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QNB CORP - Quarter Report: 2019 March (Form 10-Q)

 

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             March 31, 2019            

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 every Interactive Data File required to be submitted 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 such files).    Yes      No  

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

 

Large accelerated filer

 

Accelerated filer

Non-accelerated filer

 

Smaller Reporting Company

Emerging growth company

 

 

 

 

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

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

Securities registered pursuant to Section 12(b) of the Act:  None.

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange on which registered

 

 

QNBC

 

N/A

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

 

Class

 

Outstanding at May 1, 2019

Common Stock, par value $0.625

 

3,493,935

 

 

 

 


 

QNB CORP. AND SUBSIDIARY

FORM 10-Q

QUARTER ENDED MARCH 31, 2019

INDEX

 

 

 

PART I - FINANCIAL INFORMATION

 

 

 

 

 

 

 

ITEM 1.

 

CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

PAGE

 

 

 

 

 

 

 

Consolidated Balance Sheets at March 31, 2019 and December 31, 2018

 

3

 

 

 

 

 

 

 

Consolidated Statements of Income for the Three Months Ended March 31, 2019 and 2018

 

4

 

 

 

 

 

 

 

Consolidated Statements of Comprehensive Income (Loss) for the Three Months Ended March 31, 2019 and 2018

 

5

 

 

 

 

 

 

 

Consolidated Statement of Shareholders’ Equity for the Three Months Ended March 31, 2019 and 2018

 

6

 

 

 

 

 

 

 

Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2019 and 2018

 

7

 

 

 

 

 

 

 

Notes to Consolidated Financial Statements

 

8

 

 

 

 

 

ITEM 2.

 

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

 

36

 

 

 

 

 

ITEM 3.

 

QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

 

53

 

 

 

 

 

ITEM 4.

 

CONTROLS AND PROCEDURES

 

53

 

 

 

 

 

 

 

PART II - OTHER INFORMATION

 

 

 

 

 

 

 

ITEM 1.

 

LEGAL PROCEEDINGS

 

54

 

 

 

 

 

ITEM 1A.

 

RISK FACTORS

 

54

 

 

 

 

 

ITEM 2.

 

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

54

 

 

 

 

 

ITEM 3.

 

DEFAULTS UPON SENIOR SECURITIES

 

54

 

 

 

 

 

ITEM 4.

 

MINE SAFETY DISCLOSURES

 

54

 

 

 

 

 

ITEM 5.

 

OTHER INFORMATION

 

54

 

 

 

 

 

ITEM 6.

 

EXHIBITS

 

55

 

 

 

 

 

SIGNATURES

 

 

 

 

 

 

 

CERTIFICATIONS

 

 

 

 

 

2


 

QNB Corp. and Subsidiary

 

CONSOLIDATED BALANCE SHEETS

 

 

 

(in thousands, except share data)

 

 

 

(current period unaudited)

 

 

 

March 31,

2019

 

 

December 31,

2018

 

Assets

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

12,971

 

 

$

12,888

 

Interest-bearing deposits in banks

 

 

737

 

 

 

570

 

Total cash and cash equivalents

 

 

13,708

 

 

 

13,458

 

 

 

 

 

 

 

 

 

 

Investment debt securities

 

 

 

 

 

 

 

 

Available-for-sale (amortized cost $348,965 and $353,249)

 

 

344,367

 

 

 

344,221

 

Investment equity securities (cost of $10,164 and $10,079)

 

 

10,482

 

 

 

9,421

 

Restricted investment in stocks

 

 

1,238

 

 

 

797

 

Loans held-for-sale

 

 

 

 

 

 

Loans receivable

 

 

804,528

 

 

 

785,448

 

Allowance for loan losses

 

 

(9,015

)

 

 

(8,834

)

Net loans

 

 

795,513

 

 

 

776,614

 

Bank-owned life insurance

 

 

11,261

 

 

 

11,192

 

Premises and equipment, net

 

 

11,969

 

 

 

9,918

 

Accrued interest receivable

 

 

4,212

 

 

 

2,852

 

Net deferred tax assets

 

 

2,283

 

 

 

3,724

 

Other assets

 

 

8,093

 

 

 

3,255

 

Total assets

 

$

1,203,126

 

 

$

1,175,452

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

Deposits

 

 

 

 

 

 

 

 

Demand, non-interest bearing

 

$

139,970

 

 

$

128,615

 

Interest-bearing demand

 

 

314,375

 

 

 

304,652

 

Money market

 

 

108,921

 

 

 

78,781

 

Savings

 

 

248,629

 

 

 

279,762

 

Time

 

 

119,010

 

 

 

117,569

 

Time of $100 or more

 

 

103,709

 

 

 

106,219

 

Total deposits

 

 

1,034,614

 

 

 

1,015,598

 

Short-term borrowings

 

 

49,897

 

 

 

50,872

 

Finance lease liabilities

 

 

1,878

 

 

 

-

 

Accrued interest payable

 

 

450

 

 

 

449

 

Other liabilities

 

 

5,927

 

 

 

4,185

 

Total liabilities

 

 

1,092,766

 

 

 

1,071,104

 

 

 

 

 

 

 

 

 

 

Shareholders' Equity

 

 

 

 

 

 

 

 

Common stock, par value $0.625 per share;

 

 

 

 

 

 

 

 

authorized 10,000,000 shares; 3,658,504 shares and 3,648,649

 

 

 

 

 

 

 

 

shares issued; 3,493,935 and 3,484,080 shares outstanding

 

 

2,286

 

 

 

2,280

 

Surplus

 

 

20,319

 

 

 

20,041

 

Retained earnings

 

 

93,863

 

 

 

91,635

 

Accumulated other comprehensive loss, net of tax

 

 

(3,632

)

 

 

(7,132

)

Treasury stock, at cost; 164,569 shares

 

 

(2,476

)

 

 

(2,476

)

Total shareholders' equity

 

 

110,360

 

 

 

104,348

 

Total liabilities and shareholders' equity

 

$

1,203,126

 

 

$

1,175,452

 

 

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

 

3


 

QNB Corp. and Subsidiary

CONSOLIDATED STATEMENTS OF INCOME

 

 

 

(in thousands, except per share data)

(unaudited)

 

Three months ended March 31,

 

2019

 

 

2018

 

Interest income

 

 

 

 

 

 

 

 

Interest and fees on loans

 

$

9,223

 

 

$

8,427

 

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

 

 

 

 

 

 

 

 

Taxable

 

 

1,614

 

 

 

1,576

 

Tax-exempt

 

 

426

 

 

 

483

 

Interest on interest-bearing balances and other interest income

 

 

26

 

 

 

23

 

Total interest income

 

 

11,289

 

 

 

10,509

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

 

 

 

 

 

 

Interest on deposits

 

 

 

 

 

 

 

 

Interest-bearing demand

 

 

693

 

 

 

374

 

Money market

 

 

285

 

 

 

58

 

Savings

 

 

408

 

 

 

330

 

Time

 

 

419

 

 

 

378

 

Time of $100,000 or more

 

 

458

 

 

 

399

 

Interest on short-term borrowings

 

 

190

 

 

 

179

 

Interest on finance lease liabilities

 

 

1

 

 

 

 

Total interest expense

 

 

2,454

 

 

 

1,718

 

Net interest income

 

 

8,835

 

 

 

8,791

 

Provision for loan losses

 

 

225

 

 

 

188

 

Net interest income after provision for loan losses

 

 

8,610

 

 

 

8,603

 

 

 

 

 

 

 

 

 

 

Non-interest income

 

 

 

 

 

 

 

 

Net gain on sales of  investment debt and equity securities

 

 

6

 

 

 

85

 

Unrealized gain (loss) on investment equity securities

 

 

976

 

 

 

(246

)

Fees for services to customers

 

 

393

 

 

 

421

 

ATM and debit card

 

 

470

 

 

 

430

 

Retail brokerage and advisory

 

 

141

 

 

 

103

 

Bank-owned life insurance

 

 

68

 

 

 

68

 

Merchant

 

 

75

 

 

 

74

 

Net gain on sale of loans

 

 

21

 

 

 

7

 

Other

 

 

159

 

 

 

125

 

Total non-interest income

 

 

2,309

 

 

 

1,067

 

 

 

 

 

 

 

 

 

 

Non-interest expense

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

3,781

 

 

 

3,345

 

Net occupancy

 

 

504

 

 

 

471

 

Furniture and equipment

 

 

557

 

 

 

487

 

Marketing

 

 

237

 

 

 

310

 

Third party services

 

 

440

 

 

 

410

 

Telephone, postage and supplies

 

 

199

 

 

 

181

 

State taxes

 

 

171

 

 

 

170

 

FDIC insurance premiums

 

 

130

 

 

 

175

 

Other

 

 

704

 

 

 

629

 

Total non-interest expense

 

 

6,723

 

 

 

6,178

 

Income before income taxes

 

 

4,196

 

 

 

3,492

 

Provision for income taxes

 

 

817

 

 

 

557

 

Net income

 

$

3,379

 

 

$

2,935

 

Earnings per share - basic

 

$

0.97

 

 

$

0.85

 

Earnings per share - diluted

 

$

0.97

 

 

$

0.85

 

Cash dividends per share

 

$

0.33

 

 

$

0.32

 

 

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

 

4


 

QNB Corp. and Subsidiary

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

 

 

 

(in thousands - unaudited)

 

 

 

2019

 

 

2018

 

Three months ended March 31,

 

Before

tax

amount

 

 

Tax

expense

(benefit)

 

 

Net of

tax

amount

 

 

Before

tax

amount

 

 

Tax

expense

(benefit)

 

 

Net of

tax

amount

 

Net income

 

$

4,196

 

 

$

817

 

 

$

3,379

 

 

$

3,492

 

 

$

557

 

 

$

2,935

 

Other comprehensive income (loss) :

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net unrealized holding gains (losses) on securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized holding gains (losses) arising during the period

 

 

4,391

 

 

 

922

 

 

 

3,469

 

 

 

(5,048

)

 

 

(1,060

)

 

 

(3,988

)

Reclassification adjustment for losses included in net income

 

 

39

 

 

 

8

 

 

 

31

 

 

 

1

 

 

 

 

 

 

1

 

Other comprehensive income (loss)

 

 

4,430

 

 

 

930

 

 

 

3,500

 

 

 

(5,047

)

 

 

(1,060

)

 

 

(3,987

)

Total comprehensive income (loss)

 

$

8,626

 

 

$

1,747

 

 

$

6,879

 

 

$

(1,555

)

 

$

(503

)

 

$

(1,052

)

 

Tax rate of 21% for 2019 and  2018

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

 

5


 

QNB Corp. and Subsidiary

 

CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY

Three months ended March 31, 2019 and 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

Number of

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

 

 

(unaudited)

 

Shares

 

 

Common

 

 

 

 

 

 

Retained

 

 

Comprehensive

 

 

Treasury

 

 

 

 

 

(in thousands, except share and per share data)

 

Outstanding

 

 

Stock

 

 

Surplus

 

 

Earnings

 

 

Income (Loss)

 

 

Stock

 

 

Total

 

Balance, December 31, 2018

 

 

3,484,080

 

 

$

2,280

 

 

$

20,041

 

 

$

91,635

 

 

$

(7,132

)

 

$

(2,476

)

 

$

104,348

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

3,379

 

 

 

 

 

 

 

 

 

3,379

 

Other comprehensive income, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,500

 

 

 

 

 

 

3,500

 

Cash dividends declared ($0.33 per share)

 

 

 

 

 

 

 

 

 

 

 

 

(1,151

)

 

 

 

 

 

 

 

 

(1,151

)

Stock issued in connection with dividend

   reinvestment and stock purchase plan

 

 

6,646

 

 

 

4

 

 

 

231

 

 

 

 

 

 

 

 

 

 

 

 

235

 

Stock issued for employee stock purchase plan

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock issued for options exercised

 

 

3,209

 

 

 

2

 

 

 

20

 

 

 

 

 

 

 

 

 

 

 

 

22

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

 

27

 

 

 

 

 

 

 

 

 

 

 

 

27

 

Balance, March 31, 2019

 

 

3,493,935

 

 

$

2,286

 

 

$

20,319

 

 

$

93,863

 

 

$

(3,632

)

 

$

(2,476

)

 

$

110,360

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

Number of

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

 

 

(unaudited)

 

Shares

 

 

Common

 

 

 

 

 

 

Retained

 

 

Comprehensive

 

 

Treasury

 

 

 

 

 

(in thousands, except share and per share data)

 

Outstanding

 

 

Stock

 

 

Surplus

 

 

Earnings

 

 

Income (Loss)

 

 

Stock

 

 

Total

 

Balance, December 31, 2017

 

 

3,448,108

 

 

$

2,258

 

 

$

18,691

 

 

$

84,183

 

 

$

(4,086

)

 

$

(2,476

)

 

$

98,570

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

2,935

 

 

 

 

 

 

 

 

 

2,935

 

Other comprehensive loss, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(3,987

)

 

 

 

 

 

(3,987

)

Cash dividends declared ($0.32 per share)

 

 

 

 

 

 

 

 

 

 

 

 

(1,105

)

 

 

 

 

 

 

 

 

(1,105

)

Equity securities fair value reclassification (1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(254

)

 

 

254

 

 

 

 

 

 

 

 

ASU 2018-02 stranded tax reclassification (2)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

805

 

 

 

(805

)

 

 

 

 

 

 

 

Stock issued for options exercised

 

 

5,908

 

 

 

4

 

 

 

65

 

 

 

 

 

 

 

 

 

 

 

 

69

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

 

22

 

 

 

 

 

 

 

 

 

 

 

 

22

 

Balance, March 31, 2018

 

 

3,454,016

 

 

$

2,262

 

 

$

18,778

 

 

$

86,564

 

 

$

(8,624

)

 

$

(2,476

)

 

$

96,504

 

(1) Refer to Note 1, ASU 2016-01

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2) Refer to Note 1, ASU 2018-02

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

6


 

QNB Corp. and Subsidiary

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

 

(in thousands, unaudited)

 

Three months ended March 31,

 

2019

 

 

2018

 

Operating Activities

 

 

 

 

 

 

 

 

Net income

 

$

3,379

 

 

$

2,935

 

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

385

 

 

 

197

 

Provision for loan losses

 

 

225

 

 

 

188

 

Net gain on sales of debt and equity securities

 

 

(6

)

 

 

(85

)

Net unrealized (gain) loss on equity securities

 

 

(976

)

 

 

246

 

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

 

 

 

 

 

(1

)

Net gain on sale of loans

 

 

(21

)

 

 

(7

)

Proceeds from sales of residential mortgages held-for-sale

 

 

675

 

 

 

605

 

Origination of residential mortgages held-for-sale

 

 

(654

)

 

 

(870

)

Income on bank-owned life insurance

 

 

(68

)

 

 

(68

)

Stock-based compensation expense

 

 

27

 

 

 

22

 

Deferred income tax provision (benefit)

 

 

511

 

 

 

(32

)

Net increase in income taxes payable

 

 

279

 

 

 

583

 

Net increase in accrued interest receivable

 

 

(1,360

)

 

 

(152

)

Amortization of mortgage servicing rights and change in valuation allowance

 

 

11

 

 

 

14

 

Net amortization of premiums and discounts on investment securities

 

 

345

 

 

 

386

 

Net increase (decrease) in accrued interest payable

 

 

1

 

 

 

31

 

Increase in other assets

 

 

(826

)

 

 

(520

)

Decrease in other liabilities

 

 

(517

)

 

 

(73

)

Net cash provided by operating activities

 

 

1,410

 

 

 

3,399

 

Investing Activities

 

 

 

 

 

 

 

 

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

 

 

8,541

 

 

 

11,629

 

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

 

 

11,192

 

 

 

2,403

 

Proceeds from the sale of equity securities

 

 

358

 

 

 

712

 

Purchases of debt securities available-for-sale

 

 

(17,898

)

 

 

(2,415

)

Purchases of equity securities

 

 

(398

)

 

 

(5,425

)

Proceeds from redemption of investment in restricted bank stock

 

 

2,063

 

 

 

2,961

 

Purchase of restricted stock

 

 

(2,504

)

 

 

(2,926

)

Net increase in loans

 

 

(19,124

)

 

 

(16,896

)

Net purchases of premises and equipment

 

 

(431

)

 

 

(413

)

Proceeds from sales of other real estate owned and repossessed assets

 

 

 

 

 

1

 

Net cash used in investing activities

 

 

(18,201

)

 

 

(10,369

)

Financing Activities

 

 

 

 

 

 

 

 

Net increase in non-interest bearing deposits

 

 

11,355

 

 

 

5,828

 

Net increase in interest-bearing deposits

 

 

7,661

 

 

 

6,594

 

Net (decrease) increase in short-term borrowings

 

 

(975

)

 

 

9,123

 

Principal payments on finance leases

 

 

(106

)

 

 

 

Cash dividends paid, net of reinvestment

 

 

(1,015

)

 

 

(1,105

)

Proceeds from issuance of common stock

 

 

121

 

 

 

69

 

Net cash provided by financing activities

 

 

17,041

 

 

 

20,509

 

Increase in cash and cash equivalents

 

 

250

 

 

 

13,539

 

Cash and cash equivalents at beginning of year

 

 

13,458

 

 

 

16,331

 

Cash and cash equivalents at end of period

 

$

13,708

 

 

$

29,870

 

Supplemental Cash Flow Disclosures

 

 

 

 

 

 

 

 

Interest paid

 

$

2,453

 

 

$

1,687

 

Income taxes paid

 

 

28

 

 

 

6

 

Non-cash transactions:

 

 

 

 

 

 

 

 

Unsettled trades to purchase securities

 

 

2,238

 

 

 

 

Unsettled trades to sell securities

 

 

(4,303

)

 

 

 

 

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

 

 

 

7


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 2018 Annual Report incorporated in the Form 10-K. Operating results for the three-month period ended March 31, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019.

