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☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended
September 30,
2025
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
to
Commission file number
0-17706
QNB Corp.
(Exact Name of Registrant as Specified in Its Charter)
Pennsylvania
23-2318082
(State or Other Jurisdiction of
Incorporation or Organization)
(I.R.S. Employer
Identification No.)
15 North Third Street
,
P.O. Box 9005
Quakertown
,
PA
18951-9005
(Address of Principal Executive Offices)
(Zip Code)
(
215
)
538-5600
Registrant's Telephone Number, Including Area Code
Not Applicable
Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report
Securities registered pursuant to Section 12(b) of the Act: None.
Title of each class
Trading
Symbol(s)
Name of each exchange on which registered
Common Stock
QNBC
N/A
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes
☒ No ☐
Indicate by check mark whether the registrant has submitted electronically 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.
Available-for-sale (amortized cost $
603,989
and $
626,391
)
538,318
546,559
Restricted investment in stocks
4,868
5,436
Loans held-for-sale
—
664
Loans receivable
1,246,529
1,216,048
Allowance for credit losses on loans
(
9,255
)
(
8,744
)
Loans receivable, net
1,237,274
1,207,304
Bank-owned life insurance
12,192
11,937
Premises and equipment, net
16,719
17,255
Accrued interest receivable
5,002
4,965
Net deferred tax assets
15,351
18,325
Other assets
7,189
7,736
Total assets
$
1,903,244
$
1,870,894
Liabilities
Deposits
Demand, non-interest bearing
$
189,492
$
183,499
Interest-bearing demand
566,093
537,846
Money market
264,009
250,293
Savings
274,659
275,445
Time less than $100
173,901
178,163
Time $100 through $250
156,116
156,614
Time greater than $250
57,270
46,681
Total deposits
1,681,540
1,628,541
Short-term borrowings
48,703
53,844
Long-term debt
—
30,000
Subordinated debt
39,218
39,068
Accrued interest payable
3,833
7,580
Other liabilities
8,463
8,512
Total liabilities
1,781,757
1,767,545
Shareholders' Equity
Common stock, par value $
0.625
per share;
authorized
10,000,000
shares;
3,936,511
shares and
3,905,302
shares issued;
3,727,825
and
3,696,616
shares outstanding
2,460
2,441
Surplus
28,762
27,633
Retained earnings
145,835
139,958
Accumulated other comprehensive loss, net of tax
(
51,533
)
(
62,646
)
Treasury stock, at cost;
208,686
and
208,686
shares
(
4,037
)
(
4,037
)
Total shareholders' equity
121,487
103,349
Total liabilities and shareholders' equity
$
1,903,244
$
1,870,894
The accompanying notes are an integral part of the consolidated financial statements.
2
QNB Corp. and Subsidiary
CONSOLIDATED STAT
EMENTS OF INCOME
For the Three Months Ended September 30,
For the Nine Months Ended September 30,
(in thousands, except per share data - unaudited)
2025
2024
2025
2024
Interest income
Interest and fees on loans
$
18,386
$
16,736
$
53,768
$
47,976
Interest and dividends on available-for-sale & equity securities:
Taxable
3,917
3,550
11,900
10,289
Tax-exempt
353
355
1,061
1,071
Interest on interest-bearing balances and other interest income
862
1,304
2,097
2,523
Total interest income
23,518
21,945
68,826
61,859
Interest expense
Interest on deposits
Interest-bearing demand
2,630
2,721
7,345
7,230
Money market
1,852
2,132
5,532
6,196
Savings
899
896
2,693
2,769
Time less than $100
1,583
1,846
4,870
5,027
Time of $100 through $250
1,545
1,777
4,700
4,790
Time greater than $250
560
573
1,605
1,709
Interest on short-term borrowings
514
186
1,659
1,010
Interest on long-term debt
—
364
423
918
Interest on subordinated debt
937
323
2,812
323
Total interest expense
10,520
10,818
31,639
29,972
Net interest income
12,998
11,127
37,187
31,887
Provision for credit losses
93
159
497
187
Net interest income after provision for credit losses
12,905
10,968
36,690
31,700
Non-interest income
Net gain (loss) on sales and calls of available-for-sale and equity securities
—
224
—
(
495
)
Unrealized gain on equity securities
—
143
—
1,129
Fees for services to customers
521
469
1,453
1,316
ATM and debit card
776
691
2,156
2,032
Retail brokerage and advisory
196
139
477
358
Bank-owned life insurance
86
80
254
252
Merchant
79
84
236
266
Net gain on sale of loans
41
19
63
32
Other
148
118
444
378
Total non-interest income
1,847
1,967
5,083
5,268
Non-interest expense
Salaries and employee benefits
5,248
4,650
15,531
14,662
Net occupancy
569
540
1,729
1,653
Furniture and equipment
1,119
991
3,376
2,874
Marketing
214
197
653
691
Third party services
833
661
2,283
1,946
Telephone, postage and supplies
127
120
371
369
State taxes
278
149
781
465
FDIC insurance premiums
243
341
786
1,028
Merger-related expenses
519
—
519
—
Other
1,032
987
3,084
2,715
Total non-interest expense
10,182
8,636
29,113
26,403
Income before income taxes
4,570
4,299
12,660
10,565
Provision for income taxes
922
961
2,551
2,168
Net income
$
3,648
$
3,338
$
10,109
$
8,397
Earnings per share - basic
$
0.98
$
0.91
$
2.72
$
2.29
Earnings per share - diluted
$
0.98
$
0.91
$
2.72
$
2.29
Cash dividends per share
$
0.38
$
0.37
$
1.14
$
1.11
The accompanying notes are an integral part of the consolidated financial statements.
3
QNB Corp. and Subsidiary
CONSOLIDATED STATEMENTS
OF COMPREHENSIVE INCOME
(in thousands - unaudited)
2025
2024
For the Three Months Ended September 30,
Before
tax
amount
Tax
expense (benefit)
Net of
tax
amount
Before
tax
amount
Tax
expense (benefit)
Net of
tax
amount
Net income
$
4,570
$
922
$
3,648
$
4,299
$
961
$
3,338
Other comprehensive income:
Net unrealized holding gains on available-for-sale securities:
Unrealized holding gains arising during the period
7,234
1,558
5,676
7,468
1,237
6,231
Reclassification adjustment for gains included in net income
—
—
—
—
—
—
Other comprehensive income
7,234
1,558
5,676
7,468
1,237
6,231
Total comprehensive income
$
11,804
$
2,480
$
9,324
$
11,767
$
2,198
$
9,569
(in thousands - unaudited)
For the Nine Months Ended September 30,
2025
2024
Before
tax
amount
Tax
expense
(benefit)
Net of
tax
amount
Before
tax
amount
Tax
expense
(benefit)
Net of
tax
amount
Net income
$
12,660
$
2,551
$
10,109
$
10,565
$
2,168
$
8,397
Other comprehensive income:
Net unrealized holding gains on available-for-sale securities:
Unrealized holding gains arising during the period
14,161
3,048
11,113
10,294
1,830
8,464
Reclassification adjustment for gains included in net income
—
—
—
1,096
230
866
Other comprehensive income
14,161
3,048
11,113
11,390
2,060
9,330
Total comprehensive income
$
26,821
$
5,599
$
21,222
$
21,955
$
4,228
$
17,727
The accompanying notes are an integral part of the consolidated financial statements.
4
QNB Corp. and Subsidiary
CONSOLIDATED STATEMENT O
F SHAREHOLDERS' EQUITY
For the Three Months Ended September 30, 2025 and 2024
Accumulated
Number of
Other
(unaudited)
Shares
Common
Retained
Comprehensive
Treasury
(in thousands, except share and per share data)
Outstanding
Stock
Surplus
Earnings
Loss
Stock
Total
Balance, July 1, 2025
3,718,573
$
2,455
$
28,459
$
143,601
$
(
57,209
)
$
(
4,037
)
$
113,269
Net income
—
—
3,648
—
—
3,648
Other comprehensive income, net of tax
—
—
—
5,676
—
5,676
Cash dividends declared ($
0.38
per share)
—
—
(
1,414
)
—
—
(
1,414
)
Stock issued in connection with dividend
reinvestment and stock purchase plan
5,707
3
199
—
—
—
202
Stock issued for employee stock purchase plan
—
—
—
—
—
—
—
Stock issued for options exercised
980
1
27
—
—
—
28
Stock issued for Non-Employee Director Compensation
2,565
1
(
1
)
—
—
—
—
Stock-based compensation expense
—
—
78
—
—
—
78
Balance, September 30, 2025
3,727,825
$
2,460
$
28,762
$
145,835
$
(
51,533
)
$
(
4,037
)
$
121,487
Accumulated
Number of
Other
(unaudited)
Shares
Common
Retained
Comprehensive
Treasury
(in thousands, except share and per share data)
Outstanding
Stock
Surplus
Earnings
Loss
Stock
Total
Balance, July 1, 2024
3,677,967
$
2,429
$
27,036
$
136,295
$
(
64,838
)
$
(
4,037
)
$
96,885
Net income
—
—
3,338
—
—
3,338
Other comprehensive income, net of tax
—
—
—
6,231
—
6,231
Cash dividends declared ($
0.37
per share)
—
—
(
1,362
)
—
—
(
1,362
)
Stock issued in connection with dividend
reinvestment and stock purchase plan
6,945
5
201
—
—
—
206
Stock issued for employee stock purchase plan
—
—
—
—
—
—
—
Stock issued for Non-Employee Director Compensation
1,530
1
(
1
)
—
—
—
—
Stock-based compensation expense
—
—
42
—
—
—
42
Balance, September 30, 2024
3,686,442
$
2,435
$
27,278
$
138,271
$
(
58,607
)
$
(
4,037
)
$
105,340
The accompanying notes are an integral part of the consolidated financial statements.
5
For the Nine Months Ended September 30, 2025 and 2024
Accumulated
Number of
Other
(unaudited)
Shares
Common
Retained
Comprehensive
Treasury
(in thousands, except share and per share data)
Outstanding
Stock
Surplus
Earnings
Loss
Stock
Total
Balance, January 1, 2025
3,696,616
$
2,441
$
27,633
$
139,958
$
(
62,646
)
$
(
4,037
)
$
103,349
Net income
—
—
10,109
—
—
10,109
Other comprehensive income, net of tax
—
—
—
11,113
—
11,113
Cash dividends declared
($1.14
per share)
—
—
(
4,232
)
—
—
(
4,232
)
Stock issued in connection with dividend
reinvestment and stock purchase plan
18,336
11
624
—
—
—
635
Stock issued for employee stock purchase plan
2,950
2
83
—
—
—
85
Stock issued for options exercised
6,305
4
182
—
186
Stock issued for Non-Employee Director Compensation
3,618
2
(
2
)
—
—
—
—
Stock-based compensation expense
—
—
242
—
—
—
242
Balance, September 30, 2025
3,727,825
$
2,460
$
28,762
$
145,835
$
(
51,533
)
$
(
4,037
)
$
121,487
Accumulated
Number of
Other
(unaudited)
Shares
Common
Retained
Comprehensive
Treasury
(in thousands, except share and per share data)
Outstanding
Stock
Surplus
Earnings
Loss
Stock
Total
Balance, January 1, 2024
3,653,254
$
2,414
$
26,439
$
133,945
$
(
67,937
)
$
(
4,037
)
$
90,824
Net income
—
—
8,397
—
—
8,397
Other comprehensive income, net of tax
—
—
—
9,330
—
9,330
Cash dividends declared
($1.11
per share)
—
—
(
4,071
)
—
—
(
4,071
)
Stock issued in connection with dividend
reinvestment and stock purchase plan
26,348
17
640
—
—
—
657
Stock issued for employee stock purchase plan
3,780
2
72
—
—
—
74
Stock issued for Non-Employee Director Compensation
3,060
2
(
2
)
—
—
—
—
Stock-based compensation expense
—
—
129
—
—
—
129
Balance, September 30, 2024
3,686,442
$
2,435
$
27,278
$
138,271
$
(
58,607
)
$
(
4,037
)
$
105,340
The accompanying notes are an integral part of the consolidated financial statements.
6
QNB Corp. and Subsidiary
CONSOLIDATED STATEM
ENTS OF CASH FLOWS
(in thousands, unaudited)
For the Nine Months Ended September 30,
2025
2024
Operating Activities
Net income
$
10,109
$
8,397
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
1,281
1,216
Provision for credit losses
497
187
Net loss on calls and sales of debt and equity securities
—
495
Net unrealized gain on equity securities
—
(
1,129
)
Net gain on sale of loans
(
63
)
(
32
)
Proceeds from sales of residential mortgages held-for-sale
2,254
1,466
Origination of residential mortgages held-for-sale
(
3,140
)
(
1,179
)
Increase in cash surrender value of bank-owned life insurance
(
254
)
(
252
)
Stock-based compensation expense
242
129
Deferred income tax (benefit) expense
(
74
)
389
Net increase in income taxes payable
659
66
Net (increase) decrease in accrued interest receivable
(
37
)
1,629
Fair value remeasurements on interest rate swap
(
141
)
(
128
)
Amortization of mortgage servicing rights and change in valuation allowance
35
34
Net amortization of premiums and discounts on investment securities
830
1,044
Net amortization of deferred costs on subordinated debt
150
17
Net decrease in accrued interest payable
(
3,747
)
(
556
)
Operating lease payments
(
475
)
(
474
)
Increase in other assets
(
148
)
(
379
)
Increase (decrease) in other liabilities
357
(
1,240
)
Net cash provided by operating activities
8,335
9,700
Investing Activities
Proceeds from payments, maturities and calls of investments available-for-sale
81,538
38,693
Proceeds from the sale of investments available-for-sale
—
13,139
Proceeds from the sale of equity securities
—
6,050
Purchases of investments available-for-sale
(
59,825
)
(
56,223
)
Purchases of equity securities
—
(
1,170
)
Proceeds from redemption of investment in restricted stock
4,174
45
Purchases of restricted stock
(
3,606
)
(
1,400
)
Net increase in loans
(
28,860
)
(
77,886
)
Net purchases of premises and equipment
(
670
)
(
2,769
)
Redemption of Bank Owned Life Insurance investment
—
341
Net cash used in investing activities
(
7,249
)
(
81,180
)
Financing Activities
Net increase in non-interest-bearing deposits
5,993
5,142
Net increase in interest-bearing deposits
47,006
132,429
Net decrease in short-term borrowings
(
5,141
)
(
71,176
)
Proceeds from long-term debt
—
10,000
Repayments of long-term debt
(
30,000
)
—
Proceeds from subordinated debt
—
40,000
Cash dividends paid, net of reinvestment
(
3,742
)
(
3,597
)
Proceeds from issuance of common stock
416
257
Net cash provided by financing activities
14,532
113,055
Increase in cash and cash equivalents
15,618
41,575
Cash and cash equivalents at beginning of year
50,713
62,657
Cash and cash equivalents at end of period
$
66,331
$
104,232
Supplemental Cash Flow Disclosures
Interest paid
$
24,866
$
30,528
Net income taxes paid, net of refunds
1,966
1,712
Non-cash transactions:
Trade-date settlement for purchased securities
—
(
6,085
)
Right-of-use assets obtained in exchange for new operating lease liabilities
—
457
The accompanying notes are an integral part of the consolidated financial statements.
7
QNB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements include the accounts of QNB Corp. and its wholly-owned subsidiary, QNB Bank (the “Bank”). The consolidated entity is referred to herein as “QNB” or the “Company”. All significant intercompany accounts and transactions are eliminated in the consolidated financial statements.
These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in QNB's 2024 Annual Report incorporated in the Form 10-K. Operating results for the three- and nine-month periods ended September 30, 2025 are not necessarily indicative of the results that may be expected for the year ending December 31, 2025.
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 September 30, 2025 for items that should potentially be recognized or disclosed in these consolidated financial statements and has not identified any subsequent event.
2. RECENT ACCOUNTING PRONOUNCEMENTS
On March 6, 2024, the Securities and Exchange Commission (SEC) adopted final rules requiring registrants to disclose climate-related information in registration statements and annual reports. These enhanced and standardized disclosures include material climate-related risks, board oversight and risk management activities descriptions, material impacts of these risks on a registrant’s strategy, business model and outlook, and any material climate-related targets or goals. The SEC’s climate-related disclosure rules are the subject of litigation by certain states and private parties, which has been consolidated in the federal Eighth Circuit Court of Appeals. The SEC previously stayed effectiveness of the rules pending completion of that litigation. On March 27, 2025, the SEC announced that it had voted to withdraw its defense of its climate-related disclosure rules. On April 4, 2025, the intervenor states filed a motion to hold the litigation in abeyance until the SEC determines whether it will amend or rescind the climate-related disclosure rules through the rulemaking process. The SEC has not at this time indicated whether it is considering amending or rescinding the proposed rules. Management intends to continue to monitor these developments and their potential impact on the Company.
On June 26, 2024, the Financial Accounting Standards Board (FASB) voted to issue final rules this year that will require public companies to provide enhanced detailed information about their income statement expenses. Companies will be required to break out certain expense items, such as employee compensation and purchases of inventory, in footnotes to their income statements. The standard will apply to fiscal years that start after December 15, 2026 and interim periods within fiscal years beginning after December 15, 2027. Early adoption will be permitted prospectively for the disclosure requirements, with optional retrospective application, for both interim and year-end reporting periods.
In 2025, QNB
adopted
FASB issued Accounting Standards Update (ASU) No.
2023-09
, "Income Taxes (Topic 740): Improvements to Income Tax Disclosures." The amendments in this ASU enhance annual disclosure for the rate reconciliation and income taxes paid disclosures improving the transparency of income tax disclosures and require: (1) consistent categories and greater disaggregation of information in the rate reconciliation; and (2) income taxes paid disaggregated by jurisdiction. The adoption of this ASU is for annual periods and does
no
t have a material impact on its financial statements.
8
3. STOCK-BASED COMPENSATION AND SHAREHOLDERS’ EQUITY
All Stock-based compensation plans are administered by a Board committee (the “Committee”).
2015 Stock Incentive Plan (the "2015 Plan"), under which both qualified and non-qualified stock options were granted periodically to certain employees, was authorized to issue
300,000
shares. 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 2015 Plan expired February 24, 2025.
The 2025 Stock Incentive Plan (the "2025 Plan"), authorizing the issuance of
500,000
shares, was approved at the Company's 2025 Meeting of Shareholders. Under the 2025 Plan, qualified stock options may be granted to certain employees and non-qualified stock options, restricted stock and awards may be granted to certain employees and non-employee directors. There were no grants under the 2025 Plan. Compensation cost will be measured using the fair value of an award on the grant date and recognized over the service period, which is usually the vesting period. The 2025 Plan will expire on May 19, 2035.
