Qnb Corp. QNBC US Equity☆

10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-K

Commission file number 0-17706

QNB Corp.

(Exact Name of Registrant as Specified in Its Charter)

(Address of Principal Executive Offices) (Zip Code)

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

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

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

Common Stock QNBC N/A

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

Common Stock

Title of class

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

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

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

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

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

Large accelerated filer ☐ Accelerated filer ☐

Non-accelerated filer ☒ Smaller reporting company ☒

Emerging growth company ☐

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

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

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

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

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

As of February 28, 2025, 3,701,099shares of common stock of the registrant were outstanding. As of June 30, 2024 the aggregate market value of the common stock of the registrant held by non-affiliates was approximately $73,795,561 based upon the average bid and asked prices of the common stock as reported on the OTC BB.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of registrant’s Proxy Statement for the annual meeting of its shareholders to be held May 20, 2025 are incorporated by reference in Part III of this report.

FORM 10-K INDEX

PART I PAGE

Item 1 Business 2

Item 1A Risk Factors 9

Item 1B Unresolved Staff Comments 13

Item 1C Cybersecurity 13

Item 2 Properties 14

Item 3 Legal Proceedings 14

Item 4 Mine Safety Disclosures 14

PART II

Item 6 [Reserved] 17

Item 7A Quantitative and Qualitative Disclosures about Market Risk 51

Item 8 Financial Statements and Supplementary Data 52

Item 9A Controls and Procedures 109

Item 9B Other Information 109

Item 9C Disclosure Regarding Foreign Jurisdictions that Prevent Inspection 109

PART III

Item 10 Directors, Executive Officers and Corporate Governance 110

Item 11 Executive Compensation 110

Item 14 Principal Accounting Fees and Services 111

PART IV

Item 15 Exhibits, Financial Statement Schedules 112

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PART I

FORWARD-LOOKING STATEMENTS

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

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

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Volatility in interest rates and shape of the yield curve;

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Credit risk;

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Liquidity risk;

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Operating, legal and regulatory risks;

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Economic, political and competitive forces affecting QNB Corp.’s business;

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

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

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

ITEM 1. BUSINESS

Overview

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

Prior to December 28, 2007, the Bank was a national banking association organized in 1877 as The Quakertown National Bank, was chartered under the National Banking Act and was subject to Federal and state laws applicable to national banks. Effective December 28, 2007, the Bank became a Pennsylvania chartered commercial bank and changed its name to QNB Bank. The Bank, whose principal office is located in Quakertown, Bucks County, Pennsylvania, operated twelve full-service community banking offices in Bucks, Montgomery and Lehigh counties in southeastern Pennsylvania as of December 31, 2024.

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

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At December 31, 2024, QNB had total assets of $1,870,894,000, total loans receivable of $1,216,048,000, total deposits of $1,628,541,000 and total shareholders’ equity of $103,349,000. For the year ended December 31, 2024, QNB reported net income of $11,448,000 compared to net income for the year ended December 31, 2023 of $9,483,000 and December 31, 2022 of $15,921,000.

At February 18, 2025, the Bank had 193 full-time employees and five part-time employees. The Bank’s employees have a customer-oriented philosophy emphasizing personal service and flexible solutions which together make achieving our customers’ goals possible. They maintain close contact with both the residents and local business people in the communities in which they serve, responding to changes in market conditions and customer requests in a timely manner.

Competition and Market Area

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

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

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

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

Monetary Policy and Economic Conditions

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

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

Supervision and Regulation

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

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

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

Bank Holding Company Regulation

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

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

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

Regulatory Restrictions on Dividends

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

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

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

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

The minimum capital requirements implemented by Basel III, and described below under “Capital Adequacy,” also introduced a capital conservation buffer, comprised of common equity Tier 1 capital, above a banking institution’s minimum risk-based capital requirements in an amount greater than 2.5% of total risk-weighted assets in order to avoid limitations on certain distributions, including dividend payments. Under the restrictions applicable to the Bank, to remain “well capitalized,” the Bank had approximately $54,062,000 available for payment of dividends to the Company at December 31, 2024.

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Capital Adequacy

In July 2013, the Federal bank regulatory agencies adopted revisions to the agencies’ capital adequacy guidelines and prompt corrective action rules, which were designed to enhance such requirements and implement the revised standards of the Basel Committee on Banking Supervision, commonly referred to as Basel III. The rules generally implemented higher minimum capital requirements, added a new common equity Tier 1 capital requirement, and established criteria that instruments must meet to be considered common equity Tier 1 capital, additional Tier 1 capital or Tier 2 capital. Tier 1 capital consists principally of common shareholders’ equity, plus retained earnings, less certain intangible assets. Tier 2 capital includes the allowance for loan and lease losses (up to 1.25 percent of risk-weighted assets), qualifying preferred stock, subordinated debt, and qualifying Tier 2 minority interests. The current minimum capital requirements are a common equity Tier 1 capital ratio of 4.5%, a Tier 1 capital ratio of 6.0%, and a total capital ratio of 8.0%. In addition, in order to avoid limitations on certain capital distributions (including dividend payments and certain discretionary bonus payments to executive officers), as of January 1, 2019, a banking organization must hold a capital conservation buffer comprised of common equity Tier 1 capital above its minimum risk-based capital requirements in an amount greater than 2.5% of total risk-weighted assets. At December 31, 2024, QNB’s Tier 1 capital, total capital (Tier 1 and Tier 2 combined) and common equity Tier 1 equity ratios were 12.02%, 15.56%, and 12.02%, respectively.

In addition to the risk-based capital guidelines, the Federal Reserve requires a bank holding company to maintain a minimum leverage ratio. This requires a minimum level of Tier 1 capital (as determined under the risk-based capital rules) to average total consolidated assets of 4% for those bank holding companies that have the highest regulatory examination ratings and are not contemplating or experiencing significant growth or expansion. The Federal Reserve expects all other bank holding companies to maintain a ratio of at least 1% to 2% above the stated minimum. At December 31, 2024, QNB’s leverage ratio was 8.70%.

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

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

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

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

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

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

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Leverage ratio of 5% or more, and

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

At December 31, 2024 and 2023, the Bank qualified as well capitalized under these regulatory standards. See Note 22 of the Notes to Consolidated Financial Statements included in Item 8 of this Report for additional information.

Bank Regulation

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

The Federal and state laws and regulations applicable to banks regulate, among other things, the scope of their business, their investments, the reserves required to be kept against deposits, the timing of the availability of deposited funds, the nature and amount of collateral for certain loans, the activities of a bank with respect to mergers and consolidations, and the establishment of branches. The

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laws and regulations governing the Bank generally have been promulgated to protect depositors and not for the purpose of protecting QNB’s shareholders. This regulatory structure also gives the Federal and state banking agencies extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes. Any change in such regulation, whether by the Department, the FDIC or the United States Congress, could have a material impact on the Company, the Bank and their operations.

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

FDIC Insurance Assessments

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

For the years ended December 31, 2024, 2023 and 2022, the Bank recorded $1,156,000, $1,058,000, and $768,000, respectively, in FDIC deposit insurance premium expense.

Federal Home Loan Bank System

The Bank is a member of the Federal Home Loan Bank of Pittsburgh (“FHLB”), which is one of 11 regional Federal Home Loan Banks. Each Federal Home Loan Bank serves as a reserve or central bank for members within its assigned region. It is funded primarily from funds deposited by member institutions and proceeds from the sale of consolidated obligations of the Federal Home Loan Bank System. It makes loans to members (i.e. advances) in accordance with policies and procedures established by the board of directors of the Federal Home Loan Bank. At December 31, 2024 the Bank had $25,208,000 overnight FHLB advances outstanding $10,000,000 in short-tern borrowings and $30,000,000 in long-term debt.

The Bank is required to purchase and maintain stock in the FHLB as a condition of membership in an amount equal to 0.10% of its assets. In addition, each member is required to purchase and maintain activity-based stock of 4% of outstanding advances from the FHLB. At December 31, 2024, the Bank had $3,510,000 in stock of the FHLB.

Community Reinvestment Act

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

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

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Approval of a branch or other deposit facility;

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An office relocation or a merger; and

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Any acquisition of bank shares.