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

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

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

QNB has evaluated events and transactions occurring subsequent to the balance sheet date of March 31, 2019, for items that should potentially be recognized or disclosed in these financial statements.

 

2. RECENT ACCOUNTING PRONOUNCEMENTS 

QNB adopted FASB issued ASU 2016-02, Leases (Topic 842) effective January 1, 2019. This new standard on accounting for leases introduced a lessee model that brings most leases on the balance sheet but recognizes expenses in the income statement similar to how items are recorded today. The new standard eliminates the requirement in current U.S. GAAP 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.

QNB applied the new standards to all new contracts initiated on or after the effective date; and, for contracts which have remaining obligations as of the effective date.  There was no adjustment needed to the opening balance of QNB’s retained earnings account at January 1, 2019.  The discount rates used in determining the initial value of measuring the right of use assets were based on the FHLB Amortizing Fixed Loan Rate for the remaining term of each lease at December 31, 2018.  These rates ranged from 2.82% to 3.46%.  QNB typically enters into lease agreements with an initial term of  5 to 10 years and subsequent additional optional terms in increments of 5 years.  The lease agreements also contain termination options. None of the leases contain purchase options and none transfer the ownership of the leased asset.  QNB has renewed one operating lease and entered into one finance lease that will both begin during the second quarter of 2019.  QNB also entered into a finance lease that it anticipates will begin during the third quarter of 2019.  

The right-of-use assets under the finance and operating leases are included within “Premises and equipment, net,” operating lease liabilities are included with “Other liabilities,” and finance lease liabilities are separately disclosed on the Consolidated Balance Sheets.  All operating lease costs and the amortization of the right-of-use finance lease are included in non-interest expense within  “Net occupancy” and the interest on finance lease liabilities is separately disclosed on the Consolidated Statements of Income.  The following table summarized the quantitative attributes of QNB’s operating and finance leases.

 

8


QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

For the three months ended

March 31, 2019

 

 

 

 

 

Lease cost

 

 

 

Finance lease cost:

 

 

 

Amortization of right-of-use assets

$

96

 

Interest on lease liabilities

 

1

 

Finance lease cost

 

97

 

Operating lease cost

 

28

 

Total lease cost

$

125

 

 

 

 

 

Other information

 

 

 

Cash paid for amounts included in the measurement of lease liabilities:

 

 

 

Operating cash flows from finance leases

$

(1

)

Operating cashflows from operating leases

 

(27

)

Financing cash flows from finance liabilities

 

(106

)

Total cash paid for amounts included in the measurement of lease liabilities

$

(134

)

 

 

 

 

At implementation of new accounting guidance:

 

 

 

Right-of-use assets recorded for finance lease liabilities

$

1,700

 

Right-of-use assets recorded for operating lease liabilities

 

304

 

 

 

 

 

Right-of-use assets obtained in exchange for new finance lease liabilities

$

-

 

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

 

-

 

 

 

 

 

Weighted average remaining lease terms:

 

 

 

Finance leases

9.2 years

 

Operating leases

3.9 years

 

 

 

 

 

Weighted average discount rates:

 

 

 

Finance leases

 

3.30

%

Operating leases

 

2.93

%

 

 

 

 

 

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

 

 

 

Operating Leases

 

 

Finance Leases

 

April 2019 thru March 2020

 

$

76

 

 

$

367

 

April 2020 thru March 2021

 

72

 

 

238

 

April 2021 thru March 2022

 

75

 

 

188

 

April 2022 thru March 2023

 

74

 

 

190

 

April 2023 thru March 2024

 

0

 

 

193

 

April 2024 and thereafter

 

0

 

 

1047

 

Total undiscounted cashflows

 

297

 

 

2223

 

Total discount on cashflows

 

 

(19

)

 

 

(345

)

Total lease liabilities

 

$

278

 

 

$

1,878

 

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.

9


QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

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 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.

 

 

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 $27,000 and $22,000 for the three months ended March 31, 2019 and 2018, respectively. As of March 31, 2019, there was approximately $178,000 of unrecognized compensation cost related to unvested share-based compensation award grants that is expected to be recognized over the next 35 months.

Options are granted to certain employees at prices equal to the market value of the stock on the date the options are granted. The 2005 Plan authorized the issuance of 200,000 shares. The time period during which any option is exercisable under the Plan is determined by the Committee but shall not commence before the expiration of six months after the date of grant or continue beyond the expiration of five years after the date the option is awarded. The granted options vest after a three-year period. As of March 31, 2019, there were 184,200 options granted, 65,850 options forfeited, 103,950 options exercised, and 14,400 options outstanding under this Plan. The 2005 Plan expired on March 15, 2015.

The 2015 Plan authorizes the issuance of 300,000 shares. The terms of the 2015 Plan are identical to the 2005 Plan. There were 98,200 options granted, 1,100 options forfeited and 97,100 options outstanding under this Plan as of March 31, 2019. The 2015 Plan expires on February 24, 2025.  

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

10


QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

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

 

Three months ended March 31,

 

2019

 

 

2018

 

Risk free interest rate

 

 

2.52

%

 

 

2.15

%

Dividend yield

 

 

3.36

%

 

 

1.24

%

Volatility

 

 

16.44

%

 

 

18.12

%

Expected life (years)

 

 

4.17

 

 

 

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 three months of 2019 and 2018 was $3.96 and $5.29, respectively.

Stock option activity during the three months ended March 31, 2019 and 2018 is as follows:

 

 

 

Number

of options

 

 

Weighted

average

exercise

price

 

 

Weighted

average

remaining

contractual term

(in years)

 

 

Aggregate

intrinsic value

 

Outstanding at December 31, 2018

 

 

95,075

 

 

$

35.11

 

 

 

 

 

 

 

 

 

Granted

 

 

24,700

 

 

 

38.15

 

 

 

 

 

 

 

 

 

Exercised

 

 

(8,275

)

 

 

25.38

 

 

 

 

 

 

 

 

 

Forfeited

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding at March 31, 2019

 

 

111,500

 

 

$

36.51

 

 

 

3.08

 

 

$

270

 

Exercisable at March 31, 2019

 

 

37,350

 

 

$

29.96

 

 

 

1.48

 

 

$

270

 

 

 

 

Number

of options

 

 

Weighted

average

exercise

price

 

 

Weighted

average

remaining

contractual term

(in years)

 

 

Aggregate

intrinsic value

 

Outstanding at December 31, 2017

 

 

85,525

 

 

$

30.94

 

 

 

 

 

 

 

 

 

Granted

 

 

25,000

 

 

 

43.60

 

 

 

 

 

 

 

 

 

Exercised

 

 

(9,750

)

 

 

24.75

 

 

 

 

 

 

 

 

 

Forfeited

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding at March 31, 2018

 

 

100,775

 

 

$

34.68

 

 

 

3.23

 

 

$

944

 

Exercisable at March 31, 2018

 

 

27,275

 

 

$

27.51

 

 

 

1.41

 

 

$

451

 

 

4. EARNINGS PER SHARE & SHARE REPURCHASE PLAN

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

 

Three months ended March 31,

 

2019

 

 

2018

 

Numerator for basic and diluted earnings per share - net income

 

$

3,379

 

 

$

2,935

 

Denominator for basic earnings per share - weighted average

   shares outstanding

 

 

3,486,786

 

 

 

3,452,531

 

Effect of dilutive securities - employee stock options

 

 

7,643

 

 

 

20,374

 

Denominator for diluted earnings per share - adjusted

   weighted average shares outstanding

 

 

3,494,429

 

 

 

3,472,905

 

Earnings per share - basic

 

$

0.97

 

 

$

0.85

 

Earnings per share - diluted

 

 

0.97

 

 

 

0.85

 

 

11


QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

There were 74,150 and 25,000  stock options that were anti-dilutive for the three-month periods ended March 31, 2019 and 2018, respectively.  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 three months ended March 31, 2019 and 2018. As of March 31, 2019, 57,883 shares were repurchased under this authorization at an average price of $16.97 and a total cost of $982,000.

 

 

5. COMPREHENSIVE INCOME (LOSS)

The following shows the components of accumulated other comprehensive income (loss) at March 31, 2019 and December 31, 2018:

 

 

 

March 31,

 

 

December 31,

 

 

 

2019

 

 

2018

 

Unrealized net holding losses on available-for-sale

   securities

 

$

(4,598

)

 

$

(9,028

)

Unrealized losses on available-for-sale securities

   for which a portion of an other-than-temporary

   impairment loss has been recognized in earnings

 

 

 

 

 

 

Accumulated other comprehensive loss

 

 

(4,598

)

 

 

(9,028

)

Tax effect

 

 

966

 

 

 

1,896

 

Accumulated other comprehensive loss, net of tax

 

$

(3,632

)

 

$

(7,132

)

 

 

 

 

 

 

 

 

 

 

The following tables present amounts reclassified out of accumulated other comprehensive income (loss) for the three months ended March 31, 2019 and 2018:

 

Three months ended March 31,

 

Amount reclassified from

accumulated other

comprehensive loss

 

 

 

Details about accumulated other comprehensive loss

 

2019

 

 

2018

 

 

Affected line item in statement of income

Unrealized net holding loss on available-for-sale

   securities

 

$

39

 

 

$

1

 

 

Net gain on sale of investment

   securities

Other-than-temporary impairment losses on

   investment securities

 

 

 

 

 

 

 

Net other-than-temporary impairment

   losses on investment securities

 

 

 

39

 

 

 

1

 

 

 

Tax effect

 

 

(8

)

 

 

 

 

Provision for income taxes

Total reclass out of accumulated other

   comprehensive loss, net of tax

 

$

31

 

 

$

1

 

 

Net of tax

 


12


QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

 

6. INVESTMENT SECURITIES 

Available-For-Sale Debt Securities

The amortized cost and estimated fair values of investment debt securities available-for-sale at March 31, 2019 and December 31, 2018 were as follows:

 

 

 

 

 

 

 

Gross

 

 

Gross

 

 

 

 

 

 

 

 

 

 

 

unrealized

 

 

unrealized

 

 

 

 

 

 

 

Fair

 

 

holding

 

 

holding

 

 

Amortized

 

March 31, 2019

 

value

 

 

gains

 

 

losses

 

 

cost

 

U.S. Government agency

 

$

69,359

 

 

$

 

 

$

(1,123

)

 

$

70,482

 

State and municipal

 

 

53,331

 

 

 

367

 

 

 

(61

)

 

 

53,025

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed

 

 

133,039

 

 

 

192

 

 

 

(2,411

)

 

 

135,258

 

Collateralized mortgage obligations (CMOs)

 

 

80,467

 

 

 

188

 

 

 

(1,777

)

 

 

82,056

 

Pooled trust preferred

 

 

112

 

 

 

 

 

 

(10

)

 

 

122

 

Corporate debt

 

 

8,059

 

 

 

78

 

 

 

(41

)

 

 

8,022

 

Total investment debt securities available-for-sale

 

$

344,367

 

 

$

825

 

 

$

(5,423

)

 

$

348,965

 

 

 

 

 

 

 

 

Gross

 

 

Gross

 

 

 

 

 

 

 

 

 

 

 

unrealized

 

 

unrealized

 

 

 

 

 

 

 

Fair

 

 

holding

 

 

holding

 

 

Amortized

 

December 31, 2018

 

value

 

 

gains

 

 

losses

 

 

cost

 

U.S. Government agency

 

$

68,409

 

 

$

 

 

$

(2,072

)

 

$

70,481

 

State and municipal

 

 

66,313

 

 

 

195

 

 

 

(464

)

 

 

66,582

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed

 

 

125,913

 

 

 

79

 

 

 

(4,251

)

 

 

130,085

 

Collateralized mortgage obligations (CMOs)

 

 

75,491

 

 

 

87

 

 

 

(2,549

)

 

 

77,953

 

Pooled trust preferred

 

 

116

 

 

 

 

 

 

(6

)

 

 

122

 

Corporate debt

 

 

7,979

 

 

 

33

 

 

 

(80

)

 

 

8,026

 

Total investment debt securities available-for-sale

 

$

344,221

 

 

$

394

 

 

$

(9,422

)

 

$

353,249

 

 

The amortized cost and estimated fair value of debt securities available-for-sale by contractual maturity at March 31, 2019 are shown in the following table. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Securities are assigned to categories based on contractual maturity except for mortgage-backed securities and CMOs which are based on the estimated average life of these securities and municipal securities that have been pre-refunded.

 

 

 

 

 

 

 

Amortized

 

March 31, 2019

 

Fair value

 

 

cost

 

Due in one year or less

 

$

4,452

 

 

$

4,438

 

Due after one year through five years

 

 

267,012

 

 

 

271,292

 

Due after five years through ten years

 

 

52,600

 

 

 

53,007

 

Due after ten years

 

 

20,303

 

 

 

20,228

 

Total investment debt securities available-for-sale

 

$

344,367

 

 

$

348,965

 

 

13


QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

Proceeds from sales of investment debt securities available-for-sale were approximately $11,192,000 and $2,403,000 for the three months ended March 31, 2019 and 2018, respectively.   

At March 31, 2019 and December 31, 2018, investment debt securities available-for-sale totaling approximately $197,625,000 and $194,573,000, respectively, were pledged as collateral for repurchase agreements and deposits of public funds.

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

 

 

 

Three months ended March 31

 

 

 

 

2019

 

 

2018

 

 

Gross realized gains

 

$

20

 

 

$

21

 

 

Gross realized losses

 

 

(59

)

 

 

(22

)

 

Other-than-temporary impairment

 

 

 

 

 

 

 

Total net losses on AFS debt securities

 

$

(39

)

 

$

(1

)

 

 

The tax benefit applicable to the net realized (losses)/gains for the three-month periods ended March 31, 2019 and 2018 were a credit of  $8,000 and $0, respectively.

QNB recognizes OTTI for debt securities classified as available-for-sale in accordance with FASB ASC 320, Investments – Debt and Equity Securities, which requires that we assess whether we intend to sell or it is more likely than not that the Company will be required to sell a security before recovery of its amortized cost basis less any current-period credit losses. For debt securities that are considered other-than-temporarily impaired and that we do not intend to sell and will not be required to sell prior to recovery of our amortized cost basis, the amount of the impairment is separated into the amount that is credit related (credit loss component) and the amount due to all other factors. The credit loss component is recognized in earnings and is the difference between the security’s amortized cost basis and the present value of its expected future cash flows discounted at the security’s effective yield. The remaining difference between the security’s fair value and the present value of future expected cash flows is due to factors that are not credit related and, therefore, is not required to be recognized as a loss in the income statement but is recognized in other comprehensive income. 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.  No credit impairments were recognized on debt securities during first quarter of 2019 or 2018.

