QNB Corp.

08/12/2025 | Press release | Distributed by Public on 08/12/2025 06:02

Quarterly Report for Quarter Ending June 30, 2025 (Form 10-Q)

MANAGEMENT'S DISCUSSION AND ANALYSIS OFFINANCIAL 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.

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;
•
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 second quarter of 2025 of $3,883,000, or $1.04 per share on a diluted basis, compared to net income of $2,465,000, or $0.67 per share on a diluted basis, for the same period in 2024. For the six-month period ended June 30, 2025, QNB reported net income of $6,461,000, or $1.74 per share on a diluted basis, compared to net income of $5,059,000, or $1.38 per share on a diluted basis, for the same period in 2024. The Bank contributed $7,971,000 to net income for the six months ended June 30, 2025 compared to $5,072,000 for the same period 2024; and the holding company had a negative contribution of $1,510,000 to net income for the six months ended June 30, 2025 compared to a negative contribution of $13,000 for the same period 2024. The results at the Bank were primarily due to an increase in the net interest income, partly offset by increases in non-interest expense and the provision for credit losses. The results at the holding company are due primarily to interest expense on the subordinated debt issued in the third quarter of 2024.

Net income expressed as an annualized rate of return on average assets and average shareholders' equity was 0.83% and 14.25%, respectively, for the quarter ended June 30, 2025 compared with 0.57% and 10.73%, respectively, for the quarter ended June 30, 2024. Net income expressed as an annualized rate of return on average assets and average shareholders' equity was 0.69% and 12.02%, respectively, for the six months ended June 30, 2025 compared with 0.59% and 11.05%, respectively, for the six months ended June 30, 2024.

Total assets as of June 30, 2025 were $1,884,828,000, compared with $1,870,894,000 at December 31, 2024. Loans receivable at June 30, 2025 were $1,218,539,000, a $2,491,000 increase from $1,216,048,000 at December 31, 2024. Total deposits of $1,651,667,000 at June 30, 2025 increased $23,126,000 compared with total deposits of $1,628,541,000 at December 31, 2024.

Results for the three and six months ended June 30, 2025 include the following significant components:

•
Net interest income increased $2,060,000, or 19.45%, to $12,652,000 and increased $3,429,000, or 16.52%, to $24,189,000 for the three and six months ended June 30, 2025, respectively.
•
Net interest margin on a tax-equivalent basis increased 23 basis points for the quarter to 2.69% compared to 2.46% for the same period in 2024. Net interest margin on a tax-equivalent basis increased 17 basis points for the six months ended June 30, 2025 to 2.60% compared to 2.43% for the same period in 2024.
•
QNB recorded a $145,000 reversal of its provision for credit losses on loans for the second quarter of 2025, compared with additional provision of $132,000 for the same period in 2024. QNB recorded $406,000 in its provision for credit losses on loans for the six months ended June 30, 2025, compared with $39,000 for the same period in 2024.
•
Non-interest income increased $187,000, to $1,652,000 for the second quarter and decreased $65,000, to $3,236,000 for the six months ended June 30, 2025 compared with the same periods in 2024. Excluding realized and unrealized gains (losses) on securities, non-interest income increased $107,000, or 6.9%, to $1,652,000 for the second quarter of 2025 compared to $1,545,000 for the same period in 2024; and increased $202,000, to $3,236,000 for the six months ended June 30, 2025 compared with $3,034,000 the same period in 2024.
•
Non-interest expense increased $628,000 to $9,562,000 for the second quarter of 2025 and increased $1,164,000, to $18,931,000 for the six months ended June 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 0.73% of loans receivable at June 30, 2025, compared to $1,975,000, or 0.16% of loans receivable at December 31, 2024. Net loan recoveries for the six months ended June 30, 2025 were $19,000, compared with net charge-offs of $33,000 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.

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 six-month periods ended June 30, 2025 and 2024.

For the Three Months Ended June 30,

For the Six Months Ended June 30,

2025

2024

2025

2024

Total interest income

$

23,110

$

20,345

$

45,308

$

39,914

Total interest expense

10,458

9,753

21,119

19,154

Net interest income

12,652

10,592

24,189

20,760

Tax-equivalent adjustment

100

138

240

279

Net interest income (fully taxable-equivalent)

$

12,752

$

10,730

$

24,429

$

21,039

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.

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

For the Three Months Ended

June 30, 2025

June 30, 2024

Average

Average

Average

Average

Balance

Rate

Interest

Balance

Rate

Interest

Assets

Investment securities (AFS & Equity):

U.S. Treasury securities

$

21,032

4.24

%

$

223

$

6,824

5.19

%

$

88

U.S. Government agencies

75,963

1.18

224

84,558

1.17

246

State and municipal

105,090

2.88

756

107,881

3.51

947

Mortgage-backed and CMOs

354,349

2.46

2,184

356,650

2.73

2,436

Corporate debt securities and money market funds

64,694

6.38

1,031

6,721

5.72

96

Equities

-

-

-

6,501

3.55

57

Total investment securities

621,128

2.84

4,418

569,135

2.72

3,870

Loans:

