential mortgages

 

 

 

 

 

 

 

 

 

 

 

 

 

 

46,544

 

 

 

46,544

 

 

 

 

 

 

 

 

 

481

 

 

 

481

 

 

 

50,657

 

 

 

51,138

 

Home equity loans and lines

 

 

55

 

 

 

172

 

 

 

 

 

 

227

 

 

 

70,181

 

 

 

70,408

 

 

 

 

 

 

31

 

 

 

50

 

 

 

81

 

 

 

71,710

 

 

 

71,791

 

Consumer

 

 

26

 

 

 

2

 

 

 

 

 

 

28

 

 

 

5,278

 

 

 

5,306

 

 

 

23

 

 

 

7

 

 

 

10

 

 

 

40

 

 

 

6,354

 

 

 

6,394

 

 

$

1,284

 

 

$

1,533

 

 

$

1,470

 

 

$

4,287

 

 

$

603,837

 

 

$

608,124

 

Total

 

$

373

 

 

$

242

 

 

$

1,471

 

 

$

2,086

 

 

$

692,979

 

 

$

695,065

 

 

December 31, 2015

 

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, 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

 

Commercial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

95

 

 

 

 

 

 

 

 

$

95

 

 

$

124,302

 

 

$

124,397

 

 

$

463

 

 

 

 

 

 

 

 

$

463

 

 

$

109,770

 

 

$

110,233

 

Construction

 

 

63

 

 

 

 

 

 

 

 

 

63

 

 

 

27,309

 

 

 

27,372

 

 

 

214

 

 

 

 

 

 

 

 

 

214

 

 

 

39,054

 

 

 

39,268

 

Secured by commercial real estate

 

 

443

 

 

 

 

 

$

935

 

 

 

1,378

 

 

 

233,793

 

 

 

235,171

 

 

 

64

 

 

$

395

 

 

$

1,596

 

 

 

2,055

 

 

 

253,133

 

 

 

255,188

 

Secured by residential real estate

 

 

 

 

$

97

 

 

 

369

 

 

 

466

 

 

 

62,698

 

 

 

63,164

 

 

 

 

 

 

 

 

 

285

 

 

 

285

 

 

 

68,446

 

 

 

68,731

 

State and political subdivisions

 

 

 

 

 

 

 

 

 

 

 

 

 

 

40,285

 

 

 

40,285

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

35,260

 

 

 

35,260

 

Indirect lease financing

 

 

320

 

 

 

53

 

 

 

130

 

 

 

503

 

 

 

9,868

 

 

 

10,371

 

Retail:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential mortgages

 

 

641

 

 

 

234

 

 

 

 

 

 

875

 

 

 

41,958

 

 

 

42,833

 

 

 

1,459

 

 

 

323

 

 

 

 

 

 

1,782

 

 

 

45,342

 

 

 

47,124

 

Home equity loans and lines

 

 

272

 

 

 

 

 

 

45

 

 

 

317

 

 

 

67,067

 

 

 

67,384

 

 

 

107

 

 

 

15

 

 

 

 

 

 

122

 

 

 

71,403

 

 

 

71,525

 

Consumer

 

 

12

 

 

 

10

 

 

 

 

 

 

22

 

 

 

4,264

 

 

 

4,286

 

 

 

14

 

 

 

2

 

 

 

 

 

 

16

 

 

 

5,654

 

 

 

5,670

 

 

$

1,846

 

 

$

394

 

 

$

1,479

 

 

$

3,719

 

 

$

611,544

 

 

$

615,263

 

Total

 

$

2,321

 

 

$

735

 

 

$

1,881

 

 

$

4,937

 

 

$

628,062

 

 

$

632,999

 

 

23


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, 20162017 and December 31, 2015:2016:

 

September 30, 2016

 

90 days or more past

due (still accruing)

 

 

Non-accrual

 

Commercial:

 

 

 

 

 

 

 

 

Commercial and industrial

 

 

 

 

$

2,908

 

Construction

 

 

 

 

 

 

Secured by commercial real estate

 

 

 

 

 

3,319

 

Secured by residential real estate

 

 

 

 

 

1,417

 

State and political subdivisions

 

 

 

 

 

 

Indirect lease financing

 

$

150

 

 

 

132

 

Retail:

 

 

 

 

 

 

 

 

1-4 family residential mortgages

 

 

 

 

 

270

 

Home equity loans and lines

 

 

 

 

 

96

 

Consumer

 

 

 

 

 

95

 

 

 

$

150

 

 

$

8,237

 

December 31, 2015

 

90 days or more past

due (still accruing)

 

 

Non-accrual

 

Commercial:

 

 

 

 

 

 

 

 

Commercial and industrial

 

 

 

 

$

3,433

 

Construction

 

 

 

 

 

 

Secured by commercial real estate

 

 

 

 

 

3,627

 

Secured by residential real estate

 

 

 

 

 

1,803

 

State and political subdivisions

 

 

 

 

 

 

Indirect lease financing

 

$

11

 

 

 

143

 

Retail:

 

 

 

 

 

 

 

 

1-4 family residential mortgages

 

 

 

 

 

287

 

Home equity loans and lines

 

 

 

 

 

127

 

Consumer

 

 

 

 

 

 

 

 

$

11

 

 

$

9,420

 

Activity in the allowance for loan losses for the three months ended September 30, 2016 and 2015 are as follows:

Three months ended September 30, 2016

 

Balance,

beginning of

period

 

 

Provision for

(credit to)

loan losses

 

 

Charge-offs

 

 

Recoveries

 

 

Balance, end

of period

 

June 30, 2017

 

90 days or more past

due (still accruing)

 

 

Non-accrual

 

Commercial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

1,350

 

 

$

(55

)

 

 

 

 

$

9

 

 

$

1,304

 

 

$

 

 

$

4,467

 

Construction

 

 

429

 

 

 

(79

)

 

 

 

 

 

 

 

 

350

 

 

 

 

 

 

 

Secured by commercial real estate

 

 

2,231

 

 

 

233

 

 

 

 

 

 

2

 

 

 

2,466

 

 

 

 

 

 

2,140

 

Secured by residential real estate

 

 

1,550

 

 

 

(57

)

 

 

 

 

 

50

 

 

 

1,543

 

 

 

 

 

 

1,771

 

State and political subdivisions

 

 

204

 

 

 

(64

)

 

 

 

 

 

 

 

 

140

 

 

 

 

 

 

 

Indirect lease financing

 

 

226

 

 

 

(6

)

 

 

 

 

 

 

 

 

220

 

Retail:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential mortgages

 

 

298

 

 

 

(20

)

 

 

 

 

 

 

 

 

278

 

 

 

 

 

 

874

 

Home equity loans and lines

 

 

343

 

 

 

(7

)

 

 

 

 

 

4

 

 

 

340

 

 

 

 

 

 

112

 

Consumer

 

 

73

 

 

 

33

 

 

$

(29

)

 

 

7

 

 

 

84

 

 

 

 

 

 

89

 

Unallocated

 

 

846

 

 

 

22

 

 

N/A

 

 

N/A

 

 

 

868

 

 

$

7,550

 

 

$

 

 

$

(29

)

 

$

72

 

 

$

7,593

 

Total

 

$

 

 

$

9,453

 

 

2421


QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

Three months ended September 30, 2015

 

Balance,

beginning of

period

 

 

Provision

(credit) for

loan losses

��

 

Charge-offs

 

 

Recoveries

 

 

Balance, end

of period

 

December 31, 2016

 

90 days or more past

due (still accruing)

 

 

Non-accrual

 

Commercial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

1,603

 

 

$

(79

)

 

 

 

 

$

11

 

 

$

1,535

 

 

$

 

 

$

4,798

 

Construction

 

 

149

 

 

 

118

 

 

 

 

 

 

 

 

 

267

 

 

 

 

 

 

 

Secured by commercial real estate

 

 

2,655

 

 

 

(494

)

 

 

 

 

 

3

 

 

 

2,164

 

 

 

 

 

 

3,007

 

Secured by residential real estate

 

 

1,635

 

 

 

(53

)

 

$

(4

)

 

 

2

 

 

 

1,580

 

 

 

 

 

 

1,866

 

State and political subdivisions

 

 

232

 

 

 

(4

)

 

 

 

 

 

 

 

 

228

 

 

 

 

 

 

 

Indirect lease financing

 

 

121

 

 

 

(4

)

 

 

 

 

 

5

 

 

 

122

 

Retail:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential mortgages

 

 

313

 

 

 

(7

)

 

 

 

 

 

 

 

 

306

 

 

 

 

 

 

266

 

Home equity loans and lines

 

 

474

 

 

 

(28

)

 

 

 

 

 

4

 

 

 

450

 

 

 

 

 

 

89

 

Consumer

 

 

71

 

 

 

18

 

 

 

(17

)

 

 

10

 

 

 

82

 

 

 

 

 

 

93

 

Unallocated

 

 

402

 

 

 

533

 

 

N/A

 

 

N/A

 

 

 

935

 

 

$

7,655

 

 

$

 

 

$

(21

)

 

$

35

 

 

$

7,669

 

Total

 

$

 

 

$

10,119

 

 

Activity in the allowance for loan losses for the ninethree months ended SeptemberJune 30, 20162017 and 20152016 are as follows:

 

Nine months ended September 30, 2016

 

Balance,

beginning of

period

 

 

Provision for

(credit to)

loan losses

 

 

Charge-offs

 

 

Recoveries

 

 

Balance, end

of period

 

Three months ended June 30, 2017

 

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

 

 

$

1,978

 

 

$

191

 

 

 

 

 

$

8

 

 

$

2,177

 

Construction

 

 

286

 

 

 

64

 

 

 

 

 

 

 

 

 

350

 

 

 

463

 

 

 

53

 

 

 

 

 

 

 

 

 

516

 

Secured by commercial real estate

 

 

2,411

 

 

 

49

 

 

 

 

 

 

6

 

 

 

2,466

 

 

 

2,577

 

 

 

61

 

 

 

 

 

 

2

 

 

 

2,640

 

Secured by residential real estate

 

 

1,812

 

 

 

(359

)

 

 

(20

)

 

 

110

 

 

 

1,543

 

 

 

1,344

 

 

 

(156

)

 

 

 

 

 

12

 

 

 

1,200

 

State and political subdivisions

 

 

222

 

 

 

(82

)

 

 

 

 

 

 

 

 

140

 

 

 

124

 

 

 

(1

)

 

 

 

 

 

 

 

 

123

 

Indirect lease financing

 

 

164

 

 

 

99

 

 

 

(52

)

 

 

9

 

 

 

220

 

Retail:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential mortgages

 

 

350

 

 

 

(72

)

 

 

 

 

 

 

 

 

278

 

 

 

415

 

 

 

24

 

 

 

 

 

 

 

 

 

439

 

Home equity loans and lines

 

 

428

 

 

 

(102

)

 

 

 

 

 

14

 

 

 

340

 

 

 

342

 

 

 

(25

)

 

 

 

 

 

2

 

 

 

319

 

Consumer

 

 

76

 

 

 

49

 

 

 

(62

)

 

 

21

 

 

 

84

 

 

 

77

 

 

 

9

 

 

$

(18

)

 

 

10

 

 

 

78

 

Unallocated

 

 

284

 

 

 

584

 

 

N/A

 

 

N/A

 

 

 

868

 

 

 

399

 

 

 

144

 

 

N/A

 

 

N/A

 

 

 

543

 

 

$

7,554

 

 

$

125

 

 

$

(274

)

 

$

188

 

 

$

7,593

 

Total

 

$

7,719

 

 

$

300

 

 

$

(18

)

 

$

34

 

 

$

8,035

 

 

Nine months ended September 30, 2015

 

Balance,

beginning of

period

 

 

Provision

(credit) for

loan losses

 

 

Charge-offs

 

 

Recoveries

 

 

Balance, end

of period

 

Three months ended June 30, 2016

 

Balance,

beginning of

period

 

 

Provision for

(credit to)

loan losses

 

 

Charge-offs

 

 

Recoveries

 

 

Balance, end

of period

 

Commercial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

1,892

 

 

$

(357

)

 

$

(30

)

 

$

30

 

 

$

1,535

 

 

$

1,334

 

 

$

6

 

 

 

 

 

$

10

 

 

$

1,350

 

Construction

 

 

297

 

 

 

(30

)

 

 

 

 

 

 

 

 

267

 

 

 

352

 

 

 

77

 

 

 

 

 

 

 

 

 

429

 

Secured by commercial real estate

 

 

2,700

 

 

 

(458

)

 

 

(85

)

 

 

7

 

 

 

2,164

 

 

 

2,292

 

 

 

(63

)

 

 

 

 

 

2

 

 

 

2,231

 

Secured by residential real estate

 

 

1,630

 

 

 

251

 

 

 

(321

)

 

 

20

 

 

 

1,580

 

 

 

1,690

 

 

 

(162

)

 

$

(20

)

 

 

42

 

 

 

1,550

 

State and political subdivisions

 

 

221

 

 

 

7

 

 

 

 

 

 

 

 

 

228

 

 

 

196

 

 

 

8

 

 

 

 

 

 

 

 

 

204

 

Indirect lease financing

 

 

93

 

 

 

22

 

 

 

(8

)

 

 

15

 

 

 

122

 

 

 

208

 

 

 

52

 

 

 

(43

)

 

 

9

 

 

 

226

 

Retail:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential mortgages

 

 

312

 

 

 

(6

)

 

 

 

 

 

 

 

 

306

 

 

 

352

 

 

 

(54

)

 

 

 

 

 

 

 

 

298

 

Home equity loans and lines

 

 

453

 

 

 

(19

)

 

 

 

 

 

16

 

 

 

450

 

 

 

352

 

 

 

(14

)

 

 

 

 

 

5

 

 

 

343

 

Consumer

 

 

85

 

 

 

33

 

 

 

(58

)

 

 

22

 

 

 

82

 

 

 

69

 

 

 

15

 

 

 

(16

)

 

 

5

 

 

 

73

 

Unallocated

 

 

318

 

 

 

617

 

 

N/A

 

 

N/A

 

 

 

935

 

 

 

711

 

 

 

135

 

 

N/A

 

 

N/A

 

 

 

846

 

 

$

8,001

 

 

$

60

 

 

$

(502

)

 

$

110

 

 

$

7,669

 

Total

 

$

7,556

 

 

$

 

 

$

(79

)

 

$

73

 

 

$

7,550

 

 

25Activity in the allowance for loan losses for the six months ended June 30, 2017 and 2016 are as follows:

22


QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

Six months ended June 30, 2017

 

Balance,

beginning of

period

 

 

Provision for

(credit to)

loan losses

 

 

Charge-offs

 

 

Recoveries

 

 

Balance, end

of period

 

Commercial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

1,459

 

 

$

698

 

 

 

 

 

$

20

 

 

$

2,177

 

Construction

 

 

449

 

 

 

67

 

 

 

 

 

 

 

 

 

516

 

Secured by commercial real estate

 

 

2,646

 

 

 

(10

)

 

 

 

 

 

4

 

 

 

2,640

 

Secured by residential real estate

 

 

1,760

 

 

 

(592

)

 

$

(3

)

 

 

35

 

 

 

1,200

 

State and political subdivisions

 

 

123

 

 

 

 

 

 

 

 

 

 

 

 

123

 

Retail:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential mortgages

 

 

366

 

 

 

73

 

 

 

 

 

 

 

 

 

439

 

Home equity loans and lines

 

 

353

 

 

 

(39

)

 

 

 

 

 

5

 

 

 

319

 

Consumer

 

 

76

 

 

 

22

 

 

 

(39

)

 

 

19

 

 

 

78

 

Unallocated

 

 

162

 

 

 

381

 

 

N/A

 

 

N/A

 

 

 

543

 

Total

 

$

7,394

 

 

$

600

 

 

$

(42

)

 

$

83

 

 

$

8,035

 

Six months ended June 30, 2016

 

Balance,

beginning of

period

 

 

Provision for

(credit to)

loan losses

 

 

Charge-offs

 

 

Recoveries

 

 

Balance, end

of period

 

Commercial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

1,521

 

 

$

(50

)

 

$

(140

)

 

$

19

 

 

$

1,350

 

Construction

 

 

286

 

 

 

143

 

 

 

 

 

 

 

 

 

429

 

Secured by commercial real estate

 

 

2,411

 

 

 

(184

)

 

 

 

 

 

4

 

 

 

2,231

 

Secured by residential real estate

 

 

1,812

 

 

 

(302

)

 

 

(20

)

 

 

60

 

 

 

1,550

 

State and political subdivisions

 

 

222

 

 

 

(18

)

 

 

 

 

 

 

 

 

204

 

Indirect lease financing

 

 

164

 

 

 

105

 

 

 

(52

)

 

 

9

 

 

 

226

 

Retail:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential mortgages

 

 

350

 

 

 

(52

)

 

 

 

 

 

 

 

 

298

 

Home equity loans and lines

 

 

428

 

 

 

(95

)

 

 

 

 

 

10

 

 

 

343

 

Consumer

 

 

76

 

 

 

16

 

 

 

(33

)

 

 

14

 

 

 

73

 

Unallocated

 

 

284

 

 

 

562

 

 

N/A

 

 

N/A

 

 

 

846

 

Total

 

$

7,554

 

 

$

125

 

 

$

(245

)

 

$

116

 

 

$

7,550

 

As previously discussed, the Company maintains a loan review system, which includes a continuous review of the loan portfolio by internal and external parties to aid in the early identification of potential impaired loans. A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for commercial loans, loans to state and political subdivisions and indirect lease financing loans by using either the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral if the loan is collateral dependent.

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

An allowance for loan losses 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

23


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 $1,149,000$1,393,000 and $1,288,000$1,819,000 as of SeptemberJune 30, 20162017 and December 31, 2015,2016, respectively. Non-performing TDRs totaled $2,279,000$3,339,000 and $990,000$3,555,000 as of SeptemberJune 30, 20162017 and December 31, 2015,2016, respectively. All TDRs are included in impaired loans.

26


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, 2016

 

 

December 31, 2015

 

 

June 30, 2017

 

 

December 31, 2016

 

 

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

 

$

2,860

 

 

 

 

 

$

1,787

 

 

 

 

 

$

4,110

 

 

 

 

 

$

3,992

 

 

 

 

TDRs with an allowance recorded

 

 

568

 

 

$

388

 

 

 

491

 

 

$

491

 

 

 

622

 

 

$

311

 

 

 

1,382

 

 

$

761

 

 

$

3,428

 

 

$

388

 

 

$

2,278

 

 

$

491

 

Total

 

$

4,732

 

 

$

311

 

 

$

5,374

 

 

$

761

 

 

There were elevenno newly identified TDRs during the ninesix months ended SeptemberJune 30, 2016. The TDR concessions involved extension of a maturity date, renewal of a line of credit and concessions to lower monthly payments.2017. As of SeptemberJune 30, 20162017, and December 31, 2015,2016, QNB had commitments of $2,020,000$20,000 and $1,919,000,$30,000, respectively, to lend additional funds to customers with loans whose terms have been modified in troubled debt restructurings. There were net charge-offs of $0$3,000 and $5,000$0 during the ninesix months ended SeptemberJune 30, 20162017 and 2015,2016, respectively, resulting from loans previously modified as TDRs.

24


QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following tables present loans, by loan class, modified as TDRs during the three and ninesix months ended SeptemberJune 30, 20162017 and 2015.2016. 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,

 

2016

 

 

2015

 

 

 

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:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential mortgages

 

 

 

 

 

 

 

 

 

 

 

1

 

 

$

142

 

 

$

142

 

Consumer

 

 

1

 

 

$

96

 

 

$

95

 

 

 

 

 

 

 

 

 

 

 

 

 

1

 

 

$

96

 

 

$

95

 

 

 

1

 

 

$

142

 

 

$

142

 

Three months ended June 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:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Secured by residential real estate

 

 

 

 

$

 

 

$

 

 

 

1

 

 

$

41

 

 

$

41

 

 

Nine months ended September 30,

 

2016

 

 

2015

 

 

 

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:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential mortgages

 

 

 

 

 

 

 

 

 

 

 

1

 

 

$

142

 

 

$

142

 

Consumer

 

 

1

 

 

 

96

 

 

 

95

 

 

 

 

 

 

 

 

 

 

 

 

 

11

 

 

$

1,694

 

 

$

1,631

 

 

 

1

 

 

$

142

 

 

$

142

 

Six months ended June 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

 

 

$

1,069

 

Secured by residential real estate

 

 

 

 

 

 

 

 

 

 

 

4

 

 

 

524

 

 

 

512

 

Total

 

 

 

 

$

 

 

$

 

 

 

10

 

 

$

1,598

 

 

$

1,581

 

 

There were no loanswas one loan with an outstanding balance of $21,000 that was modified as TDRsa TDR within 12 months prior to SeptemberJune 30, 2016 and 20152017 for which there was a payment default (60 days or more past due) during the three and ninesix months ended SeptemberJune 30, 2017. There were no loans modified as TDRs within 12 months prior to June 30, 2016 and 2015.for which there was a payment default during the six months ended June 30, 2016.

There were noThe Company has three consumer mortgage loans secured by residential real estate for which foreclosure proceedings are in process at SeptemberJune 30, 2016.2017. The recorded investment is $531,000.

