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QNB CORP - Annual Report: 2022 (Form 10-K)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-K

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the fiscal year ended December 31, 2022

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)

 

Registrant's Telephone Number, Including Area Code (215) 538-5600

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

 

Title of each class                                                                Trading Symbol                                         Name of each exchange on which registered                          

               Common Stock                                                                 QNBC                                                                    N/A

 

Securities registered pursuant to Section 12(g) of the Act:

Common Stock

Title of class

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined by Rule 405 of the Securities Act.    Yes      No  

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes      No  

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, 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 new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.  

If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements.  

Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-l(b).  

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

As of February 28, 2023, 3,588,262 shares of common stock of the registrant were outstanding. As of June 30, 2022 the aggregate market value of the common stock of the registrant held by non-affiliates was approximately $85,934,731 based upon the average bid and asked prices of the common stock as reported on the OTC BB.


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DOCUMENTS INCORPORATED BY REFERENCE

Portions of registrant’s Proxy Statement for the annual meeting of its shareholders to be held May 23, 2023 are incorporated by reference in Part III of this report.

 

 

 


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FORM 10-K INDEX

 

PART I

 

PAGE

 

 

 

Item 1

Business

4

 

 

 

Item 1A

Risk Factors

11

 

 

 

Item 1B

Unresolved Staff Comments

14

 

 

 

Item 2

Properties

15

 

 

 

Item 3

Legal Proceedings

15

 

 

 

Item 4

Mine Safety Disclosures

15

 

 

 

PART II

 

 

 

 

Item 5

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

16

 

 

 

Item 7

Management’s Discussion and Analysis of Financial Condition and Results of Operations

18

 

 

 

Item 7A

Quantitative and Qualitative Disclosures about Market Risk

47

 

 

 

Item 8

Financial Statements and Supplementary Data

49

 

 

 

Item 9

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

97

 

 

 

Item 9A

Controls and Procedures

97

 

 

 

Item 9B

Other Information

97

 

 

 

PART III

 

 

 

 

Item 10

Directors, Executive Officers and Corporate Governance

98

 

 

 

Item 11

Executive Compensation

98

 

 

 

Item 12

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

98

 

 

 

Item 13

Certain Relationships and Related Transactions, and Director Independence

99

 

 

 

Item 14

Principal Accounting Fees and Services

99

 

 

 

PART IV

 

 

 

 

Item 15

Exhibits, Financial Statement Schedules

100

 

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PART I

FORWARD-LOOKING STATEMENTS

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

Shareholders should note that many factors, some of which are discussed elsewhere in this document and in the documents that are incorporated by reference, could affect the future financial results of QNB Corp. and its subsidiary and could cause those results to differ materially from those expressed in the forward-looking statements contained or incorporated by reference in this document. These factors include, but are not limited to, the following:

 

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 Corp.’s business;

 

The effects of unforeseen external events, including acts of terrorism, acts of war or other events involving armed conflict in other countries, natural disasters, and pandemics, including the COVID-19 Pandemic; and

 

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

QNB Corp. (herein referred to as “QNB” or the “Company”) 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 Annual Report on Form 10-K, 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.

 

 

ITEM 1. BUSINESS

Overview

QNB was incorporated under the laws of the Commonwealth of Pennsylvania on June 4, 1984. QNB is registered with the Board of Governors of the Federal Reserve System as a bank holding company under the Bank Holding Company Act of 1956 and conducts its business through its wholly-owned subsidiary, QNB Bank (the “Bank”).

Prior to December 28, 2007, the Bank was a national banking association organized in 1877 as The Quakertown National Bank, was chartered under the National Banking Act and was subject to Federal and state laws applicable to national banks. Effective December 28, 2007, the Bank became a Pennsylvania chartered commercial bank and changed its name to QNB Bank. The Bank, whose principal office is located in Quakertown, Bucks County, Pennsylvania, operated twelve full-service community banking offices in Bucks, Montgomery and Lehigh counties in southeastern Pennsylvania as of December 31, 2022.

The Bank is engaged in the general commercial banking business and provides a full range of banking services to its customers. These banking services consist of, among other things, attracting deposits and using these funds in making commercial loans, residential mortgage loans, consumer loans, and purchasing investment securities. These deposits are in the form of time, demand and savings accounts. Time deposits include certificates of deposit and individual retirement accounts. The Bank’s demand and savings accounts include money market accounts, interest-bearing demand accounts (including a higher yielding checking account), club accounts, traditional statement savings accounts, and a higher yielding online savings account.

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At December 31, 2022, QNB had total assets of $1,668,497,000, total loans receivable of $1,039,385,000, total deposits of $1,418,369,000 and total shareholders’ equity of $70,958,000. For the year ended December 31, 2022, QNB reported net income of $15,921,000 compared to net income for the year ended December 31, 2021 of $16,492,000 and December 31, 2020 of $12,083,000.

At February 16, 2023, the Bank had 190 full-time employees and eight part-time employees. The Bank’s employees have a customer-oriented philosophy emphasizing personal service and flexible solutions which together make achieving our customers’ goals possible. They maintain close contact with both the residents and local business people in the communities in which they serve, responding to changes in market conditions and customer requests in a timely manner.

Competition and Market Area

The banking business is highly competitive, and the profitability of QNB depends principally upon the Bank’s ability to compete in its market area. QNB faces intense competition within its market, both in making loans and attracting deposits. Bucks, Lehigh, and Montgomery counties have a high concentration of financial institutions, including large national and regional banks, community banks, savings institutions and credit unions. Some of QNB’s competitors offer products and services that QNB currently does not offer, such as traditional trust services and full-service insurance.

In addition, as a result of consolidation in the banking industry, some of QNB’s competitors may enjoy advantages such as greater financial resources, a wider geographic presence, more favorable pricing alternatives and lower origination and operating costs. However, QNB has been able to compete effectively with other financial institutions by emphasizing the establishment of long-term relationships and customer loyalty. A strong focus on small-business solutions, providing fast local decision-making on loans, exceptional personal customer service and technology solutions, including internet- and mobile-banking, electronic bill pay and remote deposit capture, also enable QNB to compete successfully.

Competition for loans and deposits comes principally from commercial banks, savings institutions, credit unions and non-bank financial service providers. Factors in successfully competing for deposits include providing excellent customer service, convenient locations and hours of operation, attractive rates, low fees, and alternative delivery systems. One such delivery system is remote deposit capture for those commercial customers that are not conveniently located near one of our branches, or mobile banking for retail customers. Successful loan origination tends to depend not only on interest rate and terms of the loan but also on being responsive and flexible to the customers’ needs. While many competitors within the Bank’s primary market have substantially higher legal lending limits, QNB often has the ability, through loan participations, to meet the larger lending needs of its customers.

QNB’s success is dependent to a significant degree on economic conditions in southeastern Pennsylvania, especially Bucks, Lehigh and Montgomery counties, which it defines as its primary market. The banking industry is affected by general economic conditions, including the effects of recession, unemployment, declining real estate values, inflation, changes interest rates, trends in the national and global economies, and other factors beyond QNB’s control.

Monetary Policy and Economic Conditions

The business of financial institutions is affected not only by general economic conditions, but also by the policies of various governmental regulatory agencies, including the Board of Governors of the Federal Reserve (the “Federal Reserve”). The Federal Reserve regulates money, credit conditions and interest rates to influence general economic conditions primarily through open market operations in U.S. government securities, changes in the discount rate on bank borrowings and changes in the reserve requirements against depository institutions’ deposits. These policies and regulations significantly affect the overall growth and distribution of loans, investments and deposits, as well as the interest rates charged on loans and the interest rates paid on deposits.

The monetary policies of the Federal Reserve have had a significant effect on the operating results of financial institutions in the past and are expected to continue to have significant effects in the future. In view of the changing conditions in the economy and the financial markets in addition to the activities of monetary and fiscal authorities, the prediction of future changes in interest rates, credit availability or deposit levels is very challenging.

Supervision and Regulation

Banks and bank holding companies operate in a highly-regulated environment and are regularly examined by Federal and state regulatory authorities. Federal statutes that apply to QNB and its subsidiary include the Bank Holding Company Act of 1956 (“BHCA”), the Federal Reserve Act and the Federal Deposit Insurance Act (“FDIA”), as those statutes have been significantly amended by recent laws such as the Dodd-Frank Wall Street Reform and Consumer Protection Act the “Dodd-Frank Act”), the Gramm-Leach-Bliley Act (“GLBA”), and others. In general, these statutes regulate the corporate governance of the Bank and eligible business activities of QNB and impose certain restrictions and limitations on such important matters as mergers and acquisitions, intercompany transactions, loans and dividends, and capital adequacy, among others. Other corporate governance requirements are imposed on QNB by Federal securities and other laws, including the Sarbanes-Oxley Act, described later.

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The Company is under the jurisdiction of the Securities and Exchange Commission and of state securities commissions for matters relating to the offering and sale of its securities. In addition, the Company is subject to the Securities and Exchange Commission’s rules and regulations relating to periodic reporting, proxy solicitation and insider trading.

Set forth below is a brief summary of some of the significant regulatory concepts and laws that affect QNB and the Bank. To the extent that the following information describes statutory or regulatory provisions, it is qualified in its entirety by references to the particular statutory or regulatory provisions themselves. Proposals to change banking laws and regulations are frequently introduced in Congress, the state legislatures, and before the various bank regulatory agencies. QNB cannot determine the likelihood of passage or timing of any such proposals or legislation or the impact they may have on QNB and its subsidiary. A change in law, regulations or regulatory policy may have a material effect on QNB and its subsidiary.

Bank Holding Company Regulation

QNB is registered as a bank holding company and is subject to the regulations of the Federal Reserve under the BHCA. In addition, QNB Corp., as a Pennsylvania business corporation, is subject to the Pennsylvania Business Corporation Law of 1988 (the “BCL”), as amended, and to certain provisions of the Pennsylvania Banking Code of 1965, as amended (the “Banking Code”).

Bank holding companies are required to file periodic reports with, and are subject to examination by, the Federal Reserve. The Federal Reserve’s regulations require a bank holding company to serve as a source of financial and managerial strength to its subsidiary banks. As a result, the Federal Reserve, pursuant to its “source of strength” regulations, may require QNB to commit its resources to provide adequate capital funds to the Bank during periods of financial distress or adversity.

Federal Reserve approval may be required before QNB may begin to engage in any non-banking activity and before any non-banking business may be acquired by QNB.

Regulatory Restrictions on Dividends

Dividend payments made by the Bank to the Company are subject to the Pennsylvania Banking Code, the FDIA, and the regulations of the Federal Deposit Insurance Corporation (“FDIC”). Under the Banking Code, no dividends may be paid except from “accumulated net earnings” (generally retained earnings). The Federal Reserve and the FDIC have formal and informal policies which provide that insured banks and bank holding companies should generally pay dividends only out of current operating earnings, with some exceptions. Under the FDIA, the Bank is prohibited from paying any dividends, making other distributions or paying any management fees if, after such payment, it would fail to satisfy its minimum capital requirements. See also “Supervision and Regulation – Bank Regulation”.

In addition to the dividend restrictions described above, the banking regulators have the authority to prohibit or to limit the payment of dividends by the Bank if, in the banking regulator’s opinion, payment of a dividend would constitute an unsafe or unsound practice in light of the financial condition of the Bank.

Under Pennsylvania law, QNB may not pay a dividend, if, after giving effect thereto, it would be unable to pay its debts as they become due in the usual course of business and, after giving effect to the dividend, the total assets of QNB would be less than the sum of its total liabilities plus the amount that would be needed, if QNB were to be dissolved at the time of distribution, to satisfy the preferential rights upon dissolution of shareholders whose rights are superior to those receiving the dividend.

It is also the policy of the Federal Reserve that a bank holding company generally only pay dividends out of net income over the past year and only if the prospective rate of earnings retention appears consistent with a bank holding company’s capital needs, asset quality, and overall financial condition. In the current financial and economic environment, the Federal Reserve has indicated that bank holding companies should carefully review their dividend policy and has discouraged dividend pay-out ratios at the 100% level unless both asset quality and capital are very strong. A bank holding company also should not maintain a dividend level that places undue pressure on the capital of such institution’s subsidiaries, or that may undermine the bank holding company’s ability to serve as a source of strength for such subsidiaries.

The minimum capital requirements implemented by Basel III, and described below under “Capital Adequacy,” also introduced a capital conservation buffer, comprised of common equity Tier 1 capital, above a banking institution’s minimum risk-based capital requirements in an amount greater than 2.5% of total risk-weighted assets in order to avoid limitations on certain distributions, including dividend payments. Under the restrictions applicable to the Bank, to remain “well capitalized,” the Bank had approximately $30,162,000 available for payment of dividends to the Company at December 31, 2022.

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Capital Adequacy

In July 2013, the Federal bank regulatory agencies adopted revisions to the agencies’ capital adequacy guidelines and prompt corrective action rules, which were designed to enhance such requirements and implement the revised standards of the Basel Committee on Banking Supervision, commonly referred to as Basel III. The rules generally implemented higher minimum capital requirements, added a new common equity Tier 1 capital requirement, and established criteria that instruments must meet to be considered common equity Tier 1 capital, additional Tier 1 capital or Tier 2 capital. Tier 1 capital consists principally of common shareholders’ equity, plus retained earnings, less certain intangible assets. Tier 2 capital includes the allowance for loan and lease losses (up to 1.25 percent of risk-weighted assets), qualifying preferred stock, subordinated debt, and qualifying Tier 2 minority interests.   The current minimum capital requirements are a common equity Tier 1 capital ratio of 4.5%, a Tier 1 capital ratio of 6.0%, and a total capital ratio of 8.0%. In addition, in order to avoid limitations on certain capital distributions (including dividend payments and certain discretionary bonus payments to executive officers), as of January 1, 2019, a banking organization must hold a capital conservation buffer comprised of common equity Tier 1 capital above its minimum risk-based capital requirements in an amount greater than 2.5% of total risk-weighted assets.  At December 31, 2022, QNB’s Tier 1 capital, total capital (Tier 1 and Tier 2 combined) and common equity Tier 1 equity ratios were 12.33%, 13.19%, and 12.33%, respectively.

In addition to the risk-based capital guidelines, the Federal Reserve requires a bank holding company to maintain a minimum leverage ratio. This requires a minimum level of Tier 1 capital (as determined under the risk-based capital rules) to average total consolidated assets of 4% for those bank holding companies that have the highest regulatory examination ratings and are not contemplating or experiencing significant growth or expansion. The Federal Reserve expects all other bank holding companies to maintain a ratio of at least 1% to 2% above the stated minimum. At December 31, 2022, QNB’s leverage ratio was 8.75%.

During 2018, the FRB raised the threshold of its "Small Bank Holding Company" exemption to the application of consolidated capital requirements for qualifying small bank holding companies from $1 billion to $3 billion of consolidated assets. Consequently, qualifying bank holding companies having less than $3 billion of consolidated assets are not subject to the consolidated capital requirements unless otherwise directed by the FRB.

Under the Economic Growth, Regulatory Relief, and Consumer Protection Act enacted in May 2018, federal banking agencies adopted the community bank leverage ratio (“CBLR”) framework available to depository institutions having less than $10 billion in total assets and meeting certain other qualifying criteria. The CBLR rules provide that qualifying community banking organizations that adopt the CBLR framework and that maintain a CBLR in excess of 9% will be considered to have met the generally applicable leverage and risk-based capital requirements under the banking agencies’ capital rules and the capital ratio requirements necessary to be considered “well capitalized.” QNB has not elected to use the CBLR framework at this time.

Pursuant to the prompt corrective action provisions of the FDIA, the Federal banking agencies have specified, by regulation, the levels at which an insured institution is considered well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, or critically undercapitalized. Under these regulations, an institution is considered well capitalized if it satisfies each of the following requirements:

 

Total risk-based capital ratio of 10% or more.

 

Tier 1 risk-based capital ratio of 8% or more.

 

Common equity tier 1 risk-based capital ratio of 6.5% or more.

 

Leverage ratio of 5% or more, and

 

Not subject to any order or written directive to meet and maintain a specific capital level

At December 31, 2022 and 2021, the Bank qualified as well capitalized under these regulatory standards. See Note 20 of the Notes to Consolidated Financial Statements included in Item 8 of this Report for additional information. 

Bank Regulation

As a Pennsylvania-chartered insured commercial bank, the Bank is subject to extensive regulation and examination by the Pennsylvania Department of Banking and Securities (the “Department”) and by the FDIC, which insures its deposits to the maximum extent permitted by law.

The Federal and state laws and regulations applicable to banks regulate, among other things, the scope of their business, their investments, the reserves required to be kept against deposits, the timing of the availability of deposited funds, the nature and amount of collateral for certain loans, the activities of a bank with respect to mergers and consolidations, and the establishment of branches. The laws and regulations governing the Bank generally have been promulgated to protect depositors and not for the purpose of

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protecting QNB’s shareholders. This regulatory structure also gives the Federal and state banking agencies extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes. Any change in such regulation, whether by the Department, the FDIC or the United States Congress, could have a material impact on the Company, the Bank and their operations.

As a subsidiary bank of a bank holding company, the Bank is subject to certain restrictions imposed by the Federal Reserve Act on extensions of credit to QNB, on investments in the stock or other securities of QNB, and on taking such stock or securities as collateral for loans.

FDIC Insurance Assessments

The Bank’s deposits are insured to the applicable limits as determined by the FDIC, which is currently $250,000 per depositor.  Under the FDIC's risk-based assessment system, deposit insurance assessments are based on each insured institution's total assets less tangible equity, thereby basing deposit insurance assessments on an institution’s total liabilities, not only insured deposits. Small banks (generally, those with less than $10 billion in assets) are assigned an individual rate based on a formula using financial data and CAMELS (capital adequacy, asset quality, management, earnings, liquidity, and sensitivity) ratings. A bank’s assessment is calculated by multiplying its individual assessment rate by its assessment base (average consolidated total assets less average tangible equity), determined quarterly.

For the years ended December 31, 2022, 2021 and 2020, the Bank recorded $768,000, $793,000, and $569,000, respectively, in FDIC deposit insurance premium expense.

Federal Home Loan Bank System

The Bank is a member of the Federal Home Loan Bank of Pittsburgh (“FHLB”), which is one of 11 regional Federal Home Loan Banks. Each Federal Home Loan Bank serves as a reserve or central bank for members within its assigned region. It is funded primarily from funds deposited by member institutions and proceeds from the sale of consolidated obligations of the Federal Home Loan Bank System. It makes loans to members (i.e. advances) in accordance with policies and procedures established by the board of directors of the Federal Home Loan Bank. At December 31, 2022 the Bank had $92,018,000 in overnight FHLB advances outstanding and $10,000,000 in long-term debt.

The Bank is required to purchase and maintain stock in the FHLB as a condition of membership in an amount equal to 0.10% of its assets. In addition, each member is required to purchase and maintain activity-based stock of 4% of outstanding advances from the FHLB. At December 31, 2022, the Bank had $5,181,000 in stock of the FHLB.

Community Reinvestment Act

Under the Community Reinvestment Act (“CRA”) as amended, the FDIC is required to assess all financial institutions that it regulates to determine whether these institutions are meeting the credit needs of the communities that they serve. The CRA focuses specifically on low- and moderate-income neighborhoods.

An institution’s record is considered during the evaluation of any application made by such institutions for, among other things:

 

Approval of a branch or other deposit facility;

 

An office relocation or a merger; and

 

Any acquisition of bank shares.

The CRA also requires that the regulatory agency make publicly available the evaluation of the Bank’s record of meeting the credit needs of its entire community, including low- and moderate-income neighborhoods. This evaluation includes a descriptive rating of either outstanding, satisfactory, needs to improve, or substantial noncompliance, and a statement describing the basis for the rating. The Bank’s most recent CRA rating was “Satisfactory”.

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USA Patriot Act

The USA Patriot Act strengthens the anti-money laundering provisions of the Bank Secrecy Act. The Act requires financial institutions to establish certain procedures to be able to identify and verify the identity of its customers. Specifically, the Bank must have procedures in place to:

 

Verify the identity of persons applying to open an account;

 

Ensure adequate maintenance of the records used to verify a person’s identity; and

 

Determine whether a person is on any U.S. government agency list of known or suspected terrorists or a terrorist organization.

Sarbanes-Oxley Act of 2002

The Sarbanes-Oxley Act is intended to bolster public confidence in the nation’s capital markets by imposing new duties and penalties for non-compliance on public companies and their executives, directors, auditors, attorneys and securities analysts. Some of the more significant aspects of the Act as it relates to QNB include:

 

Corporate Responsibility for Financial Reports - requires Chief Executive Officers (“CEOs”) and Chief Financial Officers (“CFOs”) to certify certain matters relating to a company’s financial records and accounting and internal controls.

 

Management Assessment of Internal Controls - requires auditors to certify the company’s underlying controls and processes that are used to compile the financial results for companies that are accelerated filers.

 

Real-time Issuer Disclosures - requires that companies provide real-time disclosures of any events that may affect the company’s stock price or financial performance, generally within a 48-hour period.

 

Criminal Penalties for Altering Documents - provides severe penalties for “whoever knowingly alters, destroys, mutilates” any record or document with intent to impede an investigation. Penalties include monetary fines and prison time.

The Act also imposes requirements for corporate governance, auditor independence, accounting standards, audit committee member independence and increased authority, executive compensation, insider loans and whistleblower protection. As a result of the Act, QNB adopted a Code of Business Conduct and Ethics applicable to its CEO, CFO and Controller, which meets the requirements of the Act, to supplement its long-standing Code of Ethics, which applies to all directors and employees.

QNB’s Code of Business Conduct and Ethics can be found on the Bank’s website at QNBBank.com.

Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank Act”)

The Dodd-Frank Act was enacted on July 21, 2010. This law made significant changes to the bank regulatory structure and affects the lending, deposit, investment, trading and operating activities of financial institutions and their holding companies.

The Dodd-Frank Act created a new Consumer Financial Protection Bureau (“CFPB”) with broad powers to supervise and enforce consumer protection laws. The CFPB has broad rule-making authority for a wide range of consumer protection laws that apply to all banks and savings institutions, including the authority to prohibit “unfair, deceptive or abusive” acts and practices. The CFPB has examination and enforcement authority over all banks and savings institutions with more than $10 billion in assets. Banks and savings institutions with $10 billion or less in assets such as the Bank will continue to be examined for compliance with the consumer laws by their primary bank regulators. The Dodd-Frank Act also weakened the Federal preemption rules that had been applicable for national banks and Federal savings associations and gave state attorneys general the ability to enforce Federal consumer protection laws.

Many of the provisions of the Dodd-Frank Act do not apply to the Bank, as it does not engage in many of the specific activities sought to be regulated by the Dodd-Frank Act. Many of the provisions, however, such as increased capital requirements and changes to FDIC insurance premiums already implemented, affected all banking entities. In addition, the financial crisis of 2008 and the enactment of the Dodd-Frank Act in response to that crisis has resulted in an era of increased regulatory oversight over all financial entities. The ultimate changes resulting from the Dodd-Frank Act may impact the profitability of our business activities, require changes to certain of our business practices, impose upon us more stringent capital, liquidity and leverage ratio requirements or otherwise adversely affect our business. These changes may also require us to invest significant management attention and resources to evaluate and make necessary changes in order to comply with new statutory and regulatory requirements.


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Possible Future Legislation

Congress is often considering some financial industry legislation, and the Federal banking agencies routinely propose new regulations. The Company cannot predict the future effect any new legislation, or new rules adopted by Federal or state banking agencies, will have on the business of the Company and its subsidiaries.  The Company expects that there will be legislative and regulatory actions that may materially affect the banking industry in the foreseeable future.

Additional Information

QNB’s principal executive offices are located at 320 West Broad Street, Quakertown, Pennsylvania. Its telephone number is (215) 538-5600.

QNB also makes its periodic and current reports available, including this annual report for Form 10-K, free of charge, on its website, QNBBank.com, as soon as reasonably practicable after such material is electronically filed with the SEC. Information available on the website is not a part of, and should not be incorporated into, this annual report on Form 10-K.  In addition, the SEC maintains a website that contains reports, proxy and information statements and other information regarding registrants, including QNB, that file electronically with the SEC which can be accessed at SEC.gov.

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ITEM 1A. RISK FACTORS

The following discusses risks that management believes are specific to our business and could have a negative impact on QNB’s financial performance. When analyzing an investment in QNB, the risks and uncertainties described below, together with all of the other information included or incorporated by reference in this report, should be carefully considered. This list should not be viewed as comprehensive and may not include all risks that may affect the financial performance of QNB.

Our net interest income, net income and results of operations are sensitive to fluctuations in interest rates.

QNB’s profitability is largely a function of the spread between the interest rates earned on earning assets and the interest rates paid on deposits and other interest-bearing liabilities. Like most financial institutions, QNB’s net interest income and margin will be affected by general economic conditions and other factors, including fiscal and monetary policies of the Federal government, that influence market interest rates and QNB’s ability to respond to changes in such rates. At any given time, QNB’s assets and liabilities may be such that they are affected differently by a change in interest rates. As a result, an increase or decrease in rates, the length of loan terms or the mix of adjustable- and fixed-rate loans or investment securities in QNB’s portfolio could have a positive or negative effect on its net income, capital and liquidity. Although management believes it has implemented strategies and guidelines to reduce the potential effects of adverse changes in interest rates on results of operations, any substantial and prolonged change in market interest rates could affect operating results negatively.

We are subject to credit risk in connection with our lending activities, and our financial condition and results of operations may be negatively affected by economic conditions and other factors that could adversely affect our customers.

As a lender, QNB is exposed to the risk that its borrowers may be unable to repay their loans and that the current market value of any collateral securing the payment of their loans may not be sufficient to assure repayment in full. Credit losses are inherent in the lending business and could have a material adverse effect on the operating results of QNB. Adverse changes in the economy or business conditions, either nationally or in QNB’s market areas, could increase credit-related losses and expenses and/or limit growth. Substantially all of QNB’s loans are to businesses and individuals in its limited geographic area and any economic decline in this market could impact QNB adversely. QNB makes various assumptions and judgments about the collectability of its loan portfolio and provides an allowance for loan losses based on a number of factors. If these assumptions are incorrect, the allowance for loan losses may not be sufficient to cover losses and may cause QNB to increase the allowance in the future by increasing the provision for loan losses, thereby having an adverse effect on operating results. QNB has adopted underwriting and credit monitoring procedures and credit policies that management believes are appropriate to control these risks; however, such policies and procedures may not prevent unexpected losses that could have a material adverse effect on QNB’s financial condition or results of operations.

A deterioration in regional or national economic conditions may adversely affect our financial condition and results of operations.

QNB primarily provides banking services to customers located in the Bucks, Lehigh and Montgomery Counties in Pennsylvania. Adverse effects of a regional economic downturn could affect QNB’s ability to attract deposits and qualified loans.  Economic factors impacting the local economy with this region, such as a decline in real estate values, unemployment, natural disasters, or the effects of armed conflict in other parts of the world, including present armed conflicts in Ukraine, may have a negative impact on credit-worthiness of customers, the value of collateral, and customers’ ability to repay loans, which would result in write-downs, increases in non-performing loans, and a decline in QNB’s financial performance measurements.  Unlike larger banks that are more geographically diversified, we provide banking and financial services locally and therefore are more affected by adverse local economic conditions.

Similarly, potential adverse effects of any national economic downturn or concerns with the stability of the financial markets could lead to lack of consumer confidence, increased market volatility, and a general reduction in business activity.  Such events may result in increased regulation of the financial services industry and increased compliance costs; greater difficulty in assessing the creditworthiness of customers and increased credit risk; greater difficulty in originating loans that meet our underwriting criteria; liquidity issues to the extent that it becomes more difficult to borrow from third parties, including other financial institutions; and limitations on growth.

We face significant competition from other banks and financial institutions in our market area, many of which are larger in terms of asset size and market capitalization.

The financial services industry is highly competitive, with competition for attracting and retaining deposits and making loans coming from other banks and savings institutions, credit unions, mutual fund companies, insurance companies and other non-bank businesses. Many of QNB’s competitors are much larger in terms of total assets and market capitalization, have a higher lending limit, have greater access to capital and funding, and offer a broader array of financial products and services. In light of this, QNB’s ability to continue to compete effectively is dependent upon its ability to maintain and build relationships by delivering top quality service. Competition within the financial services industry also impacts QNB’s ability to attract and retain low-cost deposits which could impact QNB’s liquidity.  Lowering loan rates and increasing deposit rates compresses the interest rate margin and profitability.

- 11 -


At December 31, 2022, our lending limit per borrower was approximately $22,486,000. Accordingly, the size of loans that we may offer to potential borrowers (without participation by other lenders) is less than the size of loans that many of our competitors with larger capitalization are able to offer. Our legal lending limit also impacts the efficiency of our lending operation because it tends to lower our average loan size, which means we have to generate a higher number of transactions to achieve the same portfolio volume. We may engage in loan participations with other banks for loans in excess of our legal lending limit. However, there can be no assurance that such participations will be available or on terms which are favorable to us and our customers.

Our results of operations may be adversely affected by other-than-temporary impairment charges relating to our debt securities.

QNB purchases U.S. Government and U.S. Government agency debt securities, U.S. Government agency issued mortgage-backed securities or collateralized mortgage obligation securities, obligations of states and municipalities and corporate debt securities. QNB is exposed to the risk that the issuers of these debt securities may experience significant deterioration in credit quality which could impact the market value of such issuer’s securities. QNB periodically evaluates its debt securities to determine if market value declines are other-than-temporary. Once a decline is determined to be other-than-temporary, the value of the security is reduced and a corresponding charge to earnings is recognized for the credit related portion of the impairment.

Our results of operations may be adversely affected by fair value declines in our investments in equity securities.

The Company’s investment in marketable equity securities primarily consists of investments in large cap stock companies. Changes in fair value are recorded in unrealized gain/(losses) in non-interest income These equity securities are carried at fair value. QNB had 12 equity securities with unrealized losses of approximately $1,204,000 at December 31, 2022. The severity and duration of the fair value declines are consistent with current stock market developments.

At December 31, 2022, the Bank had $5,181,000 in capital stock of the FHLB and $12,000 in capital stock of ACBB. These equity securities are restricted in that they can only be sold back to the respective institutions or another member institution at par. Therefore, they are less liquid than other tradable equity securities, their fair value is equal to amortized cost, and no impairment write-downs have been recorded on these securities.

Our assets at December 31, 2022 included a deferred tax asset and we may not be able to realize the full benefit of that asset.

As of December 31, 2022, QNB had a net deferred tax asset of $23,077,000. Our ability to realize these tax benefits ultimately depends on the existence of sufficient taxable income of the appropriate character (ordinary income or capital gains) within the applicable carryback and carryforward periods provided under the tax law. Estimating whether the deferred tax asset will be realized requires us to exercise significant judgment and is inherently uncertain because it requires the prediction of future occurrences. The deferred tax asset may be reduced in the future if estimates of future income, our tax planning strategies, or tax rate changes resulting from Federal tax reform do not support the amount of the deferred tax asset. If it is determined in the future that a valuation allowance of the deferred tax asset is necessary, we may incur a charge to earnings and a reduction to regulatory capital for the amount included in any such allowance.

A disruption in components of our business infrastructure resulting from financial or technological difficulties of our third- party vendors on which we rely could adversely affect our business.

Third parties provide key components of our business infrastructure, such as Internet connections, software platforms and network access. Any disruption in Internet, network access or other voice or data communication services provided by these third parties or any failure of these third parties to handle current or higher volumes of use could adversely affect the ability to deliver products and services to clients and otherwise to conduct business. Disruptions or failures in the business infrastructure or operating systems that support our business and customers, or cyber-attacks or security breaches of the networks, systems, or devices that our customers use to access our products and services, could damage our reputation, cause us to incur additional expenses, result in losses, or subject us to regulatory sanctions or additional regulatory scrutiny, any of which could adversely affect our results of operations or financial condition.

Our failure to properly or timely utilize effective technologies to deliver our products and services, or a systems failure or breach of network security with respect to our information systems could adversely affect our business.

The market for financial services is increasingly affected by advances in technology, including developments in telecommunications, data processing, computers, automation, Internet-based banking and mobile banking. Our ability to compete successfully in our markets may depend on the extent to which we are able to exploit such technological changes. However, we can provide no assurance that we will be able to properly or timely anticipate or implement such technologies or properly train our staff to use such technologies. Any failure to adapt to new technologies could adversely affect our business, financial condition or operating results.

- 12 -


In addition, we rely heavily on our information systems to conduct business. Maintaining and protecting those systems is difficult and expensive, as is dealing with any failure, interruption or breach in security of these systems, whether due to acts or omissions by us or by a third party and whether intentional or not. Any such failure, interruption or breach could result in failures or disruptions in our customer relationship management or our information systems. The policies, procedures and technical safeguards we have in place to prevent or limit the effect of any failure, interruption or security breach of our information systems may be insufficient to prevent or remedy the effects of any such event. Moreover, as cyber threats continue to evolve, we may be required to expend significant additional resources to modify or enhance our protective measures relating to information security.  The occurrence of any failures, interruptions or security breaches of our information systems could damage our reputation, cause us to incur additional expenses, result in losses, or subject us to regulatory sanctions or additional regulatory scrutiny, any of which could adversely affect our business, financial condition or operating results.

Changes in accounting standards applicable to us could materially impact how we report our financial condition and results of operations.

Our accounting policies and methods are fundamental to how we record and report our financial condition and results of operations. From time to time the FASB changes the financial accounting and reporting standards that govern the preparation of our financial statements.

These changes can be hard to predict and can materially impact how we record and report our financial condition and results of operations. In some cases, we could be required to apply a new or revised standard retroactively, resulting in our restating prior period financial statements. Management believes the current financial statements are prepared in accordance with U.S. generally accepted accounting principles.

 

We operate in a highly regulated environment and are subject to examination and supervision by bank regulatory agencies, which could have an adverse impact on our operations or increase the cost of our operations.  

 

We operate in a highly regulated environment and are subject to extensive examination by the Board of Governors of the Federal Reserve System, the FDIC, and the Pennsylvania Department of Banking and Securities.  The bank regulatory agencies exercise broad discretion in connection with their supervisory and enforcement activities. Federal and state banking laws and regulations are designed primarily to protect depositors, the deposit funds, and consumers, and not necessarily shareholders of a financial institution.  Banking regulations or the activities of bank regulatory agencies may, for example, limit a financial institution’s growth and potential shareholder returns by restricting certain activities such as the payment of dividends, expansion of branch offices, and acquisition activities.

  

The significant laws and regulations that govern our activities are described under “Item 1 - Description of Business” in this Form 10-K.  These laws and regulations, along with existing tax, accounting, securities, and monetary laws, regulations, standards, policies, and interpretations control the manner in which financial institutions conduct business.  Such laws, regulations, standards, policies, and interpretations are constantly evolving and may change significantly over time.  The potential exists for additional federal or state laws or regulations, or new policies or interpretations by regulatory agencies having jurisdiction over our activities, to affect many aspects of our operations, including capital requirements, lending and funding practices, and liquidity standards.  Additional laws, regulations or other regulatory requirements, or any substantial change in regulation and oversight, may have a material impact on our operations by increasing our cost of regulatory compliance and of doing business and otherwise affecting our operations, and may significantly affect the markets in which we do business, the markets for and value of our investments, the fees we charge and our ongoing operations, costs and profitability.

 

If we lose the availability of wholesale funding we may be unable to support interest-earning asset growth, which could adversely impact our operating results and liquidity.

Management periodically uses wholesale funding sources to support loan demand and deposit withdrawals and to provide sufficient liquidity.  Wholesale funding primarily is made up of borrowings from the FHLB but may also include unsecured Federal funds from correspondent banks, Federal advances and wholesale certificates of deposit.

If wholesale funding becomes unavailable, QNB may need to reduce interest-earning asset growth through production reduction, sale of assets, or participating out future and current loans; this could adversely impact future net income.  A termination or change in borrowings from the FHLB, the Federal Reserve or correspondent banks may have an adverse effect on our liquidity and operating results.

- 13 -


Our disclosure controls and procedures and our internal control over financial reporting may not achieve their intended objectives.

Management diligently reviews and updates its internal controls, disclosure controls and procedures, and corporate governance policies and procedures. Our disclosure controls and procedures are designed to reasonably assure that information required to be disclosed by QNB in reports filed or submitted under the Exchange Act is accumulated and communicated to management, and recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. Management believes that any disclosure controls and procedures or internal controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Any undetected circumvention of these controls could have a material adverse impact on QNB’s financial condition and results of operations.

These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by an unauthorized override of the controls. Accordingly, because of the inherent limitations in our control system, misstatements due to error or fraud may occur and not be detected.

We may not be able to attract and retain highly qualified personnel to execute our business strategy.

Our success depends upon the ability to attract and retain highly motivated, well-qualified personnel. We face significant competition in the recruitment of qualified employees. Our ability to execute our business strategy and provide high-quality service may suffer if we are unable to recruit or retain a sufficient number of qualified employees or if the costs of employee compensation or benefits increase substantially. QNB currently has employment agreements and/or change of control agreements with six of its senior officers.

Acts of terrorism and other external events, including natural disasters, national or global health emergencies, and events of armed conflict in other countries, could impact our ability to do business or otherwise adversely affect our business, operations or financial condition.

Financial institutions have been, and continue to be, targets of terrorist threats aimed at compromising operating and communications systems.  Such events could cause significant damage, impact the stability of our facilities, result in additional expenses, and impair the ability of our borrowers to repay their loans. Although we have established and regularly test disaster recovery procedures, the occurrence of any such event could have a material adverse effect on our business, operations, and financial condition. In addition, other external events, including natural disasters, health emergencies and epidemics or pandemics, such as the COVID-19 pandemic, and events of armed conflict in other parts of the world, such as the present armed conflict involving Ukraine and Russia, could adversely affect the global or regional economies resulting in unfavorable economic conditions in the United States. Any of such developments could have an adverse effect on our business, operations or financial condition.