Stock-based compensation expense related to the 2015 Plan was $
35,000
and $
24,000
for the three months ended September 30, 2025 and 2024, respectively.
Stock-based compensation expense related to the 2015 Plan was $
100,000
and $
63,000
for the nine months ended September 30, 2025 and 2024, respectively.
At September 30, 2025, there was approximately $
540,000
of unrecognized compensation cost related to unvested share-based compensation award grants that is expected to be recognized over the next
30
months.
Options were granted to certain employees at prices equal to the market value of the stock on the date the options are granted. The time period during which any option is exercisable under the 2015 Plan was determined by the Committee but shall not commence before the expiration of
six months
after the date of grant. The 2015 Plan was amended, effective January 1, 2023, to increase the maximum term of any options granted under the plan from five years to
ten years
, and to also require that awards granted under the Plan will vest
20
% each consecutive year commencing on the first anniversary date of the award unless otherwise specified in an award agreement. As of September 30, 2025 there were
321,525
options granted (including canceled awards returned to the Plan and reissued),
115,500
options forfeited,
27,130
options exercised, and
178,895
options outstanding under this Plan.
The following assumptions were used in the option pricing model in determining the fair value of options granted during the period:
For the Nine Months Ended September 30,
2025
2024
Risk free interest rate
4.44
%
3.98
%
Dividend yield
4.36
%
5.97
%
Volatility
24.96
%
20.96
%
Expected life (years)
6.50
8.19
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 nine months ended September 30, 2025 and 20
24 was $
6.64
and
$
3.08
, respectively.
Stock option activity during the nine months ended September 30, 2025 and 2024 is as follows:
Number
of options
Weighted
average
exercise
price
Weighted
average
remaining
contractual term
(in years)
Aggregate
intrinsic value
Outstanding at December 31, 2024
137,275
$
30.51
$
—
Granted
68,975
33.50
—
Exercised
(
6,305
)
29.53
30
Forfeited
(
21,050
)
36.04
—
Outstanding at September 30, 2025
178,895
$
31.05
6.87
$
801
Exercisable at September 30, 2025
59,300
$
32.87
3.03
$
190
9
Number
of options
Weighted
average
exercise
price
Weighted
average
remaining
contractual term
(in years)
Aggregate
intrinsic value
Outstanding at December 31, 2023
121,550
$
34.29
$
—
Granted
40,000
23.40
—
Exercised
—
—
—
Forfeited
(
24,275
)
37.69
—
Outstanding at September 30, 2024
137,275
$
30.51
5.49
$
2,444
Exercisable at September 30, 2024
45,315
$
33.74
2.01
$
—
QNB maintains a 2021 Employee Stock Purchase Plan (the "2021 ESPP") offering eligible employees an opportunity to purchase shares of QNB Corp. common stock at a
10
% discount from the lesser of fair market value on the first or last day of each offering period (as defined by the Plan). There was $
13,000
and $
13,000
stock-based compensation expense related to the 2021 ESPP for the nine months ended September 30, 2025 and 2024, respectively. The 2021 ESPP authorized the issuance of
30,000
shares. As of September 30, 2025, there were
5,817
shares remaining for issuance under the 2021 ESPP Plan. The 2021 ESPP Plan expires
May 31, 2026
.
The QNB Corp. 2023 Non-Employee Director Compensation Plan was approved by shareholders on May 23, 2023 (The "Director Compensation Plan"). The Director Compensation Plan authorized the issuance of
50,000
shares, is effective January 1, 2023 and expires on January 1, 2033. The Plan initially required each non-employee director of QNB, or any subsidiary of QNB designated by the Board (including QNB Bank), to receive $
8,000
of their total annual compensation for service as a director in the form of the QNB’s common stock; this amount was increased to $
19,230
for 2025 to align director compensation with our peers. Under the Director Compensation Plan, commencing with the six-month period ended June 30, 2023, each non-employee director will receive, in addition to any cash compensation otherwise payable, a semi-annual grant of such number of shares of the QNB’s common stock determined by dividing (i) the Semi-Annual Stock Payment Amount (which is one-half of the annual compensation paid in stock) by (ii) the market value of a share of common stock determined as of June 30 or December 31 of any year, as applicable. Payments will be made under the Director Compensation Plan on
ly to non-employee directors in office on the applicable payment date. As of September 30, 2025,
8,418
shares were issued to non-employee directors and there were
41,582
shares remaining under the Plan. Stock-based compensation expense related to the Director Compensation Plan was $
129,000
for the nine mon
ths ended September 30, 2025 and $
53,000
for the nine months ended September 30, 2024.
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 September 30,
For the Nine Months Ended September 30,
2025
2024
2025
2024
Numerator for basic and diluted earnings per share - net income
$
3,648
$
3,338
$
10,109
$
8,397
Denominator for basic earnings per share - weighted
average shares outstanding
3,721,501
3,679,799
3,710,824
3,666,937
Effect of dilutive securities - employee stock options
14,492
2,974
12,372
—
Denominator for diluted earnings per share - adjusted
weighted average shares outstanding
3,735,993
3,682,773
3,723,196
3,666,937
Earnings per share - basic
$
0.98
$
0.91
$
2.72
$
2.29
Earnings per share - diluted
0.98
0.91
2.72
2.29
There were
92,075
and
97,275
stock options that were anti-dilutive for the three-month periods ended September 30, 2025 and 2024, respectively. There were
108,775
and
137,275
stock options that were anti-dilutive for the nine-month periods ended September 30, 2025 and 2024, respectively. These stoc
k 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 27, 2021 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
no
shares repurchased during the nine months ended September 30, 2025 and 2024. As of September 30, 2025,
102,000
shares were repurchased under this authorization at an average price of $
24.93
and a total cost of approximately $
2,543,000
.
10
5. COMPREHENSIVE INCOME (LOSS)
The following shows the components of accumulated other comprehensive loss at September 30, 2025 and December 31, 2024:
September 30,
December 31,
2025
2024
Unrealized net holding losses on available-for-sale
securities
$
(
65,671
)
$
(
79,832
)
Tax effect
14,138
17,186
Accumulated other comprehensive loss, net of tax
$
(
51,533
)
$
(
62,646
)
The following table presents amounts reclassified out of accumulated other comprehensive loss for the three and nine months ended September 30, 2025 and 2024:
For the Three Months Ended September 30,
Amount reclassified from
accumulated other
comprehensive loss
Details about accumulated other comprehensive income (loss)
2025
2024
Affected line item in statement of income
Unrealized net holding losses on available-for-sale securities
$
—
$
—
Net gain (loss) on sales of investments available-for-sale
Tax effect
—
—
Provision for income taxes
Total reclassification out of accumulated other comprehensive gain (loss), net of tax
$
—
$
—
Net of tax
For the Nine Months Ended September 30,
Amount reclassified from
accumulated other
comprehensive loss
Details about accumulated other comprehensive loss
2025
2024
Affected line item in statement of income
Unrealized net holding losses on available-for-sale securities
$
—
$
(
1,096
)
Net gain (loss) on sales of investments available-for-sale
Tax effect
—
230
Provision for income taxes
Total reclassification out of accumulated other comprehensive loss, net of tax
$
—
$
(
866
)
Net of tax
6. INVESTMENT SECURITIES
Available-For-Sale Securities
The amortized cost and estimated fair values of investment securities available-for-sale at September 30, 2025 and December 31, 2024 were as follows:
Fair
Gross unrealized holding
Gross unrealized holding
Gross unrealized fair value hedge
Amortized
September 30, 2025
value
gains
losses
gains (1)
cost
U.S. Treasury
$
19,480
$
3
$
(
1
)
$
—
$
19,478
U.S. Government agency
70,210
—
(
5,756
)
—
75,966
State and municipal
86,788
—
(
17,322
)
(
758
)
104,868
U.S. Government agencies and sponsored enterprises (GSEs):
Mortgage-backed
185,554
—
(
28,022
)
(
1,597
)
215,173
Collateralized mortgage obligations (CMOs)
152,618
38
(
12,109
)
—
164,689
Corporate debt and money market funds
23,668
154
(
301
)
—
23,815
Total investment debt securities available-for-sale
$
538,318
$
195
$
(
63,511
)
$
(
2,355
)
$
603,989
(1) See Note 12
11
Gross
Gross
Gross
unrealized
unrealized
unrealized
Fair
holding
holding
fair value hedge
Amortized
December 31, 2024
value
gains
losses
losses (1)
cost
U.S. Treasury
$
18,010
$
6
$
—
$
—
$
18,004
U.S. Government agency
66,908
—
(
9,051
)
—
75,959
State and municipal
86,352
—
(
20,631
)
1,566
105,417
U.S. Government agencies and sponsored enterprises (GSEs):
Mortgage-backed
198,510
—
(
38,902
)
3,264
234,148
Collateralized mortgage obligations (CMOs)
161,646
31
(
15,821
)
—
177,436
Corporate debt and money market funds
15,133
10
(
304
)
—
15,427
Total investment debt securities available-for-sale
$
546,559
$
47
$
(
84,709
)
$
4,830
$
626,391
(1) See Note 12
The amortized cost and estimated fair value of securities available-for-sale by contractual maturity at September 30, 2025 is 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. Maturities for mortgage-backed securities and collateralized mortgage obligations are dependent upon the interest rate environment and prepayments of the underlying loans.
September 30, 2025
Fair value
Amortized cost
Due in one year or less
$
21,782
$
21,790
Due after one year through five years
70,122
75,244
Due after five years through ten years
53,770
59,076
Due after ten years
54,472
68,017
200,146
224,127
Residential mortgage-backed securities
185,554
215,173
Collateralized mortgage obligations
152,618
164,689
Total
$
538,318
$
603,989
Proceeds from sales of investment securities available-for-sale were approximately $
0
and $
13,139,000
for the nine months ended September 30, 2025 and 2024, respectively.
At September 30, 2025 and December 31, 2024, investment securities available-for-sale totaling approximately $
286,724,000
and $
241,586,000
, 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 impairment 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 impairment charges:
For the Three Months Ended September 30,
For the Nine Months Ended September 30,
2025
2024
2025
2024
Gross realized gains
$
—
$
—
$
—
$
—
Gross realized losses
—
—
—
(
1,096
)
Impairment
—
—
—
—
Total net gains (losses) on AFS securities
$
—
$
—
$
—
$
(
1,096
)
The tax applicable to the net realize
d losses for the three-month periods ended September 30, 2025 and 2024 was $
0
and $
0
, respectively. The tax applicable to the net realized losses for the nine-mont
h periods ended September 30, 2025 and 2024 was $
0
and $
236,000
, respectively.
QNB follows the accounting guidance in FASB ASC 326-10 as it relates to the recognition and presentation of impairment. This accounting guidance specifies that (a) if a company does not have the intent to sell a debt security prior to recovery and (b) it is more likely than not that it will not have to sell the debt security prior to recovery, the security would not be considered impaired unless there
12
is a credit loss. When an entity does not intend to sell the security, and it is more likely than not that the entity will not have to sell the security before recovery of its cost basis, it will recognize the credit component of an impairment of a debt security in earnings and the remaining portion in other comprehensive loss.
No
credit impairments were re
cognized on debt securities during the nine months ended September 30, 2025 and 2024, respectively.
The following table indicates the length of time individual debt securities have been in a continuous unrealized loss position as of September 30, 2025 and December 31, 2024:
Less than 12 months
12 months or longer
Total
No. of
Fair
Unrealized
Fair
Unrealized
Fair
Unrealized
September 30, 2025
securities
value
losses
value
losses
value
losses
U.S. Treasury
1
$
5,004
$
(
1
)
$
—
$
—
$
5,004
$
(
1
)
U.S. Government agency
35
—
—
70,210
(
5,756
)
70,210
(
5,756
)
State and municipal
187
—
—
87,262
(
17,322
)
87,262
(
17,322
)
U.S. Government agencies and sponsored enterprises (GSEs):
Mortgage-backed
152
—
—
186,993
(
28,022
)
186,993
(
28,022
)
Collateralized mortgage obligations (CMOs)
147
45,418
(
257
)
91,790
(
11,852
)
137,208
(
12,109
)
Corporate debt and money market funds
7
13,111
(
192
)
1,391
(
109
)
14,502
(
301
)
Total
529
$
63,533
$
(
450
)
$
437,646
$
(
63,061
)
$
501,179
$
(
63,511
)
Less than 12 months
12 months or longer
Total
No. of
Fair
Unrealized
Fair
Unrealized
Fair
Unrealized
December 31, 2024
securities
value
losses
value
losses
value
losses
U.S. Treasury
—
$
—
$
—
$
—
$
—
$
—
$
—
U.S. Government agency
35
—
—
75,959
(
9,051
)
75,959
(
9,051
)
State and municipal
188
288
(
2
)
84,471
(
20,629
)
84,759
(
20,631
)
U.S. Government agencies and sponsored enterprises (GSEs):
Mortgage-backed
153
1
—
234,073
(
38,902
)
234,074
(
38,902
)
Collateralized mortgage obligations (CMOs)
154
83,026
(
262
)
78,569
(
15,559
)
161,595
(
15,821
)
Corporate debt and money markets
7
10,672
(
28
)
4,275
(
276
)
14,947
(
304
)
Total
537
$
93,987
$
(
292
)
$
477,347
$
(
84,417
)
$
571,334
$
(
84,709
)
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 impairment and considers the current economic conditions, interest rates and the bond rating of each security. The unrealized losses at September 30, 2025 in U.S. Government agency securities, state and municipal securities, mortgage-backed securities, CMOs and corporate debt securities are primarily the result of interest rate fluctuations. If held to maturity, these bonds will mature at par, and QNB will not realize a loss. QNB 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 September 30, 2025.
This security has a total amortized cost of approximately $
55,000
and a fair value of $
50,000
. The pooled trust preferred security is available-f
or-sale and is carried at fair value.
Marketable Equity Securities
The Company’s investment in marketable equity securities primarily consisted of investments with readily determinable fair values in large cap stock companies. Changes in fair value are recorded in unrealized gain/(losses) in non-interest income. The Company sold its equity portfolio during 2024; at both September 30, 2025 and December 31, 2024, QNB had
no
remaining equity securities.
13
The following is a summary of unrealized and realized gains and losses recognized in net income on equity securities during the three and nine months ended September 30, 2025 and 2024:
For the Three Months Ended September 30,
For the Nine Months Ended September 30,
2025
2024
2025
2024
Net gains (losses) recognized during the period on equity securities
$
—
$
367
$
—
$
1,730
Less: Net gains recognized during the period on equity securities sold during the period
—
224
—
601
Net unrealized gains (losses) recognized during the reporting period on equity securities still held at the reporting date
$
—
$
143
$
—
$
1,129
There were
no
taxes applicable to the net gains (losses) recognized for the three and nine months ended September 30, 2025 compared to an
expense of $
99,000
and $
392,000
for the three and nine months ended September 30, 2024, respectively.
Proceeds from sales of investment equity securities were $
0
and $
6,050,000
for the nine months ended September 30, 2025 and 2024, respectively.
7. RESTRICTED INVESTMENTS IN STOCK
Restricted investment in stocks includes Federal Home Loan Bank of Pittsburgh (“FHLB”) with a carrying cost of $
2,147,000,
Atlantic Community Bankers Bank (“ACBB”) stock with a carrying cost of $
12,000
, VISA Class B-2 stock with a carrying cost of $
0
, and Senior Housing Crime Prevention Investment Corporation ("SHCPFIC") preferred stock of $
1,000,000
at September 30, 2025. FHLB and ACBB stock were issued to the Bank as a requirement to facilitate the Bank’s participation in borrowing and other banking services. The SHCPFIC stock was issued to the Bank to enable its participation in a Community Reinvestment Act qualified investment. The Bank owns
100
shares of preferred stock of SHCPFIC. These shares are not transferable without the consent of SHCPFIC and do not have a readily-determinable fair value. The Bank’s investment in FHLB stock may fluctuate, as it is based on the member banks’ use of FHLB’s services.
The Bank has a $
1,709,000
non-controlling investment in a discrete class of non-voting limited liability company membership interests issued by National Energy Improvement Fund, LLC (“NEIF”), a Pennsylvania limited liability company licensed in Pennsylvania as a consumer discount company. The proceeds of the investment will be used b
y NEIF to fund a State-sponsored consumer loan program, the KEEP Home Energy Loan Program, designed to assist Pennsylvania homeowners in reducing their energy costs.
The Bank owns
3,251
shares of Visa Class B-2 common shares, 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-2 stock will be converted to Visa Class A shares using a conversion factor (
1.5223
as of September 25, 2025), 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-2 shares are permitted to transact in Class B-2. Due to the lack of orderly trades and public information of such trades, Visa Class B-2 stock does not have a readily determinable fair value.
These restricted investments are carried at cost and evaluated for impairment periodically. As of September 30
, 2025, there was
no
impairment associated with these shares.
8. LOANS & ALLOWANCE FOR CREDIT LOSSES ON LOANS
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off are stated at the principal amount outstanding, net of deferred loan fees and costs. Interest income is accrued on the principal amount outstanding. Loan origination and commitment fees and related direct costs are deferred and amortized to income over the term of the respective loan and loan commitment period as a yield adjustment.
Loans held-for-sale 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.
The Company maintains an allowance for credit losses on loans, 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 or decreased by the provision (reversal) for loan losses and increased by recoveries of previous losses. The provisions or reversals for credit losses are charged to earnings to bring the total allowance for loan losses to a level considered necessary by management.
14
The allowance for credit losses is measured on a pool basis when similar risk characteristics exist; these pools are identified in the first table below. The Company establishes a general valuation allowance for performing loans, including non-accrual student loans. QNB calculates each segment's historical loss rate using a full economic cycle of loan balance and historical loss experienced. The level of the allowance is determined by assigning specific reserves to all non-accrual loans, except the homogeneous pool of student loans which are measured in the general reserve. An allowance on these non-accrual loans is established when the discounted cash flows (or collateral value) of the loan is lower than the carrying value of that loan. The portion of the allowance that is allocated to 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 is adjusted for qualitative factors. These qualitative risk factors include:
1.
Concentrations: The Company adjusts historic loss for concentrations in the current commercial portfolio that were not present during the down-turn of the economic cycle.
2.
Economic Forecast: The Company utilizes an entire economic cycle of data to determine loss rates by segment. This approach reflects an inherent reversion to the historical losses during the life of the loans within the pool considering prepayments and loss experience throughout an entire economic cycle. However, the Company feels it is prudent to maintain a floor in its model to assure that there is enough reserve on hand to sustain any losses upon an upcoming recession.
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. The Company’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 the Company's allowance for credit losses on loans. Such agencies may require the Company 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 credit losses on loans in accordance with Accounting Principles Generally Accepted in the United States of America (U.S. GAAP.) If circumstances differ substantially from the current calculation, future adjustments to the allowance for credit losses on loans 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.