27


QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following tables present the balance in the allowance for loan losses at SeptemberJune 30, 20162017 and December 31, 20152016 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, 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

 

June 30, 2017

 

Balance

 

 

Balance related

to loans

individually

evaluated for

impairment

 

 

Balance related

to loans

collectively

evaluated for

impairment

 

 

Balance

 

 

Balance

individually

evaluated for

impairment

 

 

Balance

collectively

evaluated for

impairment

 

Commercial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

1,304

 

 

$

462

 

 

$

842

 

 

$

110,892

 

 

$

3,820

 

 

$

107,072

 

 

$

2,177

 

 

$

964

 

 

$

1,213

 

 

$

140,218

 

 

$

4,712

 

 

$

135,506

 

Construction

 

 

350

 

 

 

 

 

 

350

 

 

 

32,133

 

 

 

280

 

 

 

31,853

 

 

 

516

 

 

 

 

 

 

516

 

 

 

44,823

 

 

 

4

 

 

 

44,819

 

Secured by commercial real estate

 

 

2,466

 

 

 

 

 

 

2,466

 

 

 

233,430

 

 

 

6,050

 

 

 

227,380

 

 

 

2,640

 

 

 

42

 

 

 

2,598

 

 

 

276,738

 

 

 

5,401

 

 

 

271,337

 

Secured by residential real estate

 

 

1,543

 

 

 

189

 

 

 

1,354

 

 

 

65,671

 

 

 

1,716

 

 

 

63,955

 

 

 

1,200

 

 

 

127

 

 

 

1,073

 

 

 

68,704

 

 

 

2,200

 

 

 

66,504

 

State and political subdivisions

 

 

140

 

 

 

 

 

 

140

 

 

 

35,033

 

 

 

 

 

 

35,033

 

 

 

123

 

 

 

 

 

 

123

 

 

 

35,259

 

 

 

 

 

 

35,259

 

Indirect lease financing

 

 

220

 

 

 

55

 

 

 

165

 

 

 

8,707

 

 

 

132

 

 

 

8,575

 

Retail:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential mortgages

 

 

278

 

 

 

11

 

 

 

267

 

 

 

46,544

 

 

 

561

 

 

 

45,983

 

 

 

439

 

 

 

 

 

 

439

 

 

 

51,138

 

 

 

1,213

 

 

 

49,925

 

Home equity loans and lines

 

 

340

 

 

 

 

 

 

340

 

 

 

70,408

 

 

 

119

 

 

 

70,289

 

 

 

319

 

 

 

 

 

 

319

 

 

 

71,791

 

 

 

134

 

 

 

71,657

 

Consumer

 

 

84

 

 

 

 

 

 

84

 

 

 

5,306

 

 

 

95

 

 

 

5,211

 

 

 

78

 

 

 

 

 

 

78

 

 

 

6,394

 

 

 

89

 

 

 

6,305

 

Unallocated

 

 

868

 

 

N/A

 

 

N/A

 

 

N/A

 

 

N/A

 

 

N/A

 

 

 

543

 

 

N/A

 

 

N/A

 

 

N/A

 

 

N/A

 

 

N/A

 

 

$

7,593

 

 

$

717

 

 

$

6,008

 

 

$

608,124

 

 

$

12,773

 

 

$

595,351

 

Total

 

$

8,035

 

 

$

1,133

 

 

$

6,359

 

 

$

695,065

 

 

$

13,753

 

 

$

681,312

 

 

 

 

Allowance for Loan Losses

 

 

Loans Receivable

 

December 31, 2015

 

Balance

 

 

Balance related

to loans

individually

evaluated for

impairment

 

 

Balance related

to loans

collectively

evaluated for

impairment

 

 

Balance

 

 

Balance

individually

evaluated for

impairment

 

 

Balance

collectively

evaluated for

impairment

 

Commercial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

1,521

 

 

$

712

 

 

$

809

 

 

$

124,397

 

 

$

4,586

 

 

$

119,811

 

Construction

 

 

286

 

 

 

 

 

 

286

 

 

 

27,372

 

 

 

364

 

 

 

27,008

 

Secured by commercial real estate

 

 

2,411

 

 

 

14

 

 

 

2,397

 

 

 

235,171

 

 

 

6,998

 

 

 

228,173

 

Secured by residential real estate

 

 

1,812

 

 

 

203

 

 

 

1,609

 

 

 

63,164

 

 

 

2,113

 

 

 

61,051

 

State and political subdivisions

 

 

222

 

 

 

 

 

 

222

 

 

 

40,285

 

 

 

 

 

 

40,285

 

Indirect lease financing

 

 

164

 

 

 

20

 

 

 

144

 

 

 

10,371

 

 

 

146

 

 

 

10,225

 

Retail:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential mortgages

 

 

350

 

 

 

25

 

 

 

325

 

 

 

42,833

 

 

 

583

 

 

 

42,250

 

Home equity loans and lines

 

 

428

 

 

 

 

 

 

428

 

 

 

67,384

 

 

 

151

 

 

 

67,233

 

Consumer

 

 

76

 

 

 

 

 

 

76

 

 

 

4,286

 

 

 

 

 

 

4,286

 

Unallocated

 

 

284

 

 

N/A

 

 

N/A

 

 

N/A

 

 

N/A

 

 

N/A

 

 

 

$

7,554

 

 

$

974

 

 

$

6,296

 

 

$

615,263

 

 

$

14,941

 

 

$

600,322

 

25


QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

Allowance for Loan Losses

 

 

Loans Receivable

 

December 31, 2016

 

Balance

 

 

Balance related

to loans

individually

evaluated for

impairment

 

 

Balance related

to loans

collectively

evaluated for

impairment

 

 

Balance

 

 

Balance

individually

evaluated for

impairment

 

 

Balance

collectively

evaluated for

impairment

 

Commercial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

1,459

 

 

$

696

 

 

$

763

 

 

$

110,233

 

 

$

5,134

 

 

$

105,099

 

Construction

 

 

449

 

 

 

 

 

 

449

 

 

 

39,268

 

 

 

224

 

 

 

39,044

 

Secured by commercial real estate

 

 

2,646

 

 

 

 

 

 

2,646

 

 

 

255,188

 

 

 

6,383

 

 

 

248,805

 

Secured by residential real estate

 

 

1,760

 

 

 

494

 

 

 

1,266

 

 

 

68,731

 

 

 

2,313

 

 

 

66,418

 

State and political subdivisions

 

 

123

 

 

 

 

 

 

123

 

 

 

35,260

 

 

 

 

 

 

35,260

 

Retail:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential mortgages

 

 

366

 

 

 

8

 

 

 

358

 

 

 

47,124

 

 

 

748

 

 

 

46,376

 

Home equity loans and lines

 

 

353

 

 

 

 

 

 

353

 

 

 

71,525

 

 

 

111

 

 

 

71,414

 

Consumer

 

 

76

 

 

 

 

 

 

76

 

 

 

5,670

 

 

 

93

 

 

 

5,577

 

Unallocated

 

 

162

 

 

N/A

 

 

N/A

 

 

N/A

 

 

N/A

 

 

N/A

 

Total

 

$

7,394

 

 

$

1,198

 

 

$

6,034

 

 

$

632,999

 

 

$

15,006

 

 

$

617,993

 

 

2826


QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

The following tables summarize additional information in regards to impaired loans by loan portfolio class as of SeptemberJune 30, 20162017 and December 31, 2015:2016:

 

 

September 30, 2016

 

 

December 31, 2015

 

 

June 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

 

 

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

 

$

3,167

 

 

$

3,531

 

 

$

 

 

$

3,629

 

 

$

3,923

 

 

$

 

 

$

2,235

 

 

$

2,584

 

 

$

 

 

$

2,482

 

 

$

2,862

 

 

$

 

Construction

 

 

280

 

 

 

301

 

 

 

 

 

 

364

 

 

 

364

 

 

 

 

 

 

4

 

 

 

4

 

 

 

 

 

 

224

 

 

 

234

 

 

 

 

Secured by commercial real estate

 

 

6,050

 

 

 

6,004

 

 

 

 

 

 

6,932

 

 

 

7,416

 

 

 

 

 

 

5,299

 

 

 

5,832

 

 

 

 

 

 

6,383

 

 

 

6,367

 

 

 

 

Secured by residential real estate

 

 

918

 

 

 

1,286

 

 

 

 

 

 

942

 

 

 

1,653

 

 

 

 

 

 

1,607

 

 

 

2,037

 

 

 

 

 

 

1,046

 

 

 

1,438

 

 

 

 

State and political subdivisions

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Indirect lease financing

 

 

 

 

 

 

 

 

 

 

 

3

 

 

 

3

 

 

 

 

Retail:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential mortgages

 

 

381

 

 

 

398

 

 

 

 

 

 

393

 

 

 

406

 

 

 

 

 

 

1,213

 

 

 

1,256

 

 

 

 

 

 

570

 

 

 

589

 

 

 

 

Home equity loans and lines

 

 

119

 

 

 

180

 

 

 

 

 

 

151

 

 

 

201

 

 

 

 

 

 

134

 

 

 

176

 

 

 

 

 

 

111

 

 

 

174

 

 

 

 

Consumer

 

 

95

 

 

 

96

 

 

 

 

 

 

-

 

 

 

-

 

 

 

 

 

 

89

 

 

 

92

 

 

 

 

 

 

93

 

 

 

95

 

 

 

 

 

$

11,010

 

 

$

11,796

 

 

$

 

 

$

12,414

 

 

$

13,966

 

 

$

 

Total

 

$

10,581

 

 

$

11,981

 

 

$

 

 

$

10,909

 

 

$

11,759

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

With an allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

653

 

 

$

804

 

 

$

462

 

 

$

957

 

 

$

1,086

 

 

$

712

 

 

$

2,477

 

 

$

2,686

 

 

$

964

 

 

$

2,652

 

 

$

2,812

 

 

$

696

 

Construction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Secured by commercial real estate

 

 

 

 

 

 

 

 

 

 

 

66

 

 

 

66

 

 

 

14

 

 

 

102

 

 

 

105

 

 

 

42

 

 

 

 

 

 

 

 

 

 

Secured by residential real estate

 

 

798

 

 

 

929

 

 

 

189

 

 

 

1,171

 

 

 

1,279

 

 

 

203

 

 

 

593

 

 

 

724

 

 

 

127

 

 

 

1,267

 

 

 

1,435

 

 

 

494

 

State and political subdivisions

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Indirect lease financing

 

 

132

 

 

 

134

 

 

 

55

 

 

 

143

 

 

 

145

 

 

 

20

 

Retail:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential mortgages

 

 

180

 

 

 

194

 

 

 

11

 

 

 

190

 

 

 

197

 

 

 

25

 

 

 

 

 

 

 

 

 

 

 

 

178

 

 

 

193

 

 

 

8

 

Home equity loans and lines

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

1,763

 

 

$

2,061

 

 

$

717

 

 

$

2,527

 

 

$

2,773

 

 

$

974

 

Total

 

$

3,172

 

 

$

3,515

 

 

$

1,133

 

 

$

4,097

 

 

$

4,440

 

 

$

1,198

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

3,820

 

 

$

4,335

 

 

$

462

 

 

$

4,586

 

 

$

5,009

 

 

$

712

 

 

$

4,712

 

 

$

5,270

 

 

$

964

 

 

$

5,134

 

 

$

5,674

 

 

$

696

 

Construction

 

 

280

 

 

 

301

 

 

 

 

 

 

364

 

 

 

364

 

 

 

 

 

 

4

 

 

 

4

 

 

 

 

 

 

224

 

 

 

234

 

 

 

 

Secured by commercial real estate

 

 

6,050

 

 

 

6,004

 

 

 

 

 

 

6,998

 

 

 

7,482

 

 

 

14

 

 

 

5,401

 

 

 

5,937

 

 

 

42

 

 

 

6,383

 

 

 

6,367

 

 

 

 

Secured by residential real estate

 

 

1,716

 

 

 

2,215

 

 

 

189

 

 

 

2,113

 

 

 

2,932

 

 

 

203

 

 

 

2,200

 

 

 

2,761

 

 

 

127

 

 

 

2,313

 

 

 

2,873

 

 

 

494

 

State and political subdivisions

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Indirect lease financing

 

 

132

 

 

 

134

 

 

 

55

 

 

 

146

 

 

 

148

 

 

 

20

 

Retail:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential mortgages

 

 

561

 

 

 

592

 

 

 

11

 

 

 

583

 

 

 

603

 

 

 

25

 

 

 

1,213

 

 

 

1,256

 

 

 

 

 

 

748

 

 

 

782

 

 

 

8

 

Home equity loans and lines

 

 

119

 

 

 

180

 

 

 

 

 

 

151

 

 

 

201

 

 

 

-

 

 

 

134

 

 

 

176

 

 

 

 

 

 

111

 

 

 

174

 

 

 

 

Consumer

 

 

95

 

 

 

96

 

 

 

 

 

 

-

 

 

 

-

 

 

 

 

 

 

89

 

 

 

92

 

 

 

 

 

 

93

 

 

 

95

 

 

 

 

 

$

12,773

 

 

$

13,857

 

 

$

717

 

 

$

14,941

 

 

$

16,739

 

 

$

974

 

Total

 

$

13,753

 

 

$

15,496

 

 

$

1,133

 

 

$

15,006

 

 

$

16,199

 

 

$

1,198

 

 

2927


QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

Nine Months Ended September 30,

 

2016

 

 

2015

 

Six Months Ended June 30,

 

2017

 

 

2016

 

 

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

 

$

4,288

 

 

$

50

 

 

$

6,301

 

 

$

154

 

 

$

4,879

 

 

$

8

 

 

$

4,370

 

 

$

35

 

Construction

 

 

412

 

 

 

15

 

 

 

410

 

 

 

16

 

 

 

86

 

 

 

2

 

 

 

429

 

 

 

10

 

Secured by commercial real estate

 

 

6,327

 

 

 

100

 

 

 

7,881

 

 

 

121

 

 

 

5,838

 

 

 

78

 

 

 

6,426

 

 

 

67

 

Secured by residential real estate

 

 

1,945

 

 

 

11

 

 

 

1,522

 

 

 

 

 

 

2,252

 

 

 

13

 

 

 

2,013

 

 

 

7

 

State and political subdivisions

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Indirect lease financing

 

 

114

 

 

 

 

 

 

22

 

 

 

1

 

 

 

 

 

 

 

 

 

112

 

 

 

 

Retail:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential mortgages

 

 

572

 

 

 

8

 

 

 

415

 

 

 

4

 

 

 

955

 

 

 

7

 

 

 

576

 

 

 

5

 

Home equity loans and lines

 

 

134

 

 

 

1

 

 

 

130

 

 

 

1

 

 

 

102

 

 

 

1

 

 

 

139

 

 

 

1

 

Consumer

 

 

10

 

 

 

 

 

 

3

 

 

 

 

 

 

91

 

 

 

 

 

 

 

 

 

 

 

$

13,802

 

 

$

185

 

 

$

16,684

 

 

$

297

 

Total

 

$

14,203

 

 

$

109

 

 

$

14,065

 

 

$

125

 

 

 

9.8. FAIR VALUE MEASUREMENTS AND DISCLOSURES

Financial Accounting Standards Board (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 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 comparables.comparable transactions. 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.

3028


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, 2016:2017:

 

September 30, 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

 

June 30, 2017

 

Quoted prices

in active

markets

for identical

assets

(Level 1)

 

 

Significant

other

observable

input

(Level 2)

 

 

Significant

unobservable

inputs

(Level 3)

 

 

Balance at end

of period

 

Recurring fair value measurements

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Trading Securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

State and municipal securities

 

$

 

 

$

4,312

 

 

$

 

 

$

4,312

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities available-for-sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government agency securities

 

 

 

 

$

65,812

 

 

 

 

 

$

65,812

 

 

 

 

 

$

72,938

 

 

 

 

 

$

72,938

 

State and municipal securities

 

 

 

 

 

73,560

 

 

 

 

 

 

73,560

 

 

 

 

 

 

78,687

 

 

 

 

 

 

78,687

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities

 

 

 

 

 

132,746

 

 

 

 

 

 

132,746

 

 

 

 

 

 

141,358

 

 

 

 

 

 

141,358

 

Collateralized mortgage obligations (CMOs)

 

 

 

 

 

79,264

 

 

 

 

 

 

79,264

 

 

 

 

 

 

73,765

 

 

 

 

 

 

73,765

 

Pooled trust preferred securities

 

 

 

 

 

 

 

$

2,275

 

 

 

2,275

 

 

 

 

 

 

 

 

$

212

 

 

 

212

 

Corporate debt securities

 

 

 

 

 

7,112

 

 

 

 

 

 

7,112

 

 

 

 

 

 

8,074

 

 

 

 

 

 

8,074

 

Equity securities

 

$

8,065

 

 

 

 

 

 

 

 

 

8,065

 

 

$

7,530

 

 

 

 

 

 

 

 

 

7,530

 

Total securities available-for-sale

 

$

8,065

 

 

$

358,494

 

 

$

2,275

 

 

$

368,834

 

 

$

7,530

 

 

$

374,822

 

 

$

212

 

 

$

382,564

 

Total recurring fair value measurements

 

$

8,065

 

 

$

362,806

 

 

$

2,275

 

 

$

373,146

 

 

$

7,530

 

 

$

374,822

 

 

$

212

 

 

$

382,564

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nonrecurring fair value measurements

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans

 

$

 

 

$

 

 

$

1,046

 

 

$

1,046

 

 

$

 

 

$

 

 

$

2,039

 

 

$

2,039

 

Mortgage servicing rights

 

 

 

 

 

 

 

 

142

 

 

 

142

 

 

 

 

 

 

 

 

 

36

 

 

 

36

 

Total nonrecurring fair value measurements

 

$

 

 

$

 

 

$

1,188

 

 

$

1,188

 

 

$

 

 

$

 

 

$

2,075

 

 

$

2,075

 

 

There were no transfers in and out of Level 1 and Level 2 fair value measurements during the ninethree or six months ended SeptemberJune 30, 2016.2017. There were also no transfers in or out of level 3 for the same period. There were no losses included in earnings attributable to the change in unrealized gains or losses relating to the available-for-sale securities above with fair value measurements utilizing significant unobservable inputs for the nine-month periodthree- and six-month periods ended SeptemberJune 30, 2016.2017.

3129


QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

The following table sets forth QNB’s financial assets measured at fair value on a recurring and nonrecurring basis, the fair value measurements by level within the fair value hierarchy as of December 31, 2015:2016:

 

December 31, 2015

 

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, 2016

 

Quoted prices

in active

markets

for identical

assets

(Level 1)

 

 

Significant

other

observable

input

(Level 2)

 

 

Significant

unobservable

inputs

(Level 3)

 

 

Balance at end

of period

 

Recurring fair value measurements

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Trading Securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

State and municipal securities

 

$

 

 

$

4,189

 

 

$

 

 

$

4,189

 

 

$

 

 

$

3,596

 

 

$

 

 

$

3,596

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities available-for-sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government agency securities

 

 

 

 

$

61,779

 

 

 

 

 

$

61,779

 

 

 

 

 

$

76,650

 

 

 

 

 

$

76,650

 

State and municipal securities

 

 

 

 

 

78,954

 

 

 

 

 

 

78,954

 

 

 

 

 

 

72,295

 

 

 

 

 

 

72,295

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities

 

 

 

 

 

136,681

 

 

 

 

 

 

136,681

 

 

 

 

 

 

145,301

 

 

 

 

 

 

145,301

 

Collateralized mortgage obligations (CMOs)

 

 

 

 

 

65,610

 

 

 

 

 

 

65,610

 

 

 

 

 

 

77,415

 

 

 

 

 

 

77,415

 

Pooled trust preferred securities

 

 

 

 

 

 

 

$

2,653

 

 

 

2,653

 

 

 

 

 

 

 

 

$

2,281

 

 

 

2,281

 

Corporate debt securities

 

 

 

 

 

9,004

 

 

 

 

 

 

9,004

 

 

 

 

 

 

8,030

 

 

 

 

 

 

8,030

 

Equity securities

 

$

7,234

 

 

 

 

 

 

 

 

 

7,234

 

 

$

8,503

 

 

 

 

 

 

 

 

 

8,503

 

Total securities available-for-sale

 

$

7,234

 

 

$

352,028

 

 

$

2,653

 

 

$

361,915

 

 

$

8,503

 

 

$

379,691

 

 

$

2,281

 

 

$

390,475

 

Total recurring fair value measurements

 

$

7,234

 

 

$

356,217

 

 

$

2,653

 

 

$

366,104

 

 

$

8,503

 

 

$

383,287

 

 

$

2,281

 

 

$

394,071

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nonrecurring fair value measurements

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans

 

$

 

 

$

 

 

$

1,698

 

 

$

1,698

 

 

$

 

 

$

 

 

$

2,899

 

 

$

2,899

 

Mortgage servicing rights

 

 

 

 

 

 

 

 

133

 

 

 

133

 

 

 

 

 

 

 

 

 

58

 

 

 

58

 

Total nonrecurring fair value measurements

 

$

 

 

$

 

 

$

1,831

 

 

$

1,831

 

 

$

 

 

$

 

 

$

2,957

 

 

$

2,957

 

 

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

 

 

Quantitative information about Level 3 fair value measurements

 

Quantitative information about Level 3 fair value measurements

September 30, 2016

 

Fair value

 

 

Valuation

techniques

 

 

Unobservable

input

 

 

Value or range

of values

June 30, 2017

 

Fair value

 

 

Valuation

techniques

 

 

Unobservable

input

 

 

Value or range

of values

Impaired loans

 

$

778

 

 

Appraisal of collateral

(1)

 

Appraisal adjustments

(2)

 

-20% to -90%

 

$

526

 

 

Appraisal of collateral

(1)

 

Appraisal adjustments

(2)

 

-15% to -80%

 

 

 

 

 

 

 

 

Liquidation expenses

(3)

 

-10%

 

 

 

 

 

 

 

 

Liquidation expenses

(3)

 

-10%

Impaired loans

 

 

140

 

 

Used commercial vehicle and equipment guides

 

 

Guide value discounts

(4)

 

0% to -30%

 

 

14

 

 

Used commercial vehicle and equipment guides

 

 

Guide value discounts

(4)

 

-25%

Impaired loans

 

 

128

 

 

Financial statement values for UCC collateral

 

 

Financial statement value discounts

(5)

 

-20% to -25%

 

$

1,499

 

 

Financial statement values for UCC collateral

 

 

Financial statement value discounts

(5)

 

-25% to -50%

Mortgage servicing rights

 

 

142

 

 

Discounted cash flow

 

 

Remaining term

 

 

2 - 27 yrs

 

 

36

 

 

Discounted cash flow

 

 

Remaining term

 

 

2 to 27 yrs

 

 

 

 

 

 

 

 

Discount rate

 

 

12% to 14%

 

 

 

 

 

 

 

 

Discount rate

 

 

14% to 16%

 

3230


QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

 

Quantitative information about Level 3 fair value measurements

 

Quantitative information about Level 3 fair value measurements

December 31, 2015

 

Fair value

 

 

Valuation

techniques

 

 

Unobservable

input

 

 

Value or range

of values

December 31, 2016

 

Fair value

 

 

Valuation

techniques

 

 

Unobservable

input

 

 

Value or range

of values

Impaired loans

 

$

1,331

 

 

Appraisal of collateral

(1)

 

Appraisal adjustments

(2)

 

-15% to -80%

 

$

938

 

 

Appraisal of collateral

(1)

 

Appraisal adjustments

(2)

 

-10% to -80%

 

 

 

 

 

 

 

 

Liquidation expenses

(3)

 

-10%

 

 

 

 

 

 

 

 

Liquidation expenses

(3)

 

-10%

Impaired loans

 

 

199

 

 

Used commercial vehicle and equipment guides

 

 

Guide value discounts

(4)

 

0% to -30%

 

 

76

 

 

Used commercial vehicle and equipment guides

 

 

Guide value discounts

(4)

 

0% to -25%

Impaired loans

 

 

168

 

 

Financial statement values for UCC collateral

 

 

Financial statement value discounts

(5)

 

-25% to -70%

 

 

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

 

 

133

 

 

Discounted cash flow

 

 

Remaining term

 

 

3 - 28 yrs

 

 

58

 

 

Discounted cash flow

 

 

Remaining term

 

 

2 to 27 yrs

 

 

 

 

 

 

 

 

Discount rate

 

 

10% to 12%

 

 

 

 

 

 

 

 

Discount rate

 

 

14% to 16%

 

(1)

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

(2)

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

(3)

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

(4)

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

(5)

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

(6)

Fair value is determined by the net amount due.

