QNBC 10-Q Quarterly Report March 31, 2022

QNB CORP

10-Ks and 10-Qs

10-Q	Quarter ended Sept. 30, 2025
10-Q	Quarter ended June 30, 2025
10-Q	Quarter ended March 31, 2025
10-K	Fiscal year ended Dec. 31, 2024
10-Q	Quarter ended Sept. 30, 2024
10-Q	Quarter ended June 30, 2024
10-Q	Quarter ended March 31, 2024
10-K	Fiscal year ended Dec. 31, 2023
10-Q	Quarter ended Sept. 30, 2023
10-Q	Quarter ended June 30, 2023
10-Q	Quarter ended March 31, 2023
10-K	Fiscal year ended Dec. 31, 2022
10-Q	Quarter ended Sept. 30, 2022
10-Q	Quarter ended June 30, 2022
10-Q	Quarter ended March 31, 2022
10-K	Fiscal year ended Dec. 31, 2021
10-Q	Quarter ended Sept. 30, 2021
10-Q	Quarter ended June 30, 2021
10-Q	Quarter ended March 31, 2021
10-K	Fiscal year ended Dec. 31, 2020
10-Q	Quarter ended Sept. 30, 2020
10-Q	Quarter ended June 30, 2020
10-Q	Quarter ended March 31, 2020
10-K	Fiscal year ended Dec. 31, 2019
10-Q	Quarter ended Sept. 30, 2019
10-Q	Quarter ended June 30, 2019
10-Q	Quarter ended March 31, 2019
10-K	Fiscal year ended Dec. 31, 2018
10-Q	Quarter ended Sept. 30, 2018
10-Q	Quarter ended June 30, 2018
10-Q	Quarter ended March 31, 2018
10-K	Fiscal year ended Dec. 31, 2017
10-Q	Quarter ended Sept. 30, 2017
10-Q	Quarter ended June 30, 2017
10-Q	Quarter ended March 31, 2017
10-K	Fiscal year ended Dec. 31, 2016
10-Q	Quarter ended Sept. 30, 2016
10-Q	Quarter ended June 30, 2016
10-Q	Quarter ended March 31, 2016
10-K	Fiscal year ended Dec. 31, 2015
10-Q	Quarter ended Sept. 30, 2015
10-Q	Quarter ended June 30, 2015
10-Q	Quarter ended March 31, 2015
10-K	Fiscal year ended Dec. 31, 2014
10-Q	Quarter ended Sept. 30, 2014
10-Q	Quarter ended June 30, 2014
10-Q	Quarter ended March 31, 2014
10-K	Fiscal year ended Dec. 31, 2013
10-Q	Quarter ended Sept. 30, 2013
10-Q	Quarter ended June 30, 2013
10-Q	Quarter ended March 31, 2013
10-K	Fiscal year ended Dec. 31, 2012
10-Q	Quarter ended Sept. 30, 2012
10-Q	Quarter ended June 30, 2012
10-Q	Quarter ended March 31, 2012
10-K	Fiscal year ended Dec. 31, 2011
10-Q	Quarter ended Sept. 30, 2011
10-Q	Quarter ended June 30, 2011
10-Q	Quarter ended March 31, 2011
10-K	Fiscal year ended Dec. 31, 2010
10-Q	Quarter ended Sept. 30, 2010
10-Q	Quarter ended June 30, 2010
10-Q	Quarter ended March 31, 2010
10-K	Fiscal year ended Dec. 31, 2009

PROXIES

DEF 14A	Filed on April 8, 2025
DEF 14A	Filed on March 25, 2025
DEF 14A	Filed on April 9, 2024
DEF 14A	Filed on March 27, 2024
DEF 14A	Filed on April 11, 2023
DEF 14A	Filed on May 24, 2022
DEF 14A	Filed on April 12, 2022
DEF 14A	Filed on April 13, 2021
DEF 14A	Filed on April 14, 2020
DEF 14A	Filed on April 16, 2019
DEF 14A	Filed on April 10, 2018
DEF 14A	Filed on April 12, 2017
DEF 14A	Filed on April 12, 2016
DEF 14A	Filed on April 15, 2015
DEF 14A	Filed on April 16, 2014
DEF 14A	Filed on April 17, 2013
DEF 14A	Filed on April 20, 2012
DEF 14A	Filed on April 20, 2011
DEF 14A	Filed on April 15, 2010
DEF 14A	Filed on None

qnbc-10q_20220331.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 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)

( 215 ) 538-5600

Registrant's Telephone Number, Including Area Code

Not Applicable

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

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

Title of each class

Trading

Symbol(s)

Name of each exchange on which registered

Common Stock

QNBC

N/A

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

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

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

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

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

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

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

Class		Outstanding at April 29, 2022
Common Stock, par value $0.625		3,557,806

QNB CORP. AND SUBSIDIARY

FORM 10-Q

QUARTER ENDED MARCH 31, 2022

INDEX

	PART I - FINANCIAL INFORMATION

ITEM 1.	CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)	PAGE

	Consolidated Balance Sheets at M arch 31 , 2022 and December 31, 2021	2

	Consolidated Statements of Income for the Three Months Ended March 31, 2022 and 2021	3

	Consolidated Statements of Comprehensive Income (Loss) for the Three Months Ended March 31 , 2022 and 2021	4

	Consolidated Statement of Shareholders’ Equity for the Three Months Ended March 31 , 2022 and 2021	5

	Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2022 and 2021	6

	Notes to Consolidated Financial Statements	7

ITEM 2.	MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	34

ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK	51

ITEM 4.	CONTROLS AND PROCEDURES	52

	PART II - OTHER INFORMATION

ITEM 1.	LEGAL PROCEEDINGS	53

ITEM 1A.	RISK FACTORS	53

ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	53

ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	53

ITEM 4.	MINE SAFETY DISCLOSURES	53

ITEM 5.	OTHER INFORMATION	53

ITEM 6.	EXHIBITS	54

SIGNATURES

CERTIFICATIONS

QNB Corp. and Subsidiary

CONSOLIDATED BALANCE SHEETS

	(in thousands, except share data)
	(current period unaudited)
	March 31, 2022			December 31, 2021
Assets
Cash and due from banks	$	12,106		$	9,194
Interest-bearing deposits in banks		1,154			4,196
Total cash and cash equivalents		13,260			13,390
Investments:
Available-for-sale (amortized cost $ 707,911 and $ 697,094 )		656,846			692,360
Equity securities (cost of $ 11,669 and $ 11,419 )		12,652			12,410
Restricted investment in stocks		1,337			1,329
Loans receivable		926,369			926,470
Allowance for loan losses		( 11,231	)		( 11,184	)
Net loans		915,138			915,286
Bank-owned life insurance		11,578			11,497
Premises and equipment, net		16,269			16,540
Accrued interest receivable		3,781			4,104
Net deferred tax assets		12,046			2,449
Other assets		5,079			3,975
Total assets	$	1,647,986		$	1,673,340

Liabilities
Deposits
Demand, non-interest bearing	$	242,024		$	243,006
Interest-bearing demand		454,594			468,199
Money market		143,724			143,942
Savings		447,756			426,225
Time less than $100		91,531			93,456
Time $100 through $250		47,120			49,930
Time greater than $250		25,004			24,987
Total deposits		1,451,753			1,449,745
Short-term borrowings		76,738			68,476
Long-term debt		10,000			10,000
Accrued interest payable		178			211
Other liabilities		6,819			8,414
Total liabilities		1,545,488			1,536,846

Shareholders' Equity
Common stock, par value $ 0.625 per share;
authorized 10,000,000 shares; 3,766,492 shares and 3,760,315
shares issued; 3,557,806 and 3,553,629 shares outstanding		2,354			2,350
Surplus		23,928			23,683
Retained earnings		120,594			118,163
Accumulated other comprehensive gain, net of tax		( 40,341	)		( 3,740	)
Treasury stock, at cost; 208,686 and 206,686 shares		( 4,037	)		( 3,962	)
Total shareholders' equity		102,498			136,494
Total liabilities and shareholders' equity	$	1,647,986		$	1,673,340

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

QNB Corp. and Subsidiary

CONSOLIDATED STATEMENTS OF INCOME

	For the Three Months Ended March 31,
(in thousands, except per share data - unaudited)	2022			2021
Interest income
Interest and fees on loans	$	9,003		$	10,011
Interest and dividends on available-for-sale & equity securities:
Taxable		2,274			1,314
Tax-exempt		517			386
Interest on interest-bearing balances and other interest income		15			20
Total interest income		11,809			11,731
Interest expense
Interest on deposits
Interest-bearing demand		237			238
Money market		106			82
Savings		321			290
Time less than $100		184			279
Time of $100 through $250		85			145
Time greater than $250		42			86
Interest on short-term borrowings		59			55
Interest on long-term debt		39			39
Total interest expense		1,073			1,214
Net interest income		10,736			10,517
Provision for loan losses		—			275
Net interest income after provision for loan losses		10,736			10,242
Non-interest income
Net gain on sales and calls of available-for-sale and equity securities		36			342
Unrealized (loss) gain on investment equity securities		( 8	)		1,096
Fees for services to customers		384			299
ATM and debit card		641			593
Retail brokerage and advisory		205			167
Bank-owned life insurance		81			263
Merchant		95			104
Net gain on sale of loans		—			352
Other		177			188
Total non-interest income		1,611			3,404
Non-interest expense
Salaries and employee benefits		4,266			4,017
Net occupancy		578			618
Furniture and equipment		687			670
Marketing		194			214
Third party services		667			488
Telephone, postage and supplies		194			198
State taxes		272			273
FDIC insurance premiums		217			171
Other		738			674
Total non-interest expense		7,813			7,323
Income before income taxes		4,534			6,323
Provision for income taxes		824			1,273
Net income	$	3,710		$	5,050
Earnings per share - basic	$	1.04		$	1.42
Earnings per share - diluted	$	1.04		$	1.42
Cash dividends per share	$	0.36		$	0.35
The accompanying notes are an integral part of the consolidated financial statements.

QNB Corp. and Subsidiary

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

	(in thousands - unaudited)
	2022									2021
For the Three Months Ended March 31,	Before tax amount			Tax expense			Net of tax amount			Before tax amount			Tax expense			Net of tax amount
Net income	$	4,534		$	824		$	3,710		$	6,323		$	1,273		$	5,050
Other comprehensive loss:
Net unrealized holding losses on available-for-sale securities:
Unrealized holding losses arising during the period		( 46,331	)		( 9,731	)		( 36,600	)		( 8,006	)		( 1,681	)		( 6,325	)
Reclassification adjustment for gains included in net income		( 1	)		—			( 1	)		( 3	)		( 1	)		( 2	)
Other comprehensive loss		( 46,332	)		( 9,731	)		( 36,601	)		( 8,009	)		( 1,682	)		( 6,327	)
Total comprehensive loss	$	( 41,798	)	$	( 8,907	)	$	( 32,891	)	$	( 1,686	)	$	( 409	)	$	( 1,277	)

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

QNB Corp. and Subsidiary

CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY

For the Three Months Ended March 31, 2022 and 2021

											Accumulated
	Number of										Other
(unaudited)	Shares			Common				Retained			Comprehensive			Treasury
(in thousands, except share and per share data)	Outstanding			Stock		Surplus		Earnings			Income (Loss)			Stock			Total
Balance, January 1, 2022		3,553,629		$	2,350	$	23,683	$	118,163		$	( 3,740	)	$	( 3,962	)	$	136,494
Net income					—		—		3,710			—			—			3,710
Other comprehensive loss, net of tax					—		—		—			( 36,601	)		—			( 36,601	)
Cash dividends declared ($ 0.36 per share)					—		—		( 1,279	)		—			—			( 1,279	)
Stock issued in connection with dividend reinvestment and stock purchase plan		6,177			4		223		—			—			—			227
Stock-based compensation expense					—		22		—			—			—			22
Treasury stock purchase		( 2,000	)		—		—		—			—			( 75	)		( 75	)
Balance, March 31, 2022		3,557,806		$	2,354	$	23,928	$	120,594		$	( 40,341	)	$	( 4,037	)	$	102,498