Commercial real estate

863,096

5.94

12,775

801,691

5.46

10,876

Residential real estate

114,600

4.38

1,255

108,693

4.07

1,106

Home equity loans

70,666

6.41

1,130

65,575

6.83

1,114

Commercial and industrial

145,261

7.41

2,682

142,174

7.60

2,686

Consumer loans

3,355

7.70

65

3,781

7.50

71

Tax-exempt loans

19,347

4.23

205

18,284

3.87

176

Total loans, net of unearned income*

1,216,325

5.97

18,112

1,140,198

5.65

16,029

Other earning assets

61,355

4.45

680

43,200

5.44

584

Total earning assets

1,898,808

4.90

23,210

1,752,533

4.70

20,483

Cash and due from banks

13,806

13,313

Accumulated other comprehensive loss, net of tax

(59,921

)

(68,908

)

Allowance for credit losses on loans

(9,376

)

(8,885

)

Other assets

43,821

41,079

Total assets

$

1,887,138

$

1,729,132

Liabilities and Shareholders' Equity

Interest-bearing deposits:

Interest-bearing demand

$

376,735

0.94

%

888

$

334,017

0.84

%

702

Municipals

146,214

3.92

1,427

132,762

4.81

1,587

Money market

259,621

2.88

1,862

229,984

3.58

2,049

Savings

281,076

1.29

901

290,172

1.28

924

Time < $100

179,411

3.61

1,617

170,640

4.03

1,708

Time $100 through $250

155,026

3.99

1,542

143,315

4.59

1,636

Time > $250

51,832

4.08

527

53,316

4.63

614

Total interest-bearing deposits

1,449,915

2.42

8,764

1,354,206

2.74

9,220

Short-term borrowings

70,942

3.90

689

52,383

1.52

199

Long-term debt

5,495

4.79

67

28,132

4.70

334

Subordinated debt

39,141

9.58

938

-

-

-

Total borrowings

115,578

5.88

1,694

80,515

2.66

533

Total interest-bearing liabilities

1,565,493

2.68

10,458

1,434,721

2.73

9,753

Non-interest-bearing deposits

198,075

188,455

Other liabilities

14,271

13,524

Shareholders' equity

109,299

92,432

Total liabilities and shareholders' equity

$

1,887,138

$

1,729,132

Net interest rate spread

2.22

%

1.97

%

Margin/net interest income

2.69

%

$

12,752

2.46

%

$

10,730

For the Six Months Ended

June 30, 2025

June 30, 2024

Average

Average

Average

Average

Balance

Rate

Interest

Balance

Rate

Interest

Assets

Investment securities (AFS & Equity):

U.S. Treasury securities

$

20,596

4.31

%

$

440

$

6,803

5.26

%

$

178

U.S. Government agencies

75,962

1.18

448

84,755

1.17

494

State and municipal

105,172

2.87

1,510

108,027

3.46

1,871

Mortgage-backed and CMOs

358,969

2.45

4,392

361,317

2.66

4,809

Corporate debt securities

63,128

6.62

2,089

6,714

5.66

190

Equities

-

-

-

6,260

3.63

113

Total investment securities

623,827

2.85

8,879

573,876

2.67

7,655

Loans:

Commercial real estate

860,363

5.82

24,844

788,413

5.40

21,176

Residential real estate

114,436

4.36

2,493

108,808

3.99

2,172

Home equity loans

69,327

6.41

2,204

63,922

6.82

2,169

Commercial and industrial

146,962

7.41

5,399

141,233

7.55

5,301

Consumer loans

3,400

7.69

130

3,712

7.80

144

Tax-exempt loans

19,073

4.19

397

18,462

3.85

353

Total loans, net of unearned income*

1,213,561

5.89

35,467

1,124,550

5.60

31,315

Other earning assets

54,536

4.44

1,202

44,922

5.48

1,223

Total earning assets

1,891,924

4.85

45,548

1,743,348

4.64

40,193

Cash and due from banks

13,517

13,041

Accumulated other comprehensive loss, net of tax

(59,954

)

(68,475

)

Allowance for credit losses on loans

(9,059

)

(8,916

)

Other assets

43,655

40,839

Total assets

$

1,880,083

$

1,719,837

Liabilities and Shareholders' Equity

Interest-bearing deposits:

Interest-bearing demand

$

378,504

0.98

%

1,832

$

327,961

0.82

%

1,345

Municipals

147,887

3.93

2,883

132,325

4.81

3,164

Money market

257,952

2.88

3,680

228,928

3.57

4,064

Savings

280,371

1.29

1,794

294,262

1.28

1,873

Time < $100

178,958

3.70

3,287

164,175

3.90

3,181

Time $100 through $250

154,578

4.12

3,155

135,464

4.47

3,013

Time > $250

50,317

4.19

1,045

51,536

4.43

1,136

Total interest-bearing deposits

1,448,567

2.46

17,676

1,334,651

2.68

17,776

Short-term borrowings

59,300

3.90

1,145

69,912

2.37

824

Long-term debt

17,735

4.74

423

24,066

4.56

554

Subordinated debt

39,117

9.59

1,875

-

-

-

Total borrowings

116,152

5.98

3,443

93,978

2.95

1,378

Total interest-bearing liabilities

1,564,719

2.72

21,119

1,428,629

2.70

19,154

Non-interest-bearing deposits

192,067

185,525

Other liabilities

14,891

13,619

Shareholders' equity

108,406

92,064

Total liabilities and shareholders' equity

$

1,880,083

$

1,719,837

Net interest rate spread

2.13

%

1.94

%

Margin/net interest income

2.60

%

$

24,429

2.43

%

$

21,039

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 six months ended June 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 Six Months Ended