The following table presents additional information about the 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, 2017 and 2016:

 

 

Fair value

measurements

using

significant

unobservable

inputs

(Level 3)

 

 

Fair value measurements using significant unobservable inputs

(Level 3)

 

Balance, January 1, 2016

 

$

2,653

 

 

2017

 

 

2016

 

Balance, January 1,

 

$

2,281

 

 

$

2,653

 

Payments received

 

 

(312

)

 

 

(55

)

 

 

(197

)

Sale of securities

 

 

(2,026

)

 

 

 

Total gains or losses (realized/unrealized)

 

 

 

 

 

 

 

 

 

 

 

 

Included in earnings

 

 

 

 

 

(15

)

 

 

 

Included in other comprehensive income

 

 

(66

)

 

 

27

 

 

 

(56

)

Transfers in and/or out of Level 3

 

 

 

 

 

 

 

 

 

Balance, September 30, 2016

 

$

2,275

 

Balance, June 30,

 

$

212

 

 

$

2,400

 

 

The Level 3 securities consist of six collateralized debt obligation securities, PreTSL securities, which are backed by trust preferred securities issued by banks, thrifts, and insurance companies. As discussed in Note 7, despite the fact that there were some trades over the past few years, the market for these securities at September 30, 2016 was not active and markets for similar securities also are not active. The inactivity was evidenced first by a significant widening of the bid-ask spread in the brokered markets in which PreTSLs trade and then by a significant decrease in the volume of trades relative to historical levels. 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.

3331


QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

The Level 3 securities consist of one collateralized debt obligation security (“PreTSL”), which is backed by trust preferred securities issued by banks. Given conditions in the debt markets today and the absence of observable transactions in the secondary and new issue markets, we determined:

The few observable transactions and market quotations that are available are not reliable for purposes of determining fair value at SeptemberJune 30, 2016;2017;

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

PreTSLsTrust 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 is aware of several factors indicating that recent transactions of PreTSL securities are not orderly including an increased spread between bid/ask prices, lower sales transaction volumes for these types of securities, andutilized a lack of new issuances. As a result, the Bank engaged an independent third party to value the securitiesthis security using a discounted cash flow analysis.  The estimated cash flowsBased on management’s review of the five underlying issuers, there are no expected credit losses or prepayments; cashflows used were contractual based on specific assumptions about defaults, deferrals and prepayments of the trust preferred securities underlying each PreTSL.Bloomberg YA screen.  The resulting collateral cash flows are allocated to the bond waterfall using the INTEXcalc valuation model.  Default rates are calculated based upon a comparison of key financial ratios of active individual issuers without a short-term probability of default compared to all FDIC insured banks.  The base loss severity assumption and long-term loss severity assumptions are modeled at 95%. The severity factor for near-term default is vectored to reflect the relative expected performance of the institutions modeled to default, with lower forecasted severities used for the higher quality institutions.  Prepayments are modeled to take into account the disruption in the asset-backed securities marketplace and the lack of new pooled trust preferred issuances.  For those institutions rated below investment grade the holding companies’ approximate cost of long-term funding given their rating and marketplace interest rate was estimated. The following assumption was made; any holding company that could refinance for a cost savings of more than 2% will refinance and will do so as soon as possible. Finally, for issuers not impacted by the Tier 1 regulatory capital legislation enacted by the Dodd-Frank Act, the issuers that have shown a recent history of prepayment of both floating rate and fixed rate issues were identified and it was assumed these issuers will prepay as soon as possible.

The internal rate of return is the pre-tax yield used to discount the best estimate of future cash flows after credit losses. The cash flows have been discounted using an estimated market discount rate based on the 30-year swap rate.  The 30-year swap rate is used as the reference rate, since it is indicative of market expectation for short term rates in the future.  This is consistent with the 30-year nature of PreTSL securities, which are priced using the 3-month LIBOR plus spreads ranging from 5.03% to 7.79%. The determination of appropriate market discount rates involved the consideration of the following:

the time value of money

the price for bearing uncertainty in cash flows

other factors that would be considered by market participants

The analysis of discount rates involved the review of corporate bond spreads for banks, U.S. Treasury yields, credit default swap rates for financial companies (utilized as a proxyreference rate.  The discount rate of 6.18% includes the risk-free rate, a credit component and a spread for credit), the swap/LIBOR yield curve and the characteristics of the individual securities being valued.illiquidity. For a further discussion of PreTSL valuation see Note 7,6, Investment Securities.

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

The following methods and assumptions were used to estimate the fair values of each major classification of financial instrument and non-financial asset at SeptemberJune 30, 20162017 and December 31, 2015:2016:

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) and held-to-maturity (carried at amortized cost):  The fair value of securities are 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

34


QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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 is the carrying amount, based on redemption provisions, and considers the limited marketability of such securities.

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

32


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 credit and interest rate-risk inherent in the loans. Projected future cash flows are calculated based upon contractual maturity or call dates, projected repayments and prepayments of principal. Generally, for variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values.

Impaired Loans (generally carried at fair value):  Impaired loans are loans, in which the Company has measured impairment generally based on the fair value of the loan’s collateral. Fair value is generally determined based upon independent third-party appraisals of the properties, or discounted cash flows based upon the expected proceeds. These assets are included as Level 3 fair values, based upon the lowest level of input that is significant to the fair value measurements. Included in the fair value of impaired loans at December 31, 2015 were $145,000 of loans that had no specific reserves required at year end; however, were partially charged-off at year end.  There were no such loans at September 30, 2016.

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.

Foreclosed assets (other real estate owned and repossessed assets): Foreclosed assets are the only non-financial assets valued on a non-recurring basis which are held by the Company at fair value, less cost to sell. At foreclosure or repossession, if the fair value, less estimated costs to sell, of the collateral acquired (real estate, vehicles, equipment) is less than the Company’s recorded investment in the related loan, a write-down is recognized through a charge to the allowance for loan losses. Additionally, valuations are periodically performed by management and any subsequent reduction in value is recognized by a charge to income. The fair value of foreclosed assets held-for-sale is estimated using Level 2 inputs based on observable market data.

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

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

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

35


QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

33


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, 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)

 

June 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)

 

Financial assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

69,428

 

 

$

69,428

 

 

$

69,428

 

 

 

 

 

 

 

 

$

15,248

 

 

$

15,248

 

 

$

15,248

 

 

 

 

 

 

 

Investment securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Trading

 

 

4,312

 

 

 

4,312

 

 

 

 

 

$

4,312

 

 

 

 

Available-for-sale

 

 

368,834

 

 

 

368,834

 

 

 

8,065

 

 

 

358,494

 

 

$

2,275

 

Held-to-maturity

 

 

147

 

 

 

147

 

 

 

 

 

 

147

 

 

 

 

Investment securities: Available-for-sale

 

 

382,564

 

 

 

382,564

 

 

 

7,530

 

 

$

374,822

 

 

$

212

 

Restricted investment in bank stocks

 

 

522

 

 

 

522

 

 

 

 

 

 

522

 

 

 

 

 

 

1,974

 

 

 

1,974

 

 

 

 

 

 

1,974

 

 

 

 

Loans held-for-sale

 

 

456

 

 

 

466

 

 

 

 

 

 

466

 

 

 

 

 

 

530

 

 

 

539

 

 

 

 

 

 

539

 

 

 

 

Net loans

 

 

600,638

 

 

 

610,066

 

 

 

 

 

 

 

 

 

610,066

 

 

 

687,178

 

 

 

694,371

 

 

 

 

 

 

 

 

 

694,371

 

Mortgage servicing rights

 

 

498

 

 

 

555

 

 

 

 

 

 

 

 

 

555

 

 

 

485

 

 

 

571

 

 

 

 

 

 

 

 

 

571

 

Accrued interest receivable

 

 

2,573

 

 

 

2,573

 

 

 

 

 

 

2,573

 

 

 

 

 

 

2,506

 

 

 

2,506

 

 

 

 

 

 

2,506

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits with no stated maturities

 

$

698,336

 

 

$

698,336

 

 

$

698,336

 

 

 

 

 

$

 

 

$

729,465

 

 

$

729,465

 

 

$

729,465

 

 

 

 

 

$

 

Deposits with stated maturities

 

 

228,376

 

 

 

230,993

 

 

 

 

 

$

230,993

 

 

 

 

 

 

221,849

 

 

 

221,628

 

 

 

 

 

$

221,628

 

 

 

 

Short-term borrowings

 

 

41,179

 

 

 

41,179

 

 

 

41,179

 

 

 

 

 

 

 

 

 

66,907

 

 

 

66,907

 

 

 

66,907

 

 

 

 

 

 

 

Accrued interest payable

 

 

310

 

 

 

310

 

 

 

 

 

 

310

 

 

 

 

 

 

298

 

 

 

298

 

 

 

 

 

 

298

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Off-balance sheet instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commitments to extend credit

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

Standby letters of credit

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3634


QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

Fair value measurements

 

 

 

 

 

 

 

 

 

 

Fair value measurements

 

December 31, 2015

 

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, 2016

 

Carrying

amount

 

 

Fair value

 

 

Quoted

prices in

active

markets for

identical

assets

(Level 1)

 

 

Significant

other

observable

inputs

(Level 2)

 

 

Significant

unobservable

inputs

(Level 3)

 

Financial assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

16,991

 

 

$

16,991

 

 

$

16,991

 

 

 

 

 

 

 

 

$

10,721

 

 

$

10,721

 

 

$

10,721

 

 

 

 

 

 

 

Investment securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Trading

 

 

4,189

 

 

 

4,189

 

 

 

 

 

$

4,189

 

 

 

 

 

 

3,596

 

 

 

3,596

 

 

 

 

 

$

3,596

 

 

 

 

Available-for-sale

 

 

361,915

 

 

 

361,915

 

 

 

7,234

 

 

 

352,028

 

 

$

2,653

 

 

 

390,475

 

 

 

390,475

 

 

 

8,503

 

 

 

379,691

 

 

$

2,281

 

Held-to-maturity

 

 

147

 

 

 

151

 

 

 

 

 

 

151

 

 

 

 

Restricted investment in bank stocks

 

 

508

 

 

 

508

 

 

 

 

 

 

508

 

 

 

 

 

 

1,017

 

 

 

1,017

 

 

 

 

 

 

1,017

 

 

 

 

Loans held-for-sale

 

 

987

 

 

 

1,004

 

 

 

 

 

 

1,004

 

 

 

 

 

 

789

 

 

 

789

 

 

 

 

 

 

789

 

 

 

 

Net loans

 

 

607,716

 

 

 

610,315

 

 

 

 

 

 

 

 

 

610,315

 

 

 

625,685

 

 

 

626,052

 

 

 

 

 

 

 

 

 

626,052

 

Mortgage servicing rights

 

 

504

 

 

 

642

 

 

 

 

 

 

 

 

 

642

 

 

 

498

 

 

 

579

 

 

 

 

 

 

 

 

 

579

 

Accrued interest receivable

 

 

2,562

 

 

 

2,562

 

 

 

 

 

 

2,562

 

 

 

 

 

 

3,128

 

 

 

3,128

 

 

 

 

 

 

3,128

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits with no stated maturities

 

$

662,410

 

 

$

662,410

 

 

$

662,410

 

 

 

 

 

$

 

 

$

687,773

 

 

$

687,773

 

 

$

687,773

 

 

 

 

 

$

 

Deposits with stated maturities

 

 

227,376

 

 

 

227,862

 

 

 

 

 

$

227,862

 

 

 

 

 

 

225,582

 

 

 

225,403

 

 

 

 

 

$

225,403

 

 

 

 

Short-term borrowings

 

 

37,163

 

 

 

37,163

 

 

 

37,163

 

 

 

 

 

 

 

 

 

52,660

 

 

 

52,660

 

 

 

52,660

 

 

 

 

 

 

 

Accrued interest payable

 

 

330

 

 

 

330

 

 

 

 

 

 

330

 

 

 

 

 

 

335

 

 

 

335

 

 

 

 

 

 

335

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Off-balance sheet instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commitments to extend credit

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

Standby letters of credit

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

10.9. OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS AND GUARANTEES

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

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

 

 

September 30,

 

 

December 31,

 

 

June 30,

 

 

December 31,

 

 

2016

 

 

2015

 

 

2017

 

 

2016

 

Commitments to extend credit and unused lines of credit

 

$

308,483

 

 

$

232,492

 

 

$

295,823

 

 

$

277,216

 

Standby letters of credit

 

 

12,980

 

 

 

9,493

 

 

 

14,386

 

 

 

16,490

 

Total financial instrument commitments

 

$

321,463

 

 

$

241,985

 

 

$

310,209

 

 

$

293,706

 

 

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

Standby letters of credit are conditional commitments issued by the Bank 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

37


QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

for standby letters of credit is represented by the contractual amount of those instruments. The Bank uses the same credit policies in

35


QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

making conditional obligations as it does for on-balance sheet instruments. TheseThe majority of these standby letters of credit expire within threeone year with the longest term being five years. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending other loan commitments. The Bank 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, 20162017 and December 31, 20152016 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.

 

 

11.10. REGULATORY RESTRICTIONS

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

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

The capital amounts and classification are also subject to qualitative judgments by the regulators. Management believes, as of SeptemberJune 30, 2016,2017, that the Company and the Bank met capital adequacy requirements to which they were subject.

As of the most recent notification, the primary regulator of the Bank considered it to be “well capitalized” under the regulatory framework. There are no conditions or events since that notification that management believes have changed the classification. To be categorized as well capitalized, the Company and the Bank must maintain minimum ratios as set forth in the following table below.

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

 

 

Capital levels

 

 

Capital levels

 

 

Actual

 

 

Minimum required

 

 

Well capitalized

 

 

Actual

 

 

Adequately capitalized

 

 

Well capitalized

 

As of September 30, 2016

 

Amount

 

 

Ratio

 

 

Amount

 

 

Ratio

 

 

Amount

 

 

Ratio

 

As of June 30, 2017

 

Amount

 

 

Ratio

 

 

Amount

 

 

Ratio

 

 

Amount

 

 

Ratio

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

$

103,357

 

 

 

13.08

%

 

$

63,207

 

 

 

8.00

%

 

$

79,009

 

 

 

10.00

%

 

$

109,129

 

 

 

12.76

%

 

$

68,444

 

 

 

8.00

%

 

$

85,555

 

 

 

10.00

%

Bank

 

 

95,163

 

 

12.43

 

 

 

61,266

 

 

8.00

 

 

 

76,583

 

 

10.00

 

 

 

100,244

 

 

12.04

 

 

 

66,628

 

 

8.00

 

 

 

83,285

 

 

10.00

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier I capital (to risk-weighted assets):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

 

95,704

 

 

12.11

 

 

 

47,405

 

 

6.00

 

 

 

47,405

 

 

6.00

 

 

 

101,021

 

 

11.81

 

 

 

51,333

 

 

6.00

 

 

 

51,333

 

 

6.00

 

Bank

 

 

87,511

 

 

11.43

 

 

 

45,950

 

 

6.00

 

 

 

61,266

 

 

8.00

 

 

 

92,136

 

 

11.06

 

 

 

49,971

 

 

6.00

 

 

 

66,628

 

 

8.00

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

 

95,704

 

 

12.11

 

 

 

35,554

 

 

4.50

 

 

N/A

 

 

N/A

 

 

 

101,021

 

 

11.81

 

 

 

38,500

 

 

4.50

 

 

N/A

 

 

N/A

 

Bank

 

 

87,511

 

 

11.43

 

 

 

34,462

 

 

4.50

 

 

 

49,779

 

 

6.50

 

 

 

92,136

 

 

11.06

 

 

 

37,478

 

 

4.50

 

 

 

54,135

 

 

6.50

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier I capital (to average assets):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

 

95,704

 

 

9.08

 

 

 

42,160

 

 

4.00

 

 

N/A

 

 

N/A

 

 

 

101,021

 

 

9.17

 

 

 

44,078

 

 

4.00

 

 

N/A

 

 

N/A

 

Bank

 

 

87,511

 

 

8.37

 

 

 

41,835

 

 

4.00

 

 

 

52,293

 

 

5.00

 

 

 

92,136

 

 

8.43

 

 

 

43,712

 

 

4.00

 

 

 

54,640

 

 

5.00

 

3836


QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

 

 

Capital levels

 

 

Capital levels

 

 

Actual

 

 

Adequately capitalized

 

 

Well capitalized

 

 

Actual

 

 

Adequately capitalized

 

 

Well capitalized

 

As of December 31, 2015

 

Amount

 

 

Ratio

 

 

Amount

 

 

Ratio

 

 

Amount

 

 

Ratio

 

As of December 31, 2016

 

Amount

 

 

Ratio

 

 

Amount

 

 

Ratio

 

 

Amount

 

 

Ratio

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

$

98,432

 

 

 

12.58

%

 

$

62,613

 

 

 

8.00

%

 

$

78,266

 

 

 

10.00

%

 

$

104,820

 

 

 

12.75

%

 

$

65,777

 

 

 

8.00

%

 

$

82,221

 

 

 

10.00

%

Bank

 

 

91,091

 

 

11.97

 

 

 

60,874

 

 

8.00

 

 

 

76,093

 

 

10.00

 

 

 

96,478

 

 

12.10

 

 

 

63,792

 

 

8.00

 

 

 

79,740

 

 

10.00

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier I capital (to risk-weighted assets):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

 

90,819

 

 

11.60

 

 

 

46,960

 

 

6.00

 

 

 

46,960

 

 

6.00

 

 

 

97,320

 

 

11.84

 

 

 

49,333

 

 

6.00

 

 

 

49,333

 

 

6.00

 

Bank

 

 

83,478

 

 

10.97

 

 

 

45,656

 

 

6.00

 

 

 

60,874

 

 

8.00

 

 

 

89,025

 

 

11.16

 

 

 

47,844

 

 

6.00

 

 

 

63,792

 

 

8.00

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

 

90,819

 

 

11.60

 

 

 

35,220

 

 

4.50

 

 

N/A

 

 

N/A

 

 

 

97,320

 

 

11.84

 

 

 

36,999

 

 

4.50

 

 

N/A

 

 

N/A

 

Bank

 

 

83,478

 

 

10.97

 

 

 

34,242

 

 

4.50

 

 

 

49,460

 

 

6.50

 

 

 

89,025

 

 

11.16

 

 

 

35,883

 

 

4.50

 

 

 

51,831

 

 

6.50

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier I capital (to average assets):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

 

90,819

 

 

8.87

 

 

 

40,934

 

 

4.00

 

 

N/A

 

 

N/A

 

 

 

97,320

 

 

9.16

 

 

 

42,479

 

 

4.00

 

 

N/A

 

 

N/A

 

Bank

 

 

83,478

 

 

8.22

 

 

 

40,632

 

 

4.00

 

 

 

50,790

 

 

5.00

 

 

 

89,025

 

 

8.45

 

 

 

42,144

 

 

4.00

 

 

 

52,680

 

 

5.00

 

 

 

 

3937


QNB CORP. AND SUBSIDIARY

 

 

 

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.

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

FORWARD-LOOKING STATEMENTS

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

Shareholders should note that many factors, some of which are discussed elsewhere in this document and in the documents that are incorporated by reference, and including the risk factors identified in Item 1A of QNB’s 20152016 Form 10-K, could affect the future financial results of the Company and its subsidiary and could cause those results to differ materially from those expressed in the forward-looking statements contained or incorporated by reference in this document. These factors include, but are not limited, to the following:

Volatility in interest rates and shape of the yield curve;

Credit risk;

Liquidity risk;

Operating, legal and regulatory risks;

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

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

38


QNB CORP. AND SUBSIDIARY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

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

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

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The discussion and analysis of the financial condition and results of operations are based on the consolidated financial statements of QNB, which are prepared in accordance with U.S. generally accepted accounting principles (GAAP) 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

40


QNB CORP. AND SUBSIDIARY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Other-Than-Temporary Investment Security Impairment

Securities are evaluated periodically to determine whether a decline in their value is other-than-temporary. Management utilizes criteria such as the magnitude and duration of the decline, in addition to the reasons underlying the decline, to determine whether the loss in value is other-than-temporary. The term “other-than-temporary” is not intended to indicate that the decline is permanent, but 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, 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, $70,000$122,000 and $122,000$192,000 of other-than-temporary impairment charges were recorded during the second quarter and first and second quarterssix months of 2016, respectively.2016.  There were no other-than-temporary impairment charges recorded during the third quarter 2016.first six months of 2017.