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

In October 2023, the federal banking regulators issued a final rule, effective April 1, 2024, to modernize their respective CRA regulations. The revised rule substantially alters the methodology for assessing compliance with the CRA. Among other things, the revised rule evaluates lending outside traditional assessment areas generated by the growth of non-branch delivery systems, such as online and mobile banking, apply a metrics-based benchmarking approach to assessment, and clarifies eligible CRA activities. Prior to the proposed effective date of the revised CRA rule, a federal District Court enjoined enforcement of the rule as it relates to certain

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industry trade groups and their members, including the Bank, pending further litigation on the merits. The injunction remains in place. Accordingly, it is not possible at present to determine the timing of the applicability of the revised CRA rule at the Bank.

USA Patriot Act

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

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Verify the identity of persons applying to open an account;

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

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

Sarbanes-Oxley Act of 2002

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

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

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

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

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

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

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

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

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

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

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

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Possible Future Legislation

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

Additional Information

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

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

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ITEM 1A. RISK FACTORS

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

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

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

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

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

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

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

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

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

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

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At December 31, 2024, our lending limit per borrower was approximately $28,809,000. Accordingly, the size of loans that we may offer to potential borrowers (without participation by other lenders) is less than the size of loans that many of our competitors with larger capitalization are able to offer. Our legal lending limit also impacts the efficiency of our lending operation because it tends to lower our average loan size, which means we have to generate a higher number of transactions to achieve the same portfolio volume. We may engage in loan participations with other banks for loans in excess of our legal lending limit. However, there can be no assurance that such participations will be available or on terms which are favorable to us and our customers.

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

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

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

The Company’s investment in marketable equity securities during 2024 were primarily consists of investments in large cap stock companies. Changes in fair value were recorded in unrealized gain/(losses) in non-interest income. These equity securities were sold in 2024.

At December 31, 2024, the Bank had $3,510,000 in capital stock of the FHLB and $12,000 in capital stock of ACBB. These equity securities are restricted in that they can only be sold back to the respective institutions or another member institution at par. Therefore, they are less liquid than other tradable equity securities, their fair value is equal to amortized cost, and no impairment write-downs have been recorded on these securities.

The Bank has a $914,000 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 by 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 stock post conversion of its original Class B 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 (1.5430 as of September 26, 2024), 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 does not have a readily determinable fair value.

The Bank owns 100 shares of preferred stock of SHCPFIC. These shares are not transferable without the consent of SHCPFIC and does not have a readily determinable fair value. These restricted investments are carried at cost and evaluated for impairment periodically. As of December 31, 2024, there was no impairment associated with these securities.

Our assets at December 31, 2024 included a deferred tax asset and we may not be able to realize the full benefit of that asset.

As of December 31, 2024, QNB had a net deferred tax asset of $18,325,000. Our ability to realize these tax benefits ultimately depends on the existence of sufficient taxable income of the appropriate character (ordinary income or capital gains) within the applicable carryback and carryforward periods provided under the tax law. Estimating whether the deferred tax asset will be realized requires us to exercise significant judgment and is inherently uncertain because it requires the prediction of future occurrences. The deferred tax asset may be reduced in the future if estimates of future income, our tax planning strategies, or tax rate changes resulting from Federal tax reform do not support the amount of the deferred tax asset. If it is determined in the future that a valuation allowance of the deferred tax asset is necessary, we may incur a charge to earnings and a reduction to regulatory capital for the amount included in any such allowance.

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

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

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

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

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

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

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

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

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

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

The significant laws and regulations that govern our activities are described under “Item 1 - Description of Business” in this Form 10-K. These laws and regulations, along with existing tax, accounting, securities, and monetary laws, regulations, standards, policies, and interpretations control the manner in which financial institutions conduct business. Such laws, regulations, standards, policies, and interpretations are constantly evolving and may change significantly over time. The potential exists for additional federal or state laws or regulations, or new policies or interpretations by regulatory agencies having jurisdiction over our activities, to affect many aspects of our operations, including capital requirements, lending and funding practices, and liquidity standards. Additional laws, regulations or

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other regulatory requirements, or any substantial change in regulation and oversight, may have a material impact on our operations by increasing our cost of regulatory compliance and of doing business and otherwise affecting our operations, and may significantly affect the markets in which we do business, the markets for and value of our investments, the fees we charge and our ongoing operations, costs and profitability.

High concentrations of commercial real estate loans ("CRE loans") could subject the Bank to increased regulatory scrutiny and directives, which could force us to preserve or raise capital and/or limit future commercial lending activities.

Bank regulators have expectations of banks with high CRE concentrations to manage the risk in the concentrated portfolio. Bank regulators recognize that diversification can be achieved within CRE portfolios and differentiates risk in different types of CRE loans. They focus on those CRE loans for which the cash flow from the real estate is the primary source of repayment rather than loans to a borrower for which real estate collateral is taken as a secondary source of repayment or through abundance of caution. Generally, these would include development and construction loans for which repayment is dependent upon the sale of the property as well as properties for which repayment is dependent upon rental income.

Financial institutions that have high concentrations of CRE loans within their lending portfolios could face increased risk of financial difficulties in an economic downturn effecting its CRE markets. Therefore, bank regulators have issued guidance directed financial institutions whose concentrations exceed certain percentages of capital to implement heightened risk management practices appropriate to their concentration risk. These general guidelines are not limits, are not viewed negatively, nor are they viewed a safe haven. If a financial institution’s CRE portfolio goes outside of these general guidelines they will not automatically be criticized, but heightened risk management practices may be needed. Risk management practices should align with the complexity of the financial institution and its portfolio and include factors such as: portfolio diversification across property types; geographic dispersion of CRE loans; underwriting standards; level of pre-sold units or other types of take-out commitments on construction loans; and portfolio liquidity (ability to sell or securitize exposures on the secondary market).

Bank regulators may require such financial institutions to reduce their concentrations and/or maintain higher capital ratios than financial institutions with lower concentrations in CRE. At December 31, 2024, our CRE loans did not result in concentrations that require heightened risk management practices.

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

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

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

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

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

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

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

Our success depends upon the ability to attract and retain highly motivated, well-qualified personnel. We face significant competition in the recruitment of qualified employees. Our ability to execute our business strategy and provide high-quality service may suffer if we

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are unable to recruit or retain a sufficient number of qualified employees or if the costs of employee compensation or benefits increase substantially. QNB currently has employment agreements and/or change of control agreements with six of its senior officers.

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

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

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 1C. CYBERSECURITY RISK MANAGEMENT, STRATEGY AND GOVERNANCE

QNB maintains comprehensive and continually evolving processes for assessing, identifying, and managing material risks from cybersecurity threats, including any potential unauthorized occurrence on, or conducted through, QNB’s information systems that may result in adverse effects on the confidentiality, integrity, or availability of such systems or any information residing on such systems. The processes relating to cybersecurity threats are integrated into the QNB’s overall risk management processes, which are overseen by the entire board of directors and not delegated to any committee or subcommittee of the board.

As part of the QNB’s overall risk management processes, it has established both the Information Technology Committee and the Information Security Committee. The Technology Committee comprises the executive management team, selected department heads, and the Information Security Officer ("ISO"). The Technology Committee reports to the Board of Directors. The second committee is the Information Security Committee, composed of QNB’s Chief Operating Officer (“COO”), the Information Technology Director, and the ISO. The Information Security Committee reports to QNB’s Audit Committee.QNB’s COO presents a detailed report on information systems and cybersecurity matters to the Board of Directors at least once annually. The Board of Directors also receives and reviews copies of minutes of all meetings of the Audit Committee and the Information Technology Committee. The Audit Committee receives minutes from the Information Security Committee and audit reports related to Technology and Cyber control testing.