											Accumulated
	Number of										Other
(unaudited)	Shares			Common				Retained			Comprehensive			Treasury
(in thousands, except share and per share data)	Outstanding			Stock		Surplus		Earnings			Income			Stock			Total
Balance, January 1, 2021		3,556,533		$	2,328	$	22,430	$	106,644		$	5,649		$	( 2,606	)	$	134,445
Net income					—		—		5,050			—			—			5,050
Other comprehensive loss, net of tax					—		—		—			( 6,327	)		—			( 6,327	)
Cash dividends declared ($ 0.35 per share)					—		—		( 1,243	)		—			—			( 1,243	)
Stock issued in connection with dividend reinvestment and stock purchase plan		6,319			4		203		—			—			—			207
Stock issued for options exercised		5,017			3		128		—			—			—			131
Stock-based compensation expense					—		20		—			—			—			20
Treasury stock purchase		( 8,700	)		—		—		—			—			( 287	)		( 287	)
Balance, March 31, 2021		3,559,169		$	2,335	$	22,781	$	110,451		$	( 678	)	$	( 2,893	)	$	131,996

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

QNB Corp. and Subsidiary

CONSOLIDATED STATEMENTS OF CASH FLOWS

	(in thousands, unaudited)
For the Three Months ended March 31,	2022			2021
Operating Activities
Net income	$	3,710		$	5,050
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		419			470
Provision for loan losses		—			275
Net gain on calls and sales of debt and equity securities		( 36	)		( 342	)
Net unrealized gain on equity securities		8			( 1,096	)
Net gain on sale of loans		—			( 352	)
Proceeds from sales of residential mortgages held-for-sale		—			9,105
Origination of residential mortgages held-for-sale		—			( 4,890	)
Increase in cash surrender value of bank-owned life insurance		( 81	)		( 263	)
Stock-based compensation expense		22			20
Deferred income tax provision		131			401
Net (decrease) increase in income taxes payable		( 385	)		333
Net decrease in accrued interest receivable		323			117
Amortization of mortgage servicing rights and change in valuation allowance		15			23
Net amortization of premiums and discounts on investment securities		643			737
Net decrease in accrued interest payable		( 34	)		( 104	)
Operating lease payments		( 154	)		( 171	)
Increase in other assets		( 759	)		( 1,051	)
Decrease in other liabilities		( 1,468	)		( 159	)
Net cash provided by operating activities		2,354			8,103
Investing Activities
Proceeds from payments, maturities and calls of investments available-for-sale		21,853			27,377
Proceeds from the sale of equity securities		262			1,185
Purchases of investments available-for-sale		( 33,312	)		( 56,123	)
Purchases of equity securities		( 477	)		( 1,423	)
Proceeds from redemption of investment in restricted stock		1,827			—
Purchases of restricted stock		( 1,835	)		—
Net decrease (increase) in loans		148			( 26,091	)
Net purchases of premises and equipment		( 93	)		( 2,892	)
Redemption of Bank Owned Life Insurance investment		—			797
Net cash used in investing activities		( 11,627	)		( 57,170	)
Financing Activities
Net (decrease) increase in non-interest bearing deposits		( 982	)		49,275
Net increase in interest-bearing deposits		2,990			64,278
Net increase in short-term borrowings		8,262			6,109
Cash dividends paid, net of reinvestment		( 1,131	)		( 1,092	)
Purchase of treasury shares		( 75	)		( 287	)
Proceeds from issuance of common stock		79			187
Net cash provided by financing activities		9,143			118,470
Increase in cash and cash equivalents		( 130	)		69,403
Cash and cash equivalents at beginning of year		13,390			39,331
Cash and cash equivalents at end of period	$	13,260		$	108,734
Supplemental Cash Flow Disclosures
Interest paid	$	4,676		$	1,318
Net income taxes paid		1,078			538
Non-cash transactions:
Unsettled trades to purchase securities		—			( 13,454	)
Right-of-use assets obtained in exchange for new operating lease liabilities		43			698
The accompanying notes are an integral part of the consolidated financial statements.

QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. BASIS OF PRESENTATION

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

These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in QNB's 2021 Annual Report incorporated in the Form 10-K. Operating results for the three-month period ended March 31, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022.

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

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

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

QNB has evaluated events and transactions occurring subsequent to the balance sheet date of March 31, 2022 for items that should potentially be recognized or disclosed in these consolidated financial statements.

COVID-19 Developments

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

The full impact of the COVID-19 Pandemic is unknown. Uncertainties exist related to the duration of the COVID-19 Pandemic and its potential effects on QNB’s customers and prospects, including impacts on national and local economies, unemployment, maintaining a competent workforce, and disruptions in the supply chain. There are no assurances as to how the COVID-19 Pandemic might affect QNB’s loan, investment and deposit portfolios.

2. RECENT ACCOUNTING PRONOUNCEMENTS

On September 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 accounting principles generally accepted in the United States of America (“U.S. GAAP”) and, instead, reflects an organization’s current estimate of all expected credit losses over the contractual term of its financial assets

•

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

•

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

•

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

QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

•

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. QNB continues to evaluate the impact of this new standard on its consolidated financial statements and currently does not anticipate a material change to its allowance for loan losses upon the eventual implementation of CECL.

On March 31, 2022, FASB issued ASU 2022-02, Troubled Debt Restructurings and Vintage Disclosures, under Financial Instruments—Credit Losses (topic 326). 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.

3. STOCK-BASED COMPENSATION AND SHAREHOLDERS’ EQUITY

QNB sponsors stock-based compensation plans, administered by a Board committee (the “Committee”), under which both qualified and non-qualified stock options may be granted periodically to certain employees. Compensation cost has been measured using the fair value of an award on the grant date and is recognized over the service period, which is usually the vesting period.

Stock-based compensation expense was $ 22,000 and $ 20,000 for the three months ended March 31, 2022 and 2021, respectively. At March 31, 2022, there was approximately $ 204,000 of unrecognized compensation cost related to unvested share-based compensation award grants that is expected to be recognized over the next 35 months.

Options are granted to certain employees at prices equal to the market value of the stock on the date the options are granted. The 2015 Plan authorized the issuance of 300,000 shares. The time period during which any option is exercisable under the 2015 Plan is determined by the Committee but shall not commence before the expiration of six months after the date of grant or continue beyond the expiration of five years after the date the option is awarded. The granted options vest after a three-year period. As of March 31, 2022, there were 177,550 options granted, 63,175 options forfeited, 20,825 options exercised, and 122,050 options outstanding under this Plan. The 2015 Plan expires on February 24, 2025.

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

For the Three Months Ended March 31,	2022			2021
Risk free interest rate		1.25	%		0.20	%
Dividend yield		3.64	%		4.17	%
Volatility		22.68	%		21.14	%
Expected life (years)		4.05			4.88

QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

The fair market value of options granted in the three months ended March 31, 2022 and 2021 was $ 5.02 and $ 3.08 , respectively.

Stock option activity during the three months ended March 31, 2022 and 2021 is as follows:

	Number of options			Weighted average exercise price		Weighted average remaining contractual term (in years)		Aggregate intrinsic value
Outstanding at December 31, 2021		113,950		$	37.58
Granted		29,350			37.26
Exercised		—			—
Forfeited		( 21,250	)		37.69
Outstanding at March 31, 2022		122,050		$	37.49		3.01	$	117
Exercisable at March 31, 2022		44,500		$	40.86		1.39	$	—

	Number of options			Weighted average exercise price		Weighted average remaining contractual term (in years)		Aggregate intrinsic value
Outstanding at December 31, 2020		116,550		$	37.42
Granted		25,000			32.50
Exercised		( 17,525	)		30.40
Forfeited		( 3,125	)		30.40
Outstanding at March 31, 2021		120,900		$	37.60		2.17	$	—
Exercisable at March 31, 2021		46,975		$	40.63		0.64	$	—

4. EARNINGS PER SHARE & SHARE REPURCHASE PLAN

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

	For the Three Months Ended March 31,
	2022		2021
Numerator for basic and diluted earnings per share - net income	$	3,710	$	5,050
Denominator for basic earnings per share - weighted average shares outstanding		3,552,854		3,555,028
Effect of dilutive securities - employee stock options		1,602		—
Denominator for diluted earnings per share - adjusted weighted average shares outstanding		3,554,456		3,555,028
Earnings per share - basic	$	1.04	$	1.42
Earnings per share - diluted		1.04		1.42

There were 92,200 and 120,900 stock options that were anti-dilutive for the three-month periods ended March 31, 2022 and 2021, respectively. These stock options were not included in the above calculation.

QNB’s current stock repurchase plan was originally approved by the Board of Directors on January 21, 2008 , increased in amount on February 9, 2009 to 100,000 shares, and subsequently increased on April 29, 2021 to up to 200,000 shares of common stock in the open market or privately negotiated transactions. The repurchase authorization has no termination date. There were 2,000 and 8,700

QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

shares repurchased during the three months ended March 31, 2022 and 20 2 1 , re s pectively . As of March 3 1 , 20 2 2 , 102,000 shares were repurchased under this authorization at an average price of $ 24.93 and a total cost of approximately $ 2,543,000 .

5. COMPREHENSIVE INCOME (LOSS)

The following shows the components of accumulated other comprehensive income (loss) at March 31, 2022 and December 31, 2021:

	March 31,			December 31,
	2022			2021
Unrealized net holding losses gains on available-for-sale securities	$	( 51,065	)	$	( 4,734	)
Unrealized gains (losses) on available-for-sale securities for which a portion of an other-than-temporary impairment loss has been recognized in earnings		—			—
Accumulated other (loss) income		( 51,065	)		( 4,734	)
Tax effect		10,724			994
Accumulated other comprehensive (loss) income, net of tax	$	( 40,341	)	$	( 3,740	)

The following tables present amounts reclassified out of accumulated other comprehensive income (loss) for the three months ended March 31, 2022 and 2021:

For the Three Months Ended March 31,	Amount reclassified from accumulated other comprehensive income
Details about accumulated other comprehensive income	2022		2021			Affected line item in statement of income
Unrealized net holding gains on available-for-sale securities	$	1	$	3		Net gain on sales of investments available-for-sale
Other-than-temporary impairment on investment securities		—		—		Net other-than-temporary impairment losses on investment securities
		1		3
Tax effect		—		( 1	)	Provision for income taxes
Total reclassification out of accumulated other comprehensive income, net of tax	$	1	$	2		Net of tax

QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

6. INVESTMENT SECURITIES

Available-For-Sale Securities

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

			Gross		Gross
			unrealized		unrealized
	Fair		holding		holding			Amortized
March 31, 2022	value		gains		losses			cost
U.S. Treasury	$	894	$	—	$	—		$	894
U.S. Government agency		94,063		—		( 7,872	)		101,935
State and municipal		119,510		139		( 12,427	)		131,798
U.S. Government agencies and sponsored enterprises (GSEs):
Mortgage-backed		308,225		59		( 22,699	)		330,865
Collateralized mortgage obligations (CMOs)		127,534		8		( 8,198	)		135,724
Corporate debt		6,620		66		( 141	)		6,695
Total investment debt securities available-for-sale	$	656,846	$	272	$	( 51,337	)	$	707,911

			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 debt securities available-for-sale	$	692,360	$	3,568	$	( 8,302	)	$	697,094

The amortized cost and estimated fair value of securities available-for-sale by contractual maturity at March 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 municipal securities that have been pre-refunded.


March 31, 2022	Fair value		Amortized cost
Due in one year or less	$	5,277	$	5,260
Due after one year through five years		140,407		146,514
Due after five years through ten years		417,401		450,278
Due after ten years		93,761		105,859
Total investment debt securities available-for-sale	$	656,846	$	707,911

QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

There were no proceeds from sales of investment securities available-for-sale during the three months ended March 31, 2022 and 2021.

At March 31, 2022 and December 31, 2021, investment securities available-for-sale totaling approximately $ 243,162,000 and $ 264,154,000 , respectively, were pledged as collateral for repurchase agreements and deposits of public funds.

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

	For the Three Months Ended March 31,
	2022		2021
Gross realized gains	$	1	$	3
Gross realized losses		—		—
Other-than-temporary impairment		—		—
Total net gains (losses) on AFS securities	$	1	$	3

The tax expense applicable to the net realized gains for both of the three-month periods ended March 31, 2022 and 2021 was $ 0 and $ 1,000 , respectively.