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 basis of the timing of future estimated cash flows of the security. There were no credit-related other-than-temporary impairment charges in the third quarter or ninesecond quarters and first six months ended SeptemberJune 30, 20162017 or 2015, respectively.2016.

39


QNB CORP. AND SUBSIDIARY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

Allowance for Loan Losses

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 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 collection. Each commercial loan is assigned a grade based upon an assessment of the borrower’s financial capacity to service the debt and the presence and value of collateral for the loan. An independent loan review group tests risk assessments and evaluates the adequacy of the allowance for loan losses. Management meets monthly to review the credit quality of the loan portfolio and quarterly to review the allowance for loan losses.

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

41


QNB CORP. AND SUBSIDIARY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

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 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 boardBoard 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

40


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 to a great extent 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 20162017 of $2,292,000,$2,386,000, or $0.67$0.69 per share on a diluted basis, compared to net income of $2,220,000,$2,098,000, or $0.66$0.62 per share on a diluted basis, for the same period in 2015.2016. For the nine monthsix-month period ended SeptemberJune 30, 2016,2017, QNB reported net income of $6,655,000,$5,246,000, or $1.96 per share on a diluted basis. This compares to net income of $6,290,000, or $1.88$1.53 per share on a diluted basis, reportedcompared to net income of $4,363,000, or $1.29 per share on a diluted basis, for the nine monthsame period ended September 30, 2015.in 2016.

Net income expressed as an annualized rate of return on average assets and average shareholders’ equity was 0.86%0.87% and 9.57%9.52%, respectively, for the quarter ended SeptemberJune 30, 20162017 compared with 0.88%0.84% and 9.86%9.01%, respectively, for the quarter ended September 30, 2015.same period in 2016. For the comparative nine month periods, the annualized rate ofsix months ended June 30, 2017, return on average assets and average shareholders’ equity was 0.97% and 10.62%, respectively, compared with 0.87% and 9.48%, respectively,9.44% for 2016 compared with 0.86% and 9.56%, respectively, for 2015.the same period in 2016.

Total assets as of SeptemberJune 30, 20162017 were $1,071,931,000,$1,120,523,000, compared with $1,020,936,000$1,063,141,000 at December 31, 2015.2016. Loans receivable at SeptemberJune 30, 20162017 were $608,231,000,$695,213,000, compared with $615,270,000$633,079,000 at December 31, 2015, a decrease2016, an increase of $7,039,000,$62,134,000, or 1.1%.9.8%, with commercial lending as the largest contributor to the growth. Total deposits of $926,712,000$951,314,000 at SeptemberJune 30, 20162017 increased $36,926,000,$37,959,000, or 4.1%4.2%, compared with total deposits of $889,786,000$913,355,000 at December 31, 2015.2016.

42


QNB CORP. AND SUBSIDIARY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

Results for the three and ninesix months ended SeptemberJune 30, 20162017 include the following significant components:

Net interest income increased $70,000,$839,000, or 1.0%12.0%, to $7,085,000$7,858,000 and $881,000,$1,598,000, or 4.3%11.3%, to $21,225,000$15,738,000 for the three and ninesix months ended SeptemberJune 30, 2016,2017, respectively.

Net interest margin on a tax-equivalent basis decreased fifteenincreased two basis points for the quarter and decreased twofive basis points year-to-date, to 2.93%3.10% and 3.05%3.16%, respectively.

QNB recorded no$300,000 in provision for loan losses for the third quarters 2016quarter and 2015, and$600,000 for the six months ended June 30, 2017, compared with $125,000 for the first ninesix months of 2016 compared with $60,0002016. There was no provision recorded for the first nine monthssecond quarter of 2015.2016.

Non-interest income increased $151,000,$241,000, or 10.1%17.5%, to $1,644,000$1,615,000 for the thirdsecond quarter and declined $175,000,$655,000, or 3.7%22.2%, to $4,594,000$3,605,000 for year-to-date 2016, respectively,2017, compared with the same periods in 2016.

Non-interest expense increased $349,000, or 6.2%, to $5,942,000 for the second quarter and $418,000, or 3.8%, to $11,530,000 for year-to-date 2017, compared to the same periods in 2015.

Non-interest expense increased $43,000, or 0.8%, to $5,616,000 for the third quarter and decreased $36,000, to $16,728,000 year-to-date 2016, respectively, compared to the same periods in 2015.2016.

Total non-performing loans were $9,536,000,$10,846,000, or 1.57%1.56% of loans receivable at SeptemberJune 30, 2016,2017, compared with $10,719,000,$11,938,000, or 1.74%1.89% of loans receivable at December 31, 2015.2016. Loans on non-accrual status were $8,237,000$9,453,000 at SeptemberJune 30, 20162017 compared with $9,420,000$10,119,000 at December 31, 2015.2016. Net charge-offsrecoveries for the first ninesix months of 2016ended June 30, 2017 were $86,000,$41,000, or 0.02%-0.01% annualized of average total loans, compared with $392,000,net charge-offs of $129,000, or 0.09%0.04% annualized of average total loans for the first nine months of 2015.same period in 2016.

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

NET INTEREST INCOME

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

41


QNB CORP. AND SUBSIDIARY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

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

The following table presents the adjustment to convert net interest income to net interest income on a fully taxable-equivalent basis for the three and nine monthsix-month periods ended SeptemberJune 30, 20162017 and 2015.2016.

 

 

Three months

ended September 30,

 

 

Nine months

ended September 30,

 

 

Three months

ended June 30,

 

 

Six months

ended June 30,

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Total interest income

 

$

8,287

 

 

$

8,138

 

 

$

24,751

 

 

$

23,691

 

 

$

9,192

 

 

$

8,184

 

 

$

18,328

 

 

$

16,464

 

Total interest expense

 

 

1,202

 

 

 

1,123

 

 

 

3,526

 

 

 

3,347

 

 

 

1,334

 

 

 

1,165

 

 

 

2,590

 

 

 

2,324

 

Net interest income

 

 

7,085

 

 

 

7,015

 

 

 

21,225

 

 

 

20,344

 

 

 

7,858

 

 

 

7,019

 

 

 

15,738

 

 

 

14,140

 

Tax-equivalent adjustment

 

 

403

 

 

 

449

 

 

 

1,252

 

 

 

1,328

 

 

 

390

 

 

 

412

 

 

 

777

 

 

 

848

 

Net interest income (fully taxable-equivalent)

 

$

7,488

 

 

$

7,464

 

 

$

22,477

 

 

$

21,672

 

 

$

8,248

 

 

$

7,431

 

 

$

16,515

 

 

$

14,988

 

 

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

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

43


QNB CORP. AND SUBSIDIARY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

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.

 

4442


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 )Basis)

 

 

Three Months Ended

 

 

Three Months Ended

 

 

September 30, 2016

 

 

September 30, 2015

 

 

June 30, 2017

 

 

June 30, 2016

 

 

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

 

 

$

4,312

 

 

 

5.98

%

 

$

64

 

 

$

1,985

 

 

 

4.78

%

 

$

24

 

 

$

3,899

 

 

 

4.67

%

 

$

46

 

Investment securities (AFS & HTM):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government agencies

 

 

60,860

 

 

 

1.88

%

 

 

286

 

 

 

46,701

 

 

 

1.57

%

 

 

183

 

 

 

73,007

 

 

 

1.78

 

 

 

325

 

 

 

53,551

 

 

 

1.84

 

 

 

247

 

State and municipal

 

 

71,905

 

 

 

4.03

%

 

 

724

 

 

 

75,293

 

 

 

4.15

%

 

 

781

 

 

 

75,620

 

 

 

3.88

 

 

 

733

 

 

 

73,191

 

 

 

4.05

 

 

 

741

 

Mortgage-backed and CMOs

 

 

197,462

 

 

 

1.95

%

 

 

963

 

 

 

200,241

 

 

 

1.99

%

 

 

994

 

 

 

221,045

 

 

 

2.04

 

 

 

1,130

 

 

 

192,598

 

 

 

1.99

 

 

 

957

 

Pooled trust preferred securities

 

 

3,091

 

 

 

0.23

%

 

 

2

 

 

 

3,495

 

 

 

0.36

%

 

 

3

 

 

 

2,846

 

 

 

2.27

 

 

 

16

 

 

 

3,216

 

 

 

0.22

 

 

 

2

 

Corporate debt securities

 

 

7,224

 

 

 

1.74

%

 

 

31

 

 

 

6,018

 

 

 

1.18

%

 

 

18

 

 

 

8,064

 

 

 

1.98

 

 

 

40

 

 

 

8,186

 

 

 

1.97

 

 

 

40

 

Equities

 

 

6,568

 

 

 

2.85

%

 

 

47

 

 

 

7,460

 

 

 

3.45

%

 

 

65

 

 

 

6,923

 

 

 

3.18

 

 

 

55

 

 

 

7,491

 

 

 

3.28

 

 

 

61

 

Total investment securities

 

 

347,110

 

 

 

2.37

%

 

 

2,053

 

 

 

339,208

 

 

 

2.41

%

 

 

2,044

 

 

 

387,505

 

 

 

2.37

 

 

 

2,299

 

 

 

338,233

 

 

 

2.42

 

 

 

2,048

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

 

329,786

 

 

 

4.40

%

 

 

3,645

 

 

 

295,979

 

 

 

4.62

%

 

 

3,450

 

 

 

387,959

 

 

 

4.41

 

 

 

4,270

 

 

 

326,670

 

 

 

4.44

 

 

 

3,607

 

Residential real estate

 

 

45,606

 

 

 

3.94

%

 

 

449

 

 

 

40,789

 

 

 

4.23

%

 

 

431

 

 

 

49,196

 

 

 

3.84

 

 

 

472

 

 

 

44,600

 

 

 

3.93

 

 

 

438

 

Home equity loans

 

 

63,141

 

 

 

3.62

%

 

 

574

 

 

 

60,066

 

 

 

3.55

%

 

 

537

 

 

 

65,822

 

 

 

3.78

 

 

 

621

 

 

 

62,457

 

 

 

3.74

 

 

 

580

 

Commercial and industrial

 

 

111,058

 

 

 

4.32

%

 

 

1,206

 

 

 

123,416

 

 

 

4.29

%

 

 

1,333

 

 

 

124,363

 

 

 

4.63

 

 

 

1,437

 

 

 

112,393

 

 

 

4.24

 

 

 

1,185

 

Indirect lease financing

 

 

9,202

 

 

 

8.58

%

 

 

197

 

 

 

9,576

 

 

 

9.16

%

 

 

219

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

9,927

 

 

 

8.76

 

 

 

218

 

Consumer loans

 

 

4,626

 

 

 

5.21

%

 

 

61

 

 

 

3,927

 

 

 

5.37

%

 

 

53

 

 

 

6,494

 

 

 

5.38

 

 

 

87

 

 

 

4,367

 

 

 

5.21

 

 

 

57

 

Tax-exempt loans

 

 

39,226

 

 

 

3.75

%

 

 

370

 

 

 

42,191

 

 

 

3.99

%

 

 

424

 

 

 

34,927

 

 

 

3.97

 

 

 

346

 

 

 

40,347

 

 

 

3.74

 

 

 

375

 

Total loans, net of unearned income*

 

 

602,645

 

 

 

4.29

%

 

 

6,502

 

 

 

575,944

 

 

 

4.44

%

 

 

6,447

 

 

 

668,761

 

 

 

4.34

 

 

 

7,233

 

 

 

600,761

 

 

 

4.32

 

 

 

6,460

 

Other earning assets

 

 

62,778

 

 

 

0.51

%

 

 

81

 

 

 

41,419

 

 

 

0.31

%

 

 

32

 

 

 

9,018

 

 

 

1.18

 

 

 

26

 

 

 

28,900

 

 

 

0.59

 

 

 

42

 

Total earning assets

 

 

1,016,525

 

 

 

3.40

%

 

 

8,690

 

 

 

960,883

 

 

 

3.55

%

 

 

8,587

 

 

 

1,067,269

 

 

 

3.60

 

 

 

9,582

 

 

 

971,793

 

 

 

3.56

 

 

 

8,596

 

Cash and due from banks

 

 

16,378

 

 

 

 

 

 

 

 

 

 

 

13,225

 

 

 

 

 

 

 

 

 

 

 

13,213

 

 

 

 

 

 

 

 

 

 

 

14,197

 

 

 

 

 

 

 

 

 

Allowance for loan losses

 

 

(7,630

)

 

 

 

 

 

 

 

 

 

 

(7,720

)

 

 

 

 

 

 

 

 

 

 

(7,766

)

 

 

 

 

 

 

 

 

 

 

(7,627

)

 

 

 

 

 

 

 

 

Other assets

 

 

28,728

 

 

 

 

 

 

 

 

 

 

 

28,894

 

 

 

 

 

 

 

 

 

 

 

29,228

 

 

 

 

 

 

 

 

 

 

 

28,673

 

 

 

 

 

 

 

 

 

Total assets

 

$

1,054,001

 

 

 

 

 

 

 

 

 

 

$

995,282

 

 

 

 

 

 

 

 

 

 

$

1,101,944

 

 

 

 

 

 

 

 

 

 

$

1,007,036

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and Shareholders' Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing deposits:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing demand

 

$

157,179

 

 

 

0.20

%

 

 

80

 

 

$

135,455

 

 

 

0.21

%

 

 

71

 

 

$

171,584

 

 

 

0.21

%

 

 

88

 

 

$

153,457

 

 

 

0.23

%

 

 

87

 

Municipals

 

 

114,403

 

 

 

0.34

%

 

 

97

 

 

 

116,572

 

 

 

0.34

%

 

 

99

 

 

 

92,188

 

 

 

0.61

 

 

 

140

 

 

 

86,770

 

 

 

0.35

 

 

 

76

 

Money market

 

 

71,963

 

 

 

0.27

%

 

 

48

 

 

 

66,854

 

 

 

0.24

%

 

 

40

 

 

 

92,866

 

 

 

0.33

 

 

 

76

 

 

 

69,558

 

 

 

0.27

 

 

 

47

 

Savings

 

 

231,496

 

 

 

0.40

%

 

 

233

 

 

 

218,753

 

 

 

0.37

%

 

 

204

 

 

 

253,524

 

 

 

0.44

 

 

 

278

 

 

 

230,086

 

 

 

0.40

 

 

 

229

 

Time

 

 

133,296

 

 

 

1.13

%

 

 

378

 

 

 

139,403

 

 

 

1.08

%

 

 

381

 

 

 

128,394

 

 

 

1.16

 

 

 

372

 

 

 

133,832

 

 

 

1.11

 

 

 

371

 

Time of $100,000 or more

 

 

95,915

 

 

 

1.37

%

 

 

330

 

 

 

92,285

 

 

 

1.29

%

 

 

300

 

 

 

94,741

 

 

 

1.39

 

 

 

328

 

 

 

94,052

 

 

 

1.36

 

 

 

319

 

Total interest-bearing deposits

 

 

804,252

 

 

 

0.58

%

 

 

1,166

 

 

 

769,322

 

 

 

0.56

%

 

 

1,095

 

 

 

833,297

 

 

 

0.62

 

 

 

1,282

 

 

 

767,755

 

 

 

0.59

 

 

 

1,129

 

Short-term borrowings

 

 

38,506

 

 

 

0.37

%

 

 

36

 

 

 

31,134

 

 

 

0.37

%

 

 

28

 

 

 

44,365

 

 

 

0.46

 

 

 

52

 

 

 

38,208

 

 

 

0.38

 

 

 

36

 

Total interest-bearing liabilities

 

 

842,758

 

 

 

0.57

%

 

 

1,202

 

 

 

800,456

 

 

 

0.56

%

 

 

1,123

 

 

 

877,662

 

 

 

0.61

 

 

 

1,334

 

 

 

805,963

 

 

 

0.58

 

 

 

1,165

 

Non-interest-bearing deposits

 

 

112,114

 

 

 

 

 

 

 

 

 

 

 

101,429

 

 

 

 

 

 

 

 

 

 

 

118,895

 

 

 

 

 

 

 

 

 

 

 

103,624

 

 

 

 

 

 

 

 

 

Other liabilities

 

 

3,874

 

 

 

 

 

 

 

 

 

 

 

4,057

 

 

 

 

 

 

 

 

 

 

 

4,846

 

 

 

 

 

 

 

 

 

 

 

3,761

 

 

 

 

 

 

 

 

 

Shareholders' equity

 

 

95,255

 

 

 

 

 

 

 

 

 

 

 

89,340

 

 

 

 

 

 

 

 

 

 

 

100,541

 

 

 

 

 

 

 

 

 

 

 

93,688

 

 

 

 

 

 

 

 

 

Total liabilities and shareholders' equity

 

$

1,054,001

 

 

 

 

 

 

 

 

 

 

$

995,282

 

 

 

 

 

 

 

 

 

 

$

1,101,944

 

 

 

 

 

 

 

 

 

 

$

1,007,036

 

 

 

 

 

 

 

 

 

Net interest rate spread

 

 

 

 

 

 

2.83

%

 

 

 

 

 

 

 

 

 

 

2.99

%

 

 

 

 

 

 

 

 

 

 

2.99

%

 

 

 

 

 

 

 

 

 

 

2.98

%

 

 

 

 

Margin/net interest income

 

 

 

 

 

 

2.93

%

 

$

7,488

 

 

 

 

 

 

 

3.08

%

 

$

7,464

 

 

 

 

 

 

 

3.10

%

 

$

8,248

 

 

 

 

 

 

 

3.08

%

 

$

7,431

 

 

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

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 )

 

Nine Months Ended

 

 

Six Months Ended

 

 

September 30, 2016

 

 

September 30, 2015

 

 

June 30, 2017

 

 

June 30, 2016

 

 

Average

 

 

Average

 

 

 

 

 

 

Average

 

 

Average

 

 

 

 

 

 

Average

 

 

Average

 

 

 

 

 

 

Average

 

 

Average

 

 

 

 

 

 

Balance

 

 

Rate

 

 

Interest

 

 

Balance

 

 

Rate

 

 

Interest

 

 

Balance

 

 

Rate

 

 

Interest

 

 

Balance

 

 

Rate

 

 

Interest

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Trading securities

 

$

3,919

 

 

 

5.47

%

 

$

161

 

 

$

4,211

 

 

 

5.95

%

 

$

188

 

 

$

2,393

 

 

 

5.69

%

 

$

68

 

 

$

3,883

 

 

 

5.48

%

 

$

106

 

Investment securities (AFS & HTM):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government agencies

 

 

57,160

 

 

 

1.85

%

 

 

794

 

 

 

49,194

 

 

 

1.60

%

 

 

590

 

 

 

74,540

 

 

 

1.76

 

 

 

657

 

 

 

55,290

 

 

 

1.84

 

 

 

508

 

State and municipal

 

 

73,765

 

 

 

4.06

%

 

 

2,247

 

 

 

71,378

 

 

 

4.17

%

 

 

2,233

 

 

 

73,823

 

 

 

3.89

 

 

 

1,438

 

 

 

74,705

 

 

 

4.08

 

 

 

1,523

 

Mortgage-backed and CMOs

 

 

196,830

 

 

 

1.98

%

 

 

2,926

 

 

 

208,138

 

 

 

1.96

%

 

 

3,060

 

 

 

222,497

 

 

 

2.05

 

 

 

2,278

 

 

 

196,511

 

 

 

2.00

 

 

 

1,963

 

Pooled trust preferred securities

 

 

3,197

 

 

 

0.21

%

 

 

5

 

 

 

3,510

 

 

 

0.37

%

 

 

10

 

 

 

2,876

 

 

 

1.26

 

 

 

18

 

 

 

3,250

 

 

 

0.21

 

 

 

3

 

Corporate debt securities

 

 

8,160

 

 

 

1.77

%

 

 

108

 

 

 

6,011

 

 

 

1.15

%

 

 

52

 

 

 

8,067

 

 

 

1.94

 

 

 

78

 

 

 

8,634

 

 

 

1.78

 

 

 

77

 

Equities

 

 

7,192

 

 

 

3.28

%

 

 

177

 

 

 

7,205

 

 

 

3.26

%

 

 

175

 

 

 

6,881

 

 

 

3.27

 

 

 

112

 

 

 

7,507

 

 

 

3.48

 

 

 

130

 

Total investment securities

 

 

346,304

 

 

 

2.41

%

 

 

6,257

 

 

 

345,436

 

 

 

2.36

%

 

 

6,120

 

 

 

388,684

 

 

 

2.36

 

 

 

4,581

 

 

 

345,897

 

 

 

2.43

 

 

 

4,204

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

 

327,225

 

 

 

4.43

%

 

 

10,854

 

 

 

290,561

 

 

 

4.55

%

 

 

9,882

 

 

 

381,609

 

 

 

4.57

 

 

 

8,650

 

 

 

325,929

 

 

 

4.45

 

 

 

7,209

 

Residential real estate

 

 

44,447

 

 

 

3.90

%

 

 

1,301

 

 

 

38,848

 

 

 

4.13

%

 

 

1,203

 

 

 

48,370

 

 

 

3.85

 

 

 

930

 

 

 

43,862

 

 

 

3.89

 

 

 

852

 

Home equity loans

 

 

62,557

 

 

 

3.72

%

 

 

1,740

 

 

 

58,177

 

 

 

3.58

%

 

 

1,556

 

 

 

66,104

 

 

 

3.82

 

 

 

1,251

 

 

 

62,262

 

 

 

3.77

 

 

 

1,166

 

Commercial and industrial

 