 

 

 

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

- 14 -


ITEM 2. PROPERTIES

The principal office of both QNB Bank and QNB Corp. is located at 15 North Third Street, Quakertown, Pennsylvania. QNB Bank conducts business from its principal office and eleven other branch offices located in Bucks, Lehigh, and Montgomery Counties in Pennsylvania. QNB Bank owns its principal office, three branch locations, its administrative and operations facility and a computer facility. QNB Bank leases its remaining eight branch properties. The leases on the properties generally contain renewal options. In management’s opinion, these properties are in good condition and are currently adequate for QNB’s purposes.

The following table details QNB Bank’s properties:

Location

 

 

Quakertown, PA – Downtown Branch (Principal Office) - 15 North Third Street

Owned

 

Quakertown, PA – Towne Bank Center - 320-322 West Broad Street      

Owned

 

Quakertown, PA – Computer Center - 121 West Broad Street      

Owned

 

Quakertown, PA – Country Square Branch - 240 South West End Boulevard      

Owned

 

Quakertown, PA – Quakertown Commons Branch - 901 South West End Boulevard      

Leased

 

Dublin, PA – Dublin Branch - 161 North Main Street      

Leased

 

Pennsburg, PA – Upper Perkiomen Valley Branch - 410 Pottstown Avenue      

Leased

 

Coopersburg, PA – Coopersburg Branch - 51 South Third Street      

Owned

 

Perkasie, PA – Perkasie Branch - 607 Chestnut Street      

Owned

 

Souderton, PA – Souderton Branch - 750 Route 113      

Leased

 

Wescosville, PA – Wescosville Branch - 950 Mill Creek Road      

Leased

 

Colmar, PA – Colmar Branch - 127 Bethlehem Pike      

Owned

 

Warminster, PA – Warminster Branch - 1402 West Street Road      

Leased

 

Allentown, PA – Allentown Branch - 535 N. 19th Street     

Leased

 

Although there are currently no material proceedings to which QNB is the subject, future litigation that arises during the normal course of QNB’s business could be material and have a negative impact on QNB’s earnings. Future litigation also could adversely impact the reputation of QNB in the communities that it serves.

ITEM 4. MINE SAFETY DISCLOSURES

None.

 

- 15 -


 

PART II

 

ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Stock Information

QNB common stock is quoted on the over-the-counter bulletin board (“OTCBB”). QNB had approximately 631 shareholders of record as of February 28, 2023.

The following table sets forth the high and low bid and ask stock prices for QNB common stock on a quarterly basis during 2022 and 2021. These prices reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash

 

 

 

High

 

 

Low

 

 

dividend

 

 

 

Bid

 

 

Ask

 

 

Bid

 

 

Ask

 

 

per share

 

2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

First Quarter

 

$

37.54

 

 

$

38.25

 

 

$

35.80

 

 

$

36.00

 

 

$

0.36

 

Second Quarter

 

 

36.27

 

 

 

36.90

 

 

 

26.80

 

 

 

27.25

 

 

 

0.36

 

Third Quarter

 

 

30.50

 

 

 

31.00

 

 

 

26.01

 

 

 

27.00

 

 

 

0.36

 

Fourth Quarter

 

 

26.90

 

 

 

29.50

 

 

 

25.50

 

 

 

26.24

 

 

 

0.36

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

First Quarter

 

$

34.60

 

 

$

36.50

 

 

$

31.02

 

 

$

32.00

 

 

$

0.35

 

Second Quarter

 

 

38.00

 

 

 

39.97

 

 

 

34.00

 

 

 

34.69

 

 

 

0.35

 

Third Quarter

 

 

37.01

 

 

 

39.50

 

 

 

35.41

 

 

 

35.70

 

 

 

0.35

 

Fourth Quarter

 

 

36.77

 

 

 

36.98

 

 

 

35.86

 

 

 

35.90

 

 

 

0.35

 

 

QNB has traditionally paid quarterly cash dividends on the last Friday of each quarter. The Company expects to continue the practice of paying quarterly cash dividends to its shareholders; however, future dividends are dependent upon future earnings, financial condition, appropriate legal restrictions, and other factors relevant at the time the board of directors considers declaring a dividend. Certain laws restrict the amount of dividends that may be paid to shareholders in any given year. See “Shareholders’ Equity - Capital Adequacy” included in Item 7 of this Form 10-K filing and Note 20 of the Notes to Consolidated Financial Statements included in Item 8 of this Form 10-K filing, for additional information that discusses and quantifies this regulatory restriction.

The following table provides information on repurchases by QNB of its common stock in each month of the quarter ended December 31, 2022.

 

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

 

October 1, 2022 through October 31, 2022

 

 

 

 

$

 

 

 

 

 

 

98,000

 

November 1, 2022 through November 30, 2022

 

 

 

 

 

 

 

 

 

 

 

98,000

 

December 1, 2022 through December 31, 2022

 

 

 

 

 

 

 

 

 

 

 

98,000

 

Total

 

 

 

 

$

 

 

 

 

 

 

98,000

 

 

(1)

Transactions are reported as of settlement dates.

(2)

QNB’s current stock repurchase plan was originally approved by its Board of Directors and announced on January 24, 2008 and subsequently increased on February 9, 2009 and April 27, 2021.

(3)

The total number of shares approved for repurchase under QNB’s current stock repurchase plan is 200,000 as of the filing of this Form 10-K.

(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.

- 16 -


Stock Performance Graph

Set forth below is a performance graph comparing the yearly cumulative total shareholder return on QNB’s common stock with:

 

the yearly cumulative total shareholder return on stocks included in the NASDAQ Composite Index, a broad market index;

 

the yearly cumulative total shareholder return on the S&P US SmallCap Banks Index, a group encompassing publicly traded banking companies trading on the NYSE or NASDAQ with an average market capitalization of $1.8 billion (individually ranging from $129 million to $13.3 billion); and

 

the yearly cumulative total shareholder return on the S&P U.S. BMI Banks - Mid-Atlantic Bank Index, a group encompassing publicly traded banking companies trading on the NYSE, AMEX, or NASDAQ headquartered in Delaware, District of Columbia, Maryland, New Jersey, New York, Pennsylvania, and Puerto Rico.

 

All of these cumulative total returns are computed assuming the reinvestment of dividends at the frequency with which dividends were paid during the applicable years.

 

 

 

 

 

Period Ending

 

Index

 

12/31/17

 

 

12/31/18

 

 

12/31/19

 

 

12/31/20

 

 

12/31/21

 

 

12/31/22

 

QNB Corp.

 

 

100.00

 

 

 

89.22

 

 

 

92.78

 

 

 

80.47

 

 

 

93.92

 

 

 

72.01

 

NASDAQ Composite Index

 

 

100.00

 

 

 

97.16

 

 

 

132.81

 

 

 

192.47

 

 

 

235.15

 

 

 

158.65

 

S&P U.S. SmallCap Banks Index

 

 

100.00

 

 

 

83.44

 

 

 

104.69

 

 

 

95.08

 

 

 

132.36

 

 

 

116.69

 

S&P U.S. BMI Banks - Mid-Atlantic Region Index

 

 

100.00

 

 

 

85.44

 

 

 

121.49

 

 

 

109.82

 

 

 

138.70

 

 

 

117.14

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Source:  S&P Global Market Intelligence© 2023

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

- 17 -


 

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Results of Operations – Overview

QNB Corp. (“QNB” or the “Company”) earns its net income primarily through its subsidiary, QNB Bank (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. QNB 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. Due to its limited geographic area, comprised principally of Bucks, Lehigh and Montgomery counties, 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.

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

The following table displays five years of  selected financial amounts and ratios for the QNB:

 

Year ended December 31,

 

2022

 

 

2021

 

 

2020

 

 

2019

 

 

2018

 

Income and expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

$

44,497

 

 

$

42,127

 

 

$

37,248

 

 

$

36,294

 

 

$

35,015

 

Provision for loan losses

 

 

(850

)

 

 

458

 

 

 

1,250

 

 

 

1,300

 

 

 

1,130

 

Non-interest income

 

 

5,731

 

 

 

9,781

 

 

 

7,602

 

 

 

8,317

 

 

 

4,892

 

Non-interest expense

 

 

31,492

 

 

 

30,997

 

 

 

28,955

 

 

 

28,104

 

 

 

25,885

 

Net income

 

 

15,921

 

 

 

16,492

 

 

 

12,083

 

 

 

12,357

 

 

 

11,335

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Share and Per Share Data

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income - basic

 

$

4.47

 

 

$

4.64

 

 

$

3.42

 

 

$

3.53

 

 

$

3.27

 

Net income - diluted

 

 

4.47

 

 

 

4.64

 

 

 

3.42

 

 

 

3.53

 

 

 

3.25

 

Book value

 

 

19.78

 

 

 

38.41

 

 

 

37.80

 

 

 

34.30

 

 

 

29.95

 

Cash dividends

 

 

1.44

 

 

 

1.40

 

 

 

1.36

 

 

 

1.32

 

 

 

1.28

 

Average common shares outstanding - basic

 

 

3,564,481

 

 

 

3,553,949

 

 

 

3,537,323

 

 

 

3,498,326

 

 

 

3,463,450

 

Average common shares outstanding - diluted

 

 

3,564,481

 

 

 

3,554,138

 

 

 

3,537,360

 

 

 

3,504,150

 

 

 

3,482,509

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance Sheet at Year-end

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment securities

 

$

558,581

 

 

$

704,770

 

 

$

448,495

 

 

$

358,874

 

 

$

353,642

 

Loans receivable

 

 

1,039,385

 

 

 

926,470

 

 

 

920,042

 

 

 

820,616

 

 

 

785,448

 

Allowance for loan losses

 

 

(10,531

)

 

 

(11,184

)

 

 

(10,826

)

 

 

(9,887

)

 

 

(8,834

)

Other earning assets

 

 

1,242

 

 

 

4,196

 

 

 

25,909

 

 

 

5,210

 

 

 

570

 

Total assets

 

 

1,668,497

 

 

 

1,673,340

 

 

 

1,440,229

 

 

 

1,225,023

 

 

 

1,175,452

 

Deposits

 

 

1,418,369

 

 

 

1,449,745

 

 

 

1,228,067

 

 

 

1,037,860

 

 

 

1,015,598

 

Borrowed funds

 

 

171,327

 

 

 

78,476

 

 

 

68,838

 

 

 

55,931

 

 

 

50,872

 

Shareholders' equity

 

 

70,958

 

 

 

136,494

 

 

 

134,445

 

 

 

120,717

 

 

 

104,348

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selected Financial Ratios

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest margin

 

 

2.71

%

 

 

2.79

%

 

 

2.92

%

 

 

3.16

%

 

 

3.13

%

Net income as a percentage of:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average total assets

 

 

0.93

 

 

 

1.04

 

 

 

0.90

 

 

 

1.02

 

 

 

0.96

 

Average shareholders' equity

 

 

10.90

 

 

 

12.19

 

 

 

9.76

 

 

 

10.58

 

 

 

10.47

 

Average shareholders' equity to average total assets

 

 

8.54

 

 

 

8.53

 

 

 

9.21

 

 

 

9.63

 

 

 

9.20

 

Dividend payout ratio

 

 

32.24

 

 

 

30.15

 

 

 

39.82

 

 

 

37.39

 

 

 

39.12

 

Net income for the year ended December 31, 2022 was $15,921,000, or $4.47 per share on a diluted basis. This compares to 2021 net income of $16,492,000, or $4.64 per share on a diluted basis and 2020 net income of $12,083,000, or $3.42 per share on a diluted basis. Two important measures of profitability in the banking industry are an institution’s return on average assets and return on average shareholders’ equity.  Return on average assets was 0.93%, 1.04% and 0.90% in 2022, 2021, and 2020, respectively, and return on average shareholders’ equity was 10.90%, 12.19% and 9.76%, respectively, during those same periods.

- 18 -


The Bank contributed $16,445,000 to net income for the year ended December 31, 2022 compared to $14,607,000 for the same period in 2021; whereas the holding company reduced consolidated net income with a loss of $524,000 for the year ended December 31, 2022 compared to a contribution of $1,885,000 for the same period in 2021.  The decrease at the holding company resulted primarily from a decrease in gains on sales of equity securities and a decrease in the fair value of the equity portfolio during 2022.

 

2022 versus 2021

 

The results for 2022 include the following significant components:

 

Net interest income increased $2,370,000, or 5.63%, to $44,497,000 for 2022.

 

 

The net interest margin on a tax-equivalent basis decreased eight basis points to 2.71% for 2022 from 2.79% for 2021.

 

 

Provision for loan losses was a credit of $850,000 for 2022, compared with expense of $458,000 for 2021.

 

 

Non-interest income for 2022 was $5,731,000, a decrease of $4,050,000, or 41.4%, compared with 2021.

 

 

Non-interest expense for 2022 was $31,492,000, an increase of $495,000, or 1.6%, compared with 2021.

 

 

The fair value of the investment securities declined $145,835,000, or 21.1% from December 31, 2021.  

 

 

Loans receivable grew $112,915,000, or 12.2%, from December 31, 2021.

 

 

Deposits decreased $31,376,000, or 2.2%, from December 31, 2021.    

 

 

Total non-performing loans, which represent loans on non-accrual status, loans past due 90 days or more and still accruing interest, and restructured loans, were $9,121,000, or 0.88% of total loans receivable at December 31, 2022, compared with $11,672,000, or 1.26% of total loans receivable at December 31, 2021.  Loans on non-accrual status were $4,820,000 at December 31, 2022 compared with $7,530,000 at December 31, 2021.  Net recoveries for 2022 were $197,000, or 0.02% of average total loans, as compared with net charge-offs of $100,000, or 0.01% of average total loans for 2021.

 

2021 versus 2020

 

The results for 2021 include the following significant components:

 

Net interest income increased $4,879,000, or 13.1%, to $42,127,000 for 2021.

 

 

The net interest margin on a tax-equivalent basis decreased 13 basis points to 2.79% for 2021 from 2.92% for 2020.

 

 

Provision for loan losses totaled $458,000 for 2021, compared with $1,250,000 for 2020.

 

 

Non-interest income for 2021 was $9,781,000, an increase of $2,179,000, or 28.7%, compared with 2020.

 

 

Non-interest expense for 2021 was $30,997,000, an increase of $2,042,000, or 7.1%, compared with 2020.

 

 

Investment securities grew $256,275,000, or 57.1% from December 31, 2020.  

 

 

Loans receivable grew $6,428,000, or 0.7%, from December 31, 2020.

 

 

Deposits increased $221,678,000, or 18.1%, from December 31, 2020.    

 

 

Total non-performing loans, which represent loans on non-accrual status, loans past due 90 days or more and still accruing interest, and restructured loans, were $11,672,000, or 1.26% of total loans receivable at December 31, 2021, compared with $14,109,000, or 1.53% of total loans receivable at December 31, 2020.  Loans on non-accrual status were $7,530,000 at December 31, 2021 compared with $9,640,000 at December 31, 2020.  Net charge-offs for 2021 were $100,000, or 0.01% of average total loans, as compared with $311,000, or 0.04% of average total loans for 2020.

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

- 19 -


Net Interest Income

The following table presents the adjustment to convert net interest income to net interest income on a fully taxable equivalent basis for the years ended December 31, 2022, 2021, and 2020.

 

Year ended December 31,

 

2022

 

 

2021

 

 

2020

 

Total interest income

 

$

52,421

 

 

$

46,770

 

 

$

43,693

 

Total interest expense

 

 

7,924

 

 

 

4,643

 

 

 

6,445

 

Net interest income

 

 

44,497

 

 

 

42,127

 

 

 

37,248

 

Tax-equivalent adjustment

 

 

713

 

 

 

706

 

 

 

691

 

Net interest income (tax-equivalent basis)

 

$

45,210

 

 

$

42,833

 

 

$

37,939

 

 

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 and interest-bearing balances at the Federal Reserve Bank (Fed). 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 table that appears 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 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.

2022 versus 2021

On a tax-equivalent basis, net interest income for 2022 increased $2,377,000, or 5.5%, to $45,210,000. The net interest margin, which decreased eight basis points to 2.71% was unfavorably impacted by increased rates on deposits and short-term borrowings.  The average rate earned on earning assets increased nine basis points from 3.09% for 2021 to 3.18% for 2022 with the yield on investments increasing 14 basis points and the yield on loans increasing 11 basis points.  The yield on investment securities was favorably impacted by increased yields on all categories except state and municipal securities, causing an increase in interest income of $1,296,000; additionally, the yield was favorably impacted by an increase in average volume of $130,234,000 contributing to a $1,758,000 increase in interest income.  The yield on loans was favorably impacted by increased rates in all loan categories except tax-exempt loans, contributing to a net $1,410,000 increase in interest income.  This was also favorably impacted by a $35,456,000 net increase in average volume, of which $80,201,000 was related to an increase in average commercial real estate loans, contributing $3,327,000 in interest income; partially offset by a decrease of $47,912,000 in commercial and industrial loans average balances, resulting in a decrease of $2,275,000 in interest income.  The yield on total average interest-bearing liabilities increased 21 basis points from 0.39% for 2021 to 0.60% for 2022.  The growth in loans and investment securities was funded by a $101,316,000, or 7.5%, increase in average total deposits and by a $14,218,000, or 19.8%, increase in short-term borrowings.  The average rate paid on interest-bearing deposits increased from 0.38% to 0.57% for the same time periods, respectively, contributing to an increase in interest expense of $2,489,000, and a $95,049,000 increase in average interest-bearing deposits resulting in additional interest expense of $189,000.  The average rate paid on short-term borrowings increased from 0.36% to 1.00% for the same time periods, respectively, contributing to an increase in interest expense of $552,000.

Loan and deposit growth was partially offset by the competitive local interest rate market for quality loans and deposits.  Net interest spread decreased 12 basis points to 2.58% for 2022 compared to 2.70% for 2021.  

2021 versus 2020

On a tax-equivalent basis, net interest income for 2021 increased $4,894,000, or 12.9%, to $42,833,000. The net interest margin, which decreased 13 basis points to 2.79% was unfavorably impacted by decreased rates on loans and investments.  The average rate earned on earning assets decreased 33 basis points from 3.42% for 2020 to 3.09% for 2021 with the yield on investments decreasing 35 basis points and the yield on loans decreasing nine basis points.  The yield on investment securities was unfavorably impacted by decreased yields on all categories except corporate debt securities, causing a reduction in interest income of $2,145,000; this was favorable offset by an increase in average volume of $175,018,000 contributing to a $3,528,000 increase in interest income.  The yield on loans was unfavorably impacted by decreased rates in all loan categories except commercial and industrial loans, contributing to a $994,000 decline in interest income; this was favorably offset by a $59,997,000 net increase in average volume, of which $70,591,000 was related to an increase in average commercial real estate loans, contributing $2,727,000 in interest income.  The yield on total average interest-bearing liabilities decreased 24 basis points from 0.63% for 2020 to 0.39% for 2021.  The growth in loans and investment securities was funded by a $208,689,000, or 18.1%, increase in average total deposits.  The average rate paid on interest-bearing deposits decreased from 0.63% to 0.38% for the same time periods, respectively, contributing to a decrease in interest expense of $2,051,000, partially offset by a $159,075,000 increase in average interest-bearing deposits resulting in additional interest expense of $215,000.

 


- 20 -


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

 

 

 

2022

 

 

2021

 

 

2020

 

 

 

Average

 

 

Average

 

 

 

 

 

 

Average

 

 

Average

 

 

 

 

 

 

Average

 

 

Average

 

 

 

 

 

 

 

balance

 

 

rate

 

 

Interest

 

 

balance

 

 

rate

 

 

Interest

 

 

balance

 

 

rate

 

 

Interest

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment securities (AFS &  Equities):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury

 

$

524

 

 

 

1.18

%

 

$

6

 

 

$

 

 

 

0.00

%

 

$

 

 

$

 

 

 

0.00

%

 

$

 

U.S. Government agencies

 

 

101,455

 

 

 

1.10

 

 

 

1,119

 

 

 

80,340

 

 

 

1.05

 

 

 

842

 

 

 

64,517

 

 

 

1.38

 

 

 

891

 

State and municipal

 

 

128,126

 

 

 

2.39

 

 

 

3,056

 

 

 

112,011

 

 

 

2.47

 

 

 

2,765

 

 

 

65,824

 

 

 

3.08

 

 

 

2,027

 

Mortgage-backed and CMOs

 

 

447,369

 

 

 

1.58

 

 

 

7,059

 

 

 

351,801

 

 

 

1.29

 

 

 

4,540

 

 

 

242,039

 

 

 

1.61

 

 

 

3,908

 

Corporate debt

 

 

6,673

 

 

 

4.37

 

 

 

291

 

 

 

7,291

 

 

 

4.01

 

 

 

292

 

 

 

7,450

 

 

 

3.69

 

 

 

275

 

Equities

 

 

12,011

 

 

 

3.32

 

 

 

399

 

 

 

14,481

 

 

 

3.02

 

 

 

437

 

 

 

11,076

 

 

 

3.54

 

 

 

392

 

Total investment securities

   (AFS & Equities)

 

 

696,158

 

 

 

1.71

 

 

 

11,930

 

 

 

565,924

 

 

 

1.57

 

 

 

8,876

 

 

 

390,906

 

 

 

1.92

 

 

 

7,493

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

 

637,023

 

 

 

4.20

 

 

 

26,759

 

 

 

556,822

 

 

 

4.15

 

 

 

23,098

 

 

 

486,231

 

 

 

4.46

 

 

 

21,662

 

Residential real estate

 

 

104,397

 

 

 

3.34

 

 

 

3,484

 

 

 

95,241

 

 

 

3.41

 

 

 

3,244

 

 

 

77,077

 

 

 

3.79

 

 

 

2,922

 

Home equity loans

 

 

56,155

 

 

 

4.38

 

 

 

2,459

 

 

 

57,311

 

 

 

3.29

 

 

 

1,886

 

 

 

61,493

 

 

 

3.79

 

 

 

2,328

 

Commercial and industrial

 

 

145,579

 

 

 

5.10

 

 

 

7,432

 

 

 

193,491

 

 

 

4.75

 

 

 

9,189

 

 

 

205,566

 

 

 

4.02

 

 

 

8,273

 

Consumer loans

 

 

4,512

 

 

 

5.63

 

 

 

254

 

 

 

5,097

 

 

 

4.98

 

 

 

254

 

 

 

5,959

 

 

 

5.28

 

 

 

314

 

Tax-exempt loans

 

 

19,778

 

 

 

3.42

 

 

 

676

 

 

 

24,026

 

 

 

3.47

 

 

 

835

 

 

 

35,665

 

 

 

3.57

 

 

 

1,274

 

Total loans, net of unearned

   income*

 

 

967,444

 

 

 

4.24

 

 

 

41,064

 

 

 

931,988

 

 

 

4.13

 

 

 

38,506

 

 

 

871,991

 

 

 

4.22

 

 

 

36,773

 

Other earning assets

 

 

5,782

 

 

 

2.42

 

 

 

140

 

 

 

36,715

 

 

 

0.26

 

 

 

94

 

 

 

34,254

 

 

 

0.34

 

 

 

118

 

Total earning assets

 

 

1,669,384

 

 

 

3.18

 

 

 

53,134

 

 

 

1,534,627

 

 

 

3.09

 

 

 

47,476

 

 

 

1,297,151

 

 

 

3.42

 

 

 

44,384

 

Cash and due from banks

 

 

13,803

 

 

 

 

 

 

 

 

 

 

 

23,408

 

 

 

 

 

 

 

 

 

 

 

19,654

 

 

 

 

 

 

 

 

 

Allowance for loan losses

 

 

(11,287

)

 

 

 

 

 

 

 

 

 

 

(11,157

)

 

 

 

 

 

 

 

 

 

 

(10,443

)

 

 

 

 

 

 

 

 

Other assets

 

 

38,549

 

 

 

 

 

 

 

 

 

 

 

38,749

 

 

 

 

 

 

 

 

 

 

 

37,622

 

 

 

 

 

 

 

 

 

Total assets

 

$

1,710,449

 

 

 

 

 

 

 

 

 

 

$

1,585,627

 

 

 

 

 

 

 

 

 

 

$

1,343,984

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and Shareholders' Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing deposits:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing demand

 

$

345,054

 

 

 

0.27

%

 

$

933

 

 

$

307,258

 

 

 

0.20

%

 

$

624

 

 

$

252,050

 

 

 

0.26

%

 

$

668

 

Municipals

 

 

122,824

 

 

 

1.43

 

 

 

1,758

 

 

 

127,828

 

 

 

0.32

 

 

 

411

 

 

 

119,673

 

 

 

0.57

 

 

 

679

 

Money market

 

 

137,830

 

 

 

0.45

 

 

 

617

 

 

 

122,361

 

 

 

0.31

 

 

 

381

 

 

 

90,989

 

 

 

0.45

 

 

 

405

 

Savings

 

 

443,104

 

 

 

0.49

 

 

 

2,175

 

 

 

386,630

 

 

 

0.30

 

 

 

1,178

 

 

 

288,285

 

 

 

0.40

 

 

 

1,155

 

Time less than $100

 

 

91,216

 

 

 

0.79

 

 

 

723

 

 

 

98,986

 

 

 

0.93

 

 

 

921

 

 

 

113,647

 

 

 

1.41

 

 

 

1,599

 

Time $100 through $250

 

 

52,314

 

 

 

0.93

 

 

 

489

 

 

 

52,693

 

 

 

0.86

 

 

 

454

 

 

 

65,840

 

 

 

1.54

 

 

 

1,012

 

Time greater than $250

 

 

25,296

 

 

 

0.83

 

 

 

209

 

 

 

26,833

 

 

 

0.96

 

 

 

257

 

 

 

33,030

 

 

 

1.65

 

 

 

544

 

Total interest-bearing deposits

 

 

1,217,638

 

 

 

0.57

 

 

 

6,904

 

 

 

1,122,589

 

 

 

0.38

 

 

 

4,226

 

 

 

963,514

 

 

 

0.63

 

 

 

6,062

 

Short-term borrowings

 

 

85,876

 

 

 

1.00

 

 

 

861

 

 

 

71,658

 

 

 

0.36

 

 

 

258

 

 

 

51,745

 

 

 

0.48

 

 

 

247

 

Long-term debt

 

 

10,000

 

 

 

1.57

 

 

 

159

 

 

 

10,000

 

 

 

1.57

 

 

 

159

 

 

 

8,566

 

 

 

1.57

 

 

 

136

 

Total interest-bearing liabilities

 

 

1,313,514

 

 

 

0.60

 

 

 

7,924

 

 

 

1,204,247

 

 

 

0.39

 

 

 

4,643

 

 

 

1,023,825

 

 

 

0.63

 

 

 

6,445

 

Non-interest-bearing deposits

 

 

242,778

 

 

 

 

 

 

 

 

 

 

 

236,511

 

 

 

 

 

 

 

 

 

 

 

186,897

 

 

 

 

 

 

 

 

 

Other liabilities

 

 

8,069

 

 

 

 

 

 

 

 

 

 

 

9,545

 

 

 

 

 

 

 

 

 

 

 

9,472

 

 

 

 

 

 

 

 

 

Shareholders' equity

 

 

146,088

 

 

 

 

 

 

 

 

 

 

 

135,324

 

 

 

 

 

 

 

 

 

 

 

123,790

 

 

 

 

 

 

 

 

 

Total liabilities and shareholders' equity

 

$

1,710,449

 

 

 

 

 

 

 

 

 

 

$

1,585,627

 

 

 

 

 

 

 

 

 

 

$

1,343,984

 

 

 

 

 

 

 

 

 

Net interest rate spread

 

 

 

 

 

 

2.58

%

 

 

 

 

 

 

 

 

 

 

2.70

%

 

 

 

 

 

 

 

 

 

 

2.79

%

 

 

 

 

Margin/net interest income

 

 

 

 

 

 

2.71

%

 

$

45,210

 

 

 

 

 

 

 

2.79

%

 

$

42,833

 

 

 

 

 

 

 

2.92

%

 

$

37,939

 

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.  Non-accrual loans and investment securities are included in earning assets.

* Includes loans held-for-sale

- 21 -


Rate-Volume Analysis of Changes in Net Interest Income (1) (2) (3)

 

 

 

2022 vs. 2021

 

 

2021 vs. 2020

 

 

 

Due to change in:

 

 

Total

 

 

Due to change in:

 

 

Total

 

 

 

Volume

 

 

Rate

 

 

Change

 

 

Volume

 

 

Rate

 

 

Change

 

Interest income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment securities (AFS & Equities):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury

 

$

6

 

 

$

 

 

$

6

 

 

$

 

 

$

 

 

$

 

U.S. Government agencies

 

 

221

 

 

 

56

 

 

 

277

 

 

 

219

 

 

 

(268

)

 

 

(49

)

State and municipal

 

 

397

 

 

 

(106

)

 

 

291

 

 

 

1,423

 

 

 

(685

)

 

 

738

 

Mortgage-backed and CMOs

 

 

1,233

 

 

 

1,286

 

 

 

2,519

 

 

 

1,772

 

 

 

(1,140

)

 

 

632

 

Corporate debt

 

 

(25

)

 

 

24

 

 

 

(1

)

 

 

(6

)

 

 

23

 

 

 

17

 

Equities

 

 

(74

)

 

 

36

 

 

 

(38

)

 

 

120

 

 

 

(75

)

 

 

45

 

Total investment securities (AFS & Equities)

 

 

1,758

 

 

 

1,296

 

 

 

3,054

 

 

 

3,528

 

 

 

(2,145

)

 

 

1,383

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

 

3,327

 

 

 

334

 

 

 

3,661

 

 

 

3,145

 

 

 

(1,709

)

 

 

1,436

 

Residential real estate

 

 

311

 

 

 

(71

)

 

 

240

 

 

 

689

 

 

 

(367

)

 

 

322

 

Home equity loans

 

 

(38

)

 

 

611

 

 

 

573

 

 

 

(159

)

 

 

(283

)

 

 

(442

)

Commercial and industrial

 

 

(2,275

)

 

 

518

 

 

 

(1,757

)

 

 

(487

)

 

 

1,403

 

 

 

916

 

Consumer loans

 

 

(29

)

 

 

29

 

 

 

 

 

 

(45

)

 

 

(15

)

 

 

(60

)

Tax-exempt loans

 

 

(148

)

 

 

(11

)

 

 

(159

)

 

 

(416

)

 

 

(23

)

 

 

(439

)

Total loans

 

 

1,148

 

 

 

1,410

 

 

 

2,558

 

 

 

2,727

 

 

 

(994

)

 

 

1,733

 

Other earning assets

 

 

(79

)

 

 

125

 

 

 

46

 

 

 

7

 

 

 

(31

)

 

 

(24

)

Total interest income

 

 

2,827

 

 

 

2,831

 

 

 

5,658

 

 

 

6,262

 

 

 

(3,170

)

 

 

3,092

 

Interest expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing demand

 

 

77

 

 

 

232

 

 

 

309

 

 

 

146

 

 

 

(190

)

 

 

(44

)

Municipals

 

 

(16

)

 

 

1,363

 

 

 

1,347

 

 

 

46

 

 

 

(314

)

 

 

(268

)

Money market

 

 

47

 

 

 

189

 

 

 

236

 

 

 

140

 

 

 

(164

)

 

 

(24

)

Savings

 

 

172

 

 

 

825

 

 

 

997

 

 

 

394

 

 

 

(371

)

 

 

23

 

Time less than $100

 

 

(73

)

 

 

(125

)

 

 

(198

)

 

 

(207

)

 

 

(471

)

 

 

(678

)

Time $100 through $250

 

 

(3

)

 

 

38

 

 

 

35

 

 

 

(203

)

 

 

(355

)

 

 

(558

)

Time greater than $250

 

 

(15

)

 

 

(33

)

 

 

(48

)

 

 

(101

)

 

 

(186

)

 

 

(287

)

Total interest-bearing deposits

 

 

189

 

 

 

2,489

 

 

 

2,678

 

 

 

215

 

 

 

(2,051

)

 

 

(1,836

)

Short-term borrowings

 

 

51

 

 

 

552

 

 

 

603

 

 

 

95

 

 

 

(84

)

 

 

11

 

Long-term debt

 

 

 

 

 

 

 

 

 

 

 

23

 

 

 

 

 

 

23

 

Total interest expense

 

 

240

 

 

 

3,041

 

 

 

3,281

 

 

 

333

 

 

 

(2,135

)

 

 

(1,802

)

Net interest income

 

$

2,587

 

 

$

(210

)

 

$

2,377

 

 

$

5,929

 

 

$

(1,035

)

 

$

4,894

 

 

(1)

Loan fees have been included in the change in interest income totals presented. Non-accrual loans and investment securities have been included in average balances.

(2)

Changes due to both volume and rates have been allocated in proportion to the relationship of the dollar amount change in each.

(3)

Interest income on loans and securities is presented on a tax-equivalent basis.

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 $5,658,000 to $53,134,000 for 2022, while total interest expense increased $3,281,000 to $7,924,000. Volume growth in earning assets contributed an additional $2,827,000 of interest income and interest rate increases contributed an additional $2,831,000 of interest income. Rate-related interest expense increased $3,041,000, while volume-related interest expense increased $240,000.

Investments

2022 versus 2021

Interest income on available-for-sale and equity investment securities increased $3,054,000 when comparing the two years. The increase in average balances contributed an additional $1,758,000 to interest income and the 14 basis-point increase in rate contributed $1,296,000 to interest income. The average yield on the available-for-sale and equity investment portfolio increased to 1.71% for 2022 compared to 1.57% for 2021.

- 22 -


Income on U.S. Government agency securities increased $277,000, due to a 5 basis-point increase in the yield from 1.05% for 2021 to 1.10% for 2022 and an increase in average balances totaling $21,115,000.  Most of the bonds in the agency portfolio have call features ranging from three months to three years, none of which were exercised during 2022.  QNB invested excess funds toward the end of 2021 to earn a higher rate than current available on interest-earning deposits.

Interest income on tax-exempt municipal securities increased $291,000.  Average balances, which increased $16,115,000, contributed $397,000 to interest income. The decrease in yield of eight basis points from 2.47% in 2021 to 2.39% in 2022 partially offset the increase in interest income by $106,000. Many of these bonds have either reached maturity or their call dates and are being replaced with municipal bonds with less favorable tax-equivalent yields. Typically, QNB purchased municipal bonds with 10- to 15-year maturities with call dates between 2 and 5 years.   Future demand for tax-exempt municipal securities is uncertain, as the tax-equivalent yield could be less favorable compared to other securities with similar risk-based capital asset-weighting characteristics.  

All the mortgage-backed and collateralized mortgage obligations (“CMO”) securities owned by QNB are issued by U.S. Government agencies and sponsored enterprises (“GSE”) and carry the implicit backing of the U.S. Government, but they are not direct obligations of the U.S. Government. Interest income on mortgage-backed securities and CMOs increased $2,519,000 due to a $95,568,000 increase in average balances and a 29 basis-point increase in rate from 1.29% for 2021 to 1.58% for 2022. This portfolio generally provides higher yields relative to agency bonds and provides monthly cash flow which can be used for liquidity purposes or can be reinvested as interest rates increase. QNB invested excess funds toward the end of 2021 to earn a higher rate than current available on interest-earning deposits.

Income on corporate debt securities decreased $1,000 due to a decrease in average balances of $618,000 partially offset by an increase in yield from 4.01% for 2021 to 4.37% for 2022.  

Excess cash at the holding company was invested in Treasury securities during 2022 adding $6,000 to interest income.

Dividend income on equities decreased $38,000 due to a decrease in average balances of $2,470,000, partially offset by an increase in yield of 30 basis points.

 

2021 versus 2020

Interest income on available-for-sale and equity investment securities increased $1,383,000 when comparing the two years. The increase in average balances contributed an additional $3,528,000 to interest income but was partially offset by $2,145,000 due to a 35 basis-point decrease in rates. The average yield on the available-for-sale and equity investment portfolio decreased to 1.57% for 2021 compared to 1.92% for 2020.

Income on U.S. Government agency securities decreased $49,000, due to a 33 basis-point decrease in the yield from 1.38% for 2020 to 1.05% for 2021, partially offset by an increase in average balances totaling $15,823,000.  Most of the bonds in the agency portfolio have call features ranging from three months to three years, many of which were exercised during 2021 as a result of the declining rates during the year; these bonds were replaced by lower-yielding securities.

Interest income on tax-exempt municipal securities increased $738,000.  Average balances, which increased $46,187,000, contributed $1,423,000 to interest income. The decrease in yield of 61 basis points from 3.08% in 2020 to 2.47% in 2021 partially offset the increase in interest income by $685,000.

Interest income on mortgage-backed securities and CMOs increased $632,000 due to a $109,762,000 increase in average balances, partially offset by a 32 basis-point decrease in rate from 1.61% for 2020 to 1.29% for 2021.

Income on corporate debt securities increased $17,000 due to an increase in yield from 3.69% for 2020 to 4.00% for 2021 partially offset by a decrease in average balances of $159,000.  

Dividend income on equities increased $45,000 due to an increase in average balances of $3,405,000, partially offset by a decrease in yield of 52 basis points.

Loans

2022 versus 2021

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, hotels, factories, warehouses, medical facilities and retail establishments, or residential real estate, usually the residence of the business owner or investment properties. The category also includes construction and land development loans. Income on commercial real estate loans increased $3,661,000. The increase in average balances of $80,201,000, or 14.4%, contributed an increase in interest income of $3,327,000; the five basis-point increase in yield, from 4.15% in 2021 to 4.20% in 2022 contributes $334,000 to the increase in interest income.

- 23 -


Income on commercial and industrial loans, the second largest category, decreased $1,757,000 with average balances decreasing $47,912,000 resulting in a decrease to interest income of $2,275,000, partially offset by the positive impact from an increase in average yield of 35 basis points to 5.10% in 2022 from 4.75% in 2021, contributing to a $518,000 increase in interest income. Many of the loans in this category are indexed to the prime interest rate.  Included in this category are the PPP loans which contributed $41,515,000 of the net volume decrease.  The PPP loans yield one percent to the customer; however, QNB received origination fees from the SBA ranging from a flat fee of $2,500 to one to five basis points, resulting in a yield of approximately 11.07% for 2022 compared to 7.48% for 2021.   Excluding the PPP loans, the yield on the commercial and industrial loans, the average yield increased 102 basis points to 4.62% in 2022 from 3.90% in 2021.