QNB recognizes OTTI for debt securities classified as available-for-sale in accordance with FASB ASC 320, Investments – Debt and Equity Securities, which requires that we assess whether we intend to sell or it is more likely than not that the Company will be required to sell a security before recovery of its amortized cost basis less any current-period credit losses. For debt securities that are considered other-than-temporarily impaired and that we do not intend to sell and will not be required to sell prior to recovery of our amortized cost basis, the amount of the impairment is separated into the amount that is credit related (credit loss component) and the amount due to all other factors. The credit loss component is recognized in earnings and is the difference between the security’s amortized cost basis and the present value of its expected future cash flows discounted at the security’s effective yield. The remaining difference between the security’s fair value and the present value of future expected cash flows is due to factors that are not credit related and, therefore, is not required to be recognized as a loss in the statement of income but is recognized in other comprehensive income. QNB believes that we will fully collect the carrying value of securities on which we have recorded a non-credit related impairment in other comprehensive income. No credit impairments were recognized on debt securities during the three months ended March 31, 2022 and 2021, respectively.

The following table indicates the length of time individual debt securities have been in a continuous unrealized loss position as of March 31, 2022 and December 31, 2021:


			Less than 12 months					12 months or longer					Total
	No. of		Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
March 31, 2022	securities		value		losses			value		losses			value		losses
U.S. Treasury		—	$	—	$	—		$	—	$	—		$	—	$	—
U.S. Government agency		46		35,508		( 2,434	)		58,554		( 5,438	)		94,062		( 7,872	)
State and municipal		190		75,613		( 8,712	)		19,860		( 3,715	)		95,473		( 12,427	)
U.S. Government agencies and sponsored enterprises (GSEs):
Mortgage-backed		178		256,078		( 18,096	)		45,724		( 4,603	)		301,802		( 22,699	)
Collateralized mortgage obligations (CMOs)		120		115,320		( 7,950	)		2,495		( 248	)		117,815		( 8,198	)
Corporate debt		3		3,479		( 133	)		76		( 8	)		3,555		( 141	)
Total		537	$	485,998	$	( 37,325	)	$	126,709	$	( 14,012	)	$	612,707	$	( 51,337	)

QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)


			Less than 12 months					12 months or longer					Total
	No. of		Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
December 31, 2021	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. Treasury, U.S. Government agencies, state and municipalities, mortgage-backed securities, CMOs and corporate debt securities, for other-than-temporary impairment and considers the current economic conditions, the length of time and the extent to which the fair value has been less than cost, interest rates and the bond rating of each security. The unrealized losses at March 31, 2022 in U.S. Treasury, U.S. Government agency securities, state and municipal securities, mortgage-backed securities, and CMOs are primarily the result of interest rate fluctuations. If held to maturity, these bonds will mature at par, and QNB will not realize a loss. The Company has the intent to hold the securities and does not believe it will be required to sell the securities before recovery occurs.

QNB holds one pooled trust preferred security as of March 31, 2022. This security has a total amortized cost of approximately $ 83,000 and a fair value of $ 75,000 . The pooled trust preferred security is available-for-sale and is carried at fair value.

Marketable Equity Securities

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

At March 31, 2022 and December 31, 2021, the Company had $ 12,652,000 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 the three months ended March 31, 2022 and 2021:

	For the Three Months Ended March 31,

	2022			2021
Net gains (loss) recognized during the period on equity securities	$	27		$	1,435
Less: Net gains recognized during the period on equity securities sold during the period		35			339
Net unrealized gains (losses) recognized during the reporting period on equity securities still held at the reporting date	$	( 8	)	$	1,096

Tax expense applicable to the net gains recognized for the three months ended March 31, 2022 and 2021 was $ 8,000 and $ 415,000 , repectively. Proceeds from sales of investment equity securities were $ 262,000 and $ 1,185,000 for the three months ended March 31, 2022 and 2021, respectively.

7. RESTRICTED INVESTMENT IN STOCKS

Restricted investment in stocks includes Federal Home Loan Bank of Pittsburgh (“FHLB”) with a carrying cost of $ 1,325,000 , Atlantic Community Bankers Bank (“ACBB”) stock with a carrying cost of $ 12,000 and VISA Class B stock with a carrying cost of

QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

$ 0 at March 31, 2022 . FHLB and ACBB stock was issued to the Bank as a requirement to facilitate the Bank’s participation in borrowing and other banking services. The Bank’s investment in FHLB stock may fluctuate, as it is based on the member banks’ use of FHLB’s services.

The Bank owns 6,502 shares of Visa Class B stock, which was necessary to participate in Visa services in support of the Bank’s credit card, debit card, and related payment programs (permissible activities under banking regulations) as a member institution. Following the resolution of Visa’s covered litigation, shares of Visa’s Class B stock will be converted to Visa Class A shares using a conversion factor ( 1.6181 as of December 29, 2021), which is periodically adjusted to reflect VISA’s ongoing litigation costs. There is a very limited market for this stock, as only current owners of Class B shares are permitted to transact in Class B. Due to the lack of orderly trades and public information of such trades, Visa Class B stock does not have a readily determinable fair value.

These restricted investments are carried at cost and evaluated for OTTI periodically. As of March 31, 2022, there was no OTTI associated with these shares.

8. LOANS & ALLOWANCE FOR LOAN LOSSES

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

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

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

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

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

Effect of external factors, 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.

QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

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

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

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

Management believes that it uses the best information available to make determinations about the adequacy of the allowance and that it has established its existing allowance for loan losses in accordance with U.S. GAAP. If circumstances differ substantially from the assumptions used in making determinations, future adjustments to the allowance for loan losses may be necessary and results of operations could be affected. Because future events affecting borrowers and collateral cannot be predicted with certainty, there can be no assurance that increases to the allowance will not be necessary should the quality of any loans deteriorate as a result of the factors discussed above.

Major classes of loans are as follows:

	March 31,			December 31,
	2022			2021
Commercial:
Commercial and industrial	$	135,257		$	148,610
Construction		64,453			55,855
Secured by commercial real estate		454,290			451,404
Secured by residential real estate		84,358			84,741
State and political subdivisions		19,448			19,775
Retail:
1-4 family residential mortgages		103,248			100,281
Home equity loans and lines		59,783			61,782
Consumer		5,923			4,699
Total loans		926,760			927,147
Net unearned (fees) costs		( 391	)		( 677	)
Loans receivable	$	926,369		$	926,470

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 receivable on the Consolidated Balance Sheets. At March 31, 2022 and December 31, 2021, overdrafts were approximately $ 1,511,000 and $ 91,000 , respectively.

QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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 March 31, 2022, there was a concentration of loans to lessors of residential buildings and dwellings of 18.1 % of total loans and to lessors of nonresidential buildings of 25.1 % 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.

QNB continues to provide solutions to customers experiencing financial hardship caused by the COVID-19 Pandemic. As of March 31, 2022, QNB had two modifications to commercial loans and no modifications to retail loans related to the COVID-19 Pandemic. The commercial loans were each modified one time and totaled $ 321,000 with deferred interest and/or principal payments of three to six months

At March 31, 2022 and December 31, 2021, QNB had 32 and 98 PPP loans, respectively, totaling $ 6,013,000 and $ 14,327,000 , respectively, reported in commercial and industrial loans. The PPP loans are 100% guaranteed by the SBA. QNB received origination fees from the SBA ranging from a flat fee of $ 2,500 to one to five basis points of the originated loan amount which are recognized in interest income as a yield adjustment over the term of the loan. At March 31, 2022 and December 31, 2021, net unearned (fees) costs included $ 169,000 and $ 482,000 , respectively, in PPP loan origination fees net of costs.

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

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

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

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

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

QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

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

Excellent - no apparent risk

Good - minimal risk

Acceptable - lower risk

Acceptable - average risk

Acceptable – higher risk

Pass watch

Special Mention - potential weaknesses

Substandard - well defined weaknesses

Doubtful - full collection unlikely

Loss - considered uncollectible

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

The following tables present the classes of the loan portfolio summarized by the aggregate pass rating and the classified ratings of special mention, substandard and doubtful within the Company’s internal risk rating system as of March 31, 2022 and December 31, 2021:

March 31, 2022	Pass		Special mention		Substandard		Doubtful		Total
Commercial:
Commercial and industrial	$	128,012	$	139	$	7,106	$	—	$	135,257
Construction		64,453		—		—		—		64,453
Secured by commercial real estate		440,399		2,934		10,957		—		454,290
Secured by residential real estate		83,152		197		1,009		—		84,358
State and political subdivisions		19,448		—		—		—		19,448
Total	$	735,464	$	3,270	$	19,072	$	—	$	757,806

QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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, the Company evaluates credit quality based on the performance of the individual credits. The following tables present the recorded investment in the retail classes of the loan portfolio based on payment activity as of March 31, 2022 and December 31, 2021:

March 31, 2022	Performing		Non-performing		Total
Retail:
1-4 family residential mortgages	$	102,439	$	809	$	103,248
Home equity loans and lines		59,296		487		59,783
Consumer		5,834		89		5,923
Total	$	167,569	$	1,385	$	168,954

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 summarized by the past due status as of March 31, 2022 and December 31, 2021:

March 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	$	2,245	$	—	$	574	$	2,819	$	132,438	$	135,257
Construction		—		—		—		—		64,453		64,453
Secured by commercial real estate		—		—		—		—		454,290		454,290
Secured by residential real estate		—		—		26		26		84,332		84,358
State and political subdivisions		—		—		—		—		19,448		19,448
Retail:
1-4 family residential mortgages		421		—		127		548		102,700		103,248
Home equity loans and lines		41		115		—		156		59,627		59,783
Consumer		14		11		—		25		5,898		5,923
Total	$	2,721	$	126	$	727	$	3,574	$	923,186	$	926,760

QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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 March 31, 2022 and December 31, 2021:

March 31, 2022	90 days or more past due (still accruing)		Non-accrual
Commercial:
Commercial and industrial	$	—	$	3,314
Construction		—		—
Secured by commercial real estate		—		2,207
Secured by residential real estate		—		366
State and political subdivisions		—		—
Retail:
1-4 family residential mortgages		—		809
Home equity loans and lines		—		487
Consumer		—		89
Total	$	—	$	7,272

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

QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Activity in the allowance for loan losses for the three months ended March 31, 2022 and 2021 are as follows:

For the Three Months Ended March 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	$	( 242	)	$	—		$	66	$	3,192
Construction		363		346			—			—		709
Secured by commercial real estate		4,280		( 467	)		—			—		3,813
Secured by residential real estate		1,035		( 9	)		—			3		1,029
State and political subdivisions		69		( 1	)		—			—		68
Retail:
1-4 family residential mortgages		646		19			—			—		665
Home equity loans and lines		376		21			—			1		398
Consumer		542		69			( 31	)		8		588
Unallocated		505		264		N/A			N/A			769
Total	$	11,184	$	—		$	( 31	)	$	78	$	11,231

For the Three Months Ended March 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	$	( 147	)	$	—		$	13	$	3,916
Construction		346		( 33	)		—			—		313
Secured by commercial real estate		3,736		358			—			—		4,094
Secured by residential real estate		871		( 57	)		—			11		825
State and political subdivisions		89		( 3	)		—			—		86
Retail:
1-4 family residential mortgages		533		77			—			—		610
Home equity loans and lines		386		( 20	)		—			2		368
Consumer		265		10			( 32	)		20		263
Unallocated		550		90		N/A			N/A			640
Total	$	10,826	$	275		$	( 32	)	$	46	$	11,115

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

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

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

QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

For commercial loans secured by real estate, estimated fair values are determined primarily through third-party appraisals. When a real estate secured loan becomes impaired, a decision is made regarding whether an updated certified appraisal of the real estate is necessary. This decision is based on various considerations, including the age of the most recent appraisal, the loan-to-value ratio based on the original appraisal and the condition of the property. Appraised values are discounted to arrive at the estimated selling price of the collateral, which is considered to be the estimated fair value. The discounts also include estimated costs to sell the property.

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

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

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

Performing TDRs (not reported as non-accrual or past due 90 days or more and still accruing) totaled $ 4,375,000 and $ 4,142,000 as of March 31, 2022 and December 31, 2021, respectively. Non-performing TDRs totaled $ 609,000 and $ 658,000 as of March 31, 2022 and December 31, 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.

	March 31, 2022				December 31, 2021
	Unpaid principal balance		Related allowance		Unpaid principal balance		Related allowance

TDRs with no specific allowance recorded	$	4,135	$	—	$	1,477	$	—
TDRs with an allowance recorded		849		516		3,323		690
Total	$	4,984	$	516	$	4,800	$	690

There was one new TDR during the three months ended March 31, 2022; an extension of credit on an existing relationship that is a TDR. As of March 31, 2022 and December 31, 2021, QNB had $ 2,000 in commitments to lend additional funds to customers with loans whose terms have been modified in troubled debt restructurings. There were no charge-offs during the three months ended March 31, 2022 and 2021, resulting from loans previously modified as TDRs.