 

112,918

 

 

 

4.25

%

 

 

3,592

 

 

 

124,211

 

 

 

4.16

%

 

 

3,865

 

 

 

118,717

 

 

 

4.65

 

 

 

2,736

 

 

 

113,858

 

 

 

4.21

 

 

 

2,386

 

Indirect lease financing

 

 

9,844

 

 

 

8.88

%

 

 

656

 

 

 

8,784

 

 

 

9.07

%

 

 

598

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

10,168

 

 

 

9.02

 

 

 

458

 

Consumer loans

 

 

4,460

 

 

 

5.25

%

 

 

175

 

 

 

3,981

 

 

 

5.41

%

 

 

161

 

 

 

6,377

 

 

 

5.25

 

 

 

166

 

 

 

4,376

 

 

 

5.27

 

 

 

115

 

Tax-exempt loans

 

 

39,959

 

 

 

3.77

%

 

 

1,127

 

 

 

44,803

 

 

 

4.00

%

 

 

1,340

 

 

 

35,117

 

 

 

3.95

 

 

 

689

 

 

 

40,330

 

 

 

3.77

 

 

 

757

 

Total loans, net of unearned income*

 

 

601,410

 

 

 

4.32

%

 

 

19,445

 

 

 

569,365

 

 

 

4.37

%

 

 

18,605

 

 

 

656,294

 

 

 

4.43

 

 

 

14,422

 

 

 

600,785

 

 

 

4.33

 

 

 

12,943

 

Other earning assets

 

 

34,156

 

 

 

0.55

%

 

 

140

 

 

 

23,653

 

 

 

0.60

%

 

 

106

 

 

 

7,540

 

 

 

0.92

 

 

 

34

 

 

 

19,687

 

 

 

0.60

 

 

 

59

 

Total earning assets

 

 

985,789

 

 

 

3.52

%

 

 

26,003

 

 

 

942,665

 

 

 

3.55

%

 

 

25,019

 

 

 

1,054,911

 

 

 

3.65

 

 

 

19,105

 

 

 

970,252

 

 

 

3.59

 

 

 

17,312

 

Cash and due from banks

 

 

14,013

 

 

 

 

 

 

 

 

 

 

 

11,922

 

 

 

 

 

 

 

 

 

 

 

12,658

 

 

 

 

 

 

 

 

 

 

 

12,818

 

 

 

 

 

 

 

 

 

Allowance for loan losses

 

 

(7,622

)

 

 

 

 

 

 

 

 

 

 

(7,923

)

 

 

 

 

 

 

 

 

 

 

(7,605

)

 

 

 

 

 

 

 

 

 

 

(7,618

)

 

 

 

 

 

 

 

 

Other assets

 

 

28,683

 

 

 

 

 

 

 

 

 

 

 

29,291

 

 

 

 

 

 

 

 

 

 

 

29,032

 

 

 

 

 

 

 

 

 

 

 

28,661

 

 

 

 

 

 

 

 

 

Total assets

 

$

1,020,863

 

 

 

 

 

 

 

 

 

 

$

975,955

 

 

 

 

 

 

 

 

 

 

$

1,088,996

 

 

 

 

 

 

 

 

 

 

$

1,004,113

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and Shareholders' Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing deposits:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing demand

 

$

151,907

 

 

 

0.21

%

 

 

237

 

 

$

133,285

 

 

 

0.22

%

 

 

217

 

 

$

166,783

 

 

 

0.20

%

 

 

168

 

 

$

149,242

 

 

 

0.21

%

 

 

157

 

Municipals

 

 

98,777

 

 

 

0.35

%

 

 

255

 

 

 

108,554

 

 

 

0.34

%

 

 

273

 

 

 

89,764

 

 

 

0.53

 

 

 

234

 

 

 

90,878

 

 

 

0.35

 

 

 

158

 

Money market

 

 

70,556

 

 

 

0.27

%

 

 

142

 

 

 

63,960

 

 

 

0.24

%

 

 

114

 

 

 

85,469

 

 

 

0.30

 

 

 

128

 

 

 

69,844

 

 

 

0.27

 

 

 

94

 

Savings

 

 

228,894

 

 

 

0.40

%

 

 

688

 

 

 

216,510

 

 

 

0.37

%

 

 

600

 

 

 

247,317

 

 

 

0.44

 

 

 

537

 

 

 

227,579

 

 

 

0.40

 

 

 

455

 

Time

 

 

133,930

 

 

 

1.12

%

 

 

1,122

 

 

 

143,781

 

 

 

1.08

%

 

 

1,166

 

 

 

129,540

 

 

 

1.15

 

 

 

740

 

 

 

134,251

 

 

 

1.11

 

 

 

744

 

Time of $100,000 or more

 

 

94,462

 

 

 

1.37

%

 

 

967

 

 

 

92,543

 

 

 

1.29

%

 

 

890

 

 

 

95,129

 

 

 

1.38

 

 

 

651

 

 

 

93,728

 

 

 

1.37

 

 

 

637

 

Total interest-bearing deposits

 

 

778,526

 

 

 

0.59

%

 

 

3,411

 

 

 

758,633

 

 

 

0.57

%

 

 

3,260

 

 

 

814,002

 

 

 

0.61

 

 

 

2,458

 

 

 

765,522

 

 

 

0.59

 

 

 

2,245

 

Short-term borrowings

 

 

39,922

 

 

 

0.38

%

 

 

115

 

 

 

31,792

 

 

 

0.37

%

 

 

87

 

 

 

52,418

 

 

 

0.51

 

 

 

132

 

 

 

40,638

 

 

 

0.39

 

 

 

79

 

Total interest-bearing liabilities

 

 

818,448

 

 

 

0.58

%

 

 

3,526

 

 

 

790,425

 

 

 

0.57

%

 

 

3,347

 

 

 

866,420

 

 

 

0.60

 

 

 

2,590

 

 

 

806,160

 

 

 

0.58

 

 

 

2,324

 

Non-interest-bearing deposits

 

 

104,922

 

 

 

 

 

 

 

 

 

 

 

94,071

 

 

 

 

 

 

 

 

 

 

 

118,381

 

 

 

 

 

 

 

 

 

 

 

101,287

 

 

 

 

 

 

 

 

 

Other liabilities

 

 

3,756

 

 

 

 

 

 

 

 

 

 

 

3,518

 

 

 

 

 

 

 

 

 

 

 

4,605

 

 

 

 

 

 

 

 

 

 

 

3,696

 

 

 

 

 

 

 

 

 

Shareholders' equity

 

 

93,737

 

 

 

 

 

 

 

 

 

 

 

87,941

 

 

 

 

 

 

 

 

 

 

 

99,590

 

 

 

 

 

 

 

 

 

 

 

92,970

 

 

 

 

 

 

 

 

 

Total liabilities and shareholders' equity

 

$

1,020,863

 

 

 

 

 

 

 

 

 

 

$

975,955

 

 

 

 

 

 

 

 

 

 

$

1,088,996

 

 

 

 

 

 

 

 

 

 

$

1,004,113

 

 

 

 

 

 

 

 

 

Net interest rate spread

 

 

 

 

 

 

2.94

%

 

 

 

 

 

 

 

 

 

 

2.98

%

 

 

 

 

 

 

 

 

 

 

3.05

%

 

 

 

 

 

 

 

 

 

 

3.01

%

 

 

 

 

Margin/net interest income

 

 

 

 

 

 

3.05

%

 

$

22,477

 

 

 

 

 

 

 

3.07

%

 

$

21,672

 

 

 

 

 

 

 

3.16

%

 

$

16,515

 

 

 

 

 

 

 

3.11

%

 

$

14,988

 

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

46

44


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

 

 

Six months ended

 

 

 

June 30, 2017 compared

 

 

June 30, 2017 compared

 

 

 

to June 30, 2016

 

 

to June 30, 2016

 

 

 

Total

 

 

Due to change in:

 

 

Total

 

 

Due to change in:

 

 

 

Change

 

 

Volume

 

 

Rate

 

 

Change

 

 

Volume

 

 

Rate

 

Interest income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Trading securities

 

$

(22

)

 

$

(23

)

 

$

1

 

 

$

(38

)

 

$

(40

)

 

$

2

 

Investment securities (AFS & HTM):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government agencies

 

 

78

 

 

 

90

 

 

 

(12

)

 

 

149

 

 

 

177

 

 

 

(28

)

State and municipal

 

 

(8

)

 

 

24

 

 

 

(32

)

 

 

(85

)

 

 

(18

)

 

 

(67

)

Mortgage-backed and CMOs

 

 

173

 

 

 

142

 

 

 

31

 

 

 

315

 

 

 

259

 

 

 

56

 

Pooled trust preferred securities

 

 

14

 

 

 

(1

)

 

 

15

 

 

 

15

 

 

 

 

 

 

15

 

Corporate debt securities

 

 

-

 

 

 

 

 

 

-

 

 

 

1

 

 

 

(6

)

 

 

7

 

Equities

 

 

(6

)

 

 

(4

)

 

 

(2

)

 

 

(18

)

 

 

(11

)

 

 

(7

)

Total Investment securities (AFS & HTM)

 

 

251

 

 

 

251

 

 

 

-

 

 

 

377

 

 

 

401

 

 

 

(24

)

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

 

663

 

 

 

689

 

 

 

(26

)

 

 

1,441

 

 

 

1,208

 

 

 

233

 

Residential real estate

 

 

34

 

 

 

45

 

 

 

(11

)

 

 

78

 

 

 

88

 

 

 

(10

)

Home equity loans

 

 

41

 

 

 

33

 

 

 

8

 

 

 

85

 

 

 

68

 

 

 

17

 

Commercial and industrial

 

 

252

 

 

 

130

 

 

 

122

 

 

 

350

 

 

 

94

 

 

 

256

 

Indirect lease financing

 

 

(218

)

 

 

(218

)

 

 

-

 

 

 

(458

)

 

 

(458

)

 

 

-

 

Consumer loans

 

 

30

 

 

 

27

 

 

 

3

 

 

 

51

 

 

 

52

 

 

 

(1

)

Tax-exempt loans

 

 

(29

)

 

 

(49

)

 

 

20

 

 

 

(68

)

 

 

(99

)

 

 

31

 

Total Loans

 

 

773

 

 

 

657

 

 

 

116

 

 

 

1,479

 

 

 

953

 

 

 

526

 

Other earning assets

 

 

(16

)

 

 

(29

)

 

 

13

 

 

 

(25

)

 

 

(37

)

 

 

12

 

Total interest income

 

 

986

 

 

 

856

 

 

 

130

 

 

 

1,793

 

 

 

1,277

 

 

 

516

 

Interest expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing deposits:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing demand

 

 

1

 

 

 

11

 

 

 

(10

)

 

 

11

 

 

 

18

 

 

 

(7

)

Municipals

 

 

64

 

 

 

4

 

 

 

60

 

 

 

76

 

 

 

(3

)

 

 

79

 

Money market

 

 

29

 

 

 

15

 

 

 

14

 

 

 

34

 

 

 

20

 

 

 

14

 

Savings

 

 

49

 

 

 

24

 

 

 

25

 

 

 

82

 

 

 

38

 

 

 

44

 

Time

 

 

1

 

 

 

(15

)

 

 

16

 

 

 

(4

)

 

 

(28

)

 

 

24

 

Time of $100,000 or more

 

 

9

 

 

 

4

 

 

 

5

 

 

 

14

 

 

 

8

 

 

 

6

 

Total interest-bearing deposits

 

 

153

 

 

 

43

 

 

 

110

 

 

 

213

 

 

 

53

 

 

 

160

 

Short-term borrowings

 

 

16

 

 

 

6

 

 

 

10

 

 

 

53

 

 

 

22

 

 

 

31

 

Total interest expense

 

 

169

 

 

 

49

 

 

 

120

 

 

 

266

 

 

 

75

 

 

 

191

 

Net interest income

 

$

817

 

 

$

807

 

 

$

10

 

 

$

1,527

 

 

$

1,202

 

 

$

325

 

 

 

 

Three months ended

 

 

Nine months ended

 

 

 

September 30, 2016 compared

 

 

September 30, 2016 compared

 

 

 

to September 30, 2015

 

 

to September 30, 2015

 

 

 

Total

 

 

Due to change in:

 

 

Total

 

 

Due to change in:

 

 

 

Change

 

 

Volume

 

 

Rate

 

 

Change

 

 

Volume

 

 

Rate

 

Interest income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Trading securities

 

$

(10

)

 

$

(5

)

 

$

(5

)

 

$

(27

)

 

$

(13

)

 

$

(14

)

Investment securities (AFS & HTM):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government agencies

 

 

103

 

 

 

56

 

 

 

47

 

 

 

204

 

 

 

95

 

 

 

109

 

State and municipal

 

 

(57

)

 

 

(35

)

 

 

(22

)

 

 

14

 

 

 

75

 

 

 

(61

)

Mortgage-backed and CMOs

 

 

(31

)

 

 

(14

)

 

 

(17

)

 

 

(134

)

 

 

(167

)

 

 

33

 

Pooled trust preferred securities

 

 

(1

)

 

 

 

 

 

(1

)

 

 

(5

)

 

 

(1

)

 

 

(4

)

Corporate debt securities

 

 

13

 

 

 

3

 

 

 

10

 

 

 

56

 

 

 

19

 

 

 

37

 

Equities

 

 

(18

)

 

 

(8

)

 

 

(10

)

 

 

2

 

 

 

1

 

 

 

1

 

Total Investment securities (AFS & HTM)

 

 

9

 

 

 

2

 

 

 

7

 

 

 

137

 

 

 

22

 

 

 

115

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

 

195

 

 

 

383

 

 

 

(188

)

 

 

972

 

 

 

1,258

 

 

 

(286

)

Residential real estate

 

 

18

 

 

 

51

 

 

 

(33

)

 

 

98

 

 

 

173

 

 

 

(75

)

Home equity loans

 

 

37

 

 

 

26

 

 

 

11

 

 

 

184

 

 

 

118

 

 

 

66

 

Commercial and industrial

 

 

(127

)

 

 

(137

)

 

 

10

 

 

 

(273

)

 

 

(348

)

 

 

75

 

Indirect lease financing

 

 

(22

)

 

 

(9

)

 

 

(13

)

 

 

58

 

 

 

72

 

 

 

(14

)

Consumer loans

 

 

8

 

 

 

10

 

 

 

(2

)

 

 

14

 

 

 

20

 

 

 

(6

)

Tax-exempt loans

 

 

(54

)

 

 

(30

)

 

 

(24

)

 

 

(213

)

 

 

(143

)

 

 

(70

)

Total Loans

 

 

55

 

 

 

294

 

 

 

(239

)

 

 

840

 

 

 

1,150

 

 

 

(310

)

Other earning assets

 

 

49

 

 

 

17

 

 

 

32

 

 

 

34

 

 

 

47

 

 

 

(13

)

Total interest income

 

 

103

 

 

 

308

 

 

 

(205

)

 

 

984

 

 

 

1,206

 

 

 

(222

)

Interest expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing deposits:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing demand

 

 

9

 

 

 

11

 

 

 

(2

)

 

 

20

 

 

 

30

 

 

 

(10

)

Municipals

 

 

(2

)

 

 

(3

)

 

 

1

 

 

 

(18

)

 

 

(24

)

 

 

6

 

Money market

 

 

8

 

 

 

3

 

 

 

5

 

 

 

28

 

 

 

12

 

 

 

16

 

Savings

 

 

29

 

 

 

11

 

 

 

18

 

 

 

88

 

 

 

35

 

 

 

53

 

Time

 

 

(3

)

 

 

(17

)

 

 

14

 

 

 

(44

)

 

 

(79

)

 

 

35

 

Time of $100,000 or more

 

 

30

 

 

 

10

 

 

 

20

 

 

 

77

 

 

 

19

 

 

 

58

 

Total interest-bearing deposits

 

 

71

 

 

 

15

 

 

 

56

 

 

 

151

 

 

 

(7

)

 

 

158

 

Short-term borrowings

 

 

8

 

 

 

7

 

 

 

1

 

 

 

28

 

 

 

23

 

 

 

5

 

Total interest expense

 

 

79

 

 

 

22

 

 

 

57

 

 

 

179

 

 

 

16

 

 

 

163

 

Net interest income

 

$

24

 

 

$

286

 

 

$

(262

)

 

$

805

 

 

$

1,190

 

 

$

(385

)

Net Interest Income and Net Interest Margin – Quarterly Comparison

Average earning assets for the thirdsecond quarter 2016of 2017 were $1,016,525,000,$1,067,269,000, an increase of $55,642,000 for$95,476,000, or 9.8%, from the second quarter comparedof 2016, with the same period in 2015.  Averageaverage loans increased $26,701,000,increasing $68,000,000, or 4.6%11.3%, for the quarter and average investment securities increased $7,582,000increasing $47,358,000, or 13.8%, over the comparable period of 2015.same period. Growth in the loan portfolio mitigates the impact of the low rate environment on net interest income and the net interest margin as loans generally earn a higher yield than investment securities. Average loans as a percent of average earning assets grew to 61.0%were 62.7% for the nine months ended September 30, 2016second quarter of 2017, compared to 60.4%with 61.8% for the same period in 2015.second quarter of 2016. On the funding side, average deposits increased $45,615,000,$80,813,000, or 5.2%9.3%, for third quarter 2016 and $30,744,000, or 3.6%,to $952,192,000 for the nine months ended September 30, 2016, compared to the same periodssecond quarter of 2017 with growth in 2015.all categories except for time deposits. Customers continue to reinvest funds into non-time deposits, as the yield onin time deposits remains low and customers prefer to keep their funds liquid to capitalize on rising rates. Average short-term borrowings, which consist primarily of commercial repurchase agreements, increased $7,372,000borrowed funds for the thirdsecond quarter 2016 comparedof 2017 increased $6,157,000, to the third quarter 2015.

4745


QNB CORP. AND SUBSIDIARY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

 

 

The low interest rate environment$44,365,000, which consisted of average commercial repurchase agreements of $40,216,000 and loan rate competition continues to exert pressure on asset yields andaverage overnight borrowings of $4,149,000.  For the net interest margin as longer term assets reprice to lower interest rate levels while funding costs are near their implied floors.  same period in 2016, borrowings consisted solely of commercial repurchase agreements.

The net interest margin for the thirdsecond quarter 2016of 2017 was 2.93%3.10% compared towith 3.08% for same period in 20152016.  While competition for quality loans in our local market continues to exert pressure on the net interest margin, three increases in the prime lending rate since June 2016 have provided increased interest income on variable rate loans, and 3.08% reported for the second quarter of 2016.little competitive pricing pressure on deposits.  

The Rate-Volume Analysis tables, as presented on a tax-equivalent basis, highlight the impact of changing rates and volumes on interest income and interest expense. Total interest income on a tax-equivalent basis increased $103,000,$986,000, or 1.2%11.5%, to $8,690,000$9,582,000 for the thirdsecond quarter of 2016;2017; total interest expense increased 7.0%14.5% to $1,202,000.$1,334,000. Growth in earning assets was the primary contributorcontributed to the increase in interest income.income, as well as the additional interest income referenced above.  All categories of interest-bearing deposits except interest-bearing demand and municipal deposits experienced higher rates in the thirdsecond quarter 2016of 2017 compared to thirdsecond quarter 2015,of 2016, due to the increase in balances in tiered-pricing accountsrate increases for municipal deposits indexed to Fed Funds, and a five basis point rate increaseincreases to the eSavings productand Rewards checking products in late 2015.2016 and the second quarter of 2017.

The yield on earning assets on a tax-equivalent basis declined fifteenincreased four basis points from 3.55% for the third quarter of 2015, to 3.40% for the third quarter of 2016 and declined sixteen basis points from the 3.56% reported for the second quarter of 2016.2016, to 3.60% for the second quarter of 2017.  The rate paid oncost of interest-bearing liabilities increased one basis point to 0.57%was 0.61% for the third quarter of 2016 compared to the same period in 2015 and decreased one basis point, compared to the quarter ended June 30, 2017, compared with 0.58% for the same period in 2016.

Interest income on investment securities (trading, available-for-sale and held-to-maturity) decreased $1,000increased $229,000 when comparing the quarters ended SeptemberJune 30, 20162017 and 2015.2016. The average yield on the investment portfolio was 2.40%2.39% for the thirdsecond quarter of 20162017 compared with 2.46%2.45% for the thirdsecond quarter of 2015. The current market has provided little opportunity to invest the cash flow from calls and prepayments2016. Investment opportunities in the current rate environment provide a yield comparable to the overall portfolio in bonds with better yields than the securities being called and repaid.yield.

Income on U.S. Government agency securities increased $103,000,$78,000, as the $14,159,000,$19,456,000, or 30.3%36.3%, increase in average balances contributed to an increase in interest income of $90,000. This was offset by $56,000. This sector experienced a 31$12,000 decrease in interest income due to a six basis point increasedecrease in the yield from 1.57%1.84% for the thirdsecond quarter of 20152016 to 1.88%1.78% for the same period in 2016, which contributed an additional $47,000.2017.

Interest income on every other category of investment securities, except for corporate debt securities, declined in the third quarter 2016, compared to the same period in 2015.  Tax-exemptAverage tax-exempt municipal securities experiencedincreased $2,429,000, contributing $24,000 to interest income, which was offset by a decrease in average balances of $3,388,000, which, coupled with a twelve17 basis point reduction in average yield, which resulted in a decrease of interest income of $57,000.$32,000.  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 with lower yields. Typically, QNB purchases municipal bonds with 10-15 year maturities with call dates between 2-5 years. The yield on this portfolio is expected to continue to decline as additional higher yielding municipal bonds are expected to be called or mature during 2016.2017.  The current yield on replacement bonds is well below the yield of the bonds being called or maturing.