15
Major classes of loans are as follows:
September 30,
December 31,
2025
2024
Commercial:
Commercial and industrial
$
133,259
$
153,187
Construction and land development
119,028
129,464
Real estate secured by multi-family properties
144,546
137,461
Real estate secured by owner-occupied properties
161,231
163,955
Real estate secured by other commercial properties
351,427
313,390
Revolving real estate secured by 1-4 family properties-business
7,701
5,652
Real estate secured by 1st lien on 1-4 family properties-business
110,834
105,779
Real estate secured by junior lien on 1-4 family properties-business
5,246
3,238
State and political subdivisions
19,552
17,683
Retail:
1-4 family residential mortgages
116,451
114,423
Construction-individual
1,897
—
Revolving home equity secured by 1-4 family properties-personal
52,719
48,231
Real estate secured by 1st lien on 1-4 family properties-personal
6,483
6,561
Real estate secured by junior lien on 1-4 family properties-personal
13,505
14,092
Student loans
1,288
1,444
Overdrafts
290
209
Other consumer
1,552
1,782
Total loans
1,247,009
1,216,551
Net unearned (fees) costs
(
480
)
(
503
)
Allowance for credit losses on loans
(
9,255
)
(
8,744
)
Loans receivable, net
$
1,237,274
$
1,207,304
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.
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.
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.
16
The Company originates fixed-rate and adjustable-rate real estate-residential mortgage loans for personal purposes that are secured by first liens on the underlying 1-4 family residential properties. Credit risk exposure in this area of lending is minimized by the evaluation of the credit worthiness of the borrower, including debt-to-income ratios, credit scores and adherence to underwriting policies that emphasize conservative loan-to-value ratios of generally no more than 80%. Residential mortgage loans granted in excess of the
80
% loan-to-value ratio criterion are generally insured by private mortgage insurance.
The real estate-home equity portfolio consists of fixed-rate home equity loans and variable-rate home equity lines of credit. Risks associated with loans secured by residential properties are generally lower than commercial loans and include general economic risks, such as the strength of the job market, employment stability and the strength of the housing market. Since most loans are secured by a primary or secondary residence, the borrower’s continued employment is the greatest risk to repayment.
The Company offers a variety of loans to individuals for personal and household purposes. Consumer loans are generally considered to have greater risk than first or second mortgages on real estate because they may be unsecured, or, if they are secured, the value of the collateral may be difficult to assess and is more likely to decrease in value than real estate. Credit risk in this portfolio is controlled by conservative underwriting standards that consider debt-to-income levels and the creditworthiness of the borrower and, if secured, collateral values.
The Company employs a ten-grade risk rating system related to the credit quality of commercial loans and loans to state and political subdivisions of which the first six categories are pass categories (credits not adversely rated). The following is a description of the internal risk ratings and the likelihood of loss related to each risk rating.
1.
Excellent - no apparent risk
2.
Good - minimal risk
3.
Acceptable - lower risk
4.
Acceptable - average risk
5.
Acceptable – higher risk
6.
Pass watch
7.
Special Mention - potential weaknesses
8.
Substandard - well defined weaknesses
9.
Doubtful - full collection unlikely
10.
Loss - considered uncollectible
The Company maintains a loan review system, which allows for a periodic review of our loan portfolio and the early identification of potential problem loans. Each loan officer assigns a risk rating to all loans in the portfolio at the time the loan is originated. Loans are generally reviewed annually based on the borrower’s fiscal year and the dollar amount of the relationship. 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 with 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 adequacy of the allowance for credit losses on loans.
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 September 30, 2025 and December 31, 2024:
17
Term Loans by Origination Year
September 30, 2025
2025
2024
2023
2022
2021
Prior
Revolving
Total
Commercial Loans
Commercial and industrial:
Risk rating
Pass
$
11,749
$
13,230
$
8,117
$
8,111
$
3,080
$
7,757
$
75,658
$
127,702
Special mention
—
—
366
—
—
—
2,108
2,474
Substandard
953
—
529
87
53
96
1,365
3,083
Doubtful
—
—
—
—
—
—
—
—
Total commercial and industrial
$
12,702
$
13,230
$
9,012
$
8,198
$
3,133
$
7,853
$
79,131
$
133,259
Construction and land development:
Risk rating
Pass
$
15,821
$
60,984
$
25,616
$
2,063
$
1,420
$
6,801
$
—
$
112,705
Special mention
—
—
—
—
—
—
—
—
Substandard
—
—
6,296
—
—
27
—
6,323
Doubtful
—
—
—
—
—
—
—
—
Total construction and land development
$
15,821
$
60,984
$
31,912
$
2,063
$
1,420
$
6,828
$
—
$
119,028
Real estate secured by multi-family properties:
Risk rating
Pass
$
30,045
$
16,644
$
9,301
$
26,792
$
21,730
$
37,272
$
—
$
141,784
Special mention
—
—
—
—
—
—
—
—
Substandard
—
—
462
—
—
2,300
—
2,762
Doubtful
—
—
—
—
—
—
—
—
Total real estate secured by multi-family properties
$
30,045
$
16,644
$
9,763
$
26,792
$
21,730
$
39,572
$
—
$
144,546
Real estate secured by owner-occupied properties:
Risk rating
Pass
$
16,883
$
14,165
$
13,623
$
24,049
$
22,068
$
52,065
$
—
$
142,853
Special mention
—
—
—
—
—
739
—
739
Substandard
10,100
—
—
1,897
—
5,642
—
17,639
Doubtful
—
—
—
—
—
—
—
—
Total real estate secured by owner-occupied properties
$
26,983
$
14,165
$
13,623
$
25,946
$
22,068
$
58,446
$
—
$
161,231
Real estate secured by other commercial properties:
Risk rating
Pass
$
47,898
$
44,938
$
33,588
$
73,625
$
39,617
$
108,204
$
—
$
347,870
Special mention
—
—
—
—
—
—
—
—
Substandard
—
—
649
—
—
2,908
—
3,557
Doubtful
—
—
—
—
—
—
—
—
Total real estate secured by other commercial properties
$
47,898
$
44,938
$
34,237
$
73,625
$
39,617
$
111,112
$
—
$
351,427
Revolving real estate secured by 1-4 family properties-business:
Risk rating
Pass
$
—
$
—
$
—
$
—
$
—
$
—
$
7,701
$
7,701
Special mention
—
—
—
—
—
—
—
—
Substandard
—
—
—
—
—
—
—
—
Doubtful
—
—
—
—
—
—
—
—
Total revolving real estate secured by 1-4 family properties-business
$
—
$
—
$
—
$
—
$
—
$
—
$
7,701
$
7,701
Real estate secured by 1st lien on 1-4 family properties-business:
Risk rating
Pass
$
15,713
$
8,718
$
15,364
$
23,882
$
16,747
$
29,057
$
—
$
109,481
Special mention
—
—
—
—
—
—
—
—
Substandard
—
—
—
331
419
603
—
1,353
18
Term Loans by Origination Year
September 30, 2025
2025
2024
2023
2022
2021
Prior
Revolving
Total
Doubtful
—
—
—
—
—
—
—
—
Total real estate secured by 1st lien on 1-4 family properties-business
$
15,713
$
8,718
$
15,364
$
24,213
$
17,166
$
29,660
$
—
$
110,834
Real estate secured by junior lien on 1-4 family properties-business:
Risk rating
Pass
$
2,323
$
209
$
513
$
438
$
159
$
1,348
$
—
$
4,990
Special mention
—
—
—
—
—
—
—
—
Substandard
—
240
—
16
—
—
—
256
Doubtful
—
—
—
—
—
—
—
—
Total real estate secured by junior lien on 1-4 family properties-business
$
2,323
$
449
$
513
$
454
$
159
$
1,348
$
—
$
5,246
State and political subdivisions:
Risk rating
Pass
$
126
$
3,223
$
2,275
$
—
$
3,428
$
10,500
$
—
$
19,552
Special mention
—
—
—
—
—
—
—
—
Substandard
—
—
—
—
—
—
—
—
Doubtful
—
—
—
—
—
—
—
—
Total real estate secured by junior lien on 1-4 family properties-business
$
126
$
3,223
$
2,275
$
—
$
3,428
$
10,500
$
—
$
19,552
Total Commercial Loans:
Risk rating
Pass
$
140,558
$
162,111
$
108,397
$
158,960
$
108,249
$
253,004
$
83,359
$
1,014,638
Special mention
—
—
366
—
—
739
2,108
3,213
Substandard
11,053
240
7,936
2,331
472
11,576
1,365
34,973
Doubtful
—
—
—
—
—
—
—
—
Total Commercial loans
$
151,611
$
162,351
$
116,699
$
161,291
$
108,721
$
265,319
$
86,832
$
1,052,824
Current Period Gross Charge-Offs:
Commercial and industrial
$
—
$
—
$
—
$
—
$
—
$
—
$
—
$
—
19
Term Loans by Origination Year
December 31, 2024
2024
2023
2022
2021
2020
Prior
Revolving
Total
Commercial Loans
Commercial and industrial:
Risk rating
Pass
$
24,130
$
11,476
$
10,818
$
4,796
$
2,513
$
8,138
$
86,094
$
147,965
Special mention
—
392
—
—
—
—
2,557
2,949
Substandard
—
555
—
113
84
676
845
2,273
Doubtful
—
—
—
—
—
—
—
—
Total commercial and industrial
$
24,130
$
12,423
$
10,818
$
4,909
$
2,597
$
8,814
$
89,496
$
153,187
Construction and land development:
Risk rating
Pass
$
53,278
$
33,332
$
11,404
$
13,998
$
3,268
$
8,056
$
—
$
123,336
Special mention
—
—
—
—
—
—
—
—
Substandard
—
6,094
—
—
—
34
—
6,128
Doubtful
—
—
—
—
—
—
—
—
Total construction and land development
$
53,278
$
39,426
$
11,404
$
13,998
$
3,268
$
8,090
$
—
$
129,464
Real estate secured by multi-family properties:
Risk rating
Pass
$
26,080
$
17,395
$
27,638
$
22,402
$
9,210
$
31,488
$
—
$
134,213
Special mention
—
—
—
—
—
—
—
—
Substandard
—
471
—
—
—
2,777
—
3,248
Doubtful
—
—
—
—
—
—
—
—
Total real estate secured by multi-family properties
$
26,080
$
17,866
$
27,638
$
22,402
$
9,210
$
34,265
$
—
$
137,461
Real estate secured by owner-occupied properties:
Risk rating
Pass
$
14,110
$
14,121
$
25,747
$
23,080
$
14,890
$
53,062
$
—
$
145,010
Special mention
656
—
—
—
—
869
—
1,525
Substandard
745
7,027
1,665
—
2,131
5,852
—
17,420
Doubtful
—
—
—
—
—
—
—
—
Total real estate secured by owner-occupied properties
$
15,511
$
21,148
$
27,412
$
23,080
$
17,021
$
59,783
$
—
$
163,955
Real estate secured by other commercial properties:
Risk rating
Pass
$
42,414
$
30,132
$
67,747
$
40,771
$
13,624
$
115,015
$
—
$
309,703
Special mention
—
—
—
—
—
—
—
—
Substandard
—
663
—
—
2,298
726
—
3,687
Doubtful
—
—
—
—
—
—
—
—
Total real estate secured by other commercial properties
$
42,414
$
30,795
$
67,747
$
40,771
$
15,922
$
115,741
$
—
$
313,390
Revolving real estate secured by 1-4 family properties-business:
Risk rating
Pass
$
—
$
—
$
—
$
—
$
—
$
—
$
5,652
$
5,652
Special mention
—
—
—
—
—
—
—
—
Substandard
—
—
—
—
—
—
—
—
Doubtful
—
—
—
—
—
—
—
—
Total revolving real estate secured by 1-4 family properties-business
$
—
$
—
$
—
$
—
$
—
$
—
$
5,652
$
5,652
Real estate secured by 1st lien on 1-4 family properties-business:
Risk rating
Pass
$
9,890
$
16,641
$
26,410
$
18,786
$
8,349
$
24,375
$
—
$
104,451
Special mention
—
—
—
132
—
—
—
132
20
Term Loans by Origination Year
December 31, 2024
2024
2023
2022
2021
2020
Prior
Revolving
Total
Substandard
—
—
339
205
145
507
—
1,196
Doubtful
—
—
—
—
—
—
—
—
Total real estate secured by 1st lien on 1-4 family properties-business
$
9,890
$
16,641
$
26,749
$
19,123
$
8,494
$
24,882
$
—
$
105,779
Real estate secured by junior lien on 1-4 family properties-business:
Risk rating
Pass
$
213
$
533
$
574
$
176
$
538
$
855
$
—
$
2,889
Special mention
—
—
—
—
—
—
—
—
Substandard
330
—
19
—
—
—
—
349
Doubtful
—
—
—
—
—
—
—
—
Total real estate secured by junior lien on 1-4 family properties-business
$
543
$
533
$
593
$
176
$
538
$
855
$
—
$
3,238
State and political subdivisions:
Risk rating
Pass
$
1,914
$
1,141
$
—
$
3,749
$
8
$
10,871
$
—
$
17,683
Special mention
—
—
—
—
—
—
—
—
Substandard
—
—
—
—
—
—
—
—
Doubtful
—
—
—
—
—
—
—
—
Total real estate secured by junior lien on 1-4 family properties-business
$
1,914
$
1,141
$
—
$
3,749
$
8
$
10,871
$
—
$
17,683
Total Commercial Loans:
Risk rating
Pass
$
172,029
$
124,771
$
170,338
$
127,758
$
52,400
$
251,860
$
91,746
$
990,902
Special mention
656
392
—
132
—
869
2,557
4,606
Substandard
1,075
14,810
2,023
318
4,658
10,572
845
34,301
Doubtful
—
—
—
—
—
—
—
—
Total Commercial loans
$
173,760
$
139,973
$
172,361
$
128,208
$
57,058
$
263,301
$
95,148
$
1,029,809
Current Period Gross Charge-Offs:
Commercial and industrial
$
—
$
—
$
—
$
—
$
—
$
—
$
23
$
23
21
F
or 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 September 30, 2025 and December 31, 2024:
Term Loans by Origination Year
September 30, 2025
2025
2024
2023
2022
2021
Prior
Revolving
Total
Retail Loans
1-4 family residential mortgages:
Payment performance
Performing
$
7,955
$
11,286
$
12,105
$
13,301
$
27,074
$
43,887
$
—
$
115,608
Nonperforming
—
—
—
—
—
843
—
843
Total 1-4 family residential mortgages
$
7,955
$
11,286
$
12,105
$
13,301
$
27,074
$
44,730
$
—
$
116,451
Construction-individual:
Payment performance
Performing
$
1,897
$
—
$
—
$
—
$
—
$
—
$
—
$
1,897
Nonperforming
—
—
—
—
—
—
—
—
Total construction-individual
$
1,897
$
—
$
—
$
—
$
—
$
—
$
—
$
1,897
Revolving home equity secured by 1-4 family properties-personal:
Payment performance
Performing
$
—
$
—
$
—
$
—
$
—
$
—
$
52,424
$
52,424
Nonperforming
—
—
—
—
—
—
295
295
Total revolving home equity secured by 1-4 family properties-personal
$
—
$
—
$
—
$
—
$
—
$
—
$
52,719
$
52,719
Real estate secured by 1st lien on 1-4 family properties-personal:
Payment performance
Performing
$
1,141
$
457
$
561
$
894
$
969
$
2,346
$
—
$
6,368
Nonperforming
—
—
—
90
—
25
—
115
Total real estate secured by 1st lien on 1-4 family properties-personal
$
1,141
$
457
$
561
$
984
$
969
$
2,371
$
—
$
6,483
Real estate secured by junior lien on 1-4 family properties-personal:
Payment performance
Performing
$
2,124
$
4,602
$
2,378
$
681
$
626
$
3,079
$
—
$
13,490
Nonperforming
—
—
—
15
—
—
—
15
Total real estate secured by junior lien on 1-4 family properties-personal
$
2,124
$
4,602
$
2,378
$
696
$
626
$
3,079
$
—
$
13,505
Student loans:
Payment performance
Performing
$
—
$
—
$
—
$
—
$
—
$
1,277
$
—
$
1,277
Nonperforming
—
—
—
—
—
11
—
11
Total student loans
$
—
$
—
$
—
$
—
$
—
$
1,288
$
—
$
1,288
Overdrafts:
Payment performance
Performing
$
—
$
—
$
—
$
—
$
—
$
—
$
290
$
290
Nonperforming
—
—
—
—
—
—
—
—
Total overdrafts
$
—
$
—
$
—
$
—
$
—
$
—
$
290
$
290
Other consumer:
Payment performance
Performing
$
314
$
594
$
317
$
58
$
42
$
21
$
184
$
1,530
Nonperforming
—
—
—
—
—
22
—
22
Total other consumer
$
314
$
594
$
317
$
58
$
42
$
43
$
184
$
1,552
Total Retail Loans:
Payment performance
Performing
$
13,431
$
16,939
$
15,361
$
14,934
$
28,711
$
50,610
$
52,898
$
192,884
Nonperforming
—
—
—
105
—
901
295
1,301
Total Retail Loans
$
13,431
$
16,939
$
15,361
$
15,039
$
28,711
$
51,511
$
53,193
$
194,185
22
Term Loans by Origination Year
September 30, 2025
2025
2024
2023
2022
2021
Prior
Revolving
Total
Current Period Gross Charge-Offs:
Student loans
$
—
$
—
$
—
$
—
$
—
$
—
$
—
$
—
Overdrafts
—
—
—
—
—
—
74
74
Other consumer
—
—
7
—
3
—
5
15
23
24
Term Loans by Origination Year
December 31, 2024
2024
2023
2022
2021
2020
Prior
Revolving
Total
Retail Loans
1-4 family residential mortgages:
Payment performance
Performing
$
12,129
$
12,404
$
13,901
$
28,707
$
18,871
$
27,643
$
—
$
113,655
Nonperforming
—
—
—
—
—
768
—
768
Total 1-4 family residential mortgages
$
12,129
$
12,404
$
13,901
$
28,707
$
18,871
$
28,411
$
—
$
114,423
Construction-individual:
Payment performance
Performing
$
—
$
—
$
—
$
—
$
—
$
—
$
—
$
—
Nonperforming
—
—
—
—
—
—
—
—
Total construction-individual
$
—
$
—
$
—
$
—
$
—
$
—
$
—
$
—
Revolving home equity secured by 1-4 family properties-personal:
Payment performance
Performing
$
—
$
—
$
—
$
—
$
—
$
—
$
47,918
$
47,918
Nonperforming
—
—
—
—
—
—
313
313
Total revolving home equity secured by 1-4 family properties-personal
$
—
$
—
$
—
$
—
$
—
$
—
$
48,231
$
48,231
Real estate secured by 1st lien on 1-4 family properties-personal:
Payment performance
Performing
$
599
$
721
$
968
$
1,027
$
813
$
2,315
$
—
$
6,443
Nonperforming
—
—
90
—
—
28
—
118
Total real estate secured by 1st lien on 1-4 family properties-personal
$
599
$
721
$
1,058
$
1,027
$
813
$
2,343
$
—
$
6,561
Real estate secured by junior lien on 1-4 family properties-personal:
Payment performance
Performing
$
5,241
$
3,317
$
833
$
958
$
922
$
2,804
$
—
$
14,075
Nonperforming
—
—
17
—
—
—
—
17
Total real estate secured by junior lien on 1-4 family properties-personal
$
5,241
$
3,317
$
850
$
958
$
922
$
2,804
$
—
$
14,092
Student loans:
Payment performance
Performing
$
—
$
—
$
—
$
—
$
—
$
1,433
$
—
$
1,433
Nonperforming
—
—
—
—
—
11
—
11
Total student loans
$
—
$
—
$
—
$
—
$
—
$
1,444
$
—
$
1,444
Overdrafts:
Payment performance
Performing
$
—
$
—
$
—
$
—
$
—
$
—
$
209
$
209
Nonperforming
—
—
—
—
—
—
—
—
Total overdrafts
$
—
$
—
$
—
$
—
$
—
$
—
$
209
$
209
Other consumer:
Payment performance
Performing
$
785
$
487
$
127
$
104
$
16
$
32
$
202
$
1,753
Nonperforming
—
—
—
—
—
29
—
29
Total other consumer
$
785
$
487
$
127
$
104
$
16
$
61
$
202
$
1,782
Total Retail Loans:
Payment performance
Performing
$
18,754
$
16,929
$
15,829
$
30,796
$
20,622
$
34,227
$
48,329
$
185,486
Nonperforming
—
—
107
—
—
836
313
1,256
Total Retail Loans
$
18,754
$
16,929
$
15,936
$
30,796
$
20,622
$
35,063
$
48,642
$
186,742
Current Period Gross Charge-Offs:
Student loans
$
—
$
—
$
—
$
—
$
—
$
52
$
—
$
52
Overdrafts
—
—
—
—
—
—
101
101
Other consumer
—
4
8
4
—
—
7
23
25
Revolving home equity lines of credit secured by 1-4 family properties termed out during 2025 and 2024 were $
2,609,000
and $
2,477,000
all of which are performing.