Tax-exempt loan income decreased $159,000 to $676,000 in 2022. When comparing the same periods, average balances decreased $4,248,000 to $19,778,000, which contributed a $148,000 decrease in interest income.  The average yield on the tax-exempt loan portfolio decreased from 3.47% for 2021 to 3.42% for 2022, resulting in a decrease in interest income of $11,000.

QNB strives to be the “local consumer lender of choice.” QNB continues to focus on its retail lending efforts by adding new product offerings and by marketing and promotion. Overall, retail lending balances increased $7,415,000 and interest income for retail lending increased $813,000 in 2022 compared with 2021, driven by a 33 basis-point decrease in yield.  

Given the low yields on alternative investment securities, QNB retained certain fixed rate and hybrid adjustable-rate mortgages to borrowers with high credit scores and low loan-to-value ratios. As a result, average residential mortgage loans secured by first lien 1-4 family residential mortgages increased by $9,156,000, or 9.6%, to $104,397,000 for 2022. The average yield on the residential real estate portfolio decreased seven basis points to 3.34% for 2022 compared to 3.41% for 2021. Overall, interest income for this segment grew $240,000 in 2022.

Income on home equity loans increased by $573,000 when comparing 2022 and 2021.  During 2022 and 2021, QNB offered attractive rates on both variable rate and fixed rate home equity loans.  Average balances in home equity loans decreased $1,156,000, or 2.0%, to $56,155,000 when comparing 2022 and 2021. The yield on the home equity portfolio increased 109 basis points to 4.38% when comparing the two years. The home values have continued to grow; therefore, we expect that the demand for home equity loans will continue.

Interest income on consumer loans remained flat.  Consumer loans at QNB experienced a decline in average balances in 2022 of $585,000, or 11.5%, led by a decline in installment loans and student loans. Installment loan average balances declined $357,000  and interest declined $14,000.  Student loan balances are no longer insured, and QNB ceased funding originations through its third-party provider during the second half of 2018; average balances decreased $283,000 and interest income increased $9,000 when comparing 2022 and 2021.  

 

2021 versus 2020

Income on commercial real estate loans increased $1,436,000.  The increase in average balances of $70,591,000, or 14.5%, contributed an increase in interest income of $3,145,000; this was partially offset by the 31-basis point decrease in yield from 4.46% in 2020 to 4.15% in 2021 which, which resulted in a decrease of interest income of $1,709,000.  

Income on commercial and industrial loans increased $916,000 with a positive impact from an increase in yield of 73 basis points to 4.75% in 2021 from 4.02% in 2020, contributing to a $1,403,000 increase in interest income. This was partially offset by a decrease in average commercial and industrial loans of $12,075,000, or 5.9%, to $193,491,000 for 2021, resulting in a $487,000 decrease in interest income.  Included in this category are the PPP loans which contributed $7,422,000 of the net volume decrease.  crease in average yield of 73 basis points to 4.75% in 2021 from 4.02% in 2020, contributing to a $1,403,000 increase in interest income. The PPP loans contributed 109 basis points to the increase in the average yield.  

Tax-exempt loan income decreased $439,000 from $1,274,000 in 2020. When comparing the same periods, average balances decreased $11,639,000 to $24,026,000, which contributed a $416,000 decrease in interest income.  The average yield on the tax-exempt loan portfolio decreased from 3.57% for 2020 to 3.47% for 2021, resulting in a decrease in interest income of $23,000.

Retail lending balances increased $13,120,000 while interest income for retail lending decreased $180,000 in 2021 compared with 2020, driven by the 49-basis point decrease in yield.   Average residential mortgage loans secured by first lien 1-4 family residential mortgages increased by $18,164,000, or 23.6%, to $95,241,000 for 2021. The average yield on the residential real estate portfolio decreased 38 basis points to 3.41% for 2021 compared to 3.79% for 2020. Overall, interest income for this segment grew $322,000 in 2021.

- 24 -


Average home equity loans balances decreased $4,182,000, or 6.8%, to $57,311,000 when comparing 2021 and 2020. The yield on the home equity portfolio decreased 50 basis points to 3.29% when comparing the two years.

Interest income on consumer loans decreased $60,000 primarily due to a $470,000 decrease in Student loans average balances.

Deposits and Borrowings

2022 versus 2021

Earning assets are funded primarily by deposits, which increased on average by $101,316,000, or 7.5%, to $1,460,416,000, when comparing 2022 and 2021. Total interest expense for 2022 was $7,924,000 compared with $4,643,000 for 2021, an increase of $3,281,000. Interest expense on total deposits increased $2,678,000 and interest expense on borrowed funds increased $603,000 when comparing the two years. The rate paid on interest-bearing deposits increased 19 basis points; the rate paid on borrowings increased 64 basis points, when comparing the two periods. Deposit and borrowing costs are expected to increase as the competition for deposits increases when rates rise.

Consistent with the past several years, the growth in deposits during 2022 was centered in accounts with greater liquidity. Average non-interest-bearing demand accounts increased $6,267,000, or 2.6%, to $242,778,000 for 2022; QNB has been successful in increasing business checking accounts. Average interest-bearing demand accounts increased $37,796,000, or 12.3%, to $345,054,000 for 2022 compared with 2021, with interest expense on interest-bearing demand accounts increasing $309,000 to $933,000 for 2022. The average rate paid increased seven basis points to 0.27% for 2022 compared to 0.20% for 2021. Interest-bearing business checking account average balances increased by $7,918,000, or 12.8%, and related interest expense increased $141,000, or 17 basis points in yield, when comparing the two years. Also included in this category is QNB-Rewards checking, a tiered-rate checking account product. 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 debit card purchase transactions post and clear per statement cycle. If these qualifications are not met, the rate paid is 0.10%.  For 2022, the average balance in this product was $104,122,000 and the related interest expense was $366,000 for an average cost of funds of 0.35%. In comparison, the average balance in this product for 2021 was $96,522,000 and the related interest expense was $350,000 for an average cost of funds of 0.36%. The rates paid on the QNB-Rewards product, assuming qualifications are met, is attractive relative to competitors’ offerings as well as other QNB products. This product also generates fee income through the use of the debit card. The average balance of other interest-bearing demand accounts included in this category increased from $148,969,000 for 2021 to $171,247,000 for 2022. The average rate paid on these balances was 0.05% in 2021 and 0.13% in 2022.

Average money market accounts increased $15,469,000, or 12.6%, to $137,830,000 for 2022 compared with 2021. Interest expense on money market accounts increased $236,000 to $617,000 for 2022 compared with 2021. The average interest rate paid on money market accounts was 0.45% for 2022, an increase of 14 basis points compared with 2021. The balances in this category primarily comprise Select money market accounts, a product that pays a tiered rate based on account balances. The balances remaining in these accounts for 2022 were primarily at higher-yielding tiers.

Interest expense on municipal interest-bearing demand accounts increased $1,347,000 to $1,758,000 for 2022. The average balance of municipal interest-bearing demand accounts decreased $5,004,000, or 3.9%, to $122,824,000 and the average interest rate paid on these accounts increased 111 basis points to 1.43% for 2022 from 0.32% for 2021. Most of these accounts are indexed to the Federal funds rate with negotiated rate floors between 0.15% and 0.35%. Many of these 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.

QNB’s online e-Savings product is the largest category of savings deposits and was created to compete with other online savings accounts.  Average e-Savings balances increased $45,577,000, or 15.7%, to $335,490,000 in 2022 compared with $289,913,000 in 2021.   The average cost of funds on these accounts was 0.59% for 2022 and 0.36% for 2021. The yield on this account may rise along with market rates and as competition for savings balances increases. Traditional statement savings accounts and club accounts are also included in the savings category and increased on average by $10,897,000, or 11.3%, to $107,614,000. The average rate paid on total savings accounts was 0.49% for 2022, a 19 basis-point increase from 0.30% for 2021 and interest expense increased $997,000, to $2,175,000 from $1,178,000 over the same period.

Interest expense on time deposits decreased $211,000, to $1,421,000 in 2022, due to a decrease in average balances of $9,686,000 in 2022, to $168,826,000 and a seven basis-point decrease in yield, from 0.91% in 2021 to 0.84% in 2022.  Similar to fixed-rate loans and investment securities, time deposits reprice over time and, therefore, have less of an immediate impact on costs in either a rising or falling rate environment. However, the maturity and repricing characteristics of time deposits tend to be shorter.

- 25 -


Approximately $85,267,000, or 48.6%, in time deposits will reprice or mature over the next 12 months compared with 56.8% of the portfolio at December 31, 2021. The average rate paid on these time deposits is approximately 0.81%.

Short-term borrowings are comprised of sweep accounts structured as repurchase agreements with our commercial customers and overnight borrowings from correspondent banks with average balances in 2022 of $68,650,000 and $17,226,000, respectively. Interest expense on short-term borrowings increased by $603,000 to $861,000 when comparing the two years. During this period average balances of repurchase agreements decreased $2,817,000 with a 14 basis-point increase in average rate paid, resulting in an increase of cost of funds of $85,000.  The average balances of borrowings from correspondent banks increased $17,035,000 and the average rate paid increased 249 basis points, resulting in an increase in cost of funds of $518,000.  

Average long-term debt was $10,000,000 with an average yield of 1.57%. The yield on interest-bearing liabilities increased 21 basis points to 0.60% for 2022.

2021 versus 2020

Total interest expense for 2021 was $4,643,000 compared with $6,445,000 for 2020, a decrease of $1,802,000. Interest expense on total deposits decreased $1,836,000 and interest expense on borrowed funds increased $34,000 when comparing the two years. The rate paid on interest-bearing deposits decreased 25 basis points; the rate paid on borrowings decreased 13 basis points, when comparing the two periods.

Average non-interest-bearing demand accounts increased $49,614,000, or 26.5%, to $236,511,000 for 2021; QNB has been successful in increasing both personal and business checking accounts. Average interest-bearing demand accounts increased $55,208,000, or 21.9%, to $307,258,000 for 2021 compared with 2020, with interest expense on interest-bearing demand accounts decreasing $44,000 to $624,000 for 2021. The average rate paid decreased six basis points to 0.20% for 2021 compared to 0.26% for 2020. Interest-bearing business checking account average balances increased by $7,025,000, or 12.8%, and related interest expense decreased $79,000, or 19 basis points in yield, when comparing the two years.  For 2021, the average balance QNB-Rewards checking was $96,522,000 and the related interest expense was $350,000 for an average cost of funds of 0.36%. In comparison, the average balance in this product for 2020 was $74,447,000 and the related interest expense was $325,000 for an average cost of funds of 0.44%. The average balance of other interest-bearing demand accounts included in this category increased from $122,861,000 for 2020 to $148,969,000 for 2021. The average rate paid on these balances was 0.05% for both years.

Average money market accounts increased $31,372,000, or 34.5%, to $122,361,000 for 2021 compared with 2020. Interest expense on money market accounts decreased $24,000 to $381,000 for 2021 compared with 2020. The average interest rate paid on money market accounts was 0.31% for 2021, a decrease of 14 basis points compared with 2020.

Online eSavings average balances increased $82,736,000, or 39.9%, to $289,913,000 in 2021 compared with $207,177,000 in 2020.   The average cost of funds on these accounts was 0.36% for 2021 and 0.50% for 2020. Traditional statement savings accounts and club accounts are also included in the savings category and increased on average by $15,609,000, or 19.2%, to $96,717,000. The average rate paid on total savings accounts was 0.30% for 2021, a ten-basis point decrease from 0.40% for 2020 and interest expense increased $23,000, to $1,178,000 from $1,155,000 over the same period.

Interest expense on time deposits decreased $1,523,000, to $1,632,000 in 2021, due to a 57-basis point decrease in yield, from 1.48% in 2020 to 0.91% in 2021.  The decrease in average balances was $34,005,000 in 2021, to $178,512,000.

Short-term borrowing average balances in 2021 comprised of sweep accounts structured as repurchase agreements with our commercial customers and overnight borrowings from correspondent banks of $71,467,000 and $191,000, respectively. Interest expense on short-term borrowings increased by $11,000 to $258,000 when comparing the two years. During this period average balances of repurchase agreements increased $21,460,000 with a seven-basis point decrease in average rate paid, resulting in an increase of cost of funds of $43,000.  The average balances of borrowings from correspondent banks declined $1,547,000 and the average rate paid decreased 138 basis points, resulting in a decrease in cost of funds of $32,000.  

Average long-term debt was $10,000,000 with an average yield of 1.57%.  The yield on interest-bearing liabilities decreased 24 basis points to 0.39% for 2021.

- 26 -


Provision 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. QNB recorded a reversal of the provision for loan losses of $850,000 for the twelve months ended December 31, 2022 compared to a provision for loan losses of $458,000 and $1,250,000 for the twelve-month periods ended December 31, 2021 and 2020, respectively.  Net loan recoveries were $197,000, or 0.02% of total average loans for 2022 compared with net charge-offs of $100,000, or 0.01% of total average loans for 2021 and $311,000, or 0.04% of total average loans in 2020. The majority of the commercial loans charged off during 2021 and 2020 had specific reserves established during the allowance for loan loss calculation process prior to the decision to charge-off the loans. The majority of the recoveries during 2022, were on these previously charged off commercial loans.  Deterioration in credit quality or significant growth in the loan portfolio may result in a higher provision for loan losses in 2023.

Non-Interest Income

 

Non-interest income comparison

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change from prior year

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$ Change

 

 

% Change

 

Year ended December 31,

 

2022

 

 

2021

 

 

2020

 

 

2022 to 2021

 

 

2021 to 2020

 

 

2022 to 2021

 

 

2021 to 2020

 

Fees for services to customers

 

$

1,614

 

 

$

1,326

 

 

$

1,315

 

 

$

288

 

 

$

11

 

 

 

21.7

%

 

 

0.8

%

ATM and debit card

 

 

2,719

 

 

 

2,682

 

 

 

2,195

 

 

 

37

 

 

 

487

 

 

 

1.4

 

 

 

22.2

 

Retail brokerage and advisory

 

 

788

 

 

 

786

 

 

 

581

 

 

 

2

 

 

 

205

 

 

 

0.3

 

 

 

35.3

 

Bank-owned life insurance

 

 

361

 

 

 

497

 

 

 

294

 

 

 

(136

)

 

 

203

 

 

 

-27.4

 

 

 

69.0

 

Merchant

 

 

394

 

 

 

451

 

 

 

417

 

 

 

(57

)

 

 

34

 

 

 

-12.6

 

 

 

8.2

 

Net gain (loss) on sale of investment

   securities

 

 

266

 

 

 

1,806

 

 

 

609

 

 

 

(1,540

)

 

 

1,197

 

 

 

-85.3

 

 

 

196.6

 

Unrealized gain (loss) on investment equity

   securities

 

 

(1,026

)

 

 

926

 

 

 

(47

)

 

 

(1,952

)

 

 

973

 

 

 

-210.8

 

 

N/M

 

Net gain on sale of loans

 

 

6

 

 

 

595

 

 

 

1,724

 

 

 

(589

)

 

 

(1,129

)

 

 

-99.0

 

 

 

-65.5

 

Other

 

 

609

 

 

 

712

 

 

 

514

 

 

 

(103

)

 

 

198

 

 

 

-14.5

 

 

 

38.5

 

Total

 

$

5,731

 

 

$

9,781

 

 

$

7,602

 

 

$

(4,050

)

 

$

2,179

 

 

 

-41.4

%

 

 

28.7

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

N/M - Not Meaningful

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2022 versus 2021

QNB, through its core banking business, generates various fees and service charges. Total non-interest income includes service charges on deposit accounts, ATM and debit card income, retail brokerage and advisory income, income on bank-owned life insurance, merchant income and gains and losses on investment securities and residential mortgage loans. Total non-interest income was $5,731,000 in 2022 compared with $9,781,000 in 2021, a decrease of $4,050,000.   Excluding the unrealized (losses)gains on equity securities, gains(losses) on sales of investment securities and gains on sales of loans, noninterest income was $6,485,000 in 2022 compared to $6,454,000 in 2021, an increase of $31,000.

Fees for services to customers are primarily comprised of service charges on deposit accounts. These fees were $1,614,000 for 2022, an increase of $288,000 from 2021. Overdraft income, which represented approximately 78% and 72% of total fees for services to customers in 2022 and 2021, respectively, increased by $312,000, or 32.8%, when comparing 2022 to 2021. The increase in overdraft income primarily reflects an increase in the number of overdraft occurrences.

ATM and debit card income is primarily comprised of transaction income on debit cards and ATM cards and ATM surcharge income for the use of QNB’s ATM machines by non-QNB customers. ATM and debit card income was $2,719,000 in 2022, an increase of $37,000, or 1.4%, from the amount recorded in 2021. Debit card interchange income increased $44,000, or 1.7%, to $2,664,000 in 2022, while ATM surcharge income and monthly card fees income decreased $7,000 to $55,000. The growth in checking accounts and card usage contributed to the increase in debit card income, including the QNB Rewards checking product, a tiered-rate checking account which requires, among other terms, the posting of a minimum of twelve debit card purchase transactions per statement cycle to receive the high interest rate.

QNB provides securities and advisory services under the name QNB Financial Services through an independent third-party registered Broker/Dealer and Registered Investment Advisor. QNB terminated its contract with its third-party broker-dealer effective August 1, 2018 and entered into a similar arrangement with another third-party provider. QNB Financial Services finalized the transferring of accounts to the new provider’s platform during 2019. QNB receives a percentage of the revenue generated but is responsible for salaries and expenses of advisors who are QNB employees.  Retail brokerage and advisory revenue was $788,000 for 2022 compared with $786,000 for 2021, an increase of $2,000, or 0.3%.  Advisory fees increased $31,000 comparing 2022 to 2021.  Sales in front-loaded products, such as annuities and alternative investments (which include private equity, hedge funds, managed futures, real estate

- 27 -


“REITs”, commodities and derivatives contracts) and trailing income related to these decreased $29,000 in 2022 over 2021. In 2022, the net income provided by QNB Financial Services was $210,000, compared with $206,000 in net income for 2021.

Income on bank-owned life insurance (“BOLI”) represents the earnings and death benefits on life insurance policies in which the Bank is the beneficiary. The insurance carriers reset the rates on these policies annually taking into consideration the interest rate environment as well as mortality costs. The existing policies have rate floors which limit how low the earnings rate can go. Some of these policies are currently at their floor. Income on these policies during 2022 was $361,000 compared to $497,000 for 2021; included in these numbers was a life insurance benefit of $46,000 realized during 2022 and a benefit of $193,000 realized during 2021.

Merchant income represents fees charged to merchants for the Bank’s handling of credit card or charge sales. Merchant income was $394,000 for 2022, a decrease of $57,000, or 12.6%, from the amount reported in 2021. The decrease in merchant income is primarily a result of decreased usage.

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, 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. In addition, the Corporation owns a small portfolio of equity securities for the purpose of generating both dividend income and capital appreciation.

Net gains on sales of investment securities decreased $1,540,000 to a net gain of $266,000 for the year ended December 31, 2022, compared with a net gain of $1,806,000 for the year ended December 31, 2021, primarily due to market conditions which resulted in greater opportunities for profitable sales in 2021 compared with 2022. Gains from equity securities were $405,000 in 2022 compared to gains of $1,788,000 in 2021. Net losses/gains on the sale of fixed income securities were a net loss of $139,000 for 2022 compared to a net gain of $18,000 for 2021. Unrealized losses/gains on equity securities were unrealized losses of $1,026,000 recorded during 2022 compared to unrealized gains of $926,000 during 2021.

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. The net gain on the sale of residential mortgage loans was $6,000 and $595,000 for 2022 and 2021, respectively. Mortgage financing activity was greater in 2021, as an improvement in rates prompted borrowers to purchase. Proceeds from the sale of residential mortgages were $304,000 and $16,773,000 for the years ended December 31, 2022 and 2021, respectively. Included in the gains on the sale of residential mortgages in 2022 and 2021 are $2,000 and $122,000, respectively, related to the recognition of mortgage servicing assets.  

QNB retains servicing rights for residential mortgages sold in the secondary market. A servicing fee is retained on all mortgage loans sold and serviced. QNB recognizes its obligation to service financial assets that are retained in a transfer of assets in the form of a servicing asset. The servicing asset is amortized in proportion to, and over, the period of net servicing income or loss. On a quarterly basis, servicing assets are assessed for impairment based on their fair value. Mortgage servicing income of $143,000 for 2022 and $102,000 for 2021 is included in other non-interest income.

Other non-interest income, excluding mortgage servicing income, was $466,000 for 2022, a decrease of $144,000 from the amount recorded in 2021. Other non-interest income included broker-dealer conversion costs reimbursements of $39,000 and $55,000 for 2022 and 2021, respectively. Other non-interest income included $37,000 in an anti-trust settlement in 2021. Title company income decreased $83,000 and letter of credit fees decreased $30,000 when comparing 2022 to 2021.

2021 versus 2020

Total non-interest income was $7,602,000 in 2020 compared with $9,781,000 in 2021, an increase of $2,179,000.

Fees for services to customers are primarily comprised of service charges on deposit accounts. These fees were $1,326,000 for 2021, an increase of $11,000 from 2020. Overdraft income, which represented approximately 72% and 71% of total fees for services to customers in 2021 and 2020, respectively, increased by $20,000, or 2.2%, when comparing 2021 to 2020.

Advisory fees increased $175,000 comparing 2021 to 2020.  Sales in front-loaded products, such as annuities and alternative investments (which include private equity, hedge funds, managed futures, real estate “REITs”, commodities and derivatives contracts) and trailing income related to these increased $30,000 in 2021 over 2020. In 2021, the net income provided by QNB Financial Services was $206,000, compared with $197,000 in net income for 2020.

- 28 -


BOLI income during 2021 was $497,000 compared to $294,000 for 2020; there was a life insurance benefit of $193,000 realized during 2021.  

Merchant income was $451,000 for 2021, an increase of $34,000, or 8.28%, from the amount reported in 2020.

Net gains on sales of investment securities increased $1,197,000 to a net gain of $1,806,000 for the year ended December 31, 2021, compared with a net gain of $609,000 for the year ended December 31, 2020, primarily due to market conditions which resulted in greater opportunities for profitable sales in 2021 compared with 2020. Gains from equity securities were $1,788,000 in 2021 compared to gains of $585,000 in 2020.  Net gains on the sale of fixed income securities were $18,000 for 2021 compared to $24,000 for 2020.  Unrealized losses on equity securities of $47,000 were recorded during 2020 compared to unrealized gains $926,000 during 2021.

The net gain on the sale of residential mortgage loans was $595,000 and $1,724,000 for 2021 and 2020, respectively. Mortgage financing activity increased in 2020, as an improvement in rates prompted borrowers to purchase and continued to represent opportunities in 2021. Proceeds from the sale of residential mortgages were $16,773,000 and $35,605,000 for the years ended December 31, 2021 and 2020, respectively. Included in the gains on the sale of residential mortgages in 2021 and 2020 are $122,000 and $249,000, respectively, related to the recognition of mortgage servicing assets.

Other non-interest income, excluding mortgage servicing income, was $610,000 for 2021, an increase of $137,000 from the amount recorded in 2020. Other non-interest income included broker-dealer conversion costs reimbursements of $55,000 and $66,000 for 2021 and 2020, respectively.  Other non-interest income included $37,000 in an anti-trust settlement. Title company income increased $79,000 and letter of credit fees increased $45,000 when comparing 2021 to 2020.

Non-Interest Expense

 

Non-interest expense comparison

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change from prior year

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$ Change

 

 

% Change

 

Year ended December 31,

 

2022

 

 

2021

 

 

2020

 

 

2022 to 2021

 

 

2021 to 2020

 

 

2022 to 2021

 

 

2021 to 2020

 

Salaries and employee benefits

 

$

17,306

 

 

$

17,453

 

 

$

16,541

 

 

$

(147

)

 

$

912

 

 

 

-0.8

%

 

 

5.5

%

Net occupancy

 

 

2,195

 

 

 

2,228

 

 

 

2,164

 

 

 

(33

)

 

 

64

 

 

 

-1.5

 

 

 

3.0

 

Furniture and equipment

 

 

2,917

 

 

 

2,787

 

 

 

2,750

 

 

 

130

 

 

 

37

 

 

 

4.7

 

 

 

1.3

 

Marketing

 

 

870

 

 

 

922

 

 

 

876

 

 

 

(52

)

 

 

46

 

 

 

-5.6

 

 

 

5.3

 

Third party services

 

 

2,474

 

 

 

2,160

 

 

 

1,923

 

 

 

314

 

 

 

237

 

 

 

14.5

 

 

 

12.3

 

Telephone, postage and supplies

 

 

748

 

 

 

715

 

 

 

736

 

 

 

33

 

 

 

(21

)

 

 

4.6

 

 

 

-2.9

 

State taxes

 

 

1,004

 

 

 

1,013

 

 

 

887

 

 

 

(9

)

 

 

126

 

 

 

-0.9

 

 

 

14.2

 

FDIC insurance premiums

 

 

768

 

 

 

793

 

 

 

569

 

 

 

(25

)

 

 

224

 

 

 

-3.2

 

 

 

39.4

 

Other

 

 

3,210

 

 

 

2,926

 

 

 

2,509

 

 

 

284

 

 

 

417

 

 

 

9.7

 

 

 

16.6

 

Total

 

$

31,492

 

 

$

30,997

 

 

$

28,955

 

 

$

495

 

 

$

2,042

 

 

 

1.6

%

 

 

7.1

%

 

2022 versus 2021

Non-interest expense is comprised of costs related to salaries and employee benefits, net occupancy, furniture and equipment, marketing, third party services, FDIC insurance premiums, regulatory assessments and taxes and various other operating expenses. Total non-interest expense was $31,492,000 in 2022, an increase of $495,000, or 1.6%, from the $30,997,000 in 2021. QNB’s overhead efficiency ratio, which represents the percentage of each dollar of revenue that is used for non-interest expense, is calculated by taking non-interest expense divided by net operating revenue (tax-equivalent net interest income plus non-interest income). QNB’s efficiency ratios for 2022, 2021 and 2020 were 61.8%, 58.9%, and 63.6%, respectively.  The unfavorable increase in the 2022 efficiency ratio is primarily due to a reduction in tax-equivalent non-interest income of $4,050,000 in 2022 over 2021, partially offset by an increase in tax-equivalent interest income of $2,377,000 over the same period.

Salaries and benefits expense is the largest component of non-interest expense. QNB monitors, using various surveys, the competitive salary and benefit information in its markets and makes adjustments when appropriate. Salaries and benefits expense for 2022 was $17,306,000, a decrease of $147,000 compared with $17,453,000 reported in 2021. Salary expense and related payroll taxes for 2022 was $14,739,000, an increase of $35,000 compared with $14,704,000 reported in 2021. Included in salary expense in 2022 was incentive compensation plus related payroll taxes of $607,000, a $575,000 decrease over incentive compensation in 2021. Benefit expense for 2022 was $2,567,000, a decline of $182,000, or 6.6%, from the amount recorded in 2021.  Medical premiums decreased

- 29 -


$235,000 primarily due to a reduction in claims.  Retirement plan matching and safe harbor increased $15,000 compared to 2021. QNB utilized unvested forfeited 401(k) contributions to offset retirement plan matching in 2022 and 2021.

Net occupancy and furniture and equipment expense increased $97,000, to $5,112,000 when comparing 2022 to 2021, due primarily to increased software maintenance.

Marketing expense was $870,000 for 2022, a $52,000 decrease from the expense recorded in 2021. Advertising and sales promotions costs decreased $40,000.  QNB’s contributions and sponsorships for not-for-profit organizations, events and clubs in the communities it serves are included in public relations expense which decreased $9,000 in 2022.

Third party services are comprised of professional services, including legal, accounting, auditing and consulting services, as well as fees paid to outside vendors for support services of day-to-day operations. These support services include correspondent banking services, statement printing and mailing, investment security safekeeping and supply management services. Third party services increased $314,000; QNB incurred additional legal, consulting and other third-party services to implement core-processing software.

Telephone, postage and supplies expense increased $33,000 to $748,000 in 2022 compared with 2021, primarily due to higher transportation costs for supplies and mail delivery services.

The premium assessment formula for small institutions is based on asset growth and related risk assumptions determined by the FDIC as well as capital. Small institutions, for FDIC premium assessments purposes, are defined as those with total consolidated assets less than $10 billion.  FDIC insurance premium expense decreased $25,000 in 2022.

State tax expense represents the payment of the Pennsylvania Shares Tax and Pennsylvania sales and use tax. State tax expense was $1,004,000 and $1,013,000 for the years 2022 and 2021, respectively. The Pennsylvania Shares Tax is based primarily on the equity of the Bank.  The decrease in Pennsylvania Shares Tax is a result of a lower apportionment factor in Pennsylvania.

Other operating expenses for the twelve months ended December 31, 2022 increased $284,000, or 9.7%.  Checkcard expense increased $114,000 and employee travel, training, entertainment and membership fees collectively increased $100,000 as in-person events opened after the Covid-19 pandemic.  

2021 versus 2020

Total non-interest expense was $30,997,000 in 2021, an increase of $2,042,000, or 7.1%, from the $28,955,000 in 2020.   Salaries and benefits expense for 2021 was $17,453,000, an increase of $912,000 compared with $16,541,000 reported in 2020. Salary expense and related payroll taxes for 2021 was $14,704,000, an increase of $942,000 compared with $13,762,000 reported in 2020. Included in salary expense in 2021 was incentive compensation plus related payroll taxes of $1,182,000, a $451,000 increase over incentive compensation in 2020. Benefit expense for 2021 was $1,544,000, a decline of $94,000, or 5.7%, from the amount recorded in 2020.  Medical premiums decreased $151,000 primarily due to stop-loss adjustments.  Retirement plan matching and safe harbor declined $18,000 compared to 2020.  QNB utilized unvested forfeited 401(k) contributions to offset retirement plan matching in 2021 and 2020.   

Net occupancy and furniture and equipment expense increased $101,000, to $5,015,000 when comparing 2021 to 2020, due primarily to increased software maintenance, additional building maintenance resulting from the COVID-19 Pandemic was recognized in 2021 and 2020.

Marketing expense was $922,000 for 2021, a $46,000 increase from the expense recorded in 2020. QNB’s contributions and sponsorships for not-for-profit organizations, events and clubs in the communities it serves are included in public relations expense which increased $45,000 in 2021; many of these events were cancelled or postponed in 2020 due to the COVID-19 Pandemic..

Third party services increased $237,000; QNB incurred additional legal, consulting and other third-party services to implement a new retail loan software.

Telephone, postage and supplies expense decreased $21,000 to $715,000 in 2021 compared with 2020, primarily due to an increase in supplies during 2020 related to the COVID-19 Pandemic.

- 30 -


FDIC insurance premium expense increased $224,000 in 2021 primarily due to asset growth.

State tax expense was $1,013,000 and $887,000 for the years 2021 and 2020, respectively. The Pennsylvania Shares Tax is based primarily on the equity of the Bank.  The increase in Pennsylvania Shares Tax is a result of growth of the Bank’s capital.

Other operating expenses for the twelve months ended December 31, 2021 increased $417,000, or 16.6%.  During 2020 there was reduced business development, travel, seminar and meeting expenses related to cancellations of events due to the COVID-19 Pandemic; many of these activities returned in 2021.

Income Taxes

Applicable income tax expense and effective tax rates were $3,665,000, or 18.7% for 2022, $3,961,000, or 19.4% for 2021 and $2,562,000, or 17.5% for 2020. The primary reason for the decreased effective tax rate for 2022 over 2021 was due to the state taxes on the realized gains on equity sales securities in 2021.  The primary reason for the increased effective tax rate for 2021 over 2020 2020 was due to the state taxes on the realized gains on equity sales securities in 2021.

QNB expects the effective tax rate in 2023 to be less than the 21% corporate rate, due to its holdings of tax-free assets, including municipal bonds, municipal loans, and life insurance contracts.  For a more comprehensive analysis of income tax expense and deferred taxes, refer to Note 11 in the Notes to Consolidated Financial Statements.

Financial Condition

ASSETS

The following table presents total assets at the dates indicated:

 

 

 

 

 

 

 

 

 

 

 

Change from prior year

 

Year ended December 31,

 

2022

 

 

2021

 

 

Amount

 

 

Percent

 

Cash and cash equivalents

 

$

15,899

 

 

$

13,390

 

 

$

2,509

 

 

 

18.7

%

Investment securities AFS

 

 

546,525

 

 

 

692,360

 

 

 

(145,835

)

 

 

-21.1

 

Investment equity securities

 

 

12,056

 

 

 

12,410

 

 

 

(354

)

 

 

-2.9

 

Restricted investment in bank stocks

 

 

5,193

 

 

 

1,329

 

 

 

3,864

 

 

 

290.7

 

Loans receivable

 

 

1,039,385

 

 

 

926,470

 

 

 

112,915

 

 

 

12.2

 

Allowance for loan losses

 

 

(10,531

)

 

 

(11,184

)

 

 

653

 

 

 

5.8

 

Premises and equipment, net

 

 

15,463

 

 

 

16,540

 

 

 

(1,077

)

 

 

-6.5

 

Bank-owned life insurance

 

 

11,625

 

 

 

11,497

 

 

 

128

 

 

 

1.1

 

Accrued interest receivable

 

 

5,038

 

 

 

4,104

 

 

 

934

 

 

 

22.8

 

Other assets

 

 

27,844

 

 

 

6,424

 

 

 

21,420

 

 

 

333.4

 

Total assets

 

$

1,668,497

 

 

$

1,673,340

 

 

$

(4,843

)

 

 

-0.3

%

 

Cash and interest-earning deposits

Total cash and cash equivalents increased $2,509,000 to $15,899,000 at December 31, 2022 from $13,390,000 at December 31, 2021. QNB had interest-bearing balances at the Federal Reserve Bank of $880,000 compared with $2,931,000 and interest-bearing balances in a brokerage account of $353,000 compared with $1,234,000 at December 31, 2022 and December 31, 2021, respectively. Net cash was provided by both operating and financing activities. The maturity, prepayment and sales of investment securities, proceeds received from deposit growth and proceeds from short-term borrowings more than offset loan growth and the purchases of investment securities.

 

Investment Securities and Other Short-Term Investments

At December 31, 2022 and 2021, QNB had no Federal funds sold.

QNB accounts for its investments by classifying securities into four categories. Debt securities that are bought and held principally for the purpose of selling them in the near term are classified as trading securities and reported at fair value, with unrealized gains and losses included in earnings. Debt securities that QNB has the positive intent and ability to hold to maturity are classified as held-to-maturity securities and reported at amortized cost. Debt securities not classified as either held-to-maturity securities or trading securities are classified as available-for-sale securities and reported at fair value, with unrealized gains and losses, net of tax, excluded

- 31 -


from earnings and reported as a separate component of shareholders’ equity. Equity investments with readily determinable fair values are measured at fair value with changes in fair value recognized in net income.  Management determines the appropriate classification of securities at the time of purchase.

 

Investment Portfolio History

 

 

 

 

 

 

 

 

 

 

 

 

December 31,

 

2022

 

 

2021

 

 

2020

 

Investment Securities Available-for-Sale

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasuries

 

$

301

 

 

$

 

 

$

 

U.S. Government agency

 

 

86,709

 

 

 

97,499

 

 

 

69,776

 

State and municipal

 

 

95,367

 

 

 

131,035

 

 

 

87,812

 

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

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed

 

 

256,161

 

 

 

329,938

 

 

 

175,847

 

Collateralized mortgage obligations (CMOs)

 

 

101,672

 

 

 

127,012

 

 

 

94,948

 

Corporate debt

 

 

6,315

 

 

 

6,876

 

 

 

7,263

 

Total investment securities available-for-sale

 

$

546,525

 

 

$

692,360

 

 

$

435,646

 

Equity Investments

 

 

 

 

 

 

 

 

 

 

 

 

Equity

 

$

12,056

 

 

$

12,410

 

 

$

12,849

 

Total equity investments

 

$

12,056

 

 

$

12,410

 

 

$

12,849

 

Total investment securities

 

$

558,581

 

 

$

704,770

 

 

$

448,495

 

Investments Available-For-Sale Debt Securities

Available-for-sale investment securities include securities that management intends to use as part of its liquidity and asset/liability management strategy. These securities may be sold in response to changes in market interest rates, changes in the securities prepayment or credit risk, the need for liquidity, or growth in loan demand. At December 31, 2022, the fair value of investment debt securities available-for-sale was $546,525,000, or $102,692,000 less the amortized cost of $649,217,000. This compares to a fair value of $692,360,000, or $4,734,000 less the amortized cost of $697,094,000, at December 31, 2021. The available-for-sale portfolio had a weighted average maturity of approximately 7.2 years at December 31, 2022 and 5.7 years at December 31, 2021. The weighted average tax-equivalent yield was 1.68% and 1.56% at December 31, 2022 and 2021, respectively.

 

At December 31, 2022, approximately 81% of QNB’s investment securities available-for-sale were either U.S. Government agency debt securities, U.S. Government agency issued mortgage-backed securities or CMOs. As of December 31, 2022, QNB held no securities of any one issue or any one issuer (excluding the U.S. Government and its agencies) that were in excess of 10% of shareholders’ equity.

The QNB investment portfolio represents a significant portion of earning assets and interest income. QNB actively manages the investment portfolio in an attempt to maximize earnings, while considering liquidity needs, interest rate risk and credit risk.  The decrease of the investment portfolio as a percent of total assets in 2022 is due to a decrease in the fair value and loan growth. During 2022, $35,001,000 of investment securities available-for-sale were purchased compared with $385,926,000 during 2021.  Proceeds from the sale of investment securities available-for-sale were $7,551,000 during 2022 compared with $282,000 during 2021.  In addition to the proceeds from the sale of investment securities available-for-sale, proceeds from maturities, calls and prepayments were $72,965,000 in 2022 compared with $113,911,000 in 2021.  