Interest income on mortgage-backed securities and CMOs decreased $31,000increased $173,000 with a fourfive basis point declineincrease in average yield, plus the $28,447,000 increase in average balances contributing approximately halfto the decline in interest income.  Average balances decreased $2,779,000, or 1.4%, to $197,462,000 when comparing the two periods.increase.  This portfolio generally provides higher yields relative to agency bonds and also provides monthly cash flow which can be used for liquidity purposes or can be reinvested when interest rates eventually increase. With the low interest rate environment, mortgage refinancing activity over the past three years was significant resulting in an increase in prepayments on these securities. Since most of these securities were purchased at a premium, prepayments result in a shorter amortization period of this premium and therefore a reduction in income.

Income on loans increased $55,000$773,000 to $6,502,000$7,233,000 when comparing the thirdsecond quarters of 2017 and 2016, and 2015, with a 4.6%the strong growth in average balances contributing an increase in interest income of $294,000, offset by a decline$657,000.  The yield on average loans for the second quarter of 2017 was 4.34%, two basis points higher than the 4.32% in interest incomesecond quarter of $239,000 as a result of a fifteen basis point reduction2016.   Despite increases in average portfolio yield to 4.29%. As a result of the interestFed funds rate environmentin December 2016, March 2017, and June 2017, competitive pressures result in new loans are being originated at lower rates,relatively low rates. Mitigating competitive pricing, variable rate loans are repricing lower and many customers with fixed rates are requesting modifications for lower rates.have repriced higher as the prime rate increase went into effect.

The largest category of the loan portfolio is commercial real estate loans. This category of loans includes commercial purpose loans secured by either commercial properties such as office buildings, factories, warehouses, medical facilities and retail establishments, or residential real estate, usually the residence of the business owner. The category also includes construction and land development loans.  Income on commercial real estate loans increased $195,000 due to the 11.4% increase in average balances. Average balances increased $33,807,000,$61,289,000, or 18.8%, to $329,786,000$387,959,000 for the quarter ended SeptemberJune 30, 20162017 compared with the same quarter in 2015. The2016, contributing $689,000 in increased interest income.  This increase was offset in part by a $26,000 decrease in interest income, as the yield on commercial real estate loans declined 22decreased three basis points from 4.62%4.44% in 20152016 to 4.40%4.41% in 2016.2017.

4846


QNB CORP. AND SUBSIDIARY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

 

 

Income on commercial and industrial loans increased $252,000. Average balances increased $11,970,000, or 10.7%, to $124,363,000 for the second largest category, decreased $127,000 as average commercial and industrial loan balances decreased $12,358,000, or 10.0%, to $111,058,000 for the third quarter of 20162017 resulting in a $137,000 decrease$130,000 increase in income. The average yield on these loans increased three39 basis points to 4.32%4.63% resulting in an increase in income of $10,000.$122,000.  Many of the loans in this category are indexed to the prime interest rate, which increased by one quarter of one percent in late December 2015.three times since June 2016.

Tax-exempt loan income was $370,000$346,000 for the thirdsecond quarter of 2016,2017, a decrease of $54,000$29,000 from the same period in 2015. With the decline in market interest rates2016. As with municipal marketable securities, many municipalities have refinanced existing debt or taken on new debt.loans. While QNB has been successful in winning some of these bids, average balances have decreased $2,965,000,$5,420,000, or 7.0%13.4%, to $39,226,000$34,927,000 for the thirdsecond quarter of 2016,2017, resulting in a decrease of $30,000$49,000 in income. The rate renegotiation or biddingyield on thesemunicipal loans has resultedimproved 23 basis points, to 3.97% for the second quarter of 2017, compared with the same period in 2016, resulting in an additional $24,000 decline$20,000 in interest income.

In October 2016, QNB sold its interest in third-party originated indirect lease financing contracts.  This portfolio provided $218,000 in interest income asduring the average yield on the tax-exempt loan portfolio declined from 3.99% for the third quarter of 2015 to 3.75% for the thirdsecond quarter of 2016.

QNB desires to become the “local consumer lender of choice” and to affect this QNB focusedrefocused its retail lending efforts, adding new product offerings and increasing marketing and promotion.  The positive impact of this focus has been year-over-year growth in balances in all three categories of retail lending: residential mortgage, home equity and consumer loans.  Average residential mortgage loans secured by first lien 1-4 family residential mortgages increased by $4,817,000,$4,596,000, or 11.8%10.3%, to $45,606,000$49,196,000 for the thirdsecond quarter of 20162017 compared to the same period in 2015.2016. Over this same timeframe, the average yield on the portfolio declined by 29decreased nine basis points to 3.94%3.84% for the thirdsecond quarter of 2016.2017. The net result was an increase in interest income of $18,000.$34,000. Average home equity loans increased $3,075,000,$3,365,000, or 5.1%5.4%, to $63,141,000$65,822,000 while the average yield increased sevenfour basis points to 3.62%3.78% resulting in an increase in interest income of $37,000.$41,000. Average consumer loans increased $699,000,$2,127,000, or 17.8%48.7%, to $4,626,000 while$6,494,000, led primarily by student loan average balances, which increased $1,897,000 from second quarter 2016 to second quarter 2017.  When comparing these two periods, the yield on the portfolio decreased sixteenincreased seventeen basis points to 5.21% for the third quarter of 20165.38%, resulting in an $8,000a $30,000 increase in interest income.

For the most part, earningEarning assets are funded by deposits whichand borrowed funds.  Interest expense increased 5.2%$169,000, when comparing the average balances for third quarterssecond quarter of 2016 and 2015.  Interest expense on total deposits and borrowed funds increased $71,000 and $8,000, respectively, when comparing2017 to the two quarters.

same period in 2016.  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. Average non-interest-bearing demand accounts increased $10,685,000,$15,271,000, or 10.5%14.7%, to $112,114,000$118,895,000 for the thirdsecond quarter of 2016.2017. QNB has been successful in increasing business checking accounts as average balances in these accounts have increased by $9,111,000,$13,211,000, or 11.2%15.9%, to $96,369,000 when comparing the quarters. Average interest-bearing demand accounts increased $21,724,000,$18,127,000, or 16.0%11.8%, to $157,179,000$171,584,000 for the thirdsecond quarter of 2016.2017. Interest expense on interest-bearing demand accounts increased $9,000$1,000 to $80,000$88,000 for the same period, as the average rate paid decreased by onetwo basis pointpoints to 0.20%0.21% for the thirdsecond quarter of 2016.2017. Included in this category is QNB-Rewards checking, a higher-rate checking account product that pays 1.00%1.10% on balances up to $25,000 and 0.25%0.30% for balances over $25,000. In order to receive the high rate a customer must receive an electronic statement, have one direct deposit or other ACH transaction and have at least 12 check card purchase transactions post and clear per statement cycle. For the thirdsecond quarter of 2016,2017, the average balance in this product was $45,125,000$51,815,000 and the related interest expense was $63,000$70,000 for an average yield of 0.55%0.54%. In comparison, the average balance of the QNB-Rewards accounts for the thirdfirst quarter of 20152016 was $40,395,000$45,528,000 with a related interest expense of $57,000$71,000 and an average rate paid of 0.56%0.63%. 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 $95,060,000$107,929,000 for the thirdsecond quarter of 20152016 to $112,054,000$119,769,000 for the thirdsecond quarter of 2016.2017. The average rate paid on these balances was 0.06% for both periods.

Interest expense on municipal interest-bearing demand accounts decreased $2,000increased $64,000 to $97,000$140,000 for the thirdsecond quarter of 2016.2017. The average balance of municipal interest-bearing demand accounts decreased $2,169,000,increased $5,418,000, or 1.9%6.2%, to $114,403,000,$92,188,000, with the average interest rate paid on these accounts at 0.34%increasing 26 basis points to 0.61% for both periods. The decrease in balances in 2016 may be attributable to school districts’ need for funds, as state funding has been delayed due to the state budget impasse.second quarter of 2017.  Many of these accounts are indexed to the Federal funds rate with rate floors between 0.25% and 0.50%, therefore the increaseincreases in the Federal funds rate by one quarter of one percent in late December 2015 had minimal effect onaffected the yield of these deposits. TheseMunicipal deposits are seasonal in nature and are received during the third quarter as tax receipts are collected and are withdrawn over the course of the next year.

Average money market accounts increased $5,109,000,$23,308,000, or 7.6%33.5%, to $71,963,000$92,866,000 for the thirdsecond quarter of 20162017 compared with the same period in 2015.2016. Interest expense on money market accounts increased $8,000$29,000 to $48,000 and$76,000, while the average interest rate paid on money market accounts increased from 0.24%six basis points to 0.33% for the thirdsecond quarter of 2015 to 0.27% for2017 compared with the third quarter ofsame period in 2016. The majorityMost of balances in this category are in a product that pays a tiered rate based on account balances.

4947


QNB CORP. AND SUBSIDIARY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

 

 

Interest expense on savings accounts increased $29,000$49,000 when comparing the thirdsecond quarter of 20162017 to the thirdsecond quarter of 2015,2016, and the average rate increased threefour basis points to 0.40% when comparing both periods.0.44%.  When comparing these same periods, average savings accounts increased $12,743,000,$23,438,000, or 5.8%10.2%, to $231,496,000$253,524,000 for the thirdsecond quarter of 20162017 with both the statement savings and e-Savings products accounting for the growth in savings balances. QNB’s online e-Savings product is the largest category of savings deposits, with average balances for the thirdsecond quarter of 2016 of $168,438,000.2017 at $184,660,000. This product has grown successfully since its introduction in the third quarter of 2009. The average yield paid on these accounts was 0.50%0.55% for the thirdsecond quarter of 20162017 and 0.46%0.50% for the same period in 2015.2016. Traditional statement savings accounts, passbook savings and club accounts are also included in the savings category and average balances in these types of savings accounts increased $5,307,000,$6,765,000, or 9.2%10.9%, when comparing the thirdsecond quarter 2016of 2017 average to the same 2015 quarter.period in 2016.

Total interest expense on time deposits increased $27,000 to $708,000totaled $700,000 and $690,000 for the third quartersecond quarters of 2016.2017 and 2016, respectively. Average total time deposits decreased by $2,477,000$4,749,000 to $229,211,000$223,135,000 for the thirdsecond quarter of 2016. Similar to2017. As with fixed-rate loans and investment securities, time deposits reprice over time and, therefore, have less of an immediate impact on costs in either a rising or falling rate environment. Unlike loans and investment securities,environment, however, the maturity and repricing characteristics of time deposits tend to be shorter. The average rate paid on time deposits increased sixfour basis points from 1.17%1.22% to 1.23%1.26% when comparing the thirdsecond quarter of 20152017 to the same period in 2016.

Approximately $96,000,000,$87,000,000, or 42%39%, of time deposits at SeptemberJune 30, 20162017 will mature over the next 12 months. The average rate paid on these time deposits is approximately 0.76%0.69%. The yield on the time deposit portfolio may change slightly in the next quarter as short-term time deposits reprice. However, given the short-term nature of these deposits, interest expense may increase if short-term time deposit rates were to increase suddenly or if customers select higher paying longer-term time deposits.

Short-term borrowings are comprised of sweep accounts structured as repurchase agreements with our commercial customers.customers and overnight FHLB borrowings. Interest expense on short-term borrowings increased $8,000$16,000 for the thirdsecond quarter of 20162017 to $36,000$52,000 when compared to the same period in 2015.2016. When comparing these same periods, average balances increased from $31,134,000$38,208,000 to $38,506,000$44,365,000, due to an increase in average FHLB borrowings of $4,149,000, while the average rate paid was 0.37%increased eight basis points to 0.46% for both periods.the second quarter of 2017.

Nine

Six Month Comparison

For the nine monthsix-month period ending SeptemberJune 30, 20162017 average earning assets increased $43,124,000,$84,659,000, or 4.6%8.7%, to $985,789,000,$1,054,911,000, with average loans increasing 5.6%9.2% and average investment securities increasing by $576,000.11.8%. Average total deposits increased $30,744,000,$65,574,000, or 3.6%7.6%, to $883,448,000$932,383,000 for the nine-monthsix-month period ended SeptemberJune 30, 20162017 compared to the same period in 2015.2016. The net interest margin on a tax-equivalent basis was 3.05%3.16% for the nine-monthsix-month period ended SeptemberJune 30, 2016,2017, a twofive basis point decreaseincrease from the same period in 2015.2016.

Total interest income on a tax-equivalent basis increased $984,000,$1,793,000, or 3.9%10.4%, from $25,019,000$17,312,000 to $26,003,000,$19,105,000, when comparing the nine-monthsix-month periods ended September 30, 2015 and SeptemberJune 30, 2016 asand June 30, 2017 due to the additional interest income generated from the growth in earning assets combined with the impact of improved yields on some of those assets. Interest income increased $1,206,000$1,277,000 as a result of volume increases, but declined $222,000and $516,000 as a result of lowerbetter 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 decreasedincreased from 3.55%3.59% to 3.52%3.65% for the nine-monthsix-month periods with the yield on loans declining fiveup 10 basis points to at 4.32%4.43%. QNB continues to feel the effectexperience pressure on yields ofdue 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, increased threedecreased eight basis points from 2.41%2.46% to 2.44%2.38% when comparing the nine-monthsix-month periods.

Total interest expense increased $179,000$266,000 for the nine-monthsix-month period ended SeptemberJune 30, 20162017 compared with the same period in 2015,2016, attributable to the increase in deposits into higher-earning tiered money markets and interest-bearing demand accounts,DDA, as well as a five basis point increaserate increases in the eSavings, rateRewards checking, and municipal deposits, which are correlated to changes in late 2015.the Fed Funds target rate. The average rate paid on interest bearing deposits increased two basis pointspoint to 0.59%0.61% for the nine monthsix-month period ended SeptemberJune 30, 20162017 versus the first nine monthshalf of 2015.2016.  QNB Bank funded short-term cash needs with increased Federal Home Loan Bank borrowings in the first half of 2017 compared with the same period in 2016, and the borrowing rate increased 12 basis points, which also contributed to the increase in interest expense.  The yield on interest-bearing liabilities rose two basis points to 0.60% for the first half of 2017.

48


QNB CORP. AND SUBSIDIARY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

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

50


QNB CORP. AND SUBSIDIARY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

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). The determination of an appropriate level for the allowance for loan losses is based upon an analysis of the risks inherent in QNB’s loan portfolio. Management, in determining the allowance for loan losses, makes significant estimates and assumptions. Since the allowance for loan losses is dependent, to a great extent, on conditions that may be beyond QNB’s control, it is at least reasonably possible that management’s estimates of the allowance for loan losses and actual results could differ. In addition, various regulatory agencies, as an integral part of their examination process, periodically review QNB’s allowance for losses on loans. Such agencies may require QNB to recognize changes to the allowance based on their judgments about information available to them at the time of their examination. Actual loan losses, net of recoveries, serve to reduce the allowance.

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

Based on this analysis, QNB recorded no$300,000 and $600,000 in provision for loan losses in the thirdsecond quarter and first six months of 2017, respectively, compared with no provisions in the second quarter and $125,000 year-to-date 2016, compared with no provision recorded in the third quarter 2015, and $60,000 year-to-date 2015.2016.  QNB's allowance for loan losses of $7,593,000$8,035,000 represents 1.25%1.16% of loans receivable at SeptemberJune 30, 20162017 compared towith an allowance for loan losses of $7,554,000,$7,394,000, or 1.23%1.17% of loans receivable, at December 31, 2015,2016, and $7,669,000,$7,550,000, or 1.32%1.25% of loans receivable at SeptemberJune 30, 2015. The2016. Management believes the allowance for loan losses at SeptemberJune 30, 2016 is at a level that QNB management believes2017 is adequate as of that date based on its analysis of known and inherent losses in the portfolio.

Net recoveries were $43,000$16,000 and $41,000, respectively, for the third quarter of 2016, comprising net overdraft charge-offs totaling $22,000, offset by net recoveries of previously charged off loans.  This comparesthree and six months ended June 30, 2017, compared with net loan recoveriescharge-offs of $14,000$6,000 and $129,000, respectively, for the third quarter of 2015. For the nine monthsame periods ended September 30, 2016 and 2015 net loan charge-offs were $86,000 and $392,000, respectively.in 2016.  

Non-performing assets of $11,811,000$10,846,000 at SeptemberJune 30, 20162017 compares favorably with $13,372,000$14,219,000 as of December 31, 20152016 and is slightly higher than $11,360,000$12,583,000 as of SeptemberJune 30, 2015. Included in2016. Prior to June 2017, this classification arecategory comprised non-performing loans and non-accrualtrust preferred securities.  In June 2017, QNB Bank sold five non-performing pooled trust preferred securities. securities, with a $2,235,000 carrying value.  The remaining trust preferred security, which had a carrying balance of $212,000 at June 30, 2017, was returned to accruing status. Non-accrual pooled trust preferred securities are carried at fair value of $2,281,000, and $2,400,000 at December 31, 2016 and June 30, 2016, respectively.

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 $9,536,000,$10,846,000, or 1.57%1.56% of loans receivable at SeptemberJune 30, 2016,2017 compared with $10,719,000,$11,938,000, or 1.74%1.89% of loans receivable at December 31, 2015,2016, and $8,760,000,$10,183,000, or 1.50%1.68% of loans receivable at SeptemberJune 30, 2015.2016. 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, 2016, $6,053,000,2017, $7,655,000, or approximately 73%81% of the loans classified as non-accrual, are current or past due less than 30 days. Loans classified as substandard or doubtful within the Company’s risk rating system totaled $22,165,000,$17,556,000, a reduction of $5,160,000, or 18.9%,$4,648,000 from the $27,325,000$22,204,000 reported at December 31, 20152016 and a $5,920,000 decline from the $23,462,000$23,476,000 reported at SeptemberJune 30, 2015.2016.

QNB had $150,000 ofno loans past due 90 days or more and still accruing interest at SeptemberJune 30, 2017 or December 31, 2016 consisting of indirect lease financing balances, compared with $11,000$65,000 at December 31, 2015, and $52,000 at SeptemberJune 30, 2015.2016. Total loans 30 days or more past due, which includes non-accrual loans by actual number of days delinquent, represented 0.70%0.30% of loans receivable at SeptemberJune 30, 20162017 compared with 0.60%0.78% at December 31, 20152016 and 0.42%0.65% at SeptemberJune 30, 2015.2016.  

Troubled debt restructured loans, not classified as non-accrual loans or loans past due 90 days or more and accruing, were $1,149,000$1,393,000 at SeptemberJune 30, 2016,2017, compared with $1,288,000$1,819,000 at December 31, 2015,2016, and $626,000$1,433,000 at SeptemberJune 30, 2015.2016. There were elevenno newly identified troubled debt restructures in the ninethree or six months ended SeptemberJune 30, 2016.2017. QNB had no other real estate owned or repossessed assets as of SeptemberJune 30, 2016,2017, December 31, 2015,2016, or SeptemberJune 30, 2015.  Non-accrual pooled trust preferred securities are carried at fair value of $2,275,000, $2,653,000, and $2,600,000 at September 30, 2016, December 31, 2015 and September 30, 2015, respectively. The decrease in the carrying value of these securities reflects a combination of payments received and a decrease in their fair value.2016.  


5149


QNB CORP. AND SUBSIDIARY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

 

 

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 and indirect lease financing loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral, if the loan is collateral dependent.