June 30, 2025 compared

June 30, 2025 compared

to June 30, 2024

to June 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

$

135

$

185

$

(50

)

$

262

$

359

$

(97

)

U.S. Government agencies

(22

)

(24

)

2

(46

)

(51

)

5

State and municipal

(191

)

(25

)

(166

)

(361

)

(50

)

(311

)

Mortgage-backed and CMOs

(252

)

(15

)

(237

)

(417

)

(31

)

(386

)

Corporate debt securities and money market funds

935

829

106

1,899

1,596

303

Equities

(57

)

(57

)

-

(113

)

(113

)

-

Total Investment securities (AFS & Equity)

548

893

(345

)

1,224

1,710

(486

)

Loans:

Commercial real estate

1,899

866

1,033

3,668

1,869

1,799

Residential real estate

149

60

89

321

113

208

Home equity loans

16

90

(74

)

35

177

(142

)

Commercial and industrial

(4

)

65

(69

)

98

199

(101

)

Consumer loans

(6

)

(8

)

2

(14

)

(12

)

(2

)

Tax-exempt loans

29

12

17

44

11

33

Total Loans

2,083

1,085

998

4,152

2,357

1,795

Other earning assets

96

248

(152

)

(21

)

258

(279

)

Total interest income

2,727

2,226

501

5,355

4,325

1,030

Interest expense:

Interest-bearing deposits:

Interest-bearing demand

186

92

94

487

203

284

Municipals

(160

)

166

(326

)

(281

)

363

(644

)

Money market

(187

)

270

(457

)

(384

)

502

(886

)

Savings

(23

)

(27

)

4

(79

)

(94

)

15

Time < $100

(91

)

93

(184

)

106

277

(171

)

Time $100 through $250

(94

)

139

(233

)

142

415

(273

)

Time > $250

(87

)

(15

)

(72

)

(91

)

(30

)

(61

)

Total interest-bearing deposits

(456

)

718

(1,174

)

(100

)

1,636

(1,736

)

Short-term borrowings

490

69

421

321

(128

)

449

Long-term debt

(267

)

(268

)

1

(131

)

(147

)

16

Subordinated debt

938

938

-

1,875

1,875

-

Total borrowings

1,161

739

422

2,065

1,600

465

Total interest expense

705

1,457

(752

)

1,965

3,236

(1,271

)

Net interest income

$

2,022

$

769

$

1,253

$

3,390

$

1,089

$

2,301

Net Interest Income and Net Interest Margin - Quarterly Comparison

Average earning assets for the second quarter of 2025 were $1,898,808,000, an increase of $146,275,000, or 8.3%, from the second quarter of 2024, with average loans increasing $76,127,000, or 6.7%, and average investment securities increasing $51,993,000, or 9.1%, 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 second quarter of 2025, compared with 65.1% for the second quarter of 2024. On the funding side, average deposits increased $105,329,000, or 6.8%, to $1,647,990,000 for the second quarter of 2025 primarily due to an increase in interest-bearing and non-interest-bearing demand, money market products and time deposits. Average short-term borrowed funds, which consisted primarily of average commercial repurchase agreements and FHLB borrowings, increased $18,559,000 to $70,942,000 for the second quarter of 2025 compared to $52,383,000 for the same period in 2024. During the third quarter of 2024, QNB Corp. issued $40,000,000 of subordinated debt; the carrying value net of deferred costs was $39,168,000 at June 30, 2025.

The net interest margin for the second quarter of 2025 increased 23 basis points to 2.69% from 2.46% 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 and the sale of lower-yielding investments have had a positive impact on the net interest margin. The net interest margin is expected to improve as loans and deposits reprice.

The Rate-Volume Analysis tables, as presented on a tax-equivalent basis, highlight the impact of changing rates and volumes on interest income and interest expense. Total interest income on a tax-equivalent basis increased $2,727,000, or 13.3%, to $23,210,000 for the second quarter of 2025; total interest expense increased $705,000 to $10,458,000.

The yield on earning assets on a tax-equivalent basis increased 20 basis points to 4.90% for the second quarter of 2025, from 4.70% for the second quarter of 2024. The cost of interest-bearing liabilities was 2.68% for the second quarter of 2025, compared with 2.73% for the same period in 2024.

Interest income on investment securities (available-for-sale and equity) increased $548,000 when comparing the second quarters of 2025 and 2024. The average yield on the investment portfolio was 2.84% for the second quarter of 2025 compared with 2.72% for the same period in 2024, an increase of 12 basis points.