Treasury securities had a fair value of $301,000 at December 31, 2022 compared to no balances at December 31, 2021.  Excess cash at the holding company was invested in short-term Treasury securities in 2022.    

The balance of U.S. Government agency securities decreased $10,790,000 to $86,709,000 at December 31, 2022 and represents 15.9% of the available-for-sale investment portfolio, compared with 14.1% at December 31, 2021. U.S. Government agency issued CMO and MBS balances decreased $99,117,000 to $357,833,000 and represents 65.5% of the available-for-sale portfolio compared with 66.0% at December 31, 2021. These bonds provide monthly cash flow to be reinvested in either loans or other securities, potentially at higher yields as rates increase.

- 32 -


The balance of municipal securities decreased $35,668,000 to $95,367,000 at December 31, 2022, representing 17.4% of the available-for-sale portfolio compared with 18.9% at December 31, 2021. QNB focuses on the financial performance of the underlying issuer for municipal bond purchases in addition to the bond rating of the issuer or the rating of bond insurer, if present. Eight bonds were purchased with a book value of $4,627,000; 20 bonds with a book value of $7,865,000 were called or matured in 2022; and 20 bonds with a book value of $7,387,0000 were sold in 2022.  

QNB owns one collateralized debt obligations (“CDO”) in the form of a pooled trust preferred security and is included in the Corporate debt category. The security is comprised of securities issued by banks or bank holding companies. QNB owns the mezzanine tranche of this security. The security is structured so that the senior and mezzanine tranches are protected from defaults by over-collateralization and cash flow default protection provided by subordinated tranches.  The trust preferred security the Bank continues to hold has a carrying balance of $53,000 at December 31, 2022 and represents the senior-most obligation of the trust.  There was no credit-related other-than-temporary impairment charge during 2022, 2021 or 2020.  Future estimates of fair value of the remaining security could require recording additional OTTI charges through earnings. For additional detail on these securities see Note 17 of the Notes to Consolidated Financial Statements.

 

The weighted average maturity is based on the stated contractual maturity or likely call date of all securities except for MBS and CMOs, which are based on estimated average life. The maturity of the portfolio could become shorter if interest rates decline and prepayments on MBS and CMOs increase or securities are called. However, the estimated average life could lengthen if interest rates were to increase and principal payments on MBS and CMOs slowed or securities anticipated to be called extend past their call date.

 

Investment Portfolio Maturities and Weighted Average Yields

 

December 31, 2022

 

One year

or less

 

 

After one

year

through

five years

 

 

After five

years

through

ten years

 

 

After ten

years

 

 

Total

 

Investment Securities Available-for-Sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasuries

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair value

 

$

301

 

 

$

 

 

$

 

 

$

 

 

$

301

 

Weighted average yield

 

 

1.34

%

 

 

 

 

 

 

 

 

 

 

 

1.34

%

U.S. Government agency:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair value

 

 

 

 

$

23,420

 

 

$

63,289

 

 

 

 

 

$

86,709

 

Weighted average yield

 

 

 

 

 

0.76

%

 

 

1.23

%

 

 

 

 

 

1.10

%

State and municipal:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair value

 

 

 

 

 

1,464

 

 

 

15,535

 

 

 

78,368

 

 

 

95,367

 

Weighted average yield

 

 

 

 

 

3.45

%

 

 

2.76

%

 

 

2.11

%

 

 

2.24

%

Mortgage-backed:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair value

 

 

1

 

 

 

48,304

 

 

 

207,856

 

 

 

 

 

 

256,161

 

Weighted average yield

 

 

2.79

%

 

 

1.68

%

 

 

1.59

%

 

 

 

 

 

1.61

%

Collateralized mortgage obligations (CMOs):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair value

 

 

187

 

 

 

19,804

 

 

 

81,681

 

 

 

 

 

 

101,672

 

Weighted average yield

 

 

2.23

%

 

 

1.87

%

 

 

1.60

%

 

 

 

 

 

1.65

%

Corporate debt:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair value

 

 

 

 

 

1,957

 

 

 

4,358

 

 

 

 

 

 

6,315

 

Weighted average yield

 

 

 

 

 

2.30

%

 

 

5.36

%

 

 

 

 

 

4.41

%

Total fair value

 

$

489

 

 

$

94,949

 

 

$

372,719

 

 

$

78,368

 

 

$

546,525

 

Weighted average yield

 

 

1.68

%

 

 

1.53

%

 

 

1.62

%

 

 

2.11

%

 

 

1.68

%

 

Securities are assigned to categories based on stated contractual maturity except for mortgage-backed securities and CMOs which are based on anticipated payment periods and state and municipal securities which are based on pre-refunded date, if applicable. Tax-exempt securities were adjusted to a tax-equivalent basis and are based on the marginal Federal corporate tax rate of 21% and a Tax Equity and Financial Responsibility Act (“TEFRA”) adjustment for the cost of funds. Weighted average yields on investment securities available-for-sale are based on amortized cost.

 

Investments in Equity Securities

Equity securities decreased $354,000 to $12,056,000 at December 31, 2022 from $12,410,000 at December 31, 2021.  QNB sold $1,594,000 in equity securities for a net gain of $405,000 and purchased $1,860,000 in equities during 2022.

- 33 -


Increases and decreases in the fair value of equity securities were recognized in net income,  At December 31, 2022, the fair value of the equity securities was $12,056,000, or $35,000 below the cost of $12,091,000 compared to $12,410,000, or $991,000 above the cost of $11,419,000 at December 31, 2021.

The equities portfolio comprises blue-chip large-capitalized stocks, providing a taxable equivalent dividend yield of 3.32%.  The estimated cumulative contribution (realized and unrealized net gains (losses), plus dividends) of the equity portfolio to earnings per share from January 1, 2012 through December 31, 2022 is $2.39 per diluted share.  Details of the equity portfolio’s contribution to net income is detailed in the following table.

 

Net Income (Expense) on Equity Securities

 

For the Year Ended December 31,

 

 

 

2015

 

 

2016

 

 

2017

 

 

2018

 

 

2019

 

 

2020

 

 

2021

 

 

2022

 

Equity Securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tax-equivalent dividends*

 

$

244

 

 

$

233

 

 

$

249

 

 

$

300

 

 

$

274

 

 

$

392

 

 

$

437

 

 

$

399

 

Net gain (loss) on sales

 

 

691

 

 

 

758

 

 

 

1,557

 

 

 

(79

)

 

 

1,781

 

 

 

585

 

 

 

1,788

 

 

 

405

 

OTTI

 

 

(55

)

 

 

(192

)

 

 

(80

)

 

N/A

 

 

N/A

 

 

N/A

 

 

N/A

 

 

N/A

 

Unrealized (loss) gain

 

N/A

 

 

N/A

 

 

N/A

 

 

 

(336

)

 

 

770

 

 

 

(47

)

 

 

926

 

 

 

(1,026

)

Tax-equivalent income before tax

 

 

880

 

 

 

799

 

 

 

1,726

 

 

 

(115

)

 

 

2,825

 

 

 

930

 

 

 

3,151

 

 

 

(222

)

Tax expense (benefit)*

 

 

357

 

 

 

324

 

 

 

701

 

 

 

(33

)

 

 

816

 

 

 

269

 

 

 

910

 

 

 

(64

)

Net income

 

$

523

 

 

$

475

 

 

$

1,025

 

 

$

(82

)

 

$

2,009

 

 

$

661

 

 

$

2,241

 

 

$

(158

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share - basic

 

$

0.16

 

 

$

0.14

 

 

$

0.30

 

 

$

(0.02

)

 

$

0.57

 

 

$

0.19

 

 

$

0.63

 

 

$

(0.04

)

Earnings per share - diluted

 

 

0.16

 

 

 

0.14

 

 

 

0.30

 

 

 

(0.02

)

 

 

0.57

 

 

 

0.19

 

 

 

0.63

 

 

 

(0.04

)

Tax-equivalent yield

 

 

3.35

%

 

 

3.13

%

 

 

3.49

%

 

 

3.08

%

 

 

3.31

%

 

 

3.54

%

 

 

3.02

%

 

 

3.32

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

*Based on Federal tax rates of 34% for the 2015 and 2016 periods and 21% for the 2017, 2018, 2019, 2020, 2021 and 2022 periods.

 

Loans

QNB’s primary business is to accept deposits and to make 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 has comprehensive policies and procedures that define and govern commercial and retail loan originations and the management of risk. All loans are underwritten in a manner that emphasizes the borrowers’ capacity to pay. The measurement of capacity to pay delineates the potential risk of non-payment or default. The higher potential for default determines the need for and amount of collateral required. QNB makes unsecured commercial loans when the capacity to pay is considered substantial. As capacity lessens, collateral is required to provide a secondary source of repayment and to mitigate the risk of loss. Various policies and procedures provide guidance to the lenders on such factors as amount, terms, price, maturity and appropriate collateral levels. Each risk factor is considered critical to ensuring that QNB receives an adequate return for the risk undertaken, and that the risk of loss is minimized.

QNB manages the risk associated with commercial loans by having lenders work in tandem with credit analysts while maintaining independence between personnel. In addition, a Bank loan committee and a committee of the Board of Directors review and approve certain loan requests on a weekly basis. Other than disclosed in the forthcoming Loan Portfolio Table, at December 31, 2022, there was a concentration of loans to lessors of residential buildings and dwellings of 20.0% of total loans and to lessors of nonresidential buildings of 22.5% of total loans, compared with 18.0% and 24.2% of total loans, respectively, at December 31, 2021. These concentrations were primarily within the commercial real estate categories.

- 34 -


QNB’s commercial lending activity is focused on small businesses within the local community. Commercial purpose loans 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 group 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 types 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. Commercial and industrial loans represent commercial purpose loans that are either secured by collateral other than real estate or unsecured.

Commercial loans secured by commercial real estate include commercial purpose loans collateralized at least in part by commercial real estate. Some of these loans may not be for the express purpose of conducting commercial real estate transactions. Commercial loans secured by residential real estate are commercial purpose loans generally secured by the business owner’s residence or residential investment properties owned by the borrower and rented to tenants. Commercial loans secured by either commercial real estate or residential real estate are originated primarily within the Eastern Pennsylvania market area, are within the Bank’s underwriting criteria, and generally include the guarantee of the borrowers. 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 and commercial construction 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.

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 residential real estate loans that are secured by 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%. To reduce interest rate risk, qualifying originations of fixed-rate loans to individuals for 1-4 family residential mortgages with maturities of 15 years or greater are generally sold in the secondary market. Mortgage loan origination activity decreased in 2022 with $298,000 in residential mortgages originated for sale during 2022, compared with $4,892,000 for 2021. There were no in residential mortgage loans held-for-sale at December 31, 2022 or at December 31, 2021. Loan held for sale are carried at the lower of aggregate cost or market.

The home equity portfolio consists of fixed-rate home equity loans and variable rate home equity lines of credit. These loans are often in a junior lien position and therefore carry a higher risk than first lien 1-4 family residential loans. Risks associated with loans secured by residential properties, either first lien residential mortgages or home equity loans and lines, 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 loans secured by residential real estate because they may be unsecured, or, if they are secured, the value of the collateral may be difficult to assess or 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, the value of the collateral.

Under the CARES Act, enacted on March 27, 2020, QNB continues to provide customers experiencing financial hardship caused by the COVID-19 Pandemic, solutions to help them through this difficult period. QNB had modified a total 305 commercial loans or $160,676,000 and 61 retail loans or $8,808,000 during 2020 due to COVID-19.  As of December 31, 2022, QNB had no modifications    related to the COVID-19 Pandemic.   QNB will continue to work with our borrowers during this difficult time.  During 2020, the Bank originated $82,475,000 in PPP loans, enabling 660 businesses to maintain their payrolls and stay in operation.  At December 31, 2020, QNB had 556 PPP loans totaling $72,821,000 reported in commercial and industrial loans.  At December 31, 2021 there were 16 loans remaining outstanding under the 2020 originated PPP loans totaling $806,000 and related net originations fees were $11,000 which are recognized in interest income as a yield adjustment over the term of the loans.  At December 31, 2022 there were three loans remaining outstanding under the 2020 originated PPP loans totaling $329,000 and related net originations fees were $1,000.

Under the Economic Aid Act, enacted on December 27, 2020,  QNB originated additional first draw PPP loans and second draw PPP loans during 2021.  QNB closed 315 loans totaling $35,021,000, including first draw loans of $2,781,000 and second draw loans of $32.241.000.  There were 82 loans totaling $13,521,000 outstanding at December 31, 2021 and one loan totaling $2,000,000 at

- 35 -


December 31, 2022.   QNB received origination fees from the SBA ranging from a flat fee of $2,500 to five basis points which are recognized in interest income as a yield adjustment over the term of the loan.  Net unearned fees and costs on these PPP loans was $471,000 at December 31, 2021 and $38,000 at December 31, 2022.  The PPP loans are 100% guaranteed by the SBA.

Excluding PPP loans net of deferred fees at December 31, 2022 and December 31, 2021, loans receivable would have increased $124,470,000, or 13.6% since year-end 2021 and $63,678,000, or 7.5% comparing year-end 2021 to year-end 2020.

Total loan receivables at December 31, 2022 were $1,039,385,000, an increase of $112,915,000, or 12.2%, from December 31, 2021. A key financial ratio, loans to deposits was 73.3% at December 31, 2022, compared with 63.9% at December 31, 2021.  QNB continues to be committed to make loans available to credit worthy consumers and businesses.

 

Loan Portfolio

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31,

 

2022

 

 

2021

 

 

2020

 

 

2019

 

 

2018

 

Commercial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

160,875

 

 

$

148,610

 

 

$

227,431

 

 

$

168,031

 

 

$

162,452

 

Construction

 

 

62,955

 

 

 

55,855

 

 

 

57,594

 

 

 

56,209

 

 

 

50,135

 

Secured by commercial real estate

 

 

518,070

 

 

 

451,404

 

 

 

377,586

 

 

 

336,050

 

 

 

308,590

 

Secured by residential real estate

 

 

103,419

 

 

 

84,741

 

 

 

81,897

 

 

 

72,443

 

 

 

68,581

 

State and political subdivisions

 

 

20,971

 

 

 

19,775

 

 

 

25,302

 

 

 

38,376

 

 

 

43,737

 

Retail:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential mortgages

 

 

105,654

 

 

 

100,281

 

 

 

82,739

 

 

 

69,469

 

 

 

67,453

 

Home equity loans and lines

 

 

63,580

 

 

 

61,782

 

 

 

63,943

 

 

 

73,311

 

 

 

77,475

 

Consumer

 

 

4,113

 

 

 

4,699

 

 

 

5,364

 

 

 

6,530

 

 

 

6,785

 

Total loans

 

 

1,039,637

 

 

 

927,147

 

 

 

921,856

 

 

 

820,419

 

 

 

785,208

 

Net unearned costs (fees)

 

 

(252

)

 

 

(677

)

 

 

(1,814

)

 

 

197

 

 

 

240

 

Loans receivable

 

$

1,039,385

 

 

$

926,470

 

 

$

920,042

 

 

$

820,616

 

 

$

785,448

 

 

Loan Maturities and Interest Sensitivity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans due after one year

 

December 31, 2022

 

One year

or less

 

 

After one

year through

five years

 

 

After

five through 15 years

 

 

After

15 years

 

 

Total

 

 

With fixed predetermined interest rate

 

 

With variable or adjustable interest rates

 

Commercial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

102,133

 

 

$

40,841

 

 

$

17,133

 

 

$

768

 

 

$

160,875

 

 

$

35,301

 

 

$

23,441

 

Construction

 

 

17,267

 

 

 

12,998

 

 

 

4,114

 

 

 

28,576

 

 

 

62,955

 

 

 

1,571

 

 

 

44,117

 

Secured by commercial real estate

 

 

12,626

 

 

 

27,096

 

 

 

166,917

 

 

 

311,431

 

 

 

518,070

 

 

 

41,674

 

 

 

463,770

 

Secured by residential real estate

 

 

1,411

 

 

 

3,145

 

 

 

29,868

 

 

 

68,995

 

 

 

103,419

 

 

 

2,821

 

 

 

99,187

 

State and political subdivisions

 

 

 

 

 

1,145

 

 

 

15,199

 

 

 

4,627

 

 

 

20,971

 

 

 

1,306

 

 

 

19,665

 

Retail:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential mortgages

 

 

130

 

 

 

701

 

 

 

14,091

 

 

 

90,732

 

 

 

105,654

 

 

 

43,701

 

 

 

61,823

 

Home equity loans and lines

 

 

5,240

 

 

 

2,743

 

 

 

17,041

 

 

 

38,556

 

 

 

63,580

 

 

 

21,337

 

 

 

37,003

 

Consumer

 

 

396

 

 

 

1,450

 

 

 

653

 

 

 

1,614

 

 

 

4,113

 

 

 

1,767

 

 

 

1,950

 

Total

 

$

139,203

 

 

$

90,119

 

 

$

265,016

 

 

$

545,299

 

 

$

1,039,637

 

 

$

149,478

 

 

$

750,956

 

 

Demand loans and loans with no stated maturity are included in one year or less. Table details final maturity.

The Allowance for Loan Losses Allocation table on Page 39 shows the percentage composition of the loan portfolio over the past five years. There was little change in the composition of the portfolio between the periods ended December 31, 2022 and 2021. Loans secured by commercial real estate remained the largest sector of the portfolio amounting to 49.8% and 48.7% of the portfolio at December 31, 2022 and December 31, 2021, respectively, as the balances in this sector grew by $66,666,000, or 14.8%, from $431,404,000 at December 31, 2021 to $518,070,000 at December 31, 2022. While loans secured by commercial real estate represent a significant portion of the total portfolio, the collateral is diversified, including investment properties, manufacturing facilities, office

- 36 -


buildings, hospitality properties, hospitals, retirement and nursing home facilities, warehouses and owner-occupied facilities. Commercial real estate loans have drawn the attention of the regulators in recent years as a potential source of risk. QNB monitors these types of loans closely, obtaining updated appraisals on loans classified substandard or worse. As detailed in the Allowance for Loan Losses table, QNB had no charge-offs in this category in 2022, 2021 or 2020.

Commercial loans secured by residential real estate increased by $18,678,000, or 22.0%, to $103,419,000 at December 31, 2022 and at 9.9% represent a slightly higher share of the overall portfolio than the 9.2% at December 31, 2021. Some of the properties that serve as collateral for these loans are located outside the Bank’s market area and have experienced vacancies and significant declines in market value in prior years. Non-accrual commercial loans secured by residential real estate were $285,000, $391,000, and $875,000 at December 31, 2022, 2021, and 2020, respectively.  Charge-offs in this category have significantly decreased over the past three years. Net recoveries of $45,000 in 2022, compared to net charge-off of $17,000 in 2021 and net recoveries of $68,000 in 2020.  In 2022, $41,000 in net recoveries were on out-of-market properties compared with $23,000 of the net charge-offs in 2021 and $64,000 of the net recoveries in 2020.

Commercial and industrial loans, the second largest sector of the portfolio, experienced an increase in balances of $12,265,000, or 8.3%, to $160,875,000 at December 31, 2022. This followed a decline in this category of $78,821,000, or 34.7%, in 2021. Excluding PPP loans, commercial and industrial loans increased $24,263,000, or 18.1%, in 2022 and increased $49,069,000, or 7.0%, in 2021. Commercial and industrial loans represented 15.5% of the portfolio at year-end 2022 compared with 16.0% at December 31, 2021. Excluding PPP loans, commercial and industrial loans represented 15.3% of the portfolio at year-end 2022 compared to 14.7% of the portfolio at year-end 2021. This category of loans generally presents a greater risk than loans secured by real estate since these loans are either secured by accounts receivable, inventory or equipment, or are unsecured.  During 2022, nonaccrual commercial and industrial loan balances decreased $1,794,000 to $1,575,000, the majority of which is due to paydowns of $1,811,000. During 2021, nonaccrual commercial and industrial loan balances decreased $998,000 to $3,369,000, the majority of which is due to paydowns of $998,000. During 2020, nonaccrual commercial and industrial loan balances decreased $1,534,000 to $4,367,000, the majority of which is due to paydowns of $1,270,000 and the partial charge-off of three credits totaling of $263,000. In 2021, 2020 and 2019, there were charge-off of $0, $268,000 and $207,000, respectively.

Construction loans increased 12.7% to $62,955,000, or 6.1% of the portfolio at December 31, 2022, from $55,855,000, or 6.0% of the portfolio at December 31, 2021. These loans are primarily to developers and builders for the construction of residential units or commercial buildings or to businesses for the construction of owner-occupied facilities. This portfolio is diversified among different types of collateral including: 1-4 family residential construction, medical and retirement home facilities, office buildings, hotels and land for development loans. Construction loans are generally made only on projects that have municipal approval. These loans are usually originated to include a short construction period followed by permanent financing provided through a commercial mortgage after construction is complete. Once construction is complete, the balance is moved to the secured by commercial real estate category if the permanent financing is provided by the Bank. There were no charge-offs in the construction loan portfolio since 2011, and no construction loans on non-accrual since 2014.

Loans to state and political subdivisions increased $1,196,000, or 2.9%, to $20,971,000 at December 31, 2022 from $19,775,000 at December 31, 2021. This sector decreased to 2.0% of the total loan portfolio at December 31, 2022 from 2.1% at December 31, 2021. Many municipalities, counties and school districts refinanced their existing bonds or bank debt due to rate.  The decrease in 2021 in the above table was primarily due to one relationship lost during the end of 2021.  

Residential mortgage loans secured by first lien balances increased by $5,373,000, or 5.4%, to $105,654,000 at December 31, 2022. This followed an increase of $17,542,000, or 21.2%, to $100,281,000, between December 31, 2020 and December 31, 2021.  In 2022 and 2021, QNB retained some adjustable and fixed rate mortgages to borrowers with high credit scores and low loan-to-value ratios.

Balances in home equity loans and lines increased $1,798,000, or 2.9%, to $63,580,000 at December 31, 2022. During 2022, QNB continued to offer very attractive rates on both variable and fixed rate home equity loans and lines. These attractive rates, along with excellent customer service, including quick turnaround time, resulted in new originations in home equity loans, however, paydowns and refinancing into mortgage loans contributed to the decline. QNB expects demand for home equity loans will increase as rates normalize and debt consolidation into mortgage loans decline.

Consumer loan balances decreased $586,000 to $4,113,000 at December 31, 2022. In 2013, QNB reentered the private student loan market through a relationship with a third party. These student loans are either fixed or variable rate with the rate dependent on the credit scores of the student and/or the cosigner. As of December 31, 2022 the balance of student loans was $2,180,000, a decrease of $256,000 compared with December 31, 2021.  Student loan balances will decline, as their balances are no longer insured, and QNB ceased funding originations through the third party during 2019 and forward.

Non-Performing Assets

Non-performing assets include non-performing loans, OREO and repossessed assets.  Non-performing assets totaled $9,121,000, or 0.55% of total assets at December 31, 2022, a $2,551,000 decrease over the $11,672,000, or 0.70% of total assets at December 31, 2021.

Total non-performing loans, which represent loans on non-accrual status, loans past due 90 days or more and still accruing interest and troubled debt restructured loans were $9,121,000, or 0.88% of total loans receivable at December 31, 2022 compared with

- 37 -


$11,672,000, or 1.26% of total loans receivable at December 31, 2021. Loans on non-accrual status were $4,820,000 at December 31, 2022 compared $7,530,000 at December 31, 2021. The decrease was primarily due to paydowns of $2,288,000, net charge-offs of $66,000 and loans returned to accruing of $519,000; partially offset by $163,000 being placed on nonaccrual of which $138,000 were due to retail relationships.  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. Of the total amount of non-accrual loans at December 31, 2022, $3,345,000, or approximately 71% of the loans classified as non-accrual, are current or past due less than 30 days.

QNB had no loans 90 days or more past due and still accruing at December 31, 2022 or at December 31, 2021. Total loans that are 30 days or more past due decreased $1,804,000 to $2,439,000, representing 0.23% of total loans at December 31, 2022 compared with $4,243,000 and 0.46% of total loans at December 31, 2021. Restructured loans, as defined in accounting guidance for troubled debt restructuring in ASC 310-40, that have not already been included in loans past due 90 days or more and still accruing or in non-accrual loans, totaled $4,301,000 and $4,142,000 at December 31, 2022 and 2021, respectively.  

QNB held no OREO at December 31, 2022 or 2021.  There were no repossessed assets as of December 31, 2022 or 2021.

 

Non-Performing Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31,

 

2022

 

 

2021

 

 

2020

 

 

2019

 

 

2018

 

Loans past due 90 days or more and accruing

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

Construction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Secured by commercial real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Secured by residential real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

State and political subdivisions

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Indirect lease financing

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retail:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential mortgages

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Home equity loans and lines

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total loans past due 90 days or more and accruing

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-accrual loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

 

1,575

 

 

 

3,369

 

 

 

4,367

 

 

 

5,901

 

 

 

3,179

 

Construction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Secured by commercial real estate

 

 

2,031

 

 

 

2,279

 

 

 

2,905

 

 

 

3,640

 

 

 

1,965

 

Secured by residential real estate

 

 

289

 

 

 

391

 

 

 

875

 

 

 

851

 

 

 

1,102

 

State and political subdivisions

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retail:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential mortgages

 

 

461

 

 

 

721

 

 

 

636

 

 

 

636

 

 

 

940

 

Home equity loans and lines

 

 

402

 

 

 

680

 

 

 

752

 

 

 

537

 

 

 

166

 

Consumer

 

 

62

 

 

 

90

 

 

 

105

 

 

 

139

 

 

 

126

 

Total non-accrual loans

 

 

4,820

 

 

 

7,530

 

 

 

9,640

 

 

 

11,704

 

 

 

7,478

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Troubled debt restructured loans, not included above

 

 

4,301

 

 

 

4,142

 

 

 

4,469

 

 

 

4,760

 

 

 

2,160

 

Total non-performing assets

 

$

9,121

 

 

$

11,672

 

 

$

14,109

 

 

$

16,464

 

 

$

9,638

 

Total non-performing assets as a percent of total assets

 

 

0.55

%

 

 

0.70

%

 

 

0.98

%

 

 

1.34

%

 

 

0.82

%

Nonaccrual loans to total loans

 

 

0.88

 

 

 

1.26

 

 

 

1.53

 

 

 

2.01

 

 

 

1.23

 

 

Additional loan quality information can be found in Note 5 of the Notes to the Consolidated Financial Statements included in Item 8 of this Form 10-K. Management’s view is that loans classified as substandard or doubtful that are not included in the past due, non-accrual or restructured categories are potential problem loans. For some of these loans, management may have knowledge of possible credit problems that will cause management to question the ability of the borrowers to comply with the present loan repayment terms. Commercial loans classified as substandard or doubtful, which includes non-performing loans, continue to show improvement. At December 31, 2022, substandard or doubtful loans totaled $13,684,000, a decrease of $4,847,000, or 26.6%, from the $18,531,000, reported as of December 31, 2021.

- 38 -


Allowance for Loan Losses

The allowance for loan losses 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 (“US GAAP”). The determination of an appropriate level of 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 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 and the level of unallocated reserves. This analysis considers a number of 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.

Economic conditions, nationally and in QNB’s market, improved in 2022 and asset quality remained strong. The allowance level stated as a percent of loans receivable decreased from 1.21% at December 31, 2021 to 1.01% at December 31, 2022.  Excluding PPP loans, the allowance level stated as a percent of loans receivable was 1.23% at December 31, 2021 and 1.02% at December 31, 2022.  PPP loans are 100% guaranteed by the SBA.   The allowance for loan losses decreased to $10,531,000 at year-end 2022 from $11,184,000 at year-end 2021, due to the decrease in non-performing assets loans and improvements in credit quality.

 

Allowance for Loan Losses Allocation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31,

 

2022

 

 

2021

 

 

2020

 

 

2019

 

 

2018

 

 

 

Amount

 

 

Percent

gross

loans

 

 

Amount

 

 

Percent

gross

loans

 

 

Amount

 

 

Percent

gross

loans

 

 

Amount

 

 

Percent

gross

loans

 

 

Amount

 

 

Percent

gross

loans

 

Balance at end of period applicable to:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

1,316

 

 

 

15.5

%

 

$

3,368

 

 

 

16.0

%

 

$

4,050

 

 

 

24.7

%

 

$

4,689

 

 

 

20.5

%

 

$

3,092

 

 

 

20.7

%

Construction

 

 

755

 

 

 

6.1

 

 

 

363

 

 

 

6.0

 

 

 

346

 

 

 

6.2

 

 

 

590

 

 

 

6.8

 

 

 

551

 

 

 

6.4

 

Secured by commercial real estate

 

 

5,002

 

 

 

49.8

 

 

 

4,280

 

 

 

48.7

 

 

 

3,736

 

 

 

41.0

 

 

 

2,519

 

 

 

41.0

 

 

 

2,824

 

 

 

39.3

 

Secured by residential real estate

 

 

1,240

 

 

 

9.9

 

 

 

1,035

 

 

 

9.2

 

 

 

871

 

 

 

8.9

 

 

 

629

 

 

 

8.8

 

 

 

754

 

 

 

8.7

 

State and political subdivisions

 

 

94

 

 

 

2.0

 

 

 

69

 

 

 

2.1

 

 

 

89

 

 

 

2.7

 

 

 

115

 

 

 

4.7

 

 

 

153

 

 

 

5.6

 

Retail:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential mortgages

 

 

683

 

 

 

10.2

 

 

 

646

 

 

 

10.8

 

 

 

533

 

 

 

9.0

 

 

 

549

 

 

 

8.5

 

 

 

497

 

 

 

8.6

 

Home equity loans and lines

 

 

437

 

 

 

6.1

 

 

 

376

 

 

 

6.7

 

 

 

386

 

 

 

6.9

 

 

 

310

 

 

 

8.9

 

 

 

338

 

 

 

9.9

 

Consumer

 

 

502

 

 

 

0.4

 

 

 

542

 

 

 

0.5

 

 

 

265

 

 

 

0.6

 

 

 

230

 

 

 

0.8

 

 

 

164

 

 

 

0.8

 

Unallocated

 

 

502

 

 

 

 

 

 

 

505

 

 

 

 

 

 

 

550

 

 

 

 

 

 

 

256

 

 

 

 

 

 

 

461

 

 

 

 

 

Total

 

$

10,531

 

 

 

100.0

%

 

$

11,184

 

 

 

100.0

%

 

$

10,826

 

 

 

100.0

%

 

$

9,887

 

 

 

100.0

%

 

$

8,834

 

 

 

100.0

%

 

Gross loans represent loans before unamortized net loan fees and costs. Percent gross loans lists the percentage of each loan type to total loans.

 

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 may not be 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. At December 31, 2022 and 2021, the recorded investment in loans for which impairment has been identified totaled $9,567,000 and $12,192,000, respectively, of which $4,943,000 and $4,633,000, respectively, required no specific allowance for loan loss. The recorded investment in impaired loans requiring an allowance for loan losses was $4,624,000 and $7,559,000 at December 31, 2022 and 2021, respectively. At December 31, 2022 and

- 39 -


2021, the related allowance for loan losses associated with these loans was $696,000 and $2,873,000, respectively. See Note 5 to the Notes to Consolidated Financial Statements included in Item 8 of this Form 10-K for additional detail of impaired loans.

 

Allowance for Loan Losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2022

 

 

2021

 

 

2020

 

 

2019

 

 

2018

 

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, January 1

 

$

11,184

 

 

$

10,826

 

 

$

9,887

 

 

$

8,834

 

 

$

7,841

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Charge-offs

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

 

38

 

 

 

 

 

 

268

 

 

 

207

 

 

 

 

Construction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Secured by commercial real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Secured by residential real estate

 

 

 

 

 

38

 

 

 

 

 

 

51

 

 

 

77

 

State and political subdivisions

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retail:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential mortgages

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1

 

Home equity loans and lines

 

 

 

 

 

49

 

 

 

 

 

 

17

 

 

 

84

 

Consumer

 

 

158

 

 

 

176

 

 

 

282

 

 

 

197

 

 

 

112

 

Total charge-offs

 

 

196

 

 

 

263

 

 

 

550

 

 

 

472

 

 

 

274

 

Recoveries

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

 

306

 

 

 

92

 

 

 

40

 

 

 

33

 

 

 

40

 

Construction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Secured by commercial real estate

 

 

 

 

 

 

 

 

12

 

 

 

10

 

 

 

23

 

Secured by residential real estate

 

 

45

 

 

 

21

 

 

 

68

 

 

 

123

 

 

 

27

 

State and political subdivisions

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retail:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential mortgages

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Home equity loans and lines

 

 

6

 

 

 

7

 

 

 

41

 

 

 

15

 

 

 

13

 

Consumer

 

 

36

 

 

 

43

 

 

 

78

 

 

 

44

 

 

 

34

 

Total recoveries

 

 

393

 

 

 

163

 

 

 

239

 

 

 

225

 

 

 

137

 

Net charge-offs

 

 

197

 

 

 

(100

)

 

 

(311

)

 

 

(247

)

 

 

(137

)

Provision for loan losses

 

 

(850

)

 

 

458

 

 

 

1,250

 

 

 

1,300

 

 

 

1,130

 

Balance, December 31

 

$

10,531

 

 

$

11,184

 

 

$

10,826

 

 

$

9,887

 

 

$

8,834

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total loans (excluding loans held-for-sale)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average

 

$

967,438

 

 

$

928,017

 

 

$

868,461

 

 

$

811,413

 

 

$

766,692

 

Year-end

 

 

1,039,385

 

 

 

926,470

 

 

 

920,042

 

 

 

820,616

 

 

 

785,448

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ratios:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net charge-offs to:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average loans

 

 

-0.02

%

 

 

0.01

%

 

 

0.04

%

 

 

0.03

%

 

 

0.02

%

Loans at year-end

 

 

-0.02

 

 

 

0.01

 

 

 

0.03

 

 

 

0.03

 

 

 

0.02

 

Allowance for loan losses

 

 

-1.87

 

 

 

0.89

 

 

 

2.87

 

 

 

2.50

 

 

 

1.55

 

Provision for loan losses

 

 

23.18

 

 

 

21.83

 

 

 

24.88

 

 

 

19.00

 

 

 

12.12

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan losses to:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average loans

 

 

1.09

%

 

 

1.35

%

 

 

1.25

%

 

 

1.22

%

 

 

1.22

%

Loans at year-end

 

 

1.01

 

 

 

1.21

 

 

 

1.18

 

 

 

1.20

 

 

 

1.12

 

Nonaccrual loans

 

 

218.49

 

 

 

148.53

 

 

 

112.30

 

 

 

84.48

 

 

 

118.13

 

 

QNB had net loan recoveries of $197,000, or 0.02% of average loans for 2022 compared to net charge-off of $100,000, or 0.01% of average loans for 2021 and $311,000, or 0.04% of average loans for 2020. The majority of charge-offs recorded during these periods had specific reserves established during the allowance for loan loss calculation process prior to the decision to charge-off the loan.  The increase in commercial and industrial charge-offs in 2020 and 2019 was primarily related to a single relationship.

- 40 -


Management believes the allowance for loan losses of $10,531,000 is adequate as of December 31, 2022, in relation to the estimate of known and inherent losses in the portfolio.

Premises and equipment

Premises and equipment includes a right-of-use asset of $2,909,000 and $3,423,000 at December 31, 2022 and December 31, 2022 respectively. The discount rates used in determining the initial value of the right of use assets are based on the FHLB Amortizing Fixed Loan Rate for the term of each lease.  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 during 2022. QNB renewed one operating lease during 2021 and acquired the underlying assets of one of its leased properties.   Operating lease liabilities are included with “Other liabilities” on the Consolidated Balance Sheets.  All operating lease costs are included in non-interest expense within “Net occupancy” on the Consolidated Statements of Income.  Other premises and equipment, net of depreciation decreased $563,000 to $12,554,000 at December 31, 2022; this was primarily due to depreciation.

Other assets

Other assets increased $21,420,000 from $6,424,000 at December 31, 2021 to $27,844,000 at December 31, 2022. Most of the increase in other assets relates to a $20,628,000 increase to the deferred tax asset resulting from the fair value adjustment on investment securities available-for-sale of $20,571,000.  The detail of the net deferred tax asset can be found in Note 11 in the Notes to Consolidated Financial Statements.

LIABILITIES

The following table presents total liabilities at the dates indicated:

 

 

 

 

 

 

 

 

 

 

 

Change from prior year

 

Year ended December 31,

 

2022

 

 

2021

 

 

Amount

 

 

Percent

 

Deposits

 

$

1,418,369

 

 

$

1,449,745

 

 

$

(31,376

)

 

 

-2.2

%

Short-term borrowings

 

 

161,327

 

 

 

68,476

 

 

 

92,851

 

 

 

135.6

 

Long-term debt

 

 

10,000

 

 

 

10,000

 

 

 

 

 

N/M

 

Accrued interest payable

 

 

467

 

 

 

211

 

 

 

256

 

 

 

121.3

 

Other liabilities

 

 

7,376

 

 

 

8,414

 

 

 

(1,038

)

 

 

-12.3

 

Total liabilities

 

$

1,597,539

 

 

$

1,536,846

 

 

$

60,693

 

 

 

3.9

%

 

Deposits

QNB primarily attracts deposits from within its market area by offering various deposit products. These deposits are in the form of time deposits, which include certificates of deposit and individual retirement accounts (“IRAs”) which have a stated maturity, and non-maturity deposit accounts, which include: non-interest-bearing demand accounts, interest-bearing demand accounts, money market accounts and savings accounts.