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 September 30, 2025 and December 31, 2024:
September 30, 2025
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
$
—
$
—
$
—
$
—
$
133,259
$
133,259
Construction and land development
—
—
—
—
119,028
119,028
Real estate secured by multi-family properties
5,763
—
—
5,763
138,783
144,546
Real estate secured by owner-occupied properties
—
—
—
—
161,231
161,231
Real estate secured by other commercial properties
—
—
—
—
351,427
351,427
Revolving real estate secured by 1-4 family properties-business
—
—
—
—
7,701
7,701
Real estate secured by 1st lien on 1-4 family properties-business
316
—
227
543
110,291
110,834
Real estate secured by junior lien on 1-4 family properties-business
—
—
—
—
5,246
5,246
State and political subdivisions
—
—
—
—
19,552
19,552
Retail:
1-4 family residential mortgages
—
101
527
628
115,823
116,451
Construction-individual
—
—
—
—
1,897
1,897
Revolving home equity secured by 1-4 family properties-personal
339
—
119
458
52,261
52,719
Real estate secured by 1st lien on 1-4 family properties-personal
—
—
90
90
6,393
6,483
Real estate secured by junior lien on 1-4 family properties-personal
24
—
15
39
13,466
13,505
Student loans
—
—
—
—
1,288
1,288
Overdrafts
15
—
—
15
275
290
Other consumer
17
—
—
17
1,535
1,552
Total
$
6,474
$
101
$
978
$
7,553
$
1,239,456
$
1,247,009
26
December 31, 2024
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
$
—
$
—
$
—
$
—
$
153,187
$
153,187
Construction and land development
—
—
—
—
129,464
129,464
Real estate secured by multi-family properties
—
—
—
—
137,461
137,461
Real estate secured by owner-occupied properties
150
169
—
319
163,636
163,955
Real estate secured by other commercial properties
—
—
—
—
313,390
313,390
Revolving real estate secured by 1-4 family properties-business
—
—
—
—
5,652
5,652
Real estate secured by 1st lien on 1-4 family properties-business
—
—
—
—
105,779
105,779
Real estate secured by junior lien on 1-4 family properties-business
—
—
—
—
3,238
3,238
State and political subdivisions
—
—
—
—
17,683
17,683
Retail:
1-4 family residential mortgages
114
440
571
1,125
113,298
114,423
Construction-individual
—
—
—
—
—
—
Revolving home equity secured by 1-4 family properties-personal
235
42
119
396
47,835
48,231
Real estate secured by 1st lien on 1-4 family properties-personal
126
—
91
217
6,344
6,561
Real estate secured by junior lien on 1-4 family properties-personal
95
—
17
112
13,980
14,092
Student loans
—
—
—
—
1,444
1,444
Overdrafts
13
—
—
13
196
209
Other consumer
5
—
—
5
1,777
1,782
Total
$
738
$
651
$
798
$
2,187
$
1,214,364
$
1,216,551
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 problem loans. A loan is considered collateral dependent 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. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as collateral dependent. When placing a loan on non-accrual status, 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. All non-accrual loans, except student loans, are individually evaluated for an allowance for credit losses ("ACL"). This ACL is measured 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 less costs to sell if the loan is collateral dependent.
An ACL is established for a non-accrual loan if its carrying value exceeds its estimated fair value. The estimated fair values of the majority of the Company’s non-accrual loans are measured based on the estimated fair value of the loan’s collateral less costs to sell.
For commercial loans secured by real estate, estimated fair values are determined primarily through third-party appraisals. When a real estate secured loan becomes individually evaluated, 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.
The following tables discloses 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 September 30, 2025 and December 31, 2024:
27
September 30, 2025
90 Days or More Past Due-Still Accruing
Nonaccrual With No Specifically-Related ACL
Nonaccrual With Related ACL
Total Nonaccrual Loans
Commercial:
Commercial and industrial
$
—
$
—
$
552
$
552
Construction and land development
—
—
6,296
6,296
Real estate secured by multi-family properties
—
—
—
—
Real estate secured by owner-occupied properties
—
139
—
139
Real estate secured by other commercial properties
—
—
—
—
Revolving real estate secured by 1-4 family properties-business
—
—
—
—
Real estate secured by 1st lien on 1-4 family properties-business
—
419
—
419
Real estate secured by junior lien on 1-4 family properties-business
—
—
240
240
State and political subdivisions
—
—
—
—
Retail:
1-4 family residential mortgages
—
843
—
843
Construction-individual
—
—
—
—
Revolving home equity secured by 1-4 family properties-personal
—
295
—
295
Real estate secured by 1st lien on 1-4 family properties-personal
—
115
—
115
Real estate secured by junior lien on 1-4 family properties-personal
—
15
—
15
Student loans
—
11
—
11
Other consumer
—
22
—
22
Total
$
—
$
1,859
$
7,088
$
8,947
December 31, 2024
90 Days or More Past Due-Still Accruing
Nonaccrual With No Specifically-Related ACL
Nonaccrual With Related ACL
Total Nonaccrual Loans
Commercial:
Commercial and industrial
$
—
$
—
$
27
$
27
Construction and land development
—
—
—
—
Real estate secured by multi-family properties
—
—
—
—
Real estate secured by owner-occupied properties
—
157
—
157
Real estate secured by other commercial properties
—
—
—
—
Revolving real estate secured by 1-4 family properties-business
—
—
—
—
Real estate secured by 1st lien on 1-4 family properties-business
—
205
—
205
Real estate secured by junior lien on 1-4 family properties-business
—
—
330
330
State and political subdivisions
—
—
—
—
Retail:
1-4 family residential mortgages
—
768
—
768
Construction-individual
—
—
—
—
Revolving home equity secured by 1-4 family properties-personal
—
313
—
313
Real estate secured by 1st lien on 1-4 family properties-personal
—
118
—
118
Real estate secured by junior lien on 1-4 family properties-personal
—
17
—
17
Student loans
—
11
—
11
Other consumer
—
29
—
29
Total
$
—
$
1,618
$
357
$
1,975
QNB recognized interest income of $
7,000
and $
51,000
on non
-accrual loans during the nine months ended September 30, 2025 and 2024, respectively.
28
The following tables present the collateral-dependent loans by loan category at September 30, 2025 and December 31, 2024:
September 30, 2025
Real Estate Secured
Other (1)
Deficiency in Collateral
Total Collateral Dependent Nonaccrual Loans
Commercial:
Commercial and industrial
$
426
$
—
$
126
$
552
Construction and land development
5,071
—
1,226
6,297
Real estate secured by multi-family properties
—
—
—
—
Real estate secured by owner-occupied properties
139
—
—
139
Real estate secured by other commercial properties
—
—
—
—
Revolving real estate secured by 1-4 family properties-business
—
—
—
—
Real estate secured by 1st lien on 1-4 family properties-business
419
—
—
419
Real estate secured by junior lien on 1-4 family properties-business
180
—
60
240
State and political subdivisions
—
—
—
—
Retail:
1-4 family residential mortgages
843
—
—
843
Construction-individual
—
—
—
—
Revolving home equity secured by 1-4 family properties-personal
295
—
—
295
Real estate secured by 1st lien on 1-4 family properties-personal
114
—
—
114
Real estate secured by junior lien on 1-4 family properties-personal
15
—
—
15
Other consumer
—
22
—
22
Total
$
7,502
$
22
$
1,412
$
8,936
(1)
Secured by business assets, personal property and equipment or guarantees
29
December 31, 2024
Real Estate Secured
Other (1)
Deficiency in Collateral
Total Collateral Dependent Nonaccrual Loans
Commercial:
Commercial and industrial
$
—
$
278
$
33
$
311
Construction and land development
—
—
—
—
Real estate secured by multi-family properties
—
—
—
—
Real estate secured by owner-occupied properties
175
—
—
175
Real estate secured by other commercial properties
—
—
—
—
Revolving real estate secured by 1-4 family properties-business
—
—
—
—
Real estate secured by 1st lien on 1-4 family properties-business
—
—
Real estate secured by junior lien on 1-4 family properties-business
—
—
165
165
State and political subdivisions
—
—
—
—
Retail:
1-4 family residential mortgages
805
—
—
805
Construction-individual
—
—
—
—
Revolving home equity secured by 1-4 family properties-personal
185
—
110
295
Real estate secured by 1st lien on 1-4 family properties-personal
116
—
—
116
Real estate secured by junior lien on 1-4 family properties-personal
19
—
—
19
Other consumer
—
37
—
37
Total
$
1,300
$
315
$
308
$
1,923
30
Activity in the allowance for credit losses on loans for the three and nine months ended September 30, 2025 and 2024 are as follows:
For the Three Months Ended September 30, 2025
Balance, beginning of period
Credit loss expense (reversal)
Charge-offs
Recoveries
Balance, end
of period
Commercial:
Commercial and industrial
$
821
$
(
167
)
$
—
$
6
$
660
Construction and land development
1,135
(
56
)
—
—
1,079
Real estate secured by multi-family properties
1,838
313
—
—
2,151
Real estate secured by owner-occupied properties
901
(
142
)
—
—
759
Real estate secured by other commercial properties
1,991
325
—
—
2,316
Revolving real estate secured by 1-4 family properties-business
31
(
1
)
—
—
30
Real estate secured by 1st lien on 1-4 family properties-business
1,366
(
21
)
—
2
1,347
Real estate secured by junior lien on 1-4 family properties-business
16
(
4
)
—
—
12
State and political subdivisions
42
(
12
)
—
—
30
Retail:
1-4 family residential mortgages
356
(
79
)
—
—
277
Construction-individual
—
3
—
—
3
Revolving home equity secured by 1-4 family properties-personal
160
(
28
)
—
—
132
Real estate secured by 1st lien on 1-4 family properties-personal
33
(
5
)
—
—
28
Real estate secured by junior lien on 1-4 family properties-personal
80
(
14
)
—
—
66
Student loans
257
(
15
)
—
4
246
Overdrafts
21
28
(
30
)
5
24
Other consumer
121
(
27
)
(
3
)
4
95
Total
$
9,169
$
98
$
(
33
)
$
21
$
9,255
31
For the Three Months Ended September 30, 2024
Balance, beginning of period
Credit loss expense (reversal)
Charge-offs
Recoveries
Balance, end
of period
Commercial:
Commercial and industrial
$
920
$
(
8
)
$
—
$
12
$
924
Construction and land development
1,388
(
90
)
—
—
1,298
Real estate secured by multi-family properties
1,818
203
—
—
2,021
Real estate secured by owner-occupied properties
970
(
62
)
—
—
908
Real estate secured by other commercial properties
1,246
41
—
—
1,287
Revolving real estate secured by 1-4 family properties-business
23
4
—
—
27
Real estate secured by 1st lien on 1-4 family properties-business
1,298
(
16
)
—
2
1,284
Real estate secured by junior lien on 1-4 family properties-business
11
—
—
—
11
State and political subdivisions
44
3
—
—
47
Retail:
1-4 family residential mortgages
380
11
—
3
394
Construction-individual
—
—
—
—
—
Revolving home equity secured by 1-4 family properties-personal
166
9
—
—
175
Real estate secured by 1st lien on 1-4 family properties-personal
134
(
5
)
—
—
129
Real estate secured by junior lien on 1-4 family properties-personal
79
3
—
—
82
Student loans
336
15
(
17
)
2
336
Overdrafts
13
29
(
22
)
8
28
Other consumer
32
17
(
14
)
1
36
Total
$
8,858
$
154
$
(
53
)
$
28
$
8,987
32
For the Nine Months Ended September 30, 2025
Balance, beginning of period
Credit loss expense (reversal)
Charge-offs
Recoveries
Balance, end
of period
Commercial:
Commercial and industrial
$
829
$
(
192
)
$
—
$
23
$
660
Construction and land development
1,336
(
257
)
—
—
1,079
Real estate secured by multi-family properties
2,012
139
—
—
2,151
Real estate secured by owner-occupied properties
853
(
94
)
—
—
759
Real estate secured by other commercial properties
1,142
1,144
—
30
2,316
Revolving real estate secured by 1-4 family properties-business
24
6
—
—
30
Real estate secured by 1st lien on 1-4 family properties-business
1,238
102
—
7
1,347
Real estate secured by junior lien on 1-4 family properties-business
339
(
327
)
—
—
12
State and political subdivisions
34
(
4
)
—
—
30
Retail:
1-4 family residential mortgages
323
(
46
)
—
—
277
Construction-individual
—
3
—
—
3
Revolving home equity secured by 1-4 family properties-personal
143
(
11
)
—
—
132
Real estate secured by 1st lien on 1-4 family properties-personal
31
(
3
)
—
—
28
Real estate secured by junior lien on 1-4 family properties-personal
77
(
11
)
—
—
66
Student loans
310
(
81
)
—
17
246
Overdrafts
18
65
(
74
)
15
24
Other consumer
35
71
(
15
)
4
95
Total
$
8,744
$
504
$
(
89
)
$
96
$
9,255
33
For the Nine Months Ended September 30, 2024
Balance, beginning of period
Credit loss expense (reversal)
Charge-offs
Recoveries
Balance, end
of period
Commercial:
Commercial and industrial
$
823
$
87
$
(
23
)
$
37
$
924
Construction and land development
1,252
46
—
—
1,298
Real estate secured by multi-family properties
1,735
286
—
—
2,021
Real estate secured by owner-occupied properties
1,001
(
93
)
—
—
908
Real estate secured by other commercial properties
1,167
120
—
—
1,287
Revolving real estate secured by 1-4 family properties-business
27
—
—
—
27
Real estate secured by 1st lien on 1-4 family properties-business
1,507
(
230
)
—
7
1,284
Real estate secured by junior lien on 1-4 family properties-business
14
(
3
)
—
—
11
State and political subdivisions
55
(
8
)
—
—
47
Retail:
1-4 family residential mortgages
427
(
36
)
—
3
394
Construction-individual
—
—
—
—
—
Revolving home equity secured by 1-4 family properties-personal
138
37
—
—
175
Real estate secured by 1st lien on 1-4 family properties-personal
182
(
53
)
—
—
129
Real estate secured by junior lien on 1-4 family properties-personal
105
(
23
)
—
—
82
Student loans
369
(
20
)
(
23
)
10
336
Overdrafts
16
65
(
75
)
22
28
Other consumer
34
18
(
22
)
6
36
Total
$
8,852
$
193
$
(
143
)
$
85
$
8,987
Since the implementation of ASC 326 on January 1, 2023, the Company may give loan modifications to borrowers experiencing financial difficulty ("FDM"). A FDM could involve principal forgiveness, term extension, an other-than-insignificant payment delay, interest rate reduction or exchanging or paying off existing debt for new debt with the Company. The effect of most modifications made to borrowers experiencing financial difficulty is already included in the allowance for credit losses because of the measurement methodologies used to estimate the allowance, a change to the allowance for credit losses is generally not recorded upon modification. Any amount forgiven would be charged to the allowance for credit losses. The amount of the principal forgiveness is deemed to be uncollectible; therefore, that portion of the loan is written off, resulting in a reduction of the amortized cost basis and a corresponding adjustment to the allowance for credit losses. In some cases, modifications could include multiple types of concessions. Typically, one type of concession, such as a term extension, is granted initially. If the borrower continues to experience financial difficulty, another concession, such as principal forgiveness, may be granted.
34
The following table shows the amortized cost basis at September 30, 2025 and December 31, 2024 of the loans modified to borrowers experiencing financial difficulty, disaggregated by loan class, type of concession granted and the financial effect of the modification:
September 30, 2025
December 31, 2024
Amortized Cost Basis
% of Total Loan Class
Financial Effect
Amortized Cost Basis
% of Total Loan Class
Financial Effect
Commercial:
Payment Modification to Interest Only for Six Months:
Real estate secured by owner-occupied properties
$
1,000
0.61
%
Temporary reduction of principal payments with no extension of term
Payment Modification to Interest Only for 12 Months:
C&I Other
$
529
0.40
%
Temporary reduction of principal payments with no extension of term
—
Construction Other and Land Development
6,296
5.29
%
Temporary reduction of principal payments with no extension of term
—
Total
$
6,825
$
1,000
There were
no
payment defaults during the nine months ended September 30, 2025 and 2024 on FDMs. However, FDMs of $
6,825,000
modified in 2025 remain on nonaccrual status with a $
1,329,000
related allowance due to collateral shortfalls. At September 30, 2025, there were $
2,901,000
in commitments to extend credit on the FDMs.