The yield on U.S. Treasury securities was 4.24% for the second quarter of 2025 compared to 5.19% for the same period in 2024; the decline in rate was more than offset by the average balances increase of $14,208,000 for a net increase in interest income of $135,000. The average balances of U.S. Government agency securities decreased $8,595,000 as the average rate slightly increased for a net reduction in interest income of $22,000.

Interest income on municipal securities, which are primarily tax-exempt, decreased $191,000 due to a 63 basis-point decrease in rate, and a $2,791,000 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 $252,000 and average balances decreased $2,301,000 and the yield decreased 27 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 $935,000 as average balances increased $57,973,000 and the average yield increased 66 basis points. Proceeds from the issuance of subordinated debt were invested in high-yielding securities.

Average balances on equities decreased $6,501,000 as the portfolio was sold during 2024; this was the cause of the $57,000 decrease in dividends comparing the second 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 $2,083,000 to $18,112,000 when comparing the second quarters of 2025 and 2024, with a $76,127,000 increase in average balances contributing to an increase in interest income of $1,085,000 and a 32-basis point increase in yield contributing to a $998,000 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 $1,899,000 when comparing the second quarters of 2025 and

2024, primarily due to a 48-basis point increase in rate from 5.46% in 2024 to 5.94% and increased average balances of $61,405,000, or 7.7%.

Income on commercial and industrial loans decreased $4,000 when comparing the second quarters of 2025 and 2024. The average yield on these loans decreased 19 basis points to 7.41% resulting in a decrease in income of $69,000; average balances increased $3,087,000, to $145,261,000 for the second quarter of 2025 resulting in a $65,000 increase in interest income. Many of the loans in this category are indexed to the prime interest rate.

Tax-exempt loan income increased $29,000 for the second quarter of 2025 compared to the same period in 2024. Average balances increased $1,063,000 to $19,347,000 for the second quarter of 2025. The yield on municipal loans increased 36 basis points, to 4.23% for the second 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 $149,000 when comparing the second quarter of 2025 to the same period in 2024. Average residential mortgage loan balances increased by $5,907,000, or 5.4%, to $114,600,000 for the second quarter of 2025 compared to the same period in 2024, which contributed a $60,000 increase in interest income. The average yield on the portfolio increased 31 basis points and contributed an increase of $89,000 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 $5,091,000 to $70,666,000 and the average yield decreased 42 basis points to 6.41% resulting in a $16,000 net increase in interest income. The yield on the consumer portfolio increased 20 basis points to 7.70% for the second quarter of 2025 and there was a $426,000 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 increased $705,000, when comparing the second 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 $9,096,000 to $281,076,000. 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 $9,620,000 to $198,075,000 for the second quarter of 2025. Average interest-bearing demand accounts increased $42,718,000, or 12.8%, to $376,735,000 for the second quarter of 2025 and the average rate paid on these deposits increased ten basis points; interest expense on interest-bearing demand accounts increased $186,000 to $888,000 for the same period. Average money market accounts increased $29,637,000, or 12.9%, to $259,621,000 for the second quarter of 2025 compared with the same period in 2024. Interest expense on money market accounts decreased $187,000 to $1,862,000, and the average interest rate paid on money market accounts decreased 70 basis points to 2.88% for the second 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 $160,000 to $1,427,000 for the second quarter of 2025. The average interest rate paid on municipal interest-bearing demand accounts decreased 89 basis points to 3.92% for the second quarter of 2025 over the same quarter of 2024, and average balances increased $13,452,000 to $146,214,000. 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 decreased $23,000 when comparing the second quarter of 2025 to the same quarter of 2024. The average interest rate paid on savings accounts increased one basis point to 1.29% for the second quarter of 2025. When comparing these same periods, average savings accounts decreased $9,096,000, or 3.1%, to $281,076,000 for the second quarter of 2025. QNB's online e-Savings product is the largest category of savings deposits, with average balances for the second quarter of 2025 of $208,239,000 compared to $211,598,000 in the same period of 2024. The average yield paid on these accounts was 1.70% for the second quarter of 2025 compared to 1.71% 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 $5,737,000 when comparing the second quarter of 2025 to the same period in 2024.

Interest expense on time deposits totaled $3,686,000 for the second quarter of 2025 compared to $3,958,000 in 2024. Average total time deposits increased $18,998,000 to $386,269,000 for the second 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 $369,830,000, or 95%, of time deposits at June 30, 2025 will mature over the next 12 months. The average rate paid on these time deposits is approximately 3.63%. 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 $490,000 for the second quarter of 2025 to $689,000 when compared to the same period in 2024. When comparing these same periods, average balances increased $18,559,000 to $70,942,000. The yield on customer repos increased 103 basis points for the second quarter of 2025 to 2.55%. There were no FHLB borrowings during 2024 and $52,418,000 in average balance in the second quarter of 2025 at an average rate of 4.37%.