QNB Bank’s information technology resources are managed by the Information Technology Department, which is responsible for identifying, assessing, and managing material risks from cybersecurity threats. The present COO, who reports directly to the current President and Chief Executive Officer ("CEO"), has been with QNB Bank for over eight years and has over twenty-five years of experience in banking technology and operations. He has an MBA in Management Information Systems and is a current Certified Information Systems Security Professional. QNB’s IT Director and ISO report directly to the COO. Additionally, the ISO has a reporting line to the Audit Committee to ensure independence and transparency. The Information Technology Department is managed by the IT Director. The present IT Director has been employed by QNB Bank in the information technology area for ten years has been in the technology industry for over fifteen years and holds numerous technology certifications. QNB's ISO, whose responsibilities include security relating to QNB’s information systems, is a Certified Information Systems Security Professional and a Certified Information Security Manager. The ISO, among other duties, supervises internal employee training relating to cybersecurity risks, conducts access reviews relating to QNB’s information systems, and monitors implemented checks and balances relating to access to information.Information relating to cybersecurity risks and cybersecurity incidents, if any, is reported by the COO and the ISO and to both the Information Technology Committee and the Information Security Committees. Additionally, cyber security incidents are reported to QNB’s Board of Directors by the COO no less than quarterly.

QNB maintains an Incident Response Plan that provides documented guidelines for handling potential threats and taking appropriate measures, including timely notification of cybersecurity threats and incidents to senior management and the Board of Directors when appropriate. The Incident Response Plan is managed by the Information Security Committee and is reviewed and tested at least annually.

QNB uses third-party vendors to assist in monitoring, detecting, and managing cyber threats, including managed security service monitoring, penetration testing, and vulnerability assessment. The Information Security Committee has established risk management guidelines for third-party vendors. QNB conducts due diligence reviews of third-party vendors before contracts or agreements for the

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provision of services are signed and conducts ongoing due diligence and oversight procedures with the frequency of the procedures determined based on a risk assessment of the services provided. Generally, QNB’s agreements with service providers include cybersecurity and data privacy requirements.. All such agreements are reviewed at least annually. QNB cannot guarantee, however, that such agreements, due diligence, and oversight procedures will prevent a cybersecurity incident from impacting information systems. Moreover, as a result of applicable laws and regulations or applicable contractual provisions, QNB may be held responsible for cybersecurity incidents attributed to its service providers in relation to any data that QNB shares with such providers.

To date, QNB has not experienced any risks from cybersecurity threats, including as a result of any previous cybersecurity incidents, that have materially affected or are reasonably likely to materially affect QNB, including its business strategy, results of operations, or financial condition. As discussed under “Risk Factors” in Item 1A, however, the sophistication of cybersecurity threats continues to increase, and the preventative actions taken by QNB to reduce the risk of cybersecurity threats or incidents may not be sufficient in a particular circumstance. Accordingly, QNB may not be able to anticipate all cybersecurity breaches no matter how well designed or implemented QNB’s cybersecurity controls and procedures are, and QNB may not be able to implement effective preventive measures against such security breaches in a timely manner.

ITEM 2. PROPERTIES

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

The following table details QNB Bank’s properties:

Location

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

 Quakertown, PA – Computer Center - 121 West Broad Street Owned

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

 Dublin, PA – Dublin Branch - 161 North Main Street Leased

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

 Coopersburg, PA – Coopersburg Branch - 51 South Third Street Owned

 Perkasie, PA – Perkasie Branch - 607 Chestnut Street Owned

 Souderton, PA – Souderton Branch - 750 Route 113 Leased

 Wescosville, PA – Wescosville Branch - 950 Mill Creek Road Leased

 Colmar, PA – Colmar Branch - 127 Bethlehem Pike Owned

 Warminster, PA – Warminster Branch - 1402 West Street Road Leased

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

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IITEM 3. LEGAL PROCEEDINGS

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

ITEM 4. MINE SAFETY DISCLOSURES

None

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PART II

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

Stock Information

QNB common stock is quoted on the over-the-counter bulletin board (“OTCBB”). QNB had approximately 627 shareholders of record as of February 28, 2025.

The following table sets forth the high and low bid and ask stock prices for QNB common stock on a quarterly basis during 2024 and 2023. These prices reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.

Cash

High Low dividend

Bid Ask Bid Ask per share

QNB has traditionally paid quarterly cash dividends on the last Friday of each quarter. The Company expects to continue the practice of paying quarterly cash dividends to its shareholders; however, future dividends are dependent upon future earnings, financial condition, appropriate legal restrictions, and other factors relevant at the time the board of directors considers declaring a dividend. Certain laws restrict the amount of dividends that may be paid to shareholders in any given year. See “Shareholders’ Equity - Capital Adequacy” included in Item 7 of this Form 10-K filing and Note 22 of the Notes to Consolidated Financial Statements included in Item 8 of this Form 10-K filing, for additional information that discusses and quantifies this regulatory restriction.

The following table provides information on repurchases by QNB of its common stock in each month of the quarter ended December 31, 2024.

(1)

Transactions are reported as of settlement dates.

(2)

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

(3)

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

(4)

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

(5)

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

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Stock Performance Graph

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

•

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

•

the yearly cumulative total shareholder return on the S&P US SmallCap Banks Index, a group encompassing publicly traded banking companies trading on the NYSE or NASDAQ with an average market capitalization of $2.0 billion (individually ranging from $133 million to $19.3 billion); and

•

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

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

Period Ending

Source: S&P Global Market Intelligence© 2025

ITEM 6. [RESERVED]

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

Results of Operations – Overview

QNB Corp. (“QNB” or the “Company”) earns its net income primarily through its subsidiary, QNB Bank (the “Bank”). Net interest income, or the spread between the interest, dividends and fees earned on loans and investment securities and the expense incurred on deposits and other interest-bearing liabilities, is the primary source of operating income for QNB. QNB seeks to achieve sustainable and consistent earnings growth while maintaining adequate levels of capital and liquidity and limiting its exposure to credit and interest rate risk levels approved by the Board of Directors. Due to its limited geographic area, comprised principally of Bucks, Lehigh and Montgomery counties, growth is pursued through expansion of existing customer relationships and building new relationships by stressing a consistent high level of service at all points of contact.

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

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

Income and expense

Share and Per Share Data

Balance Sheet at Year-end

Selected Financial Ratios

Net income as a percentage of:

Average shareholders' equity to average total assets 8.84 8.99 8.54 8.53 9.21

Net income for the year ended December 31, 2024 was $11,448,000, or $3.12 per share on a diluted basis. This compares to 2023 net income of $9,483,000, or $2.63 per share on a diluted basis and 2022 net income of $15,921,000, or $4.47 per share on a diluted basis. Two important measures of profitability in the banking industry are an institution’s return on average assets and return on average shareholders’ equity. Return on average assets was 0.62%, 0.54% and 0.93% in 2024, 2023, and 2022, respectively, and return on average shareholders’ equity was 7.05%, 6.04% and 10.90%, respectively, during those same periods.

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The Bank contributed $12,237,000 to net income for the year ended December 31, 2024 compared to $9,395,000 for the same period in 2023; whereas the holding company contributed a net loss of $789,000 to consolidated net income for the year ended December 31, 2024 compared to net income of $88,000 for the same period in 2023. The increase at the Bank was primarily due to improvement in net interest margin and gains on sales of investments securities. The decrease at the holding company resulted primarily from an increase in interest expense related to the issuance of subordinated debt in 2024.

2024 versus 2023

The results for 2024 include the following significant components:

•

Net interest income increased $2,707,000, or 6.74%, to $42,862,000 for 2024.

•

The net interest margin on a tax-equivalent basis increased four basis points to 2.43% for 2024 from 2.39% for 2023.

•

Reversal of the provision for credit losses was $68,000 for 2024, compared with $844,000 for 2023.

•

Non-interest income for 2024 was $6,913,000, an increase of $2,076,000, or 42.9%, compared with 2023.

•

Non-interest expense for 2024 was $35,484,000, an increase of $1,375,000, or 4.0%, compared with 2023.

•

Total investment securities increased $50,467,000, or 10.2%, from December 31, 2023.

•

Loans receivable grew $122,515,000, or 11.2%, from December 31, 2023.

•

Deposits increased $139,828,000, or 9.4%, from December 31, 2023.

•

The holding company issued $40,000,000 in subordinated debt in 2024.

•

Total non-performing loans, which represent loans on non-accrual status and loans past due 90 days or more and still accruing interest, were $1,975,000, or 0.16% of total loans receivable at December 31, 2024, compared with $1,940,000, or 0.18% of total loans receivable at December 31, 2023. Loans on non-accrual status were $1,975,000 at December 31, 2024 compared with $1,940,000 at December 31, 2023. Net charge-offs for 2024 were $59,000, or 0.01% of average total loans, as compared with net recoveries for 2023 of $238,000, or 0.02% of average total loans for 2023.