The Company has
six
relationships with mortgage loans secured by residential real estate totaling $
881,000
for which foreclosure proceedings are in process at September 30, 2025.
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
35
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.
The following tables 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 September 30
, 2025 and December 31, 2024:
September 30, 2025
Quoted prices in active markets for identical assets
(Level 1)
Significant other observable inputs
(Level 2)
Significant unobservable inputs
(Level 3)
Balance at end
of period
Recurring fair value measurements
Securities available-for-sale
U.S. Treasury securities
$
—
$
19,480
$
—
$
19,480
U.S. Government agency securities
—
70,210
—
70,210
State and municipal securities (1)
—
86,788
—
86,788
U.S. Government agencies and sponsored enterprises (GSEs):
Mortgage-backed securities (1)
—
185,554
—
185,554
Collateralized mortgage obligations (CMOs)
—
152,618
—
152,618
Corporate debt securities and money market funds
—
23,618
50
23,668
Total securities available-for-sale
—
538,268
50
538,318
Total recurring fair value measurements
$
—
$
538,268
$
50
$
538,318
Nonrecurring fair value measurements
Collateral dependent loans
$
—
$
—
$
5,676
$
5,676
Mortgage servicing rights
—
—
1
1
Total nonrecurring fair value measurements
$
—
$
—
$
5,677
$
5,677
December 31, 2024
Quoted prices in active markets for identical assets
(Level 1)
Significant other observable inputs
(Level 2)
Significant unobservable inputs
(Level 3)
Balance at end
of period
Recurring fair value measurements
Securities available-for-sale
U.S. Treasury securities
$
—
$
18,010
$
—
$
18,010
U.S. Government agency securities
—
66,908
—
66,908
State and municipal securities (1)
—
86,352
—
86,352
U.S. Government agencies and sponsored enterprises (GSEs):
Mortgage-backed securities (1)
—
198,510
—
198,510
Collateralized mortgage obligations (CMOs)
—
161,646
—
161,646
Corporate debt securities and money market funds
—
15,082
51
15,133
Total securities available-for-sale
—
546,508
51
546,559
Total recurring fair value measurements
$
—
$
546,508
$
51
$
546,559
Nonrecurring fair value measurements
Collateral dependent loans
$
—
$
—
$
—
$
—
Mortgage servicing rights
—
—
1
1
Total nonrecurring fair value measurements
$
—
$
—
$
1
$
1
(1)
Includes derivatives designated as fair value hedges.
There were no transfers in and out of Level 1, Level 2, or Level 3 fair value measurements during the nine months ended September 30, 2025
. There were
no
losses
included in earnings attributable to the change in unrealized gains or losses relating to the available-for-sale
36
securities
above with fair value measurements utilizing significant unobservable inputs for the three- or nine-month periods ended September 30, 2025.
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
September 30, 2025
Fair value
Valuation
techniques
Unobservable
inputs
Value or range
of values
Collateral dependent loans
$
5,676
Appraisal of collateral
(1)
Appraisal adjustments
(2)
-
10
% to -
100
%
Liquidation expenses
(3)
-
10
%
Mortgage servicing rights
1
Discounted cash flow
Remaining term
3.1
to
28.3
years
Prepayment speeds
90
% to
199
%
Discount rate
12.0
% to
12.5
%
Quantitative information about Level 3 fair value measurements
December 31, 2024
Fair value
Valuation
techniques
Unobservable
inputs
Value or range
of values
Collateral dependent loans
$
—
Appraisal of collateral
(1)
Appraisal adjustments
(2)
-
100
%
Liquidation expenses
(3)
0
%
Mortgage servicing rights
1
Discounted cash flow
Remaining term
0.4
to
29.2
yrs
Prepayment speeds
90
% to
350
%
Discount rate
12.0
% to
12.5
%
(1)
Fair value is primarily determined through appraisals of the underlying collateral by independent parties, which generally includes various Level 3 inputs which are not always identifiable.
(2)
Appraisals may be adjusted by management for qualitative factors such as economic conditions and the age of the appraisal. The range is presented as a percentage 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 percentage of the initial appraised 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 nine months ended September 30, 2025 and 2024:
Fair value measurements
using significant
unobservable inputs
(Level 3)
2025
2024
Balance, January 1,
$
52
$
52
Payments received
(
3
)
(
1
)
Total gains or losses (realized/unrealized)
Included in earnings
—
—
Included in other comprehensive (loss) income
1
—
Transfers in and/or out of Level 3
—
—
Balance, September 30,
$
50
$
51
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 September 30
, 2025 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 able to transact for these securities.
37
Given conditions in the debt markets today and the absence of observable transactions in the secondary and new issue markets, we determined:
•
The few observable transactions and market quotations that are available are not reliable for purposes of determining fair value at September 30, 2025;
•
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
8.63
% includes the risk-free rate, a credit component and a spread for illiquidity.
The following information should not be interpreted as an estimate of the fair value of 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 September 30, 2025 and December 31, 2024:
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 (including derivative instruments) (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.
The fair value of derivatives instruments designated as fair value hedges are based on estimates QNB would receive or pay to terminate the contracts or agreement, taking into account current interest rates and when appropriate, the credit-worthiness of the counterparties; these values are included in Level 2.
Restricted investment in stocks (carried at cost)
: The fair value of stock in Atlantic Community Bankers Bank, the Federal Home Loan Bank, VISA Class B-2 SHCPFIC and NEIF 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.
38
Collateral Dependent Loans (generally collateral value less cost to sell)
: Collateral dependent loans are loans for which the Company has measured generally based on the fair value of the loan’s collateral, less cost to sell. The 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). Deposits with a stated maturity (time deposits) have been valued using the present value of cash flows discounted at rates approximating the current market for similar deposits.
Short-term borrowings (carried at cost)
: The carrying amount of short-term borrowings approximates their fair values.
Long-term debt (carried at cost)
: Long-term debt has stated maturities and have been valued using the present value of cash flows discounted at rates approximating the current market for similar debt instruments.
Subordinated debt (carried at cost)
: Subordinated debt has stated maturities and call dates 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.
39
The estimated fair values and carrying amounts of the Company’s financial and off-balance sheet instruments are summarized as follows:
Fair value measurements
September 30, 2025
Carrying
amount
Fair value
Quoted prices in active
markets for identical assets
(Level 1)
Significant other observable inputs
(Level 2)
Significant unobservable inputs
(Level 3)
Financial assets
Cash and cash equivalents
$
66,331
$
66,331
$
66,331
$
—
$
—
Investment securities:
Available-for-sale (1)
538,318
538,318
—
538,268
50
Restricted investment in bank stocks
4,868
4,868
—
4,868
—
Loans held for sale
—
—
—
—
—
Net loans
1,237,274
1,254,582
—
—
1,254,582
Mortgage servicing rights
360
551
—
—
551
Accrued interest receivable
5,002
5,002
—
5,002
—
Financial liabilities
Deposits with no stated maturities
$
1,294,253
$
1,294,253
$
1,294,253
$
—
$
—
Deposits with stated maturities
387,287
386,166
—
386,166
—
Short-term borrowings
48,703
48,703
48,703
—
—
Long-term debt
—
—
—
—
—
Subordinated debt
39,218
40,100
—
40,100
—
Accrued interest payable
3,833
3,833
—
3,833
—
Off-balance sheet instruments
Commitments to extend credit
$
—
$
—
$
—
$
—
$
—
Standby letters of credit
—
76
—
76
—
40
Fair value measurements
December 31, 2024
Carrying
amount
Fair
value
Quoted prices in active
markets for identical assets
(Level 1)
Significant other observable inputs
(Level 2)
Significant unobservable inputs
(Level 3)
Financial assets
Cash and cash equivalents
$
50,713
$
50,713
$
50,713
$
—
$
—
Investment securities:
Available-for-sale (1)
546,559
546,559
—
546,508
51
Restricted investment in bank stocks
5,436
5,436
—
5,436
—
Loans held for sale
664
664
—
664
—
Net loans
1,207,304
1,212,780
—
—
1,212,780
Mortgage servicing rights
378
556
—
—
556
Accrued interest receivable
4,965
4,965
—
4,965
—
Financial liabilities
Deposits with no stated maturities
$
1,247,083
$
1,247,083
$
1,247,083
$
—
$
—
Deposits with stated maturities
381,458
379,960
—
379,960
—
Short-term borrowings
53,844
53,844
53,844
—
—
Long-term debt
30,000
30,033
—
30,033
—
Subordinated debt
39,068
40,600
—
40,600
—
Accrued interest payable
7,580
7,580
—
7,580
—
Off-balance sheet instruments
Commitments to extend credit
$
—
$
—
$
—
$
—
$
—
Standby letters of credit
—
59
—
59
—
(1)
Includes derivatives designated as fair value hedges.
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. QNB applies the resulting loss factors under the allowance for credit losses on loans to its unused commitments, assuming: additional funding for commercial lines up to the average line usage for non-pass rated lines with no current usage; and, additional fundin
g up to the average line usage for retail lines with no current usage. This resulted in an allowance for credit losses on unused commitments of $
80,000
at September 30, 2025 and $
87,000
at December 31, 2024, which is included in other liabilities on the Consolidated Balance Sheets.
A summary of the Company's financial instrument commitments is as follows:
September 30,
December 31,
2025
2024
Commitments to extend credit and unused lines of credit
$
403,122
$
329,509
Standby letters of credit
20,190
19,018
Total financial instrument commitments
$
423,312
$
348,527
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.
41
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 instrum
ents. Standby letters of credit of $
13,944,000
will expire
within
one year
. The credit risk involved in issuing letters of credit is essentially the sam
e 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 September 30, 2025 and December 31, 2024 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. There were no lease renewals during the nine months ended September 30, 2025.
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 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 September 30, 2025, that QNB 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.
42
The Company and the Bank’s actual capital amounts and ratios are presented as follows:
Capital levels
Actual
Adequately capitalized
Well capitalized
September 30, 2025
Amount
Ratio
Amount
Ratio
Amount
Ratio
Total risk-based capital (to risk-weighted assets):
The Company
$
214,355
15.08
%
$
113,738
8.00
%
$
142,172
10.00
%
Bank
198,418
13.97
113,644
8.00
142,055
10.00
Tier 1 capital (to risk-weighted assets):
The Company
$
173,020
12.17
85,303
6.00
85,303
6.00
Bank
189,083
13.31
85,233
6.00
113,644
8.00
Common equity tier 1 capital (to risk-weighted
assets):
The Company
173,020
12.17
63,977
4.50
N/A
N/A
Bank
189,083
13.31
63,925
4.50
92,336
6.50
Tier 1 capital (to average assets):
The Company
173,020
9.08
76,181
4.00
N/A
N/A
Bank
189,083
9.75
77,534
4.00
96,918
5.00
Capital levels
Actual
Adequately capitalized
Well capitalized
As of December 31, 2024
Amount
Ratio
Amount
Ratio
Amount
Ratio
Total risk-based capital (to risk-weighted assets):
The Company
$
214,826
15.56
%
110,480
8.00
%
138,100
10.00
%
Bank
192,057
13.92
110,396
8.00
137,995
10.00
Tier 1 capital (to risk-weighted assets):
The Company
165,995
12.02
82,860
6.00
82,860
6.00
Bank
183,226
13.28
82,797
6.00
110,396
8.00
Common equity tier 1 capital (to risk-weighted
assets):
The Company
165,995
12.02
62,145
4.50
N/A
N/A
Bank
183,226
13.28
62,098
4.50
89,696
6.50
Tier 1 capital (to average assets):
The Company
165,995
8.70
76,357
4.00
N/A
N/A
Bank
183,226
9.71
75,483
4.00
94,353
5.00
12. DERIVATIVES AND HEDGING ACTIVITIES
QNB's risk management objective with respect to derivative financial instruments is to hedge the risk of changes in the fair value of certain fixed-rate investment securities, included in a closed portfolio, for changes in the Secured Overnight Financing Rate ("SOFR").
The effective portions of changes in the fair value of each derivative financial instrument are reported in accumulated other comprehensive (loss) income, net of tax, and are reclassified to interest income as interest payments are made or received on the hedged portfolios. QNB assesses the effectiveness of each hedging relationship using a regression analysis of prior periodic changes in fair value of both the hedge and the hedged item. In the assessment of hedge effectiveness, QNB will consider the likelihood of the counterparty's compliance with the contractual terms of the hedging derivative that could require the counterparty to make payments (counterparty default risk). If the likelihood that the counterparty will not default ceases to be probable, the hedge may no longer be highly effective and hedge ineffectiveness due to counterparty payment risk will be assessed.
43
The following tables present the notional amounts of derivatives designated as fair value hedging instruments at September 30, 2025, and December 31, 2024. QNB pledges cash or securities to cover the negative fair value of derivatives instruments. Cash collateral associated with the derivative instruments are not added to or netted against the fair value amounts.
Interest Rate Swaps-Fair Value Hedges
At September 30, 2025
At December 31, 2024
Balance Sheet Classification
Notional Amount
Amortized Cost of Hedged Portfolio
Cumulative Amount of Fair Value Hedging Adjustment Included in Carrying Amount of Hedged Asset
Notional Amount
Amortized Cost of Hedged Portfolio
Cumulative Amount of Fair Value Hedging Adjustment Included in Carrying Amount of Hedged Asset
Investment Securities Available-for-sale:
State and municipal securities
$
75,000
$
96,375
$
(
758
)
$
75,000
$
96,709
$
1,566
U.S. Government agencies and GSE mortgage-backed securities
210,733
284,431
(
1,597
)
225,000
309,546
3,264
Total
$
285,733
$
380,806
$
(
2,355
)
$
300,000
$
406,255
$
4,830
The following table presents amounts included in the Consolidated Statements of Income for derivatives designated as fair value hedging instruments for the three and nine months ended September 30, 2025 and 2024.
For the Three Months Ended September 30,
For the Nine Months Ended September 30,
Income Sheet Classification
2025
2024
2025
2024
Interest and dividends on available-for-sale and equity securities:
State and municipal securities
Recognized on fair value hedge
$
823
$
1,007
$
2,469
$
3,017
Recognized on hedge portfolio
(
668
)
(
661
)
(
2,011
)
(
1,989
)
Recognized on remeasurement of fair value hedge
17
57
57
47
U.S. Government agencies and GSE mortgage-backed securities
Recognized on fair value hedge
2,354
3,075
7,252
9,070
Recognized on hedge portfolio
(
1,967
)
(
2,106
)
(
6,061
)
(
6,182
)
Recognized on remeasurement of fair value hedge
54
93
83
81
Total
$
613
$
1,465
$
1,789
$
4,044
13. SUBORDINATED DEBT
On August 30, 2024, the Company entered into Subordinated Note Purchase Agreements with certain qualified institutional buyers and accredited investors (collectively, the "Subordinated Note Purchasers") pursuant to which the Company issued and sold $
40.0
million in aggregate principal amount of its
8.875
% Fixed-to-Floating Rate Subordinated Notes due 2034 (the "Subordinated Notes"). The Subordinated Notes were offered and sold by the Company to the Subordinated Note Purchasers in a private offering in reliance on the Section 4(a)(2) exemption from the registration requirements of the Securities Act of 1933, as amended (the "Securities Act"), and the provisions of Regulation D thereunder. The Company intends to use the proceeds from the offering for general corporate purposes and potential future strategic opportunities.
The Subordinated Notes mature on
September 1, 2034
and bear interest at a fixed annual rate of
8.875
%, payable
semi-annually
in arrears, to but excluding September 1, 2029. From and including September 1, 2029 to but excluding the maturity date or early redemption date, the interest rate will reset quarterly to an interest rate per annum initially equal to the then-current three-month Secured Overnight Financing Rate published by the Federal Reserve Bank of New York plus
545
basis
points, payable quarterly in arrears. The
44
Company
is entitled to redeem the Subordinated Notes, in whole or in part, at any time on or after September 1, 2029, and to redeem the Subordinated Notes at any time in whole upon certain other events. Any redemption of the Subordinated Notes will be subject to prior regulatory approval to the extent required.
The Subordinated Notes are not subject to any sinking fund and are not convertible into or exchangeable for any other securities or assets of the Company or any of its subsidiaries. The Subordinated Notes are not subject to redemption at the option of the holders. The Subordinated Notes are unsecured, subordinated obligations of the Company only and are not obligations of, and are not guaranteed by, any subsidiary of the Company. The Subordinated Notes rank junior in right to payment to the Company's current and future senior indebtedness. The Subordinated Notes are intended to qualify as Tier 2 capital for regulatory capital purposes.
At September 30, 2025, the carrying cost of the Subordinated Notes on the consolidated balance sheet represents the outstanding balance of the notes net of unamortized origination costs of $
782,000
which are amortized to interest expense through September 1, 2029.
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.
The Company uses non-GAAP financial information in its analysis of performance. These non-GAAP ratios and calculations provide a better understanding of ongoing operations and comparability with prior period results by showing the effects of significant gains and charges in the periods presented. The Company believes that investors may use these non-GAAP measures to analyze the Company's financial performance without the impact of unusual items or events that may obscure trends. This non-GAAP data is not a substitute for GAAP results and should be considered in addition to results prepared in accordance with GAAP. Non-GAAP financial measures include risks as companies might calculate these measures differently and persons might disagree as to the appropriateness of items included in these measures. Please see table under the
RESULTS OF OPERATIONS - OVERVIEW
section,
"Impact of Merger-Related Costs--GAAP to Non-GAAP Measure Reconciliation."
In 2025, the Company changed its calculation of average assets and average equity to include the impact of accumulated other comprehensive income (loss), net of tax, to align its calculation with its peer group. Prior period information has been restated for this new calculation; specifically impacting the non-GAAP performance ratios for return on average assets and return on average equity.
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 2024 Form 10-K, could affect the future financial results of QNB 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;
45
•
Economic, political and competitive forces affecting QNB’s business, including the effects of inflation;
•
The effects of unforeseen external events, including acts of terrorism, natural disasters, and pandemics; and
•
The risk that the analysis of these risks and forces could be incorrect, and/or that the strategies developed to address them could be unsuccessful.
QNB cautions that these forward-looking statements are subject to numerous assumptions, risks and uncertainties, all of which change over time, and QNB assumes no duty to update forward-looking statements. Management cautions readers not to place undue reliance on any forward-looking statements. These statements speak only as of the date of this report on Form 10-Q, even if subsequently made available by QNB on its website or otherwise, and they advise readers that various factors, including those described above, could affect QNB’s financial performance and could cause actual results or circumstances for future periods to differ materially from those anticipated or projected. Except as required by law, QNB does not undertake, and specifically disclaims any obligation, to publicly release any revisions to any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Disclosure of our significant accounting policies is included in Note 1 to the consolidated financial statements of the Annual Report on Form 10-K for the year ended December 31, 2024, which is incorporated herein by reference. Some of these policies are particularly sensitive requiring significant judgments, estimates and assumptions.