Average long-term borrowings decreased $22,637,000 and the interest rate increased nine basis points when comparing the second quarter of 2025 to the same period in 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 $39,141,000 for the second quarter of 2025. The average yield of 9.58% 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 - Six-Month Comparison

For the six-month period ending June 30, 2025 average earning assets increased $148,576,000, or 8.5%, to $1,891,924,000, with average loans increasing 7.9% and average investment securities increasing 8.7%. Average total deposits increased $120,458,000, or 7.9%, to $1,640,634,000 for the six-month period ended June 30, 2025 compared to the same period in 2024. The net interest margin on a tax-equivalent basis was 2.60% for the six-month period ended June 30, 2025, a 17-basis point increase from the same period in 2024.

Total interest income on a tax-equivalent basis increased $5,355,000, or 13.3%, to $45,548,000, when comparing the six-month periods ended June 30, 2025 and June 30, 2024 due to an increase in volume and rate on loans. Interest income on loans increased $2,357,000 as a result of volume and increased $1,795,000 as a result of yields. The analysis of the six-month comparison periods is similar to what was described in the quarterly analysis.

The yield on earning assets increased from 4.64% to 4.85% for the six-month periods with the yield on loans up 29 basis points to 5.89%. QNB continues to experience pressure on yields due to competitive pressures on loan pricing.

Total interest expense increased $1,965,000 for the six-month period ended June 30, 2025 compared with the same period in 2024 attributable to an increase in volume. Average interest-bearing liabilities increased $139,090,000 and the average rate paid on interest-bearing deposits increased two basis points to 2.72% for the six-month period ended June 30, 2025 versus the same period in 2024. Average interest-bearing deposits increased $113,916,000 and the related interest expense decreased $100,000 for the six-month period ended June 30, 2025 versus the same period in 2024. The average balance of total short-term borrowings decreased $10,612,000 primarily due to reductions in customer repurchase agreements and FRB borrowings, partly offset by an increase in FHLB borrowings of $40,858,000. During the first quarter of 2023, QNB borrowed $50,000,000 from the FRB under its Bank Term Funding Program and locked in a rate of 4.39%; there were no pre-payment penalties. The FRB borrowings were paid off during the first quarter of 2024; there was an average balance of $20,055,000 for the six-month period ended June 30, 2024 compared to no average balance for the same period in 2025. QNB invested proceeds from the issuance of subordinated debt and deposit growth into loans and investments.

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.

Based on this analysis, QNB recorded $406,000 in the provision for credit losses on loans for the six months ended June 30, 2025, through the allowance for credit losses on loans, compared to $39,000 through the provision for credit losses for the same period in 2024. QNB recorded a reversal of provision of $2,000 for the allowance for credit losses for unused commitments in the six months ended June 30, 2025 compared to a reversal in provision of $11,000 for the same period in 2024.

QNB's allowance for credit losses on loans of $9,169,000 represents 0.75% of loans receivable at June 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 $8,858,000, or 0.76%, at June 30, 2024. Management believes the allowance for credit losses on loans at June 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 recoveries were $16,000 for the three months ended June 30, 2025 compared to net charge-offs of $12,000 for the three months ended June 30, 2024. Charge-offs consisted of overdrafts of $31,000 and other consumer loans of $1,000. Recoveries of approximately $48,000 during the three months ended June 30, 2025 consisted of $44,000 in repayments from borrowers of previously charged-off credits and overdrafts recoveries of $4,000. Annualized net recoveries as a percentage of average loans receivable were 0.01% for the three months ended June 30, 2025, compared to annualized net charge-offs of 0.00% for the three months ended June 30, 2024.

Net recoveries were $19,000 for the six months ended June 30, 2025 compared to net charge-offs of $33,000 for the six months ended June 30, 2024. Charge-offs of approximately $43,000 during the six months ended June 30, 2025 consisted primarily of overdrafts of $44,000 and consumer loans of $12,000. These were offset by $75,000 in recoveries comprising $65,000 in repayments from borrowers of previously charged-off credits, and $10,000 related to overdraft recoveries. Annualized net recoveries as a percentage of average loans receivable were 0.00% for the six months ended June 30, 2025, compared to annualized net charge-offs of 0.01% for the six months ended June 30, 2024.

Non-performing assets were $8,947,000 at June 30, 2025 compared to $1,975,000 as of December 31, 2024 and $2,078,000 at June 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 0.73% of loans receivable at June 30, 2025, 0.16% at December 31, 2024 and 0.18% of loans receivable at June 30, 2024. The increase in non-accrual loans was 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 $34,275,000, a decrease of $26,000 from the $34,301,000 reported at December 31, 2024 and an increase of $1,565,000 from the $32,710,000 reported at June 30, 2024.

QNB had no loans past due 90 days or more and still accruing interest at June 30, 2025, December 31, 2024, or June 30, 2024. Total loans 30 days or more past due, which includes non-accrual loans by actual number of days delinquent, represented 0.98% of loans receivable at June 30, 2025 compared with 0.18% at December 31, 2024, and 0.44% at June 30, 2024.

There were two loan modifications to one borrower experiencing financial difficulty identified during the six months ended June 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 June 30, 2025, December 31, 2024 or June 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.