 

The following table indicates the length of time individual debt securities have been in a continuous unrealized loss position at March 31, 2019 and December 31, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less than 12 months

 

 

12 months or longer

 

 

Total

 

 

 

No. of

 

 

Fair

 

 

Unrealized

 

 

Fair

 

 

Unrealized

 

 

Fair

 

 

Unrealized

 

March 31, 2019

 

securities

 

 

value

 

 

losses

 

 

value

 

 

losses

 

 

value

 

 

losses

 

U.S. Government agency

 

 

51

 

 

$

 

 

$

 

 

$

69,359

 

 

$

(1,123

)

 

$

69,359

 

 

$

(1,123

)

State and municipal

 

 

21

 

 

 

569

 

 

 

(1

)

 

 

7,493

 

 

 

(60

)

 

 

8,062

 

 

 

(61

)

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed

 

 

102

 

 

 

3,573

 

 

 

(4

)

 

 

109,299

 

 

 

(2,407

)

 

 

112,872

 

 

 

(2,411

)

Collateralized mortgage obligations (CMOs)

 

 

72

 

 

 

173

 

 

 

 

 

 

60,832

 

 

 

(1,777

)

 

 

61,005

 

 

 

(1,777

)

Pooled trust preferred

 

 

1

 

 

 

 

 

 

 

 

 

112

 

 

 

(10

)

 

 

112

 

 

 

(10

)

Corporate debt

 

 

5

 

 

 

120

 

 

 

 

 

 

3,982

 

 

 

(41

)

 

 

4,102

 

 

 

(41

)

Total

 

 

252

 

 

$

4,435

 

 

$

(5

)

 

$

251,077

 

 

$

(5,418

)

 

$

255,512

 

 

$

(5,423

)

 

14


QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less than 12 months

 

 

12 months or longer

 

 

Total

 

 

 

No. of

 

 

Fair

 

 

Unrealized

 

 

Fair

 

 

Unrealized

 

 

Fair

 

 

Unrealized

 

December 31, 2018

 

securities

 

 

value

 

 

losses

 

 

value

 

 

losses

 

 

value

 

 

losses

 

U.S. Government agency

 

 

51

 

 

$

 

 

$

 

 

$

68,409

 

 

$

(2,072

)

 

$

68,409

 

 

$

(2,072

)

State and municipal

 

 

81

 

 

 

21,657

 

 

 

(204

)

 

 

10,558

 

 

 

(260

)

 

 

32,215

 

 

 

(464

)

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed

 

 

111

 

 

 

12,561

 

 

 

(91

)

 

 

108,802

 

 

 

(4,160

)

 

 

121,363

 

 

 

(4,251

)

Collateralized mortgage obligations (CMOs)

 

 

73

 

 

 

433

 

 

 

(1

)

 

 

62,467

 

 

 

(2,548

)

 

 

62,900

 

 

 

(2,549

)

Pooled trust preferred

 

 

1

 

 

 

 

 

 

 

 

 

116

 

 

 

(6

)

 

 

116

 

 

 

(6

)

Corporate debt

 

 

4

 

 

 

 

 

 

 

 

 

3,947

 

 

 

(80

)

 

 

3,947

 

 

 

(80

)

Total

 

 

321

 

 

$

34,651

 

 

$

(296

)

 

$

254,299

 

 

$

(9,126

)

 

$

288,950

 

 

$

(9,422

)

 

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 March 31, 2019 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.

QNB holds one pooled trust preferred security as of March 31, 2019. This security has a total amortized cost of approximately $122,000 and a fair value of $112,000.   The pooled trust preferred security is available-for-sale and is carried at fair value.

Marketable Equity Securities

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. When 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 evaluated the near-term prospects of the issuers in relation to the severity and duration of the impairment as well as the individual issuer’s financial condition, industry, geographic and legal environment.  There was no other-than-temporary impairment recorded during the first quarters of 2019 or 2018.   QNB has the ability and intent to hold securities in an unrealized loss position until recovery.

At March 31, 2019 and December 31, 2018, the Company had $10,482,000 and $9,421,000, respectively, in equity securities recorded at fair value. The following is a summary of unrealized and realized gains and losses recognized in net income on equity securities during the first quarters of 2019 and 2018:  

 

 

 

Three months ended March 31

 

 

 

 

 

 

 

 

 

 

 

 

2019

 

 

2018

 

Net gains (losses) recognized during the period on equity securities

 

$

1,021

 

 

$

(160

)

Less:  Net gains recognized during the period on equity securities sold during the period

 

 

45

 

 

 

86

 

Net unrealized gains (losses) recognized during the reporting period on equity securities still held at the reporting date

 

$

976

 

 

$

(246

)

 

Tax expense applicable to the net realized gains for the 1st quarter of 2019 were $295,000 and the tax benefit applicable to the net realized losses for the 1st quarter of 2018 was $46,000.  Proceeds from sales of investment equity securities were approximately $358,000 and $712,000 for the three months ended March 31, 2019 and 2018, respectively.

 

 

 


15


QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

7. RESTRICTED INVESTMENT IN STOCK

 

Restricted investment in stock includes Federal Home Loan Bank of Pittsburgh (FHLB) with a carrying cost of $1,226,000, Atlantic Community Bankers Bank (ACBB) stock with a carrying cost of $12,000 and VISA Class B stock with a carrying cost of $0 at March 31, 2019. FHLB and ACBB stock was issued to the Bank as a requirement to facilitate the Bank’s participation in borrowing and other banking services.  The Bank’s investment in FHLB stock may fluctuate, as it is based on the member banks’ use of FHLB’s services.

 

The Bank owns 6,502 shares of Visa Class B stock, which was necessary to participate in Visa services in support of the Bank’s credit card, debit card, and related payment programs (permissible activities under banking regulations) as a member institution.  Following the resolution of Visa’s covered litigation, shares of Visa’s Class B stock will be converted to Visa Class A shares using a conversion factor (1.6298 as of June 28, 2018), which is periodically adjusted to reflect VISA’s ongoing litigation costs. There is a very limited market for this stock, as only current owners of Class B shares are permitted to transact in Class B.  Due to the lack of orderly trades and public information of such trades, Visa Class B does not have a readily determinable fair value.

 

These restricted investments are carried at cost and evaluated for OTTI periodically. As of March 31, 2019, there was no OTTI associated with these shares.

 

 

8. LOANS & ALLOWANCE FOR LOAN LOSSES

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

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

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

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

 

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.

16


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 firm reviews risk assessment and evaluates the adequacy of the allowance for loan losses. Management meets monthly to review the credit quality of the loan portfolio and quarterly to review the allowance for loan losses.

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

Management believes that it uses the best information available to make determinations about the adequacy of the allowance and that it has established its existing allowance for loan losses in accordance with 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.

Major classes of loans are as follows:

 

 

 

March 31,

 

 

December 31,

 

 

 

2019

 

 

2018

 

Commercial:

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

165,381

 

 

$

162,452

 

Construction

 

 

54,717

 

 

 

50,135

 

Secured by commercial real estate

 

 

313,436

 

 

 

308,590

 

Secured by residential real estate

 

 

72,211

 

 

 

68,581

 

State and political subdivisions

 

 

47,552

 

 

 

43,737

 

Retail:

 

 

 

 

 

 

 

 

1-4 family residential mortgages

 

 

67,831

 

 

 

67,453

 

Home equity loans and lines

 

 

76,519

 

 

 

77,475

 

Consumer

 

 

6,661

 

 

 

6,785

 

Total loans

 

 

804,308

 

 

 

785,208

 

Net unearned costs

 

 

220

 

 

 

240

 

Loans receivable

 

$

804,528

 

 

$

785,448

 

 

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

Overdrafts are reclassified as loans and are included in consumer loans above and total loans on the balance sheet. At March 31, 2019 and December 31, 2018, overdrafts were approximately $114,000 and $183,000, respectively.

QNB generally lends in its trade area which is comprised of Quakertown and the surrounding communities. To a large extent, QNB makes loans collateralized at least in part by real estate. Its lending activities could be affected by changes in the general economy, the regional economy, or real estate values. Other than disclosed in the table above, at March 31, 2019, there was a concentration of loans to lessors of residential buildings and dwellings of 15.6% of total loans and to lessors of nonresidential buildings of 18.6% of total

17


QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

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

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

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

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

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

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

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

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

 

1

- Excellent - no apparent risk

 

2

- Good - minimal risk

 

3

- Acceptable - lower risk

 

4

- Acceptable - average risk

18


QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

 

5

- Acceptable – higher risk

 

6

- Pass watch

 

7

- Special Mention - potential weaknesses

 

8

- Substandard - well defined weaknesses

 

9

- Doubtful - full collection unlikely

 

10

- Loss - considered uncollectible

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

The following tables present the classes of the loan portfolio summarized by the aggregate pass rating and the classified ratings of special mention, substandard and doubtful within the Company’s internal risk rating system as of March 31, 2019 and December 31, 2018:

 

March 31, 2019

 

Pass

 

 

Special

mention

 

 

Substandard

 

 

Doubtful

 

 

Total

 

Commercial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

161,678

 

 

$

78

 

 

$

3,625

 

 

$

 

 

$

165,381

 

Construction

 

 

54,717

 

 

 

 

 

 

 

 

 

 

 

 

54,717

 

Secured by commercial real estate

 

 

302,758

 

 

 

1,245

 

 

 

9,433

 

 

 

 

 

 

313,436

 

Secured by residential real estate

 

 

70,548

 

 

 

 

 

 

1,663

 

 

 

 

 

 

72,211

 

State and political subdivisions

 

 

47,552

 

 

 

 

 

 

 

 

 

 

 

 

47,552

 

Total

 

$

637,253

 

 

$

1,323

 

 

$

14,721

 

 

$

 

 

$

653,297

 

 

December 31, 2018

 

Pass

 

 

Special

mention

 

 

Substandard

 

 

Doubtful

 

 

Total

 

Commercial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

155,219

 

 

$

82

 

 

$

7,151

 

 

$

 

 

$

162,452

 

Construction

 

 

50,135

 

 

 

 

 

 

 

 

 

 

50,135

 

Secured by commercial real estate

 

 

297,713

 

 

 

1,259

 

 

 

9,618

 

 

 

 

 

 

308,590

 

Secured by residential real estate

 

 

66,838

 

 

 

173

 

 

 

1,570

 

 

 

 

 

 

68,581

 

State and political subdivisions

 

 

43,737

 

 

 

 

 

 

 

 

 

 

43,737

 

Total

 

$

613,642

 

 

$

1,514

 

 

$

18,339

 

 

$

 

 

$

633,495

 

 

19


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 March 31, 2019 and December 31, 2018:

 

March 31, 2019

 

Performing

 

 

Non-performing

 

 

Total

 

Retail:

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential mortgages

 

$

66,911

 

 

$

920

 

 

$

67,831

 

Home equity loans and lines

 

 

76,389

 

 

 

130

 

 

 

76,519

 

Consumer

 

 

6,529

 

 

 

132

 

 

 

6,661

 

Total

 

$

149,829

 

 

$

1,182

 

 

$

151,011

 

 

December 31, 2018

 

Performing

 

 

Non-performing

 

 

Total

 

Retail:

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential mortgages

 

$

66,513

 

 

$

940

 

 

$

67,453

 

Home equity loans and lines

 

 

77,309

 

 

 

166

 

 

 

77,475

 

Consumer

 

 

6,659

 

 

 

126

 

 

 

6,785

 

Total

 

$

150,481

 

 

$

1,232

 

 

$

151,713

 

 

The performance and credit quality of the loan portfolio is also monitored by analyzing the age of the loans receivable as determined by the length of time a recorded payment is past due. The following table presents the classes of the loan portfolio summarized by the past due status as of March 31, 2019 and December 31, 2018:

 

March 31, 2019

 

30-59 days

past due

 

 

60-89 days

past due

 

 

90 days or

more past

due

 

 

Total past

due loans

 

 

Current

 

 

Total loans

receivable

 

Commercial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

725

 

 

$

349

 

 

$

1,280

 

 

$

2,354

 

 

$

163,027

 

 

$

165,381

 

Construction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

54,717

 

 

 

54,717

 

Secured by commercial real estate

 

 

1,754

 

 

 

 

 

 

1,613

 

 

 

3,367

 

 

 

310,069

 

 

 

313,436

 

Secured by residential real estate

 

 

166

 

 

 

 

 

 

429

 

 

 

595

 

 

 

71,616

 

 

 

72,211

 

State and political subdivisions

 

 

 

 

 

 

 

 

 

 

 

 

 

 

47,552

 

 

 

47,552

 

Retail:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential mortgages

 

 

746

 

 

 

 

 

 

465

 

 

 

1,211

 

 

 

66,620

 

 

 

67,831

 

Home equity loans and lines

 

 

55

 

 

 

243

 

 

 

30

 

 

 

328

 

 

 

76,191

 

 

 

76,519

 

Consumer

 

 

72

 

 

 

31

 

 

 

 

 

 

103

 

 

 

6,558

 

 

 

6,661

 

Total

 

$

3,518

 

 

$

623

 

 

$

3,817

 

 

$

7,958

 

 

$

796,350

 

 

$

804,308

 

 

December 31, 2018

 

30-59 days

past due

 

 

60-89 days

past due

 

 

90 days or

more past

due

 

 

Total past

due loans

 

 

Current

 

 

Total loans

receivable

 

Commercial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

94

 

 

$

141

 

 

$

1,372

 

 

$

1,607

 

 

$

160,845

 

 

$

162,452

 

Construction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

50,135

 

 

 

50,135

 

Secured by commercial real estate

 

 

305

 

 

 

1,029

 

 

 

638

 

 

 

1,972

 

 

 

306,618

 

 

 

308,590

 

Secured by residential real estate

 

 

24

 

 

 

352

 

 

 

291

 

 

 

667

 

 

 

67,914

 

 

 

68,581

 

State and political subdivisions

 

 

 

 

 

 

 

 

 

 

 

 

 

 

43,737

 

 

 

43,737

 

Retail:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential mortgages

 

 

544

 

 

 

245

 

 

 

476

 

 

 

1,265

 

 

 

66,188

 

 

 

67,453

 

Home equity loans and lines

 

 

82

 

 

 

205

 

 

 

61

 

 

 

348

 

 

 

77,127

 

 

 

77,475

 

Consumer

 

 

23

 

 

 

35

 

 

 

24

 

 

 

82

 

 

 

6,703

 

 

 

6,785

 

Total

 

$

1,072

 

 

$

2,007

 

 

$

2,862

 

 

$

5,941

 

 

$

779,267

 

 

$

785,208

 

 

20


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 March 31, 2019 and December 31, 2018:

 

March 31, 2019

 

90 days or more past

due (still accruing)

 

 

Non-accrual

 

Commercial:

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

 

 

$

3,430

 

Construction

 

 

 

 

 

 

Secured by commercial real estate

 

 

 

 

 

1,885

 

Secured by residential real estate

 

 

 

 

 

1,209

 

State and political subdivisions

 

 

 

 

 

 

Retail:

 

 

 

 

 

 

 

 

1-4 family residential mortgages

 

 

 

 

 

920

 

Home equity loans and lines

 

 

 

 

 

130

 

Consumer

 

 

 

 

 

132

 

Total

 

$

 

 

$

7,706

 

 

December 31, 2018

 

90 days or more past

due (still accruing)

 

 

Non-accrual

 

Commercial:

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

 

 

$

3,179

 

Construction

 

 

 

 

 

 

Secured by commercial real estate

 

 

 

 

 

1,965

 

Secured by residential real estate

 

 

 

 

 

1,102

 

State and political subdivisions

 

 

 

 

 

 

Retail:

 

 

 

 

 

 

 

 

1-4 family residential mortgages

 

 

 

 

 

940

 

Home equity loans and lines

 

 

 

 

 

166

 

Consumer

 

 

 

 

 

126

 

Total

 

$

 

 

$

7,478

 

 

Activity in the allowance for loan losses for the three months ended March 31, 2019 and 2018 are as follows:

 

Three months ended March 31, 2019

 

Balance,

beginning of

period

 

 

Provision for

(credit to)

loan losses

 

 

Charge-offs

 

 

Recoveries

 

 

Balance, end

of period

 

Commercial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

3,092

 

 

$

(16

)

 

$

 

 

$

7

 

 

$

3,083

 

Construction

 

 

551

 

 

 

51

 

 

 

 

 

 

 

 

 

602

 

Secured by commercial real estate

 