There were no loans modified as TDRs within 12 months prior to March 31, 2022 and 2021, respectively, for which there was a payment default (60 days or more past due) during the three months ended March 31, 2022 and 2021, respectively.

The Company has one loan secured by residential real estate for which foreclosure proceedings are in process at March 31, 2022 with a total recorded investment of $ 127,000 .

QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following tables present the balance in the allowance for loan losses at March 31, 2022 and December 31, 2021 disaggregated on the basis of the Company’s impairment method by class of loans receivable along with the balance of loans receivable by class, excluding unearned fees and costs, disaggregated on the basis of the Company’s impairment methodology:

	Allowance for Loan Losses						Loans Receivable
March 31, 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	$	3,192	$	2,005	$	1,187	$	135,257	$	3,462	$	131,795
Construction		709		—		709		64,453		—		64,453
Secured by commercial real estate		3,813		134		3,679		454,290		5,633		448,657
Secured by residential real estate		1,029		366		663		84,358		1,452		82,906
State and political subdivisions		68		—		68		19,448		—		19,448
Retail:
1-4 family residential mortgages		665		—		665		103,248		981		102,267
Home equity loans and lines		398		128		270		59,783		487		59,296
Consumer		588		1		587		5,923		51		5,872
Unallocated		769	N/A		N/A		N/A		N/A		N/A
Total	$	11,231	$	2,634	$	7,828	$	926,760	$	12,066	$	914,694

	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

QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

	March 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	$	148	$	148			$	150	$	157
Construction		—		—				—		—
Secured by commercial real estate		4,797		5,157				2,361		2,702
Secured by residential real estate		804		857				715		768
Retail:
1-4 family residential mortgages		981		1,095				893		1,002
Home equity loans and lines		316		364				514		586
Consumer		—		—				—		—
Total	$	7,046	$	7,621			$	4,633	$	5,215

With an allowance recorded:
Commercial:
Commercial and industrial	$	3,314	$	3,803	$	2,005	$	3,367	$	3,825	$	2,090
Construction		—		—		—		—		—		—
Secured by commercial real estate		836		1,008		134		3,293		3,451		312
Secured by residential real estate		648		767		366		672		787		368
Retail:
1-4 family residential mortgages		—		—		—		—		—		—
Home equity loans and lines		171		192		128		174		193		100
Consumer		51		66		1		53		68		3
Total	$	5,020	$	5,836	$	2,634	$	7,559	$	8,324	$	2,873

Total:
Commercial:
Commercial and industrial	$	3,462	$	3,951	$	2,005	$	3,517	$	3,982	$	2,090
Construction		—		—		—		—		—		—
Secured by commercial real estate		5,633		6,165		134		5,654		6,153		312
Secured by residential real estate		1,452		1,624		366		1,387		1,555		368
Retail:
1-4 family residential mortgages		981		1,095		—		893		1,002		—
Home equity loans and lines		487		556		128		688		779		100
Consumer		51		66		1		53		68		3
Total	$	12,066	$	13,457	$	2,634	$	12,192	$	13,539	$	2,873

QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

For the Three Months Ended March 31,	2022				2021
	Average recorded investment		Interest income recognized		Average recorded investment		Interest income recognized
Commercial:
Commercial and industrial	$	3,481	$	1	$	4,075	$	1
Construction		—		—		—		—
Secured by commercial real estate		5,617		38		6,006		41
Secured by residential real estate		1,346		12		2,017		16
Retail:
1-4 family residential mortgages		913		2		877		1
Home equity loans and lines		546		—		763		—
Consumer		52		—		60		—
Total	$	11,955	$	53	$	13,798	$	59

9. FAIR VALUE MEASUREMENTS AND DISCLOSURES

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

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

Level 1:

Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

Level 2:

Quoted prices in markets that are not active, or inputs that are observable either directly or indirectly, for substantially the full term of the asset or liability.

Level 3:

Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported with little or no market activity).

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

The measurement of fair value should be consistent with one of the following valuation techniques: market approach, income approach, and/or cost approach. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities (including a business). For example, valuation techniques consistent with the market approach often use market multiples derived from a set of 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.

QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table sets forth QNB’s financial assets measured at fair value on a recurring and nonrecurring basis and the fair value measurements by level within the fair value hierarchy as of March 31, 2022:

March 31, 2022	Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)		Balance at end of period
Recurring fair value measurements
Available-for-sale securities:
U.S. Treasury securities	$	—	$	894	$	—	$	894
U.S. Government agency securities		—		94,063		—		94,063
State and municipal securities		—		119,510		—		119,510
U.S. Government agencies and sponsored enterprises (GSEs):
Mortgage-backed securities		—		308,225		—		308,225
Collateralized mortgage obligations (CMOs)		—		127,534		—		127,534
Corporate debt securities		—		6,545		75		6,620
Total debt securities available-for-sale		—		656,771		75		656,846
Equity securities		12,652		—		—		12,652
Total recurring fair value measurements	$	12,652	$	656,771	$	75	$	669,498

Nonrecurring fair value measurements*
Impaired loans	$	—	$	—	$	2,386	$	2,386
Mortgage servicing rights		—		—		74		74
Total nonrecurring fair value measurements	$	—	$	—	$	2,460	$	2,460
*Impairment

There were no transfers in and out of Level 1, Level 2, or Level 3 fair value measurements during the three months ended March 31, 2022. There were no losses included in earnings attributable to the change in unrealized gains or losses relating to the available-for-sale securities above with fair value measurements utilizing significant unobservable inputs for the three- month period ended March 31, 2022.

QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table sets forth QNB’s financial assets measured at fair value on a recurring and nonrecurring basis, showing the fair value measurements by level within the fair value hierarchy, as of December 31, 2021:

December 31, 2021	Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)		Balance at end of period
Recurring fair value measurements
Debt 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 debt 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

March 31, 2022

Fair value

Valuation

techniques

Unobservable

inputs

Value or range

of values

Impaired loans

2,070

Appraisal of collateral

(1)

Appraisal adjustments

( 2 )

-20% to -25%

Liquidation expenses

(3)

-10

Impaired loans

316

Financial statement values for UCC collateral

Financial statement value discounts

(4)

-30% to -100%

Mortgage servicing rights

Discounted cash flow

Remaining term

3 to 29 years

Prepayment speeds

142% to 287%

Discount rate

12.0% to 12.5%

Quantitative information about Level 3 fair value measurements

December 31, 2021

Fair value

Valuation

techniques

Unobservable

inputs

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 years

Prepayment speeds

187% to 312%

Discount rate

12.0% to 12.5%

QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

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

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

( 4 )

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 available-for-sale securities measured at fair value on a recurring basis and for which QNB utilized significant unobservable inputs (Level 3 inputs) to determine fair value for the three months ended March 31, 2022 and 2021:

	Fair value measurements using significant unobservable inputs (Level 3)
	2022		2021
Balance, January 1,	$	75	$	70
Payments received		—		—
Total gains or losses (realized/unrealized)
Included in earnings		—		—
Included in other comprehensive (loss) income		—		4
Transfers in and/or out of Level 3		—		—
Balance, March 31,	$	75	$	74

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

•

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

•

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

QNB used an independent third party to value this security using a discounted cash flow analysis. Based on management’s review of the bond’s three underlying issuers, there are no expected credit losses or prepayments; cashflows used were contractual based on the Bloomberg YA screen. The assumed cashflows have been discounted using an estimated market discount rate based on the 30 -year swap rate. The 30-year is used as the reference rate since it is indicative of market expectation for short-term rates in the future. This is consistent with the 30-year nature of the PreTSL security, which is priced using the 3-month LIBOR as a reference rate. The discount rate of 5.64 % includes the risk-free rate, a credit component and a spread for illiquidity.

QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

The following methods and assumptions were used to estimate the fair values of each major classification of financial instrument and non-financial asset at March 31, 2022 and December 31, 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 (carried at fair value) : The fair value of securities is primarily determined by obtaining quoted market prices on nationally recognized securities exchanges (Level 1), or matrix pricing (Level 2), which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted market prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted prices. Level 2 debt securities are valued by a third-party pricing service commonly used in the banking industry. Level 2 fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution date, market consensus prepayment speeds, credit information and the security’s terms and conditions, among other things. For certain securities which are not traded in active markets or are subject to transfer restrictions, valuations are adjusted to reflect illiquidity and/or non-transferability, and such adjustments are generally based on available market evidence (Level 3). In the absence of such evidence, management’s best estimate is used. Management’s best estimate consists of both internal and external support on certain Level 3 investments. Cash flow models using a present value formula that includes assumptions market participants would use along with indicative exit pricing obtained from broker/dealers (where available) were used to support fair values of certain Level 3 investments.

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

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

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

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

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

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

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

QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

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

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

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

					Fair value measurements
March 31, 2022	Carrying amount		Fai r 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	$	13,260	$	13,260	$	13,260	$	—	$	—
Investment securities:
Available-for-sale		656,846		656,846		—		656,771		75
Equities		12,652		12,652		12,652		—		—
Restricted investment in stocks		1,337		1,337		—		1,337		—
Net loans		915,138		909,767		—		—		909,767
Mortgage servicing rights		523		647		—		—		647
Accrued interest receivable		3,781		3,781		—		3,781		—

Financial liabilities
Deposits with no stated maturities	$	1,288,098	$	1,288,098	$	1,288,098	$	—	$	—
Deposits with stated maturities		163,655		160,687		—		160,687		—
Short-term borrowings		76,738		76,738		76,738		—		—
Long-term debt		10,000		9,986		9,986		—		—
Accrued interest payable		178		178		—		178		—

Off-balance sheet instruments
Commitments to extend credit	$	—	$	—	$	—	$	—	$	—
Standby letters of credit		—		65		—		65		—

QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

					Fair value measurements
December 31, 2021	Carrying amount		Fai r 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
Equities		12,410		12,410		12,410		—		—
Restricted investment in stocks		1,329		1,329		—		1,329		—
Loans held-for-sale	—			—		—		—		—
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		—

10. 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 Company's financial instrument commitments is as follows:

	March 31,		December 31,
	2022		2021
Commitments to extend credit and unused lines of credit	$	368,719	$	325,449
Standby letters of credit		18,562		21,321
Total financial instrument commitments	$	387,281	$	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.

QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Standby letters of credit are conditional commitments issued by the Company to guarantee the financial or performance obligation of a customer to a third party. QNB’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for standby letters of credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making conditional obligations as it does for on-balance sheet instruments. Standby letters of credit of $ 17,541,000 will 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 Company requires collateral and personal guarantees supporting these letters of credit as deemed necessary. Management believes that the proceeds obtained through a liquidation of such collateral and the enforcement of personal guarantees would be sufficient to cover the maximum potential amount of future payments required under the corresponding guarantees. The amount of the liability as of March 31, 2022 and December 31, 2021 for guarantees under standby letters of credit issued is not material.

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

Other commitments :

QNB has committed to various operating leases for several of their branch and office facilities. Some of these leases include specific provisions relating to rent increases. Some of the leases contain renewal options to extend the initial terms of the lease for periods ranging from five to ten years and certain leases allow for multiple extensions. During the three months ended March 31, 2022, QNB renewed one lease and recorded an additional right-of-use asset in exchange for an operating lease liability of $ 43,000 .

11. REGULATORY RESTRICTIONS

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

Both the QNB and the Bank are subject to regulatory capital requirements administered by Federal banking agencies. Failure to meet minimum capital requirements can initiate actions by regulators that could have an effect on the financial statements. Under the framework for prompt corrective action, the Bank must meet capital guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance-sheet items. The capital amounts and classification are also subject to qualitative judgments by the regulators. Management believes, as of March 31, 2022, that the Company and the Bank met capital adequacy requirements to which they were subject.