2023 versus 2022

The results for 2023 include the following significant components:

•

Net interest income decreased $4,342,000, or 9.76%, to $40,155,000 for 2023.

•

The net interest margin on a tax-equivalent basis decreased 32 basis points to 2.39% for 2023 from 2.71% for 2022.

•

Provision for credit losses was a credit of $844,000 for 2023, compared with a credit of $850,000 for 2022.

•

Non-interest income for 2023 was $4,837,000, a decrease of $894,000, or 15.6%, compared with 2022.

•

Non-interest expense for 2023 was $34,109,000, an increase of $2,617,000, or 8.3%, compared with 2022.

•

Total investment securities declined $62,489,000, or 11.2%, from December 31, 2022.

•

Loans receivable grew $54,148,000, or 5.2%, from December 31, 2022.

•

Deposits increased $70,344,000, or 5.0%, from December 31, 2022.

•

Total non-performing loans, which represent loans on non-accrual status and loans past due 90 days or more and still accruing interest, were $1,940,000, or 0.18% of total loans receivable at December 31, 2023, compared with $9,121,000, or 0.88% of total loans receivable at December 31, 2022. Loans on non-accrual status were $1,940,000 at December 31, 2023 compared with $4,820,000 at December 31, 2022. Net recoveries for 2023 were $238,000, or 0.02% of average total loans, as compared with net recoveries for 2022 of $197,000, or 0.02% of average total loans for 2022.

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

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Net Interest Income

The following table presents the adjustment to convert net interest income to net interest income on a fully taxable equivalent basis for the years ended December 31, 2024, 2023, and 2022.

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

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

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

2024 versus 2023

On a tax-equivalent basis, net interest income for 2024 increased $2,681,000, or 6.6%, to $43,420,000. The net interest margin, which increased four basis points to 2.43%, was favorably impacted by increased rates on and volume of loans and investments. The average rate earned on earning assets increased 64 basis points from 4.09% for 2023 to 4.73% for 2024 with the yield on investments increasing 57 basis points and the yield on loans increasing 50 basis points. The yield on investment securities was favorably impacted by increased yields on all categories except U.S. Treasuries and Equities, causing an increase in interest income of $2,721,000; the yield was unfavorably impacted by a decrease in average volume of $49,754,000 contributing to a $494,000 decrease in interest income. The yield on loans was favorably impacted by increased rates in all loan categories, contributing to a $5,890,000 increase in interest income. This was also favorably impacted by a $110,151,000 net increase in average volume, of which $97,231,000 was related to an increase in average commercial real estate loans contributing $4,757,000 in interest income, an increase of $7,570,000 in home equity loans contributing $494,000 in interest income, and an increase of $4,032,000 in commercial and industrial loans average balances contributing an increase of $303,000 in interest income. The yield on total average interest-bearing liabilities increased 69 basis points from 2.11% for 2023 to 2.80% for 2024. The growth in loans was funded by the growth in deposits of $113,977,000, or 7.8%. The average rate paid on interest-bearing deposits increased from 2.01% to 2.71% for the same time periods, respectively, contributing to an increase in interest expense of $7,967,000, and a $134,229,000 increase in average interest-bearing deposits resulting in additional interest expense of $4,508,000. The average rate paid on total borrowings increased from 3.15% to 4.16% for the same time periods, respectively, offset by an average volume decrease of $34,917,000; the net impact contributed to a decrease in interest expense of $196,000. Loan and deposit growth was partially offset by the competitive local interest rate market for quality loans and deposits. Net interest spread decreased five basis points to 1.93% for 2024 compared to 1.98% for 2023.

2023 versus 2022

On a tax-equivalent basis, net interest income for 2023 decreased $4,471,000, or 9.9%, to $40,739,000. The net interest margin, which decreased 32 basis points to 2.39%, was unfavorably impacted by increased rates on deposits and short-term borrowings. The average rate earned on earning assets increased 91 basis points from 3.18% for 2022 to 4.09% for 2023 with the yield on investments increasing 47 basis points and the yield on loans increasing 95 basis points. The yield on investment securities was favorably impacted by increased yields on all categories, causing an increase in interest income of $3,057,000; the yield was unfavorably impacted by a decrease in average volume of $67,778,000 contributing to a $1,307,000 decrease in interest income. The yield on loans was favorably impacted by increased rates in all loan categories, contributing to a $9,999,000 increase in interest income. This was also favorably impacted by a $73,104,000 net increase in average volume, of which $76,271,000 was related to an increase in average commercial real estate loans, contributing $3,204,000 in interest income; partially offset by a decrease of $7,613,000 in commercial and industrial loans average balances, resulting in a decrease of $389,000 in interest income. The yield on total average interest-bearing liabilities increased 151 basis points from 0.60% for 2022 to 2.11% for 2023. The average rate paid on interest-bearing deposits increased from 0.57% to 2.01% for the same time periods, respectively, contributing to an increase in interest expense of $17,446,000, and a $29,102,000 increase in average interest-bearing deposits resulting in additional interest expense of $651,000. The average rate paid on short-term borrowings increased from 1.00% to 3.01% for the same time periods, respectively, contributing to an increase in interest expense of $2,182,000. Net interest spread decreased 60 basis points to 1.98% for 2023 compared to 2.58% for 2022.

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

Average Average Average Average Average Average

balance rate Interest balance rate Interest balance rate Interest

Assets

Investment securities (AFS & Equity):

Loans:

Liabilities and Shareholders' Equity

Interest-bearing deposits:

Tax-exempt securities and loans were adjusted to a tax-equivalent basis and are based on the marginal Federal corporate tax rate of 21 percent. Non-accrual loans and investment securities are included in earning assets.

* Includes loans held-for-sale

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

Due to change in: Total Due to change in: Total

Volume Rate Change Volume Rate Change

Interest income:

Investment securities (AFS & Equity):

Corporate debt securities and money market funds 481 238 719 (1 ) 3 2

Loans:

Interest expense:

Interest-bearing deposits:

(1)

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

(2)

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

(3)

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

The Rate-Volume Analysis tables, as presented on a tax-equivalent basis, highlight the impact of changing rates and volumes on interest income and interest expense. Total interest income on a tax-equivalent basis increased $14,960,000 to $84,626,000 for 2024, while total interest expense increased $12,279,000 to $41,206,000. Volume growth in earning assets contributed an additional $6,500,000 of interest income and interest rate increases contributed an additional $8,460,000 of interest income. Rate-related interest expense increased $7,817,000, while volume-related interest expense increased $4,462,000.

Investments

2024 versus 2023

Interest income on available-for-sale and equity investment securities increased $2,227,000 when comparing the two years. The 57 basis-point increase in rate, of which the interest rate swaps contributed 38 basis points, contributed an additional $2,721,000 to interest income and the $49,754,000 decrease in volume reduced interest income $494,000. The average yield on the available-for-sale and equity investment portfolio increased to 2.75% for 2024 compared to 2.18% for 2023.

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Income on U.S. Government agency securities yields were 1.17% for 2024 compared to 1.11% for 2023. Most of the bonds in the agency portfolio have call features ranging from three months to three years, none of which were exercised during 2024. Average balances, which decreased $20,077,000, reduced interest income by $224,000.

Interest income on state and municipal securities increased $459,000. Average balances, which decreased $2,792,000, reduced interest income by $81,000. The increase in yield of 50 basis points from 2.89% in 2023 to 3.39% in 2024 contributing $540,000 to interest income more than offset the decrease in interest income caused by volume. The rate and interest income increases on municipal securities was positively impacted by the interest rate swap, contributing 51 basis points of the increase in rate.

Many of these bonds have either reached maturity or their call dates and are being replaced with municipal bonds with less favorable tax-equivalent yields. Typically, QNB purchased municipal bonds with 10- to 15-year maturities with call dates between 2 and 5 years. Future demand for tax-exempt municipal securities is uncertain, as the tax-equivalent yield could be less favorable compared to other securities with similar risk-based capital asset-weighting characteristics.