 

2,824

 

 

 

5

 

 

 

 

 

 

 

 

 

2,829

 

Secured by residential real estate

 

 

754

 

 

 

(1

)

 

 

(31

)

 

 

21

 

 

 

743

 

State and political subdivisions

 

 

153

 

 

 

37

 

 

 

 

 

 

 

 

 

190

 

Retail:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential mortgages

 

 

497

 

 

 

3

 

 

 

 

 

 

 

 

 

500

 

Home equity loans and lines

 

 

338

 

 

 

18

 

 

 

(16

)

 

 

1

 

 

 

341

 

Consumer

 

 

164

 

 

 

28

 

 

 

(35

)

 

 

9

 

 

 

166

 

Unallocated

 

 

461

 

 

 

100

 

 

N/A

 

 

N/A

 

 

 

561

 

Total

 

$

8,834

 

 

$

225

 

 

$

(82

)

 

$

38

 

 

$

9,015

 

 

21


QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

Three months ended March 31, 2018

 

Balance,

beginning of

period

 

 

Provision for

(credit to)

loan losses

 

 

Charge-offs

 

 

Recoveries

 

 

Balance, end

of period

 

Commercial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

2,711

 

 

$

103

 

 

$

 

 

$

15

 

 

$

2,829

 

Construction

 

 

563

 

 

 

(6

)

 

 

 

 

 

 

 

 

557

 

Secured by commercial real estate

 

 

2,410

 

 

 

20

 

 

 

 

 

 

1

 

 

 

2,431

 

Secured by residential real estate

 

 

816

 

 

 

17

 

 

 

 

 

 

2

 

 

 

835

 

State and political subdivisions

 

 

114

 

 

 

7

 

 

 

 

 

 

 

 

 

121

 

Retail:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential mortgages

 

 

444

 

 

 

68

 

 

 

 

 

 

 

 

 

512

 

Home equity loans and lines

 

 

357

 

 

 

20

 

 

 

 

 

 

4

 

 

 

381

 

Consumer

 

 

57

 

 

 

18

 

 

 

(26

)

 

 

12

 

 

 

61

 

Unallocated

 

 

369

 

 

 

(59

)

 

N/A

 

 

N/A

 

 

 

310

 

Total

 

$

7,841

 

 

$

188

 

 

$

(26

)

 

$

34

 

 

$

8,037

 

 

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

22


QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

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 $2,047,000 and $2,160,000 as of March 31, 2019 and December 31, 2018, respectively. Non-performing TDRs totaled $1,293,000 and $1,317,000 as of March 31, 2019 and December 31, 2018, respectively. All TDRs are included in impaired loans.

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

 

 

 

March 31, 2019

 

 

December 31, 2018

 

 

 

Unpaid

principal

balance

 

 

Related

allowance

 

 

Unpaid

principal

balance

 

 

Related

allowance

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

TDRs with no specific allowance recorded

 

$

2,945

 

 

$

 

 

$

2,513

 

 

$

 

TDRs with an allowance recorded

 

 

395

 

 

 

395

 

 

 

964

 

 

 

411

 

Total

 

$

3,340

 

 

$

395

 

 

$

3,477

 

 

$

411

 

 

There was one newly identified TDR during the three months ended March 31, 2019. The TDR concession involved lower monthly payments.  As of March 31, 2019 and December 31, 2018, QNB had no commitments to lend additional funds to customers with loans whose terms have been modified in troubled debt restructurings. There were no net charge-offs   during the three months ended March 31, 2019 and 2018, resulting from loans previously modified as TDRs.

The following tables present loans, by loan class, modified as TDRs during the three months ended March 31, 2019 and 2018. The pre-modification and post-modification outstanding recorded investments disclosed in the tables below, represent carrying amounts immediately prior to the modification and as of the period end indicated.

 

Three months ended March 31,

 

2019

 

 

2018

 

 

 

Number of

contracts

 

 

Pre-modification

outstanding

recorded

investment

 

 

Post-modification

outstanding

recorded

investment

 

 

Number of

contracts

 

 

Pre-modification

outstanding

recorded

investment

 

 

Post-modification

outstanding

recorded

investment

 

Retail:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Home equity loans and lines

 

 

 

 

$

 

 

$

 

 

 

1

 

 

$

47

 

 

$

47

 

Consumer

 

 

1

 

 

 

12

 

 

 

12

 

 

 

 

 

 

 

 

 

 

Total

 

 

1

 

 

$

12

 

 

$

12

 

 

 

1

 

 

$

47

 

 

$

47

 

 

There were no loans modified as TDRs within 12 months prior to March 31, 2019 and 2018 for which there was a payment default (60 days or more past due) during the three months ended March 31, 2019 and 2018.

The Company has four consumer mortgage loans secured by residential real estate for which foreclosure proceedings are in process at March 31, 2019. The recorded investment is $616,000.

23


QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

The following tables present the balance in the allowance for loan losses at March 31, 2019 and December 31, 2018 disaggregated 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 on the basis of the Company’s impairment methodology:

 

 

 

Allowance for Loan Losses

 

 

Loans Receivable

 

March 31, 2019

 

Balance

 

 

Balance related

to loans

individually

evaluated for

impairment

 

 

Balance related

to loans

collectively

evaluated for

impairment

 

 

Balance

 

 

Balance

individually

evaluated for

impairment

 

 

Balance

collectively

evaluated for

impairment

 

Commercial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

3,083

 

 

$

1,572

 

 

$

1,511

 

 

$

165,381

 

 

$

3,537

 

 

$

161,844

 

Construction

 

 

602

 

 

 

 

 

 

602

 

 

 

54,717

 

 

 

 

 

 

54,717

 

Secured by commercial real estate

 

 

2,829

 

 

 

62

 

 

 

2,767

 

 

 

313,436

 

 

 

5,941

 

 

 

307,495

 

Secured by residential real estate

 

 

743

 

 

 

75

 

 

 

668

 

 

 

72,211

 

 

 

1,833

 

 

 

70,378

 

State and political subdivisions

 

 

190

 

 

 

 

 

 

190

 

 

 

47,552

 

 

 

 

 

 

47,552

 

Retail:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential mortgages

 

 

500

 

 

 

 

 

 

500

 

 

 

67,831

 

 

 

1,247

 

 

 

66,584

 

Home equity loans and lines

 

 

341

 

 

 

 

 

 

341

 

 

 

76,519

 

 

 

149

 

 

 

76,370

 

Consumer

 

 

166

 

 

 

 

 

 

166

 

 

 

6,661

 

 

 

75

 

 

 

6,586

 

Unallocated

 

 

561

 

 

N/A

 

 

N/A

 

 

N/A

 

 

N/A

 

 

N/A

 

Total

 

$

9,015

 

 

$

1,709

 

 

$

6,745

 

 

$

804,308

 

 

$

12,782

 

 

$

791,526

 

 

 

 

Allowance for Loan Losses

 

 

Loans Receivable

 

December 31, 2018

 

Balance

 

 

Balance related

to loans

individually

evaluated for

impairment

 

 

Balance related

to loans

collectively

evaluated for

impairment

 

 

Balance

 

 

Balance

individually

evaluated for

impairment

 

 

Balance

collectively

evaluated for

impairment

 

Commercial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

3,092

 

 

$

1,461

 

 

$

1,631

 

 

$

162,452

 

 

$

7,128

 

 

$

155,324

 

Construction

 

 

551

 

 

 

 

 

 

551

 

 

 

50,135

 

 

 

 

 

 

50,135

 

Secured by commercial real estate

 

 

2,824

 

 

 

101

 

 

 

2,723

 

 

 

308,590

 

 

 

6,083

 

 

 

302,507

 

Secured by residential real estate

 

 

754

 

 

 

97

 

 

 

657

 

 

 

68,581

 

 

 

1,740

 

 

 

66,841

 

State and political subdivisions

 

 

153

 

 

 

 

 

 

153

 

 

 

43,737

 

 

 

 

 

 

43,737

 

Retail:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential mortgages

 

 

497

 

 

 

 

 

 

497

 

 

 

67,453

 

 

 

1,268

 

 

 

66,185

 

Home equity loans and lines

 

 

338

 

 

 

5

 

 

 

333

 

 

 

77,475

 

 

 

186

 

 

 

77,289

 

Consumer

 

 

164

 

 

 

 

 

 

164

 

 

 

6,785

 

 

 

77

 

 

 

6,708

 

Unallocated

 

 

461

 

 

N/A

 

 

N/A

 

 

N/A

 

 

N/A

 

 

N/A

 

Total

 

$

8,834

 

 

$

1,664

 

 

$

6,709

 

 

$

785,208

 

 

$

16,482

 

 

$

768,726

 

 

24


QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

The following table summarize additional information, in regards to impaired loans by loan portfolio class, as of March 31, 2019 and December 31, 2018:

 

 

 

March 31, 2019

 

 

December 31, 2018

 

 

 

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

 

$

804

 

 

$

1,041

 

 

 

 

 

 

$

4,243

 

 

$

4,525

 

 

 

 

 

Construction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Secured by commercial real estate

 

 

4,928

 

 

 

5,530

 

 

 

 

 

 

 

5,012

 

 

 

5,577

 

 

 

 

 

Secured by residential real estate

 

 

1,550

 

 

 

1,728

 

 

 

 

 

 

 

1,023

 

 

 

1,140

 

 

 

 

 

Retail:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential mortgages

 

 

1,247

 

 

 

1,347

 

 

 

 

 

 

 

1,268

 

 

 

1,357

 

 

 

 

 

Home equity loans and lines

 

 

149

 

 

 

274

 

 

 

 

 

 

 

140

 

 

 

190

 

 

 

 

 

Consumer

 

 

75

 

 

 

83

 

 

 

 

 

 

 

77

 

 

 

84

 

 

 

 

 

Total

 

$

8,753

 

 

$

10,003

 

 

 

 

 

 

$

11,763

 

 

$

12,873

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

With an allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

2,733

 

 

$

4,015

 

 

$

1,572

 

 

$

2,885

 

 

$

4,128

 

 

$

1,461

 

Construction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Secured by commercial real estate

 

 

1,013

 

 

 

1,030

 

 

 

62

 

 

 

1,071

 

 

 

1,095

 

 

 

101

 

Secured by residential real estate

 

 

283

 

 

 

319

 

 

 

75

 

 

 

717

 

 

 

773

 

 

 

97

 

Retail:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential mortgages

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Home equity loans and lines

 

 

 

 

 

 

 

 

 

 

 

46

 

 

 

46

 

 

 

5

 

Consumer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

4,029

 

 

$

5,364

 

 

$

1,709

 

 

$

4,719

 

 

$

6,042

 

 

$

1,664

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

3,537

 

 

$

5,056

 

 

$

1,572

 

 

$

7,128

 

 

$

8,653

 

 

$

1,461

 

Construction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Secured by commercial real estate

 

 

5,941

 

 

 

6,560

 

 

 

62

 

 

 

6,083

 

 

 

6,672

 

 

 

101

 

Secured by residential real estate

 

 

1,833

 

 

 

2,047

 

 

 

75

 

 

 

1,740

 

 

 

1,913

 

 

 

97

 

Retail:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential mortgages

 

 

1,247

 

 

 

1,347

 

 

 

 

 

 

1,268

 

 

 

1,357

 

 

 

 

Home equity loans and lines

 

 

149

 

 

 

274

 

 

 

 

 

 

186

 

 

 

236

 

 

 

5

 

Consumer

 

 

75

 

 

 

83

 

 

 

 

 

 

77

 

 

 

84

 

 

 

 

Total

 

$

12,782

 

 

$

15,367

 

 

$

1,709

 

 

$

16,482

 

 

$

18,915

 

 

$

1,664

 

 


25


QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

The following table presents additional information regarding the average recorded investment and interest income recognized on impaired loans:

 

Three Months Ended March 31,

 

2019

 

 

2018

 

 

 

Average

recorded

investment

 

 

Interest income

recognized

 

 

Average

recorded

investment

 

 

Interest income

recognized

 

Commercial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

4,298

 

 

$

3

 

 

$

6,635

 

 

$

64

 

Construction

 

 

 

 

 

 

 

 

 

 

 

 

Secured by commercial real estate

 

 

6,011

 

 

 

48

 

 

 

3,710

 

 

 

23

 

Secured by residential real estate

 

 

1,749

 

 

 

10

 

 

 

1,728

 

 

 

4

 

Retail:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential mortgages

 

 

1,257

 

 

 

3

 

 

 

1,212

 

 

 

3

 

Home equity loans and lines

 

 

176

 

 

 

 

 

 

193

 

 

 

 

Consumer

 

 

76

 

 

 

 

 

 

84

 

 

 

 

Total

 

$

13,567

 

 

$

64

 

 

$

13,562

 

 

$

94

 

 

 

9. FAIR VALUE MEASUREMENTS AND DISCLOSURES

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. 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.

26


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 March 31, 2019:

 

March 31, 2019

 

Quoted prices

in active

markets

for identical

assets

(Level 1)

 

 

Significant

other

observable

input

(Level 2)

 

 

Significant

unobservable

inputs

(Level 3)

 

 

Balance at end

of period

 

Recurring fair value measurements

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity securities

 

$

10,482

 

 

$

 

 

$

 

 

$

10,482

 

Debt securities available-for-sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government agency securities

 

 

 

 

 

69,359

 

 

 

 

 

 

69,359

 

State and municipal securities

 

 

 

 

 

53,331

 

 

 

 

 

 

53,331

 

U.S. Government agencies and sponsored

   enterprises (GSEs):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities

 

 

 

 

 

133,039

 

 

 

 

 

 

133,039

 

Collateralized mortgage obligations (CMOs)

 

 

 

 

 

80,467

 

 

 

 

 

 

80,467

 

Pooled trust preferred securities

 

 

 

 

 

 

 

 

112

 

 

 

112

 

Corporate debt securities

 

 

 

 

 

8,059

 

 

 

 

 

 

8,059

 

Total debt securities available-for-sale

 

 

 

 

 

344,255

 

 

 

112

 

 

 

344,367

 

Total recurring fair value measurements

 

$

10,482

 

 

$

344,255

 

 

$

112

 

 

$

354,849

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nonrecurring fair value measurements

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans

 

$

 

 

$

 

 

$

2,320

 

 

$

2,320

 

Mortgage servicing rights

 

 

 

 

 

 

 

 

4

 

 

 

4

 

Total nonrecurring fair value measurements

 

$

 

 

$

 

 

$

2,324

 

 

$

2,324

 

 

There were no transfers in and out of Level 1 and Level 2 fair value measurements during the three months ended March 31, 2019. There were also no transfers in or out of level 3 for the same period. There were no losses included in earnings attributable to the change in unrealized gains or losses relating to the available-for-sale securities above with fair value measurements utilizing significant unobservable inputs for the three-month period ended March 31, 2019.