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

QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

	Capital levels
	Actual					Adequately capitalized					Well capitalized
March 31, 2022	Amount		Ratio			Amount		Ratio			Amount		Ratio
Total risk-based capital (to risk-weighted assets):
The Company	$	154,160		13.44	%	$	91,733		8.00	%	$	114,666		10.00	%
Bank		140,997		12.71			88,737	8.00				110,921	10.00

Tier 1 capital (to risk-weighted assets):
The Company	$	142,821		12.46			68,800	6.00				68,800	6.00
Bank		129,668		11.69			66,553	6.00				88,737	8.00

Common equity tier 1 capital (to risk-weighted assets):
The Company		142,821		12.46			51,600	4.50			N/A		N/A
Bank		129,668		11.69			49,915	4.50				72,099	6.50

Tier 1 capital (to average assets):
The Company		142,821		8.52			67,015	4.00			N/A		N/A
Bank		129,668		7.80			66,495	4.00				83,118	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):
The Company	$	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 1 capital (to risk-weighted assets):
The Company		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):
The Company		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 1 capital (to average assets):
The Company		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

QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

12. REVENUE RECOGNITION FROM CONTRACTS WITH CUSTOMERS

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

•

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

•

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

•

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

•

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

•

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

•

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

•

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

•

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

•

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

QNB CORP. AND SUBSIDIARY

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

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

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

FORWARD-LOOKING STATEMENTS

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

Shareholders should note that many factors, some of which are discussed elsewhere in this document and in the documents that are incorporated by reference, including the risk factors identified in Item 1A of QNB’s 2021 Form 10-K, 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’s business;

•

The effects of unforeseen external events, including acts of terrorism, natural disasters, and pandemics, including the COVID-19 Pandemic; and

•

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

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

QNB CORP. AND SUBSIDIARY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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

Other-Than-Temporary Investment Security Impairment

Securities are evaluated periodically to determine whether a decline in their value is other-than-temporary. Management utilizes criteria such as the magnitude and duration of the decline, in addition to the reasons underlying the decline, to determine whether the loss in value is other-than-temporary. The term “other-than-temporary” is not intended to indicate that the decline is permanent, it indicates that the prospect for a near-term recovery of value is not necessarily favorable, or that there is a lack of evidence to support a realizable value equal to or greater than the carrying value of the investment. For equity securities that do not have readily-determinable fair values, once a decline in value is determined to be other-than-temporary, the value of the equity security is reduced and a corresponding charge to earnings is recognized. There were no other-than-temporary impairment charges recorded during the three months ended March 31, 2022 and 2021, respectively.

The Company follows accounting guidance related to the recognition and presentation of other-than-temporary impairment that specifies (a) if a company does not have the intent to sell a debt security prior to recovery and (b) it is more likely than not that it will not have to sell the debt security prior to recovery, the security would not be considered other-than-temporarily impaired unless there is a credit loss. When an entity does not intend to sell the security, and it is more likely than not the entity will not have to sell the security before recovery of its cost basis, it will recognize the credit component of an other-than-temporary impairment of a debt security in earnings and the remaining portion in other comprehensive income. There were no credit-related other-than-temporary impairment charges in the three months ended March 31, 2022 or 2021, respectively.

Allowance for Loan Losses

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

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

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

QNB CORP. AND SUBSIDIARY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

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

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

Foreclosed Assets

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

Stock-Based Compensation

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

Income Taxes

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

RESULTS OF OPERATIONS - OVERVIEW

QNB reported net income for the first quarter of 2022 of $3,710,000, or $1.04 per share on a diluted basis, compared to net income of $5,050,000, or $1.42 per share on a diluted basis, for the same period in 2021. The Bank contributed $3,708,000 to net income for the three months ended March 31, 2022 compared to $4,038,000 for the same period 2021; and the holding company contributed $2,000 to net income for the three months ended March 31, 2022 compared to $1,012,000 for the same period 2021. The results at the Bank were primarily due to a reduction in non-interest income as no mortgage loans were sold in 2022. The results at the holding company are due primarily to the change in the fair value of the equity portfolio.

Net income expressed as an annualized rate of return on average assets and average shareholders’ equity was 0.90% and 10.60%, respectively, for the quarter ended March 31, 2022 compared with 1.40% and 15.70%, respectively, for the quarter ended March 31, 2021.

Total assets at March 31, 2022 were $1,647,986,000, compared with $1,673,340,000 at December 31, 2021. Loans receivable at March 31, 2022 were $926,369,000, fairly level compared with $926,470,000 at December 31, 2021. QNB participated in the Small

QNB CORP. AND SUBSIDIARY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

Business Administration’s (“SBA”) Paycheck Protection Program (“PPP ”) . Excluding PPP loans net of deferred fees at March 31, 2022 and December 31, 202 1 , loans would have in creased $ 7 , 900 , 000 since year-end 202 1 . Total deposits of $ 1 , 451 , 753 , 000 at March 31, 2022 increased $ 2 , 008 ,000 compared with total deposits of $1, 449 , 745 ,000 at December 31, 202 1 .

Results for the three months ended March 31, 2022 include the following significant components:

•

Net interest income increased $219,000, or 2.1%, to $10,736,000 for the three months ended March 31, 2022.

•

Net interest margin on a tax-equivalent basis decreased 36 basis points for the quarter to 2.71%.

•

QNB recorded no provision for loan losses for the first quarter of 2022 compared to a provision of $275,000 for the same period in 2021.

•

Non-interest income decreased $1,793,000, to $1,611,000, for the first quarter ended March 31, 2022 compared with the same period in 2021. Excluding realized and unrealized gains (losses) on equity securities and gains on sales of loans, and the life insurance benefit of $193,000 in 2021, non-interest income increased $160,000, or 11.2%, to $1,584,000 for the quarter ended March 31, 2022 compared with the same period in 2021.

•

Non-interest expense increased $490,000, or 6.7%, to $7,813,000 for the quarter ended March 31, 2022 compared to the same period in 2021.

•

Total non-performing loans were $11,647,000, or 1.26% of loans receivable at March 31, 2022, compared to $11,672,000, or 1.26% of loans receivable at December 31, 2021. Loans on non-accrual status were $7,272,000 at March 31, 2022 compared with $7,530,000 at December 31, 2021. Net loan recoveries for the three months ended March 31, 2022 were $47,000, compared with $14,000 for the same period in 2021.

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

NET INTEREST INCOME

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

The following table presents the adjustment to convert net interest income to net interest income on a fully taxable-equivalent basis for the three-month periods ended March 31, 2022 and 2021.

	For the Three Months Ended March 31,
	2022		2021
Total interest income	$	11,809	$	11,731
Total interest expense		1,073		1,214
Net interest income		10,736		10,517
Tax-equivalent adjustment		184		162
Net interest income (fully taxable-equivalent)	$	10,920	$	10,679

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

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

The net interest rate spread is the difference between average rates received on earning assets and average rates paid on interest-bearing liabilities, while the net interest rate margin, which includes interest-free sources of funds, is net interest income expressed as

QNB CORP. AND SUBSIDIARY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

a percentage of average interest-earning assets. The Asset/Liability and Investment Management Committee works to manage and maximize the net interest margin for the Company.

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

	For the Three Months Ended
	March 31, 2022								March 31, 2021
	Average			Average					Average			Average
	Balance			Rate			Interest		Balance			Rate			Interest
Assets
Investment securities (AFS & Equity):
U.S. Treasury securities	$	89			0.74	%	$	—	$	—			0.00	%	$	—
U.S. Government agencies		99,979			1.08			270		70,229			1.02			178
State and municipal		129,790			2.41			781		93,723			2.59			608
Mortgage-backed and CMOs		461,137			1.49			1,718		262,937			1.30			856
Corporate debt securities		6,700			4.34			73		7,242			3.70			68
Equities		12,414			3.20			98		13,159			3.26			106
Total investment securities		710,109			1.66			2,940		447,290			1.62			1,816
Loans:
Commercial real estate		597,661			4.04			5,957		530,672			4.34			5,680
Residential real estate		101,431			3.23			818		88,506			3.50			775
Home equity loans		54,618			3.36			453		58,738			3.47			502
Commercial and industrial		140,588			4.57			1,585		228,337			5.00			2,814
Consumer loans		4,735			5.05			59		5,333			4.91			65
Tax-exempt loans		19,569			3.41			165		25,075			3.57			221
Total loans, net of unearned income*		918,602			3.99			9,037		936,661			4.35			10,057
Other earning assets		6,689			0.97			16		28,562			0.29			20
Total earning assets		1,635,400			2.97			11,993		1,412,513			3.41			11,893
Cash and due from banks		13,082								26,844
Allowance for loan losses		(11,204	)							(10,935	)
Other assets		38,107								38,098
Total assets	$	1,675,385							$	1,466,520
Liabilities and Shareholders' Equity
Interest-bearing deposits:
Interest-bearing demand	$	338,296			0.18	%		146	$	281,728			0.21	%		148
Municipals		116,516			0.32			91		112,550			0.32			90
Money market		141,296			0.30			106		105,556			0.31			82
Savings		437,645			0.30			321		354,018			0.33			290
Time < $100		92,692			0.80			184		103,783			1.09			279
Time $100 through $250		48,537			0.71			85		55,491			1.03			145
Time > $250		24,970			0.69			42		29,396			1.19			86
Total interest-bearing deposits		1,199,952			0.33			975		1,042,522			0.44			1,120
Short-term borrowings		71,480			0.33			59		58,086			0.39			55
Long-term debt		10,000			1.57			39		10,000			1.57			39
Total interest-bearing liabilities		1,281,432			0.34			1,073		1,110,608			0.44			1,214
Non-interest-bearing deposits		244,097								216,293
Other liabilities		7,870								9,146
Shareholders' equity		141,986								130,473
Total liabilities and shareholders' equity	$	1,675,385							$	1,466,520
Net interest rate spread					2.63	%							2.97	%
Margin/net interest income					2.71	%	$	10,920					3.07	%	$	10,679

QNB CORP. AND SUBSIDIARY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

Tax-exempt securities and loans were adjusted to a tax-equivalent basis and are based on the marginal Federal corporate tax rate of 21 percent for three months ended March 31, 2022 and 2021.

Non-accrual loans are included in earning assets.

* Includes loans held-for-sale

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

	For the Three Months Ended
	March 31, 2022 compared
	to March 31, 2021
	Total			Due to change in:
	Change			Volume			Rate
Interest income:
Investment securities (AFS & Equity):
U.S. Treasury securities	$	—		$	—		$	—
U.S. Government agencies		92			76			16
State and municipal		173			234			(61	)
Mortgage-backed and CMOs		862			645			217
Corporate debt securities		5			(6	)		11
Equities		(8	)		(6	)		(2	)
Total Investment securities (AFS & Equity)		1,124			943			181
Loans:
Commercial real estate		277			717			(440	)
Residential real estate		43			113			(70	)
Home equity loans		(49	)		(35	)		(14	)
Commercial and industrial		(1,229	)		(1,081	)		(148	)
Consumer loans		(6	)		(8	)		2
Tax-exempt loans		(56	)		(48	)		(8	)
Total Loans		(1,020	)		(342	)		(678	)
Other earning assets		(4	)		(15	)		11
Total interest income		100			586			(486	)
Interest expense:
Interest-bearing deposits:
Interest-bearing demand		(2	)		30			(32	)
Municipals		1			3			(2	)
Money market		24			27			(3	)
Savings		31			69			(38	)
Time < $100		(95	)		(30	)		(65	)
Time $100 through $250		(60	)		(18	)		(42	)
Time > $250		(44	)		(13	)		(31	)
Total interest-bearing deposits		(145	)		68			(213	)
Short-term borrowings		4			13			(9	)
Long-term debt		—			—			—
Total interest expense		(141	)		81			(222	)
Net interest income	$	241		$	505		$	(264	)

QNB CORP. AND SUBSIDIARY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

Net Interest Income and Net Interest Margin – Quarterly Comparison

Average earning assets for the first quarter of 2022 were $1,675,385,000, an increase of $208,865,000, or 14.2%, from the first quarter of 2021, with average loans decreasing $18,059,000, or 1.9%, and average investment securities increasing $262,819,000, or 58.8%, over the same period in 2021. Excess cash from deposit growth was deployed to the securities portfolio, which earns a better yield than Fed Funds or deposits at the Federal Reserve Bank. Average loans as a percent of average earning assets was 56.2% for the first quarter of 2022, compared with 66.3% for the first quarter of 2021. On the funding side, average deposits increased $185,234,000, or 14.7%, to $1,444,049,000 for the first quarter of 2022 primarily due to growth in non-interest-bearing and interest-bearing demand, money market and savings deposits. Customers continue to reinvest funds into more liquid accounts. Average short-term borrowed funds, which consisted primarily of average commercial repurchase agreements, increased $13,394,000 to $71,480,000 during the first quarter of 2022 compared to $58,086,000 for the same period in 2021.