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

June 30,

December 31,

June 30,

2025

2024

2024

Non-accrual loans

$

8,947

$

1,975

$

2,078

Loans past due 90 days or more and still accruing interest

-

-

-

Total non-performing loans

8,947

1,975

2,078

Total non-performing assets

$

8,947

$

1,975

$

2,078

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

Average total loans (YTD)

$

1,213,173

$

1,150,489

$

1,124,354

Total loans

1,218,539

1,216,048

1,162,310

Allowance for credit losses on loans

9,169

8,744

8,858

Allowance for loan losses to:

Non-performing loans

102.48

%

442.73

%

426.28

%

Total loans (excluding held-for-sale)

0.75

%

0.72

%

0.76

%

Average total loans (excluding held-for-sale)

0.76

%

0.76

%

0.79

%

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

0.73

%

0.16

%

0.18

%

Non-performing assets / total assets

0.47

%

0.11

%

0.12

%

An analysis of net loan charge-offs (recoveries) for the three and six months ended June 30, 2025 compared to the same periods in 2024 is as follows:

For the Three Months Ended June 30,

For the Six Months Ended June 30,

2025

2024

2025

2024

Net (recoveries) charge-offs

$

(16

)

$

12

$

(19

)

$

33

Net annualized (recoveries) charge-offs to:

Total loans

(0.01

)%

0.00

%

0.00

%

0.01

%

Average total loans excluding held-for-sale

(0.01

)%

0.00

%

0.00

%

0.01

%

Allowance for loan losses

(0.70

)%

0.54

%

(0.42

)%

0.75

%

At June 30, 2025 and December 31, 2024, the recorded investment in collateral dependent loans totaled $8,936,000 and $1,923,000 of which $1,808,000 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 $7,128,000 and $357,000 at June 30, 2025 and December 31, 2024, respectively, and the related allowance for loan losses associated with these loans was $890,000 and $308,000, respectively. See Note 8 to the Notes to Consolidated Financial Statements for additional detail of collateral dependent loans.

NON-INTEREST INCOME

Non-Interest Income Comparison

For the Three Months Ended June 30,

Change from prior year

For the Six Months Ended June 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

$

-

$

(1,096

)

$

1,096

(100.0

)%

$

-

$

(719

)

$

719

N/M%

Unrealized gain (loss) on equity securities

-

1,016

(1,016

)

(100.0

)

-

986

(986

)

(100.0

)

Fees for services to customers

485

427

58

13.6

932

847

85

10.0

ATM and debit card

724

705

19

2.7

1,380

1,341

39

2.9

Retail brokerage and advisory

140

126

14

11.1

281

219

62

28.3

Bank-owned life insurance

81

78

3

3.8

168

172

(4

)

(2.3

)

Merchant

82

83

(1

)

(1.2

)

157

182

(25

)

(13.7

)

Net gain on sale of loans

4

(2

)

6

(300.0

)

22

13

9

N/M

Other

136

128

8

6.3

296

260

36

13.8

Total

$

1,652

$

1,465

$

187

12.8

%

$

3,236

$

3,301

$

(65

)

(2.0

)%

Quarter to Quarter Comparison

Total non-interest income for the second quarter of 2025 was $1,652,000, an increase of $187,000, compared to the second quarter of 2024. Excluding realized and unrealized gains (losses) on securities and loans, non-interest income increased $107,000, or 6.9%, for the second quarter of 2025 compared with the same period in 2024.

There was a net realized loss of $1,096,000 on the sale of investments for the second quarter of 2024 compared to no gains on the sales of securities in the same period in 2025. During the second quarter of 2024, unrealized gains on investment equity securities of $1,016,000 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 $4,000 for the second quarter of 2025 compared to a net loss of $2,000 in the second 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 $58,000 for the second quarter of 2025, as overdraft fees increased $45,000 and other deposit-related fees increased $13,000.

QNB provides securities and advisory services under the name QNB Financial Services. Retail brokerage and advisory fees increased $14,000 for the second quarter of 2025 compared to the same period in 2024. Advisory fees decreased $14,000 and transactional fees increased $28,000 for the second quarter of 2025 compared with the same period in 2024.

ATM and debit card income increased $19,000 due to usage and merchant fees remained level for the second quarter of 2025 compared with the same period in 2024. Other non-interest income increased $8,000 due to growth in letter of credit fees of $7,000 for the second quarter of 2025 compared with the same period in 2024.

Six-Month Comparison

Total non-interest income for the six-month period ended June 30, 2025 was $3,236,000, a decrease of $65,000 over the same period in 2024. Excluding realized and unrealized gain and losses on securities, total non-interest income increased of $202,000, or 6.7%, over the same period in 2024.

There was a net realized loss of $719,000 on the sale of investments for the six-month period ended June 30, 2024 compared to no gains on the sales of securities in the same period in 2025. During the six-month period ended June 30, 2024, unrealized gains on investment equity securities of $986,000 were recorded compared to no unrealized gains or losses the same period of 2025.

Net gains on sales of loans increased $9,000 to $22,000, when comparing the six months ended June 30, 2025 to the same period in 2023. Proceeds from the sale of residential mortgages were $668,000 and $801,000 for the six-month period ended June 30, 2025 and 2024, respectively.