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

 

 

September 30,

 

 

December 31,

 

 

September 30,

 

 

June 30,

 

 

December 31,

 

 

June 30,

 

 

2016

 

 

2015

 

 

2015

 

 

2017

 

 

2016

 

 

2016

 

Non-accrual loans

 

$

8,237

 

 

$

9,420

 

 

$

8,082

 

 

$

9,453

 

 

$

10,119

 

 

$

8,685

 

Loans past due 90 days or more and still accruing interest

 

 

150

 

 

 

11

 

 

 

52

 

 

 

 

 

 

 

 

 

65

 

Troubled debt restructured loans (not already included

above)

 

 

1,149

 

 

 

1,288

 

 

 

626

 

 

 

1,393

 

 

 

1,819

 

 

 

1,433

 

Total non-performing loans

 

 

9,536

 

 

 

10,719

 

 

 

8,760

 

 

 

10,846

 

 

 

11,938

 

 

 

10,183

 

Other real estate owned and repossessed assets

 

 

 

 

 

 

 

 

 

Non-accrual investment securities

 

 

2,275

 

 

 

2,653

 

 

 

2,600

 

 

 

 

 

 

2,281

 

 

 

2,400

 

Total non-performing assets

 

$

11,811

 

 

$

13,372

 

 

$

11,360

 

 

$

10,846

 

 

$

14,219

 

 

$

12,583

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total loans (excluding loans held-for-sale):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average total loans (YTD)

 

$

601,143

 

 

$

574,015

 

 

$

568,978

 

 

$

656,026

 

 

$

604,757

 

 

$

600,601

 

Total loans

 

 

608,231

 

 

 

615,270

 

 

 

582,255

 

 

 

695,213

 

 

 

633,079

 

 

 

604,478

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan losses

 

 

7,593

 

 

 

7,554

 

 

 

7,669

 

 

 

8,035

 

 

 

7,394

 

 

 

7,550

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan losses to:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-performing loans

 

 

79.63

%

 

 

70.48

%

 

 

87.54

%

 

 

74.09

%

 

 

61.94

%

 

 

74.14

%

Total loans (excluding held-for-sale)

 

 

1.25

%

 

 

1.23

%

 

 

1.32

%

 

 

1.16

%

 

 

1.17

%

 

 

1.25

%

Average total loans

 

 

1.26

%

 

 

1.32

%

 

 

1.35

%

 

 

1.22

%

 

 

1.22

%

 

 

1.26

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-performing loans / total loans (excluding held-for-sale)

 

 

1.57

%

 

 

1.74

%

 

 

1.50

%

 

 

1.56

%

 

 

1.89

%

 

 

1.68

%

Non-performing assets / total assets

 

 

1.10

%

 

 

1.31

%

 

 

1.09

%

 

 

0.97

%

 

 

1.34

%

 

 

1.22

%

 

An analysis of net loan (recoveries) charge-offs for the three and ninesix months ended SeptemberJune 30, 20162017 compared to 20152016 is as follows:

 

 

Three months

ended September 30,

 

 

Nine months

ended September 30,

 

 

Three months

ended June 30,

 

 

Six months

ended June 30,

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Net (recoveries) charge-offs

 

$

(43

)

 

$

(14

)

 

$

86

 

 

$

392

 

 

$

(16

)

 

$

6

 

 

$

(41

)

 

$

129

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net annualized (recoveries) charge-offs to:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total loans

 

 

(0.03

%)

 

 

(0.01

%)

 

 

0.02

%

 

 

0.09

%

 

 

(0.01

%)

 

 

0.00

%

 

 

(0.01

%)

 

 

0.04

%

Average total loans excluding held-for-sale

 

 

(0.03

%)

 

 

(0.01

%)

 

 

0.02

%

 

 

0.09

%

 

 

(0.01

%)

 

 

0.00

%

 

 

(0.01

%)

 

 

0.04

%

Allowance for loan losses

 

 

(2.26

%)

 

 

(0.69

%)

 

 

1.52

%

 

 

6.84

%

 

 

(0.81

%)

 

 

0.29

%

 

 

(1.03

%)

 

 

3.45

%

At SeptemberJune 30, 20162017 and December 31, 2015,2016, the recorded investment in loans for which impairment has been identified totaled $12,773,000$13,753,000 and $14,941,000$15,006,000 of which $11,010,000$10,581,000 and $12,414,000,$10,909,000, respectively, required no specific allowance for loan loss. The recorded investment in impaired loans requiring an allowance for loan losses was $1,763,000$3,172,000 and $2,527,000$4,097,000 at SeptemberJune 30, 20162017 and December 31, 2015,2016, respectively, and the related allowance for loan losses associated with these loans was $717,000$1,133,000 and

5250


QNB CORP. AND SUBSIDIARY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

 

 

$974,000,1,198,000, respectively. Most of the loans that have been identified as impaired are collateral-dependent. See Note 87 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

 

 

Three months

 

 

Change from

 

 

Six months

 

 

Change from

 

 

ended September 30,

 

 

prior year

 

 

ended September 30,

 

 

prior year

 

 

ended June 30,

 

 

prior year

 

 

ended June 30,

 

 

 

prior year

 

 

2016

 

 

2015

 

 

Amount

 

 

Percent

 

 

2016

 

 

2015

 

 

Amount

 

 

Percent

 

 

2017

 

 

2016

 

 

Amount

 

 

Percent

 

 

2017

 

 

2016

 

 

 

Amount

 

 

Percent

 

Net gain on investment securities

 

$

316

 

 

$

83

 

 

$

233

 

 

 

280.7

%

 

$

650

 

 

$

800

 

 

$

(150

)

 

 

-18.8

%

 

$

115

 

 

$

15

 

 

$

100

 

 

 

666.7

%

 

$

864

 

 

$

334

 

 

$

530

 

 

 

158.7

%

Net (loss) gain on trading activity

 

 

(39

)

 

 

36

 

 

 

(75

)

 

 

-208.3

%

 

 

47

 

 

 

17

 

 

 

30

 

 

 

176.5

%

Net gain on trading activity

 

 

10

 

 

 

52

 

 

 

(42

)

 

 

-80.8

%

 

 

27

 

 

 

86

 

 

 

(59

)

 

 

-68.6

%

Fees for services to customers

 

 

425

 

 

 

434

 

 

 

(9

)

 

 

-2.1

%

 

 

1,205

 

 

 

1,240

 

 

 

(35

)

 

 

-2.8

%

 

 

421

 

 

 

397

 

 

 

24

 

 

 

6.0

%

 

 

813

 

 

 

780

 

 

 

33

 

 

 

4.2

%

ATM and debit card

 

 

419

 

 

 

397

 

 

 

22

 

 

 

5.5

%

 

 

1,229

 

 

 

1,153

 

 

 

76

 

 

 

6.6

%

 

 

449

 

 

 

422

 

 

 

27

 

 

 

6.4

%

 

 

866

 

 

 

810

 

 

 

56

 

 

 

6.9

%

Retail brokerage and advisory

 

 

129

 

 

 

180

 

 

 

(51

)

 

 

-28.3

%

 

 

425

 

 

 

557

 

 

 

(132

)

 

 

-23.7

%

 

 

104

 

 

 

126

 

 

 

(22

)

 

 

-17.5

%

 

 

207

 

 

 

296

 

 

 

(89

)

 

 

-30.1

%

Bank-owned life insurance

 

 

73

 

 

 

73

 

 

 

-

 

 

 

0.0

%

 

 

217

 

 

 

215

 

 

 

2

 

 

 

0.9

%

 

 

120

 

 

 

73

 

 

 

47

 

 

 

64.4

%

 

 

191

 

 

 

144

 

 

 

47

 

 

 

32.6

%

Merchant

 

 

86

 

 

 

75

 

 

 

11

 

 

 

14.7

%

 

 

242

 

 

 

226

 

 

 

16

 

 

 

7.1

%

 

 

92

 

 

 

83

 

 

 

9

 

 

 

10.8

%

 

 

172

 

 

 

156

 

 

 

16

 

 

 

10.3

%

Net gain on sale of loans

 

 

143

 

 

 

120

 

 

 

23

 

 

 

19.2

%

 

 

263

 

 

 

302

 

 

 

(39

)

 

 

-12.9

%

 

 

201

 

 

 

71

 

 

 

130

 

 

 

183.1

%

 

 

251

 

 

 

120

 

 

 

131

 

 

 

109.2

%

Other

 

 

92

 

 

 

95

 

 

 

(3

)

 

 

-3.2

%

 

 

316

 

 

 

259

 

 

 

57

 

 

 

22.0

%

 

 

103

 

 

 

135

 

 

 

(32

)

 

 

-23.7

%

 

 

214

 

 

 

224

 

 

 

(10

)

 

 

-4.5

%

Total

 

$

1,644

 

 

$

1,493

 

 

$

151

 

 

 

10.1

%

 

$

4,594

 

 

$

4,769

 

 

$

(175

)

 

 

-3.7

%

 

$

1,615

 

 

$

1,374

 

 

$

241

 

 

 

17.5

%

 

$

3,605

 

 

$

2,950

 

 

$

655

 

 

 

22.2

%

Quarter to Quarter Comparison

Total non-interest income for the thirdsecond quarter of 20162017 was $1,644,000,$1,615,000, an increase of $151,000,$241,000, compared to $1,493,000$1,374,000 for the thirdsecond quarter of 2015.2016. Excluding net gains on investment securities, trading activities and sale of loans for both periods, total non-interest income was $1,224,000$1,289,000 and $1,254,000, a decrease$1,236,000 for the second quarters of $30,000, or 2.4%.2017 and 2016, respectively.

Net gains on investment securities increased $233,000$100,000 from $83,000$15,000 in thirdthe second quarter 2015of 2016 to $316,000$115,000 in thirdthe second quarter 2016.of 2017.  Gain on investments are primarily derived from sale of equities.equities, offset in part by loss on sale of $15,000 due to the sale of five trust preferred securities during the quarter.  Market conditions in the equities market for the quarter ended SeptemberJune 30, 20162017 versus the same period in 20152016 resulted in better opportunities for sales.

QNB originates residential mortgage loans for sale in the secondary market.  Net gain on sale of mortgage loans increased $23,000, or 19.2%, to $143,000,originated for resale was $102,000, an increase of $31,000 when comparing the third quarter 2016 to the same period in 2015.two periods.  The net gain on residential mortgage sales is directly related to the volume of mortgages sold and the timing of the sales relative to the interest rate environment.  Residential mortgage loans to be sold are identified at origination.  Proceeds from the sale of residential mortgages were $3,632,000$2,652,000 and $3,108,000$1,999,000 for the thirdsecond quarters of 2017 and 2016, and 2015, respectively.  QNB Bank also realized a $99,000 gain on sale of a non-performing loan during the quarter.

ATM and debit card income and merchant income increased $22,000, or 5.5%,$27,000 and $9,000, respectively, to $419,000$449,000 and $92,000, respectively, for the thirdsecond quarter 2016,of 2017, compared to the same period in 2015,2016, due to increases in card-based transactions and expansion of checkingretail and business account households.  Fees for services to customers increased $24,000 to $421,000, primarily due to increased overdrafts.  The increase in bank-owned life insurance income, to $120,000 for the quarter, includes a life insurance benefit of $51,000.

These increases in non-interest income were offset in part by a $75,000$42,000 decrease in trading income for the third quarter 2016, which had a net loss of $39,000, compared to a net gain on trading activity.  During the quarter, QNB Bank redeemed the trading portfolio, as lack of $36,000 formarket volatility and the same periodinterest rate environment resulted in 2015.declining performance.  Retail brokerage and advisory feesincome declined $51,000,$22,000, or 28.3%, to $129,000 for the third quarter 2016 compared to the same period in 2015.17.5%.  While assets under management have grown over 37% since year end 2015, to $95,000,000, the$116,000,000 at June 30, 2017, recent asset growth has been in products with more trailing income than up-front income.  Fees for servicesOther non-interest income decreased $32,000, or 23.7%, due to customers decreased $9,000, or 2.1%, from $434,000 at September 30, 2015 to $425,000 at September 30, 2016, due primarily to a decreasesales tax refunds received in net overdraft income and the elimination of an ATM network service charge in September 2015.2016.

Nine-Month

Six-Month Comparison

Total non-interest income for the nine monthsix-month periods ended SeptemberJune 30, 2017 and 2016 was $3,605,000 and 2015 was $4,594,000 and $4,769,000,$2,950,000, respectively, a decreasean increase of $175,000,$655,000, or 3.7%22.2%. Excluding net gains on investment securities, trading activities and loans for both periods total non-interest income was $3,634,000$2,463,000 and $3,650,000, a decrease$2,410,000, an increase of $16,000$53,000.

Net investment securities gains decreased $150,000, or 18.8%, to $650,000 for the nine months ended September 30, 2016 compared to $800,000 for the comparable nine months in 2015. During the first half of 2016, QNB recorded $192,000 of other-than-temporary

5351


QNB CORP. AND SUBSIDIARY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

 

 

Net investment securities gains increased $530,000 to $864,000 for the six months ended June 30, 2017 compared to $334,000 for the comparable six months in 2016. During the first half of 2016, QNB recorded $192,000 of other-than-temporary impairment charges in two equity securities, as a result of a prolonged decline in their fair values.  There were no OTTI charges taken in the third quarter 2016 and 2015, and no OTTI charges taken for the nine months ended September 30, 2015.first half of 2017. Gains on sales of securities were $842,000$526,000 in the 2016 period versus $800,000 in the 2015 period.

Retail brokerage

ATM and advisorydebit card income, decreased $132,000, or 23.7%,merchant income and fees for services to $425,000customers increased for the ninefirst six months ended September 30,of 2017 compared to 2016, compared with the same period in 2015, for the reasonreasons detailed in the quarterly comparison.  Fees for services to customers decreased $35,000 in

Excluding the nine months ended September 30, 2016 compared to 2015.  Overdraft income$99,000 gain on note sale during 2017, net of waived charges, representing approximately 74% of total fees for services to customers during the nine months ended September 30, 2016, decreased by $31,000. The decrease in overdraft income reflects a decrease in the volume of overdrafts, as well as increased fee waivers and refunds.

Net gains on the sale of loans decreased $39,000, or 12.9%,increased $32,000 to $152,000, when comparing the ninesix months ended SeptemberJune 30, 20162017 to the same period in 2015.2016.  Proceeds from the sale of residential mortgages were $7,188,000$4,675,000 and $9,595,000$3,556,000 for the nine-monthsix-month periods ended SeptemberJune 30, 2017 and 2016, respectively.

Retail brokerage and 2015, respectively

These decreases were offset byadvisory income was $207,000 for the first half of 2017 compared with $296,000 for the first half of 2016, a $76,000,decrease of $89,000, or 6.6%, increase30.1%. Trading revenue decreased $59,000 in ATM and debit card incomethe first half of 2017 compared to $1,229,000 due to increased purchases by cardholders, and increased checking accounts during the period.  Net gain on trading activity increased $30,000 when comparing the two periods.  Other non-interest income increased $57,000, or 22.0%, when comparing the two periods, due to net losses on the sale of OREO and repossessed assets recorded in 2015, which did not recursame period in 2016.

NON-INTEREST EXPENSE

 

Non-Interest Expense Comparison

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months

 

 

Change from

 

 

Nine months

 

 

Change from

 

 

Three months

 

 

Change from

 

 

Six months

 

 

Change from

 

 

ended September 30,

 

 

prior year

 

 

ended September 30,

 

 

prior year

 

 

ended June 30,

 

 

prior year

 

 

ended June 30,

 

 

prior year

 

 

2016

 

 

2015

 

 

Amount

 

 

Percent

 

 

2016

 

 

2015

 

 

Amount

 

 

Percent

 

 

2017

 

 

2016

 

 

Amount

 

 

Percent

 

 

2017

 

 

2016

 

 

Amount

 

 

Percent

 

Salaries and employee benefits

 

$

3,072

 

 

$

2,911

 

 

$

161

 

 

 

5.5

%

 

$

9,114

 

 

$

8,960

 

 

$

154

 

 

 

1.7

%

 

$

3,237

 

 

$

2,988

 

 

$

249

 

 

 

8.3

%

 

$

6,323

 

 

$

6,042

 

 

$

281

 

 

 

4.7

%

Net occupancy

 

 

438

 

 

 

427

 

 

 

11

 

 

 

2.6

%

 

 

1,305

 

 

 

1,336

 

 

 

(31

)

 

 

-2.3

%

 

 

425

 

 

 

426

 

 

 

(1

)

 

 

-0.2

%

 

 

876

 

 

 

867

 

 

 

9

 

 

 

1.0

%

Furniture and equipment

 

 

437

 

 

 

424

 

 

 

13

 

 

 

3.1

%

 

 

1,302

 

 

 

1,285

 

 

 

17

 

 

 

1.3

%

 

 

456

 

 

 

440

 

 

 

16

 

 

 

3.6

%

 

 

885

 

 

 

865

 

 

 

20

 

 

 

2.3

%

Marketing

 

 

220

 

 

 

174

 

 

 

46

 

 

 

26.4

%

 

 

681

 

 

 

596

 

 

 

85

 

 

 

14.3

%

 

 

307

 

 

 

265

 

 

 

42

 

 

 

15.8

%

 

 

536

 

 

 

461

 

 

 

75

 

 

 

16.3

%

Third-party services

 

 

440

 

 

 

389

 

 

 

51

 

 

 

13.1

%

 

 

1,246

 

 

 

1,235

 

 

 

11

 

 

 

0.9

%

 

 

407

 

 

 

403

 

 

 

4

 

 

 

1.0

%

 

 

801

 

 

 

806

 

 

 

(5

)

 

 

-0.6

%

Telephone, postage and supplies

 

 

189

 

 

 

182

 

 

 

7

 

 

 

3.8

%

 

 

549

 

 

 

551

 

 

 

(2

)

 

 

-0.4

%

 

 

199

 

 

 

174

 

 

 

25

 

 

 

14.4

%

 

 

399

 

 

 

360

 

 

 

39

 

 

 

10.8

%

State taxes

 

 

178

 

 

 

173

 

 

 

5

 

 

 

2.9

%

 

 

499

 

 

 

520

 

 

 

(21

)

 

 

-4.0

%

 

 

155

 

 

 

141

 

 

 

14

 

 

 

9.9

%

 

 

348

 

 

 

321

 

 

 

27

 

 

 

8.4

%

FDIC insurance premiums

 

 

162

 

 

 

162

 

 

 

-

 

 

 

0.0

%

 

 

489

 

 

 

479

 

 

 

10

 

 

 

2.1

%

 

 

134

 

 

 

157

 

 

 

(23

)

 

 

-14.6

%

 

 

275

 

 

 

327

 

 

 

(52

)

 

 

-15.9

%

Other

 

 

480

 

 

 

731

 

 

 

(251

)

 

 

-34.3

%

 

 

1,543

 

 

 

1,802

 

 

 

(259

)

 

 

-14.4

%

 

 

622

 

 

 

599

 

 

 

23

 

 

 

3.8

%

 

 

1,087

 

 

 

1,063

 

 

 

24

 

 

 

2.3

%

Total

 

$

5,616

 

 

$

5,573

 

 

$

43

 

 

 

0.8

%

 

$

16,728

 

 

$

16,764

 

 

$

(36

)

 

 

-0.2

%

 

$

5,942

 

 

$

5,593

 

 

$

349

 

 

 

6.2

%

 

$

11,530

 

 

$

11,112

 

 

$

418

 

 

 

3.8

%

 

Quarter to Quarter Comparison

Total non-interest expense was $5,616,000$5,942,000 for the thirdsecond quarter of 2016,2017, an increase of $43,000,$349,000, or 0.8%6.2%, compared to the thirdsecond quarter of 2015.2016.

Salaries and benefits comprise the largest component of non-interest expense. QNB monitors, through the use of various surveys, the competitive salary and benefit information in its markets and makes adjustments when appropriate.  Salaries and benefits expense forincreased $249,000, or 8.3%, to $3,237,000 when comparing the thirdtwo quarters.  Salary expense and related payroll taxes increased $274,000, or 10.7%, to $2,822,000 during the second quarter of 2016 increased $161,000, or 5.5%, to $3,072,000,2017 compared to the same period in 2015.  Salaries increased $60,000, or 2.5%,2016, due to new hiresmerit increases and ordinary merit increases.additional staff.  Benefits costs rose $101,000, or 19.1%,expense decreased $25,000, due primarily to decreased medical insurance claims when comparing the two periods.

Net occupancy and furniture and equipment expense increased health insurance cost resulting from$15,000, or 1.7%, to $881,000 for the second quarter of 2017, with maintenance and rent expense increases of $32,000 and $20,000, respectively, partially offset by a $23,000 decrease in building repairs and maintenance and $25,000 decrease in depreciation and amortization expense.   Marketing expense increased $42,000, or 15.8%, to $307,000 for the quarter ended June 30, 2017. The increase is due to additional claims insponsorships and donations for the thirdsecond quarter 2016,of 2017 compared to the same period in 2015.2016.

Net occupancy costs increased $11,000, or 2.6%, reflecting increased building maintenance expense of $16,000, offset in part by decreased building utility expense of $5,000, when comparing the two periods.  Furniture and equipment expense increased by $13,000, or 3.1%, with declines in depreciation expense being offset by increases in software and equipment maintenance. Marketing expense increased $46,000, or 26.4%, to $220,000 for the three month period ended September 30, 2016. The increase is due to increased billboard and television advertising in the third quarter 2016, compared to the same period in 2015.

54


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, statement printing and mailing, investment security safekeeping and supply management services. Third party services expense increased $51,000,slightly when comparing the two periods. Telephone and postage and supplies expenses increased $25,000, or 13.1%

52


QNB CORP. AND SUBSIDIARY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

14.4%, due to increased data line capacity, and costs related to debit chip card conversion and the increase in new deposits and loans.  State taxes are based on the Bank’s equity, and the $14,000 increase is due to increased net worth of the Bank as well as a higher rate in effect for 2017.  FDIC insurance premiums decreased $23,000, or 14.6%, due to the change in the FDIC insurance premium calculation, implemented starting 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.

Six-Month Comparison

Total non-interest expense was $11,530,000 for the six-month period ended June 30, 2017, an increase of $418,000, or 3.8%, compared to the first half of 2016.

Salaries and benefits expense increased $281,000 to $6,323,000 for the six months ended June 30, 2017 compared to the same period in 2016. Salary and related payroll tax expense increased $380,000, or 7.4% during the period, to $5,524,000 while benefits expense decreased $99,000, to $799,000, related to decreased medical premium and post-retirement life insurance expense.

Net occupancy and furniture and equipment expense increased $29,000 to $1,761,000, for the same reasons described in the quarter comparison.

Marketing expense increased $75,000, or 16.3%, to $440,000$536,000 for the threesix months ended SeptemberJune 30, 2017 attributable to increased donations and advertising campaigns and sales promotions.

Telephone, postage and supplies expenses increased in the first six months of 2017 compared to 2016, due to the reasons described in the quarter comparison.  Third party services expense decreased slightly to $801,000 for the six months ended June 30, 2017 when compared to the same period in 2015, attributable primarily to increased consulting cost of $28,000 for www.qnbbank.com website redesign, increased legal fees of $19,000 related to loan origination2016.  

State taxes and collection activity, and increased audit and accounting fees of $6,000.

Other non-interest expense decreased $251,000, or 34.3%, to $480,000 for the third quarter of 2016. In the third quarter 2015, other non-interest expense was $731,000 which included a $208,000 third party contract termination fee related to debit card platform upgrades, which occurred in 2016.

Nine-Month Comparison

Total non-interest expense was $16,728,000increased $27,000 and $24,000, respectively, while FDIC insurance premiums decreased $52,000 for the nine-month period ended September 30, 2016, a decreasefirst half of $36,000, or 0.2%, compared to the same period2017 for reasons described in 2015.

Salaries and benefits expense increased $154,000, or 1.7%, to $9,114,000 for the nine months ended September 30, 2016 compared to the same period in 2015, due primarily to increased health insurance cost resulting from additional claims.

Net occupancy costs decreased $31,000, or 2.3%, primarily due to reduced utilities expense and branch rent.  Furniture and equipment expense increased $17,000, or 1.3%, when comparing the two periods, with increased software and computer backup expense offset in part by a decrease in depreciation expense.   Marketing expense increased $85,000, or 14.3%, to $681,000 for the nine months ended September 30, 2016 for the same reason noted for the quarter in addition to a $50,000 charitable donation, which resulted in QNB receiving a shares tax credit.comparison.

Third party services expense increased $11,000, or 0.9%, to $1,246,000 for the nine months ended September 30, 2016 when compared to the same period in 2015. This included an increase in legal, consulting and audit and accounting expenses, offset by decreased third party services expense.