All the mortgage-backed and collateralized mortgage obligations (“CMO”) securities owned by QNB are issued by U.S. Government agencies and sponsored enterprises (“GSE”) and carry the implicit backing of the U.S. Government, but they are not direct obligations of the U.S. Government. Interest income on mortgage-backed securities and CMOs increased $1,025,000 due to a 54 basis-point increase in rate from 2.14% for 2023 to 2.68% for 2024 adding $1,917,000 to interest income; this was partly offset by a $41,622,000 decrease in average balances reducing interest income by $892,000. The rate and interest income increases on mortgage-backed securities were positively impacted by the interest rate swap, contributing 46 basis points. This portfolio generally provides higher yields relative to agency bonds and provides monthly cash flow which can be used for liquidity purposes or can be reinvested as interest rates increase.

Income on corporate debt securities increased $719,000 due to an increase average balances of $10,905,000 and in yield from 4.40% for 2023 to 5.76% for 2024.

Excess cash at the holding company was invested in U.S. Treasury securities during 2024 adding $355,000 to interest income. The yield on U.S. Treasury securities was 5.00% for 2024 compared to 5.06% for 2023. Average balances increased $7,147,000.

Dividend income on equities decreased $154,000 due to a decrease in average balances of $3,315,000. The equity portfolio was sold during 2024.

2023 versus 2022

Interest income on available-for-sale and equity investment securities increased $1,750,000 when comparing the two years. The 47 basis-point increase in rate contributed an additional $3,057,000 to interest income and the $67,778,000 decrease in volume reduced interest income $1,307,000. The average yield on the available-for-sale and equity investment portfolio increased to 2.18% for 2023 compared to 1.71% for 2022.

Income on U.S. Government agency securities remained level at yields of 1.11% for 2023 compared to 1.10% for 2022. Most of the bonds in the agency portfolio have call features ranging from three months to three years, none of which were exercised during 2023.

Interest income on state and municipal securities increased $108,000. Average balances, which decreased $18,528,000, reduced interest income by $441,000. The increase in yield of 50 basis points from 2.39% in 2022 to 2.89% in 2023 contributing $549,000 to interest income more than offset the decrease in interest income caused by volume.

Interest income on mortgage-backed securities and CMOs increased $1,496,000 due to a 56 basis-point increase in rate from 1.58% for 2022 to 2.14% for 2023 adding $2,249,000 to interest income; this was partly offset by a $47,770,000 decrease in average balances reducing interest income by $753,000.

Income on corporate debt securities increased $2,000 due to an increase in yield from 4.37% for 2022 to 4.40% for 2023.

Excess cash at the holding company was invested in Treasury securities during 2023 adding $223,000 to interest income.

Dividend income on equities decreased $79,000 due to a decrease in average balances of $4,427,000, partially offset by an increase in yield of 90 basis points.

Loans

2024 versus 2023

The largest category of the loan portfolio is commercial real estate loans. This category of loans includes commercial purpose loans secured by either commercial properties such as office buildings, hotels, factories, warehouses, medical facilities and retail establishments, or residential real estate, usually the residence of the business owner or investment properties. The category also includes

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construction and land development loans. Income on commercial real estate loans increased $9,905,000. The increase in average balances of $97,231,000, or 13.6%, contributed an increase in interest income of $4,757,000; the 64 basis-point increase in yield, from 4.89% in 2023 to 5.53% in 2024 contributed $5,148,000 to the increase in interest income.

Income on commercial and industrial loans, the second largest category, increased $338,000 with average balances increasing $4,032,000 resulting in an increase to interest income of $303,000 and an average yield increase of two basis points to 7.52% in 2024 from 7.50% in 2023, contributing to a $35,000 increase in interest income. Many of the loans in this category are indexed to the prime interest rate.

Tax-exempt loan income increased $14,000 to $721,000 in 2024. When comparing the same periods, average balances decreased $1,369,000 to $18,507,000, which contributed a $48,000 decrease in interest income. The average yield on the tax-exempt loan portfolio increased from 3.56% for 2023 to 3.90% for 2024, resulting in an increase in interest income of $62,000.

QNB strives to be the “local consumer lender of choice.” QNB continues to focus on its retail lending efforts by adding new product offerings and by marketing and promotion. Overall, retail lending balances increased $10,257,000 and interest income for retail lending increased $1,230,000 in 2024 compared with 2023, driven by a 41 basis-point increase in yield.

Given the low yields on alternative investment securities, QNB retained certain fixed rate and hybrid adjustable-rate mortgages to borrowers with high credit scores and low loan-to-value ratios. As a result, average residential mortgage loans secured by first lien 1-4 family residential mortgages increased by $2,941,000, or 2.7%, to $110,320,000 for 2024. The average yield on the residential real estate portfolio increased 39 basis points to 4.12% for 2024 compared to 3.73% for 2023. Overall, interest income for this segment grew $537,000 in 2024.

Income on home equity loans increased by $681,000 when comparing 2024 and 2023. During 2024 and 2023, QNB offered attractive rates on both variable rate and fixed rate home equity loans. Average balances in home equity loans increased $7,570,000, or 13.0%, to $65,714,000 when comparing 2024 and 2023. The yield on the home equity portfolio increased 29 basis points to 6.81% when comparing the two years. Home values have continued to grow; therefore, we expect the demand for home equity loans will continue.

Interest income on consumer loans increased $12,000. Consumer loans at QNB experienced a decline in average balances in 2024 of $254,000, or 6.5%, led by a decline in student loans. Student loan balances are no longer insured, and QNB ceased funding originations through its third-party provider during the second half of 2018; average balances decreased $302,000 and interest income decreased $2,000 when comparing 2024 and 2023. Student loans are primarily variable rate loans and interest income was favorably impacted by a 160 basis-point increase in rate.

2023 versus 2022

Income on commercial real estate loans increased $8,141,000. The increase in average balances of $76,271,000, or 12.0%, contributed an increase in interest income of $3,204,000; the 69 basis-point increase in yield, from 4.20% in 2022 to 4.89% in 2023 contributed $4,937,000 to the increase in interest income.

Income on commercial and industrial loans, the second largest category, increased $2,912,000 with average balances decreasing $7,613,000 resulting in a decrease to interest income of $389,000, this decrease was more than offset by the positive impact from an increase in average yield of 240 basis points to 7.50% in 2023 from 5.10% in 2022, contributing to a $3,301,000 increase in interest income.

Tax-exempt loan income increased $31,000 to $707,000 in 2023. When comparing the same periods, average balances increased $98,000 to $19,876,000, which contributed a $3,000 increase in interest income. The average yield on the tax-exempt loan portfolio increased from 3.42% for 2022 to 3.56% for 2023, resulting in an increase in interest income of $28,000.

Retail lending balances increased $4,348,000 and interest income for retail lending increased $1,885,000 in 2023 compared with 2022, driven by a 103 basis-point increase in yield. Average residential mortgage loans secured by first lien 1-4 family residential mortgages increased by $2,982,000, or 2.9%, to $107,379,000 for 2023. The average yield on the residential real estate portfolio increased 39 basis points to 3.73% for 2023 compared to 3.34% for 2022. Overall, interest income for this segment grew $521,000 in 2023.

Income on home equity loans increased by $1,335,000 when comparing 2023 and 2022. Average balances in home equity loans increased $1,989,000, or 3.5%, to $58,144,000 when comparing 2023 and 2022. The yield on the home equity portfolio increased 214 basis points to 6.52% when comparing the two years.

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Interest income on consumer loans increased $29,000. Consumer loans at QNB experienced a decline in average balances in 2023 of $623,000, or 13.8%, led by a decline in installment loans and student loans. Installment loan average balances declined $164,000 and interest declined $2,000. Student loan balances are no longer insured, and QNB ceased funding originations through its third-party provider during the second half of 2018; average balances decreased $448,000 and interest income increased $25,000 when comparing 2023 and 2022.