Fees for services to customers increased $85,000 to $932,000 for the six months ended June 30, 2025, as overdraft fees increased $57,000 and other deposit-related fees increased $28,000. ATM and debit card decreased $39,000 over the same period due to volume.

Retail brokerage and advisory fees increased $62,000, or 28.3%, to $281,000 for the six months ended June 30, 2025 compared to the same period in 2024; advisory fees increased $32,000 and transaction-based fees increased $30,000.

Merchant income decreased $25,000 due to volume. Other non-interest income increased $36,000 primarily due to growth in letter of credit fees of $19,000 and title insurance company income of $8,000 for the six months ended June 30, 2025 compared with the same period in 2024.

NON-INTEREST EXPENSE

Non-Interest Expense Comparison

For the Three Months Ended June 30,

Change from prior year

For the Six Months Ended June 30,

Change from prior year

2025

2024

Amount

Percent

2025

2024

Amount

Percent

Salaries and employee benefits

$

5,251

$

5,038

$

213

4.2

%

$

10,283

$

10,012

$

271

2.7

%

Net occupancy

546

535

11

2.1

1,160

1,113

47

4.2

Furniture and equipment

1,135

946

189

20.0

2,257

1,883

374

19.9

Marketing

250

228

22

9.6

439

494

(55

)

(11.1

)

Third-party services

788

661

127

19.2

1,450

1,285

165

12.8

Telephone, postage and supplies

120

123

(3

)

(2.4

)

244

249

(5

)

(2.0

)

State taxes

236

216

20

9.3

503

316

187

59.2

FDIC insurance premiums

269

342

(73

)

(21.3

)

543

687

(144

)

(21.0

)

Other

967

845

122

14.4

2,052

1,728

324

18.8

Total

$

9,562

$

8,934

$

628

7.0

%

$

18,931

$

17,767

$

1,164

6.6

%

Quarter to Quarter Comparison

Total non-interest expense was $9,562,000 for the second quarter of 2025, an increase of $628,000 compared to the second quarter of 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 $213,000 to $5,251,000 when comparing the two quarters. Salary expense and related payroll taxes increased $350,000, or 8.5%, to $4,447,000 during the second quarter of 2025 compared to the same period in 2024 due to pay increases. Medical and dental premiums, net of employee contributions, decreased $177,000 when comparing the two quarters due to a reduction in medical claims.

Net occupancy and furniture and equipment expenses combined increased $200,000 when comparing the second quarters of 2025 and 2024. This is due primarily to increased software maintenance expense. Marketing expense increased $22,000 to $250,000 for the second 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 $127,000 due to consulting and audit costs. State taxes increased $20,000 due to increased capital at the Bank and the timing of tax credits received for qualified charitable contributions. FDIC insurance premiums decreased $73,000 due to a decrease in the assessment rate.

Other non-interest expense increased $122,000, or 14.4%, due to an increase in write-offs due to fraud on customer accounts of $150,000 and increases in director fees of $23,000, as fees were bought in line with peers, and business development cost of $12,000; partly offset by the recording of a potential expense of $85,000 related to the Visa stock exchange make-whole agreement in the second quarter of 2024.

Six-Month Comparison

Total non-interest expense was $18,931,000 for the six-month period ended June 30, 2025, an increase of $1,164,000, or 6.6%, compared to the six months ended June 30, 2024.

Salaries and benefits expense increased $271,000 to $10,283,000 for the six months ended June 30, 2025 compared to the same period in 2024. Salary and related payroll tax expense increased $548,000 during the period, to $8,791,000 and medical and dental costs decreased $331,000, due to the reasons described in the quarter-to-quarter comparison.

Net occupancy and furniture and equipment expense increased $421,000, or 14.1%, to $3,417,000, due to the reasons described in the quarter-to-quarter comparison. Marketing expenses decreased $55,000 due to timing of advertising and promotions. Third-party services increased $165,000, or 12.8%, to $1,450,000 for the six months ended June 30, 2025.

FDIC insurance premiums decreased $144,000 and state taxes increased $187,000, due to the reasons described in the quarter- to-quarter comparison.

Other non-interest expense increased $324,000 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 June 30, 2025, QNB's net deferred tax asset was $16,803,000. The primary components of deferred taxes are deferred tax assets of which $15,696,000 relates to investment securities fair value adjustments and $1,974,000 relates to the allowance for credit losses on loans, partly offset by a deferred tax liability on deferred loan costs of $533,000. 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 June 30, 2025 to December 31, 2024 of $1,522,000 is due to the unrealized gains on available for sale securities contributing a reduction of $1,490,000.

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 $299,000 deferred tax asset related to a state net operating loss.

Applicable income tax expense was $1,005,000 for the quarter and $1,629,000 for the six months ended June 30, 2025, compared to $544,000 for the quarter and $1,207,000 for the six months ended June 30, 2024, respectively. The effective tax rate for the second quarter and six-month period ended June 30, 2025 was 20.6% and 20.1%, respectively, compared with 18.1% and 19.3%, respectively, for the same periods in 2024. The effective tax rate for the six months ended June 30, 2025 was higher due to a higher percentage of taxable 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.