The net interest margin for the first quarter of 2022 decreased 36 points to 2.71% from 3.07% for the same period in 2021. Competition for quality loans in our local market continues to exert pressure on the net interest margin. The increase in interest rates starting in March 2022 is expected to compress the net interest margin initially as QNB is liability sensitive; but is expected to improve as loans and securities reprice.

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 $100,000, or 0.8%, to $11,993,000 for the first quarter of 2022; total interest expense decreased $141,000, or 11.6%, to $1,073,000. All categories of interest-bearing deposits, except municipal deposits, experienced lower rates in the first quarter of 2022 compared to the first quarter of 2021.

The yield on earning assets on a tax-equivalent basis decreased 44 basis points from 3.41% for the first quarter of 2021, to 2.97% for the first quarter of 2022. The cost of interest-bearing liabilities was 0.34% for the first quarter of 2022, compared with 0.44% for the same period in 2021.

Interest income on investment securities (available-for-sale and equity) increased $1,124,000 when comparing the quarters ended March 31, 2022 and 2021. The average yield on the investment portfolio was 1.66% for the first quarter of 2022 compared with 1.62% for the first quarter of 2021.

QNB invested in U.S. Treasury securities during the first quarter of 2022 which yielded 0.74%. Income on U.S. Government agency securities increased $92,000 as the average balances increased $29,750,000 and the rate increased six basis points.

Interest income on municipal securities, which are primarily tax-exempt, increased due to a $36,067,000 increase in average balances, partially offset by an 18 basis-point decline in rates. Proceeds from matured, called securities and proceeds from deposits were invested back into the U.S. Government agency, municipal and mortgage-backed securities portfolios. Typically, QNB purchases municipal bonds with 10-20-year maturities and may have call dates between 2-10 years.

Interest income on mortgage-backed securities and CMOs increased $862,000 while average balances increased $198,200,000 and yield increased 19 basis points. This portfolio generally provides higher yields relative to agency bonds and also provides monthly cash flow which can be used for liquidity purposes or can be reinvested as interest rates increase. Since most of these securities were purchased at a premium, any prepayments result in a shorter amortization period of this premium and therefore a reduction in income.

Income on loans decreased $1,020,000 to $9,037,000 when comparing the first quarters of 2022 and 2021, with a 1.9% decline in average balances contributing a decrease in interest income of $342,000 and a 36-basis point decline in yield contributing to a $678,000 decrease in interest income. Low interest rates during the repricing period of the loans as well as competitive pressures compressed the yields on new loans being originated.

The largest category of the loan portfolio is commercial real estate loans. This category of loans includes commercial purpose loans secured by either commercial properties such as office buildings, factories, warehouses, hotels and restaurants, medical facilities and retail establishments, or residential real estate, usually the residence of the business owner. The category also includes construction and land development loans. Income on commercial real estate loans increased $277,000 when comparing the first quarters of 2022 and 2021, primarily due to increased average balances of $66,989,000, or 12.6%, offset in part by a 30-basis point decrease in rate from 4.34% in 2021 to 4.04% in 2022.

QNB CORP. AND SUBSIDIARY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

Income on commercial and industrial loans de creased $ 1,229 ,000 when comparing the first quarter s of 202 2 and 202 1 . The average yield on these loans de creased 43 basis points to 4.57 % resulting in a de crease in income of $ 148 ,0 00; a verage balances de creased $ 87 , 749 ,00 0, to $ 140 , 588 , 000 for the first quarter of 2 02 2 resulting in a $ 1,081 ,000 dec rease 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 ; forgiveness of the PPP loans contributed approximately $ 62 , 433 ,000 of the net volume de crease and $807,000 of the decrease in interest . 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 hundred basis points . The accretion of SBA origination fees is accelerated upon forgiveness of the loan. Income on PPP loan forgiveness was $298,000 for the first quarter of 2022 compared to $744,000 for the same period in 2021 . Excluding the PPP loans, the average balance of commercial and industrial loan portfolio decreased $25,316,000 and the yield declined 47 basis points, comparing the first quarter of 2022 to 2021 .

Tax-exempt loan income was $165,000 for the first quarter of 2022, a decrease of $56,000, or 25.3%, from the same period in 2021. Average balances decreased $5,506,000, or 22.0%, to $19,569,000 for the first quarter of 2022, resulting in a decrease of $48,000 in income. The yield on municipal loans decreased 16 basis points, to 3.41% for the first quarter of 2022, compared with the same period in 2021, resulting in a decrease of $8,000 in interest income. The decrease in volume during 2022 was a result of municipal loans being refinanced as bonds.

QNB desires to be the “local consumer lender of choice”, focusing its retail lending efforts on product offerings and marketing and promotion. Interest income on residential mortgage loans secured by first lien 1-4 family increased $43,000 when comparing the first quarter of 2022 to the same period in 2021. Average residential mortgage loan balances increased by $12,925,000, or 14.6%, to $101,431,000 for the first quarter of 2022 compared to the same period in 2021, which contributed a $113,000 increase in interest income. However, the average yield on the portfolio decreased 27 basis points to 3.23% for the first quarter of 2022, which resulted in a $70,000 decrease in interest income. QNB chose to retain certain mortgage loans instead of selling them in the secondary market, as the yield on our originated mortgages was higher than comparable mortgage-backed securities. Average home equity loans decreased by $4,120,000, or 7.0%, to $54,618,000 and the average yield decreased 11 basis points to 3.36% resulting in a combined decrease in interest income of $49,000. The yield on the consumer portfolio increased 14 basis points to 5.05% for the first quarter of 2022 and there was a $598,000 decrease in average balances resulting in a combined $6,000 decrease in interest income.

Earning assets are funded by deposits and borrowed funds. Interest expense decreased $141,000, when comparing the first quarter of 2022 to the same period in 2021. The growth in average deposits continues to be centered in accounts with greater liquidity. Average non-interest-bearing demand accounts increased $27,804,000, or 12.9%, to $244,097,000 for the first quarter of 2022. Average interest-bearing demand accounts increased $56,568,000, or 20.1%, to $338,296,000 for the first quarter of 2022. Interest expense on interest-bearing demand accounts decreased $2,000 to $146,000 for the same period, as the average rate paid decreased three basis points to 0.18% for the first quarter 2022. Included in this category is QNB-Rewards checking, a higher-rate checking account product that pays 1.00% on balances up to $25,000 and 0.15% for balances over $25,000. In order to receive the high rate a customer must receive an electronic statement, have one direct deposit or other ACH transaction and have at least 12 check card purchase transactions post and clear per statement cycle. For the first quarter of 2022, the average balance in this product was $96,522,000 and the related interest expense was $80,000 for an average yield of 0.34%. In comparison, the average balance of the QNB-Rewards accounts for the first quarter of 2021 was $89,966,000 and the related interest expense was $79,000 for an average yield of 0.36%. This product also generates fee income through the use of the check card.

Interest expense on municipal interest-bearing demand accounts increased $1,000 to $91,000 for the first quarter of 2022. The average interest rate paid on municipal interest-bearing demand accounts remained the same at 0.32% for the first quarter of 2022 and 2021, and average balances increased $3,966,000, or 3.5%, to $116,516,000. Many of these accounts are indexed to the Federal funds rate with rate floors. Municipal deposits are seasonal in nature and are received during the first and second quarters as tax receipts are collected and are withdrawn over the course of the year.

Average money market accounts increased $35,740,000, or 33.9%, to $141,296,000 for the first quarter of 2022 compared with the same period in 2021. Interest expense on money market accounts increased $24,000 to $106,000, and the average interest rate paid on money market accounts decreased one basis point to 0.30% for the first quarter of 2022. Most of the balances in this category are in a product that pays a tiered rate based on account balances.

Interest expense on savings accounts increased $31,000 when comparing the first quarter of 2022 to the first quarter of 2021. The average interest rate paid on savings accounts decreased three basis points to 0.30% for the first quarter of 2022. When comparing these same periods, average savings accounts increased $83,627,000, or 23.6%, to $437,645,000 for the first quarter of 2022 primarily

QNB CORP. AND SUBSIDIARY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

due to in creases in the e-Savings product. QNB’s online e-Savings product is the largest category of savings deposits, with average balances for the first quarter of 202 2 of $ 334 , 096 ,000 compared to $ 263 , 038 , 000 in the same period of 202 1 . The average yield paid on these accounts was 0 . 35 % for the first quarter of 202 2 and 0. 4 0 % for the same period in 202 1 . Traditional statement savings accounts, passbook savings and club accounts are also included in the savings category and average balances in these types of savings accounts in creased $ 12 , 569 ,000 when comparing the first quarter of 202 2 average to the same period in 2021 . Many of the Bank’s maturing time deposits throughout 202 1 and into 202 2 were deposited to these liquid interest-bearing accounts.

Interest expense on time deposits totaled $311,000 for the first quarter of 2022 compared to $510,000 in 2021. Average total time deposits decreased $22,471,000 to $166,199,000 for the first quarter of 2022. As with fixed-rate loans and investment securities, these deposits reprice over time and, therefore, have less of an immediate impact on costs in either a rising or falling rate environment; however, the maturity and repricing characteristics of time deposits tend to be shorter. The average rate paid on total time deposits decreased 34 basis points from 1.10% to 0.76% when comparing the first quarter of 2021 to the same period in 2022.

Approximately $88,395,000, or 55%, of time deposits at March 31, 2022 will mature over the next 12 months. The average rate paid on these time deposits is approximately 0.54%. The yield on the time deposit portfolio may change slightly in the next quarter as short-term time deposits reprice; however, given the short-term nature of these deposits, interest expense may increase if short-term time deposit rates were to increase suddenly or if customers select higher paying time deposits.

Short-term borrowings were comprised primarily of sweep accounts structured as repurchase agreements with our commercial customers at March 31, 2022 and March 31, 2021. Interest expense on short-term borrowings increased $4,000 for the first quarter of 2022 to $59,000 when compared to the same period in 2021. When comparing these same periods, average balances increased $13,394,000 to $71,480,000. During 2020, QNB borrowed long-term debt of $10,000,000 to lock in borrowing at a lower yield than short-term borrowings at that time.

PROVISION FOR LOAN LOSSES AND ALLOWANCE FOR LOAN LOSSES

The provision for loan losses represents management's determination of the amount necessary to be charged to operations to bring the allowance for loan losses to a level that represents management’s best estimate of the known and inherent losses in the existing loan portfolio. Management believes that it uses the best information available to make determinations about the adequacy of the allowance and that it has established its existing allowance for loan losses in accordance with U.S. GAAP. The determination of an appropriate level for the allowance for loan losses is based upon an analysis of the risks inherent in QNB’s loan portfolio. Management, in determining the allowance for loan losses, makes significant estimates and assumptions.

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

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

Based on this analysis, QNB recorded no provision for the three months ended March 31, 2022 and recorded $275,000 in provision for loan losses for the same period in 2021. QNB's allowance for loan losses of $11,231,000 represents 1.21% of loans receivable at March 31, 2022 compared with an allowance for loan losses of $11,184,000, or 1.21% of loans receivable, at December 31, 2021, and $11,115,000, or 1.18% of loans receivable, at March 31, 2021. Management believes the allowance for loan losses at March 31, 2022 is adequate as of that date based on its analysis of known and inherent losses in the portfolio. Excluding PPP loans, the allowance level stated as a percent of loans receivable was 1.22% at March 31, 2022, 1.23% at December 31, 2021, and 1.27% at March 31, 2021.

Net recoveries were $47,000 for the three months ended March 31, 2022 compared to net recoveries of $14,000 for the three months ended March 31, 2021. Charge-offs of approximately $31,000 during the three months ended March 31, 2022 consisted primarily of consumer loans of $13,000 and overdrafts of $18,000. These were offset by $78,000 in recoveries comprising $72,000 in repayments

QNB CORP. AND SUBSIDIARY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

from borrowers of previously charged-off credits, and $ 6 ,000 related to overdraft recoveries. Annualized net recoveries as a percentage of average loans receivable were 0 . 02 % fo r th e three months ended March 31, 2022, compared to annualized net recoveries of 0.01% for the three months ended March 31, 2021 .