RESULTS OF OPERATIONS - OVERVIEW
QNB reported net income for the third quarter of 2025 of $3,648,000, or $0.98 per share on a diluted basis, compared to net income of $3,338,000, or $0.91 per share on a diluted basis, for the same period in 2024. For the nine-month period ended September 30, 2025, QNB reported net income of $10,109,000, or $2.72 per share on a diluted basis, compared to net income of $8,397,000, or $2.29 per share on a diluted basis, for the same period in 2024.
On September 23, 2025, QNB Corp. and The Victory Bancorp, Inc. (Victory) announced they have entered into a definitive agreement under which QNB will acquire Victory in an all-stock transaction, creating a bank holding company with nearly $2.4 billion in assets. Upon the completion of the merger, the pro-forma post-merger shareholder ownership split would be approximately 76.4% for QNB and 23.6% for Victory. The transaction is expected to close in the fourth quarter of 2025 or first quarter of 2026, subject to satisfaction of customary closing conditions, including regulatory approvals and approval from both QNB and Victory shareholders.
Results for the third quarter and nine months ending September 30, 2025 included significant merger-related costs that are non-recurring
46
of $519,000; the costs are not normal recurring operating expenses. The following table shows
calculated impact of the merger-related costs on net income and ratios, reconciling GAAP to non-GAAP measurements:
Impact of Merger-Related Costs--GAAP to Non-GAAP Measure Reconciliation
(Dollars in thousands, except per share data)
Three months ended,
Nine months ended,
For the period:
9/30/2025
9/30/2024
Variance
9/30/2025
9/30/2024
Variance
Net income (GAAP)
$
3,648
$
3,338
$
310
$
10,109
$
8,397
$
1,712
Merger-related costs
519
—
519
519
—
519
Income tax benefit
(109
)
—
(109
)
(109
)
—
(109
)
Merger-related costs, net of tax
410
—
410
410
—
410
Net income excluding impact of merger-related costs (Non-GAAP)
$
4,058
$
3,338
$
720
$
10,519
$
8,397
$
2,122
Share and Per Share Data:
Basic:
EPS using Net income (GAAP)
$
0.98
$
0.91
$
0.07
$
2.72
$
2.29
$
0.43
EPS using Net income excluding impact of merger-related costs (Non-GAAP)
$
1.09
$
0.91
$
0.18
$
2.83
$
2.29
$
0.54
Fully-diluted:
EPS using Net income (GAAP)
$
0.98
$
0.91
$
0.07
$
2.72
$
2.29
$
0.43
EPS using Net income excluding impact of merger-related costs (Non-GAAP)
$
1.09
$
0.91
$
0.18
$
2.83
$
2.29
$
0.54
Average common shares outstanding:
Basic
3,721,501
3,679,799
3,710,824
3,666,937
Diluted
3,735,993
3,682,773
3,723,196
3,666,937
Selected Ratios:
Return on Average Assets (ROAA):
ROAA using Net income (GAAP)
0.76
%
0.74
%
2 bp
0.72
%
0.64
%
8 bp
ROAA using Net income excluding impact of merger-related costs (Non-GAAP)
0.85
%
0.74
%
11 bp
0.74
%
0.64
%
10 bp
Return on Average Equity (ROAE):
ROAE using Net income (GAAP)
12.49
%
13.25
%
-76 bp
12.18
%
11.83
%
35 bp
ROAE using Net income excluding impact of merger-related costs (Non-GAAP)
13.89
%
13.25
%
64 bp
12.68
%
11.83
%
85 bp
Average Assets
$
1,904,529
$
1,792,952
$
1,888,321
$
1,744,387
AverageEquity
$
115,907
$
100,192
$
110,934
$
94,794
Excluding the impact of the merger-related costs net of tax, diluted earnings per share were $1.09 and $2.83 for the three and nine month periods of 2025, respectively. The Bank contributed $12,808,000 to net income for the nine months ended September 30, 2025 compared to $8,466,000 for the same period 2024; and the holding company had a negative contribution of $2,699,000 to net income for the nine months ended September 30, 2025 compared to a negative contribution of $69,000 for the same period 2024. The improved results at the Bank were primarily due to improvement in the interest margin causing a $7,612,000 increase in net interest income and a $140,000 increase in non-interest income; this was partly offset by and an increase in the provision for credit losses on loans and unfunded commitments of $310,000 and an increase in non-interest expense of $1,931,000. The change in contribution from QNB Corp. is
47
primarily due to a decrease in net interest income of $2,312,000, related to the subordinated debt issuance at the end of the third quarter of 2024, an increase in non-interest expense of $793,000, primarily due to merger-related expenses and a decrease of $311,000 in non-interest income due to realized and unrealized gain on the equity portfolio in 2024 compared to none in 2025.
Net income expressed as an annualized rate of return on average assets and average shareholders’ equity was 0.76% and 12.49%, respectively, for the quarter ended September 30, 2025 compared with 0.74% and 13.25%, respectively, for the quarter ended September 30, 2024. Net income expressed as an annualized rate of return on average assets and average shareholders’ equity was 0.72% and 12.18%, respectively, for the nine months ended September 30, 2025 compared with 0.64% and 11.83%, respectively, for the nine months ended September 30, 2024. . Return on average assets, excluding the impact of the merger-related cost, for the three- and nine-month periods of 2025 was 0.85% and 0.74%, respectively. Return on average equity,excluding the impact of the merger-related cost, for the three- and nine-month periods of 2025 was 0.13.89% and 12.68%, respectively.
Total assets as of September 30, 2025 were $1,903,244,000, compared with $1,870,894,000 at December 31, 2024. Loans receivable at September 30, 2025 were $1,246,529,000, a $30,481,000 increase from $1,216,048,000 at December 31, 2024. Total deposits of $1,681,540,000 at September 30, 2025 increased $52,999,000 compared with total deposits of $1,628,541,000 at December 31, 2024.
Results for the three and nine months ended September 30, 2025 include the following significant components:
•
Net interest income increased $1,871,000, or 16.8%, to $12,998,000 and increased $5,300,000, or 16.6%, to $37,187,000 for the three and nine months ended September 30, 2025, respectively.
•
Net interest margin on a tax-equivalent basis increased 24 basis points for the quarter to 2.72% compared to 2.48% for the same period in 2024. Net interest margin on a tax-equivalent basis increased 19 basis points for the nine months ended September 30, 2025 to 2.64% compared to 2.45% for the same period in 2024.
•
QNB recorded a $98,000 provision for credit losses on loans for the third quarter of 2025, compared with a provision of $154,000 for the same period in 2024. QNB recorded $504,000 in its provision for credit losses on loans for the nine months ended September 30, 2025, compared with $193,000 for the same period in 2024.
•
Non-interest income decreased $120,000, to $1,847,000 for the third quarter and decreased $185,000, to $5,083,000 for the nine months ended September 30, 2025 compared with the same periods in 2024. Excluding realized and unrealized gains (losses) on securities, non-interest income increased $247,000, or 15.4%, to $1,847,000 for the third quarter of 2025 compared to $1,600,000 for the same period in 2024; and increased $449,000, to $5,083,000 for the nine months ended September 30, 2025 compared with $4,634,000 the same period in 2024.
•
Non-interest expense increased $1,546,000 to $10,182,000 for the third quarter of 2025 and increased $2,710,000, to $29,113,000 for the nine months ended September 30, 2025 compared with the same periods in 2024. Non-interest expense, excluding merger-related costs increased $1,027,000, or 11.9% to $9,663,000 for the third quarter of 2025 and increased $2,191,000, or 8.3%,to $28,594,000 for the nine months ended September 30, 2025 compared with the same periods in 2024.
•
Total non-performing loans, comprised of loans on non-accrual status, were $8,947,000, or 0.72% of loans receivable at September 30, 2025, compared to $1,975,000, or 0.16% of loans receivable at December 31, 2024. Net loan recoveries for the nine months ended September 30, 2025 were $7,000, compared with net charge-offs of $58,000 for the same period in 2024.
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.
48
The following table presents the adjustment to convert net interest income to net interest income on a fully taxable-equivalent basis for the three- and nine-month periods ended September 30, 2025 and 2024.
For the Three Months Ended September 30,
For the Nine Months Ended September 30,
2025
2024
2025
2024
Total interest income
$
23,518
$
21,945
$
68,826
$
61,859
Total interest expense
10,520
10,818
31,639
29,972
Net interest income
12,998
11,127
37,187
31,887
Tax-equivalent adjustment
109
137
349
416
Net interest income (fully taxable-equivalent)
$
13,107
$
11,264
$
37,536
$
32,303
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 and Federal funds sold. Sources used to fund these assets include deposits and borrowed funds. Net interest income is affected by changes in interest rates, the volume and mix of earning assets and interest-bearing liabilities, and the amount of earning assets funded by non-interest-bearing deposits.
For purposes of this discussion, interest income and the average yield earned on loans and investment securities are adjusted to a tax-equivalent basis as detailed in the tables that appear above. This adjustment to interest income is made for analysis purposes only. Interest income is increased by the amount of savings of Federal income taxes, which QNB realizes by investing in certain tax-exempt state and municipal securities and by making loans to certain tax-exempt organizations. In this way, the ultimate economic impact of earnings from various assets can be more easily compared.
The net interest rate spread is the difference between average rates received on earning assets and average rates paid on interest-bearing liabilities, while the net interest rate margin, which includes interest-free sources of funds, is net interest income expressed as a percentage of average interest-earning assets. The Asset/Liability and Investment Management Committee works to manage and maximize the net interest margin for the Company.
49
Average Balances, Rate, and Interest Income and Expense Summary (Tax-Equivalent Basis)
For the Three Months Ended
September 30, 2025
September 30, 2024
Average
Average
Average
Average
Balance
Rate
Interest
Balance
Rate
Interest
Assets
Investment securities (AFS & Equity):
U.S. Treasury securities
$
20,556
4.18
%
$
216
$
12,811
4.94
%
$
159
U.S. Government agencies
75,965
1.18
224
75,956
1.18
224
State and municipal
104,934
2.87
754
105,674
3.74
989
Mortgage-backed and CMOs
344,214
2.50
2,152
345,119
2.84
2,453
Corporate debt securities and money market funds
66,535
6.11
1,017
8,804
5.97
131
Equities
—
—
—
3,959
4.61
46
Total investment securities
612,204
2.85
4,363
552,323
2.90
4,002
Loans:
Commercial real estate
885,635
5.95
13,285
819,091
5.60
11,525
Residential real estate
116,550
4.52
1,316
110,760
4.21
1,165
Home equity loans
71,090
6.34
1,135
66,239
6.84
1,138
Commercial and industrial
128,744
7.45
2,418
140,980
7.61
2,696
Consumer loans
3,182
8.06
64
3,613
7.75
70
Tax-exempt loans
19,629
4.28
211
18,305
3.88
179
Total loans, net of unearned income*
1,224,830
5.97
18,429
1,158,988
5.76
16,773
Other earning assets
74,054
4.47
835
95,780
5.43
1,307
Total earning assets
1,911,088
4.91
23,627
1,807,091
4.86
22,082
Cash and due from banks
16,062
15,540
Accumulated other comprehensive loss, net of tax
(56,590
)
(63,082
)
Allowance for credit losses on loans
(9,185
)
(8,860
)
Other assets
43,154
42,263
Total assets
$
1,904,529
$
1,792,952
Liabilities and Shareholders' Equity
Interest-bearing deposits:
Interest-bearing demand
$
377,473
0.98
%
933
$
356,763
1.00
%
898
Municipals
179,161
3.76
1,697
154,619
4.69
1,823
Money market
256,289
2.87
1,852
238,494
3.56
2,132
Savings
277,808
1.28
899
278,247
1.28
896
Time < $100
178,371
3.52
1,583
178,228
4.12
1,846
Time $100 through $250
157,409
3.89
1,545
152,416
4.64
1,777
Time > $250
56,258
3.95
560
49,506
4.61
573
Total interest-bearing deposits
1,482,769
2.43
9,069
1,408,273
2.81
9,945
Short-term borrowings
57,063
3.57
514
34,078
2.18
186
Long-term debt
—
—
—
30,000
4.75
364
Subordinated debt
39,191
9.57
937
13,716
9.42
323
Total borrowings
96,254
5.98
1,451
77,794
4.47
873
Total interest-bearing liabilities
1,579,023
2.64
10,520
1,486,067
2.90
10,818
Non-interest-bearing deposits
195,349
192,652
Other liabilities
14,250
14,041
Shareholders' equity
115,907
100,192
Total liabilities and shareholders' equity
$
1,904,529
$
1,792,952
Net interest rate spread
2.27
%
1.96
%
Margin/net interest income
2.72
%
$
13,107
2.48
%
$
11,264
50
For the Nine Months Ended
September 30, 2025
September 30, 2024
Average
Average
Average
Average
Balance
Rate
Interest
Balance
Rate
Interest
Assets
Investment securities (AFS & Equity):
U.S. Treasury securities
$
20,582
4.26
%
$
656
$
8,820
5.10
%
$
337
U.S. Government agencies
75,963
1.18
672
81,800
1.17
718
State and municipal
105,092
2.87
2,264
107,237
3.56
2,860
Mortgage-backed and CMOs
353,997
2.46
6,544
355,878
2.72
7,262
Corporate debt securities
64,276
6.44
3,106
7,416
5.78
321
Equities
—
—
—
5,487
3.87
159
Total investment securities
619,910
2.85
13,242
566,638
2.74
11,657
Loans:
Commercial real estate
868,880
5.87
38,129
798,714
5.47
32,701
Residential real estate
115,149
4.41
3,809
109,463
4.07
3,337
Home equity loans
69,921
6.39
3,339
64,700
6.83
3,307
Commercial and industrial
140,822
7.42
7,817
141,148
7.57
7,997
Consumer loans
3,327
7.81
194
3,679
7.78
214
Tax-exempt loans
19,260
4.22
608
18,410
3.86
532
Total loans, net of unearned income*
1,217,359
5.92
53,896
1,136,114
5.65
48,088
Other earning assets
61,114
4.46
2,037
61,999
5.45
2,530
Total earning assets
1,898,383
4.87
69,175
1,764,751
4.71
62,275
Cash and due from banks
14,375
13,880
Accumulated other comprehensive loss, net of tax
(58,821
)
(66,664
)
Allowance for credit losses on loans
(9,102
)
(8,897
)
Other assets
43,486
41,317
Total assets
$
1,888,321
$
1,744,387
Liabilities and Shareholders' Equity
Interest-bearing deposits:
Interest-bearing demand
$
378,157
0.98
%
2,765
$
337,632
0.89
%
2,243
Municipals
158,426
3.87
4,580
139,810
4.76
4,987
Money market
257,392
2.87
5,532
232,140
3.57
6,196
Savings
279,507
1.29
2,693
288,885
1.28
2,769
Time < $100
178,760
3.64
4,870
168,894
3.98
5,027
Time $100 through $250
155,532
4.04
4,700
141,156
4.53
4,790
Time > $250
52,319
4.10
1,605
50,855
4.49
1,709
Total interest-bearing deposits
1,460,093
2.45
26,745
1,359,372
2.72
27,721
Short-term borrowings
58,546
3.79
1,659
57,880
2.33
1,010
Long-term debt
11,758
4.74
423
26,058
4.63
918
Subordinated debt
39,142
9.58
2,812
4,605
9.35
323
Total borrowings
109,446
5.98
4,894
88,543
3.40
2,251
Total interest-bearing liabilities
1,569,539
2.70
31,639
1,447,915
2.77
29,972
Non-interest-bearing deposits
193,173
187,918
Other liabilities
14,675
13,760
Shareholders' equity
110,934
94,794
Total liabilities and shareholders' equity
$
1,888,321
$
1,744,387
Net interest rate spread
2.17
%
1.94
%
Margin/net interest income
2.64
%
$
37,536
2.45
%
$
32,303
51
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 and nine months ended September 30, 2025 and 2024.
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
For the Nine Months Ended
September 30, 2025 compared
September 30, 2025 compared
to September 30, 2024
to September 30, 2024
Total
Due to change in:
Total
Due to change in:
Change
Volume
Rate
Change
Volume
Rate
Interest income:
Investment securities (AFS & Equity):
U.S. Treasury securities
$
57
$
96
$
(39
)
$
319
$
448
$
(129
)
U.S. Government agencies
—
—
—
(46
)
(51
)
5
State and municipal
(235
)
(6
)
(229
)
(596
)
(57
)
(539
)
Mortgage-backed and CMOs
(301
)
(6
)
(295
)
(718
)
(38
)
(680
)
Corporate debt securities and money market funds
886
861
25
2,785
2,463
322
Equities
(46
)
(46
)
—
(159
)
(159
)
—
Total Investment securities (AFS & Equity)
361
899
(538
)
1,585
2,606
(1,021
)
Loans:
Commercial real estate
1,760
970
790
5,428
2,840
2,588
Residential real estate
151
61
90
472
174
298
Home equity loans
(3
)
87
(90
)
32
263
(231
)
Commercial and industrial
(278
)
(227
)
(51
)
(180
)
(26
)
(154
)
Consumer loans
(6
)
(9
)
3
(20
)
(21
)
1
Tax-exempt loans
32
12
20
76
24
52
Total Loans
1,656
894
762
5,808
3,254
2,554
Other earning assets
(472
)
(294
)
(178
)
(493
)
(38
)
(455
)
Total interest income
1,545
1,499
46
6,900
5,822
1,078
Interest expense:
Interest-bearing deposits:
Interest-bearing demand
35
55
(20
)
522
267
255
Municipals
(126
)
295
(421
)
(407
)
659
(1,066
)
Money market
(280
)
166
(446
)
(664
)
668
(1,332
)
Savings
3
2
1
(76
)
(92
)
16
Time < $100
(263
)
4
(267
)
(157
)
287
(444
)
Time $100 through $250
(232
)
63
(295
)
(90
)
483
(573
)
Time > $250
(13
)
80
(93
)
(104
)
48
(152
)
Total interest-bearing deposits
(876
)
665
(1,541
)
(976
)
2,320
(3,296
)
Short-term borrowings
328
129
199
649
12
637
Long-term debt
(364
)
(363
)
(1
)
(495
)
(505
)
10
Subordinated debt
614
599
15
2,489
2,421
68
Total borrowings
578
365
213
2,643
1,928
715
Total interest expense
(298
)
1,030
(1,328
)
1,667
4,248
(2,581
)
Net interest income
$
1,843
$
469
$
1,374
$
5,233
$
1,574
$
3,659
52
Net Interest Income and Net Interest Margin – Quarterly Comparison
Average earning assets for the third quarter of 2025 were $1,911,088,000, an increase of $103,997,000, or 5.8%, from the third quarter of 2024, with average loans increasing $65,842,000, or 5.7%, and average investment securities increasing $59,881,000, or 10.8%, over the same period in 2024. Proceeds from the growth in average deposits and the issuance of subordinated debt over the past year were invested in loans and higher-yielding securities. Average loans as a percentage of average earning assets was 64.1% for the third quarter of 2025, unchanged from 64.1% for the third quarter of 2024. On the funding side, average deposits increased $77,193,000, or 4.8%, to $1,678,118,000 for the third quarter of 2025 primarily due to an increase in interest-bearing demand, municipal deposits, money market products and time deposits. Average short-term borrowed funds, which consisted primarily of average commercial repurchase agreements and FHLB borrowings, increased $22,985,000 to $57,063,000 for the third quarter of 2025 compared to $34,078,000 for the same period in 2024. Proceeds from the issuance of short-term debt were used to payoff long-term debt which decreased on average $30,000,000. During the third quarter of 2024, QNB Corp. issued $40,000,000 of subordinated debt; the carrying value net of deferred costs was $39,218,000 at September 30, 2025.