27


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, 2018:

 

December 31, 2018

 

Quoted prices

in active

markets

for identical

assets

(Level 1)

 

 

Significant

other

observable

input

(Level 2)

 

 

Significant

unobservable

inputs

(Level 3)

 

 

Balance at end

of period

 

Recurring fair value measurements

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity securities

 

$

9,421

 

 

$

 

 

$

 

 

$

9,421

 

Debt securities available-for-sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government agency securities

 

 

 

 

 

68,409

 

 

 

 

 

 

68,409

 

State and municipal securities

 

 

 

 

 

66,313

 

 

 

 

 

 

66,313

 

U.S. Government agencies and sponsored

   enterprises (GSEs):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities

 

 

 

 

 

125,913

 

 

 

 

 

 

125,913

 

Collateralized mortgage obligations (CMOs)

 

 

 

 

 

75,491

 

 

 

 

 

 

75,491

 

Pooled trust preferred securities

 

 

 

 

 

 

 

 

116

 

 

 

116

 

Corporate debt securities

 

 

 

 

 

7,979

 

 

 

 

 

 

7,979

 

Total debt securities available-for-sale

 

 

 

 

 

344,105

 

 

 

116

 

 

 

344,221

 

Total recurring fair value measurements

 

$

9,421

 

 

$

344,105

 

 

$

116

 

 

$

353,642

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nonrecurring fair value measurements

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans

 

$

 

 

$

 

 

$

3,055

 

 

$

3,055

 

Mortgage servicing rights

 

 

 

 

 

 

 

 

5

 

 

 

5

 

Total nonrecurring fair value measurements

 

$

 

 

$

 

 

$

3,060

 

 

$

3,060

 

 

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

 

 

 

Quantitative information about Level 3 fair value measurements

 

March 31, 2019

 

Fair value

 

 

Valuation

techniques

 

 

Unobservable

input

 

 

Value or range

of values

 

Impaired loans

 

$

1,159

 

 

Appraisal of collateral

(1)

 

Appraisal adjustments

(2)

 

-20.0% to -22.5%

 

 

 

 

 

 

 

 

 

 

Liquidation expenses

(3)

 

 

-10.0

%

Impaired loans

 

 

1,161

 

 

Financial statement values for UCC collateral

 

 

Financial statement value discounts

(5)

 

-25.0% to -100.0%

 

Mortgage servicing rights

 

 

4

 

 

Discounted cash flow

 

 

Remaining term

 

 

2 - 26 years

 

 

 

 

 

 

 

 

 

 

Discount rate

 

 

12.0% to 12.5%

 

 

 

 

Quantitative information about Level 3 fair value measurements

 

December 31, 2018

 

Fair value

 

 

Valuation

techniques

 

 

Unobservable

input

 

 

Value or range

of values

 

Impaired loans

 

$

1,632

 

 

Appraisal of collateral

(1)

 

Appraisal adjustments

(2)

 

-20.0% to -90.0%

 

 

 

 

 

 

 

 

 

 

Liquidation expenses

(3)

 

 

-10.0

%

Impaired loans

 

 

1,415

 

 

Financial statement values for UCC collateral

 

 

Financial statement value discounts

(5)

 

-25.0% to -100.0%

 

Impaired loans

 

 

8

 

 

Used commercial vehicle guides

 

 

Guide value discounts

(4)

 

-10%

 

Mortgage servicing rights

 

 

5

 

 

Discounted cash flow

 

 

Remaining term

 

 

2 to 26 yrs

 

 

 

 

 

 

 

 

 

 

Discount rate

 

 

12.0% to 12.5%

 

28


QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

 

(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.

(4)

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

(5)

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

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 three months ended March 31, 2019 and 2018:

 

 

 

Fair value measurements

using significant

unobservable inputs

(Level 3)

 

 

 

2019

 

 

2018

 

Balance, January 1,

 

$

116

 

 

$

215

 

Payments received

 

 

 

 

 

(118

)

Total gains or losses (realized/unrealized)

 

 

 

 

 

 

 

 

Included in earnings

 

 

 

 

 

 

Included in other comprehensive (loss) income

 

 

(4

)

 

 

18

 

Transfers in and/or out of Level 3

 

 

 

 

 

 

Balance, March 31,

 

$

112

 

 

$

115

 

 

The Level 3 securities consist of one collateralized debt obligation security, the PreTSL security, which is backed by trust preferred securities issued by banks. The market for this security at March 31, 2019 was not active and markets for similar securities also are not active.  The new issue market is also inactive and there are currently very few market participants who are willing and or able to transact for these securities.

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

 

The few observable transactions and market quotations that are available are not reliable for purposes of determining fair value at March 31, 2019;

 

An income valuation approach technique (present value technique) that maximizes the use of relevant observable inputs and minimizes the use of unobservable inputs will be equally or more representative of fair value than the market approach valuation technique used at prior measurement dates; and

 

The PreTSL will be classified within Level 3 of the fair value hierarchy because significant adjustments are required to determine fair value at the measurement date.

The Bank used an independent third party to value this security using a discounted cash flow analysis. Based on management’s review of the bond’s four underlying issuers, there are no expected credit losses or prepayments; cashflows used were contractual based on the Bloomberg YA screen.  The assumed cashflows have been discounted using and estimated market discount rate based on the 30-year swap rate.  The 30-year 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  the PreTSL security, which is priced using the 3-month LIBOR as a reference rate.  The discount rate of 5.92% includes the risk-free rate, a credit component and a spread for illiquidity.  

 

29


QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

 

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

The following methods and assumptions were used to estimate the fair values of each major classification of financial instrument and non-financial asset at March 31, 2019 and December 31, 2018:

Cash and cash equivalents, accrued interest receivable and accrued interest payable (carried at cost):  The carrying amounts reported in the balance sheet approximate those assets’ fair value.

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

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

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

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

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

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

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

30


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.

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

 

 

 

 

 

 

 

 

 

 

 

Fair value measurements

 

March 31, 2019

 

Carrying

amount

 

 

Fair value

 

 

Quoted

prices in

active

markets for

identical

assets

(Level 1)

 

 

Significant

other

observable

inputs

(Level 2)

 

 

Significant

unobservable

inputs

(Level 3)

 

Financial assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

13,708

 

 

$

13,708

 

 

$

13,708

 

 

$

 

 

$

 

Investment securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equities

 

 

10,482

 

 

 

10,482

 

 

 

10,482

 

 

 

 

 

 

 

Available-for-sale

 

 

344,367

 

 

 

344,367

 

 

 

 

 

 

344,255

 

 

 

112

 

Restricted investment in stocks

 

 

1,238

 

 

 

1,238

 

 

 

 

 

 

1,238

 

 

 

 

Net loans

 

 

795,513

 

 

 

795,909

 

 

 

 

 

 

 

 

 

795,909

 

Mortgage servicing rights

 

 

446

 

 

 

574

 

 

 

 

 

 

 

 

 

574

 

Accrued interest receivable

 

 

4,212

 

 

 

4,212

 

 

 

 

 

 

4,212

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits with no stated maturities

 

$

811,895

 

 

$

811,895

 

 

$

811,895

 

 

$

 

 

$

 

Deposits with stated maturities

 

 

222,719

 

 

 

220,896

 

 

 

 

 

 

220,896

 

 

 

 

Short-term borrowings

 

 

49,897

 

 

 

49,897

 

 

 

49,897

 

 

 

 

 

 

 

Accrued interest payable

 

 

450

 

 

 

450

 

 

 

 

 

 

450

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Off-balance sheet instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commitments to extend credit

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

Standby letters of credit

 

 

 

 

 

63

 

 

 

 

 

 

63

 

 

 

 

 

31


QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

Fair value measurements

 

December 31, 2018

 

Carrying

amount

 

 

Fair value

 

 

Quoted

prices in

active

markets for

identical

assets

(Level 1)

 

 

Significant

other

observable

inputs

(Level 2)

 

 

Significant

unobservable

inputs

(Level 3)

 

Financial assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

13,458

 

 

$

13,458

 

 

$

13,458

 

 

$

 

 

$

 

Investment securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equities

 

 

9,421

 

 

 

9,421

 

 

 

9,421

 

 

 

 

 

 

 

Available-for-sale

 

 

344,221

 

 

 

344,221

 

 

 

 

 

 

344,105

 

 

 

116

 

Restricted investment in stocks

 

 

797

 

 

 

797

 

 

 

 

 

 

797

 

 

 

 

Net loans

 

 

776,614

 

 

 

771,685

 

 

 

 

 

 

 

 

 

771,685

 

Mortgage servicing rights

 

 

451

 

 

 

604

 

 

 

 

 

 

 

 

 

604

 

Accrued interest receivable

 

 

2,852

 

 

 

2,852

 

 

 

 

 

 

2,852

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits with no stated maturities

 

$

791,810

 

 

$

791,810

 

 

$

791,810

 

 

$

 

 

$

 

Deposits with stated maturities

 

 

223,788

 

 

 

220,876

 

 

 

 

 

 

220,876

 

 

 

 

Short-term borrowings

 

 

50,872

 

 

 

50,872

 

 

 

50,872

 

 

 

 

 

 

 

Accrued interest payable

 

 

449

 

 

 

449

 

 

 

 

 

 

449

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Off-balance sheet instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commitments to extend credit

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

Standby letters of credit

 

 

 

 

 

31

 

 

 

 

 

 

31

 

 

 

 

 

 

10. OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS AND GUARANTEES

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

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

 

 

 

March 31,

 

 

December 31,

 

 

 

2019

 

 

2018

 

Commitments to extend credit and unused lines of credit

 

$

314,701

 

 

$

266,021

 

Standby letters of credit

 

 

18,306

 

 

 

17,269

 

Total financial instrument commitments

 

$

333,007

 

 

$

283,290

 

 

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

Standby letters of credit are conditional commitments issued by the Bank to guarantee the financial or performance obligation of a customer to a third party. QNB’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for standby letters of credit is represented by the contractual amount of those instruments. The Bank uses the same credit policies in making conditional obligations as it does for on-balance sheet instruments. Standby letters of credit of $17,655,000 will expire within

32


QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

one year. 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 March 31, 2019 and December 31, 2018 for guarantees under standby letters of credit issued is not material.

The amount of collateral obtained for letters of credit and commitments to extend credit is based on management’s credit evaluation of the customer. Collateral varies, but may include real estate, accounts receivable, marketable securities, pledged deposits, inventory or equipment.

 

 

11. 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 Federal and Pennsylvania banking law, the Bank is subject to certain restrictions on the amount of dividends that it may declare without prior regulatory approval. Under Federal Reserve regulations, the Bank is limited as to the amount it may lend affiliates, including QNB Corp., unless such loans are collateralized by specific obligations.

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

The capital amounts and classification are also subject to qualitative judgments by the regulators. Management believes, as of March 31, 2019, that the Company and the Bank met capital adequacy requirements to which they were subject.

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

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

 

 

 

Capital levels

 

 

 

Actual

 

 

Adequately capitalized

 

 

Well capitalized

 

As of March 31, 2019

 

Amount

 

 

Ratio

 

 

Amount

 

 

Ratio

 

 

Amount

 

 

Ratio

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

$

123,043

 

 

 

13.00

%

 

$

75,710

 

 

 

8.00

%

 

$

94,637

 

 

 

10.00

%

Bank

 

 

112,382

 

 

 

12.28

 

 

 

73,192

 

 

8.00

 

 

 

91,489

 

 

10.00

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier I capital (to risk-weighted assets):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

 

113,955

 

 

 

12.04

 

 

 

56,782

 

 

6.00

 

 

 

56,782

 

 

6.00

 

Bank

 

 

103,294

 

 

 

11.29

 

 

 

54,894

 

 

6.00

 

 

 

73,192

 

 

8.00

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common equity tier 1 capital (to risk-weighted

   assets):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

 

113,955

 

 

 

12.04

 

 

 

42,587

 

 

4.50

 

 

N/A

 

 

N/A

 

Bank

 

 

103,294

 

 

 

11.29

 

 

 

41,170

 

 

4.50

 

 

 

59,468

 

 

6.50

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier I capital (to average assets):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

 

113,955

 

 

 

9.60

 

 

 

47,495

 

 

4.00

 

 

N/A

 

 

N/A

 

Bank

 

 

103,294

 

 

 

8.78

 

 

 

47,075

 

 

4.00

 

 

 

58,844

 

 

5.00

 

33


QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

 

 

 

Capital levels

 

 

 

Actual

 

 

Adequately capitalized

 

 

Well capitalized

 

As of December 31, 2018

 

Amount

 

 

Ratio

 

 

Amount

 

 

Ratio

 

 

Amount

 

 

Ratio

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

$

120,379

 

 

13.21%

 

 

$

72,910

 

 

 

8.00

%

 

$

91,137

 

 

 

10.00

%

Bank

 

 

110,508

 

 

 

12.52

 

 

 

70,619

 

 

8.00

 

 

 

88,273

 

 

10.00

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier I capital (to risk-weighted assets):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

 

111,472

 

 

 

12.23

 

 

 

54,682

 

 

6.00

 

 

 

54,682

 

 

6.00

 

Bank

 

 

101,601

 

 

 

11.51

 

 

 

52,964

 

 

6.00

 

 

 

70,619

 

 

8.00

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common equity tier 1 capital (to risk-weighted

   assets):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

 

111,472

 

 

 

12.23

 

 

 

41,012

 

 

4.50

 

 

N/A

 

 

N/A

 

Bank

 

 

101,601

 

 

 

11.51

 

 

 

39,723

 

 

4.50

 

 

 

57,378

 

 

6.50

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier I capital (to average assets):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

 

111,472

 

 

 

9.40

 

 

 

47,458

 

 

4.00

 

 

N/A

 

 

N/A

 

Bank

 

 

101,601

 

 

 

8.64

 

 

 

47,045

 

 

4.00

 

 

 

58,807

 

 

5.00

 

 

 

12.  REVENUE RECOGNITION FROM CONTRACTS WITH CUSTOMERS

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

 

Fees for services to customers—fees include service charges on deposits which are included as liabilities in the consolidated statement of financial position and consist of transaction-based fees, stop payment fees, Automated Clearing House (ACH) fees, account maintenance fees, and overdraft services fees for various retail and business checking customers.  These fees are charged as earned on the day of the transaction or within the month of the service, with the exception of Enhanced Account Analysis Fees, which are calculated on the previous month’s activity and assessed on the following month.  The Enhanced Account Analysis Fees are currently being accrued; the revenue is currently being recorded in the month it is earned.   Service charges on deposits are withdrawn directly from the customer’s account balance.

 

ATM and debit card – fees are recognized at the time the transaction is executed as that is the point in time the Company fulfills the customer’s request.

 

Retail brokerage and advisory—fee income and related expenses are accrued monthly to properly record the revenues in the month they are earned.  Advisory fees are collected in advance on a quarterly basis.  These advisory fees are recorded in the first month of the quarter for which the service is being performed.     Fees that are transaction based are recognized at the point in time that the transaction is executed (i.e. trade date).

 

Merchant – QNB earns interchange fees from credit/debit cardholder transactions conducted through VISA/MasterCard payment networks.  Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized monthly, concurrently with the transaction processing services provided to the cardholder within the month.

34


QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

 

Other—includes credit card fees, sales of checks to depositors, miscellaneous fees and gain/losses on sale of OREO.

 

Credit card fees are recognized monthly, concurrently with the transaction processing services provided to the cardholder within the month.

 

Sales of checks to depositors are commissions earned from a third-party who provides checks to QNB’s customers.  There is a pre-paid incentive with the third party which is recognized over the term of the contact.  Other commissions on the sales of checks are recorded weekly.

 

Miscellaneous fees, such as wire, cashier check and garnishment fees, are charged as earned on the day of the transaction.

 

Gain (loss) on sales of OREO – QNB records a gain or loss from the sale of OREO when control of the property transfers to the buyer, which generally occurs at the time of an executed deed. When the QNB finances the sale of OREO to the buyer, QNB assesses whether the buyer is committed to perform their obligations under the contract and whether collectability of the transaction price is probable.  Once these criteria are met, the OREO asset is derecognized and the gain or loss on sale is recorded upon the transfer of control of the property to the buyer.  In determining the gain or loss on the sale, QNB adjusts the transaction prices and related gain (loss) on sale if a significant financing component is present.

 

 

 

35


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 2018 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.

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.

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 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.

36


QNB CORP. AND SUBSIDIARY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

 

 

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.  There were no other-than-temporary impairment charges recorded during the first quarters of 2019 and 2018, respectively.

The Company follows accounting guidance related to the recognition and presentation of other-than-temporary impairment that specifies (a) if a company does not have the intent to sell a debt security prior to recovery and (b) it is more likely than not that it will not have to sell the debt security prior to recovery, the security would not be considered other-than-temporarily impaired unless there is a credit loss. When an entity does not intend to sell the security, and it is more likely than not the entity will not have to sell the security before recovery of its cost basis, it will recognize the credit component of an other-than-temporary impairment of a debt security in earnings and the remaining portion in other comprehensive income. There were no credit-related other-than-temporary impairment charges in the first quarters ended March 31, 2019 or 2018, respectively.

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

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

Management believes that it uses the best information available to make determinations about the adequacy of the allowance and that it has established its existing allowance for loan losses in accordance with 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.

37


QNB CORP. AND SUBSIDIARY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

 

 

Foreclosed Assets

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

Stock-Based Compensation

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

Income Taxes

QNB accounts for income taxes under the asset/liability method in accordance with income tax accounting guidance, ASC 740, Income Taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, as well as operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is established against deferred tax assets when, in the judgment of management, it is more likely than not that such deferred tax assets will not become available. Because the judgment about the level of future taxable income is dependent on matters that may, at least in part, be beyond QNB’s control, it is at least reasonably possible that management’s judgment about the need for a valuation allowance for deferred tax assets could change in the near term.