Total deposits decreased $31,376,000, or 2.2%, to $1,418,369,000 at December 31, 2022, due to the competitive local interest rate market for deposits.  The mix of deposits continues to be impacted by customers’ reactions to the competition, regulations and the interest rate environment. Many customers are looking for transaction accounts that provide liquidity and pay a reasonable amount of interest, while others look for high rate. Time deposit balances increased $7,076,000, or 4.2% between 2021 and 2022, as customers took advantage of a higher rate environment.  Customers appear to be looking for the safety of FDIC insured deposits and the stability of a strong local community bank.

Non-interest-bearing demand accounts decreased $11,157,000 to $231,849,000 at December 31, 2022. These deposits are both retail and commercial checking accounts and are volatile depending on the timing of deposits and withdrawals. QNB has been successful in attracting new customers and expanding relationships with existing customers, which provides an opportunity for fee income.

- 41 -


Interest-bearing demand accounts, retail and business interest-checking and municipal accounts, decreased $15,272,000, or 3.3%, to $452,927,000 at December 31, 2022. All three segments experienced a decline in 2022.  QNB has been successful in developing relationships with several school districts and municipalities as well as expanding existing relationships, the balances in these accounts are seasonal in nature and can be volatile on a daily basis. Most of the school district taxes are collected during the third quarter of the year and are disbursed over a nine-month period.  Business checking decreased from $67,069,000 at December 31, 2021 to $66,606,000 at December 31, 2022.   Retail checking accounts decreased $4,358,000, or 1.6%, to $267,980,000 at December 31, 2022.  QNB continues to open a significant number of new checking accounts; additionally, customers may choose to switch products. Rewards checking balances decreased $2,437,000 from $107,470,000 at December 31, 2021 to $105,033,000 at December 31, 2022, and personal interest-bearing balances increased $1,147,000. The balances in the Select 50 product decreased $3,186,000 from $134,915,000 at December 31, 2021 to $131,729,000 at December 31, 2022.

Money Market accounts decreased from 143,942,000 at December 31, 2021 to $127,043,000 at December 31, 2022 primarily due to decreases in business account balances.

Total savings account balances increased $4,876,000, or 1.1%, to $431,101,000 at December 31, 2022. This increase is due primarily to an increase in Statement Savings of $3,604,000, or 3.5%, and an increase of $1,285,000, or 0.4%, in the online eSavings accounts over December 31, 2021.  The rate on eSavings accounts was changed from 0.35% at the end of 2021 to 1.25% in 2022.

Total time deposit account balances were $175,449,000 at December 31, 2022, an increase of $7,076,000, or 4.2%, from the amount reported at December 31, 2021. QNB was able to retain many maturing deposits during 2022 by offering competitive rates and many current customers move balances from more liquid accounts to take advantage of these rates.  

 

Maturity of Time Deposits of $250,000 or More

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31,

 

2022

 

 

2021

 

 

2020

 

Three months or less

 

$

3,287

 

 

$

4,749

 

 

$

9,150

 

Over three months through six months

 

 

3,579

 

 

 

4,224

 

 

 

4,318

 

Over six months through twelve months

 

 

7,645

 

 

 

7,395

 

 

 

7,284

 

Over twelve months

 

 

9,959

 

 

 

8,619

 

 

 

8,767

 

Total

 

$

24,470

 

 

$

24,987

 

 

$

29,519

 

 

To continue to attract and retain deposits, QNB plans to remain competitive with respect to rates and to continue to deliver products with terms and features that appeal to customers. The QNB Rewards checking accounts and time deposits are examples of such products.

 

The following table presents trends in balances and yield on the major deposit groups.

 

Average Deposits by Major Classification

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2022

 

 

2021

 

 

2020

 

 

 

Balance

 

 

Rate

 

 

Balance

 

 

Rate

 

 

Balance

 

 

Rate

 

Demand, non-interest bearing

 

$

242,778

 

 

 

 

 

 

$

236,511

 

 

 

 

 

 

$

186,897

 

 

 

 

 

Interest-bearing demand

 

 

345,054

 

 

 

0.27

%

 

 

307,258

 

 

 

0.20

%

 

 

252,050

 

 

 

0.26

%

Municipals interest-bearing demand

 

 

122,824

 

 

 

1.43

 

 

 

127,828

 

 

 

0.32

 

 

 

119,673

 

 

 

0.57

 

Money market

 

 

137,830

 

 

 

0.45

 

 

 

122,361

 

 

 

0.31

 

 

 

90,989

 

 

 

0.45

 

Savings

 

 

443,104

 

 

 

0.49

 

 

 

386,630

 

 

 

0.30

 

 

 

288,285

 

 

 

0.40

 

Time less than $100

 

 

91,216

 

 

 

0.79

 

 

 

98,986

 

 

 

0.93

 

 

 

113,647

 

 

 

1.41

 

Time $100 through $250

 

 

52,314

 

 

 

0.93

 

 

 

52,693

 

 

 

0.86

 

 

 

65,840

 

 

 

1.54

 

Time greater than $250

 

 

25,296

 

 

 

0.83

 

 

 

26,833

 

 

 

0.96

 

 

 

33,030

 

 

 

1.65

 

Total

 

$

1,460,416

 

 

 

0.47

%

 

$

1,359,100

 

 

 

0.31

%

 

$

1,150,411

 

 

 

0.53

%

 

Short-term borrowings

Short-term borrowings comprising commercial sweep accounts and overnight FHLB borrowings increased $92,851,000, or 135.6%, to $161,327,000 at December 31, 2022.  There were no overnight FHLB borrowings outstanding at December 31, 2021 and $92,018,000 at December 31, 2022.   The FHLB borrowings were used to support loan growth.

Long-term debt

Long-term debt comprises of $10,000,0000 in FHLB borrowings. During 2020, QNB borrowed long-term debt of $10,000,000 at fixed rates to lock in at a lower yield than the overnight borrowing costs at that time.

- 42 -


Other liabilities

Other liabilities comprise accrued expenses including salaries, post-retirement life insurance benefits and income taxes, operating lease liability, deferred revenue, and ATM/debit card processing clearing.  These balances decreased $1,038,000, to $7,376,000 at December 31, 2022.     

SHAREHOLDERS’ EQUITY

The following table presents total shareholders’ equity at the dates indicated:

 

 

 

 

 

 

 

 

 

 

 

Change from prior year

 

Year ended December 31,

 

2022

 

 

2021

 

 

Amount

 

 

Percent

 

Common stock

 

$

2,373

 

 

$

2,350

 

 

$

23

 

 

 

1.0

%

Surplus

 

 

24,798

 

 

 

23,683

 

 

 

1,115

 

 

 

4.7

 

Retained earnings

 

 

128,951

 

 

 

118,163

 

 

 

10,788

 

 

 

9.1

 

Accumulated other comprehensive loss, net of tax

 

 

(81,127

)

 

 

(3,740

)

 

 

(77,387

)

 

N/M

 

Treasury stock

 

 

(4,037

)

 

 

(3,962

)

 

 

(75

)

 

 

1.9

 

Total shareholders' equity

 

$

70,958

 

 

$

136,494

 

 

$

(65,536

)

 

 

-48.0

%

 

Total shareholders’ equity decreased $65,536,000, or 48.0%, to $70,958,000 at December 31, 2022 with the negative impact of the market value of available-for-sale securities, net of tax, adjustment contributing $77,387,000.  This was partially offset with retained earnings (net income less dividends paid) contributing $10,788,000 and the dividend reinvestment and stock purchase plan, employee stock purchase plan and stock option plan contributing $1,138,000.   During 2022, QNB purchased $75,000 in treasury stock.

 

Accumulated other comprehensive loss decreased from a loss of $3,740,000 to a loss of $81,127,000, resulting from the decrease in fair value of the available-for-sale investment portfolio primarily due to a decline in market values.

 

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. The Plan also allows participants to make additional cash purchases of stock. Stock purchases under the Plan contributed $917,000 and $841,000 to capital during 2022 and 2021, respectively.

 

The Board of Directors has authorized the repurchase of up to 200,000 shares of QNB’s common stock in open market or privately

negotiated transactions. The repurchase authorization does not bear a termination date.  During 2022, 2,000 shares were repurchased at an average price of $37.07.  As of December 31, 2022, a total of 102,000 shares were repurchased under this authorization at an average price of $24.93 and a total cost of $2,543,000.

Liquidity and Capital Resources

Liquidity Management

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.

- 43 -


An additional source of liquidity is provided by the Bank’s membership in the FHLB. At December 31, 2022, the Bank’s total maximum borrowing capacity at the FHLB was $396,973,000 of which $294,496,000 remained available. The Bank had $10,000,000 in long-term debt over-night funds of $92,018,000 outstanding at year-end 2022, related interest payable of $92,000, and $350,000 in FHLB-issued letters of credit. The maximum borrowing capacity changes depending upon the Bank’s level of qualifying collateral assets. In addition, the Bank maintains five unsecured Federal funds lines with five correspondent banks totaling $101,000,000.  At December 31, 2022 and 2021, there were no outstanding borrowings under these lines. Future availability under these lines is subject to the policies of the granting banks and may be withdrawn. As part of its contingency funding plan, QNB successfully tested its ability to borrow from these sources during 2022.

Total cash and cash equivalents, equity and available-for-sale securities and loans held-for-sale totaled $574,480,000 at December 31, 2022 and $718,160,000 at December 31, 2021, of which $237,645,000 and $264,154,000, respectively, were pledged as collateral for repurchase agreements and public deposits.  This decrease in liquid sources is primarily the result of the market value decline in available-for-sale securities. Management anticipates that these liquid sources are adequate to meet normal fluctuations in loan demand or deposit withdrawals. It is anticipated that the investment portfolio will continue to provide sufficient liquidity as municipal bonds are called and as principal and interest payments on mortgage-backed and CMO securities provide steady cash flow. Increases in interest rates, however, result in decreased cash flow available from the investment portfolio.

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.  QNB had $11,284,000 in CDARS time deposits at December 31, 2022.

Capital Resources

A strong capital position is fundamental to support continued growth and profitability and to serve the needs of depositors. QNB’s shareholders’ equity at December 31, 2022 was $70,958,000, or 4.25% of total assets, compared with shareholders’ equity of $136,494,000, or 8.16% of total assets, at December 31, 2021. Shareholders’ equity at December 31, 2022 included a negative $81,127,000 related to unrealized holding losses, net of taxes, on investment securities available for sale, compared to a negative  $3,740,000 related to unrealized holding losses, net of taxes, on investment securities available for sale at December 31, 2021. Excluding these adjustments, shareholders’ equity to total assets would have been 8.69% and 8.36% at December 31, 2022 and 2021, respectively.

Average shareholders’ equity and average total assets were $146,088,000 and $1,710,449,000 for 2022, an increase of 8.0% and 7.9%, respectively, from 2021 average equity and average total assets of $135,324,000 and $1,585,627,000, respectively. The ratio of average total equity to total average assets was 8.54% for 2022, compared with 8.53% for 2021.

QNB is subject to restrictions on the payment of dividends to its shareholders pursuant to the Pennsylvania Business Corporation Law of 1988 as amended (the BCL). The BCL operates generally to preclude dividend payments, if the effect thereof would render QNB insolvent, as defined. As a practical matter, QNB’s payment of dividends is contingent upon its ability to obtain funding in the form of dividends from the Bank. Under Pennsylvania banking law, the Bank is subject to certain restrictions on the amount of dividends that it may declare without prior regulatory approval. At December 31, 2022, the retained earnings of the Bank totaling $122,052,000 was available for dividends without prior Pennsylvania Department of Banking approval, subject to the regulatory capital requirements discussed below. Under the Federal Deposit Insurance Act, an insured depository institution may not pay a dividend if, after the payment of the dividend, the institution would be undercapitalized under the FDIC’s prompt corrective action rules. In addition, federal banking agencies have the authority to restrict dividend payments under certain circumstances if such payments are not consistent with the capital needs and financial condition of the institution. It is the policy of the Federal Reserve that a bank holding company generally should not maintain its existing rate of cash dividends on common stock unless the net income available to common shareholders over the prior four quarters, net of dividends previously paid during that period, has been sufficient to fully fund the dividends and the prospective rate of earnings retention appears consistent with the company’s capital needs, asset quality, and overall financial condition.  QNB paid dividends to its shareholders of $1.44 per share, $1.40 per share, and $1.36 per share, in 2022, 2021, and 2020, respectively.

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

- 44 -


Minimum requirements for both the quantity and quality of capital held by banks are as follows: Common equity Tier 1 capital to risk-weighted assets of 4.5%; Tier 1 capital to risk-weighted assets of 6.0%; Total Capital to risk-weighted assets of 8.0%; and Tier 1 leverage ratio of 4.0%.   The capital conservation buffer, comprised of common equity Tier 1 capital, was established above the regulatory minimum capital requirements at 2.5%.  

The Federal Deposit Insurance Corporation Improvement Act of 1991 established five capital level designations for insured institutions ranging from “well capitalized” to “critically undercapitalized.” At December 31, 2022 and 2021, management believes that the Company and the Bank met all capital adequacy requirements to which they are subject and have met the “well capitalized” criteria.

 

Capital Analysis

 

December 31,

 

2022

 

 

2021

 

Regulatory Capital

 

 

 

 

 

 

 

 

Shareholders' equity

 

$

70,958

 

 

$

136,494

 

Net unrealized securities losses, net of tax

 

 

81,127

 

 

 

3,740

 

Deferred tax assets on net operating loss

 

 

 

 

 

 

Disallowed goodwill and other disallowed intangible assets

 

 

(8

)

 

 

(8

)

Common equity tier I capital

 

 

152,077

 

 

 

140,226

 

 

 

 

 

 

 

 

 

 

Tier 1 capital

 

 

152,077

 

 

 

140,226

 

Allowable portion: Allowance for loan losses and reserve for

   unfunded commitments

 

 

10,648

 

 

 

11,275

 

Total regulatory capital

 

$

162,725

 

 

$

151,501

 

Risk-weighted assets

 

$

1,233,758

 

 

$

1,113,887

 

Quarterly average assets for leverage capital purposes

 

$

1,737,671

 

 

$

1,672,259

 

 

Capital Ratios

 

December 31,

 

2022

 

 

2021

 

Common equity tier I capital / risk-weighted assets

 

 

12.33

%

 

 

12.59

%

Tier 1 capital / risk-weighted assets

 

 

12.33

%

 

 

12.59

%

Total regulatory capital / risk-weighted assets

 

 

13.19

%

 

 

13.60

%

Tier 1 capital / average assets (leverage ratio)

 

 

8.75

%

 

 

8.39

%

 

Material Cash Requirements from Known Contractual and Other Obligations

QNB has various financial obligations, including contractual obligations and commitments, which may require future cash payments.

The following table presents, as of December 31, 2022, significant contractual obligations to third parties by payment date and the amounts and expected maturities of significant commitments. Further discussion of the nature of each obligation can be found in the Notes to Consolidated Financial Statements. The Company’s reserve for unfunded commitments totaled $117,000 at December 31, 2022 compared to $91,000 at December 31, 2021.

 

December 31, 2022

 

One year

or less

 

 

After one

year

through

three years

 

 

After three

years

through

five years

 

 

After

five years

 

 

Total

 

Time deposits

 

$

85,267

 

 

$

61,954

 

 

$

28,228

 

 

$

 

 

$

175,449

 

Short-term borrowings

 

 

161,327

 

 

 

 

 

 

 

 

 

 

 

 

161,327

 

Long-term debt

 

 

10

 

 

 

 

 

 

 

 

 

 

 

 

10

 

Operating leases

 

 

569

 

 

 

931

 

 

 

555

 

 

 

2,433

 

 

 

4,488

 

Commitments to extend credit (a)

 

 

189,275

 

 

 

77,669

 

 

 

13,107

 

 

 

59,261

 

 

 

339,312

 

Standby letters of credit

 

 

17,800

 

 

 

1,712

 

 

 

 

 

 

 

 

 

19,512

 

Total

 

$

454,248

 

 

$

142,266

 

 

$

41,890

 

 

$

61,694

 

 

$

700,098

 

 

(a)

Includes available amounts for overdraft protection program in one year or less

 

- 45 -


 

Commitments to extend credit, including loan commitments, standby letters of credit, and commercial letters of credit do not necessarily represent future cash requirements, as these commitments often expire without being drawn upon. The Company does not currently have any commitments for significant capital expenditures or other purchase obligations.

 

RECENTLY ISSUED ACCOUNTING STANDARDS

Refer to Note 1 of the Notes to Consolidated Financial Statements for discussion of recently issued accounting standards.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Disclosure of the Company’s significant accounting policies is included in Note 1 to Consolidated Financial Statements. Additional information is contained in Management’s Discussion and Analysis and the Notes to Consolidated Financial Statements for the most sensitive of these issues. 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 US 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, other-than-temporary impairments on investment securities, the determination of impairment of restricted bank stock, the valuation of deferred tax assets, stock-based compensation and income taxes. QNB bases its estimates on historical experience and various other factors and assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Other-than-Temporary Investment Security Impairment

Securities are evaluated periodically to determine whether a decline in their value is other-than-temporary. Management utilizes criteria such as the magnitude and duration of the decline, in addition to the reasons underlying the decline, to determine whether the loss in value is other-than-temporary. The term “other-than-temporary” is not intended to indicate that the decline is permanent 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.

The Company follows the accounting guidance in Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 320-10 as it relates to the recognition and presentation of other-than-temporary impairment (“OTTI”). This accounting guidance specifies that (a) if a company does not have the intent to sell a debt security prior to recovery and (b) it is more likely than not that it will not have to sell the debt security prior to recovery, the security would not be considered other-than-temporarily impaired unless there is a credit loss. When an entity does not intend to sell the security, and it is more likely than not, the entity will not have to sell the security before recovery of its cost basis, it will recognize the credit component of an other-than-temporary impairment of a debt security in earnings and the remaining portion in other comprehensive income. For held to maturity debt securities, the amount of an other-than-temporary impairment recorded in other comprehensive income for the non-credit portion of a previous other-than-temporary impairment should be amortized prospectively over the remaining life of the security on the basis of the timing of future estimated cash flows of the security.  For equity securities without a readily determinable market value, once a decline in value is determined to be other-than-temporary, the value of the equity security is reduced to fair value and a corresponding charge to earnings is recognized.

Allowance for Loan Losses

QNB considers that the determination of the allowance for loan losses involves a higher degree of judgment and complexity than its 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. The general reserves are based on the composition and risk characteristics of the loan portfolio, including the nature of the loan portfolio, credit concentration trends, delinquency and loss experience, as well as other qualitative factors such as current economic trends.

Management emphasizes loan quality and close monitoring of potential problem credits. Credit risk identification and review processes are utilized in order to assess and monitor the degree of risk in the loan portfolio. QNB’s lending and credit administration staff are charged with reviewing the loan portfolio and identifying changes in the economy or in a borrower’s circumstances which

- 46 -


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 US GAAP. If circumstances differ substantially from the assumptions used in making determinations, future adjustments to the allowance for loan losses may be necessary and results of operations could be affected. Because future events affecting borrowers and collateral cannot be predicted with certainty, increases to the allowance may be necessary should the quality of any loans deteriorate as a result of the factors discussed above.

Foreclosed Assets

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

Stock-Based Compensation

QNB sponsored stock-based compensation plans, administered by a Board committee, under which both qualified and nonqualified 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 to a great extent on matters that may, at least in part, be beyond QNB’s control, it is at least reasonably possible that management’s judgment about the need for a valuation allowance for deferred taxes could change in the near term.

 

 

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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.

- 47 -


A balance sheet is considered liability sensitive when its liabilities (deposits and borrowings) reprice faster or to a greater extent than its earning assets (loans and securities). A liability sensitive balance sheet will produce relatively less net interest income when interest rates rise and more net interest income when they decline.  Based on our simulation analysis, management believes QNB’s interest sensitivity position at December 31, 2022 is liability sensitive.  Management expects market interest rates to increase in the next 12 months, based on the economic environment and policy of the Federal Reserve.

The following table shows the estimated impact of changes in interest rates on net interest income as of December 31, 2022 and 2021 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

 

Change in interest rates

 

December 31,

 

(basis points)

 

2022

 

 

2021

 

+200

 

 

-9.4

%

 

 

-11.4

%

+100

 

 

-4.7

%

 

 

-5.5

%

-100

 

 

4.1

%

 

 

0.0

%

-200

 

 

6.1

%

 

 

-5.9

%

-300

 

 

6.6

%

 

 

-11.8

%

 

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.

QNB is not subject to foreign currency exchange or commodity price risk. At December 31, 2022, QNB did not have any hedging transactions in place such as interest rate swaps, caps or floors. 

 

 

 

- 48 -


 

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

The following audited financial statements are set forth in this Annual Report on Form 10-K on the following pages:

 

 

 

Report of Independent Registered Public Accounting Firm:  Baker Tilly US, LLP (PCAOB ID 23) Iselin, NJ

Page 51

Consolidated Balance Sheets

Page 53

Consolidated Statements of Income

Page 54

Consolidated Statements of Comprehensive Income

Page 55

Consolidated Statements of Shareholders’ Equity

Page 56

Consolidated Statements of Cash Flows

Page 57

Notes to Consolidated Financial Statements

Page 58

- 49 -


 

Management’s Report on Internal Control over Financial Reporting

March 14, 2023

Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2022, in relation to criteria for effective internal control over financial reporting as described in “Internal Control Integrated Framework (2013),” issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on this assessment, management concludes that, as of December 31, 2022, the Company’s system of internal control over financial reporting is effective and meets the criteria of the “Internal Control Integrated Framework (2013).”

 

 

/s/ David W. Freeman

 

/s/ Jeffrey Lehocky

David W. Freeman

 

Jeffrey Lehocky

Chief Executive Officer

 

Chief Financial Officer

 

- 50 -


 

Report of Independent Registered Public Accounting Firm

 

Shareholders and the Board of Directors of QNB Corp.

 

 

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of QNB Corp. and subsidiary (the "Company") as of December 31, 2022 and 2021, the related consolidated statements of income, comprehensive (loss) income, shareholders' equity, and cash flows, for each of the three years in the period ended December 31, 2022, and the related notes (collectively referred to as the "consolidated financial statements"). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America..

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company's consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

Critical Audit Matter

 

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

 

Allowance for Loan Losses – Qualitative Factor Adjustments

 

Critical Audit Matter Description

 

As disclosed in Notes 1 and 5 to the Company's consolidated financial statements, the Company maintains an allowance for loan losses that is intended to absorb probable known and inherent losses in the outstanding loan portfolio based on management's continuing review and evaluation of the loan portfolio. As described in the notes, the allowance for loan losses consists of specific and general reserve components in order to estimate losses that have been incurred as of the consolidated balance sheet date. The general component is determined through historical loss rates based on loan type and qualitative factor adjustments for changes not reflected in historical losses.

 

The determination of qualitative factor adjustments involves a high degree of management judgment including consideration of the following internal and external factors: changes in lending policies and procedures, including underwriting standards and collection, charge-off, and recovery practices, changes in legal and regulatory requirements, changes in economic and business conditions, changes in the nature and volume of the loan portfolio, changes in the experience or ability of lending management, changes in the volume of past due, classified and nonaccrual loans, changes in the quality of the Company's loan review system, changes in oversight

- 51 -


by the Company's board of directors, the effects of the COVID-19 Pandemic and the existence and effect of any concentrations of credit. Changes to these factors could have a material impact on the Company's financial results.

 

The allowance for loan losses is an accounting estimate with significant measurement uncertainty and involves the application of significant judgement by management. Therefore, a high degree of auditor judgement and significant auditor effort was required in evaluating the audit evidence obtained related to the qualitative factor adjustments used by management in the calculation.

 

How the Critical Audit Matter was Addressed in the Audit

The primary procedures we performed to address this critical audit matter included:

Testing the design and operating effectiveness of internal controls related to the evaluation of the assumptions and inputs used to evaluate the qualitative factors. This testing included controls addressing management’s review of the completeness and accuracy of underlying data inputs used as the basis for determination of qualitative factor adjustments.

Substantively testing the appropriateness of the judgements and assumptions used in management's estimation process for developing the qualitative factor adjustments, including:

 

Assessing whether all relevant factors have been considered that affect the collectability of the loan portfolio;

 

Evaluation of the relevance and reliability of underlying internal and external data inputs used as a basis for the qualitative loss factor adjustments and corroboration of these inputs by comparison to the Company's lending practices, historical loan portfolio performance, and third-party macroeconomic data;

 

Evaluation of the accuracy of risk ratings, including loan modifications;

 

Recalculation of the allowance for loan loss and allocation of qualitative loss factors to the appropriate loan segments

 

/s/ Baker Tilly US, LLP

 

We have served as the Company's auditor since 2007.

 

Baker Tilly US, LLP

Iselin, New Jersey

 

March 14, 2023

- 52 -


CONSOLIDATED BALANCE SHEETS  

 

 

 

(in thousands, except share data)

 

December 31,

 

2022

 

 

2021

 

Assets

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

14,657

 

 

$

9,194

 

Interest-bearing deposits in banks

 

 

1,242

 

 

 

4,196

 

Total cash and cash equivalents

 

 

15,899

 

 

 

13,390

 

Investment securities:

 

 

 

 

 

 

 

 

Available-for-sale (amortized cost $649,217 and $697,094)

 

 

546,525

 

 

 

692,360

 

Equity securities (cost of $12,091 and $11,419)

 

 

12,056

 

 

 

12,410

 

Restricted investment in bank stocks

 

 

5,193

 

 

 

1,329

 

Loans receivable

 

 

1,039,385

 

 

 

926,470

 

Allowance for loan losses

 

 

(10,531

)

 

 

(11,184

)

Net loans

 

 

1,028,854

 

 

 

915,286

 

Bank-owned life insurance

 

 

11,625

 

 

 

11,497

 

Premises and equipment, net

 

 

15,463

 

 

 

16,540

 

Accrued interest receivable

 

 

5,038

 

 

 

4,104

 

Net deferred tax assets

 

 

23,077

 

 

 

2,449

 

Other assets

 

 

4,767

 

 

 

3,975

 

Total assets

 

$

1,668,497

 

 

$

1,673,340

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

Deposits

 

 

 

 

 

 

 

 

Demand, non-interest bearing

 

$

231,849

 

 

$

243,006

 

Interest-bearing demand

 

 

452,927

 

 

 

468,199

 

Money market

 

 

127,043

 

 

 

143,942

 

Savings

 

 

431,101

 

 

 

426,225

 

Time less than $100

 

 

91,329

 

 

 

93,456

 

Time $100 through $250

 

 

59,650

 

 

 

49,930

 

Time greater than $250

 

 

24,470

 

 

 

24,987

 

Total deposits

 

 

1,418,369

 

 

 

1,449,745

 

Short-term borrowings

 

 

161,327

 

 

 

68,476

 

Long-term debt

 

 

10,000

 

 

 

10,000

 

Accrued interest payable

 

 

467

 

 

 

211

 

Other liabilities

 

 

7,376

 

 

 

8,414

 

Total liabilities

 

 

1,597,539

 

 

 

1,536,846

 

 

 

 

 

 

 

 

 

 

Shareholders' Equity

 

 

 

 

 

 

 

 

Common stock, par value $0.625 per share; authorized 10,000,000 shares; 3,796,948

   shares and  3,760,315 shares issued; 3,588,262 and 3,553,629 shares outstanding

 

 

2,373

 

 

 

2,350

 

Surplus

 

 

24,798

 

 

 

23,683

 

Retained earnings

 

 

128,951

 

 

 

118,163

 

Accumulated other comprehensive loss, net of tax

 

 

(81,127

)

 

 

(3,740

)

Treasury stock, at cost; 208,686 and 206,686 shares

 

 

(4,037

)

 

 

(3,962

)

Total shareholders' equity

 

 

70,958

 

 

 

136,494

 

Total liabilities and shareholders' equity

 

$

1,668,497

 

 

$

1,673,340

 

 

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

 

 

- 53 -


 

CONSOLIDATED STATEMENTS OF INCOME  

 

 

 

(in thousands, except per share data)

 

Year ended December 31,

 

2022

 

 

2021

 

 

2020

 

Interest income

 

 

 

 

 

 

 

 

 

 

 

 

Interest and fees on loans

 

$

40,922

 

 

$

38,330

 

 

$

36,504

 

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

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

 

9,396

 

 

 

6,551

 

 

 

5,668

 

Tax-exempt

 

 

1,965

 

 

 

1,796

 

 

 

1,405

 

Interest on interest-bearing balances and other interest income

 

 

138

 

 

 

93

 

 

 

116

 

Total interest income

 

 

52,421

 

 

 

46,770

 

 

 

43,693

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

 

 

 

 

 

 

 

 

 

 

Interest on deposits

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing demand

 

 

2,691

 

 

 

1,035

 

 

 

1,347

 

Money market

 

 

617

 

 

 

381

 

 

 

405

 

Savings

 

 

2,175

 

 

 

1,178

 

 

 

1,155

 

Time less than $100

 

 

723

 

 

 

921

 

 

 

1,599

 

Time $100 through $250

 

 

489

 

 

 

454

 

 

 

544

 

Time greater than $250

 

 

209

 

 

 

257

 

 

 

1,012

 

Interest on short-term borrowings

 

 

861

 

 

 

258

 

 

 

247

 

Interest on long-term debt

 

 

159

 

 

 

159

 

 

 

136

 

Total interest expense

 

 

7,924

 

 

 

4,643

 

 

 

6,445

 

Net interest income

 

 

44,497

 

 

 

42,127

 

 

 

37,248

 

Provision for loan losses

 

 

(850

)

 

 

458

 

 

 

1,250

 

Net interest income after provision for loan losses

 

 

45,347

 

 

 

41,669

 

 

 

35,998

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-interest income

 

 

 

 

 

 

 

 

 

 

 

 

Net unrealized (loss) gain on investment equity securities

 

 

(1,026

)

 

 

926

 

 

 

(47

)

Net gain on sale of investment securities

 

 

266

 

 

 

1,806

 

 

 

609

 

Net gain on investment securities

 

 

(760

)

 

 

2,732

 

 

 

562

 

Fees for services to customers

 

 

1,614

 

 

 

1,326

 

 

 

1,315

 

ATM and debit card

 

 

2,719

 

 

 

2,682

 

 

 

2,195

 

Retail brokerage and advisory

 

 

788

 

 

 

786

 

 

 

581

 

Bank-owned life insurance

 

 

361

 

 

 

497

 

 

 

294

 

Merchant

 

 

394

 

 

 

451

 

 

 

417

 

Net gain on sale of loans

 

 

6

 

 

 

595

 

 

 

1,724

 

Other

 

 

609

 

 

 

712

 

 

 

514

 

Total non-interest income

 

 

5,731

 

 

 

9,781

 

 

 

7,602

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-interest expense

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

17,306

 

 

 

17,453

 

 

 

16,541

 

Net occupancy

 

 

2,195

 

 

 

2,228

 

 

 

2,164

 

Furniture and equipment

 

 

2,917

 

 

 

2,787

 

 

 

2,750

 

Marketing

 

 

870

 

 

 

922

 

 

 

876

 

Third party services

 

 

2,474

 

 

 

2,160

 

 

 

1,923

 

Telephone, postage and supplies

 

 

748

 

 

 

715

 

 

 

736

 

State taxes

 

 

1,004

 

 

 

1,013

 

 

 

887

 

FDIC insurance premiums

 

 

768

 

 

 

793

 

 

 

569

 

Other

 

 

3,210

 

 

 

2,926

 

 

 

2,509

 

Total non-interest expense

 

 

31,492

 

 

 

30,997

 

 

 

28,955

 

Income before income taxes

 

 

19,586

 

 

 

20,453

 

 

 

14,645

 

Provision for income taxes

 

 

3,665

 

 

 

3,961

 

 

 

2,562

 

Net income

 

$

15,921

 

 

$

16,492

 

 

$

12,083

 

Earnings per share - basic

 

$

4.47

 

 

$

4.64

 

 

$

3.42

 

Earnings per share - diluted

 

$

4.47

 

 

$

4.64

 

 

$

3.42

 

Cash dividends per share

 

$

1.44

 

 

$

1.40

 

 

$

1.36

 

 

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

 

- 54 -


 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

 

 

(in thousands)

 

Year ended December 31,

 

2022

 

 

2021

 

 

2020

 

 

 

Before

tax

amount

 

 

Tax

expense

(benefit)

 

 

Net of

tax

amount

 

 

Before

tax

amount

 

 

Tax

expense

(benefit)

 

 

Net of

tax

amount

 

 

Before

tax

amount

 

 

Tax

expense

(benefit)

 

 

Net of

tax

amount

 

Net income

 

$

19,586

 

 

$

3,665

 

 

$

15,921

 

 

$

20,453

 

 

$

3,961

 

 

$

16,492

 

 

$

14,645

 

 

$

2,562

 

 

$

12,083

 

Other comprehensive (loss)/income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net unrealized holding (losses)/gains on available-for-sale securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized holding (losses)/gains arising during the period

 

 

(98,097

)

 

 

(20,600

)

 

 

(77,497

)

 

 

(11,867

)

 

 

(2,492

)

 

 

(9,375

)

 

 

6,850

 

 

 

1,439

 

 

 

5,411

 

Reclassification adjustment for losses/(gains) included in net income

 

 

139

 

 

 

29

 

 

 

110

 

 

 

(18

)

 

 

(4

)

 

 

(14

)

 

 

(24

)

 

 

(5

)

 

 

(19

)

 

 

 

(97,958

)

 

 

(20,571

)

 

 

(77,387

)

 

 

(11,885

)

 

 

(2,496

)

 

 

(9,389

)

 

 

6,826

 

 

 

1,434

 

 

 

5,392

 

Total comprehensive (loss) income

 

$

(78,372

)

 

$

(16,906

)

 

$

(61,466

)

 

$

8,568

 

 

$

1,465

 

 

$

7,103

 

 

$

21,471

 

 

$

3,996

 

 

$

17,475

 

 

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

 

 

- 55 -


 

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

Number of

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

 

 

 

 

Shares

 

 

Common

 

 

 

 

 

 

Retained

 

 

Comprehensive

 

 

Treasury

 

 

 

 

 

 

 

Outstanding

 

 

Stock

 

 

Surplus

 

 

Earnings

 

 

Income (Loss)

 

 

Stock

 

 

Total

 

Balance, December 31, 2019

 

 

3,519,767

 

 

$

2,303

 

 

$

21,261

 

 

$

99,372

 

 

$

257

 

 

$

(2,476

)

 

$

120,717

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

12,083

 

 

 

 

 

 

 

 

 

12,083

 

Other comprehensive loss, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5,392

 

 

 

 

 

 

5,392

 

Cash dividends declared ($1.36 per share)

 

 

 

 

 

 

 

 

 

 

 

 

(4,811

)

 

 

 

 

 

 

 

 

(4,811

)

Treasury stock purchase

 

 

(4,100

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(130

)

 

 

(130

)

Stock issued in connection with dividend

   reinvestment and stock purchase plan

 

 

32,022

 

 

 

19

 

 

 

879

 

 

 

 

 

 

 

 

 

 

 

 

898

 

Stock issued for employee stock purchase  plan

 

 

5,723

 

 

4

 

 

143

 

 

 

 

 

 

 

 

 

 

 

 

147

 

Stock issued for options exercised

 

 

3,121

 

 

2

 

 

35

 

 

 

 

 

 

 

 

 

 

 

 

37

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

112

 

 

 

 

 

 

 

 

 

 

 

 

112

 

Balance, December 31, 2020

 

 

3,556,533

 

 

$

2,328

 

 

$

22,430

 

 

$

106,644

 

 

$

5,649

 

 

$

(2,606

)

 

$

134,445

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

16,492

 

 

 

 

 

 

 

 

 

16,492

 

Other comprehensive loss, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(9,389

)

 

 

 

 

 

(9,389

)

Cash dividends declared ($1.40 per share)

 

 

 

 

 

 

 

 

 

 

 

 

(4,973

)

 

 

 

 

 

 

 

 

(4,973

)

Treasury stock purchase

 

 

(38,017

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,356

)

 

 

(1,356

)

Stock issued in connection with dividend

   reinvestment and stock purchase plan

 

 

23,690

 

 

 

15

 

 

 

826

 

 

 

 

 

 

 

 

 

 

 

 

841

 

Stock issued for employee stock purchase plan

 

 

4,906

 

 

 

3

 

 

 

142

 

 

 

 

 

 

 

 

 

 

 

 

145

 

Stock issued for options exercised

 

 

6,517

 

 

 

4

 

 

 

183

 

 

 

 

 

 

 

 

 

 

 

 

187

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

 

102

 

 

 

 

 

 

 

 

 

 

 

 

102

 

Balance, December 31, 2021

 

 

3,553,629

 

 

$

2,350

 

 

$

23,683

 

 

$

118,163

 

 

$

(3,740

)

 

$

(3,962

)

 

$

136,494

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

15,921

 

 

 

 

 

 

 

 

 

15,921

 

Other comprehensive loss, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(77,387

)

 

 

 

 

 

(77,387

)

Cash dividends declared ($1.44 per share)

 

 

 

 

 

 

 

 

 

 

 

 

(5,133

)

 

 

 

 

 

 

 

 

(5,133

)

Treasury stock purchase

 

 

(2,000

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(75

)

 

 

(75

)

Stock issued in connection with dividend

   reinvestment and stock purchase plan

 

 

31,531

 

 

 

20

 

 

 

897

 

 

 

 

 

 

 

 

 

 

 

 

917

 

Stock issued for employee stock purchase plan

 

 

5,102

 

 

 

3

 

 

 

133

 

 

 

 

 

 

 

 

 

 

 

 

136

 

Stock issued for options exercised

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

 

85

 

 

 

 

 

 

 

 

 

 

 

 

85

 

Balance, December 31, 2022

 

 

3,588,262

 

 

$

2,373

 

 

$

24,798

 

 

$

128,951

 

 

$

(81,127

)

 

$

(4,037

)

 

$

70,958

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

- 56 -


 

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

 

(in thousands)

 

Year ended December 31,

 

2022

 

 

2021

 

 

2020

 

Operating Activities

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

15,921

 

 

$

16,492

 

 

$

12,083

 

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

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

1,724

 

 

 

1,828

 

 

 

2,035

 

Provision for loan losses

 

 

(850

)

 

 

458

 

 

 

1,250

 

Net gain on sales of investment debt and equity securities

 

 

(266

)

 

 

(1,806

)

 

 

(609

)

Net unrealized loss (gain) on equity securities

 

 

1,026

 

 

 

(926

)

 

 

47

 

Net gain on sale of loans

 

 

(6

)

 

 

(595

)

 

 

(1,724

)

Proceeds from sales of residential mortgages held-for-sale

 

 

304

 

 

 

16,773

 

 

 

35,605

 

Origination of residential mortgages held-for-sale

 

 

(298

)

 

 

(4,892

)

 

 

(39,474

)

Income on bank-owned life insurance

 

 

(361

)

 

 

(497

)

 

 

(294

)

Stock-based compensation expense

 

 

85

 

 

 

102

 

 

 

112

 

Deferred income tax (benefit) provision

 

 

(57

)

 

 

113

 

 

 

(59

)

Net  (decrease) increase in income taxes payable

 

 

(534

)

 

 

(78

)

 

 

215

 

Net (increase) decrease in accrued interest receivable

 

 

(934

)

 

 

721

 

 

 

(1,997

)

Amortization of mortgage servicing rights and change in valuation

   allowance

 

 

71

 

 

 

118

 

 

 

157

 

Net amortization of premiums and discounts on investment securities

 

 

2,222

 

 

 

3,152

 

 

 

2,473

 

Net increase (decrease) in accrued interest payable

 

 

256

 

 

 

(139

)

 

 

(559

)

Operating lease payments

 

 

(620

)

 

 

(631

)

 

 

(654

)

(Increase) decrease in other assets

 

 

(298

)

 

 

(507

)

 

 

525

 

(Decrease) increase in other liabilities

 

 

(550

)

 

 

703

 

 

 

(1,531

)

Net cash provided by operating activities

 

 

16,835

 

 

 

30,389

 

 

 

7,601

 

Investing Activities

 

 

 

 

 

 

 

 

 

 

 

 

Proceeds from payments, maturities and calls of investment debt securities

   available-for-sale

 

 

72,965

 

 

 

113,911

 

 

 

207,245

 

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

 

 

7,551

 

 

 

282

 

 

 

6,930

 

Purchases of investment securities available-for-sale

 

 

(35,001

)

 

 

(385,926

)

 

 

(295,734

)

Proceeds from the sale of equity securities

 

 

1,594

 

 

 

7,768

 

 

 

4,767

 

Purchases of equity securities

 

 

(1,860

)

 

 

(4,615

)

 

 

(7,914

)

Proceeds from redemption of investment in restricted bank stock

 

 

5,155

 

 

 

573

 

 

 

1,495

 

Purchase of restricted bank stock

 

 

(9,019

)

 

 

(861

)

 

 

(1,463

)

Net increase in loans

 

 

(112,718

)

 

 

(11,244

)

 

 

(99,737

)

Net purchases of premises and equipment

 

 

(552

)

 

 

(3,175

)

 

 

(722

)

Redemption of Bank Owned Life Insurance investment

 

 

239

 

 

 

797

 

 

 

 

Net cash used in investing activities

 

 

(71,646

)

 

 

(282,490

)

 

 

(185,133

)

Financing Activities

 

 

 

 

 

 

 

 

 

 

 

 

Net (decrease) increase in non-interest-bearing deposits

 

 

(11,157

)

 

 

38,422

 

 

 

58,314

 

Net (decrease) increase in interest-bearing deposits

 

 

(20,219

)

 

 

183,256

 

 

 

131,893

 

Net increase in short-term borrowings

 

 

92,851

 

 

 

9,638

 

 

 

2,907

 

Issuance of long-term debt

 

 

 

 

 

 

 

 

10,000

 

Treasury stock purchase

 

 

(75

)

 

 

(1,356

)

 

 

(130

)

Cash dividends paid, net of reinvestment

 

 

(4,498

)

 

 

(4,375

)

 

 

(4,226

)

Proceeds from issuance of common stock

 

 

418

 

 

 

575

 

 

 

497

 

Net cash provided by financing activities

 

 

57,320

 

 

 

226,160

 

 

 

199,255

 

Increase (decrease)  in cash and cash equivalents

 

 

2,509

 

 

 

(25,941

)

 

 

21,723

 

Cash and cash equivalents at beginning of year

 

 

13,390

 

 

 

39,331

 

 

 

17,608

 

Cash and cash equivalents at end of period

 

$

15,899

 

 

$

13,390

 

 

$

39,331

 

Supplemental Cash Flow Disclosures

 

 

 

 

 

 

 

 

 

 

 

 

Interest paid

 

$

7,668

 

 

$

4,782

 

 

$

7,004

 

Income taxes paid, net of refunds received

 

 

4,257

 

 

 

3,925

 

 

 

2,406

 

Non-cash transactions:

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

43

 

 

 

698

 

 

 

1,086

 

 

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

- 57 -


QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

Note 1 - Summary of Significant Accounting Policies

Business

QNB Corp. (the “Company”), through its wholly-owned subsidiary, QNB Bank (the “Bank”), has been serving the residents and businesses of Bucks, Lehigh, and Montgomery counties in Pennsylvania since 1877. The Bank is a locally managed community bank that provides a full range of commercial, retail banking and retail brokerage services. The Bank encounters vigorous competition for market share in the communities it serves from bank holding companies, other community banks, thrift institutions, credit unions and other non-bank financial organizations such as mutual fund companies, insurance companies and brokerage companies. The Company manages its business as a single operating segment.