Non-performing assets were $11,647,000 at March 31, 2022 compared to $11,672,000 as of December 31, 2021 and $13,266,000 at March 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 1.26% of loans receivable at March 31, 2022 and December 31, 2021, and 1.40% of loans receivable at March 31, 2021. In cases where there is a collateral shortfall on non-accrual loans, specific impairment reserves have been established based on updated collateral values even if the borrower continues to pay in accordance with the terms of the agreement. At March 31, 2022, $4,144,000, or approximately 57% of the loans classified as non-accrual, are current or past due less than 30 days. Commercial loans classified as substandard or doubtful totaled $19,072,000, an increase of $541,000, or 2.9%, from the $18,531,000 reported at December 31, 2021 and a decrease of $2,863,000, or 13.1%, from the $21,935,000 reported at March 31, 2021. The increase in classified loans since December 31, 2021 is due to the classification of one large credit, partially offset by repayments on existing substandard loans. The decrease since March 31, 2021 is primarily repayments on existing substandard loans.

QNB had no loans past due 90 days or more and still accruing interest at March 31, 2022, December 31, 2021, or March 31, 2021. Total loans 30 days or more past due, which includes non-accrual loans by actual number of days delinquent, represented 0.39% of loans receivable at March 31, 2022 compared with 0.46% at December 31, 2021, and 0.60% at March 31, 2021.

Troubled debt restructured loans, not classified as non-accrual loans or loans past due 90 days or more and accruing, were $4,375,000 at March 31, 2022, compared with $4,142,000 at December 31, 2021, and $4,379,000 at March 31, 2021. There was one new troubled debt restructuring identified during the three months ended March 31, 2022, as QNB extended credit to an existing TDR customer. QNB had no other real estate owned or repossessed assets at March 31, 2022, December 31, 2021, or March 31, 2021.

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

QNB CORP. AND SUBSIDIARY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

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

	March 31,			December 31,			March 31,
	2022			2021			2021
Non-accrual loans	$	7,272		$	7,530		$	8,887
Loans past due 90 days or more and still accruing interest		—			—			—
Troubled debt restructured loans (not already included above)		4,375			4,142			4,379
Total non-performing loans		11,647			11,672			13,266
Total non-performing assets	$	11,647		$	11,672		$	13,266

Total loans (excluding loans held-for-sale):
Average total loans (YTD)	$	918,602		$	928,017		$	932,617
Total loans		926,369			926,470			945,645

Allowance for loan losses		11,231			11,184			11,115

Allowance for loan losses to:
Non-performing loans		96.43	%		95.82	%		83.79	%
Total loans (excluding held-for-sale)		1.21	%		1.21	%		1.18	%
Average total loans (excluding held-for-sale)		1.22	%		1.21	%		1.19	%

Non-performing loans / total loans (excluding held-for-sale)		1.26	%		1.26	%		1.40	%
Non-performing assets / total assets		0.71	%		0.70	%		0.84	%

An analysis of net loan charge-offs (recoveries) for the three months ended March 31, 2022 compared to 2021 is as follows:

	For the Three Months Ended March 31,
	2022			2021
Net charge-offs	$	(47	)	$	(14	)

Net annualized charge-offs to:
Total loans		(0.02	%)		(0.01	%)
Average total loans excluding held-for-sale		(0.02	%)		(0.01	%)
Allowance for loan losses		(1.70	%)		(0.51	%)

At March 31, 2022 and December 31, 2021, the recorded investment in loans for which impairment has been identified totaled $12,066,000 and $12,192,000 of which $7,046,000 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 $5,020,000 and $7,559,000 at March 31, 2022 and December 31, 2021, respectively, and the related allowance for loan losses associated with these loans was $2,634,000 and $2,873,000, respectively. Most of the loans that have been identified as impaired are collateral-dependent. See Note 8 to the Notes to Consolidated Financial Statements for additional detail of impaired loans.

QNB CORP. AND SUBSIDIARY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

NON-INTEREST INCOME

Non-Interest Income Comparison
	For the Three Months Ended March 31,					Change from prior year
	2021			2021		Amount			Percent
Net gain on sales of investment securities	$	36		$	342	$	(306	)		-89.5	%
Unrealized gain (loss) on investment equity securities		(8	)		1,096		(1,104	)		(100.7	)
Fees for services to customers		384			299		85			28.4
ATM and debit card		641			593		48			8.1
Retail brokerage and advisory		205			167		38			22.8
Bank-owned life insurance		81			263		(182	)		(69.2	)
Merchant		95			104		(9	)		(8.7	)
Net gain on sale of loans		—			352		(352	)		(100.0	)
Other		177			188		(11	)		(5.9	)
Total	$	1,611		$	3,404	$	(1,793	)		-52.7	%

Quarter to Quarter Comparison

Total non-interest income for the first quarter of 2022 was $1,611,000, a decrease of $1,793,000, compared to $3,404,000 for the first quarter of 2021. Excluding realized and unrealized gains (losses) on equity securities, gains on sales of loans, and the life insurance benefit claim of $193,000 in 2021, non-interest income decreased $160,000, or 11.2%, to $1,584,000 for the quarter ended March 31, 2022 compared with the same period in 2021

During the first quarter of 2022, unrealized losses on investment equity securities of $8,000 were recorded compared to gains of $1,096,000 in the same period of 2021. The unrealized losses and gains for the three months ended March 31, 2022 and 2021 resulted from the change in the fair value of the equities portfolio. The equities portfolio comprises blue-chip large-capitalized stocks, providing a year-to-date taxable equivalent dividend yield of 3.20%. The estimated cumulative contribution (realized and unrealized net gains (losses), plus dividends) of the equity portfolio to earnings per share from January 1, 2011 through March 31, 2022 is $2.46 per diluted share. Details of the equity portfolio’s contribution to net income is detailed in the following table.

QNB CORP. AND SUBSIDIARY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

Net Income (Expense) on Equity Securities
	For the Year Ended December 31,																						For the Three Months Ended March 31,
		2015			2016			2017			2018			2019			2020			2021			2022			2021

Equity Securities:
Tax-equivalent dividends*		$	244		$	233		$	249		$	300		$	274		$	392		$	437		$	98		$	106
Net gain (loss) on sales			691			758			1,557			(79	)		1,781			585			1,788			35			339
OTTI			(55	)		(192	)		(80	)	N/A			N/A			N/A			N/A			N/A			N/A
Unrealized (loss) gain		N/A			N/A			N/A				(336	)		770			(47	)		926			(8	)		1,096
Tax-equivalent income before tax			880			799			1,726			(115	)		2,825			930			3,151			125			1,541
Tax expense (benefit)*			357			324			700			(33	)		816			269			910			36			445
Net income		$	523		$	475		$	1,026		$	(82	)	$	2,009		$	661		$	2,241		$	89		$	1,096

Earnings per share - basic		$	0.16		$	0.14		$	0.30		$	(0.02	)	$	0.57		$	0.19		$	0.63		$	0.03		$	0.31
Earnings per share - diluted		$	0.16		$	0.14		$	0.30		$	(0.02	)	$	0.57		$	0.19		$	0.63		$	0.03		$	0.31
Tax-equivalent yield*			3.35	%		3.13	%		3.49	%		3.08	%		3.31	%		3.54	%		3.02	%		3.20	%		3.26	%

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

QNB originates residential mortgage loans for sale in the secondary market. There were no gains on sale of loans during the first quarter of 2022 compared with $352,000 in the first quarter of 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. There were no sales of residential mortgages in the first quarter of 2022 compared to proceeds from the sale of residential mortgages of $9,105,000 for the first quarter 2021.

Fees for services to customers increased $85,000 to $384,000 for the first quarter of 2022, due primarily to an increase in net overdraft income. ATM and debit card income increased $48,000 to $641,000 for the first quarter of 2022, compared to the same period in 2021, due primarily to debit card interchange fee income.

QNB provides securities and advisory services under the name QNB Financial Services. Retail brokerage and advisory fees increased for the first quarter of 2022 compared to the same period in 2021. Advisory fees increased $39,000 for the first quarter of 2022 compared with the same period in 2021 due to increased assets under management, while transactional fees decreased $1,000 when comparing the first quarters of 2022 and 2021 due to the sale of annuity products.

Bank-owned life insurance income includes a life insurance benefit claim of $193,000 in the first quarter of 2021. Merchant income decreased by $9,000 to $95,000 for the first quarter of 2022, compared to the same period in 2021. Other non-interest income decreased $11,000. There was a decrease in title company income of $23,000 due to the decreased volume of mortgage originations. There was an increase of $20,000 in mortgages servicing fees due to a change in the fair value of previously impaired pools of mortgages.

QNB CORP. AND SUBSIDIARY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

NON-INTEREST EXPENSE

Non-Interest Expense Comparison
	For the Three Months Ended March 31,				Change from prior year
	2022		2021		Amount			Percent
Salaries and employee benefits	$	4,266	$	4,017	$	249			6.2	%
Net occupancy		578		618		(40	)		(6.5	)
Furniture and equipment		687		670		17			2.5
Marketing		194		214		(20	)		(9.3	)
Third-party services		667		488		179			36.7
Telephone, postage and supplies		194		198		(4	)		(2.0	)
State taxes		272		273		(1	)		(0.4	)
FDIC insurance premiums		217		171		46			26.9
Other		738		674		64			9.5
Total	$	7,813	$	7,323	$	490			6.7	%

Quarter to Quarter Comparison

Total non-interest expense was $7,813,000 for the first quarter of 2022, an increase of $490,000, or 6.7%, compared to the first quarter of 2021.

Salaries and benefits comprise the largest component of non-interest expense. QNB monitors, through the use of various surveys, the competitive salary and benefit information in its markets and makes adjustments when appropriate. Salaries and benefits expense increased $249,000, or 6.2%, to $4,266,000 when comparing the two quarters. Salary expense and related payroll taxes increased $178,000 to $3,606,000 during the first quarter of 2022 compared to the same period in 2021 due to increased compensation and related taxes of $71,000, bonus accruals of $11,000 and lower contra loan origination deferred costs of $97,000. Medical and dental premiums, net of employee contributions, decreased $71,000 to $660,000 when comparing the two quarters due to a decrease in medical claims.

Net occupancy and furniture and equipment expenses combined decreased $23,000, or 1.8%, when comparing the first quarters of 2022 and 2021. This is due primarily to decreased building repair expense and decreased leasehold and furniture depreciation and computer software amortization expense, offset in part by increased software maintenance expense. Marketing expense decreased $20,000, or 9.3%, to $194,000 for the quarter ended March 31, 2022, due to timing of promotions and community support donations.

Third-party services are comprised of professional services, including legal, accounting, auditing and consulting services, as well as fees paid to outside vendors for support services of day-to-day operations. These support services include correspondent banking services, IT services, statement printing and mailing, investment security safekeeping and supply management services. Third party services expense increased $179,000 when comparing the two periods, due primarily to increases in fees paid to outside vendors for support services. FDIC insurance premiums increased $46,000 due to asset growth.

Other non-interest expense increased $64,000, or 9.5%, primarily due to increased travel and entertainment expense and check fraud cost.

INCOME TAXES

QNB utilizes an asset and liability approach for financial accounting and reporting of income taxes. As of March 31, 2022, QNB’s net deferred tax asset was $12,046,000. The primary components of deferred taxes are deferred tax assets of which $10,724,000 relates to investment securities fair value adjustments and $2,358,000 relates to the allowance for loan losses. As of December 31, 2021, QNB’s net deferred tax asset was $2,449,000 of which $994,000 related to investment securities fair value adjustments and $2,349,000 was related to the allowance for loan losses. The increase in the balance of net deferred tax assets when comparing March 31, 2022 to December 31, 2021 is due to the increase in unrealized losses on available for sale securities at March 31, 2022 compared to December 31, 2021, contributing to $9,730,000 of the increase.

QNB CORP. AND SUBSIDIARY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

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

Applicable income tax expense was $824,000 for the first quarter of 2022, compared to $1,273,000 for the first quarter of 2021. The effective tax rate for first quarter of 2022 was 18.2% compared with 20.1% for the same period in 2021. The decrease in the effective tax rate for the three months ended March 31, 2022 is due to the state income tax at the parent company related to higher gains in 2021 compared to 2022 on the equities portfolio; and as pre-tax income was lower in 2022 compared to 2021, there was a higher proportion of tax-exempt net interest income to income before taxes for 2022 over 2021.

FINANCIAL CONDITION ANALYSIS

Financial service organizations are challenged to demonstrate they can generate sustainable and consistent earnings growth in a dynamic operating environment. Rate competition for quality loans is anticipated to continue through 2022. It is also anticipated that the rate competition for attracting and retaining deposits may increase in 2022, which could result in a lower net interest margin and a decline in net interest income.