Deposits and Borrowings

2024 versus 2023

Total interest expense for 2024 was $41,206,000 compared with $28,927,000 for 2023, an increase of $12,279,000. Interest expense on deposits increased $12,475,000 and interest expense on borrowed funds decreased $196,000 when comparing the two years. The rate paid on interest-bearing deposits increased 70 basis points; the rate paid on borrowings increased 101 basis points, when comparing the two periods. Deposit and borrowing costs increase due to an increase in competition for deposits when rates rise. 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 decreased $20,252,000, or 9.7%, to $188,525,000 for 2024. Average interest-bearing demand accounts increased $30,600,000, or 9.7%, to $346,590,000 for 2024 compared with 2023, with interest expense on interest-bearing demand accounts increasing $1,325,000 to $3,225,000 for 2024. The average rate paid increased 33 basis points to 0.93% for 2024 compared to 0.60% for 2023. Interest-bearing business demand average balances increased by $41,304,000, or 58.2%, and related interest expense increased $1,346,000, or 45 basis points in yield, when comparing the two years. Also included in the interest-bearing demand category is QNB-Rewards checking, a tiered-rate retail checking account product. In order to receive the high rate a customer must receive an electronic statement, have one direct deposit or other ACH transaction and have at least 12 debit card purchase transactions post and clear per statement cycle. If these qualifications are not met, the rate paid is 0.10%. For 2024, the average balance in this product was $91,932,000 and the related interest expense was $373,000 for an average cost of funds of 0.41%. In comparison, the average balance in this product for 2023 was $93,336,000 and the related interest expense was $389,000 for an average cost of funds of 0.42%. The rates paid on the QNB-Rewards product, assuming qualifications are met, is attractive relative to competitors’ offerings as well as other QNB products. This product also generates fee income through the use of the debit card. The average balance of other interest-bearing demand accounts included in this category decreased from $151,647,000 for 2023 to $142,347,000 for 2024. The average rate paid on these balances was 0.05% in 2023 and 2024.

Average money market accounts increased $54,067,000, or 29.5%, to $237,071,000 for 2024 compared with 2023. Interest expense on money market accounts increased $3,358,000 to $8,181,000 for 2024 compared with 2023. The average interest rate paid on money market accounts was 3.45% for 2024, an increase of 81 basis points compared with 2023.

Interest expense on municipal interest-bearing demand accounts increased $927,000 to $6,794,000 for 2024. The average balance of municipal interest-bearing demand accounts increased $14,836,000, or 11.3%, to $146,446,000 and the average interest rate paid on these accounts increased 18 basis points to 4.64% for 2024 from 4.46% for 2023. Most of these accounts are indexed to the Federal funds rate with negotiated rate floors between 0.15% and 0.35%. Many of these deposits are seasonal in nature and are received during the third quarter as tax receipts are collected and are withdrawn over the course of the next year.

QNB’s online e-Savings product is the largest category of savings deposits and was created to compete with other online savings accounts. Average e-Savings balances decreased $48,383,000, or 18.9%, to $207,869,000 in 2024 compared with $256,252,000 in 2023. The average cost of funds on these accounts was 1.71% for 2024 and 1.57% for 2023. The yield on this account may rise along with market rates and as competition for savings balances increases. Traditional statement savings accounts and club accounts are also included in the savings category and decreased on average by $15,484,000, or 16.7%, to $77,142,000. The average rate paid on total savings accounts was 0.12% for 2024, a six basis-point decrease from 0.18% for 2023 and interest expense decreased $79,000, to $91,000 from $170,000 over the same period.

Interest expense on time deposits increased $7,401,000, to $15,625,000 in 2024, due to an increase in average balances of $98,593,000 in 2024, to $365,851,000 and a 119 basis-point increase in yield, from 3.08% in 2023 to 4.27% in 2024. Similar to fixed-rate loans and investment securities, time deposits reprice over time and, therefore, have less of an immediate impact on costs in either a rising or falling rate environment. However, the maturity and repricing characteristics of time deposits tend to be shorter.

Approximately $350,837,000, or 92.0%, in time deposits will reprice or mature over the next 12 months compared with 82.0% of the portfolio at December 31, 2023. The average rate paid on these time deposits is approximately 4.37%.

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Short-term borrowings are comprised of sweep accounts structured as repurchase agreements with our commercial customers, overnight FHLB borrowing and short-term FRB borrowing with average balances in 2024 of $38,455,000, $98,000 and $9,973,000, respectively. Interest expense on short-term borrowings decreased $2,125,000 to $1,148,000 when comparing the two years. During this period average balances of repurchase agreements decreased $14,699,000 with a 44 basis-point increase in average rate paid, resulting in a decrease of cost of funds of $36,000. The average balances of borrowings from the FHLB decreased $15,747,000 with a 20 basis-point increase in average rate paid, resulting in a decrease in cost of funds of $772,000. 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%; this borrowing was paid off in the first quarter of 2024.

Average long-term debt increased $12,157,000 in 2024 to $27,869,000 with a 57 basis-point increase in average yield from 4.10% in 2023 to 4.67% in 2024.

During the third quarter of 2024, the QNB Corp. issued $40,000,000 of subordinated debt; the carrying value net of deferred costs was $39,068,000 at December 31, 2024. The average yield of 9.34% 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.

The yield on interest-bearing liabilities increased 69 basis points to 2.80% for 2024.

2023 versus 2022

Total interest expense for 2023 was $28,927,000 compared with $7,924,000 for 2022, an increase of $21,003,000. Interest expense on deposits increased $18,097,000 and interest expense on borrowed funds increased $2,906,000 when comparing the two years. The rate paid on interest-bearing deposits increased 144 basis points; the rate paid on borrowings increased 209 basis points, when comparing the two periods. Deposit and borrowing costs increase due to an increase in competition for deposits when rates rise.

The composition of the deposit accounts changed in 2023 as 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 interest-bearing demand accounts decreased $29,064,000, or 8.4%, to $315,990,000 for 2023 compared with 2022, with interest expense on interest-bearing demand accounts increasing $967,000 to $1,900,000 for 2023. The average rate paid increased 33 basis points to 0.60% for 2023 compared to 0.27% for 2022. Interest-bearing business demand average balances decreased by $2,188,000, or 3.0%, and related interest expense increased $950,000, or 136 basis points in yield, when comparing the two years. For 2023, the average balance in QNB-Rewards checking was $93,336,000 and the related interest expense was $389,000 for an average cost of funds of 0.42%. In comparison, the average balance in this product for 2022 was $104,122,000 and the related interest expense was $366,000 for an average cost of funds of 0.35%. The average balance of other interest-bearing demand accounts included in this category decreased from $167,737,000 for 2022 to $151,647,000 for 2023. The average rate paid on these balances was 0.05% in 2022 and 0.05% in 2023.

Average money market accounts increased $45,174,000, or 32.8%, to $183,004,000 for 2023 compared with 2022. Interest expense on money market accounts increased $4,206,000 to $4,823,000 for 2023 compared with 2022. The average interest rate paid on money market accounts was 2.64% for 2023, an increase of 219 basis points compared with 2022. A new High Yield money market account was introduced in 2023.

Average e-Savings balances decreased $79,238,000, or 23.6%, to $256,252,000 in 2023 compared with $335,490,000 in 2022. The average cost of funds on these accounts was 1.57% for 2023 and 0.59% for 2022. The yield on this account may rise along with market rates and as competition for savings balances increases. Traditional statement savings accounts and club accounts are also included in the savings category and decreased on average by $14,988,000, or 13.9%, to $92,626,000. The average rate paid on total savings accounts was 0.18% for 2023, a one basis-point increase from 0.17% for 2022 and interest expense decreased $9,000, to $170,000 from $179,000 over the same period.

Interest expense on time deposits increased $6,803,000, to $8,224,000 in 2023, due to an increase in average balances of $98,432,000 in 2023, to $267,258,000 and a 224 basis-point increase in yield, from 0.84% in 2022 to 3.08% in 2023.

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Short-term borrowings are comprised of sweep accounts structured as repurchase agreements with our commercial customers, overnight FHLB borrowing and short-term FRB borrowing with average balances in 2023 of $53,154,000, $15,845,000 and $39,863,000, respectively. Interest expense on short-term borrowings increased $2,412,000 to $3,273,000 when comparing the two years. During this period average balances of repurchase agreements decreased $15,496,000 with an 89 basis-point increase in average rate paid, resulting in an increase of cost of funds of $398,000. The average balances of borrowings from the FHLB decreased $1,381,000 with a 189 basis-point increase in average rate paid, resulting in an increase in cost of funds of $258,000.

Average long-term debt was $15,712,000 with an average yield of 4.10%. The yield on interest-bearing liabilities increased 151 basis points to 2.11% for 2023.