Total assets at June 30, 2025 were $1,884,828,000 compared with $1,870,894,000 at December 31, 2024. Cash and cash equivalents increased $15,758,000 from $50,713,000 at December 31, 2024 to $66,471,000 at June 30 31, 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 $2,297,000, due to maturities and prepayments of $49,226,000; this was partly offset by purchases of $40,452,000 and improvement in the fair value mark of $6,927,000.

Loans receivable increased $2,491,000 with retail loans increasing $2,576,000, to $189,318,000 at June 30, 2025 compared to $186,742,000 at year-end 2024; partly offset by commercial loans decreasing $174,000 to $1,029,635,000 at June 30, 2025, compared with $1,029,809,000 at year-end 2024.

Deposits grew $23,126,000 from December 31, 2024 to June 30, 2025. Non-interest-bearing demand deposits increased $17,961,000, with balances of $201,460,000 at June 30, 2025 compared with $183,499,000 at year-end 2024. Interest-bearing demand balances, excluding municipal deposits, decreased $5,339,000 to $378,258,000, with decreases in business interest-bearing checking products, partly offset by increase in retail products. The $8,850,000 increase in money market accounts was primarily due to the premier money market product offered to both personal and business customers. The $6,184,000 increase in savings was primarily due to increases in the E-Savings on-line product. Total time deposits increased $8,061,000 from December 31, 2024 to June 30, 2025. Municipal deposit balances decreased $12,591,000, to $141,658,000, during the first six 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 increased 25.3%, from $53,844,000 at December 31, 2024 to $67,464,000 at June 30, 2025. FHLB borrowings increased $14,792,000. Commercial sweep accounts decreased $1,172,000; these funds may be volatile based on businesses' receipt and disbursement of funds and are offset by business non-interest-bearing demand accounts. 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 June 30, 2025 the Bank had a maximum borrowing availability with the FHLB of approximately $399,171,000, which is net of short-term borrowing outstanding of $50,000,000 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 June 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 $13,963,000 since December 31, 2024, totaling $611,899,000 at June 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 $23,126,000, along with the net issuance of $13,620,000 from short-term borrowings, enabled the net paydown on long-term borrowings of $30,000,000. 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.

Approximately $236,699,000 and $241,586,000 of available-for-sale debt securities at June 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 June 30, 2025 was $113,269,000, or 6.01% of total assets, compared with shareholders' equity of $103,349,000, or 5.52% of total assets, at December 31, 2024. Shareholders' equity at June 30, 2025 included a negative adjustment of $57,209,000 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 8.78% and 8.59% at June 30, 2025 and December 31, 2024, respectively.

Average shareholders' equity and average total assets were $108,406,000 and $1,880,083,000 for the six months ended June 30, 2025, an increase of 17.8% and 9.3%, respectively, from the averages for the six months ended June 30, 2024. The ratio of average total equity to average total assets was 5.77% for the six months ended June 30, 2025 compared to 5.35% for the same period in 2024.

Retained earnings at June 30, 2025 were impacted by six months of net income totaling $6,461,000 offset by dividends declared and paid of $2,818,000 for the six-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 $433,000 to capital during the six months ended June 30, 2025. The exercise of stock options contributed $158,000 to capital during the six months ended June 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 six months ended June 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.

The following table sets forth consolidated information for QNB:

June 30,

December 31,

Capital Analysis

2025

2024

Regulatory Capital

Shareholders' equity

$

113,269

$

103,349

Net unrealized securities losses, net of tax

57,209

62,646

Deferred tax assets on net operating loss

-

-

Disallowed intangible assets

-

-

Common equity tier I capital

170,478

165,995

Tier 1 capital

170,478

165,995

Allowable portion:

Subordinated debt

40,000

40,000

Allowance for credit losses on loans and unfunded commitments

9,254

8,831

Total regulatory capital

$

219,732

$

214,826

Risk-weighted assets

$

1,392,460

$

1,381,002

Quarterly average assets for leverage capital purposes

$

1,947,059

$

1,908,914

June 30,

December 31,

Capital Ratios

2025

2024

Common equity tier I capital / risk-weighted assets

12.24

%

12.02

%

Tier 1 capital / risk-weighted assets

12.24

%

12.02

%

Total regulatory capital / risk-weighted assets

15.78

%

15.56

%

Tier 1 capital / average assets (leverage ratio)

8.76

%

8.70

%

At June 30, 2025, all capital ratios, including common equity Tier 1, Tier 1 capital, and the total regulatory capital ratios to risk-weighted assets and the leverage ratio, increased since December 31, 2024 primarily due to capital growth. The Company remains well-capitalized by all applicable regulatory requirements as of June 30, 2025.

QNB Corp. published this content on August 12, 2025, and is solely responsible for the information contained herein. Distributed via Edgar on August 12, 2025 at 12:03 UTC. If you believe the information included in the content is inaccurate or outdated and requires editing or removal, please contact us at [email protected]