The net interest margin for the third quarter of 2025 increased 24 basis points to 2.72% from 2.48% for the same period in 2024. Competition for quality loans and deposits in our local market continues to exert pressure on the net interest margin. Repricing strategies on loans and deposits have had a positive impact on the net interest margin.
The Rate-Volume Analysis tables, as presented on a tax-equivalent basis, highlight the impact of changing rates and volumes on interest income and interest expense. Total interest income on a tax-equivalent basis increased $1,545,000, or 7.0%, to $23,627,000 for the third quarter of 2025; total interest expense decreased $298,000 to $10,520,000.
The yield on earning assets on a tax-equivalent basis increased five basis points to 4.91% for the third quarter of 2025, from 4.86% for the third quarter of 2024. The cost of interest-bearing liabilities was 2.64% for the third quarter of 2025, compared with 2.90% for the same period in 2024.
Interest income on investment securities (available-for-sale and equity) increased $361,000 when comparing the third quarters of 2025 and 2024. The average yield on the investment portfolio was 2.85% for the third quarter of 2025 compared with 2.90% for the same period in 2024, a decrease of five basis points.
The yield on U.S. Treasury securities was 4.18% for the second quarter of 2025 compared to 4.94% for the same period in 2024; the decline in rate was more than offset by the average balances increase of $7,745,000 for a net increase in interest income of $57,000. The average balances of U.S. Government agency securities increased $9,000 as the average rate remained unchanged at 1.18%.
Interest income on municipal securities, which are primarily tax-exempt, decreased $235,000 due to an 87 basis-point decrease in rate, and a $740,000 decrease in average balances. Typically, QNB purchases municipal bonds with 10- to 20-year maturities and may have call dates between 2-10 years.
Interest income on mortgage-backed securities and CMOs decreased $301,000 and average balances decreased $905,000 and the yield decreased 34 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.
Interest income on corporate debt and mutual funds increased $886,000 as average balances increased $57,731,000 and the average yield increased 14 basis points. Proceeds from the issuance of subordinated debt were invested in high-yielding securities.
Average balances on equities decreased $3,959,000 as the portfolio was sold during 2024; this was the cause of the $46,000 decrease in dividends comparing the third quarter of 2025 to the same period in 2024. Proceeds from sales of equities in 2024 were reinvested in higher yielding treasury securities.
Income on loans increased $1,656,000 to $18,429,000 when comparing the Third quarters of 2025 and 2024, with a $65,842,000 increase in average balances contributing to an increase in interest income of $894,000 and a 21-basis point increase in yield contributing to a $762,000 increase in interest income. Higher interest rates during the repricing period were partially offset by competitive pressures that compressed the yields on new loans.
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 $1,760,000 when comparing the third quarters of 2025 and 2024, primarily due to a 35-basis point increase in rate from 5.60% in 2024 to 5.95% and increased average balances of $66,544,000, or 8.1%.
53
Income on commercial and industrial loans decreased $278,000 when comparing the third quarters of 2025 and 2024. The average yield on these loans decreased 16 basis points to 7.45% resulting in a decrease in income of $51,000; average balances decreased $12,236,000, to $128,744,000 for the third quarter of 2025 resulting in a $227,000 decrease in interest income. Many of the loans in this category are indexed to the prime interest rate.
Tax-exempt loan income increased $32,000 for the third quarter of 2025 compared to the same period in 2024. Average balances increased $1,324,000 to $19,629,000 for the third quarter of 2025. The yield on municipal loans increased 40 basis points, to 4.28% for the third quarter of 2025, compared with the same period in 2024.
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 $151,000 when comparing the third quarter of 2025 to the same period in 2024. Average residential mortgage loan balances increased by $5,790,000, or 5.2%, to $116,550,000 for the third quarter of 2025 compared to the same period in 2024, which contributed a $61,000 increase in interest income. The average yield on the portfolio increased 31 basis points and contributed an increase of $90,000 to 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 increased during the 2025 period by $4,851,000 to $71,090,000 and the average yield decreased 50 basis points to 6.34% resulting in a $3,000 net decrease in interest income. The yield on the consumer portfolio increased 31 basis points to 8.06% for the third quarter of 2025 and there was a $431,000 decrease in average balances resulting in a net $6,000 decrease in interest income. The decrease in consumer loans was primarily due to the repayment of student loan balances.
Earning assets are funded by deposits and borrowed funds. Interest expense decreased $298,000, when comparing the third quarter of 2025 to the same period in 2024. QNB experienced average balance increases in all deposit categories except savings accounts. Average savings balances decreased $439,000 to $277,808,000. QNB offered several new interest-bearing demand and money market products offering higher yields to retain large depositors and reduce the reliance on higher-cost short-term borrowings. Average non-interest-bearing demand accounts increased $2,697,000 to $195,349,000 for the third quarter of 2025. Average interest-bearing demand accounts increased $20,710,000, or 5.8%, to $377,473,000 for the third quarter of 2025 and the average rate paid on these deposits decreased two basis points; interest expense on interest-bearing demand accounts increased $35,000 to $933,000 for the same period. Average money market accounts increased $17,795,000, or 7.5%, to $256,289,000 for the third quarter of 2025 compared with the same period in 2024. Interest expense on money market accounts decreased $280,000 to $1,852,000, and the average interest rate paid on money market accounts decreased 69 basis points to 2.87% for the third quarter of 2025. Most of the balances in this category are in products that pay tiered rates based on account balances.
Interest expense on municipal interest-bearing demand accounts decreased $126,000 to $1,697,000 for the third quarter of 2025. The average interest rate paid on municipal interest-bearing demand accounts decreased 93 basis points to 3.76% for the third quarter of 2025 over the same quarter of 2024, and average balances increased $24,542,000 to $179,161,000. 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 second and third quarters as tax receipts are collected and are withdrawn over the course of the year.
Interest expense on savings accounts increased $3,000 when comparing the third quarter of 2025 to the same quarter of 2024. The average interest rate paid on savings accounts remained the same at 1.28% for the third quarter of 2025. When comparing these same periods, average savings accounts decreased $439,000, or 0.2%, to $277,808,000 for the third quarter of 2025. QNB’s online e-Savings product is the largest category of savings deposits, with average balances for the third quarter of 2025 of $206,099,000 compared to $202,810,000 in the same period of 2024. The average yield paid on these accounts was 1.69% for the third quarter of 2025 compared to 1.72% for the same period in 2024. Traditional statement savings accounts, passbook savings and club accounts are also included in the savings category and average balances in these types of savings accounts decreased $3,728,000 when comparing the third quarter of 2025 to the same period in 2024.
Interest expense on time deposits totaled $3,688,000 for the third quarter of 2025 compared to $4,196,000 in 2024. Average total time deposits increased $11,888,000 to $392,038,000 for the third quarter of 2025. 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.
Approximately $370,048,000, or 96%, of time deposits at September 30, 2025 will mature over the next 12 months. The average rate paid on these time deposits is approximately 3.09%. The yield on the time deposit portfolio may change in the next quarter as short-term time deposits reprice; however, given the short-term nature of these deposits, interest expense may increase if short-term time deposit rates were to increase suddenly or if customers select higher paying time deposits.
Short-term borrowings are comprised of sweep accounts structured as repurchase agreements with our commercial customers and short-term FHLB borrowing. Interest expense on short-term borrowings increased $328,000 for the third quarter of 2025 to $514,000 when
54
compared to the same period in 2024. When comparing these same periods, average balances increased $22,985,000 to $57,063,000. The yield on customer repos increased 29 basis points for the third quarter of 2025 to 2.47%. FHLB borrowings increased $35,867,000 over the third quarter of 2024 and interest increased $383,000 in the third quarter of 2025 at an average rate of 4.24%.
Average long-term borrowings decreased $30,000,000 as there were no long-term borrowings for the third quarter of 2024.
During the third quarter of 2024, the QNB Corp. issued $40,000,000 of subordinated debt; the average carrying value net of deferred costs was $39,191,000 for the third quarter of 2025 compared to $13,716,000 for same period in 2024. The average yield increased 15 basis points from 9.42% to 9.57% includes the amortization of the deferred costs. The subordinated debt will initially bear interest at 8.875% per annum from and including the original issue date of the subordinated notes to but excluding September 1, 2029, payable semi-annually in arrears. From September 1, 2029, through maturity or up to an early redemption date, the interest rate resets quarterly to an interest rate per annum equal to the then current three-month SOFR plus a spread, payable quarterly in arrears. On or after the fifth anniversary of the original issue date through maturity, the QNB has the option to redeem the subordinated debt, in whole or in part, on any scheduled interest payment date. QNB may also redeem the subordinated debt in whole at any time in the event of certain specified events. The subordinated debt will mature on September 1, 2034.
Net Interest Income and Net Interest Margin – Nine-Month Comparison
For the nine-month period ending September 30, 2025 average earning assets increased $133,632,000, or7.6%, to $1,898,383,000, with average loans increasing 7.2% and average investment securities increasing 9.4%. Average total deposits increased $105,976,000, or 6.8%, to $1,653,266,000 for the nine-month period ended September 30, 2025 compared to the same period in 2024. The net interest margin on a tax-equivalent basis was 2.64% for the nine-month period ended September 30, 2025, a 19-basis point increase from the same period in 2024.
Total interest income on a tax-equivalent basis increased $6,900,000, or 11.1%, to $69,175,000, when comparing the nine-month periods ended September 30, 2025 and September 30, 2024 primarily due to an increase in volume and rate on loans. Interest income on loans increased $3,254,000 as a result of volume and increased $2,554,000 as a result of yields. The analysis of the nine-month comparison periods is similar to what was described in the quarterly analysis.
The yield on earning assets increased from 4.71% to 4.87% for the nine-month periods with the yield on loans up 27 basis points to 5.92%. QNB continues to experience pressure on yields due to competitive pressures on loan pricing.
Total interest expense increased $1,667,000 for the nine-month period ended September 30, 2025 compared with the same period in 2024 attributable to an increase in volume. Average interest-bearing liabilities increased $121,624,000 and the average rate paid on interest-bearing liabilities decreased seven basis points to 2.70% for the nine-month period ended September 30, 2025 versus the same period in 2024. Average interest-bearing deposits increased $100,721,000 and the related interest expense decreased $976,000, as the rate decreased 27 basis points, for the nine-month period ended September 30, 2025 versus the same period in 2024. The average balance of total long-term borrowings decreased $14,300,000 for the nine months ended September 30, 2025 compared to the same period in 2024 and the average balance of subordinated debt increased $34,537,000. QNB invested proceeds from the issuance of subordinated debt and deposit growth into loans, investments and paying off long-term borrowings.
PROVISION FOR CREDIT LOSSES, ALLOWANCE FOR CREDIT LOSSES ON LOANS AND ALLOWANCE FOR CREDIT LOSSES ON UNUSED COMMITMENTS
The provision for credit losses represents management's determination of the amount necessary to be charged to operations to bring the allowance for credit losses on loans and the allowance for credit losses on unused commitments to amounts that are intended to absorb historical loss experience, current conditions and reasonable and supportable forecasts, in the outstanding loan portfolio and the unused commitments. Management believes that it uses the best information available to make determinations about the adequacy of these allowances and that it has established its existing allowances for credit losses on loan and on unused commitments in accordance with U.S. GAAP. The determination of an appropriate level for the allowance for credit losses on loans and the allowance for credit losses on unused commitments are based upon an analysis of the risks inherent in QNB’s loan portfolio.
Since the allowance for credit losses on loans and the reserve on unused commitments is dependent, to a great extent, on conditions that may be beyond QNB’s control, it is at least reasonably possible that management’s calculations and actual results could differ. In addition, various regulatory agencies, as an integral part of their examination process, periodically review QNB’s allowance for credit 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.
55
Based on this analysis, QNB recorded $504,000 in the provision for credit losses on loans for the nine months ended September 30, 2025, through the allowance for credit losses on loans, compared to $193,000 through the provision for credit losses for the same period in 2024. QNB recorded a reversal of provision of $7,000 for the allowance for credit losses for unused commitments in the nine months ended September 30, 2025 compared to a reversal in provision of $6,000 for the same period in 2024.
QNB's allowance for credit losses on loans of $9,255,000 represents 0.74% of loans receivable at September 30, 2025 compared with an allowance for credit losses on loans of $8,744,000, or 0.72% of loans receivable, at December 31, 2024, and $8,987,000, or 0.77%, at September 30, 2024. Management believes the allowance for credit losses on loans at September 30, 2025 is adequate as of that date based on its analysis of historical loss experience, current conditions and reasonable and supportable forecasts in the portfolio.
Net charge-offs were $12,000 for the three months ended September 30, 2025 compared to net charge-offs of $25,000 for the three months ended September 30, 2024. Charge-offs consisted of overdrafts of $30,000 and other consumer loans of $3,000. Recoveries of approximately $21,000 during the three months ended September 30, 2025 consisted of $16,000 in repayments from borrowers of previously charged-off credits and overdrafts recoveries of $5,000. Annualized net charge-offs as a percentage of average loans receivable were 0.00% for the three months ended September 30, 2025, compared to annualized net charge-offs of 0.01% for the three months ended September 30, 2024.
Net recoveries were $7,000 for the nine months ended September 30, 2025 compared to net charge-offs of $58,000 for the nine months ended September 30, 2024. Charge-offs of approximately $89,000 during the nine months ended September 30, 2025 consisted primarily of overdrafts of $74,000 and consumer loans of $15,000. These were offset by $96,000 in recoveries comprising $81,000 in repayments from borrowers of previously charged-off credits, and $15,000 related to overdraft recoveries. Annualized net recoveries as a percentage of average loans receivable were 0.00% for the nine months ended September 30, 2025, compared to annualized net charge-offs of 0.01% for the nine months ended September 30, 2024.
Non-performing assets were $8,947,000 at September 30, 2025 compared to $1,975,000 as of December 31, 2024 and $1,696,000 at September 30, 2024. Total non-performing loans, which represent loans on non-accrual status, loans past due 90 days or more and still accruing interest, were 0.72% of loans receivable at September 30, 2025, 0.16% at December 31, 2024 and 0.14% of loans receivable at September 30, 2024. The increase in non-accrual loans was primarily due to one commercial relationship placed on nonaccrual status during 2025. 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. Commercial loans classified as substandard or doubtful totaled $34,973,000, an increase of $672,000 from the $34,301,000 reported at December 31, 2024 and an increase of $8,140,000 from the $26,833,000 reported at September 30, 2024.
QNB had no loans past due 90 days or more and still accruing interest at September 30, 2025, December 31, 2024, or September 30, 2024. Total loans 30 days or more past due, which includes non-accrual loans by actual number of days delinquent, represented 0.61% of loans receivable at September 30, 2025 compared with 0.18% at December 31, 2024, and 0.18% at September 30, 2024.
There were two loan modifications to one borrower experiencing financial difficulty identified during the nine months ended September 30, 2025. These two loans continue to be reported as nonaccrual as there is a collateral deficiency. The loans were modified to interest only payments for twelve months. QNB had no other real estate owned or repossessed assets at September 30, 2025, December 31, 2024 or September 30, 2024.
A loan is considered collateral dependent, 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 if a loan is collateral dependent 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 collateral dependent. 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. Deficiency is measured on a loan-by-loan basis for all non-accrual loans, except student 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.
56
The following table shows detailed information and ratios pertaining to the Company’s loan and asset quality:
September 30,
December 31,
September 30,
2025
2024
2024
Non-accrual loans
$
8,947
$
1,975
$
1,696
Loans past due 90 days or more and still accruing interest
—
—
—
Total non-performing loans
8,947
1,975
1,696
Total non-performing assets
$
8,947
$
1,975
$
1,696
Total loans (excluding loans held-for-sale):
Average total loans (YTD)
$
1,216,987
$
1,150,489
$
1,135,898
Total loans
1,246,529
1,216,048
1,171,361
Allowance for credit losses on loans
9,255
8,744
8,987
Allowance for loan losses to:
Non-performing loans
103.44
%
442.73
%
529.89
%
Total loans (excluding held-for-sale)
0.74
%
0.72
%
0.77
%
Average total loans (excluding held-for-sale)
0.76
%
0.76
%
0.79
%
Non-performing loans / total loans (excluding held-for-sale)
0.72
%
0.16
%
0.14
%
Non-performing assets / total assets
0.47
%
0.11
%
0.09
%
An analysis of net loan charge-offs (recoveries) for the three and nine months ended September 30, 2025 compared to the same periods in 2024 is as follows:
For the Three Months Ended September 30,
For the Nine Months Ended September 30,
2025
2024
2025
2024
Net charge-offs (recoveries)
$
12
$
25
$
(7
)
$
58
Net annualized charge-offs (recoveries) to:
Total loans
0.00
%
0.01
%
(0.00
)%
0.01
%
Average total loans excluding held-for-sale
0.00
%
0.01
%
(0.00
)%
0.01
%
Allowance for loan losses
0.51
%
1.11
%
(0.10
)%
0.86
%
At September 30, 2025 and December 31, 2024, the recorded investment in collateral dependent loans totaled $8,936,000 and $1,923,000 of which $1,848,000 and $1,607,000, respectively, required no specific allowance for loan loss. The recorded investment in collateral dependent loans requiring an allowance for loan losses was $7,088,000 and $357,000 at September 30, 2025 and December 31, 2024, respectively, and the related allowance for loan losses associated with these loans was $1,412,000 and $308,000, respectively. See Note 8 to the Notes to Consolidated Financial Statements for additional detail of collateral dependent loans.