Provision for Credit Losses

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. QNB recorded a reversal of the provision for credit losses on loans of $49,000 for the twelve months ended December 31, 2024 compared to a reversal of the provision for loan losses of $828,000 for the twelve-month period ended December 31, 2023 and a reversal of the provision for loan losses of $850,000 for the twelve-month period ended December 31, 2022. QNB recorded a reversal of the provision for credit losses on unused commitments of $19,000 during 2024 compared to a reversal of the provision for credit losses on unused commitments of $16,000 during 2023. The 2022 period adjustments for the reserve for unused commitments were included in non-interest expense. Net loan charge-offs were $59,000, or 0.01% of total average loans for 2024 compared with net loan recoveries were $238,000, or 0.02% of total average loans for 2023 and net loan recoveries were $197,000, or 0.02% of total average loans for 2022. The majority of the recoveries during 2024, 2023 and 2022, were on these previously charged off commercial loans. 2024 was offset by net charge-offs in overdrafts and student loans. Deterioration in credit quality resulting in charge-offs or significant growth in the loan portfolio may result in a higher provision for credit losses on loans in 2025.

Non-Interest Income

Non-interest income comparison

Change from prior year

$ Change % Change

Net gain on sale of loans 29 16 6 13 10 N/M N/M

N/M - Not Meaningful

2024 versus 2023

QNB, through its core banking business, generates various fees and service charges. Total non-interest income includes service charges on deposit accounts, ATM and debit card income, retail brokerage and advisory income, income on bank-owned life insurance, merchant income and gains and losses on investment securities and residential mortgage loans. Total non-interest income was $6,913,000 in 2024 compared with $4,837,000 in 2023, an increase of $2,076,000. Excluding the unrealized (losses) gains on equity securities and gains (losses) on sales of investment securities, noninterest income was $6,209,000 in 2024 compared to $6,664,000 in 2023, a decrease of $455,000.

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Fees for services to customers are primarily comprised of service charges on deposit accounts. These fees were $1,770,000 for 2024, an increase of $119,000 from 2023. Overdraft income, which represented approximately 75% of total fees for services to customers in 2024 and 78% in 2023, increased by $38,000, or 2.9%, when comparing 2024 to 2023. The increasein overdraft income primarily reflects an increase in the number of overdraft occurrences. Other fees for services increased $119,000 primarily due to the increase in deposit accounts.

ATM and debit card income is primarily comprised of transaction income on debit cards and ATM cards and ATM surcharge income for the use of QNB’s ATM machines by non-QNB customers. ATM and debit card income was $2,740,000 in 2024, an increase of $5,000 from the amount recorded in 2023. Debit card interchange income increased $10,000 to $2,695,000 in 2024, while ATM surcharge income and monthly card fees income decreased $5,000 to $45,000. The growth in checking accounts and card usage contributed to the increase in debit card income, including the QNB Rewards checking product, a tiered-rate checking account which requires, among other terms, the posting of a minimum of twelve debit card purchase transactions per statement cycle to receive the high interest rate.

QNB provides securities and advisory services under the name QNB Financial Services through an independent third-party registered Broker/Dealer and Registered Investment Advisor. QNB receives a percentage of the revenue generated but is responsible for salaries and expenses of advisors who are QNB employees. Retail brokerage and advisory revenue was $476,000 for 2024 compared with $862,000 for 2023, a decrease of $386,000, or 44.8%. Advisory fees decreased $461,000 comparing 2024 to 2023 due to a decrease in client balances following employee turnover. Sales in front-loaded products, such as annuities and alternative investments (which include private equity, hedge funds, managed futures, real estate “REITs”, commodities and derivatives contracts) and trailing income related to these increased $75,000 in 2024 over 2023. In 2024, the net income provided by QNB Financial Services was $112,000, compared with $186,000 in net income for 2023.

Income on bank-owned life insurance (“BOLI”) represents the earnings and death benefits on life insurance policies in which the Bank is the beneficiary. The insurance carriers reset the rates on these policies annually taking into consideration the interest rate environment as well as mortality costs. The existing policies have rate floors which limit how low the earnings rate can go. Some of these policies are currently at their floor. Income on these policies during 2024 was $332,000 compared to $320,000 for 2023.

Merchant income represents fees charged to merchants for the Bank’s handling of credit card or charge sales. Merchant income was $348,000 for 2024, a decrease of $46,000 compared to the amount reported in 2023.

The fixed-income securities portfolio represents a significant portion of QNB’s earning assets and is also a primary tool in liquidity and asset/liability management. QNB actively manages its fixed-income portfolio to take advantage of changes in the shape of the yield curve, changes in spread relationships in different sectors, and for liquidity purposes. Management continually reviews strategies that will result in an increase in the yield or improvement in the structure of the investment portfolio, including monitoring credit and concentration risk in the portfolio. In addition, the Corporation owned a small portfolio of equity securities for the purpose of generating both dividend income and capital appreciation; this equity portfolio was sold during 2024.

Net gains (losses) on sales of investment securities increased $2,996,000 to a net gain of $919,000 for the year ended December 31, 2024, compared with a net loss of $2,077,000 for the year ended December 31, 2023. Net gains from sales of equity securities were $2,015,000 in 2024 compared to a net loss of $19,000 in 2023. QNB completed the exchange offer to convert the Bank's Visa B-1 shares to B-2 and C shares in the second quarter of 2024; QNB sold the Visa Class C shares in the fourth quarter of 2024 and realized a gain of $1,498,000. QNB sold its other equity securities and realized a gain of $517,000 during the twelve months ended December 31, 2024 compared to a loss of $19,000 for the same period of 2023. Net loss on the sale of fixed income securities were $1,096,000 for 2024 compared to a net loss of $2,058,000 for 2023. QNB improved the efficiency of its investment portfolio by executing sales of low yielding fixed rate available-for-sale securities during 2023 and 2024. QNB sold both state and municipal securities and mortgage-backed and CMO securities totaling $13,139,000 during 2024 and $33,213,000 during 2023. Unrealized losses on equity securities of $215,000 were recorded during 2024 compared to unrealized gains of $250,000 during 2023.

The net gain on residential mortgage sales is directly related to the volume of mortgages sold and the timing of the sales relative to the interest rate environment. Residential mortgage loans to be sold are identified at origination. The net gain on the sale of residential mortgage loans was $29,000 and $16,000 for 2024 and 2023, respectively. Mortgage financing activity was greater in 2024, due to available properties. Proceeds from the sale of residential mortgages were $1,765,000 and $989,000 for the years ended December 31, 2024 and 2023, respectively. Included in the gains on the sale of residential mortgages in 2024 and 2023 are $13,000 and $7,000, respectively, related to the recognition of mortgage servicing assets.

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QNB retains servicing rights for residential mortgages sold in the secondary market. A servicing fee is retained on all mortgage loans sold and serviced. QNB recognizes its obligation to service financial assets that are retained in a transfer of assets in the form of a servicing asset. The servicing asset is amortized in proportion to, and over, the period of net servicing income or loss. On a quarterly basis, servicing assets are assessed for impairment based on their fair value. Mortgage servicing income of $116,000 for 2024 and $125,000 for 2023 is included in other non-interest income.

Other non-interest income, excluding mortgage servicing income, was $398,000 for 2024, a decrease of $163,000 from the amount recorded in 2023. Other non-interest income included sales tax refunds in 2023 of $117,000 and broker-dealer conversion costs reimbursements of $18,000 in 2023. Losses on premises and equipment were $14,000 in 2024 compared to gains in 2023 of $6,000. Letter of credit fees decreased $16,000 when comparing 2024 to 2023.

2023 versus 2022

Total non-interest income was $4,837,000 in 2023 compared with $5,731,000 in 2022, a decrease of $894,000. Excluding the unrealized (losses)gains on equity securities, gains(losses) on sales of investment securities and gains on sales of loans, noninterest income was $6,648,000 in 2023 compared to $6,485,000 in 2022, an increase of $163,000.

Fees for services to customers are primarily comprised of service charges on deposit accounts. These fees were $1,651,000 for 2023, an increase of $37,000 from 2022. Overdraft income, which represented approximately 78% of total fees for services to customers in both 2023 and 2022, increased by $32,000, or 2.5%, when comparing 2023 to 2022. The increasein overdraft income primarily reflects an increase in the number of overdraft occurrences.