The Bank is a Pennsylvania chartered commercial bank. The Company and the Bank are subject to regulations of certain state and Federal agencies. These regulatory agencies periodically examine the Company and the Bank for adherence to laws and regulations.

Basis of Presentation

The Consolidated Financial Statements include the accounts of the Company and its wholly-owned subsidiary, the Bank. The consolidated entity is referred to herein as “QNB”. All significant inter-company accounts and transactions have been eliminated in the Consolidated Financial Statements.

Tabular information, other than share and per share data, is presented in thousands of dollars.  Certain prior period amounts have been reclassified to conform with the current year’s presentation.

Use of Estimates

These statements are prepared in accordance with Generally Accepted Accounting Principles in the United States of America (“US 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. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, the determination of the valuation of other real estate owned, the fair value of financial instruments, other-than-temporary impairment of investment securities, the determination of impairment of restricted bank stock and the valuation of deferred tax assets 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.

Significant Group Concentrations of Credit Risk

Most of the QNB’s activities are with customers located within Bucks, Montgomery and Lehigh Counties in southeastern Pennsylvania. Note 4 discusses the types of investment securities in which the QNB invests. Note 5 discusses the types of lending in which QNB engages. QNB does not have any significant concentrations to any one industry or customer. Although QNB has a diversified loan portfolio, its debtors’ ability to honor their contracts is influenced by the region’s economy.

Cash and Cash Equivalents

For purposes of the statement of cash flows, cash and cash equivalents consist of cash on hand, cash items in process of collection, amounts due from banks, interest-bearing deposits in the Federal Reserve Bank and other banks and Federal funds sold. QNB maintains a portion of its interest-bearing deposits at various commercial financial institutions. At times, the balances exceed the FDIC insured limits; QNB has not experienced a loss due to the balances exceeding FDIC limits.

Trading Securities

QNB may engage in trading activities for its own account. Interest and dividends are included in interest income. Debt securities that are bought and held principally for the purpose of selling in the near term are classified as trading securities and reported at fair value, with unrealized gains and losses included in earnings.

- 58 -


Investment Securities

Investment debt securities that QNB has the positive intent and ability to hold to maturity are classified as held-to-maturity securities and reported at amortized cost. Interest is included in interest income. Debt securities not classified as either held-to-maturity securities or trading securities are classified as available-for-sale debt securities and reported at fair value, with unrealized gains and losses, net of tax, excluded from earnings and reported in other comprehensive income or loss, a separate component of shareholders’ equity. Management determines the appropriate classification of securities at the time of purchase.

Available-for-sale debt securities include securities that management intends to use as part of its asset/liability management strategy and that may be sold in response to changes in credit ratings, changes in market interest rates and related changes in the securities’ prepayment risk or to meet liquidity needs.

Premiums and discounts on debt securities are recognized in interest income using a constant yield method. Gains and losses on sales of available-for-sale securities are recorded on the trade date and are computed on the specific identification method and included in non-interest income.

Equity investments with readily determinable fair values are measured at fair value.  The changes in fair value are recognized in net income.  Dividends are included in interest income.

Other-than-Temporary Impairment of Investment Securities

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 prospects for a near-term recovery of value is not necessarily favorable, or that there is a lack of evidence to support realizable value equal to or greater than carrying value of the investment. For equity securities without a readily determinable market value, once a decline in value is determined to be other-than-temporary, the value of the equity security is reduced to fair value and a corresponding charge to earnings is recognized.  Temporary improvements in the fair value on equity securities with an OTTI change would not be recognized.

QNB follows the accounting guidance in Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 320-10 as it relates to the recognition and presentation of other-than-temporary impairment (“OTTI”). This accounting guidance specifies that (a) if a company does not have the intent to sell a debt security prior to recovery and (b) it is more likely than not that it will not have to sell the debt security prior to recovery, the security would not be considered other-than-temporarily impaired unless there is a credit loss. When an entity does not intend to sell the security, and it is more likely than not the entity will not have to sell the security before recovery of its cost basis, it will recognize the credit component of an other-than-temporary impairment of a debt security in earnings and the remaining portion in other comprehensive income. For held to maturity debt securities, the amount of an other-than-temporary impairment recorded in other comprehensive income for the non-credit portion of a previous other-than-temporary impairment would be amortized prospectively over the remaining life of the security based on the timing of future estimated cash flows of the security.

Restricted Investment in Stock

Restricted bank stock is comprised of restricted stock of the Federal Home Loan Bank of Pittsburgh (“FHLB”) in the amount of $5,181,000, the Atlantic Community Bankers Bank in the amount of $12,000 and VISA Class B stock with a carrying cost of $0 at December 31, 2022. Federal law requires a member institution of the FHLB to hold stock of its district bank according to a predetermined formula. These restricted securities are carried at cost.  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 (1.5991 as of December 29, 2022), 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 December 31, 2022, there was no OTTI associated with these shares.

- 59 -


Loans

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 consist of residential mortgage loans and 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.

Non-Performing Assets

Non-performing assets are comprised of accruing loans past due 90 days or more, non-accrual loans and investment securities, restructured loans, other real estate owned and repossessed assets. Non-accrual loans and investment securities are those on which the accrual of interest has ceased. Loans are placed on non-accrual status immediately if, in the opinion of management, collection is doubtful, or when principal or interest is past due 90 days or more and collateral is insufficient to cover principal and interest. Interest accrued, but not collected at the date a loan is placed on non-accrual status, is reversed and charged against interest income. Subsequent cash receipts are applied either to the outstanding principal or recorded as interest income, depending on management’s assessment of the ultimate collectability of principal and interest. Loans are returned to an accrual status when the borrower’s ability to make periodic principal and interest payments has returned to normal (i.e. brought current with respect to principal or interest or restructured) and the paying capacity of the borrower and/or the underlying collateral is deemed sufficient to cover principal and interest.

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 QNB grants a concession to the borrower because of the borrower’s financial condition that it would not otherwise consider. Such concessions may 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.  

Accounting for impairment in the performance of a loan is required when it is probable that all amounts, including both principal and interest, will not be collected in accordance with the loan agreement. Impaired loans are measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate or, at the loan’s observable market price or the fair value of the collateral if the loans are collateral dependent. Impairment criteria are applied to the loan portfolio exclusive of smaller homogeneous loans such as residential mortgage and consumer loans which are evaluated collectively for impairment.

Loans are fully charged-off or charged down to net realizable value (fair value of collateral less estimated costs to sell) when deemed uncollectible due to bankruptcy or other factors, or when they reach a defined number of days past due based on loan product, industry practice, terms and other factors.

Loans are considered past due when contractually required principal or interest payments have not been made on the due dates.

Allowance for Loan Losses

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.

- 60 -


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:

 

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

 

External factor effects, such as legal and regulatory requirements.

 

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.

 

Nature and volume of the portfolio including growth.

 

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

 

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

 

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

 

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

 

The duration of the COVID-19 Pandemic, modifications and stimulus packages masking underlying credit issues.

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

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

Management emphasizes loan quality and close monitoring of potential problem credits. Credit risk identification and review processes are utilized in order to assess and monitor the degree of risk in the loan portfolio. QNB’s lending and credit administration staff are charged with reviewing the loan portfolio and identifying changes in the economy or in a borrower’s circumstances which may affect the ability to repay debt or the value of pledged collateral. A loan classification and review system exists that identifies those loans with a higher-than-normal risk of 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 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 US GAAP. If circumstances differ 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.

Transfers of Financial Assets

Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from QNB, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) QNB does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.

- 61 -


Servicing Assets

Servicing assets are recognized as separate assets when rights are acquired through the sale of financial assets. When mortgage loans are sold, a portion of the cost of originating the loan is allocated to the servicing rights based on relative fair value. Fair value is based on market prices for comparable mortgage servicing contracts, when available, or alternatively, is based on a valuation model that calculates the present value of estimated future net servicing income. The Company subsequently measures servicing rights using the amortization method where servicing rights are amortized in proportion to and over the period of estimated net servicing income. On a quarterly basis, an independent third party determines the fair value of QNB’s servicing assets. These assets are evaluated for impairment based upon the fair value of the rights as compared to amortized cost. Impairment is determined by stratifying rights into tranches based on predominant characteristics, such as interest rate, loan type and investor type. Impairment is recognized through a valuation allowance for an individual tranche, to the extent that fair value is less than the capitalized amount for the tranches. If QNB later determines that all or a portion of the impairment no longer exists for a particular tranche, a reduction of the valuation allowance may be recorded as an increase to income. Capitalized servicing rights are reported in other assets and are amortized into other non-interest income in proportion to, and over the period of, the estimated future net servicing income of the underlying financial assets.

Servicing fee income is recorded for fees earned for servicing loans. The fees are based on a contractual percentage of the outstanding principal, or a fixed amount per loan and are recorded as other non-interest income when earned and netted against the amortization of mortgage servicing rights.

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 from operations and changes in the valuation allowance of foreclosed assets are included in other non-interest expense. At both December 31, 2022 and 2021 QNB had  no foreclosed assets.

Premises and Equipment

Premises and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation and amortization are calculated principally on an accelerated or straight-line basis over the estimated useful lives of the assets, or the shorter of the estimated useful life or lease term for leasehold improvements, as follows:

 

Buildings

 

10 to 39 years

Furniture and equipment

 

3 to 15 years

Leasehold improvements

 

5 to 30 years

 

Expenditures for maintenance and repairs are charged to operations as incurred. Gains or losses upon disposition are reflected in earnings as realized.

 

The “Premises and equipment, net” category Consolidated Balance Sheets also includes the right-of-use assets associated with operating leases.  The discount rates used in determining the initial value of the right of use assets are based on the FHLB Amortizing Fixed Loan Rate for the term of each lease.  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 during 2022.   Operating lease liabilities are included with “Other liabilities” on the Consolidated Balance Sheets.  All operating lease costs are included in non-interest expense within  “Net occupancy” on the Consolidated Statements of Income.

Bank-Owned Life Insurance

The Bank invests in bank-owned life insurance (“BOLI”) as a source of funding for employee benefit expenses. BOLI involves the purchasing of life insurance by the Bank on a select group of employees. The Bank is the owner and beneficiary of the policies. Income from the increase in cash surrender value of the policies as well as the receipt of death benefits is included in non-interest income on the Consolidated Statement of Income. The BOLI policies are an asset that can be liquidated, if necessary, with associated tax costs. However, the Bank intends to hold these policies and, accordingly, has not provided for deferred income taxes on the earnings from the increase in cash surrender value.

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The Bank follows the accounting guidance for postretirement benefit aspects of endorsement split-dollar life insurance arrangements which applies to life insurance arrangements that provide an employee with a specified benefit that is not limited to the employee’s active service period, including certain bank-owned life insurance policies. It requires an employer to recognize a liability and related compensation costs for future benefits that extend to postretirement periods. The expense recorded during 2022, 2021 and 2020 was approximately $118,000, $87,000 and $0, respectively, and is included in non-interest expense under salaries and benefits expense. No expense was needed during 2020 as the December 31, 2019 post-retirement liability was in line with the December 31, 2020 projected post-retirement liability based on updated insurance costs and mortality tables.    

Stock-Based Compensation

At December 31, 2022, QNB sponsored 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 FASB 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.

Stock-based compensation expense was approximately $85,000, $102,000 and $112,000 for the years ended December 31, 2022, 2021 and 2020, respectively. There were $2,000, $4,000 and $5,000 in tax benefits recognized related to the nonqualified compensation and disqualifying dispositions for the years ended December 31, 2022, 2021 and 2020, respectively.

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

 

Year ended December 31,

 

2022

 

 

2021

 

 

2020

 

Risk free interest rate

 

 

1.25

%

 

 

0.20

%

 

 

1.52

%

Dividend yield

 

 

3.64

%

 

 

4.17

%

 

 

3.60

%

Volatility

 

 

22.68

%

 

 

21.14

%

 

 

13.46

%

Expected life (years)

 

 

4.05

 

 

 

4.03

 

 

 

4.03

 

 

The weighted average fair value per share of options granted during 2022, 2021 and 2020 was $5.20, $3.08 and $2.42, respectively. The risk-free interest rate was selected based upon yields of U.S. Treasury issues with a term equal to 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.

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 to a great extent on matters that may, at least in part, be beyond QNB’s control, it is at least reasonably possible that management’s judgment about the need for a valuation allowance for deferred taxes could change in the near term.

In connection with the accounting guidance related to accounting for uncertainty in income taxes, which sets out a consistent framework to determine the appropriate level of tax reserves to maintain for uncertain tax positions, QNB has evaluated its tax positions as of December 31, 2022. A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that has more than a 50 percent likelihood of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. Under the “more-likely-than-not” threshold guidelines, QNB believes no significant uncertain tax positions exist, either individually or in the aggregate, which would give rise to the non-recognition of an existing tax benefit. As of December 31, 2022, QNB had a valuation allowance of $8,000 for unrecognized tax benefits related to non-qualified stock option expense on options that are more likely than not to be exercised prior to expiring.  As of December 31, 2022 QNB had no interest expense and $1,000 in tax penalties. QNB’s policy is to account for interest as a component of interest expense and penalties as a component of other expense. The Company and its subsidiary are subject to U.S. Federal income tax as well as

- 63 -


income tax of the Commonwealth of Pennsylvania and the State of New Jersey.  Tax years from 2019 to date remain subject to examination by the tax authorities.

Treasury Stock

Common stock shares repurchased are recorded as treasury stock at cost.  

Earnings Per Share

Basic earnings per share excludes any dilutive effects of options and is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per share gives effect to all dilutive potential common shares that were outstanding during the period. Potential common shares that may be issued by the Company relate solely to outstanding stock options and are determined using the treasury stock method.

Treasury shares are not deemed outstanding for earnings per share calculations.

Comprehensive Income (Loss)

Comprehensive income (loss) is defined as the change in equity of a business entity during a period due to transactions and other events and circumstances, excluding those resulting from investments by and distributions to owners. Comprehensive income (loss) consists of net income and other comprehensive income (loss). For QNB, the primary component of other comprehensive income (loss) is the unrealized holding gains or losses on available-for-sale investment securities and unrealized losses on available-for-sale investment securities related to factors other than credit on debt securities.

Advertising Costs

Advertising costs are recorded in the period they are incurred within operating expenses in non-interest expense in the Consolidated Statements of Income.

Financial Instruments with Off-Balance-Sheet Risk

QNB’s exposure to credit loss in the event of non-performance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual notional amount of these instruments. QNB uses the same credit policies in making commitments and contractual obligations as it does for on-balance-sheet instruments. QNB reflects its estimate of credit risk for these instruments in “Other liabilities” on the Consolidated Balance Sheet with the corresponding expense recorded in “Other” non-interest  expense in the Consolidated Statements of Income.

Subsequent Events

QNB has evaluated events and transactions occurring subsequent to the balance sheet date of December 31, 2022 through the date the Consolidated Financial Statements are being issued for items that should potentially be recognized or disclosed in these Consolidated Financial Statements.  QNB received a payoff on a non-accrual loan with a previous partial charge-off in January 2023.  QNB recognized a recovery of  $582,000 and interest of $489,000.

Recent Accounting Pronouncements

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

To that end, the new guidance:

 

Eliminates the probable initial recognition threshold in current US 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.

- 64 -


 

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.

On October 16, 2019, FASB adopted its August 15, 2019 proposal to delay the effective dates for certain smaller reporting companies for the implementation CECL.  For public business entities that are U.S. Securities and Exchange Commission (SEC) filers, the new guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, except for smaller reporting companies, whose effective date is effective for fiscal years , and interim periods with those fiscal years, beginning after December 15, 2022. Early application will be permitted for all organizations for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018.  QNB has evaluated the impact of this new standard on its Consolidated Financial Statements and adoption expects a positive impact to shareholders equity between $750,000 and $950,000 and a reduction in the allowance for loan losses between $1,000,000 and $1,200,000.

 

On March 31, 2022, the FASB issued ASU 2022-02, Financial Instruments—Credit Losses (Topic 326) – Troubled Debt Restructurings and Vintage Disclosures.  The main provisions of ASU 2022-02 supersede the accounting guidance in ASC 310-40 Receivables—Troubled Debt Restructurings by Creditor in its entirety and requires entities to evaluate all receivable modifications under ASC 310-20-35-9 through 35-11 to determine whether a modification made to a borrower results in a new loan or a continuation of the existing loan. ASU 2022-02 requires that an entity disclose current-period gross write-offs by year of origination for financing receivables and net investments in leases within the scope of Subtopic 326-20, Financial Instruments—Credit Losses— Measured at Amortized Cost. ASU 2022-02 also amends other subtopics to remove references to TDRs for creditors. For QNB, the provisions under ASU 2022-02 are effective for fiscal years, and interim periods with those fiscal years, beginning after December 15,

2022.   

 

Note 2 – Earnings Per Share and Share Repurchase Plan

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

 

Year ended December 31,

 

2022

 

 

2021

 

 

2020

 

Numerator for basic and diluted earnings per share - net income

 

$

15,921

 

 

$

16,492

 

 

$

12,083

 

Denominator for basic earnings per share - weighted average shares

   outstanding

 

 

3,564,481

 

 

 

3,553,949

 

 

 

3,537,323

 

Effect of dilutive securities - employee stock options

 

 

-

 

 

 

189

 

 

 

37

 

Denominator for diluted earnings per share - adjusted weighted average

   shares outstanding

 

 

3,564,481

 

 

 

3,554,138

 

 

 

3,537,360

 

Earnings per share - basic

 

$

4.47

 

 

$

4.64

 

 

$

3.42

 

Earnings per share - diluted

 

$

4.47

 

 

$

4.64

 

 

$

3.42

 

 

There were 109,000, 90,000, and 96,000 stock options that were anti-dilutive as of December 31, 2022, 2021, and 2020 respectively. These stock options were not included in the above calculation.

- 65 -


QNB’s current stock repurchase plan was originally approved by the Board of Directors on January 21, 2008 and authorized the repurchase of up to 50,000 shares, increased the amount on February 9, 2009 to 100,000 shares, and subsequently increased on April 27, 2021 up to 200,000 shares of its common stock in the open market or privately negotiated transactions. The repurchase authorization has no termination date.   There were 2,000 shares purchased during the year ended December 31, 2022, 38,017 shares repurchased during the year ended December 31, 2021, and 4,100 shares purchased during the year ended December 31, 2020.  As of December 31, 2022, 102,000 shares were purchased under this authorization at an average price of $24.93 and a total cost of $2,543,000 and were recorded to Treasury stock.

 

 

Note 3 – Cash and Cash Equivalents

Included in cash and cash equivalents are deposits with the Federal Reserve Bank of Philadelphia. As of December 31, 2022 and 2021, QNB was not required to maintain reserves with the Federal Reserve Bank of Philadelphia.

 

 

Note 4 - Investment Securities

 

Available-For-Sale Debt Securities

The amortized cost and fair values of investment debt securities available-for-sale at December 31, 2022 and 2021 were as follows:

 

 

 

 

 

 

 

Gross

 

 

Gross

 

 

 

 

 

 

 

 

 

 

 

unrealized

 

 

unrealized

 

 

 

 

 

 

 

Fair

 

 

holding

 

 

holding

 

 

Amortized

 

December 31, 2022

 

value

 

 

gains

 

 

losses

 

 

cost

 

U.S. Treasuries

 

$

301

 

 

$

2

 

 

$

 

 

$

299

 

U.S. Government agency

 

 

86,709

 

 

 

 

 

 

(15,233

)

 

 

101,942

 

State and municipal

 

 

95,367

 

 

 

 

 

 

(23,494

)

 

 

118,861

 

U.S. Government agencies and sponsored

   enterprises (GSEs):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed

 

 

256,161

 

 

 

 

 

 

(45,303

)

 

 

301,464

 

Collateralized mortgage obligations (CMOs)

 

 

101,672

 

 

 

 

 

 

(18,338

)

 

 

120,010

 

Corporate debt

 

 

6,315

 

 

 

 

 

 

(326

)

 

 

6,641

 

Total investment securities available-for-sale

 

$

546,525

 

 

$

2

 

 

$

(102,694

)

 

$

649,217

 

 

 

 

 

 

 

 

Gross

 

 

Gross

 

 

 

 

 

 

 

 

 

 

 

unrealized

 

 

unrealized

 

 

 

 

 

 

 

Fair

 

 

holding

 

 

holding

 

 

Amortized

 

December 31, 2021

 

value

 

 

gains

 

 

losses

 

 

cost

 

U.S. Government agency

 

$

97,499

 

 

$

2

 

 

$

(2,435

)

 

$

99,932

 

State and municipal

 

 

131,035

 

 

 

1,716

 

 

 

(1,053

)

 

 

130,372

 

U.S. Government agencies and sponsored

   enterprises (GSEs):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed

 

 

329,938

 

 

 

1,273

 

 

 

(3,158

)

 

 

331,823

 

Collateralized mortgage obligations (CMOs)

 

 

127,012

 

 

 

398

 

 

 

(1,648

)

 

 

128,262

 

Corporate debt

 

 

6,876

 

 

 

179

 

 

 

(8

)

 

 

6,705

 

Total investment securities available-for-sale

 

$

692,360

 

 

$

3,568

 

 

$

(8,302

)

 

$

697,094

 

 

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The amortized cost and fair value of debt securities available-for-sale by contractual maturity at December 31, 2022 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 state and municipal securities which are based on pre-refunded date, if applicable.

 

 

 

 

 

 

 

Amortized

 

December 31, 2022

 

Fair value

 

 

cost

 

Due in one year or less

 

$

488

 

 

$

490

 

Due after one year through five years

 

 

94,950

 

 

 

105,174

 

Due after five years through ten years

 

 

372,667

 

 

 

443,013

 

Due after ten years

 

 

78,420

 

 

 

100,540

 

Total investment securities available-for-sale

 

$

546,525

 

 

$

649,217

 

 

Proceeds from sales of investment debt securities available-for-sale were $7,551,000, $282,000 and $6,930,000 for the years ended December 31, 2022, 2021 and 2020, respectively.

The following table presents information related to QNB’s gains and losses on the sales of debt securities, and losses recognized for OTTI of these investments.

 

December 31,

 

2022

 

 

2021

 

 

2020

 

Gross realized gains

 

$

8

 

 

$

18

 

 

$

28

 

Gross realized losses

 

 

(147

)

 

 

 

 

 

(4

)

Other-than-temporary impairment

 

 

 

 

 

 

 

 

 

Total net gains (losses) on available-for-sale securities

 

$

(139

)

 

$

18

 

 

$

24

 

 

 

The tax benefit applicable to the net realized losses on debt securities was $29,000 for the year ended December 31, 2022. The tax expense applicable to the net realized gains on debt securities was $4,000 for the year ended December 31, 2021.  The tax expense applicable to the net realized gains on debt securities was $5,000 for the year ended December 31, 2020. 

There were no OTTI impairment charges recognized for debt securities still held by QNB for the years ended December 31, 2022, 2021 or 2020.

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 Consolidated Statement of Income but is recognized in other comprehensive income (loss). 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 (loss).

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The following table presents a rollforward of the credit loss component recognized in earnings. The credit loss component of the amortized cost represents the difference between the present value of expected future cash flows and the amortized cost basis of the security prior to considering credit losses. The beginning balance represents the credit loss component for debt securities for which OTTI occurred prior to the beginning of the year. Credit-impaired debt securities must be presented in two components based upon whether the current period is the first time the debt security was credit-impaired (initial credit impairment) or is not the first time the debt security was credit-impaired (subsequent credit impairments). No credit impairments were recognized in 2022, 2021 or 2020. The following table presents a summary of the cumulative credit-related other-than-temporary impairment charges recognized as components of earnings for debt securities still held by QNB:

 

 

Year ended December 31,

 

2022

 

 

2021

 

 

2020

 

Balance, beginning of year

 

$

1

 

 

$

1

 

 

$

1

 

Reductions:  sale, collateralized debt obligation

 

 

 

 

 

 

 

 

 

Additions:

 

 

 

 

 

 

 

 

 

 

 

 

Initial credit impairments

 

 

 

 

 

 

 

 

 

Subsequent credit impairments

 

 

 

 

 

 

 

 

 

Balance, end of year

 

$

1

 

 

$

1

 

 

$

1

 

 

 

At December 31, 2022 and 2021, investments in debt securities available-for-sale totaling $237,645,000 and $264,154,000, respectively, were pledged as collateral for repurchase agreements and deposits of public funds.

 

Debt securities that have been in a continuous unrealized loss position are as follows:

 

December 31, 2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less than 12 months

 

 

12 months or longer

 

 

Total

 

 

 

No. of

 

 

Fair

 

 

Unrealized

 

 

Fair

 

 

Unrealized

 

 

Fair

 

 

Unrealized

 

 

 

securities

 

 

value

 

 

losses

 

 

value

 

 

losses

 

 

value

 

 

losses

 

U.S. Government agency

 

 

46

 

 

$

3,647

 

 

$

(353

)

 

$

83,062

 

 

$

(14,880

)

 

$

86,709

 

 

$

(15,233

)

State and municipal

 

 

216

 

 

 

50,156

 

 

 

(7,816

)

 

 

45,210

 

 

 

(15,678

)

 

 

95,366

 

 

 

(23,494

)

U.S. Government agencies

   and sponsored enterprises

   (GSEs):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed

 

 

197

 

 

 

58,811

 

 

 

(6,775

)

 

 

197,351

 

 

 

(38,528

)

 

 

256,162

 

 

 

(45,303

)

Collateralized mortgage

   obligations (CMOs)

 

 

129

 

 

 

35,797

 

 

 

(3,983

)

 

 

65,875

 

 

 

(14,355

)

 

 

101,672

 

 

 

(18,338

)

Corporate debt

 

 

4

 

 

 

6,262

 

 

 

(318

)

 

 

53

 

 

 

(8

)

 

 

6,315

 

 

 

(326

)

Total

 

 

592

 

 

$

154,673

 

 

$

(19,245

)

 

$

391,551

 

 

$

(83,449

)

 

$

546,224

 

 

$

(102,694

)

 

December 31, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less than 12 months

 

 

12 months or longer

 

 

Total

 

 

 

No. of

 

 

Fair

 

 

Unrealized

 

 

Fair

 

 

Unrealized

 

 

Fair

 

 

Unrealized

 

 

 

securities

 

 

value

 

 

losses

 

 

value

 

 

losses

 

 

value

 

 

losses

 

U.S. Government agency

 

 

44

 

 

$

62,530

 

 

$

(1,407

)

 

$

32,968

 

 

$

(1,028

)

 

$

95,498

 

 

$

(2,435

)

State and municipal

 

 

103

 

 

 

55,982

 

 

 

(953

)

 

 

3,742

 

 

 

(100

)

 

 

59,724

 

 

 

(1,053

)

U.S. Government agencies

   and sponsored enterprises

   (GSEs):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed

 

 

72

 

 

 

253,141

 

 

 

(2,915

)

 

 

7,370

 

 

 

(243

)

 

 

260,511

 

 

 

(3,158

)

Collateralized mortgage

   obligations (CMOs)

 

 

46

 

 

 

92,217

 

 

 

(1,648

)

 

 

 

 

 

 

 

 

92,217

 

 

 

(1,648

)

Corporate debt

 

 

1

 

 

 

 

 

 

 

 

 

75

 

 

 

(8

)

 

 

75

 

 

 

(8

)

Total

 

 

266

 

 

$

463,870

 

 

$

(6,923

)

 

$

44,155

 

 

$

(1,379

)

 

$

508,025

 

 

$

(8,302

)

 

Management evaluates debt securities, which are comprised of U.S. Government Agencies, state and municipalities, mortgage-backed securities, CMOs and other issuers, for OTTI 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 December 31, 2022 in U.S. Government 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. QNB has the intent to hold the securities and does not believe it will be required to sell the securities before recovery occurs.

- 68 -


QNB holds one trust preferred security, PreTSL IV which is classified as available-for-sale and carried at fair value.  This  security has been in an unrealized loss position for more than twelve months.

The following table provides additional information related to PreTSL IV as of December 31, 2022:

 

Deal

 

Class

 

 

Book

value

 

 

Fair

value

 

 

Unrealized

gains (losses)

 

 

Realized

OTTI

credit

loss

(YTD 2022)

 

 

Total

recognized

OTTI

credit

loss

 

 

Moody's

ratings

 

Current

number of

performing

banks

 

 

Current

number of

performing

insurance

companies

 

 

Actual

deferrals

and defaults

as a % of

total

collateral

 

 

Total

performing collateral

as a % of

outstanding

bonds

 

PreTSL IV

 

Mezzanine

*

 

$

61

 

 

$

53

 

 

$

(8

)

 

$

1

 

 

$

 

 

Ba1

 

 

3

 

 

 

-

 

 

 

0.0

%

 

 

291.5

%

 

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

 

Marketable Equity Securities

The Company’s equity securities consist of investments with readily determinable fair values in large cap stock companies. Changes in the fair value of these equity securities are recorded to earnings in non-interest income, in accordance with ASU 2016-01 Financial Instruments – Overall (Subtopic 825-10) Recognition and Measurement of Financial Assets and Financial Liabilities.    

At December 31, 2022 and 2021, the Company had $12,056,000 and $12,410,000, 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 2022, 2021 and 2020:  

 

December 31,

 

2022

 

 

2021

 

 

2020

 

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

 

$

(621

)

 

$

2,714

 

 

$

538

 

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

 

 

405

 

 

 

1,788

 

 

 

585

 

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

 

$

(1,026

)

 

$

926

 

 

$

(47

)

 

Tax benefit applicable to the net realized losses for the year ended December 31, 2022 was $296,000.  Tax expense applicable to the net realized gains for the years ended December 31 2021 and 2020 were, $784,000, and $155,000, respectively.  Proceeds from sales of investment equity securities were $1,594,000, $7,768,000 and $4,767,000 for the years ended December 31, 2022, 2021 and 2020, respectively.

 

 

Note 5 - Loans Receivable and the Allowance for Loan Losses

Major classes of loans are as follows:

 

December 31,

 

2022

 

 

2021

 

Commercial:

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

160,875

 

 

$

148,610

 

Construction

 

 

62,955

 

 

 

55,855

 

Secured by commercial real estate

 

 

518,070

 

 

 

451,404

 

Secured by residential real estate

 

 

103,419

 

 

 

84,741

 

State and political subdivisions

 

 

20,971

 

 

 

19,775

 

Retail:

 

 

 

 

 

 

 

 

1-4 family residential mortgages

 

 

105,654

 

 

 

100,281

 

Home equity loans and lines

 

 

63,580

 

 

 

61,782

 

Consumer

 

 

4,113

 

 

 

4,699

 

Total loans

 

 

1,039,637

 

 

 

927,147

 

Net deferred (fees) costs

 

 

(252

)

 

 

(677

)

Loans receivable

 

$

1,039,385

 

 

$

926,470

 

 

- 69 -


 

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 express 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 December 31, 2022 and 2021, overdrafts were $132,000 and $91,000, respectively.

QNB generally lends in Bucks, Lehigh, and Montgomery counties in southeastern Pennsylvania. 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 December 31, 2022, there was a concentration of loans to lessors of residential buildings and dwellings of 20.0% of total loans and to lessors of nonresidential buildings of 22.5% of total loans, compared with 18.0% and 24.2% of total loans, respectively, at December 31, 2021. These concentrations were primarily within the commercial real estate categories.

Under the CARES Act, QNB continues to provide customers experiencing financial hardship caused by the COVID-19 Pandemic, solutions to help them through this difficult period. At December 31, 2022, QNB had no modifications related to COVID-19.  At December 31, 2021, QNB had modifications to one retail loan with a balance of $42,000 which was modified three times with deferred interest and principal payments totaling ten months and to one commercial loan with a balance of $290,000 which was modified once with deferred interest and principal payments totaling six months.   Loans modified in 2021 and 2020 have all returned to a normal payment schedule.

 

At December 31, 2022 and 2021, QNB had four PPP loans totaling $2,329,000 and 98 PPP loans totaling $14,327,000, respectively, reported in gross commercial and industrial loans.  The PPP loans are 100% guaranteed by the SBA.  QNB received origination fees from the SBA ranging from a flat fee of $2,500 to one to five basis points which are recognized in interest income as a yield adjustment over the term of the loan.   Net unearned (fees) costs include $39,000 and $482,000 in PPP net loan origination fees at December 31, 2022 and 2021, respectively.

QNB engages in a variety of lending activities, including commercial, residential real estate and consumer transactions. QNB 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 types 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 southeastern 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.

QNB 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.

- 70 -


QNB 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.