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

Total assets at March 31, 2022 were $1,647,986,000 compared with $1,673,340,000 at December 31, 2021. Cash and cash equivalents decreased $130,000 from $13,390,000 at December 31, 2021 to $13,260,000 at March 31, 2022, due primarily to increases in investment securities during the three months ended March 31, 2022.

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

Loans receivable decreased $101,000 with commercial loans decreasing $2,579,000 to $757,806,000 at March 31, 2022, compared with $760,385,000 at year-end 2021. Excluding PPP loans, commercial loans increased $5,735,000. Retail loan balances increased $2,192,000 comparing March 31, 2022 to December 31, 2021. QNB continues to provide solutions to customers experiencing financial hardship caused by the COVID-19 Pandemic. As of March 31, 2022 QNB had modifications to two loans in the commercial portfolio, with balances totaling $321,000, and had no modifications to the retail loan portfolio, related to the COVID-19 Pandemic. At March 31, 2022, QNB had 32 PPP loans totaling $6,013,000 reported in commercial and industrial loans. In 2020, the Bank originated $82,475,000 in PPP loans, enabling 660 businesses to maintain their payrolls and stay in operation. Of this first round of funding, 653 loans have been forgiven in full and $80,497,000 in balances have been forgiven. The Bank originated 315 PPP loans, or $35,021,000, during the second round of funding which started in January 2021. Second-draw customers made up 244 of these loans, or $32,240,000, and one-draw customers made of the remaining 71 loans, or $2,781,000. Of this second round of funding, 290 loans have been forgiven in full and $29,449,000 in balances have been forgiven. Excluding PPP loans net of deferred fees at March 31, 2022 and at December 31, 2021, loans receivable would have increased $7,900,000, or 0.9%, since year-end 2021.

Deposits grew $2,008,000 from December 31, 2021 to March 31, 2022. Non-interest-bearing demand deposits decreased $982,000, with balances of $242,024,000 at March 31, 2022 compared with $243,006,000 at year-end 2021. Interest-bearing demand balances, excluding municipal deposits, increased $8,248,000, or 2.4%, to $347,655,000, with increases in all personal checking products and in the business checking product. The $218,000 decrease in money market accounts was limited primarily to business products. The $21,531,000 increase in savings was partially offset by the decline in time deposits as balances were moved to more liquid accounts. Total time deposits declined $4,718,000 from December 31, 2021 to March 31, 2022. Municipal deposit balances decreased $21,853,000, to $106,939,000, during the first quarter of 2022. Municipal deposits can be volatile depending on the timing of deposits and withdrawals, and the cash flow needs of the school districts or municipalities. Municipal deposits increase as tax money is received from the local school districts during first and second quarters and it is anticipated that these funds will flow out for the

QNB CORP. AND SUBSIDIARY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

subsequent twelve months as the schools use the funds for operations. These deposits provide incremental income as they are invested in short-term investment securities but will further reduce the net interest margin as the spread earned is significantly less than the current net interest margin.

Short-term borrowings increased 12.1%, from $68,476,000 at December 31, 2021 to $76,738,000 at March 31, 2022. Commercial sweep accounts comprised most of balance of the short-term borrowing in both periods and increased $3,371,000; these funds may be volatile based on businesses’ receipt and disbursement of funds and is offset by business non-interest-bearing demand accounts. There were $4,891,000 in overnight borrowings from FHLB at March 31, 2022 and none at December 31, 2021. In 2020, QNB borrowed long-term debt from the FHLB of $10,000,000 to lock in a rate at a low yield.

LIQUIDITY

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

Additional sources of liquidity are provided by the Bank’s membership in the FHLB. At March 31, 2022 the Bank had a maximum borrowing availability with the FHLB of approximately $343,789,000, which is net of the $10,000,000 in long-term borrowings, short-term borrowings of $4,891,000, a $350,000 letter of credit and accrued interest payable and credit enhancements. The maximum borrowing depends upon qualifying collateral assets and the Bank’s asset quality and capital adequacy. In addition, the Bank maintains unsecured Federal funds lines with five correspondent banks totaling $101,000,000. At March 31, 2022 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.

Liquid sources of funds, including cash, available-for-sale and equity investment securities, and loans held-for-sale have decreased $34,402,000 since December 31, 2021, totaling $682,758,000 at March 31, 2022. Growth in deposits since year-end 2021 has been used to fund loans. Excess cash was invested in debt securities, primarily amortizing securities, and to cover operating expenses. Management expects these liquid sources will be adequate to meet normal fluctuations in loan demand or deposit withdrawals. The investment portfolio is expected to continue to provide sufficient liquidity, as municipal bonds are called or mature and cash flow on mortgage-backed and CMO securities continues to be steady.

Approximately $243,162,000 and $264,154,000 of available-for-sale debt securities at March 31, 2022 and December 31, 2021, respectively, were pledged as collateral for repurchase agreements and deposits of public funds. The level of pledged securities corresponds with the municipal deposit and repurchase agreement balances.

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

CAPITAL ADEQUACY

A strong capital position is fundamental to support continued growth and profitability and to serve the needs of depositors. QNB's shareholders' equity at March 31, 2022 was $102,498,000, or 6.22% of total assets, compared with shareholders' equity of $136,494,000, or 8.16% of total assets, at December 31, 2021. Shareholders’ equity at March 31, 2022 included a negative adjustment of $40,341,000 compared to a negative adjustment of $3,740,000 at December 31, 2021, related to unrealized holding losses, net of taxes, on investment securities available-for-sale. Without these adjustments, shareholders' equity to total assets would have been 8.46% and 8.36% at March 31, 2022 and December 31, 2021, respectively.

QNB CORP. AND SUBSIDIARY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

Average shareholders' equity and average total assets were $ 141 , 986 ,000 and $ 1 , 675 , 385 ,000 for the three months e nded March 31, 2022 , an increase of 8.8 % and 14.2 %, respectively, from the averages for the three months ende d March 31 , 20 2 1 . The ratio of average total equity to average total assets was 8.47 % for the three months ended March 31 , 202 2 compared to 8.90 % for the same period in 20 2 1 .

Retained earnings at March 31, 2022 were impacted by three months of net income totaling $3,710,000 offset by dividends declared and paid of $1,279,000 for the three-month period. QNB offers a Dividend Reinvestment and Stock Purchase Plan (the “Plan”) to provide participants a convenient and economical method for investing cash dividends paid on the Company’s common stock in additional shares. The Plan also allows participants to make additional cash purchases of stock. Stock purchases under the Plan contributed $227,000 to capital during the three months ended March 31, 2022.

The Board of Directors has authorized the repurchase of up to 200,000 shares of QNB common stock in open market or privately negotiated transactions. The repurchase authorization does not bear a termination date. As of March 31, 2022, 102,000 shares have been repurchased since the initial authorization at an average price of $24.93 and a total cost of $2,543,000.

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 capital. Risk-based capital ratios are expressed as a percentage of risk-weighted assets. Risk-weighted assets are determined by assigning various weights to all assets and off-balance sheet arrangements, such as letters of credit and loan commitments, based on associated risk.

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

The following table sets forth consolidated information for QNB:

	March 31,			December 31,
Capital Analysis	2022			2021
Regulatory Capital
Shareholders' equity	$	102,498		$	136,494
Net unrealized securities losses, net of tax		40,341			3,740
Deferred tax assets on net operating loss		—			—
Disallowed intangible assets		(8	)		(8	)
Common equity tier 1 capital		142,831			140,226

Tier 1 capital		142,831			140,226
Allowable portion: Allowance for loan losses and reserve for unfunded commitments		11,329			11,275
Total regulatory capital	$	154,160		$	151,501
Risk-weighted assets	$	1,146,662		$	1,113,887
Quarterly average assets for leverage capital purposes	$	1,675,385		$	1,672,259

	March 31,			December 31,
Capital Ratios	2022			2021
Common equity tier 1 capital / risk-weighted assets		12.46	%		12.59	%
Tier 1 capital / risk-weighted assets		12.46			12.59
Total regulatory capital / risk-weighted assets		13.44			13.60
Tier 1 capital / average assets (leverage ratio)		8.52			8.39

At March 31, 2022, common equity Tier 1, Tier 1 capital, and total regulatory capital ratios were fairly level with December 31, 2021. The Company remains well-capitalized by all applicable regulatory requirements as of March 31, 2022.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

MARKET RISK MANAGEMENT

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

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

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

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

The following table shows the estimated impact of changes in interest rates on net interest income as of March 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
Changes in Interest rates	March 31,
(in basis points)	2022			2021
+300		-16.85	%		-2.30	%
+200		-10.53	%		-0.52	%
+100		-4.57	%		0.26	%
-100		-1.49	%		-5.85	%
-200		-5.71	%		-10.29	%

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 March 31, 2022, QNB did not have any hedging transactions in place such as interest rate swaps, caps or floors

ITEM 4. CONTROLS AND PROCEDURES

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

QNB CORP. AND SUBSIDIARY

PART II. OTHER INFORMATION

March 31, 2022

Item 1. Legal Proceedings

No material proceedings.

Item 1A. Risk Factors

There were no material changes to the Risk Factors described in Item 1A in QNB’s Annual Report on Form 10-K for the period ended December 31, 2021.

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

QNB repurchased 2,000 shares of its common stock during the quarter ended March 31, 2022. The following provides certain information relating to QNB's stock repurchase plan.

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

January 1, 2022 through January 31, 20222		1,000	$	36.16		1,000		99,000
February 1, 2022 through February 28, 2022		1,000		37.99		1,000		98,000
March 1, 2022 through March 31, 2022		—		—		—		98,000
Total		2,000	$	—		2,000		98,000

(1)	Transactions are reported as of trade dates.

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

(3)	The total number of shares approved for repurchase under QNB’s current stock repurchase plan is 200,000.

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

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

Item 3. Default Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

None.

Item 5. Other Information

None.

Item 6. Exhibits

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

Exhibit 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 . )

Exhibit 31.1		Section 302 Certification of Chief Executive Officer

Exhibit 31.2		Section 302 Certification of Chief Financial Officer

Exhibit 32.1		Section 1350 Certification of Chief Executive Officer

Exhibit 32.2		Section 1350 Certification of Chief Financial Officer

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

No.		Description

101.SCH		iXBRL Taxonomy Extension Schema Document.*
101.CAL		iXBRL Taxonomy Extension Calculation Linkbase Document.*
101.LAB		iXBRL Taxonomy Extension Label Linkbase Document.*
101.PRE		iXBRL Taxonomy Extension Presentation Linkbase Document.*
101.DEF		iXBRL Taxonomy Extension Definitions Linkbase Document.*
104		Cover Page Interactive Data File (formatted as inline iXBRL and contained in Exhibit 101)

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

SIGNATURES

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

	QNB Corp.

Date: May 9, 2022	By:	/s/ David W. Freeman
		David W. Freeman
		Chief Executive Officer

Date: May 9, 2022	By:	/s/ Janice McCracken Erkes
		Janice McCracken Erkes
		Chief Financial Officer

Date: May 9, 2022	By:	/s/ Mary E. Liddle
		Mary E. Liddle
		Chief Accounting Officer, QNB Bank

TABLE OF CONTENTS

Item 2. Management's Discussion and Analysis Of Financial Condition and Results Of Operations Item 3. Quantitative and Qualitative Disclosure About Market Risk Item 4. Controls and Procedures Part II. Other Information Item 1. Legal Proceedings Item 1A. Risk Factors Item 2. Unregistered Sales Of Equity Securities and Use Of Proceeds Item 3. Default Upon Senior Securities Item 4. Mine Safety Disclosures Item 5. Other Information Item 6. Exhibits

Exhibits

Exhibit 3.1 Articles of Incorporation of Registrant, as amended. (Incorporated by reference to Exhibit 3(i) of Registrants Annual Report on Form 10-K, SEC File No. 0-17706, filed with the Commission on September 13, 2015.) Exhibit 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.) Exhibit 31.1 Section 302 Certification of Chief Executive Officer Exhibit 31.2 Section 302 Certification of Chief Financial Officer Exhibit 32.1 Section 1350 Certification of Chief Executive Officer Exhibit 32.2 Section 1350 Certification of Chief Financial Officer

QNBC 10-Q Quarter ended March 31, 2022

Exhibits