RESULTS OF OPERATIONS - OVERVIEW

QNB reported net income for the first quarter of 2019 of $3,379,000, or $0.97 per share on a diluted basis, compared to net income of $2,935,000, or $0.85 per share on a diluted basis, for the same period in 2018.

Net income expressed as an annualized rate of return on average assets and average shareholders’ equity was 1.15% and 12.09%, respectively, for the quarter ended March 31, 2019 compared with 1.02% and 11.35%, respectively, for the quarter ended March 31, 2018.

Total assets as of March 31, 2019 were $1,203,126,000, compared with $1,175,452,000 at December 31, 2018. Loans receivable at March 31, 2019 were $804,528,000, compared with $785,448,000 at December 31, 2018, an increase of $19,080,000, or 2.4%, with commercial lending as the largest contributor to the growth. Total deposits of $1,034,614,000 at March 31, 2019 increased $19,016,000, or 1.9%, compared with total deposits of $1,015,598,000 at December 31, 2018.

Results for the three months ended March 31, 2019 include the following significant components:

 

Net interest income increased $44,000, or 0.5%, to $8,835,000 for the three months ended March 31, 2019 compared with same period in 2018.

 

Net interest margin on a tax-equivalent basis was 3.18% for the quarter ended March 31, 2019 compared to 3.22% for the same period in 2018.

 

QNB recorded $225,000 in provision for loan losses for the quarter ended March 31, 2019, compared with $188,000 for the same period in 2018.

 

Non-interest income increased $1,242,000, or 16.4%, to $2,309,000 for the first quarter of 2019 compared with the same period in 2018.

38


QNB CORP. AND SUBSIDIARY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

 

 

 

Non-interest expense increased $545,000, or 8.8%, to $6,723,000 for the first quarter of 2019, compared to the same period in 2018.

 

Total non-performing loans were $9,753,000, or 1.21% of loans receivable at March 31, 2019, compared to $9,638,000, or 1.23% of loans receivable at December 31, 2018. Loans on non-accrual status were $7,706,000 at March 31, 2019 compared with $7,478,000 at December 31, 2018. Net charge-offs for the three months ended March 31, 2019 were $44,000, compared with net recoveries of $8,000 for the same period in 2018.

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

NET INTEREST INCOME

QNB earns its net income primarily through its subsidiary, the Bank. Net interest income, or the spread between the interest, dividends and fees earned on loans and investment securities and the expense incurred on deposits and other interest-bearing liabilities, is the primary source of operating income for QNB. Management seeks to achieve sustainable and consistent earnings growth while maintaining adequate levels of capital and liquidity and limiting its exposure to credit and interest rate risk levels approved by the Board of Directors.

The following table presents the adjustment to convert net interest income to net interest income on a fully taxable-equivalent basis for the three month periods ended March 31, 2019 and 2018.

 

Three months ended March 31,

 

2019

 

 

2018

 

Total interest income

 

$

11,289

 

 

$

10,509

 

Total interest expense

 

 

2,454

 

 

 

1,718

 

Net interest income

 

 

8,835

 

 

 

8,791

 

Tax-equivalent adjustment

 

 

197

 

 

 

201

 

Net interest income (fully taxable-equivalent)

 

$

9,032

 

 

$

8,992

 

 

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

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

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

 

39


QNB CORP. AND SUBSIDIARY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

 

 

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

 

 

 

Three Months Ended

 

 

 

March 31, 2019

 

 

March 31, 2018

 

 

 

Average

 

 

Average

 

 

 

 

 

 

Average

 

 

Average

 

 

 

 

 

 

 

Balance

 

 

Rate

 

 

Interest

 

 

Balance

 

 

Rate

 

 

Interest

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment securities (AFS & Equity):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government agencies

 

$

70,482

 

 

 

1.80

%

 

$

317

 

 

$

72,473

 

 

 

1.79

%

 

$

325

 

State and municipal

 

 

63,210

 

 

 

3.42

 

 

 

540

 

 

 

74,744

 

 

 

3.27

 

 

 

612

 

Mortgage-backed and CMOs

 

 

208,694

 

 

 

2.21

 

 

 

1,153

 

 

 

219,472

 

 

 

2.10

 

 

 

1,150

 

Pooled trust preferred securities

 

 

122

 

 

 

5.13

 

 

 

2

 

 

 

235

 

 

 

3.82

 

 

 

2

 

Corporate debt securities

 

 

8,024

 

 

 

3.78

 

 

 

76

 

 

 

8,051

 

 

 

2.23

 

 

 

45

 

Equities

 

 

10,108

 

 

 

2.97

 

 

 

74

 

 

 

8,342

 

 

 

2.97

 

 

 

61

 

Total investment securities

 

 

360,640

 

 

 

2.40

 

 

 

2,162

 

 

 

383,317

 

 

 

2.29

 

 

 

2,195

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

 

444,119

 

 

 

4.79

 

 

 

5,247

 

 

 

420,911

 

 

 

4.69

 

 

 

4,864

 

Residential real estate

 

 

67,533

 

 

 

3.91

 

 

 

660

 

 

 

57,065

 

 

 

3.87

 

 

 

552

 

Home equity loans

 

 

69,363

 

 

 

4.73

 

 

 

810

 

 

 

66,208

 

 

 

4.25

 

 

 

694

 

Commercial and industrial

 

 

158,861

 

 

 

5.42

 

 

 

2,122

 

 

 

154,626

 

 

 

5.18

 

 

 

1,974

 

Consumer loans

 

 

6,916

 

 

 

6.20

 

 

 

106

 

 

 

6,914

 

 

 

5.82

 

 

 

99

 

Tax-exempt loans

 

 

42,982

 

 

 

3.32

 

 

 

352

 

 

 

38,435

 

 

 

3.26

 

 

 

309

 

Total loans, net of unearned income*

 

 

789,774

 

 

 

4.77

 

 

 

9,297

 

 

 

744,159

 

 

 

4.63

 

 

 

8,492

 

Other earning assets

 

 

2,242

 

 

 

4.85

 

 

 

27

 

 

 

5,570

 

 

 

1.67

 

 

 

23

 

Total earning assets

 

 

1,152,656

 

 

 

4.04

 

 

 

11,486

 

 

 

1,133,046

 

 

 

3.83

 

 

 

10,710

 

Cash and due from banks

 

 

11,648

 

 

 

 

 

 

 

 

 

 

 

11,314

 

 

 

 

 

 

 

 

 

Allowance for loan losses

 

 

(8,915

)

 

 

 

 

 

 

 

 

 

 

(8,068

)

 

 

 

 

 

 

 

 

Other assets

 

 

31,985

 

 

 

 

 

 

 

 

 

 

 

28,098

 

 

 

 

 

 

 

 

 

Total assets

 

$

1,187,374

 

 

 

 

 

 

 

 

 

 

$

1,164,390

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and Shareholders' Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing deposits:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing demand

 

$

208,417

 

 

 

0.45

%

 

 

232

 

 

$

180,077

 

 

 

0.21

%

 

 

95

 

Municipals

 

 

92,950

 

 

 

2.01

 

 

 

461

 

 

 

102,569

 

 

 

1.10

 

 

 

279

 

Money market

 

 

107,658

 

 

 

1.07

 

 

 

285

 

 

 

81,995

 

 

 

0.28

 

 

 

58

 

Savings

 

 

247,815

 

 

 

0.67

 

 

 

408

 

 

 

259,144

 

 

 

0.52

 

 

 

330

 

Time

 

 

117,358

 

 

 

1.45

 

 

 

419

 

 

 

123,904

 

 

 

1.24

 

 

 

378

 

Time of $100,000 or more

 

 

103,337

 

 

 

1.80

 

 

 

458

 

 

 

107,770

 

 

 

1.50

 

 

 

399

 

Total interest-bearing deposits

 

 

877,535

 

 

 

1.05

 

 

 

2,263

 

 

 

855,459

 

 

 

0.73

 

 

 

1,539

 

Short-term borrowings

 

 

59,185

 

 

 

1.30

 

 

 

190

 

 

 

71,453

 

 

 

1.02

 

 

 

179

 

Finance lease liabilities

 

 

1,907

 

 

 

0.11

 

 

 

1

 

 

 

 

 

 

 

 

 

 

Total interest-bearing liabilities

 

 

938,627

 

 

 

1.06

 

 

 

2,454

 

 

 

926,912

 

 

 

0.75

 

 

 

1,718

 

Non-interest-bearing deposits

 

 

130,525

 

 

 

 

 

 

 

 

 

 

 

128,188

 

 

 

 

 

 

 

 

 

Other liabilities

 

 

4,918

 

 

 

 

 

 

 

 

 

 

 

4,458

 

 

 

 

 

 

 

 

 

Shareholders' equity

 

 

113,304

 

 

 

 

 

 

 

 

 

 

 

104,832

 

 

 

 

 

 

 

 

 

Total liabilities and shareholders' equity

 

$

1,187,374

 

 

 

 

 

 

 

 

 

 

$

1,164,390

 

 

 

 

 

 

 

 

 

Net interest rate spread

 

 

 

 

 

 

2.98

%

 

 

 

 

 

 

 

 

 

 

3.08

%

 

 

 

 

Margin/net interest income

 

 

 

 

 

 

3.18

%

 

$

9,032

 

 

 

 

 

 

 

3.22

%

 

$

8,992

 

 

Tax-exempt securities and loans were adjusted to a tax-equivalent basis and are based on the marginal Federal corporate tax rate of 21 percent for three months ended March 31, 2019 and 2018.

 

Non-accrual loans are included in earning assets.

* Includes loans held-for-sale

40


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

 

 

 

March 31, 2019 compared

 

 

 

to March 31, 2018

 

 

 

Total

 

 

Due to change in:

 

 

 

Change

 

 

Volume

 

 

Rate

 

Interest income:

 

 

 

 

 

 

 

 

 

 

 

 

Investment securities (AFS & Equity):

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government agencies

 

$

(8

)

 

$

(10

)

 

$

2

 

State and municipal

 

 

(72

)

 

 

(95

)

 

 

23

 

Mortgage-backed and CMOs

 

 

3

 

 

 

(57

)

 

 

60

 

Pooled trust preferred securities

 

 

 

 

 

 

 

 

 

Corporate debt securities

 

 

31

 

 

 

 

 

 

31

 

Equities

 

 

13

 

 

 

13

 

 

 

 

Total Investment securities (AFS & Equity)

 

 

(33

)

 

 

(149

)

 

 

116

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

 

383

 

 

 

268

 

 

 

115

 

Residential real estate

 

 

108

 

 

 

101

 

 

 

7

 

Home equity loans

 

 

116

 

 

 

33

 

 

 

83

 

Commercial and industrial

 

 

148

 

 

 

54

 

 

 

94

 

Consumer loans

 

 

7

 

 

 

1

 

 

 

6

 

Tax-exempt loans

 

 

43

 

 

 

37

 

 

 

6

 

Total Loans

 

 

805

 

 

 

494

 

 

 

311

 

Other earning assets

 

 

4

 

 

 

(14

)

 

 

18

 

Total interest income

 

 

776

 

 

 

331

 

 

 

445

 

Interest expense:

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing deposits:

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing demand

 

 

137

 

 

 

15

 

 

 

122

 

Municipals

 

 

182

 

 

 

(26

)

 

 

208

 

Money market

 

 

227

 

 

 

18

 

 

 

209

 

Savings

 

 

78

 

 

 

(14

)

 

 

92

 

Time

 

 

41

 

 

 

(20

)

 

 

61

 

Time of $100,000 or more

 

 

59

 

 

 

(17

)

 

 

76

 

Total interest-bearing deposits

 

 

724

 

 

 

(44

)

 

 

768

 

Short-term borrowings

 

 

11

 

 

 

(31

)

 

 

42

 

Finance lease liabilities

 

 

1

 

 

 

 

 

 

1

 

Total interest expense

 

 

736

 

 

 

(75

)

 

 

811

 

Net interest income

 

$

40

 

 

$

406

 

 

$

(366

)

 

Average earning assets for the first quarter of 2019 were $1,152,656,000, an increase of $19,610,000, or 1.7%, from the first quarter of 2018, with average loans increasing $45,615,000, or 6.1%, and average investment securities decreasing $22,677,000, or 5.9%, over the same period. Growth in the loan portfolio supports interest income and the net interest margin as loans generally earn a higher yield than investment securities. Average loans as a percent of average earning assets were 68.5% for the first quarter of 2019, compared with 65.7% for the first quarter of 2018. On the funding side, average deposits increased $24,413,000, or 2.5%, to $1,008,060,000 for the first quarter of 2019 primarily due to growth in interest bearing demand and money market accounts.  Customers continue to reinvest funds into non-time deposits, as the yield in time deposits remains low and customers prefer to keep their funds liquid to capitalize on rising rates. Average borrowed funds for the first quarter of 2019 decreased $12,268,000, to $59,185,000, which consisted of average commercial repurchase agreements of $41,795,000 and average overnight borrowings of $17,390,000.  For the same period in 2018, borrowings consisted of average commercial repurchase agreements of $38,224,000 and average overnight borrowings of $33,229,000.

41


QNB CORP. AND SUBSIDIARY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

 

 

The net interest margin for the first quarter of 2019 was 3.18% compared to 3.22%, for the same period in 2018.  While competition for quality loans in our local market continues to exert pressure on the net interest margin, increases in the prime rate during 2018 have provided increased interest income and 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 $776,000, or 7.2%, to $11,486,000 for the first quarter of 2019; total interest expense increased $736,000, or 42.8%, to $2,454,000. Increases in rates of 21 basis points and growth in earning assets contributed to the increase in interest income.  All categories of interest-bearing deposits experienced higher rates in the first quarter of 2019 compared to first quarter of 2018, due to rate increases for municipal deposits indexed to Fed Funds, and a 15-basis point rate increase to the eSavings and Rewards checking products and a 15- to 20-basis point increase in the top tiers of the Money Market product since March 31, 2018.

The yield on earning assets on a tax-equivalent basis increased 21 basis points from 3.83% for the first quarter of 2018, to 4.04% for the first quarter of 2019.  The cost of interest-bearing liabilities was 1.06% for the first quarter ended March 31, 2019, compared with 0.75% for the same period in 2018.

Interest income on investment securities (available-for-sale and equity) decreased $33,000 when comparing the quarters ended March 31, 2019 and 2018.  The average yield on the investment portfolio was 2.40% for the first quarter of 2019 compared with 2.29% for the first quarter of 2018. Proceeds from sales, payments, calls and maturities, net of purchases, were utilized to grow the loan portfolio at higher yields than the investment portfolio.  

Income on U.S. Government agency securities decreased $8,000, as the $1,991,000, or 2.7%, decrease in average balances contributed to a decrease in interest income of $10,000.

Interest income on tax-exempt municipal securities declined due to an $11,534,000 decrease in average balances.  This was partially offset by a 15-basis point increase in yield.  Proceeds from sold municipal securities were invested in slightly higher yielding municipal securities and used to grow the loan portfolio.  Typically, QNB purchases municipal bonds with 10-15 year maturities with call dates between 2-5 years.

Interest income on mortgage-backed securities and CMOs increased $3,000 with an 11-basis point increase in average yield which more than offset the $10,778,000 decrease in average balances.  This portfolio generally provides higher yields relative to agency bonds and also provides monthly cash flow which can be used for liquidity purposes or can be reinvested as interest rates increase. Since most of these securities were purchased at a premium, any prepayments result in a shorter amortization period of this premium and therefore a reduction in income.

Income on loans increased $805,000 to $9,297,000 when comparing the first quarters of 2019 and 2018, with a 6.1% growth in average balances contributing an increase in interest income of $494,000.  The yield on loans, at 4.77%, was 14 basis points higher than the first quarter of 2018.   Despite increases in the prime rate in March, June, September and December of 2018, competitive pressures compressed the yields on new loans being originated. Mitigating competitive pricing, variable rate loans have repriced higher.

The largest category of the loan portfolio is commercial real estate loans. This category of loans includes commercial purpose loans secured by either commercial properties such as office buildings, factories, warehouses, medical facilities and retail establishments, or residential real estate, usually the residence of the business owner. The category also includes construction and land development loans. Income on commercial real estate loans increased $383,000 when comparing the first quarters of 2019 and 2018, primarily due to the 5.5% increase in average balances. Average balances increased $23,208,000, to $444,119,000 for the quarter ended March 31, 2019 compared with the same quarter in 2018. The yield on commercial real estate loans increased ten basis points from 4.69% in 2018 to 4.79% in 2019.  