State tax expense was $499,000 for the nine months ended September 30, 2016, a decrease of $21,000 compared to the same period in 2015.  Year-to-date accrued shares tax was adjusted during the second quarter 2016 for a $37,500 shares tax credit related to a charitable donation.

Other non-interest expense decreased $259,000, or 14.4%, to $1,543,000 for the nine months ended September 30, 2016. Contributing to the higher expenses in 2015 is a $208,000 third party contract termination fee noted previously for the quarter, as well as reduced net collection and foreclosed property expenses, reduced courier costs and a decrease in check card charge-offs, when comparing the two periods.

INCOME TAXES

QNB utilizes an asset and liability approach for financial accounting and reporting of income taxes. As of SeptemberJune 30, 2017, QNB’s net deferred tax asset was $4,639,000. The primary components comprise deferred tax assets of $2,732,000 relating to the allowance for loan losses, $1,233,000 related to unrealized losses on available for sale securities, $489,000 related to non-accrual interest income, $218,000 related to deferred fees and rent, $125,000 related to accrued bonus and payroll taxes, and $41,000 generated by OTTI charges on equity securities. As of December 31, 2016, QNB’s net deferred tax asset was $2,334,000.$5,473,000. The primary componentssale of deferred taxes arethe trust preferred bonds with prior OTTI charges during the second quarter 2017 resulted in a $392,000 reduction in the deferred tax assetsasset.  The remaining balance difference is the result of $2,582,000 relatinga $702,000 decline, due to the allowance for loandecreased unrealized losses $539,000 related to non-accrual interest income, $179,000 related to deferred fees and rent, $80,000 generated by OTTI charges on equity securities and $392,000 related to OTTI charges on trust preferred securities. These amounts are partially offset by $1,179,000 in deferred tax liabilities related to unrealized gains on available for sale securities. As ofsecurities at June 30, 2017, compared with December 31, 2015, QNB’s net deferred tax asset2016, which was $3,673,000. The primary differenceoffset in the balance of net deferred tax assets when comparing September 30, 2016part by a $218,000 increase related to December 31, 2015 is the increaseadditional loan provisions recorded in deferred tax liability due to increased unrealized gains on available for sale securities.2017.

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

Applicable income tax expense was $821,000$845,000 for the three-month period ended September 30, 2016 compared to $715,000quarter and $1,967,000 for the three-month periodsix months ended SeptemberJune 30, 2015.2017, compared with $702,000 and $1,490,000 for the same periods in 2016. The effective tax rate for thirdthe second quarter of 2016and year-to-date 2017 was 26.4%26.2% and 27.3%, respectively, compared with 24.4%25.1% and 25.5% for

55


QNB CORP. AND SUBSIDIARY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

the third quarter of 2015. For the nine-monthsame periods ended September 30, 2016 and 2015 applicable income taxes and the effective tax rates were $2,311,000, or 25.8%, and $1,999,000, or 24.1%, respectively.in 2016. This increase in effective tax rate in 20162017 is due to the decreased proportion of tax-free income to total income, primarily municipal securities and municipal loan interest income, and increased state income taxes due to the depletion of a net loss carryforward at QNB Corp. in 2015.income.

FINANCIAL CONDITION ANALYSIS

Financial service organizations are challenged to demonstrate they can generate sustainable and consistent earnings growth in a dynamic operating environment.  While the economy continues to improve, loan fundings remained lower than expected in the first nine months of 2016.  The low level of interest rates and the extreme rateRate competition for quality loans is anticipated to continue through 2016.2017. It is also anticipated that

53


QNB CORP. AND SUBSIDIARY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

the rate competition for attracting and retaining deposits may increase in 20162017 and into 20172018 as short-term interest rates increase, which could result in a lower net interest margin and a decline in net interest income.

QNB’s primary business is accepting deposits and making loans to meet the credit needs of the communities it serves. Loans are the most significant component of earning assets and growth in loans to small businesses and residents of these communities has been a primary focus of QNB. Inherent within the lending function is the evaluation and acceptance of credit risk and interest rate risk. QNB manages credit risk associated with its lending activities through portfolio diversification, underwriting policies and procedures and loan monitoring practices. QNB is committed to make credit available to its customers.

Total assets at SeptemberJune 30, 20162017 were $1,071,931,000$1,120,523,000 compared with $1,020,936,000$1,063,141,000 at December 31, 2015.2016.  Cash and cash equivalents increased $52,437,000$4,527,000 from $16,991,000$10,721,000 at December 31, 20152016 to $69,428,000$15,248,000 at SeptemberJune 30, 2016,2017, due in partprimarily to growth in deposit balances and delayed fundings for loan commitments, primarily commercial real estate projects grantedpaydowns of amortizing mortgage-backed securities during the quarter.

During the second quarter 2017, QNB Bank redeemed the trading securities portfolio, as lack of market volatility and the interest rate environment resulted in 2015 anddeclining 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 addition to delayed loan fundings,June 2017, QNB experienced large balance paydowns due to increased rate competition andBank sold five non-performing pooled trust preferred securities, with a $2,235,000 carrying value, recording a loss on sale of a commercial customer’s business$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 commercial credit lines.  Retail loan balances grew $7,755,000approximately $19,000,000 in risk-based assets related to $122,258,000, when comparing Septemberthese 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, PreTSL IV, with a carrying balance of $212,000 at June 30, 20162017, was returned to December 31, 2015.  The Bank had several successful home equity loan promotions overaccrual status during the past yearsecond quarter 2017.  QNB’s ownership in PreTSL IV represents the senior-most obligation of the trust.  There was no credit-related other-than-temporary impairment charge during the quarter or six months ended June 30, 2017 or 2016. It is possible that 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 has received a strong response toNote 8 Fair Value Measurements and Disclosures.

Aside from the product offering. Student loans also contributed toredemptions detailed above, the increase, with the portfolio doubling to $2,435,000 at September 30, 2016.

The composition of the investment portfolio is essentially unchanged since December 31, 2015.2016.  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 in an effort to take advantage of changes in the shape of the yield curve and changes in spread relationships in different sectors and for liquidity purposes. Management continually reviews strategies that will result in an increase in the yield or improvement in the structure of the investment portfolio, including monitoring credit and concentration risk in the portfolio.

QNB owns CDOs in the form of pooled trust preferred securities. These securities are comprised mainly of securities issued by banksLoans receivable grew $62,134,000, or bank holding companies, and9.8%, with commercial loans increasing $57,130,000, or 11.2%, to a lesser degree, insurance companies. In most cases QNB owns the mezzanine tranches of these securities,$565,890,000 at June 30, 2017, compared with the exception of one that now represents the senior-most obligation of the trust. 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 company received principal and interest payments totaling $115,000 for the quarter and $312,000 year-to-date on four of these securities during 2016, which was recorded as a reduction$508,760,000 at year-end 2016.  Retail loan balances grew $5,004,000, or 4.0%, to the amortized cost.  There was no credit-related other-than-temporary impairment charge during the quarter or nine months ended September$129,323,000, when comparing June 30, 2016 or 2015. It is possible that future calculations could require recording additional other-than-temporary impairment charges through earnings. For additional detail on these securities see Note 7 Investment Securities and Note 9 Fair Value Measurements and Disclosures.

Total deposits increased $36,926,000, or 4.1%2017 to $926,712,000 at September 30, 2016 compared to the December 31, 2015 balances. Non-interest bearing demand2016.  QNB has experienced growth in part due to market disruption created by bank mergers in its footprint throughout 2016 and 2017.

Deposit growth was led by savings balances, which increased $6,486,000$16,780,000, or 7.0%, to $105,029,000 at September$255,027,000 from December 31, 2016 to June 30, 2016, due primarily to business deposits.2017. Interest-bearing demand balances, excluding municipal deposits, grew $15,313,000, or 9.4%, to $178,300,000.  Municipal deposit balances increased $16,303,000$1,197,000 to $291,228,000 from December 31, 2015 to September 30, 2016.  This increase is due in part to municipal deposit balance growth, which increased $7,286,000.$93,964,000.  Municipal deposits can be volatile depending on the timing of deposits and withdrawals, and the cash flow needs of the school districts or municipalities.  Money market and savings balances increased $5,584,000 and $7,553,000, respectively, to $72,756,000 and $229,323,000, respectively.  Time deposits increased $1,000,000 from December 31, 2015 to September 30, 2016. During the first half of 2016, QNB offered an attractive five-year rate to lock in low-cost funding and retain maturing deposits, in anticipation of an eventual increase in interest

56


QNB CORP. AND SUBSIDIARY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

rates. It is anticipated that total deposits will decrease during the fourth quarter as tax money received from the local school districts during September will then 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 $7,043,000, or 9.4%, to $81,805,000 and non-interest bearing demand balances increased $1,359,000 to $120,369,000 at June 30, 2017, due primarily to increased business deposits.    Time deposits decreased $3,733,000 from December 31, 2016 to June 30, 2017. It is anticipated that total deposits will increase in the third 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.

54


QNB CORP. AND SUBSIDIARY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

Short-term borrowings increased 10.8%27.1%, from $37,163,000$52,660,000 at December 31, 20152016 to $41,179,000$66,907,000 at SeptemberJune 30, 2016. These balances are commercial2017. Commercial sweep accounts which are alsodecreased $5,130,000, as these funds may be volatile based on businesses’ receipt and disbursement of funds.  Overnight borrowings from FHLB increased $19,377,000 to $26,699,000.  

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 in an attempt to match the volatility, seasonality, interest sensitivity and growth trends of its loans and deposits. The Company manages its liquidity risk by measuring and monitoring its liquidity sources and estimated funding needs. Liquidity is provided from asset sources through repayments and maturities of loans and investment securities. The portfolio of investment securities classified as available for sale and QNB's policy of selling certain residential mortgage originations in the secondary market also provide sources of liquidity. Core deposits and cash management repurchase agreements have historically been the most significant funding source for QNB. These deposits and repurchase agreements are generated from a base of consumers, businesses and public funds primarily located in the Company’s market area.

Additional sources of liquidity are provided by the Bank’s membership in the FHLB. At SeptemberJune 30, 2016,2017, the Bank had a maximum borrowing capacity with the FHLB of approximately $242,784,000.$249,544,000, net overnight borrowings and a letter of credit at June 30, 2017. The maximum borrowing capacity changes as a function ofdepends upon qualifying collateral assets. QNB has no outstanding borrowings with the FHLB at September 30, 2016.assets and QNB’s asset quality and capital adequacy.  In addition, the Bank maintains unsecured Federal funds lines with three correspondent banks totaling $46,000,000. At SeptemberJune 30, 2016,2017, there were no outstanding borrowings under these lines.  During the first quarterand second quarters of 2016,2017, QNB borrowed from the FHLB to fund short-term liquidity needs. Future availability under these lines is subject to the policies of the granting banks and may be withdrawn.

Liquid sources of funds, including cash, trading and available-for-sale investment securities and loans held-for-sale have increased $58,948,000, or 15.3%,decreased $7,239,000 since December 31, 2015,2016, totaling $443,030,000$398,342,000 at SeptemberJune 30, 2016. This is due primarily due to increased cash provided by growth in deposits, especially seasonal municipal deposits in the third quarter 2016, coupled with declining loan balances2017. Cashflow from payments, calls and sales of securities have been used since year-end 2015.2016 to fund loans. Management expects these liquid sources will be adequate to meet normal fluctuations in loan demand or deposit withdrawals. The investment portfolio is expected to continue to provide sufficient liquidity, even in a rising rate environment, as municipal bonds and agency securities are called and as cash flow on mortgage-backed and CMO securities continues to be steady. In the eventAs interest rates rise, the cash flow available from the investment portfolio may decrease.

Approximately $215,013,000$171,738,000 and $197,149,000$166,628,000 of available-for-sale securities at SeptemberJune 30, 20162017 and December 31, 2015,2016, respectively, were pledged as collateral for repurchase agreements and deposits of public funds. The increase in the amountlevel of pledged securities corresponds withdepends upon the increase inlevel of municipal deposits from December 31, 2015 to September 30, 2016.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, 20162017 was $97,996,000,$98,750,000, or 9.14%8.81% of total assets, compared towith shareholders' equity of $90,443,000,$93,567,000, or 8.86%8.80% of total assets, at December 31, 2015.2016. Shareholders’ equity at SeptemberJune 30, 20162017 and December 31, 20152016 included a positive adjustment of $2,288,000 and a negative adjustment $546,000,of $2,393,000 and $3,757,000, respectively, related to unrealized holding gains and losses, net of taxes, on investment securities available-for-sale. Without these adjustments, shareholders' equity to total assets would have been 8.95%9.01% and 8.91%9.12% at SeptemberJune 30, 20162017 and December 31, 2015,2016, respectively.

57Average shareholders' equity and average total assets were $99,590,000 and $1,088,996,000 for the first six months of 2017, an increase of 5.4% and 5.6%, respectively, from the averages for the year ended December 31, 2016. The ratio of average total equity to average total assets was 9.15% for six months ended June 30, 2017 compared to 9.16% for all 2016. 

Retained earnings at June 30, 2017 were impacted by six months of net income totaling $5,246,000 partially offset by dividends declared and paid of $2,122,000 for the same period.  QNB offers a Dividend Reinvestment and Stock Purchase Plan (the “Plan”) to

55


QNB CORP. AND SUBSIDIARY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

 

 

Average shareholders' equity and average total assets were $93,737,000 and $1,020,863,000 for the nine months ended September 30, 2016, an increase of 5.8% and 3.3%, respectively, from the averages for the year ended December 31, 2015. The ratio of average total equity to average total assets was 9.18% for the nine months ended September 30, 2016 compared to 8.97% for all of 2015. 

Retained earnings at September 30, 2016 were impacted by nine months of net income of $6,655,000 partially offset by cash dividends declared and paid of $3,045,000 for the same period.  QNB offers a Dividend Reinvestment and Stock Purchase Plan (the “Plan”) to provide participants a convenient and economical method for investing cash dividends paid on the Company’s common stock in additional shares at a discount. The Plan also allows participants to make additional cash purchases of stock at a discount. Stock purchases under the Plan contributed $753,000$512,000 and $667,000$477,000 to capital during the ninesix months ended SeptemberJune 30, 20162017 and 2015,2016, respectively.

The Board of Directors has authorized the repurchase of up to 100,000 shares of its common stock in open market or privately negotiated transactions. The repurchase authorization does not bear a termination date. As of SeptemberJune 30, 2016,2017, 57,883 shares were repurchased under this authorization at an average price of $16.97 and a total cost of $982,000.  There have been no additional shares repurchased under the plan since the first quarter of 2009.

QNB and the Bank are subject to various regulatory capital requirements as issued by Federal regulatory authorities. Regulatory capital is defined in terms of Tier 1 capital and Tier 2. 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.

As of September 30, 2016, the capital levels for QNB and the Bank remained characterized as “well-capitalized” under the new rules.

The following table sets forth consolidated information for QNB Corp.

 

 

September 30,

 

 

December 31,

 

 

June 30,

 

 

December 31,

 

Capital Analysis

 

2016

 

 

2015

 

 

2017

 

 

2016

 

Regulatory Capital

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders' equity

 

$

97,996

 

 

$

90,443

 

 

$

98,750

 

 

$

93,567

 

Net unrealized securities gains, net of tax

 

 

(2,288

)

 

 

546

 

Net unrealized securities losses, net of tax

 

 

2,393

 

 

 

3,757

 

Net unrealized losses on available-for-sale equity securities,

net of tax

 

 

 

 

 

(167

)

 

 

(116

)

 

 

 

Disallowed intangible assets

 

 

(4

)

 

 

(3

)

 

 

(6

)

 

 

(4

)

Common equity tier I capital

 

 

95,704

 

 

 

90,819

 

 

 

101,021

 

 

 

97,320

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier I capital

 

 

95,704

 

 

 

90,819

 

 

 

101,021

 

 

 

97,320

 

Allowable portion: Allowance for loan losses and reserve

for unfunded commitments

 

 

7,652

 

 

 

7,613

 

 

 

8,108

 

 

 

7,453

 

Unrealized gains on equity securities, net of tax

 

 

1

 

 

 

 

 

 

 

 

 

47

 

Total regulatory capital

 

$

103,357

 

 

$

98,432

 

 

$

109,129

 

 

$

104,820

 

Risk-weighted assets

 

$

790,088

 

 

$

782,667

 

 

$

855,546

 

 

$

822,210

 

Quarterly average assets for leverage capital purposes

 

$

1,053,997

 

 

$

1,023,362

 

 

$

1,101,938

 

 

$

1,061,976

 

58

 

 

June 30,

 

 

December 31,

 

Capital Ratios

 

2017

 

 

2016

 

Common equity tier I capital / risk-weighted assets

 

 

11.81

%

 

 

11.84

%

Tier I capital / risk-weighted assets

 

 

11.81

%

 

 

11.84

%

Total regulatory capital / risk-weighted assets

 

 

12.76

%

 

 

12.75

%

Tier I capital / average assets (leverage ratio)

 

 

9.17

%

 

 

9.16

%

56


QNB CORP. AND SUBSIDIARY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

 

 

 

 

September 30,

 

 

December 31,

 

Capital Ratios

 

2016

 

 

2015

 

Common equity tier I capital / risk-weighted assets

 

 

12.11

%

 

 

11.60

%

Tier I capital / risk-weighted assets

 

 

12.11

%

 

 

11.60

%

Total regulatory capital / risk-weighted assets

 

 

13.08

%

 

 

12.58

%

Tier I capital / average assets (leverage ratio)

 

 

9.08

%

 

 

8.87

%

All regulatoryThere was little change in capital ratios improved frombetween December 31, 2015 as tier I capital2016 and total regulatory capital increased for the third quarter 2016 when compared to the fourth quarter of 2015.June 30, 2017. The Company remains well-capitalized by all applicable regulatory requirements as of SeptemberJune 30, 2016.2017.

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 takes into accountconsiders 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 to a greater extent 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, 20162017 is liability sensitive. Management expects that market interest rates may gradually increase in the next 12 months, based on the economic environment and policy of the Board of Governors of the Federal Reserve System.

The following table shows the estimated impact of changes in interest rates on net interest income as of SeptemberJune 30, 2017 and 2016 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)

 

2016

 

 

2015

 

 

2017

 

 

2016

 

+300

 

 

-6.73

%

 

 

-10.71

%

 

 

-8.81

%

 

 

-2.60

%

+200

 

 

-4.09

%

 

 

-7.14

%

 

 

-5.77

%

 

 

-1.48

%

+100

 

 

-1.78

%

 

 

-3.68

%

 

 

-2.69

%

 

 

-0.62

%

-100

 

*N/A

 

 

*N/A

 

 

 

-5.78

%

 

*N/A

 

 

* 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.

59


QNB CORP. AND SUBSIDIARY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

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

QNB is not subject to foreign currency exchange or commodity price risk. At SeptemberJune 30, 20162017 QNB did not have any hedging transactions in place such as interest rate swaps, caps or floors.

 

 

 


ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.

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

ITEM 4. CONTROLS AND PROCEDURES

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

 

 


QNB CORP. AND SUBSIDIARY

PART II. OTHER INFORMATION

SEPTEMBERJUNE 30, 20162017

Item 1. Legal Proceedings

No material proceedings.

Item 1A. Risk Factors

There were no material changes to the Risk Factors described in Item 1A in QNB’s Annual Report on Form 10-K for the period ended December 31, 2015.2016.

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

QNB did not repurchase any shares of its common stock during the quarter ended SeptemberJune 30, 2016.2017. 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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

JulyApril 1, 20162017 through July 31, 2016April 30, 2017

 

 

 

 

 

 

 

 

 

 

 

42,117

 

AugustMay 1, 20162017 through AugustMay 31, 20162017

 

 

 

 

 

 

 

 

 

 

 

42,117

 

SeptemberJune 1, 20162017 through SeptemberJune 30, 20162017

 

 

 

 

 

 

 

 

 

 

 

42,117

 

Total

 

 

 

 

 

 

 

 

 

 

 

42,117

 

 

(1)

Transactions are reported as of settlement dates.

(2)

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

(3)

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

(4)

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

(5)

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

Item 3. Default Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

None.

Item 5. Other Information

None.

 

 


Item 6. Exhibits

 

 

Exhibit 3.1

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

 

 

 

 

Exhibit 3.2

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

 

 

 

 

Exhibit 31.1

Section 302 Certification of Chief Executive Officer

 

 

 

 

Exhibit 31.2

Section 302 Certification of Chief Financial Officer

 

 

 

 

Exhibit 32.1

Section 906 Certification of Chief Executive Officer

 

 

 

 

Exhibit 32.2

Section 906 Certification of Chief Financial Officer

 

 

 

 

 

 

 

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

 

No.

 

Description

101.INS

 

XBRL Instance Document.*

101.SCH

 

XBRL Taxonomy Extension Schema Document.*

101.CAL

 

XBRL Taxonomy Extension Calculation Linkbase Document.*

101.LAB

 

XBRL Taxonomy Extension Label Linkbase Document.*

101.PRE

 

XBRL Taxonomy Extension Presentation Linkbase Document.*

101.DEF

 

XBRL Taxonomy Extension Definitions Linkbase Document.*

 

 

 

 

 

*

These interactive data files are being furnished as part of this Quarterly Report, and, in accordance with Rule 402 of Regulation S-T, shall not be deemed filed for purposes of Section 11 or 12 of the Securities Act of 1933, as amended, or Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability under those sections.

 

 


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:         NovemberAugust 8, 20162017          

By:

 

/s/ David W. Freeman

 

 

 

David W. Freeman

 

 

 

Chief Executive Officer

 

 

 

 

Date:         NovemberAugust 8, 20162017          

By:

 

/s/ Janice McCracken Erkes

 

 

 

Janice McCracken Erkes

 

 

 

Chief Financial Officer

 

 

 

 

Date:         NovemberAugust 8, 20162017          

By:

 

/s/ Phillip N. Geiger

 

 

 

Phillip N. Geiger

 

 

 

Chief Accounting Officer, QNB Bank