QNB 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

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

QNB 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 commercial loans and loans to state and political subdivisions 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. QNB 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 QNB’s internal risk rating system as of December 31, 2022 and 2021:

 

December 31, 2022

 

Pass

 

 

Special

mention

 

 

Substandard

 

 

Doubtful

 

 

Total

 

Commercial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

157,914

 

 

$

23

 

 

$

2,938

 

 

$

 

 

$

160,875

 

Construction

 

 

62,955

 

 

 

 

 

 

 

 

 

 

 

 

62,955

 

Secured by commercial real estate

 

 

505,657

 

 

 

2,597

 

 

 

9,816

 

 

 

 

 

 

518,070

 

Secured by residential real estate

 

 

102,295

 

 

 

194

 

 

 

930

 

 

 

 

 

 

103,419

 

State and political subdivisions

 

 

20,971

 

 

 

 

 

 

 

 

 

 

 

 

20,971

 

Total

 

$

849,792

 

 

$

2,814

 

 

$

13,684

 

 

$

 

 

$

866,290

 

 

- 71 -


 

December 31, 2021

 

Pass

 

 

Special

mention

 

 

Substandard

 

 

Doubtful

 

 

Total

 

Commercial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

141,102

 

 

$

151

 

 

$

7,357

 

 

$

 

 

$

148,610

 

Construction

 

 

55,855

 

 

 

 

 

 

 

 

 

 

 

 

55,855

 

Secured by commercial real estate

 

 

438,519

 

 

 

2,848

 

 

 

10,037

 

 

 

 

 

 

451,404

 

Secured by residential real estate

 

 

83,604

 

 

 

 

 

 

1,137

 

 

 

 

 

 

84,741

 

State and political subdivisions

 

 

19,775

 

 

 

 

 

 

 

 

 

 

 

 

19,775

 

Total

 

$

738,855

 

 

$

2,999

 

 

$

18,531

 

 

$

 

 

$

760,385

 

 

For retail loans, QNB 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 December 31, 2022 and 2021:

 

December 31, 2022

 

Performing

 

 

Non-performing

 

 

Total

 

Retail:

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential mortgages

 

$

105,193

 

 

$

461

 

 

$

105,654

 

Home equity loans and lines

 

 

63,178

 

 

 

402

 

 

 

63,580

 

Consumer

 

 

4,051

 

 

 

62

 

 

 

4,113

 

Total

 

$

172,422

 

 

$

925

 

 

$

173,347

 

 

December 31, 2021

 

Performing

 

 

Non-performing

 

 

Total

 

Retail:

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential mortgages

 

$

99,560

 

 

$

721

 

 

$

100,281

 

Home equity loans and lines

 

 

61,102

 

 

 

680

 

 

 

61,782

 

Consumer

 

 

4,609

 

 

 

90

 

 

 

4,699

 

Total

 

$

165,271

 

 

$

1,491

 

 

$

166,762

 

 

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 (excluding deferred fees and costs) summarized by the past due status, regardless of whether the loan is on non-accrual status, as of December 31, 2022 and 2021:

 

December 31, 2022

 

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

 

$

 

 

$

         1,157

 

 

$

 

 

$

1,157

 

 

$

159,718

 

 

$

160,875

 

Construction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

62,955

 

 

 

62,955

 

Secured by commercial real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

518,070

 

 

 

518,070

 

Secured by residential  real estate

 

 

 

 

 

 

 

 

13

 

 

 

13

 

 

 

103,406

 

 

 

103,419

 

State and political subdivisions

 

 

 

 

 

 

 

 

 

 

 

 

 

 

20,971

 

 

 

20,971

 

Retail:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential mortgages

 

 

703

 

 

 

168

 

 

 

216

 

 

 

1,087

 

 

 

104,567

 

 

 

105,654

 

Home equity loans and lines

 

 

95

 

 

 

 

 

 

 

 

 

95

 

 

 

63,485

 

 

 

63,580

 

Consumer

 

 

37

 

 

 

50

 

 

 

 

 

 

87

 

 

 

4,026

 

 

 

4,113

 

Total

 

$

835

 

 

$

1,375

 

 

$

229

 

 

$

2,439

 

 

$

1,037,198

 

 

$

1,039,637

 

 

- 72 -


 

December 31, 2021

 

30-59 days

past due

 

 

60-89 days

past due

 

 

90 days or

more past

due

 

 

Total past

due loans

 

 

Current

 

 

Total loans

receivable

 

Commercial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

2,288

 

 

$

1

 

 

$

596

 

 

$

2,885

 

 

$

145,725

 

 

$

148,610

 

Construction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

55,855

 

 

 

55,855

 

Secured by commercial real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

451,404

 

 

 

451,404

 

Secured by residential  real estate

 

 

 

 

 

 

 

 

30

 

 

 

30

 

 

 

84,711

 

 

 

84,741

 

State and political subdivisions

 

 

 

 

 

 

 

 

 

 

 

 

 

 

19,775

 

 

 

19,775

 

Retail:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential mortgages

 

 

1,139

 

 

 

 

 

 

127

 

 

 

1,266

 

 

 

99,015

 

 

 

100,281

 

Home equity loans and lines

 

 

21

 

 

 

 

 

 

10

 

 

 

31

 

 

 

61,751

 

 

 

61,782

 

Consumer

 

 

20

 

 

 

11

 

 

 

 

 

 

31

 

 

 

4,668

 

 

 

4,699

 

Total

 

$

3,468

 

 

$

12

 

 

$

763

 

 

$

4,243

 

 

$

922,904

 

 

$

927,147

 

 

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 December 31, 2022 and 2021:

 

December 31, 2022

 

90 days or more past

due (still accruing)

 

 

Non-accrual

 

Commercial:

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

 

 

$

1,575

 

Construction

 

 

 

 

 

 

Secured by commercial real estate

 

 

 

 

 

2,031

 

Secured by residential real estate

 

 

 

 

 

289

 

State and political subdivisions

 

 

 

 

 

 

Retail:

 

 

 

 

 

 

 

 

1-4 family residential mortgages

 

 

 

 

 

461

 

Home equity loans and lines

 

 

 

 

 

402

 

Consumer

 

 

 

 

 

62

 

Total

 

$

 

 

$

4,820

 

 

December 31, 2021

 

90 days or more past

due (still accruing)

 

 

Non-accrual

 

Commercial:

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

 

 

$

3,369

 

Construction

 

 

 

 

 

 

Secured by commercial real estate

 

 

 

 

 

2,279

 

Secured by residential real estate

 

 

 

 

 

391

 

State and political subdivisions

 

 

 

 

 

 

Retail:

 

 

 

 

 

 

 

 

1-4 family residential mortgages

 

 

 

 

 

721

 

Home equity loans and lines

 

 

 

 

 

680

 

Consumer

 

 

 

 

 

90

 

Total

 

$

 

 

$

7,530

 

 

- 73 -


 

Activity in the allowance for loan losses for the years ended December 31, 2022, 2021 and 2020 are as follows:

 

Year ended December 31, 2022

 

Balance,

beginning of

period

 

 

Provision for

(credit to)

loan losses

 

 

Charge-offs

 

 

Recoveries

 

 

Balance, end

of period

 

Commercial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

3,368

 

 

$

(2,320

)

 

$

(38

)

 

$

306

 

 

$

1,316

 

Construction

 

 

363

 

 

 

392

 

 

 

 

 

 

 

 

 

755

 

Secured by commercial real estate

 

 

4,280

 

 

 

722

 

 

 

 

 

 

 

 

 

5,002

 

Secured by residential real estate

 

 

1,035

 

 

 

160

 

 

 

 

 

 

45

 

 

 

1,240

 

State and political subdivisions

 

 

69

 

 

 

25

 

 

 

 

 

 

 

 

 

94

 

Retail:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential mortgages

 

 

646

 

 

 

37

 

 

 

 

 

 

 

 

 

683

 

Home equity loans and lines

 

 

376

 

 

 

55

 

 

 

 

 

 

6

 

 

 

437

 

Consumer

 

 

542

 

 

 

82

 

 

 

(158

)

 

 

36

 

 

 

502

 

Unallocated

 

 

505

 

 

 

(3

)

 

N/A

 

 

N/A

 

 

 

502

 

Total

 

$

11,184

 

 

$

(850

)

 

$

(196

)

 

$

393

 

 

$

10,531

 

 

Year ended December 31, 2021

 

Balance,

beginning of

period

 

 

Provision for

(credit to)

loan losses

 

 

Charge-offs

 

 

Recoveries

 

 

Balance, end

of period

 

Commercial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

4,050

 

 

$

(774

)

 

$

 

 

$

92

 

 

$

3,368

 

Construction

 

 

346

 

 

 

17

 

 

 

 

 

 

 

 

 

363

 

Secured by commercial real estate

 

 

3,736

 

 

 

544

 

 

 

 

 

 

 

 

 

4,280

 

Secured by residential real estate

 

 

871

 

 

 

181

 

 

 

(38

)

 

 

21

 

 

 

1,035

 

State and political subdivisions

 

 

89

 

 

 

(20

)

 

 

 

 

 

 

 

 

69

 

Retail:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential mortgages

 

 

533

 

 

 

113

 

 

 

 

 

 

 

 

 

646

 

Home equity loans and lines

 

 

386

 

 

 

32

 

 

 

(49

)

 

 

7

 

 

 

376

 

Consumer

 

 

265

 

 

 

410

 

 

 

(176

)

 

 

43

 

 

 

542

 

Unallocated

 

 

550

 

 

 

(45

)

 

N/A

 

 

N/A

 

 

 

505

 

Total

 

$

10,826

 

 

$

458

 

 

$

(263

)

 

$

163

 

 

$

11,184

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31, 2020

 

Balance,

beginning of

period

 

 

Provision for

(credit to)

loan losses

 

 

Charge-offs

 

 

Recoveries

 

 

Balance, end

of period

 

Commercial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

4,689

 

 

$

(411

)

 

$

(268

)

 

$

40

 

 

$

4,050

 

Construction

 

 

590

 

 

 

(244

)

 

 

 

 

 

 

 

 

346

 

Secured by commercial real estate

 

 

2,519

 

 

 

1,205

 

 

 

 

 

 

12

 

 

 

3,736

 

Secured by residential real estate

 

 

629

 

 

 

174

 

 

 

 

 

 

68

 

 

 

871

 

State and political subdivisions

 

 

115

 

 

 

(26

)

 

 

 

 

 

 

 

 

89

 

Retail:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential mortgages

 

 

549

 

 

 

(16

)

 

 

 

 

 

 

 

 

533

 

Home equity loans and lines

 

 

310

 

 

 

35

 

 

 

 

 

 

41

 

 

 

386

 

Consumer

 

 

230

 

 

 

239

 

 

 

(282

)

 

 

78

 

 

 

265

 

Unallocated

 

 

256

 

 

 

294

 

 

N/A

 

 

N/A

 

 

 

550

 

Total

 

$

9,887

 

 

$

1,250

 

 

$

(550

)

 

$

239

 

 

$

10,826

 

- 74 -


 

 

As previously discussed, QNB 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 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 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, QNB 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 QNB’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 QNB 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, extension of terms, forgiveness of principal or interest, or other modifications of interest rates to less than the current market rate for new obligations with similar risk. Loans classified as TDRs are considered non-performing and are also designated as impaired.

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

Performing TDRs (not reported as non-accrual or past due 90 days or more and still accruing) totaled $4,301,000 and $4,142,000 as of December 31, 2022 and 2021, respectively. Non-performing TDRs totaled $371,000 and $658,000 as of December 31, 2022 and 2021, 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. There were charge-offs resulting from loans modified as TDRs of $0, $0 and $0 during the years ended December 31, 2022, 2021 and 2020, respectively.

- 75 -


 

December 31,

 

2022

 

 

2021

 

 

 

Unpaid

principal

balance

 

 

Related

allowance

 

 

Unpaid

principal

balance

 

 

Related

allowance

 

TDRs with no specific allowance recorded

 

$

1,272

 

 

$

 

 

$

1,477

 

 

$

 

TDRs with an allowance recorded

 

 

3,400

 

 

 

392

 

 

 

3,323

 

 

 

690

 

Total

 

$

4,672

 

 

$

392

 

 

$

4,800

 

 

$

690

 

 

There were  two newly identified TDRs during the year ended December 31, 2022:   an extension of credit on an existing relationship that was already a TDR and one to ease cash-flow issues.  There were  no newly identified TDRs during the year ended December 31, 2021.   As of December 31, 2022 and 2021, QNB had commitments of $5,000 and $2,000, respectively, to lend additional funds to customers with loans whose terms have been modified in troubled debt restructurings.

QNB had one loan secured by residential real estate with a recorded investment of $120,000 for which foreclosure proceedings were in process as of December 31, 2022. There was one mortgage loan secured by residential real estate with a recorded investment of $127,000 for which foreclosure proceedings were in process at December 31, 2021.  

The following tables present the balance in the allowance of loan losses disaggregated on the basis of QNB’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 o QNB’s impairment methodology:

 

 

 

Allowance for Loan Losses

 

 

Loans Receivable

 

December 31, 2022

 

Balance

 

 

Balance related

to loans

individually

evaluated for

impairment

 

 

Balance related

to loans

collectively

evaluated for

impairment

 

 

Balance

 

 

Balance

individually

evaluated for

impairment

 

 

Balance

collectively

evaluated for

impairment

 

Commercial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

1,316

 

 

$

125

 

 

$

1,191

 

 

$

160,875

 

 

$

1,821

 

 

$

159,054

 

Construction

 

 

755

 

 

 

 

 

 

755

 

 

 

62,955

 

 

 

 

 

 

62,955

 

Secured by commercial real estate

 

 

5,002

 

 

 

131

 

 

 

4,871

 

 

 

518,070

 

 

 

5,309

 

 

 

512,761

 

Secured by residential real estate

 

 

1,240

 

 

 

321

 

 

 

919

 

 

 

103,419

 

 

 

1,362

 

 

 

102,057

 

State and political subdivisions

 

 

94

 

 

 

 

 

 

94

 

 

 

20,971

 

 

 

 

 

 

20,971

 

Retail:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential mortgages

 

 

683

 

 

 

 

 

 

683

 

 

 

105,654

 

 

 

628

 

 

 

105,026

 

Home equity loans and lines

 

 

437

 

 

 

119

 

 

 

318

 

 

 

63,580

 

 

 

402

 

 

 

63,178

 

Consumer

 

 

502

 

 

 

 

 

 

502

 

 

 

4,113

 

 

 

45

 

 

 

4,068

 

Unallocated

 

 

502

 

 

N/A

 

 

N/A

 

 

N/A

 

 

N/A

 

 

N/A

 

Total

 

$

10,531

 

 

$

696

 

 

$

9,333

 

 

$

1,039,637

 

 

$

9,567

 

 

$

1,030,070

 

 

 

 

Allowance for Loan Losses

 

 

Loans Receivable

 

December 31, 2021

 

Balance

 

 

Balance related

to loans

individually

evaluated for

impairment

 

 

Balance related

to loans

collectively

evaluated for

impairment

 

 

Balance

 

 

Balance

individually

evaluated for

impairment

 

 

Balance

collectively

evaluated for

impairment

 

Commercial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

3,368

 

 

$

2,090

 

 

$

1,278

 

 

$

148,610

 

 

$

3,517

 

 

$

145,093

 

Construction

 

 

363

 

 

 

 

 

 

363

 

 

 

55,855

 

 

 

 

 

 

55,855

 

Secured by commercial real estate

 

 

4,280

 

 

 

312

 

 

 

3,968

 

 

 

451,404

 

 

 

5,654

 

 

 

445,750

 

Secured by residential real estate

 

 

1,035

 

 

 

368

 

 

 

667

 

 

 

84,741

 

 

 

1,387

 

 

 

83,354

 

State and political subdivisions

 

 

69

 

 

 

 

 

 

69

 

 

 

19,775

 

 

 

 

 

 

19,775

 

Retail:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential mortgages

 

 

646

 

 

 

 

 

 

646

 

 

 

100,281

 

 

 

893

 

 

 

99,388

 

Home equity loans and lines

 

 

376

 

 

 

100

 

 

 

276

 

 

 

61,782

 

 

 

688

 

 

 

61,094

 

Consumer

 

 

542

 

 

 

3

 

 

 

539

 

 

 

4,699

 

 

 

53

 

 

 

4,646

 

Unallocated

 

 

505

 

 

N/A

 

 

N/A

 

 

N/A

 

 

N/A

 

 

N/A

 

Total

 

$

11,184

 

 

$

2,873

 

 

$

7,806

 

 

$

927,147

 

 

$

12,192

 

 

$

914,955

 

- 76 -


 

The following table summarizes additional information regarding impaired loans by loan portfolio class as of December 31, 2022 and 2021:

 

 

 

December 31, 2022

 

 

December 31, 2021

 

 

 

Recorded

investment

(after

charge-offs)

 

 

Unpaid

principal

balance

 

 

Related

allowance

 

 

Recorded

investment

(after

charge-offs)

 

 

Unpaid

principal

balance

 

 

Related

allowance

 

With no specific allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

1,402

 

 

$

1,694

 

 

 

 

 

 

$

150

 

 

$

157

 

 

 

 

 

Construction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Secured by commercial real estate

 

 

2,198

 

 

 

2,608

 

 

 

 

 

 

 

2,361

 

 

 

2,702

 

 

 

 

 

Secured by residential real estate

 

 

430

 

 

 

482

 

 

 

 

 

 

 

715

 

 

 

768

 

 

 

 

 

Retail:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential mortgages

 

 

628

 

 

 

678

 

 

 

 

 

 

 

893

 

 

 

1,002

 

 

 

 

 

Home equity loans and lines

 

 

240

 

 

 

296

 

 

 

 

 

 

 

514

 

 

 

586

 

 

 

 

 

Consumer

 

 

45

 

 

 

62

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

4,943

 

 

$

5,820

 

 

 

 

 

 

$

4,633

 

 

$

5,215

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

With an allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

419

 

 

$

601

 

 

$

125

 

 

$

3,367

 

 

$

3,825

 

 

$

2,090

 

Construction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Secured by commercial real estate

 

 

3,111

 

 

 

3,312

 

 

 

131

 

 

 

3,293

 

 

 

3,451

 

 

 

312

 

Secured by residential real estate

 

 

932

 

 

 

1,065

 

 

 

321

 

 

 

672

 

 

 

787

 

 

 

368

 

Retail:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential mortgages

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Home equity loans and lines

 

 

162

 

 

 

191

 

 

 

119

 

 

 

174

 

 

 

193

 

 

 

100

 

Consumer

 

 

 

 

 

 

 

 

 

 

 

53

 

 

 

68

 

 

 

3

 

Total

 

$

4,624

 

 

$

5,169

 

 

$

696

 

 

$

7,559

 

 

$

8,324

 

 

$

2,873

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

1,821

 

 

$

2,295

 

 

$

125

 

 

$

3,517

 

 

$

3,982

 

 

$

2,090

 

Construction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Secured by commercial real estate

 

 

5,309

 

 

 

5,920

 

 

 

131

 

 

 

5,654

 

 

 

6,153

 

 

 

312

 

Secured by residential real estate

 

 

1,362

 

 

 

1,547

 

 

 

321

 

 

 

1,387

 

 

 

1,555

 

 

 

368

 

Retail:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential mortgages

 

 

628

 

 

 

678

 

 

 

 

 

 

893

 

 

 

1,002

 

 

 

 

Home equity loans and lines

 

 

402

 

 

 

487

 

 

 

119

 

 

 

688

 

 

 

779

 

 

 

100

 

Consumer

 

 

45

 

 

 

62

 

 

 

 

 

 

53

 

 

 

68

 

 

 

3

 

Total

 

$

9,567

 

 

$

10,989

 

 

$

696

 

 

$

12,192

 

 

$

13,539

 

 

$

2,873

 

 

- 77 -


 

The following table presents additional information regarding the average recorded investment and interest income recognized on impaired loans for the years ended December 31, 2022, 2021 and 2020:

 

Year Ended December 31,

 

2022

 

 

2021

 

 

2020

 

 

 

 

 

 

 

Average

recorded

investment

 

 

Interest income

recognized

 

 

Average

recorded

investment

 

 

Interest income

recognized

 

 

Average

recorded

investment

 

 

Interest income

recognized

 

Commercial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

3,001

 

 

$

10

 

 

$

3,782

 

 

$

5

 

 

$

5,204

 

 

$

5

 

Construction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Secured by commercial real estate

 

 

5,499

 

 

 

144

 

 

 

5,813

 

 

 

167

 

 

 

6,696

 

 

 

171

 

Secured by residential real estate

 

 

1,368

 

 

 

53

 

 

 

1,706

 

 

 

61

 

 

 

2,002

 

 

 

69

 

Retail:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential mortgages

 

 

871

 

 

 

6

 

 

 

902

 

 

 

6

 

 

 

819

 

 

 

10

 

Home equity loans and lines

 

 

486

 

 

 

1

 

 

 

738

 

 

 

 

 

 

680

 

 

 

1

 

Consumer

 

 

49

 

 

 

 

 

 

57

 

 

 

1

 

 

 

66

 

 

 

 

Total

 

$

11,274

 

 

$

214

 

 

$

12,998

 

 

$

240

 

 

$

15,467

 

 

$

256

 

 

 

Note 6 - Premises and Equipment

Premises and equipment, stated at cost less accumulated depreciation and amortization, are summarized below:

 

December 31,

 

2022

 

 

2021

 

Land and buildings

 

$

15,970

 

 

$

15,933

 

Furniture and equipment

 

 

16,640

 

 

 

16,345

 

Leasehold improvements

 

 

3,622

 

 

 

3,571

 

Right-of-use asset

 

 

2,909

 

 

 

3,423

 

Book value

 

 

39,141

 

 

 

39,272

 

Accumulated depreciation and amortization

 

 

(23,678

)

 

 

(22,732

)

Net book value

 

$

15,463

 

 

$

16,540

 

 

Depreciation and amortization expense on premises and equipment, which excludes operating lease costs in the table below, amounted to $1,115,000, $1,200,000, and $1,363,000 for the years ended December 31, 2022, 2021 and 2020, respectively. During 2022 QNB renewed one operating lease and recorded a right-of-use asset of $43,000 and an operating liability of $43,000.  

 

 


- 78 -


 

The following table summarized the quantitative attributes of QNB’s operating leases:

 

Year ended December 31,

 

2022

 

 

2021

 

 

 

 

 

 

 

 

 

 

Lease cost

 

 

 

 

 

 

 

 

Operating lease cost

 

$

609

 

 

$

628

 

Total lease cost

 

 

609

 

 

 

628

 

 

 

 

 

 

 

 

 

 

Other information

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

Cashflows from operating leases

 

$

620

 

 

$

631

 

 

 

 

 

 

 

 

 

 

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

 

$

43

 

 

$

698

 

 

 

 

 

 

 

 

 

 

Weighted average remaining lease terms:

 

 

 

 

 

 

 

 

Operating leases

 

13.8 years

 

 

13.7 years

 

Weighted average discount rates:

 

 

 

 

 

 

 

 

Operating leases

 

 

2.78

%

 

 

2.78

%

 

 

Note 7 - Intangible Assets and Loan Servicing

Loans serviced for others are not included in the accompanying Consolidated Balance Sheets. The unpaid principal balances of mortgage loans serviced for others were $75,205,000 and $85,061,000 at December 31, 2022 and 2021, respectively.

The following table reflects the activity of mortgage servicing rights for the periods indicated:

 

Year ended December 31,

 

2022

 

 

2021

 

 

2020

 

Balance at beginning of year

 

$

538

 

 

$

533

 

 

$

441

 

Mortgage servicing rights capitalized

 

 

2

 

 

 

123

 

 

 

249

 

Mortgage servicing rights amortized

 

 

(80

)

 

 

(132

)

 

 

(136

)

Fair market value adjustments

 

 

9

 

 

 

14

 

 

 

(21

)

Balance at end of year

 

$

469

 

 

$

538

 

 

$

533

 

 

The balance of these mortgage servicing rights is included in other assets at December 31, 2022 and 2021 and the fair value of these rights was $638,000 and $615,000, respectively. The fair value of servicing rights was determined using discount rates ranging from 12.0% to 12.5% for both 2022 and 2021; and prepayment speeds ranging from 113% to 235% for 2022 compared to 187% to 312% for 2021.

The annual estimated amortization expense of intangible assets for each of the five succeeding fiscal years is as follows:

 

2023

 

$

72

 

2024

 

 

63

 

2025

 

 

54

 

2026

 

 

46

 

2027

 

 

40

 

 

 

Note 8 - Time Deposits

The aggregate amount of time deposits was $175,449,000 and $168,373,000 at December 31, 2022 and 2021, respectively. Time deposits that meet or exceed the FDIC insurance limit of $250,000 at December 31, 2022 and 2021 were $24,470,000 and $24,987,000, respectively.

- 79 -


At December 31, 2022, the scheduled maturities of time deposits were as follows:

 

2023

 

$

85,267

 

2024

 

 

34,398

 

2025

 

 

27,556

 

2026

 

 

17,302

 

2027

 

 

10,926

 

Thereafter

 

 

 

Total time deposits

 

$

175,449

 

 

 

Note 9 - Short-Term Borrowings

 

December 31,

 

Securities sold

under agreements

to repurchase (a)

 

 

Other short - term

borrowings (b)

 

2022

 

 

 

 

 

 

 

 

Balance

 

$

69,309

 

 

$

92,018

 

Maximum indebtedness at any month end

 

 

71,847

 

 

 

92,018

 

Daily average indebtedness outstanding

 

 

68,650

 

 

 

17,226

 

Average rate paid for the year

 

 

0.50

%

 

 

3.01

%

Average rate on period-end borrowings

 

 

1.82

 

 

 

4.51

 

 

 

 

 

 

 

 

 

 

2021

 

 

 

 

 

 

 

 

Balance

 

$

68,476

 

 

$

 

Maximum indebtedness at any month end

 

 

79,257

 

 

 

 

Daily average indebtedness outstanding

 

 

71,467

 

 

 

191

 

Average rate paid for the year

 

 

0.36

%

 

 

0.31

%

Average rate on period-end borrowings

 

 

0.34

 

 

 

 

 

(a)

Securities sold under agreements to repurchase mature overnight. The repurchase agreements were collateralized by U.S. Government mortgage-backed securities and CMOs with an amortized cost of $92,158,000 and $89,439,000 and a fair value of $79,014,000 and $89,361,000 and at December 31, 2021 and 2020 respectively. These securities are held in safekeeping at the Federal Reserve Bank of Boston.

(b)

Other short-term borrowings include Federal funds purchased and overnight borrowings from the FHLB.

The Bank has five unsecured Federal funds lines granted by correspondent banks totaling $101,000,000. Federal funds purchased under these lines were $0 at both December 31, 2022 and 2021.

 

 

Note 10 - Long-Term Debt

FHLB advances are collateralized by certain mortgage loans and also require the purchase of FHLB capital stock, which is included within restricted investment in bank stock on the Consolidated Balance Sheets. QNB’s FHLB stock was $5,181,000 and $1,317,000 at December 31, 2022 and 2021, respectively.

QNB has a maximum borrowing capacity with the FHLB of approximately $396,973,000. At December 31, 2022 QNB had $10,000,000 in long-term advances outstanding with the FHLB at fixed rates, $92,018,000 short-term borrowings as reported in Note 9 and a letter of credit issued of $350,000. At December 31, 2021 QNB had $10,000,000 in long-term debt outstanding with the FHLB and a letter of credit of $350,000.

Long-term advances at the FHLB mature as follows:

 

As of December 31, 2022

 

Balance Maturing

 

 

Weighted-Average Rate

 

2023

 

$

10,000

 

 

 

1.57

%

2024

 

 

 

 

 

-

 

2025

 

 

 

 

 

 

2026

 

 

 

 

 

 

2027

 

 

 

 

 

 

Thereafter

 

 

 

 

 

 

Total long-term debt

 

$

10,000

 

 

 

1.57

%

 

- 80 -


 

 

Note 11 - Income Taxes

The components of the provision for income taxes are as follows:

 

Year ended December 31,

 

2022

 

 

2021

 

 

2020

 

Current Federal income taxes

 

$

3,543

 

 

$

3,629

 

 

$

2,569

 

Current state income taxes

 

 

180

 

 

 

219

 

 

 

52

 

Deferred Federal income taxes (benefits)

 

 

36

 

 

 

21

 

 

 

(53

)

Deferred state income taxes (benefits)

 

 

(102

)

 

 

92

 

 

 

(6

)

Valuation adjustment

 

 

8

 

 

 

 

 

 

 

Net provision

 

$

3,665

 

 

$

3,961

 

 

$

2,562

 

 

At December 31, 2022 and 2021, the tax effects of temporary differences that represent the significant portion of deferred tax assets and liabilities are as follows:

 

December 31,

 

2022

 

 

2021

 

Deferred tax assets

 

 

 

 

 

 

 

 

Allowance for loan losses

 

$

2,212

 

 

$

2,349

 

Net unrealized holding losses on investment

   securities available-for-sale

 

 

21,565

 

 

 

994

 

Fair value adjustment on equity securities

 

 

10

 

 

 

 

Non-accrual interest income

 

 

52

 

 

 

32

 

Leasing liability

 

 

678

 

 

 

788

 

Deferred revenue

 

 

7

 

 

 

23

 

Incurred but not reported medical expense

 

 

28

 

 

 

31

 

Bonus

 

 

128

 

 

 

248

 

Other

 

 

48

 

 

 

54

 

Total deferred tax assets

 

 

24,728

 

 

 

4,519

 

Deferred tax liabilities

 

 

 

 

 

 

 

 

Deferred loan income

 

 

459

 

 

 

430

 

Depreciation

 

 

225

 

 

 

295

 

Mortgage servicing rights

 

 

98

 

 

 

110

 

Fair value adjustment on equity securities

 

 

 

 

 

286

 

Prepaid expenses

 

 

232

 

 

 

214

 

Right of use asset

 

 

611

 

 

 

719

 

Other

 

 

18

 

 

 

16

 

Total deferred tax liabilities

 

 

1,643

 

 

 

2,070

 

Valuation allowance

 

 

8

 

 

 

 

Net deferred tax asset

 

$

23,077

 

 

$

2,449

 

 

The ability to realize 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 the above deferred tax assets except an $8,000 deferred tax asset related to non-qualified stock option that it is more likely than not that the options will expire unexercised due to the strike price.  A valuation allowance was recorded for this amount.

- 81 -


A reconciliation of the tax provision on income before taxes computed at the statutory rates of 21 % for 2022, 2021 and 2020 and the actual tax provision was as follows:  

 

Year ended December 31,

 

2022

 

 

2021

 

 

2020

 

 

 

Dollar

 

 

%

 

 

Dollar

 

 

%

 

 

Dollar

 

 

%

 

Provision at statutory rate

 

$

4,113

 

 

 

21.0

%

 

$

4,295

 

 

 

21.0

%

 

$

3,075

 

 

 

21.0

%

Tax-exempt interest and dividend income

 

 

(504

)

 

 

(2.6

)

 

 

(527

)

 

 

(2.6

)

 

 

(518

)

 

 

(3.5

)

Bank-owned life insurance

 

 

(75

)

 

 

(0.4

)

 

 

(104

)

 

 

(0.5

)

 

 

(62

)

 

 

(0.4

)

Stock-based compensation expense

 

 

20

 

 

 

0.1

 

 

 

19

 

 

 

0.1

 

 

 

20

 

 

 

0.1

 

State income tax

 

 

62

 

 

 

0.3

 

 

 

245

 

 

 

1.2

 

 

 

35

 

 

 

0.2

 

Other

 

 

41

 

 

 

0.2

 

 

 

33

 

 

 

0.2

 

 

 

12

 

 

 

0.1

 

Income tax provision

 

 

3,657

 

 

 

18.7

 

 

 

3,961

 

 

 

19.4

 

 

 

2,562

 

 

 

17.5

 

Valuation Adjustment

 

 

8

 

 

 

0.0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

3,665

 

 

 

18.7

%

 

$

3,961

 

 

 

19.4

%

 

$

2,562

 

 

 

17.5

%

 

 

Note 12 - Employee Benefit Plans

The QNB Bank Retirement Savings Plan provides for elective employee contributions up to the maximum allowed by the IRS and a matching company contribution limited to 3%. In addition, the plan provides for safe harbor non-elective contributions of 5% of total compensation by QNB. QNB contributed a matching contribution of $345,000, $340,000 and $340,000 for the years ended December 31, 2022, 2021, and 2020, respectively, and a safe harbor contribution of $606,000 for 2022, $608,000 for 2021, and $608,000 for 2020.

QNB’s Employee Stock Purchase Plan (the Plan) offers eligible employees an opportunity to purchase shares of QNB Corp. common stock at a 10% discount from the lesser of fair market value on the first or last day of each offering period (as defined by the Plan). At the 2016 Annual Meeting, shareholders approved the 2016 Employee Stock Purchase Plan (the 2016 Plan), which authorizes the issuance of 30,000 shares. As of May 31, 2021, 18,792 shares were issued under the 2016 Plan. The 2016 Plan expired on May 31, 2021. At the 2021 Annual Meeting, shareholders approved the 2021 Employee Stock Purchase Plan (the 2021 Plan), which authorizes the issuance of 30,000 shares. As of December 31, 2022, 7,264 shares were issued under the 2021 Plan. The 2021 Plan expires May 31, 2026.

Shares issued pursuant to the Plan were as follows:

 

Year ended December 31,

 

2022

 

 

2021

 

 

2020

 

Shares

 

 

5,102

 

 

 

4,906

 

 

 

5,723

 

Price per share

 

$29.48 and $24.21

 

 

$27.36 and $32.29

 

 

$25.52 and $25.56

 

 

 

Note 13 - Stock Option Plan

QNB has stock option plans (the Plans) administered by a committee which consists of three or more members of QNB’s Board of Directors. The Plans provide for the granting of either (i) Non-Qualified Stock Options (NQSOs) or (ii) Incentive Stock Options (ISOs). The exercise price of an option, as defined by the Plans, is the fair market value of QNB’s common stock at the date of grant. The Plans provide for the exercise either in cash or in securities of the Company or in any combination thereof.

The 2015 Plan, which expires March 15, 2025, authorizes the issuance of 300,000 shares.  The time period by which any option is exercisable under this 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 of grant. There were 177,500 options granted, 20,825 options forfeited, 47,575 options exercised and 109,150 options outstanding under the 2015 Plan as of December 31, 2022.

As of December 31, 2022, there was approximately $112,000 of unrecognized compensation cost related to unvested stock option awards granted. That cost is expected to be recognized over the next 26 months.

- 82 -


Stock option activity during 2022, 2021, and 2020 was as follows:

 

 

 

Number

of options

 

 

Weighted

average

exercise price

 

 

Weighted average

remaining

contractual term

(in years)

 

 

Aggregate

intrinsic value

 

Outstanding at December 31, 2019

 

 

103,350

 

 

 

36.96

 

 

 

 

 

 

 

 

 

Exercised

 

 

(9,550

)

 

 

29.39

 

 

 

 

 

 

 

 

 

Forfeited

 

 

(2,250

)

 

 

39.86

 

 

 

 

 

 

 

 

 

Granted

 

 

25,000

 

 

 

36.50

 

 

 

 

 

 

 

 

 

Outstanding at December 31, 2020

 

 

116,550

 

 

 

37.42

 

 

 

 

 

 

 

 

 

Exercised

 

 

(19,025

)

 

 

30.97

 

 

 

 

 

 

 

 

 

Forfeited

 

 

(8,575

)

 

 

35.27

 

 

 

 

 

 

 

 

 

Granted

 

 

25,000

 

 

 

32.50

 

 

 

 

 

 

 

 

 

Outstanding at December 31, 2021

 

 

113,950

 

 

 

37.58

 

 

 

 

 

 

 

 

 

Exercised

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Forfeited

 

 

(34,150

)

 

 

37.07

 

 

 

 

 

 

 

 

 

Granted

 

 

29,350

 

 

 

37.26

 

 

 

 

 

 

 

 

 

Outstanding at December 31, 2022

 

 

109,150

 

 

$

37.65

 

 

 

2.20

 

 

$

 

Exercisable at December 31, 2022

 

 

43,225

 

 

$

40.82

 

 

 

0.64

 

 

$

 

 

As of December 31, 2022, outstanding stock options consist of the following:

 

 

 

Options

outstanding

 

 

Exercise

price

 

 

Remaining life

(in years)

 

 

Options

exercisable

 

 

Exercise

price

 

 

 

 

20,125

 

 

$

32.50

 

 

 

3.13

 

 

 

 

 

$

 

 

 

 

19,950

 

 

 

36.50

 

 

 

2.13

 

 

 

 

 

 

 

 

 

 

25,850

 

 

 

37.26

 

 

 

4.13

 

 

 

 

 

 

 

 

 

 

22,025

 

 

 

38.15

 

 

 

1.13

 

 

 

22,025

 

 

 

38.15

 

 

 

 

21,200

 

 

 

43.60

 

 

 

0.14

 

 

 

21,200

 

 

 

43.60

 

Outstanding at December 31, 2022

 

 

109,150

 

 

$

37.65

 

 

 

2.20

 

 

 

43,225

 

 

$

40.82

 

 

The intrinsic value related to total stock options exercised during 2022, 2021, and 2020 are as follows:

 

 

 

2022

 

 

2021

 

 

2020

 

Intrinsic value of stock options exercised

 

$

-

 

 

$

31

 

 

$

81

 

 

 

Note 14 - Related Party Transactions

QNB has had, and may be expected to have in the future, banking transactions in the ordinary course of business with its executive officers, directors, principal shareholders, their immediate families and affiliated companies. The following table presents activity and amounts due from directors, principal officers, and their related interests. All of these transactions were made in the ordinary course of business on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons. These transactions did not involve more than normal risk of collectability or present any other unfavorable features.

 

Balance, December 31, 2021

 

$

2,114

 

New loans

 

 

209

 

Repayments

 

 

(561

)

Balance, December 31, 2022

 

$

1,762

 

 

The following table provides additional information regarding transactions with related parties.