Income on commercial and industrial loans increased $148,000 when comparing the first quarters of 2019 and 2018. Average balances increased $4,235,000, or 2.7%, to $158,861,000 for the first quarter of 2019 resulting in a $54,000 increase in income. The average yield on these loans increased 24 basis points to 5.42% resulting in an increase in income of $94,000.  Many of the loans in this category are indexed to the prime interest rate, which increased by 75 basis points since March 31, 2018.

Tax-exempt loan income was $352,000 for the first quarter of 2019, an increase of $43,000 from the same period in 2018.  Average balances increased $4,547,000, or 11.8%, to $42,982,000 for the first quarter of 2019, resulting in an increase of $37,000 in income.  

42


QNB CORP. AND SUBSIDIARY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

 

 

The yield on municipal loans increased six basis points, to 3.32% for the first quarter of 2019, compared with the same period in 2018, resulting in an increase of $6,000 in interest income.  

QNB desires to become the “local consumer lender of choice” and to effect this QNB refocused its retail lending efforts, adding new product offerings and increasing marketing and promotion.  The positive impact of this focus has been year-over-year growth in balances in overall retail lending: residential mortgage, home equity and consumer loans.  Average residential mortgage loans secured by first lien 1-4 family residential mortgages increased by $10,468,000, or 18.3%, to $67,533,000 for the first quarter of 2019 compared to the same period in 2018. Over this same timeframe, the average yield on the portfolio increased four basis point to 3.91% for the first quarter of 2019. The combined result was an increase in interest income of $108,000. Average home equity loans increased by $3,155,000, or 4.8%, to $69,363,000 while the average yield increased 48 basis points to 4.73% resulting in an increase in interest income of $116,000. The yield on the consumer portfolio increased 38 basis points to 6.20% for the first quarter of 2019 along with a slight increase in average balances resulting in a combined $7,000 increase in interest income.

Earning assets are funded by deposits and borrowed funds.  Interest expense increased $736,000, when comparing the first quarter of 2019 to the same period in 2018.  The growth in average deposits continues to be centered in accounts with greater liquidity, such as non-interest and interest-bearing demand, and money market deposits. Average non-interest-bearing demand accounts increased $2,337,000, or 1.8%, to $130,525,000 for the first quarter of 2019. QNB has been successful in increasing both personal and business checking accounts.  Average interest-bearing demand accounts increased $28,340,000, or 15.7%, to $208,417,000 for the first quarter of 2019. Interest expense on interest-bearing demand accounts increased $137,000 to $232,000 for the same period, as the average rate paid increased 24 basis points to 0.45% for the first quarter of 2019. Included in this category is QNB-Rewards checking, a higher-rate checking account product that pays 1.35% on balances up to $25,000 and 0.40% for balances over $25,000. In order to receive the high rate a customer must receive an electronic statement, have one direct deposit or other ACH transaction and have at least 12 check card purchase transactions post and clear per statement cycle. For the first quarter of 2019, the average balance in this product was $58,256,000 and the related interest expense was $94,000 for an average yield of 0.65%. In comparison, the average balance of the QNB-Rewards accounts for the first quarter of 2018 was $53,671,000 with a related interest expense of $76,000 and an average rate paid of 0.57%. 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 $126,406,000 for the first quarter of 2018 to $150,161,000 for the first quarter of 2019. The average rate paid on these balances increased from 0.06% for the first quarter of 2018 to 0.37% for the first quarter of 2019.

Interest expense on municipal interest-bearing demand accounts increased $182,000 to $461,000 for the first quarter of 2019. The average balance of municipal interest-bearing demand accounts decreased $9,619,000, or 9.4%, to $92,950,000, which was more than offset with the average interest rate paid on these accounts increasing 91 basis points to 2.01% for the first quarter of 2019.  Many of these accounts are indexed to the Federal funds rate with rate floors between 0.25% and 0.50%; therefore the increases in the Federal funds rate affected the yield of these deposits. Municipal deposits are seasonal in nature and are received during the third quarter as tax receipts are collected and are withdrawn over the course of the next year.

Average money market accounts increased $25,663,000, or 31.3%, to $107,658,000 for the first quarter of 2019 compared with the same period in 2018. Interest expense on money market accounts increased $227,000 to $285,000, and the average interest rate paid on money market accounts increased 79 basis points to 1.07% for the first quarter of 2019. Most of the balances in this category are in a product that pays a tiered rate based on account balances.

Interest expense on savings accounts increased $78,000 when comparing the first quarter of 2019 to the first quarter of 2018, and the average rate increased 15 basis points to 0.67% when comparing both periods. When comparing these same periods, average savings accounts decreased $11,329,000, or 4.4%, to $247,815,000 for the first quarter of 2019 primarily due to decreases in the e-Savings product.  QNB’s online e-Savings product is the largest category of savings deposits, with average balances for the first quarter of 2019 of $176,819,000 compared to $187,669,000 in the same period of 2018.  The average yield paid on these accounts was 0.86% for the first quarter of 2019 and 0.66% for the same period in 2018. Traditional statement savings accounts, passbook savings and club accounts are also included in the savings category and average balances in these types of savings accounts decreased $479,000 when comparing the first quarter of 2019 average to the same period in 2018.

Interest expense on time deposits totaled $877,000 for the first quarter of 2019 compared to $777,000 in 2018. Average total time deposits decreased $10,979,000 to $220,695,000 for the first quarter of 2019. As with fixed-rate loans and investment securities, these deposits reprice over time and, therefore, have less of an immediate impact on costs in either a rising or falling rate environment,

43


QNB CORP. AND SUBSIDIARY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

 

 

however, the maturity and repricing characteristics of time deposits tend to be shorter. The average rate paid on total time deposits increased 25 basis points from 1.36% to 1.61% when comparing the first quarter of 2018 to the same period in 2019.

Approximately $109,305,000, or 49%, of time deposits at March 31, 2019 will mature over the next 12 months. The average rate paid on these time deposits is approximately 1.50%. 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 time deposits.

Short-term borrowings are primarily comprised of sweep accounts structured as repurchase agreements with our commercial customers and overnight FHLB borrowings. Interest expense on short-term borrowings increased $11,000 for the first quarter of 2019 to $190,000 when compared to the same period in 2018. When comparing these same periods, average balances decreased from $71,453,000 to $59,185,000 due to an decrease in average FHLB borrowings of $15,820,000, with a one-basis point increase in rate, and  an increase in repurchase agreement average balances of $3,571,000, with a rate increase of 29 basis points.

PROVISION FOR LOAN LOSSES AND ALLOWANCE FOR LOAN LOSSES

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

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

Based on this analysis, QNB recorded $225,000 in provision for loan losses in the first quarter of 2019, compared with $188,000 for the same period in 2018.  QNB's allowance for loan losses of $9,015,000 represents 1.12% of loans receivable at March 31, 2019 compared with an allowance for loan losses of $8,834,000, or 1.12% of loans receivable, at December 31, 2018, and $8,037,000, or 1.07% of loans receivable at March 31, 2018. Management believes the allowance for loan losses at March 31, 2019 is adequate as of that date based on its analysis of known and inherent losses in the portfolio.

Net charge-offs for the first quarter of 2019 were $44,000 compared to net recoveries of $8,000 for the first quarter of 2018.  Charge-offs of approximately $82,000 during the quarter ended March 31, 2019 consisted of commercial loans secured by residential real estate of $31,000, overdraft charge-offs of $23,000, a home equity line of $16,000 and a student loan of $12,000.  These were partially offset by $38,000 in recoveries comprising $31,000 in repayments from borrowers of previously charged-off credits, and $7,000 related to overdraft recoveries.  For the quarter ended March 31, 2019, annualized net charge-offs as a percent of average loans were 0.02%, compared with average net recoveries as percentage of average loans of 0.00% for the same period in 2018.

44


QNB CORP. AND SUBSIDIARY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

 

 

Non-performing assets were $9,753,000 at March 31, 2019 compared to $9,638,000 as of December 31, 2018 and $8,327,000 as of March 31, 2018.  Total non-performing loans, which represent loans on non-accrual status, loans past due 90 days or more and still accruing interest and restructured loans, were 1.21% of loans receivable at March 31, 2019 compared with 1.23% of loans receivable at December 31, 2018 and 1.11% at March 31, 2018.  In cases where there is a collateral shortfall on non-accrual loans, specific impairment reserves have been established based on updated collateral values even if the borrower continues to pay in accordance with the terms of the agreement. At March 31, 2019, $2,770,000, or approximately 36% of the loans classified as non-accrual are current or past due less than 30 days. Loans classified as substandard or doubtful totaled $14,721,000, a decrease of $3,618,000, or 19.7%, from the $18,339,000 reported at December 31, 2018 and a decrease of $2,695,000, or 15.5%, from the $17,416,000 reported at March 31, 2018.

QNB had no loans past due 90 days or more and still accruing interest at March 31, 2019, December 31, 2018 or March 31, 2018. Total loans 30 days or more past due, which includes non-accrual loans by actual number of days delinquent, represented 0.99% of loans receivable at March 31, 2019 compared with 0.76% at December 31, 2018 and 0.96% at March 31, 2018.  

Troubled debt restructured loans, not classified as non-accrual loans or loans past due 90 days or more and accruing, were $2,047,000 at March 31, 2019, compared with $2,160,000 at December 31, 2018, and $1,274,000 at March 31, 2018. There was one newly identified troubled debt restructuring in the three months ended March 31, 2019, a non-accruing consumer loan. QNB had no other real estate owned or repossessed assets as of March 31, 2019, December 31, 2018, or March 31, 2018.  

 

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

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

 

 

 

March 31,

 

 

December 31,

 

 

March 31,

 

 

 

2019

 

 

2018

 

 

2018

 

Non-accrual loans

 

$

7,706

 

 

$

7,478

 

 

$

7,053

 

Loans past due 90 days or more and still accruing interest

 

 

 

 

 

 

 

 

 

Troubled debt restructured loans (not already included above)

 

 

2,047

 

 

 

2,160

 

 

 

1,274

 

Total non-performing loans

 

 

9,753

 

 

 

9,638

 

 

 

8,327

 

Total non-performing assets

 

$

9,753

 

 

$

9,638

 

 

$

8,327

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

Average total loans (YTD)

 

$

789,737

 

 

$

766,692

 

 

$

744,132

 

Total loans

 

 

804,528

 

 

 

785,448

 

 

 

750,187

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan losses

 

 

9,015

 

 

 

8,834

 

 

 

8,037

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan losses to:

 

 

 

 

 

 

 

 

 

 

 

 

Non-performing loans

 

 

92.43

%

 

 

91.66

%

 

 

96.52

%

Total loans (excluding held-for-sale)

 

 

1.12

%

 

 

1.12

%

 

 

1.07

%

Average total loans

 

 

1.14

%

 

 

1.15

%

 

 

1.08

%

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

1.21

%

 

 

1.23

%

 

 

1.11

%

Non-performing assets / total assets

 

 

0.81

%

 

 

0.82

%

 

 

0.71

%

45


QNB CORP. AND SUBSIDIARY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

 

 

 

An analysis of net loan recoveries for the three months ended March 31, 2019 compared to 2018 is as follows:

 

Three months ended March 31,

 

2019

 

 

2018

 

Net charge-offs/(recoveries)

 

$

44

 

 

$

(8

)

 

 

 

 

 

 

 

 

 

Net annualized charge-offs/(recoveries) to:

 

 

 

 

 

 

 

 

Total loans

 

 

0.02

%

 

 

0.00

%

Average total loans excluding held-for-sale

 

 

0.02

%

 

 

0.00

%

Allowance for loan losses

 

 

1.98

%

 

 

(0.40

%)

At March 31, 2019 and December 31, 2018, the recorded investment in loans for which impairment has been identified totaled $12,782,000 and $16,482,000 of which $8,753,000 and $11,763,000, respectively, required no specific allowance for loan loss. The recorded investment in impaired loans requiring an allowance for loan losses was $4,029,000 and $4,719,000 at March 31, 2019 and December 31, 2018, respectively, and the related allowance for loan losses associated with these loans was $1,709,000 and $1,664,000, respectively. Most of the loans that have been identified as impaired are collateral-dependent. See Note 8 to the Notes to Consolidated Financial Statements for additional detail of impaired loans.

NON-INTEREST INCOME

 

Non-Interest Income Comparison

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months

 

 

Change from

 

 

 

ended March 31,

 

 

prior year

 

 

 

2019

 

 

2018

 

 

Amount

 

 

Percent

 

Net gain on sales of investment securities

 

$

6

 

 

$

85

 

 

$

(79

)

 

 

-92.9

%

Unrealized gain (loss) on investment equity securities

 

 

976

 

 

 

(246

)

 

 

1,222

 

 

N/M

 

Fees for services to customers

 

 

393

 

 

 

421

 

 

 

(28

)

 

 

(6.7

)

ATM and debit card

 

 

470

 

 

 

430

 

 

 

40

 

 

 

9.3

 

Retail brokerage and advisory

 

 

141

 

 

 

103

 

 

 

38

 

 

 

36.9

 

Bank-owned life insurance

 

 

68

 

 

 

68

 

 

 

-

 

 

 

-

 

Merchant

 

 

75

 

 

 

74

 

 

 

1

 

 

 

1.4

 

Net gain on sale of loans

 

 

21

 

 

 

7

 

 

 

14

 

 

 

200.0

 

Other

 

 

159

 

 

 

125

 

 

 

34

 

 

 

27.2

 

Total

 

$

2,309

 

 

$

1,067

 

 

$

1,242

 

 

 

116.4

%

Quarter to Quarter Comparison

Total non-interest income for the first quarter of 2019 was $2,309,000, an increase of $1,242,000, compared to $1,067,000 for the first quarter of 2018. Excluding net gains and net unrealized gains (losses) on investment securities and the gain on sale of loans for both periods, total non-interest income was $1,306,000 and $1,221,000 for the quarters ended March 31, 2019 and 2018, respectively.

Net gains on investment securities decreased $79,000 from $85,000 in first quarter of 2018 to $6,000 in first quarter of 2019.  Gain on investments are primarily derived from sale of equity securities.  Net gains on sales of equity securities were $45,000 for the first quarter of 2019 compared to $86,000 for the same period in 2018.  The gains in 2019 were offset by losses on sales of lower yielding mortgage-backed and municipal securities as QNB reinvested proceeds in higher yielding securities and loan growth.  The adoption of Accounting Standard Update 2016-01 effective January 1, 2018 requires the Company to record unrealized gains or losses on equity securities through earnings, rather than in other comprehensive income (loss), a component of shareholders’ equity.  During the first quarter of 2019, unrealized gains of $976,000 were recorded compared to unrealized losses of $246,000 in the same period of 2018.  

QNB originates residential mortgage loans for sale in the secondary market.  Net gain on sale of loans increased $14,000 when comparing the two periods.  The net gain on residential mortgage sales is directly related to the volume of mortgages sold and the timing of the sales relative to the interest rate environment.  Residential mortgage loans to be sold are identified at origination.  Proceeds from the sale of residential mortgages were $675,000 and $605,000 for the first quarters of 2019 and 2018, respectively.

46


QNB CORP. AND SUBSIDIARY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

 

 

Fees for services to customers decreased $28,000, or 6.7%, to $393,000 at March 31, 2019, due primarily to a decrease in net overdraft income.  ATM and debit card income increased $40,000, or 9.3%, to $470,000 for the first quarter of 2019, compared to the same period in 2018, due to increases in card-based transactions and expansion of checking account households.  

QNB provides securities and advisory services under the name QNB Financial Services.  Retail brokerage and advisory increased $38,000, or 36.9%, to $141,000 for the first quarter of 2019 compared to the same period in 2018.   During 2018, there was a transition to move toward advanced advisory fees based on assets under management in lieu of fees per transaction; advisory fees increased $54,000, or 36.9% comparing 2019 to 2018, partially offset by a decline in transaction-based fees of $16,000.  

Other non-interest income increased $34,000, or 27.2%.  Other non-interest income included a $29,000 broker-dealer conversion cost reimbursement in the first quarter of 2019.  