57
NON-INTEREST INCOME
Non-Interest Income Comparison
For the Three Months Ended September 30,
Change from prior year
For the Nine Months Ended September 30,
Change from prior year
2025
2024
Amount
Percent
2025
2024
Amount
Percent
Net gain (loss) on sales and calls of available-for-sale and equity securities
$
—
$
224
$
(224
)
(100.0
)%
$
—
$
(495
)
$
495
N/M%
Unrealized gain (loss) on equity securities
—
143
(143
)
(100.0
)
—
1,129
(1,129
)
(100.0
)
Fees for services to customers
521
469
52
11.1
1,453
1,316
137
10.4
ATM and debit card
776
691
85
12.3
2,156
2,032
124
6.1
Retail brokerage and advisory
196
139
57
41.0
477
358
119
33.2
Bank-owned life insurance
86
80
6
7.5
254
252
2
0.8
Merchant
79
84
(5
)
(6.0
)
236
266
(30
)
(11.3
)
Net gain on sale of loans
41
19
22
115.8
63
32
31
N/M
Other
148
118
30
25.4
444
378
66
17.5
Total
$
1,847
$
1,967
$
(120
)
(6.1
)%
$
5,083
$
5,268
$
(185
)
(3.5
)%
Quarter to Quarter Comparison
Total non-interest income for the third quarter of 2025 was $1,847,000, a decrease of $120,000, compared to the third quarter of 2024. Excluding realized and unrealized gains (losses) on securities, non-interest income increased $247,000, or 15.4%, for the third quarter of 2025 compared with the same period in 2024.
There was a net realized gain of $224,000 on the sale of investments for the third quarter of 2024 compared to no gains on the sales of securities in the same period in 2025. During the third quarter of 2024, unrealized gains on investment equity securities of $143,000 were recorded compared to no unrealized gains or losses the same period of 2025. QNB took the strategic opportunity to better position future earnings by selling all equity securities during 2024 and reinvesting the proceeds in treasury securities.
QNB originates residential mortgage loans for sale in the secondary market. Net gain on sale of loans was $41,000 for the third quarter of 2025 compared to a net loss $19,000 in the third quarter of 2024. The net gain or loss 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 and includes any lower-of-cost-market on the loans held-for-sale. Residential mortgage loans to be sold are identified at origination.
Fees for service to customers increased $52,000 for the third quarter of 2025, as overdraft fees increased $37,000 and other deposit-related fees increased $15,000.
QNB provides securities and advisory services under the name QNB Financial Services. Retail brokerage and advisory fees increased $57,000 for the third quarter of 2025 compared to the same period in 2024. Advisory fees increased $32,000 and transactional fees increased $25,000 for the third quarter of 2025 compared with the same period in 2024.
ATM and debit card income increased $85,000 due to usage and merchant fees decreased $5,000 for the third quarter of 2025 compared with the same period in 2024. Other non-interest income increased $30,000 due to growth in letter of credit fees of $12,000 for the third quarter of 2025 compared with the same period in 2024 and a loss on the disposal of equipment in 2024 of $18,000 compared to no loss in 2025.
Nine-Month Comparison
Total non-interest income for the nine-month period ended September 30, 2025 was $5,083,000, a decrease of $185,000 over the same period in 2024. Excluding realized and unrealized gain and losses on securities, total non-interest income increased of $449,000, or 9.7%, over the same period in 2024.
There was a net realized loss of $495,000 on the sale of investments for the nine-month period ended September 30, 2024 compared to no gains on the sales of securities in the same period in 2025. During the nine-month period ended September 30, 2024, unrealized gains on investment equity securities of $1,129,000 were recorded compared to no unrealized gains or losses the same period of 2025.
Net gains on sales of loans increased $31,000 to $63,000, when comparing the nine months ended September 30, 2025 to the same period in 2023. Proceeds from the sale of residential mortgages were $2,254,000 and $801,000 for the nine-month period ended September 30, 2025 and 2024, respectively.
58
Fees for services to customers increased $137,000 to $1,453,000 for the nine months ended September 30, 2025, as overdraft fees increased $94,000 and other deposit-related fees increased $43,000. ATM and debit card fees increased $124,000 over the same period due to volume.
Retail brokerage and advisory fees increased $119,000, or 33.2%, to $477,000 for the nine months ended September 30, 2025 compared to the same period in 2024; advisory fees decreased $2,000 and transaction-based fees increased $129,000.
Merchant income decreased $30,000 due to volume. Other non-interest income increased $66,000 primarily due to growth in letter of credit fees of $30,000 and title insurance company income of $10,000 for the nine months ended September 30, 2025 compared with the same period in 2024, and a loss on the disposal of equipment in 2024 of $15,000 compared to no loss in 2025.
NON-INTEREST EXPENSE
Non-Interest Expense Comparison
For the Three Months Ended September 30,
Change from prior year
For the Nine Months Ended September 30,
Change from prior year
2025
2024
Amount
Percent
2025
2024
Amount
Percent
Salaries and employee benefits
$
5,248
$
4,650
$
598
12.9
%
$
15,531
$
14,662
$
869
5.9
%
Net occupancy
569
540
29
5.4
1,729
1,653
76
4.6
Furniture and equipment
1,119
991
128
12.9
3,376
2,874
502
17.5
Marketing
214
197
17
8.6
653
691
(38
)
(5.5
)
Third-party services
833
661
172
26.0
2,283
1,946
337
17.3
Telephone, postage and supplies
127
120
7
5.8
371
369
2
0.5
State taxes
278
149
129
86.6
781
465
316
68.0
FDIC insurance premiums
243
341
(98
)
(28.7
)
786
1,028
(242
)
(23.5
)
Merger-related expenses
519
—
519
N/M
519
—
519
N/M
Other
1,032
987
45
4.6
3,084
2,715
369
13.6
Total
$
10,182
$
8,636
$
1,546
17.9
%
$
29,113
$
26,403
$
2,710
10.3
%
Quarter to Quarter Comparison
Total non-interest expense was $10,182,000 for the third quarter of 2025, an increase of $1,546,000 compared to the second quarter of 2024.
For both the three- and nine-month periods of 2025, non-interest expense included merger-related cost of $519,000. Excluding merger-related costs, noninterest expense increased $1,027,000 or 11.9% for the third quarter of 2025, compared to the same period in 2024.
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 $598,000 to $5,248,000 when comparing the two quarters. Salary expense and related payroll taxes increased $407,000, or 9.7%, to $4,616,000 during the third quarter of 2025 compared to the same period in 2024 due to pay increases. Medical and dental premiums, net of employee contributions, increased $152,000 when comparing the two quarters due to the timing of medical claims as the year-to-date expense is down $179.000.
Net occupancy and furniture and equipment expenses combined increased $157,000 when comparing the third quarters of 2025 and 2024. This is due primarily to increased software maintenance expense.
Marketing expense increased $17,000 to $214,000 for the third quarter of 2025, due to timing of advertising campaigns.
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 $172,000 due to consulting and legal costs. State taxes increased $129,000 due to increased capital at the Bank and the timing of tax credits received for qualified charitable contributions. FDIC insurance premiums decreased $98,000 due to a decrease in the assessment rate.
59
Other non-interest expense increased $45,000, or 4.6%, due to increases in director fees of $85,000, as fees were bought in line with peers, debit card expense of $23,000 and business development cost of $21,000; partly offset by a decrease in write-offs due to fraud on customer accounts of $96,000.
Nine-Month Comparison
Total non-interest expense was $29,113,000 for the nine-month period ended September 30, 2025, an increase of $2,710,000, or 10.3%, compared to the nine months ended September 30, 2024. Excluding merger-related costs, noninterest expense increased $2,191,000 or 8.3% for the nine months ended September 30, 2025, compared to the same period in 2024.
Salaries and benefits expense increased $869,000 to $15,531,000 for the nine months ended September 30, 2025 compared to the same period in 2024. Salary and related payroll tax expense increased $956,000 during the period, to $13,407,000 and medical and dental costs decreased $179,000, due to the reasons described in the quarter-to-quarter comparison.
Net occupancy and furniture and equipment expense increased $578,000, or 12.8%, to $5,105,000, due to the reasons described in the quarter-to-quarter comparison. Marketing expenses decreased $38,000 due to timing of advertising and promotions. Third-party services increased $337,000, or 17.3%, to $2,283,000 for the nine months ended September 30, 2025.
FDIC insurance premiums decreased $242,000 and state taxes increased $316,000, due to the reasons described in the quarter-to-quarter comparison.
Other non-interest expense increased $369,000 due to the reasons described above in the quarter-to-quarter comparison.
INCOME TAXES
QNB utilizes an asset and liability approach for financial accounting and reporting of income taxes. As of September 30, 2025, QNB’s net deferred tax asset was $15,351,000. The primary components of deferred taxes are deferred tax assets of which $14,138,000 relates to investment securities fair value adjustments and $1,992,000 relates to the allowance for credit losses on loans, partly offset by a deferred tax liability on deferred loan costs of $564,000. As of December 31, 2024, QNB’s net deferred tax asset was $18,325,000 of which $17,186,000 is related to investment securities fair value adjustment and $1,882,000 related to the allowance for credit losses on loans, partly offset by a deferred tax liability on deferred loan costs of $531,000. The decrease in the balance of net deferred tax assets when comparing September 30, 2025 to December 31, 2024 of $2,974,000 is due to the unrealized gains on available for sale securities contributing a reduction of $3,048,000.
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 except for a $403,000 deferred tax asset related to a state net operating loss.
Applicable income tax expense was $922,000 for the quarter and $2,551,000 for the nine months ended September 30, 2025, compared to $961,000 for the quarter and $2,168,000 for the nine months ended September 30, 2024, respectively. The effective tax rate for the third quarter and nine-month period ended September 30, 2025 was 20.2% and 20.2%, respectively, compared with 22.4% and 20.5%, respectively, for the same periods in 2024. The effective tax rate for the nine months ended September 30, 2025 was lower due to a higher percentage of tax-free income.
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 2025. It is also anticipated that the rate competition for attracting and retaining deposits may increase in the remainder of 2025, 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.
60
Total assets at September 30, 2025 were $1,903,244,000 compared with $1,870,894,000 at December 31, 2024. Cash and cash equivalents increased $15,618,000 from $50,713,000 at December 31, 2024 to $66,331,000 at September 30, 2025.
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. The available-for-sale securities portfolio decreased $8,241,000, due to maturities and prepayments of $81,538,000; this was partly offset by purchases of $59,825,000 and improvement in the fair value mark of $14,161,000.
Loans receivable increased $30,481,000 with commercial loans increasing $23,015,000, to $1,052,824,000 at September 30, 2025 compared to $1,029,809,000 at year-end 2024, and retail loans increasing $7,443,000 to $194,185,000 at September 30, 2025, compared with $186,742,000 at year-end 2024.
Deposits grew $52,999,000 from December 31, 2024 to September 30, 2025. Non-interest-bearing demand deposits increased $5,993,000, with balances of $189,492,000 at September 30, 2025 compared with $183,499,000 at year-end 2024. Interest-bearing demand balances, excluding municipal deposits, decreased $5,059,000 to $378,538,000, with decreases in both business and retail interest-bearing checking products. The $13,716,000 increase in money market accounts was primarily due to the premier money market product offered to both personal and business customers. The $786,000 decrease in savings was primarily due to decreases in the traditional statement savings accounts. Total time deposits increased $5,829,000 from December 31, 2024 to September 30, 2025. Municipal deposit balances increased $33,306,000, to $187,555,000, during the first nine months of 2025. Municipal deposits can be volatile depending on the timing of deposits and withdrawals, and the cash flow needs of the school districts or municipalities. Municipal deposits increase as tax money is received from the local school districts during second and third quarters and it is anticipated that these funds will flow out for the subsequent twelve months as the schools use the funds for operations. These deposits provide an incremental funding source as they are used to fund loans as opposed to borrowing at a higher rate; this improves the net interest margin as it increases the spread related to the net interest margin.
Short-term borrowings decreased 9.5%, from $53,844,000 at December 31, 2024 to $48,703,000 at September 30, 2025. FHLB borrowings decreased $15,208,000. Commercial sweep accounts increased $67,000; these funds may be volatile based on businesses’ receipt and disbursement of funds and are offset by business non-interest-bearing demand accounts. Long-term borrowings decrease $30,000,000. During the third quarter of 2024, QNB issued $40,000,000 in subordinated debt. Details can be found in Note 13.
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 September 30, 2025 the Bank had a maximum borrowing availability with the FHLB of approximately $446,497,000, which is net of short-term borrowing outstanding of $30,000,000 and accrued interest payable. 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 four correspondent banks totaling $86,000,000. At September 30, 2025 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 increased $6,713,000 since December 31, 2024, totaling $604,649,000 at September 30, 2025. The increase in the liquid sources of funds is primarily due to an increase in cash due to the proceeds from deposit growth. Growth in deposits provided cash flows of $52,999,000, enabled the net paydown on long-term borrowings of $30,000,000 and supporting loan growth. 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 continue to be steady.
61
Approximately $286,724,000 and $241,586,000 of available-for-sale debt securities at September 30, 2025 and December 31, 2024, respectively, were pledged as collateral for repurchase agreements and deposits of public funds and the FRB short-term borrowing. 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 September 30, 2025 was $121,487,000, or 6.38% of total assets, compared with shareholders' equity of $103,349,000, or 5.52% of total assets, at December 31, 2024. Shareholders’ equity at September 30, 2025 included a negative adjustment of $51,533,000 compared to a negative adjustment of $62,646,000 at December 31, 2024, related to net unrealized holding losses, net of taxes, on investment securities available-for-sale. Without these adjustments, shareholders' equity to total assets would have been 8.85% and 8.59% at September 30, 2025 and December 31, 2024, respectively.
Average shareholders' equity and average total assets were $110,934,000 and $1,888,321,000 for the nine months ended September 30, 2025, an increase of 17.0% and 8.3%, respectively, from the averages for the nine months ended September 30, 2024. The ratio of average total equity to average total assets was 5.87% for the nine months ended September 30, 2025 compared to 5.43% for the same period in 2024.
Retained earnings at September 30, 2025 were impacted by nine months of net income totaling $10,109,000 offset by dividends declared and paid of $4,232,000 for the nine-month period. QNB offers a Dividend Reinvestment and Stock Purchase Plan (the “DRIP”) to provide participants a convenient and economical method for investing cash dividends paid on the Company’s common stock in additional shares. The DRIP also allows participants to make additional cash purchases of stock. Stock purchases under the DRIP contributed $635,000 to capital during the nine months ended September 30, 2025. The exercise of stock options contributed $186,000 to capital during the nine months ended September 30, 2025. The Employee Stock Purchase Plan contributed $85,000 to capital during the nine months ended September 30, 2025.
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 June 30, 2025, 102,000 shares have been repurchased since the initial authorization in 2008 at an average price of $24.93 and a total cost of $2,543,000. There were no shares repurchased during the nine months ended September 30, 2025 and 2024.
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.
62
The following table sets forth consolidated information for QNB:
September 30,
December 31,
Capital Analysis
2025
2024
Regulatory Capital
Shareholders' equity
$
121,487
$
103,349
Net unrealized securities losses, net of tax
51,533
62,646
Deferred tax assets on net operating loss
—
—
Disallowed intangible assets
—
—
Common equity tier I capital
173,020
165,995
Tier 1 capital
173,020
165,995
Allowable portion:
Subordinated debt
32,000
40,000
Allowance for credit losses on loans and unfunded commitments
9,255
8,831
Total regulatory capital
$
214,275
$
214,826
Risk-weighted assets
$
1,421,719
$
1,381,002
Quarterly average assets for leverage capital purposes
$
1,904,529
$
1,908,914
September 30,
December 31,
Capital Ratios
2025
2024
Common equity tier I capital / risk-weighted assets
12.17
%
12.02
%
Tier 1 capital / risk-weighted assets
12.17
%
12.02
%
Total regulatory capital / risk-weighted assets
15.07
%
15.56
%
Tier 1 capital / average assets (leverage ratio)
9.08
%
8.70
%
At September 30, 2025, common equity Tier 1 and Tier 1 capital to risk-weighted assets and the leverage ratio, increased since December 31, 2024 primarily due to capital growth. Total regulatory capital ratios to risk-weighted assets decreased due to a reduction in allowable subordinated debt included as Tier 2 capital. The Company remains well-capitalized by all applicable regulatory requirements as of September 30, 2025.
63
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 asset sensitive when its assets (investment securities and loans) reprice faster than its interest-bearing liabilities (deposits and borrowings). An asset sensitive balance sheet will produce relatively higher net interest income when interest rates rise and less net interest income when they decline. A balance sheet is considered liability sensitive when its liabilities (deposits and borrowings) reprice faster than its earning assets (investments securities and loans). 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 September 30, 2025 is asset sensitive.
The following table shows the estimated impact of changes in interest rates on net interest income as of September 30, 2025 and 2024 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
September 30,
(in basis points)
2025
2024
+300
2.84
%
3.62
%
+200
1.96
%
2.61
%
+100
1.04
%
1.46
%
-100
(0.89
)%
(2.29
)%
-200
(2.39
)%
(5.35
)%
-300
(6.23
)%
(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. At September 30, 2025, QNB had two derivatives designated as fair value hedging instruments; these interest rate swaps had a notional value of $285,733,000.
QNB is not subject to foreign currency exchange or commodity price risk.
64
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 six-month period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
65
QNB CORP. AND SUBSIDIARY
PART II. OTHE
R INFORMATION
June 30, 2025
Item 1.
Legal
Proceedings
No material proceedings.
Item 1A.
Ri
sk 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, 2024.
Item 2.
Unregistered Sales of Equi
ty Securities and Use of Proceeds
QNB did not repurchase shares of its common stock during the quarter ended September 30, 2025. 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
July 1, 2025 through July 31, 2025
—
$
—
—
98,000
August 1, 2025 through August 31, 2025
—
—
—
98,000
September 1, 2025 through September 30, 2025
—
—
—
98,000
Total
—
$
—
—
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 Saf
ety Disclosures
None.
Item 5.
Other
Information
(a)
None.
(b)
None.
(c)
During the nine months ended September 30, 2025, no director or officer of QNB
adopted
or
terminated
a "Rule 10b5-1 trading arrangement" or "non-Rule 10b5-1 trading arrangement," as each term is defined in Item 408(a) of Regulation S-K.
The following Exhibits are being furnished* as part of this report:
No.
Description
101.SCH
Inline XBRL Taxonomy Extension Schema With Embedded Linkbase Documents*
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.
67
SIGNAT
URES
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.
(We are using algorithms to extract and display detailed data. This is a hard problem and we are working continuously to classify data in an accurate and useful manner.)