 

December 31,

 

2022

 

 

2021

 

Commitments to extend credit

 

$

3,287

 

 

$

8,144

 

Letters of credit

 

 

1,696

 

 

 

1,696

 

Deposits received

 

 

6,101

 

 

 

13,377

 

- 83 -


 

 

 

Note 15 - Commitments and Contingencies

Financial instruments with off-balance sheet risk:

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

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

 

December 31,

 

2022

 

 

2021

 

Commitments to extend credit and unused lines of credit

 

$

339,312

 

 

$

325,449

 

Standby letters of credit

 

 

19,512

 

 

 

21,321

 

Total financial instrument commitments

 

$

358,824

 

 

$

346,770

 

 

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 totaling $17,800,000 expire within 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. 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. 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 December 31, 2022 and 2021 for guarantees under standby letters of credit issued is not material.

Other commitments:

QNB has committed to various operating leases for several of their branch and office facilities. Some of these leases include specific provisions relating to rent increases. A maturity analysis of the operating lease liabilities and reconciliation of the undiscounted cash flows to the total operating lease liability is as follows:

 

 

 

Operating Leases

 

2023

 

$

569

 

2024

 

 

477

 

2025

 

 

454

 

2026

 

 

302

 

2027

 

 

253

 

Thereafter

 

 

2,433

 

Total undiscounted cashflows

 

 

4,488

 

Total discount on cashflows

 

 

(1,261

)

Total lease liabilities

 

$

3,227

 

 

- 84 -


 

Some of the leases contain renewal options to extend the initial terms of the lease for periods ranging from five to ten years and certain leases allow for multiple extensions, the commitment for such renewals is not included above if they have not been exercised as of December 31, 2022. Operating lease costs, which include common area maintenance costs not included in the minimum lease payments above, for the years ended December 31, 2022, 2021 and 2020, was $712,000, $749,000 and $808,000, respectively.  

 

 

Note 16 - Accumulated Other Comprehensive Income (Loss)

The following shows the components of accumulated other comprehensive income (loss) during the periods ended December 31, 2022, 2021 and 2020:

 

December 31,

 

2022

 

 

2021

 

 

2020

 

Unrealized net holding (losses) gains on

   available-for-sale securities

 

$

(102,692

)

 

$

(4,734

)

 

$

7,151

 

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) income

 

 

(102,692

)

 

 

(4,734

)

 

 

7,151

 

Tax effect*

 

 

21,565

 

 

 

994

 

 

 

(1,502

)

Accumulated other comprehensive (loss) income,

   net of tax

 

$

(81,127

)

 

$

(3,740

)

 

$

5,649

 

 

 

 

 

 

 

 

 

 

 

 

 

 

* At tax rates of 21%

 

 

 

 

 

 

 

 

 

 

 

 

 

The following table presents amounts reclassified out of accumulated other comprehensive income (loss) for the years ended December 31, 2022, 2021 and 2020:

 

 

 

Amount reclassified from accumulated other

comprehensive income (loss)

 

 

 

Details about accumulated other comprehensive income (loss)

 

2022

 

 

2021

 

 

2020

 

 

Affected line item in statement of income

Realized net holding (losses) gains on available-for-sale securities

 

$

(139

)

 

$

18

 

 

$

24

 

 

Net gain on sale of investment securities

Other-than-temporary impairment losses on

   investment securities

 

 

 

 

 

 

 

 

 

 

Net other-than-temporary impairment losses on investment securities

Net (loss) gain  on sale of investment securities

 

 

(139

)

 

 

18

 

 

 

24

 

 

 

Tax effect*

 

 

29

 

 

 

(4

)

 

 

(5

)

 

Provision for income taxes

Total reclassification out of accumulated other

   comprehensive (loss) income, net of tax

 

$

(110

)

 

$

14

 

 

$

19

 

 

Net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

*At rate of 21%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Note 17 - Fair Value Measurements and Fair Values of Financial Instruments

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 US 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).

- 85 -


 

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.

For financial assets measured at fair value on a recurring and nonrecurring basis, the fair value measurements by level within the fair value hierarchy used were as follows:

 

December 31, 2022

 

Quoted prices

in active

markets

for identical

assets

(Level 1)

 

 

Significant

other

observable

input

(Level 2)

 

 

Significant

unobservable

inputs

(Level 3)

 

 

Balance at end

of period

 

Recurring fair value measurements

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities available-for-sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasuries

 

$

 

 

$

301

 

 

$

 

 

$

301

 

U.S. Government agency securities

 

 

 

 

 

86,709

 

 

 

 

 

 

86,709

 

State and municipal securities

 

 

 

 

 

95,367

 

 

 

 

 

 

95,367

 

U.S. Government agencies and sponsored

   enterprises (GSEs):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities

 

 

 

 

 

256,161

 

 

 

 

 

 

256,161

 

Collateralized mortgage obligations (CMOs)

 

 

 

 

 

101,672

 

 

 

 

 

 

101,672

 

Corporate debt securities

 

 

 

 

 

6,262

 

 

 

53

 

 

 

6,315

 

Total securities available-for-sale

 

 

 

 

 

546,472

 

 

 

53

 

 

 

546,525

 

Equity securities

 

 

12,056

 

 

 

 

 

 

 

 

 

12,056

 

Total recurring fair value measurements

 

$

12,056

 

 

$

546,472

 

 

$

53

 

 

$

558,581

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nonrecurring fair value measurements *

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans

 

$

 

 

$

 

 

$

3,928

 

 

$

3,928

 

Mortgage servicing rights

 

 

 

 

 

 

 

 

1

 

 

 

1

 

Total nonrecurring fair value measurements

 

$

 

 

$

 

 

$

3,929

 

 

$

3,929

 

 

*

impairment

- 86 -


 

 

December 31, 2021

 

Quoted prices

in active

markets

for identical

assets

(Level 1)

 

 

Significant

other

observable

input

(Level 2)

 

 

Significant

unobservable

inputs

(Level 3)

 

 

Balance at end

of period

 

Recurring fair value measurements

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities available-for-sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government agency securities

 

$

 

 

$

97,499

 

 

$

 

 

$

97,499

 

State and municipal securities

 

 

 

 

 

131,035

 

 

 

 

 

 

131,035

 

U.S. Government agencies and sponsored

   enterprises (GSEs):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities

 

 

 

 

 

329,938

 

 

 

 

 

 

329,938

 

Collateralized mortgage obligations (CMOs)

 

 

 

 

 

127,012

 

 

 

 

 

 

127,012

 

Corporate debt securities

 

 

 

 

 

6,801

 

 

 

75

 

 

 

6,876

 

Total securities available-for-sale

 

 

 

 

 

692,285

 

 

 

75

 

 

 

692,360

 

Equity securities

 

 

12,410

 

 

 

 

 

 

 

 

 

12,410

 

Total recurring fair value measurements

 

$

12,410

 

 

$

692,285

 

 

$

75

 

 

$

704,770

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nonrecurring fair value measurements *

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans

 

$

 

 

$

 

 

$

4,686

 

 

$

4,686

 

Mortgage servicing rights

 

 

 

 

 

 

 

 

117

 

 

 

117

 

Total nonrecurring fair value measurements

 

$

 

 

$

 

 

$

4,803

 

 

$

4,803

 

 

*

impairment

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

 

 

 

Quantitative information about Level 3 fair value measurements

December 31, 2022

 

Fair value

 

 

Valuation

techniques

 

 

Unobservable

input

 

 

Value or range

of values

Impaired loans

 

$

3,634

 

 

Appraisal of collateral

(1)

 

Appraisal adjustments

(2)

 

-15% to -100%

 

 

 

 

 

 

 

 

 

Liquidation expenses

(3)

 

-10%

Impaired loans

 

 

294

 

 

Financial statement values for UCC collateral

 

 

Financial statement value discounts

(4)

 

-30 to -100%

Mortgage servicing rights

 

 

1

 

 

Discounted cash flow

 

 

Remaining term

 

 

2 to 28 yrs

 

 

 

 

 

 

 

 

 

Prepayment Speeds

 

 

113% to 235%

 

 

 

 

 

 

 

 

 

Discount rate

 

 

12.0% to 12.5%

- 87 -


 

 

 

 

Quantitative information about Level 3 fair value measurements

December 31, 2021

 

Fair value

 

 

Valuation

techniques

 

 

Unobservable

input

 

 

Value or range

of values

Impaired loans

 

$

4,369

 

 

Appraisal of collateral

(1)

 

Appraisal adjustments

(2)

 

-15% to -20%

 

 

 

 

 

 

 

 

 

Liquidation expenses

(3)

 

-10%

Impaired loans

 

 

317

 

 

Financial statement values for UCC collateral

 

 

Financial statement value discounts

(4)

 

-30 to -100%

Mortgage servicing rights

 

 

117

 

 

Discounted cash flow

 

 

Remaining term

 

 

3 to 29 yrs

 

 

 

 

 

 

 

 

 

Prepayment Speeds

 

 

187% to 312%

 

 

 

 

 

 

 

 

 

Discount rate

 

 

12.0% to 12.5%

 

(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)

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 year ended December 31:

 

 

 

Fair value measurements using

significant unobservable inputs (Level 3)

 

Securities available-for-sale

 

2022

 

 

2021

 

Balance, beginning of year

 

$

75

 

 

$

70

 

Payments received

 

 

(22

)

 

 

(1

)

Sale of securities

 

 

 

 

 

 

Total gains or losses (realized/unrealized)

 

 

 

 

 

 

 

 

Included in earnings

 

 

 

 

 

 

Included in other comprehensive

   income

 

 

 

 

 

6

 

Transfers in and/or out of Level 3

 

 

 

 

 

 

Balance, end of year

 

$

53

 

 

$

75

 

 

There were also no transfers in or out of level 3 for the same periods. 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 years ended December 31, 2022 and 2021.

The Level 3 securities consist of one collateralized debt obligation security (“PreTSL”), which is backed by trust preferred securities issued by banks. The market for this security at December 31, 2022 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 December 31, 2022;

- 88 -


 

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

 

PreTSLs 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 single underlying issuer, 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 an estimated market discount rate based on the 30-year swap rate.  The 30-year swap rate is used as the reference rate since it is indicative of market expectation for short-term rates in the future.  This is consistent with the 30-year nature of PreTSL securities, which are priced using the 3-month LIBOR as a reference rate.  The discount rate of 7.79% includes the risk-free rate, a credit component and a spread for illiquidity.     

The following information should not be interpreted as an estimate of the fair value of QNB 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 December 31, 2022 and 2021:

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:  available-for-sale (carried at fair value) and equity investments with readily determinable fair values (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 and the Federal Home Loan Bank and VISA Class B is the carrying amount, based on redemption provisions, and considers the limited marketability of such securities.

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

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

Impaired Loans (generally carried at fair value):  Impaired loans are loans in which QNB 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.

- 89 -


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.

Long-term debt (carried at cost):  Long-term debt has stated maturities and have been valued using the present value of cash flows discounted at rates approximating the current market for similar debt instruments.

Off-balance-sheet instruments (disclosed at cost):  The fair value 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.

Management uses its best judgment in estimating the fair value of QNB’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 a 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 year end.

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

 

 

 

 

 

 

 

 

 

 

 

Fair value measurements

 

December 31, 2022

 

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

 

$

15,899

 

 

$

15,899

 

 

$

15,899

 

 

$

 

 

$

 

Investment securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale

 

 

546,525

 

 

 

546,525

 

 

 

 

 

 

546,472

 

 

 

53

 

Equity

 

 

12,056

 

 

 

12,056

 

 

 

12,056

 

 

 

 

 

 

 

Restricted investment in bank stocks

 

 

5,193

 

 

 

5,193

 

 

 

 

 

 

5,193

 

 

 

 

Net loans

 

 

1,028,854

 

 

 

1,001,103

 

 

 

 

 

 

 

 

 

1,001,103

 

Mortgage servicing rights

 

 

469

 

 

 

638

 

 

 

 

 

 

 

 

 

638

 

Accrued interest receivable

 

 

5,038

 

 

 

5,038

 

 

 

 

 

 

5,038

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits with no stated maturities

 

$

1,242,920

 

 

$

1,242,920

 

 

$

1,242,920

 

 

$

 

 

$

 

Deposits with stated maturities

 

 

175,449

 

 

 

168,554

 

 

 

 

 

 

168,554

 

 

 

 

Short-term borrowings

 

 

161,327

 

 

 

161,327

 

 

 

161,327

 

 

 

 

 

 

 

Long-term debt

 

 

10,000

 

 

 

10,000

 

 

 

10,000

 

 

 

 

 

 

 

Accrued interest payable

 

 

467

 

 

 

467

 

 

 

 

 

 

467

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Off-balance sheet instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commitments to extend credit

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

Standby letters of credit

 

 

 

 

 

69

 

 

 

 

 

 

69

 

 

 

 

- 90 -


 

 

 

 

 

 

 

 

 

 

 

 

Fair value measurements

 

December 31, 2021

 

Carrying

amount

 

 

Fair value

 

 

Quoted

prices in

active

markets for

identical

assets

(Level 1)

 

 

Significant

other

observable

inputs

(Level 2)

 

 

Significant

unobservable

inputs

(Level 3)

 

Financial assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

13,390

 

 

$

13,390

 

 

$

13,390

 

 

$

 

 

$

 

Investment securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale

 

 

692,360

 

 

 

692,360

 

 

 

 

 

 

692,285

 

 

 

75

 

Equity

 

 

12,410

 

 

 

12,410

 

 

 

12,410

 

 

 

 

 

 

 

Restricted investment in bank stocks

 

 

1,329

 

 

 

1,329

 

 

 

 

 

 

1,329

 

 

 

 

Net loans

 

 

915,286

 

 

 

916,271

 

 

 

 

 

 

 

 

 

916,271

 

Mortgage servicing rights

 

 

538

 

 

 

615

 

 

 

 

 

 

 

 

 

615

 

Accrued interest receivable

 

 

4,104

 

 

 

4,104

 

 

 

 

 

 

4,104

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits with no stated maturities

 

$

1,281,372

 

 

$

1,281,372

 

 

$

1,281,372

 

 

$

 

 

$

 

Deposits with stated maturities

 

 

168,373

 

 

 

168,039

 

 

 

 

 

 

168,039

 

 

 

 

Short-term borrowings

 

 

68,476

 

 

 

68,476

 

 

 

68,476

 

 

 

 

 

 

 

Long-term debt

 

 

10,000

 

 

 

10,114

 

 

 

10,114

 

 

 

 

 

 

 

Accrued interest payable

 

 

211

 

 

 

211

 

 

 

 

 

 

211

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Off-balance sheet instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commitments to extend credit

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

Standby letters of credit

 

 

 

 

 

70

 

 

 

 

 

 

70

 

 

 

 

 

 

Note 18 - Revenue Recognition from Contracts with Customer

 

QNB 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 Income 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 QNB fulfills the customer’s request.

 

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

 

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

 

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

 

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

- 91 -


 

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

 

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

 

Gain (loss) on sales of OREO – QNB records a gain or loss from the sale of OREO when control of the property transfers to the buyer, which generally occurs at the time of an executed deed. When 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.

 

Note 19 - Parent Company Financial Information

Condensed financial statements of QNB Corp. only:

 

Balance Sheets

 

 

 

 

 

 

 

 

December 31,

 

2022

 

 

2021

 

Assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

353

 

 

$

1,234

 

Investment securities:

 

 

 

 

 

 

 

 

Available-for-sale (amortized cost $299 and $0)

 

 

301

 

 

 

 

Equity securities (cost of $12,091 and $11,419)

 

 

12,056

 

 

 

12,410

 

Investment in subsidiary

 

 

58,140

 

 

 

123,412

 

Other assets

 

 

146

 

 

 

8

 

Total assets

 

$

70,996

 

 

$

137,064

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

Other liabilities

 

$

38

 

 

$

570

 

 

 

 

 

 

 

 

 

 

Shareholders' equity

 

 

70,958

 

 

 

136,494

 

Total liabilities and shareholders' equity

 

$

70,996

 

 

$

137,064

 

 

Statements of Income

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31,

 

2022

 

 

2021

 

 

2020

 

Dividends from subsidiary

 

$

4,329

 

 

$

5,733

 

 

$

4,413

 

Interest, dividend and other income

 

 

358

 

 

 

386

 

 

 

346

 

Securities gains

 

 

405

 

 

 

1,788

 

 

 

585

 

Net unrealized (loss) gain on investment equity securities

 

 

(1,026

)

 

 

926

 

 

 

(47

)

Total income

 

 

4,066

 

 

 

8,833

 

 

 

5,297

 

Expenses

 

 

496

 

 

 

491

 

 

 

457

 

Income before applicable income taxes and equity in

   undistributed income of subsidiary

 

 

3,570

 

 

 

8,342

 

 

 

4,840

 

Provision for income tax (benefit) expense

 

 

(235

)

 

 

724

 

 

 

97

 

Income before equity in undistributed income of subsidiary

 

 

3,805

 

 

 

7,618

 

 

 

4,743

 

Equity in undistributed income of subsidiary

 

 

12,116

 

 

 

8,874

 

 

 

7,340

 

Net income

 

$

15,921

 

 

$

16,492

 

 

$

12,083

 

 

- 92 -


 

Statements of Comprehensive Income

 

(in thousands)

 

Year ended December 31,

 

2022

 

 

2021

 

 

2020

 

 

 

Before

tax

amount

 

 

Tax

expense

(benefit)

 

 

Net of

tax

amount

 

 

Before

tax

amount

 

 

Tax

expense

(benefit)

 

 

Net of

tax

amount

 

 

Before

tax

amount

 

 

Tax

expense

(benefit)

 

 

Net of

tax

amount

 

Net income

 

$

19,586

 

 

$

3,665

 

 

$

15,921

 

 

$

20,453

 

 

$

3,961

 

 

$

16,492

 

 

$

14,645

 

 

$

2,562

 

 

$

12,083

 

Other comprehensive (loss)/income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net unrealized holding (losses)/gains on available-for-sale securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized holding (losses)/gains arising during the period

 

 

(98,097

)

 

 

(20,600

)

 

 

(77,497

)

 

 

(11,867

)

 

 

(2,492

)

 

 

(9,375

)

 

 

6,850

 

 

 

1,439

 

 

 

5,411

 

Reclassification adjustment for losses/(gains) included in net income

 

 

139

 

 

 

29

 

 

 

110

 

 

 

(18

)

 

 

(4

)

 

 

(14

)

 

 

(24

)

 

 

(5

)

 

 

(19

)

 

 

 

(97,958

)

 

 

(20,571

)

 

 

(77,387

)

 

 

(11,885

)

 

 

(2,496

)

 

 

(9,389

)

 

 

6,826

 

 

 

1,434

 

 

 

5,392

 

Total comprehensive (loss) income

 

$

(78,372

)

 

$

(16,906

)

 

$

(61,466

)

 

$

8,568

 

 

$

1,465

 

 

$

7,103

 

 

$

21,471

 

 

$

3,996

 

 

$

17,475

 

 

Statements of Cash Flows

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31,

 

2022

 

 

2021

 

 

2020

 

Operating Activities

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

15,921

 

 

$

16,492

 

 

$

12,083

 

Adjustments to reconcile net income to net cash provided

   by operating activities:

 

 

 

 

 

 

 

 

 

 

 

 

Equity in undistributed income from subsidiary

 

 

(12,116

)

 

 

(8,874

)

 

 

(7,340

)

Net securities gains

 

 

(405

)

 

 

(1,788

)

 

 

(585

)

Net unrealized loss (gain) on investment equity securities

 

 

1,026

 

 

 

(926

)

 

 

47

 

Stock-based compensation expense

 

 

85

 

 

 

102

 

 

 

112

 

Accretion of discounts on investment securities

 

 

(6

)

 

 

 

 

 

 

(Decrease ) increase in other liabilities

 

 

(266

)

 

 

222

 

 

 

(682

)

(Increase) decrease in other assets

 

 

(121

)

 

 

2

 

 

 

17

 

Deferred income tax (benefit) provision

 

 

(285

)

 

 

265

 

 

 

(20

)

Net cash provided by operating activities

 

 

3,833

 

 

 

5,495

 

 

 

3,632

 

Investing activities

 

 

 

 

 

 

 

 

 

 

 

 

Purchase of investment equity securities

 

 

(1,860

)

 

 

(4,615

)

 

 

(7,914

)

Purchase of investment securities available-for-sale

 

 

(1,193

)

 

 

 

 

 

 

Proceeds from sale of investment equity securities

 

 

1,594

 

 

 

7,768

 

 

 

4,767

 

Proceeds from maturities of investment securities available-for-sale

 

 

900

 

 

 

 

 

 

 

Capital contribution to Bank

 

 

 

 

 

(2,500

)

 

 

 

Net cash (used) provided by investing activities

 

 

(559

)

 

 

653

 

 

 

(3,147

)

Financing activities

 

 

 

 

 

 

 

 

 

 

 

 

Cash dividend paid

 

 

(4,498

)

 

 

(4,375

)

 

 

(4,226

)

Treasury stock purchase

 

 

(75

)

 

 

(1,356

)

 

 

(130

)

Proceeds from issuance of common stock

 

 

418

 

 

 

575

 

 

 

497

 

Net cash used by financing activities

 

 

(4,155

)

 

 

(5,156

)

 

 

(3,859

)

(decrease) increase in  cash and cash equivalents

 

 

(881

)

 

 

992

 

 

 

(3,374

)

Cash and cash equivalents at beginning of year

 

 

1,234

 

 

 

242

 

 

 

3,616

 

Cash and cash equivalents at end of year

 

$

353

 

 

$

1,234

 

 

$

242

 

 

 

- 93 -


 

Note 20 - Regulatory Restrictions

Dividends payable by the Company and the Bank are subject to various limitations imposed by statutes, regulations and policies adopted by bank regulatory agencies. Under Pennsylvania and Federal 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 the Company, unless such loans are collateralized by specific obligations.

Both the Company and the Bank are subject to regulatory capital requirements administered by Federal bank regulatory 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 December 31, 2022, that the Company and the Bank met capital adequacy requirements to which they were subject.

The Bank is presently considered to be “well capitalized” under the regulatory framework. To be categorized as well capitalized, the Company and the Bank must maintain minimum ratios set forth in the 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 December 31, 2022

 

Amount

 

 

Ratio

 

 

Amount

 

 

Ratio

 

 

Amount

 

 

Ratio

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

$

162,725

 

 

 

13.19

%

 

 

98,701

 

 

 

8.00

%

 

 

123,376

 

 

 

10.00

%

Bank

 

 

149,908

 

 

 

12.52

 

 

 

95,796

 

 

8.00

 

 

 

119,746

 

 

10.00

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier I capital (to risk-weighted assets):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

 

152,077

 

 

 

12.33

 

 

 

74,025

 

 

6.00

 

 

 

74,025

 

 

6.00

 

Bank

 

 

139,260

 

 

 

11.63

 

 

 

71,847

 

 

6.00

 

 

 

95,796

 

 

8.00

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

 

152,077

 

 

 

12.33

 

 

 

55,519

 

 

4.50

 

 

N/A

 

 

N/A

 

Bank

 

 

139,260

 

 

 

11.63

 

 

 

53,886

 

 

4.50

 

 

 

77,835

 

 

6.50

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier I capital (to average assets):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

 

152,077

 

 

 

8.75

 

 

 

69,507

 

 

4.00

 

 

N/A

 

 

N/A

 

Bank

 

 

139,260

 

 

 

8.07

 

 

 

69,009

 

 

4.00

 

 

 

86,261

 

 

5.00

 

 

 

 

Capital levels

 

 

 

Actual

 

 

Adequately capitalized

 

 

Well capitalized

 

As of December 31, 2021

 

Amount

 

 

Ratio

 

 

Amount

 

 

Ratio

 

 

Amount

 

 

Ratio

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

$

151,501

 

 

 

13.60

%

 

 

89,111

 

 

 

8.00

%

 

 

111,389

 

 

 

10.00

%

Bank

 

 

138,419

 

 

 

12.85

 

 

 

86,162

 

 

8.00

 

 

 

107,702

 

 

10.00

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier I capital (to risk-weighted assets):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

 

140,226

 

 

 

12.59

 

 

 

66,833

 

 

6.00

 

 

 

66,833

 

 

6.00

 

Bank

 

 

127,144

 

 

 

11.81

 

 

 

64,621

 

 

6.00

 

 

 

86,162

 

 

8.00

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

 

140,226

 

 

 

12.59

 

 

 

50,125

 

 

4.50

 

 

N/A

 

 

N/A

 

Bank

 

 

127,144

 

 

 

11.81

 

 

 

48,466

 

 

4.50

 

 

 

70,006

 

 

6.50

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier I capital (to average assets):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

 

140,226

 

 

 

8.39

 

 

 

66,890

 

 

4.00

 

 

N/A

 

 

N/A

 

Bank

 

 

127,144

 

 

 

7.67

 

 

 

66,295

 

 

4.00

 

 

 

82,868

 

 

5.00

 

 

- 94 -


 

Note 21 - Consolidated Quarterly Financial Data (Unaudited)

The unaudited quarterly results of operations for the years ended 2022 and 2021 are in the following table:

 

 

 

Quarters Ended 2022

 

 

Quarters Ended 2021

 

 

 

March 31

 

 

June 30

 

 

September 30

 

 

December 31

 

 

March 31

 

 

June 30

 

 

September 30

 

 

December 31

 

Interest income

 

$

11,809

 

 

$

12,327

 

 

$

13,546

 

 

$

14,739

 

 

$

11,731

 

 

$

11,380

 

 

$

11,721

 

 

$

11,938

 

Interest expense

 

 

1,073

 

 

 

1,224

 

 

 

2,167

 

 

 

3,460

 

 

 

1,214

 

 

 

1,162

 

 

 

1,137

 

 

 

1,130

 

Net interest income

 

 

10,736

 

 

 

11,103

 

 

 

11,379

 

 

 

11,279

 

 

 

10,517

 

 

 

10,218

 

 

 

10,584

 

 

 

10,808

 

Provision for loan losses

 

 

 

 

 

 

 

 

 

 

 

(850

)

 

 

275

 

 

 

183

 

 

 

 

 

 

 

Non-interest income

 

 

1,611

 

 

 

639

 

 

 

484

 

 

 

2,997

 

 

 

3,404

 

 

 

2,534

 

 

 

1,315

 

 

 

2,528

 

Non-interest expense

 

 

7,813

 

 

 

7,746

 

 

 

7,814

 

 

 

8,119

 

 

 

7,323

 

 

 

7,749

 

 

 

7,790

 

 

 

8,135

 

Income before income taxes

 

 

4,534

 

 

 

3,996

 

 

 

4,049

 

 

 

7,007

 

 

 

6,323

 

 

 

4,820

 

 

 

4,109

 

 

 

5,201

 

Provision for income taxes

 

 

824

 

 

 

647

 

 

 

634

 

 

 

1,560

 

 

 

1,273

 

 

 

951

 

 

 

685

 

 

 

1,052

 

Net Income

 

$

3,710

 

 

$

3,349

 

 

$

3,415

 

 

$

5,447

 

 

$

5,050

 

 

$

3,869

 

 

$

3,424

 

 

$

4,149

 

Earnings Per Share - basic *

 

$

1.04

 

 

$

0.94

 

 

$

0.96

 

 

$

1.52

 

 

$

1.42

 

 

$

1.09

 

 

$

0.96

 

 

$

1.17

 

Earnings Per Share - diluted *

 

$

1.04

 

 

$

0.94

 

 

$

0.96

 

 

$

1.52

 

 

$

1.42

 

 

$

1.09

 

 

$

0.96

 

 

$

1.17

 

*

Due to rounding, quarterly earnings per share may not sum to annual earnings per share

 

- 95 -


 

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A. CONTROLS AND PROCEDURES

a)

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of QNB’s Chief Executive Officer, or CEO, and Chief Financial Officer, or CFO (its principal executive officer and principal financial officer), management has evaluated the effectiveness of the design and operation of QNB’s disclosure controls and procedures as of December 31, 2022. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934, as amended, or the Exchange Act, is recorded, processed, summarized and reported within the time periods required by the Securities and Exchange Commission, or the SEC, and that such information is accumulated and communicated to QNB’s management, including the CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.

Based on and as of the date of such evaluation, our CEO and CFO concluded that the design and operation of our disclosure controls and procedures were effective as of the end of the period covered by this Report.

b)

Internal Control over Financial Reporting

Information required by this item is set forth in Management’s Report included under Item 8, which is incorporated by reference into this item.

c)

Changes in Internal Control over Financial Reporting

On May 14, 2013, COSO issued an updated version of its Internal Control – Integrated Framework, referred to as the 2013 COSO Framework. Management’s assessment of the overall effectiveness of our internal controls over financial reporting for the year ended December 31, 2022 was based on the 2013 COSO Framework.

There were no changes to the Company’s internal controls over financial reporting (as defined in Rule 13a-15(f) of the Securities Exchange Act) during the quarter ended December 31, 2022 that materially affected, or are reasonably likely to materially affect, the Company’s control over financial reporting.

ITEM 9B. OTHER INFORMATION

None.

 

 

- 96 -


 

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The information required by Item 10 is incorporated by reference to information appearing in QNB Corp.’s definitive proxy statement to be used in connection with the 2023 Annual Meeting of Shareholders under the captions:

 

“Election of Directors”

 

“Governance of the Company - Code of Ethics”

 

“Meetings and Committees of the Board of Directors of QNB and the Bank”

 

“Executive Officers of QNB and/or the Bank”

The Company has adopted a Code of Business Conduct and Ethics applicable to its CEO, CFO and Controller as well as its long-standing Code of Ethics which applies to all directors and employees. The codes are available on the Company’s website at www.qnbbank.com.

ITEM 11. EXECUTIVE COMPENSATION

The information required by Item 11 is incorporated by reference to the information appearing in QNB Corp.’s definitive proxy statement to be used in connection with the 2023 Annual Meeting of Shareholders under the captions:

 

“Compensation Committee Report”

 

“Executive Compensation”

 

“Director Compensation”

 

“Compensation Tables”

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

Equity Compensation Plan Information

The following table summarizes QNB’s equity compensation plan information as of December 31, 2022. Information is included for both equity compensation plans approved by QNB shareholders and equity compensation plans not approved by QNB shareholders.

 

Plan Category

 

Number of shares to be

issued upon exercise of

outstanding options,

warrants and rights

 

 

Weighted-average

exercise price of

outstanding options,

warrants and rights

 

 

Number of shares

available for future

issuance under equity

compensation plans

[excluding securities

reflected in column (a)]

 

 

 

(a)

 

 

(b)

 

 

(c)

 

Equity compensation plans approved by

   QNB shareholders

 

 

 

 

 

 

 

 

 

 

 

 

2015 Stock option plan

 

 

109,150

 

 

$

37.65

 

 

 

170,025

 

2021 Employee stock purchase plan

 

 

 

 

 

 

 

 

22,736

 

Equity compensation plans not approved by

   QNB shareholders

 

 

 

 

 

 

 

 

 

 

 

 

None

 

 

 

 

 

 

 

 

 

Total

 

 

109,150

 

 

$

37.65

 

 

 

192,761

 

 

Additional information required by Item 12 is incorporated by reference to the information appearing in QNB Corp.’s definitive proxy statement to be used in connection with the 2023 Annual Meeting of Shareholders under the captions:

 

“Security Ownership of Certain Beneficial Owners and Management”

 

- 97 -


 

The information required by Item 13 is incorporated by reference to the information appearing in QNB Corp.’s definitive proxy statement to be used in connection with the 2023 Annual Meeting of Shareholders under the captions:

 

“Certain Relationships and Related Party Transactions”

 

“Governance of the Company - Director Independence”

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

The information required by Item 14 is incorporated by reference to the information appearing in QNB Corp.’s definitive proxy statement to be used in connection with the 2023 Annual Meeting of Shareholders under the captions:

 

“Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of Independent Auditors”

 

“Audit Fees, Audit Related Fees, Tax Fees, and All Other Fees”

 

 

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PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES

(a)

1. Financial Statements

The following financial statements are included by reference in Part II, Item 8 hereof.

 

Report of Independent Registered Public Accounting Firm

 

 

Consolidated Balance Sheets

 

 

Consolidated Statements of Income

 

 

Consolidated Statements of Comprehensive Income (Loss)

 

 

Consolidated Statements of Shareholders’ Equity

 

 

Consolidated Statements of Cash Flows

 

 

Notes to Consolidated Financial Statements

 

 

 

2. Financial Statement Schedules

The financial statement schedules required by this Item are omitted because the information is either inapplicable, not required or is in the Consolidated Financial Statements as a part of this Report.

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3. The following exhibits are incorporated by reference herein or filed with this Form 10-K:

    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)

    3.2-

 

By-laws of Registrant, as amended January 26, 2021. (Incorporated by reference to Exhibit 3.1 of the Registrant's Report on Form 8-K, SEC File No. 0-17706, filed with the Commission on January 27, 2021)

    4.1-

 

Description of Capital Securities (Incorporated by reference to Exhibit 4.1 of Registrant's Annual Report on Form 10-K, SEC File No. 0-17706, filed with the Commission on March 11, 2021)

  10.1-

 

Employment Agreement between Registrant and David W. Freeman. (Incorporated by reference to Exhibit 10.1 of Registrant’s Current Report on Form 8-K, SEC File No. 0-17706, filed with the Commission on December 28, 2012)*

  10.2-

 

Change of Control Agreement between Registrant and Scott G. Orzehoski.*

  10.3-

 

Change of Control Agreement between Registrant and Jeffrey Lehocky. (Incorporated by reference to Exhibit 10.1 of Registrant’s Annual Report on Form 8-K, SEC File No. 0-17706, filed with the Commission on November 3, 2022)*

  10.4-

 

Change of Control Agreement between Registrant and Christopher T. Cattie. (Incorporated by reference to Exhibit 10.9 of Registrant’s Annual Report on Form 10-K, SEC File No. 0-17706, filed with the Commission on March 14, 2016)*

  10.5-

 

 

Change of Control Agreement between Registrant and Courtney L. Covelens.*

10.6-

 

Change of Control Agreement between Registrant and Christina S. McDonald.*

  10.7-

 

QNB Corp 2015 Stock Incentive Plan (Incorporated by reference to Exhibit A to QNB Corp.’s proxy statement, filed April 15, 2015)*

  10.8-

 

Amendment to the QNB Corp 2015 Stock Incentive Plan (Incorporated by reference to Exhibit 10.1 to QNB Corp.’s Form 8-K statement, filed October 31, 2022)*

  10.9-

 

QNB Corp. 2021 Employee Stock Purchase Plan. (Incorporated by reference to Exhibit A to QNB Corp.’s proxy statement, filed with the Commission on April 15, 2021)

  21.1-

 

Subsidiaries of the Registrant

  23.1-

 

Consent of Independent Registered Public Accounting Firm

  31.1-

 

Section 302 Certification of the Chief Executive Officer

  31.2-

 

Section 302 Certification of the Chief Financial Officer

  32.1-

 

Section 906 Certification of the Chief Executive Officer

  32.2-

 

Section 906 Certification of the Chief Financial Officer

 

*

Indicates compensatory plan or arrangement

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

 

No.

 

Description

101.INS

 

Inline XBRL Instance Document **

101.SCH

 

Inline XBRL Taxonomy Extension Schema Document **

101.CAL

 

Inline XBRL Taxonomy Extension Calculation Linkbase Document **

101.LAB

 

Inline XBRL Taxonomy Extension Label Linkbase Document **

101.PRE

 

Inline XBRL Taxonomy Extension Presentation Linkbase Document **

101.DEF

 

Inline XBRL Taxonomy Extension Definitions Linkbase Document **

104

 

Cover page interactive data file (formatted as inline XBRL and continued in Exhibit 101).

 

**

These interactive data files are being furnished as part of this Annual 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.

 

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.

March 14, 2023

 

 

 

BY:

 

/s/  David W. Freeman

 

 

 

David W. Freeman

 

 

 

Chief Executive Officer

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report is signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated

 

/s/ Dennis Helf

 

Director, Chairman

 

March 14, 2023

Dennis Helf

 

 

 

 

 

 

 

 

 

/s/ David W. Freeman

 

Chief Executive Officer,

 

March 14, 2023

David W. Freeman

 

Principal Executive

 

 

 

 

Officer and Director

 

 

 

 

 

 

 

/s/ Autumn R. Bayles

 

Director

 

March 14, 2023

Autumn R. Bayles

 

/s/ Laurie A. Bergman

 

 

 

Director

 

 

 

March 14, 2023

Laurie A Bergman

 

/s/ Randy S. Bimes

 

 

 

Director

 

 

 

March 14, 2023

Randy S. Bimes

 

 

 

 

 

 

 

 

 

/s/ Thomas J. Bisko

 

Director

 

March 14, 2023

Thomas J. Bisko

 

 

 

 

 

 

 

 

 

/s/ Kenneth F. Brown, Jr.

 

Director

 

March 14, 2023

Kenneth F. Brown, Jr.

 

 

 

 

 

 

 

 

 

/s/ Jennifer L. Mann

 

Director

 

March 14, 2023

Jennifer L. Mann

 

 

 

 

 

 

 

 

 

/s/ Ranajoy Ray-Chaudhuri

 

Director

 

March 14, 2023

Ranajoy Ray-Chaudhuri

 

 

 

 

 

 

 

 

 

/s/ W. Randall Stauffer

 

Director

 

March 14, 2023

W. Randall Stauffer

 

 

 

 

 

 

 

 

 

/s/ Scott R. Stevenson

 

Director

 

March 14, 2023

Scott R. Stevenson

 

 

 

 

 

 

 

 

 

/s/ Jeffrey Lehocky

 

Chief Financial Officer

 

March 14, 2023

Jeffrey Lehocky

 

(Principal Financial Officer)

 

 

 

 

 

 

 

/s/ Mary E. Liddle

 

Chief Accounting Officer

 

March 14, 2023

Mary E. Liddle

 

(Principal Accounting Officer)

 

 

 

 

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