NON-INTEREST EXPENSE

 

Non-Interest Expense Comparison

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months

 

 

Change from

 

 

 

ended March 31,

 

 

prior year

 

 

 

2019

 

 

2018

 

 

Amount

 

 

Percent

 

Salaries and employee benefits

 

$

3,781

 

 

$

3,345

 

 

$

436

 

 

 

13.0

%

Net occupancy

 

 

504

 

 

 

471

 

 

 

33

 

 

 

7.0

 

Furniture and equipment

 

 

557

 

 

 

487

 

 

 

70

 

 

 

14.4

 

Marketing

 

 

237

 

 

 

310

 

 

 

(73

)

 

 

(23.5

)

Third-party services

 

 

440

 

 

 

410

 

 

 

30

 

 

 

7.3

 

Telephone, postage and supplies

 

 

199

 

 

 

181

 

 

 

18

 

 

 

9.9

 

State taxes

 

 

171

 

 

 

170

 

 

 

1

 

 

 

0.6

 

FDIC insurance premiums

 

 

130

 

 

 

175

 

 

 

(45

)

 

 

(25.7

)

Other

 

 

704

 

 

 

629

 

 

 

75

 

 

 

11.9

 

Total

 

$

6,723

 

 

$

6,178

 

 

$

545

 

 

 

8.8

%

 

Quarter to Quarter Comparison

Total non-interest expense was $6,723,000 for the first quarter of 2019, an increase of $545,000, or 8.8%, compared to the first quarter of 2018.

Salaries and benefits comprise the largest component of non-interest expense. QNB monitors, through the use of various surveys, the competitive salary and benefit information in its markets and makes adjustments when appropriate.  Salaries and benefits expense increased $436,000, or 13.0%, to $3,781,000 when comparing the two quarters.  Salary expense and related payroll taxes increased $275,000, or 9.6%, to $3,126,000 during the first quarter 2019 compared to the same period in 2018.  Medical premiums, retirement plan expense and post-retirement life insurance benefit expense increased $135,000, $9,000, and $13,000, respectively during the same period.

Net occupancy and furniture and equipment expenses increased $33,000, or 7.0%, and $70,000, or 14.4%, respectively.  This is due to increased depreciation of building and equipment of $49,000, and increased building and software maintenance totaling $48,000 comparing the first quarter of 2019 with the same period in 2018.  Marketing expense decreased $73,000, or 23.5%, to $237,000 for the quarter ended March 31, 2019. There were an additional sponsorships and donations for the first quarter of 2018 compared to the same period in 2019.

Third party services are comprised of professional services, including legal, accounting, auditing and consulting services, as well as fees paid to outside vendors for support services of day-to-day operations. These support services include correspondent banking services, IT services, statement printing and mailing, investment security safekeeping and supply management services. Third party services expense increased $30,000 when comparing the two periods, due primarily to legal fees and IT services. Telephone and postage and supplies expenses increased $18,000, or 9.9%, due to increased postage usage and per item costs.  FDIC insurance premiums decreased $45,000, or 25.7%, due to a lower assessment rate for the current quarter.

47


QNB CORP. AND SUBSIDIARY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

 

 

INCOME TAXES

QNB utilizes an asset and liability approach for financial accounting and reporting of income taxes. As of March 31, 2019, QNB’s net deferred tax asset was $2,283,000. The primary components of deferred taxes are deferred tax assets of $1,893,000 relating to the allowance for loan losses and $966,000 related to unrealized losses on available for sale securities. As of December 31, 2018, QNB’s net deferred tax asset was $3,724,000. The primary difference in the balance of net deferred tax assets when comparing March 31, 2019 to December 31, 2018 is the decrease in deferred tax asset due to decreased unrealized losses on available for sale securities.

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

Applicable income tax expense was $817,000 for the quarter ended March 31, 2019 compared to $557,000 for the same period in 2018. The effective tax rate for first quarter of 2019 was 19.5% compared with 16.0% for the first quarter of 2018. This increase in effective tax rate in 2019 is due to the state income tax provision at the parent company related to the increase in unrealized gains on the equities portfolio.  

FINANCIAL CONDITION ANALYSIS

Financial service organizations are challenged to demonstrate they can generate sustainable and consistent earnings growth in a dynamic operating environment.  Rate competition for quality loans is anticipated to continue through 2019. It is also anticipated that the rate competition for attracting and retaining deposits will continue to increase in 2019, 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 March 31, 2019 were $1,203,126,000 compared with $1,175,452,000 at December 31, 2018.  Cash and cash equivalents increased $250,000 from $13,458,000 at December 31, 2018 to $13,708,000 at March 31, 2019, due primarily to growth in deposit balances and paydowns of amortizing mortgage-backed securities during the quarter.

The composition of the investment portfolio is essentially unchanged since December 31, 2018; however, QNB traded out lower-yielding municipal bonds for higher yielding mortgage-backed bonds.  The fixed-income securities portfolio represents a significant portion of QNB’s earning assets and is also a primary tool in liquidity and asset/liability management. QNB actively manages its fixed income portfolio to take advantage of changes in the shape of the yield curve and changes in spread relationships in different sectors and for liquidity purposes. Management continually reviews strategies that will result in an increase in the yield or improvement in the structure of the investment portfolio, including monitoring credit and concentration risk in the portfolio.  QNB owns one CDO in the form of a pooled trust preferred security, with a fair value of $112,000.  PreTSL IV represents the senior-most obligation of the trust.

Loans receivable grew $19,080,000, or 2.4%, with commercial loans increasing $19,802,000, or 3.1%, to $653,297,000 at March 31, 2019, compared with $633,495,000 at year-end 2018.  Retail loan balances at $151,011,000 remained essentially unchanged when comparing March 31, 2019 to December 31, 2018.

Deposits grew $19,016,000, or 1.9%, from December 31, 2018 to March 31, 2019.  Non-interest-bearing demand deposits grew $11,355,000, or 8.8%, to $139,970,000 at March 31, 2019 compared with $128,615,000 at year-end 2018, primarily due to growth in business deposits and is partially offset by decreases in commercial sweep accounts in short-term borrowings.   Interest-bearing demand balances, excluding municipal deposits, grew $3,965,000, or 1.9%, to $214,916,000, with the Rewards checking product providing the majority of the growth.  Deposit growth in money market balances was offset by reductions in savings account balances as balances were moved to higher-yielding accounts.  Time deposits decreased $1,069,000 from December 31, 2018 to March 31, 2019.  Municipal deposit balances increased $5,758,000, or 6.1%, to $99,459,000.  Municipal deposits can be volatile depending on the timing of deposits and withdrawals, and the cash flow needs of the school districts or municipalities.  It is anticipated that total deposits will decrease during the second quarter as tax money received from the local school districts during September flows out for

48


QNB CORP. AND SUBSIDIARY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

 

 

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.

Short-term borrowings decreased 1.9%, from $50,872,000 at December 31, 2018 to $49,897,000 at March 31, 2019. Commercial sweep accounts decreased $5,438,000, as these funds may be volatile based on businesses’ receipt and disbursement of funds and is offset by increases in business non-interest-bearing demand accounts.  Overnight borrowings from FHLB increased $4,463,000 to $8,328,000.

Finance lease liabilities of $1,878,000 resulted from the implementation FASB issued ASU 2016-02, Leases (Topic 842) effective January 1, 2019, as discussed in Note 2.   Offsetting this increase in liabilities is a right-of-use finance asset recorded in premises and equipment.

LIQUIDITY

Liquidity represents an institution’s ability to generate cash or otherwise obtain funds at reasonable rates to satisfy demand for loans and deposit withdrawals. QNB attempts to manage its mix of cash and interest-bearing balances, Federal funds sold and investment securities to match the volatility, seasonality, interest sensitivity and growth trends of its loans and deposits. The Company manages its liquidity risk by measuring and monitoring its liquidity sources and estimated funding needs. Liquidity is provided from asset sources through repayments and maturities of loans and investment securities. The portfolio of investment securities classified as available for sale and QNB's policy of selling certain residential mortgage originations in the secondary market also provide sources of liquidity. Core deposits and cash management repurchase agreements have historically been the most significant funding source for 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 March 31, 2019, the Bank had a maximum borrowing capacity with the FHLB of approximately $310,559,000, net of the $8,328,000 in overnight borrowings and a $350,000 letter of credit at March 31, 2019. The maximum borrowing depends upon qualifying collateral assets and QNB’s asset quality and capital adequacy.  In addition, the Bank maintains unsecured Federal funds lines with three correspondent banks totaling $51,000,000. At March 31, 2019, there were no outstanding borrowings under these lines.  During the first quarter of 2019, 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, available-for-sale and equity investment securities, and loans held-for-sale have increased $1,457,000 since December 31, 2018, totaling $368,557,000 at March 31, 2019. Growth in deposits since year-end 2018 has been used to fund loans. Management expects these liquid sources will be adequate to meet normal fluctuations in loan demand or deposit withdrawals. The investment portfolio is expected to continue to provide sufficient liquidity, even in a rising rate environment, as municipal bonds are called or mature and cash flow on mortgage-backed and CMO securities continues to be steady.

Approximately $197,625,000 and $194,573,000 of available-for-sale debt securities at March 31, 2019 and December 31, 2018, respectively, were pledged as collateral for repurchase agreements and deposits of public funds. The level of pledged securities corresponds with the municipal deposit and repurchase agreement balances.

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

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 March 31, 2019 was $110,360,000, or 9.17% of total assets, compared with shareholders' equity of $104,348,000, or 8.88% of total assets, at December 31, 2018. Shareholders’ equity at March 31, 2019 and December 31, 2018 included a negative adjustment of $3,632,000 and $7,132,000, respectively, related to unrealized holding losses, net of taxes, on

49


QNB CORP. AND SUBSIDIARY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

 

 

investment securities available-for-sale. Without these adjustments, shareholders' equity to total assets would have been 9.45% and 9.43% at March 31, 2019 and December 31, 2018, respectively.

Average shareholders' equity and average total assets were $113,304,000 and $1,187,374,000 for the quarter ended March 31, 2019, an increase of 8.1% and 2.0%, respectively, from the averages for the three months ended March 31, 2018. The ratio of average total equity to average total assets was 9.5% for the quarter ended March 31, 2019 compared to 9.0% for the same period in 2018. 

Retained earnings at March 31, 2019 were impacted by three months of net income totaling $3,379,000 partially offset by dividends declared and paid of $1,151,000 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 $235,000 to capital during the quarter ended March 31, 2019.  

The Board of Directors has authorized the repurchase of up to 100,000 shares of its common stock in open market or privately negotiated transactions. The repurchase authorization does not bear a termination date. As of March 31, 2019, 57,883 shares were repurchased under this authorization at an average price of $16.97 and a total cost of $982,000.  There have been no additional shares repurchased under the plan since the first quarter of 2009.

QNB and the Bank are subject to various regulatory capital requirements as issued by Federal regulatory authorities. Regulatory capital is defined in terms of Tier 1 capital and Tier 2 capital. Risk-based capital ratios are expressed as a percentage of risk-weighted assets. Risk-weighted assets are determined by assigning various weights to all assets and off-balance sheet arrangements, such as letters of credit and loan commitments, based on associated risk. The final rules implementing the Basel Committee on Banking Supervision’s capital guidelines for U.S. banks (Basel III) became effective for QNB on January 1, 2015, with full compliance with all of the final rule’s requirements phased in over a multi-year schedule, and were fully phased-in 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 increased each subsequent year by an additional 0.625% until reaching its final level of 2.5% on January 1, 2019.  Strict eligibility criteria for regulatory capital instruments were also implemented.  The final rules also revised the definition and calculation of Tier 1 capital, Total Capital, and risk-weighted assets. QNB and the Bank have sufficient capital to meet minimum regulatory capital requirements plus the fully phased-in capital conservation buffer.

The following table sets forth consolidated information for QNB Corp.

 

 

 

March 31,

 

 

December 31,

 

Capital Analysis

 

2019

 

 

2018

 

Regulatory Capital

 

 

 

 

 

 

 

 

Shareholders' equity

 

$

110,360

 

 

$

104,348

 

Net unrealized securities losses, net of tax

 

 

3,632

 

 

 

7,132

 

Deferred tax assets on net operating loss

 

 

(29

)

 

 

 

Disallowed intangible assets

 

 

(8

)

 

 

(8

)

Common equity tier I capital

 

 

113,955

 

 

 

111,472

 

 

 

 

 

 

 

 

 

 

Tier I capital

 

 

113,955

 

 

 

111,472

 

Allowable portion: Allowance for loan losses and reserve

   for unfunded commitments

 

 

9,088

 

 

 

8,907

 

Total regulatory capital

 

$

123,043

 

 

$

120,379

 

Risk-weighted assets

 

$

946,340

 

 

$

911,374

 

Quarterly average assets for leverage capital purposes

 

$

1,187,337

 

 

$

1,186,448

 

 

50


QNB CORP. AND SUBSIDIARY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

 

 

 

 

March 31,

 

 

December 31,

 

Capital Ratios

 

2019

 

 

2018

 

Common equity tier I capital / risk-weighted assets

 

 

12.04

%

 

 

12.23

%

Tier I capital / risk-weighted assets

 

 

12.04

%

 

 

12.23

%

Total regulatory capital / risk-weighted assets

 

 

13.00

%

 

 

13.21

%

Tier I capital / average assets (leverage ratio)

 

 

9.60

%

 

 

9.40

%

 

At March 31, 2019, common equity Tier I, Tier I capital, and total regulatory capital ratios decreased from December 31, 2018, due to increased risk-weighted assets, primarily loans and unused loan commitments.  The Company remains well-capitalized by all applicable regulatory requirements as of March 31, 2019.

MARKET RISK MANAGEMENT

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

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

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

A balance sheet is considered liability sensitive when its liabilities (deposits and borrowings) reprice faster or than its earning assets (loans and securities). A liability sensitive balance sheet will produce relatively less net interest income when interest rates rise and more net interest income when they decline. Based on our simulation analysis, management believes QNB’s interest sensitivity position at March 31, 2019 is liability sensitive. Management expects that market interest rates will continue with gradual increases 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 March 31, 2019 and 2018 assuming instantaneous rate shocks, and consistent levels of assets and liabilities.  Net interest income for the subsequent twelve months is projected to decrease when interest rates are higher than current rates.

 

Estimated Change in Net Interest Income

 

Changes in Interest rates

 

March 31,

 

(in basis points)

 

2019

 

 

2018

 

+300

 

 

-4.86

%

 

 

-6.32

%

+200

 

 

-3.11

%

 

 

-4.10

%

+100

 

 

-1.42

%

 

 

-1.90

%

-100

 

 

-0.71

%

 

 

-1.78

%

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

Changes in interest rates can cause substantial changes in the 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.

51


QNB CORP. AND SUBSIDIARY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

 

 

QNB is not subject to foreign currency exchange or commodity price risk. At March 31, 2019, QNB did not have any hedging transactions in place such as interest rate swaps, caps or floors.

 

52


 

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.

 

 

53


 

QNB CORP. AND SUBSIDIARY

PART II. OTHER INFORMATION

MARCH 31, 2019

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, 2018.

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

QNB did not repurchase any shares of its common stock during the quarter ended March 31, 2019. The following provides certain information relating to QNB's stock repurchase plan.

 

Period

 

Total Number of

Shares Purchased

 

 

Average Price

Paid per Share

 

 

Total Number of

Shares

Purchased as

Part of Publicly

Announced

Plan

 

 

Maximum

Number of

Shares that

may yet be

Purchased

Under the Plan

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

January 1, 2019 through January 31, 2019

 

 

 

 

 

 

 

 

 

 

 

42,117

 

February 1, 2019 through February 28, 2019

 

 

 

 

 

 

 

 

 

 

 

42,117

 

March 1, 2019 through March 31, 2019

 

 

 

 

 

 

 

 

 

 

 

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.

 

 

54


 

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.

 

 

55


 

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:         May 8, 2019          

By:

 

/s/ David W. Freeman

 

 

 

David W. Freeman

 

 

 

Chief Executive Officer

 

 

 

 

Date:         May 8, 2019          

By:

 

/s/ Janice McCracken Erkes

 

 

 

Janice McCracken Erkes

 

 

 

Chief Financial Officer

 

 

 

 

Date:         May 8, 2019          

By:

 

/s/ Mary E. Liddle

 

 

 

Mary E. Liddle

 

 

 

Chief Accounting Officer, QNB Bank