ATM and debit card income was $2,735,000 in 2023, an increase of $16,000, or 0.6% from the amount recorded in 2022. Debit card interchange income increased $22,000, or 0.8%, to $2,686,000 in 2023, while ATM surcharge income and monthly card fees income decreased $6,000 to $49,000.

Retail brokerage and advisory revenue was $862,000 for 2023 compared with $788,000 for 2022, an increase of $74,000, or 9.4%. Advisory fees increased $27,000 comparing 2023 to 2022. Fee income from sales in front-loaded products and trailing income increased $47,000 in 2023 over 2022. In 2023, the net income provided by QNB Financial Services was $186,000, compared with $210,000 in net income for 2022.

BOLI income during 2023 was $320,000 compared to $361,000 for 2022; included in the 2022 number was a life insurance benefit of $46,000.

Net (losses) gains on sales of investment securities decreased $2,343,000 to a net loss of $2,077,000 for the year ended December 31, 2023, compared with a net gain of $266,000 for the year ended December 31, 2022. Net loss from sales of equity securities were $19,000 in 2023 compared to a net gain of $405,000 in 2022. Net loss on the sale of fixed income securities were 2,058,000 for 2023 compared to a net loss of $139,000 for 2022. QNB sold both state and municipal securities and mortgage-backed and CMO securities totaling $33,213,000 during 2023. Unrealized gains on equity securities of $250,000 were recorded during 2023 compared to unrealized losses of $1,026,000 during 2022.

The net gain on the sale of residential mortgage loans was $16,000 and $6,000 for 2023 and 2022, respectively. Mortgage financing activity was greater in 2023, due to available properties. Proceeds from the sale of residential mortgages were $989,000 and $304,000 for the years ended December 31, 2023 and 2022, respectively. Included in the gains on the sale of residential mortgages in 2023 and 2022 are $7,000 and $2,000, respectively, related to the recognition of mortgage servicing assets. Mortgage servicing income of $125,000 for 2023 and $143,000 for 2022 is included in other non-interest income.

Other non-interest income, excluding mortgage servicing income, was $561,000 for 2023, an increase of $95,000 from the amount recorded in 2022. Other non-interest income included sales tax refunds in 2023 of $117,000 and broker-dealer conversion costs reimbursements of $18,000 in 2023 compared to $39,000 in 2022. Title company income decreased $33,000, credit card income increased $21,000 and letter of credit fees increased $16,000 when comparing 2023 to 2022.

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Non-Interest Expense

Non-interest expense comparison

Change from prior year

$ Change % Change

2024 versus 2023

Non-interest expense is comprised of costs related to salaries and employee benefits, net occupancy, furniture and equipment, marketing, third party services, FDIC insurance premiums, regulatory assessments and taxes and various other operating expenses. Total non-interest expense was $35,484,000 in 2024, an increase of $1,375,000, or 4.0%, from the $34,109,000 in 2023. QNB’s overhead efficiency ratio, which represents the percentage of each dollar of revenue that is used for non-interest expense, is calculated by taking non-interest expense divided by net operating revenue (tax-equivalent net interest income plus non-interest income). QNB’s efficiency ratios for 2024, 2023 and 2022 were 70.5%, 74.8%, and 61.8%, respectively. The favorable decrease in the 2024 efficiency ratio is primarily due to an increase in tax-equivalent net interest income of $2,681,000 in 2024 over 2023.

Salaries and benefits expense is the largest component of non-interest expense. QNB monitors, using various surveys, the competitive salary and benefit information in its markets and makes adjustments when appropriate. Salaries and benefits expense for 2024 was $19,741,000, an increase of $715,000, or 3.8%, compared with $19,026,000 reported in 2023. Salary expense and related payroll taxes for 2024 was $16,882,000, an increase of $893,000 compared with $15,989,000 reported in 2023. Benefit expense for 2024 was $2,859,000, a decrease of $178,000, or 5.9%, from the amount recorded in 2023. Medical premiums decreased $225,000 primarily due to a decrease in claims. Retirement plan matching and safe harbor increased $44,000 compared to 2023. QNB utilized unvested forfeited 401(k) contributions to offset retirement plan matching in 2024 and 2023. During 2023, the Bank adopted a Nonqualified Deferred Compensation Plan ("NQDC Plan"). The purpose of the NQDC Plan is to provide a deferred compensation vehicle to which the Bank may credit discretionary amounts on behalf of key employees for recruitment and reward. NQDC Plan expense was $136,000 for the year ended December 31, 2024 compared to $108,000 for the year ended December 31, 2023.

Net occupancy and furniture and equipment expense increased $355,000, to $6,180,000 when comparing 2024 to 2023, due primarily to increased software maintenance.

Marketing expense was $1,044,000 for 2024, an $80,000 increase from the expense recorded in 2023. QNB’s contributions and sponsorships for not-for-profit organizations, events and clubs in the communities it serves are included in public relations expense which decreased $28,000 in 2024 Advertising and sales promotions costs increased $119,000 in 2024 over 2023.

Third party services are comprised of professional services, including legal, accounting, auditing and consulting services, as well as fees paid to outside vendors for support services of day-to-day operations. These support services include correspondent banking services, statement printing and mailing, investment security safekeeping and supply management services. Third party services increased $173,000.

Telephone, postage and supplies expense decreased $66,000 to $505,000 in 2024 compared with 2023, primarily due to reduction in transportation costs for supplies and mail delivery services due to usage.

The premium assessment formula for small institutions is based on asset growth and related risk assumptions determined by the FDIC as well as capital. Small institutions, for FDIC premium assessments purposes, are defined as those with total consolidated assets less than $10 billion. FDIC insurance premium expense increased $98,000 in 2024 due to an increase in capital.

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State tax expense represents the payment of the Pennsylvania Shares Tax and Pennsylvania sales and use tax. State tax expense was $577,000 and $367,000 for the years 2024 and 2023, respectively. The Pennsylvania Shares Tax is based primarily on the equity of the Bank. The increase in Pennsylvania Shares Tax is a result of higher capital and a decrease in tax credits.

Other operating expenses for the twelve months ended December 31, 2024 decreased $190,000, or 4.9%. There was a decrease of $478,000 in write-offs primarily due to fraud on customer accounts offset by increases in debit card expense of $233,000 and the recording of a potential expense of $85,000 related to the Visa stock exchange make-whole agreement.

2023 versus 2022

Total non-interest expense was $34,109,000 in 2023, an increase of $2,617,000, or 8.3%, from the $31,492,000 in 2022. Salaries and benefits expense for 2023 was $19,026,000, an increase of $1,720,000 compared with $17,306,000 reported in 2022. Salary expense and related payroll taxes for 2023 was $15,989,000, an increase of $1,250,000 compared with $14,739,000 reported in 2022. Benefit expense for 2023 was $3,037,000, an increase of $470,000, or 18.3%, from the amount recorded in 2022. Medical premiums increased $319,000 primarily due to an increase in claims. Retirement plan matching and safe harbor increased $101,000 compared to 2022. QNB utilized unvested forfeited 401(k) contributions to offset retirement plan matching in 2023 and 2022. NQDC Plan expense was $108,000 for the year ended December 31, 2023.

Net occupancy and furniture and equipment expense increased $713,000, to $5,825,000 when comparing 2023 to 2022, due primarily to increased software maintenance.

Marketing expense was $964,000 for 2023, a $94,000 increase from the expense recorded in 2022. QNB’s contributions and sponsorships for not-for-profit organizations, events and clubs in the communities it serves are included in public relations expense which increased $97,000 in 2023.

Third party services decreased $52,000; QNB incurred additional legal, consulting and other third-party services to implement core-processing software in 2022.

Telephone, postage and supplies expense decreased $177,000 to $571,000 in 2023 compared with 2022, primarily due to reduction in transportation costs for supplies and mail delivery services due to usage.

FDIC insurance premium expense increased $290,000 in 2023 due to an increase in the assessment rate.

State tax expense represents the payment of the Pennsylvania Shares Tax and Pennsylvania sales and use tax. State tax expense was $367,000 and $1,004,000 for the years 2023 and 2022, respectively.

Other operating expenses for the twelve months ended December 31, 2022 increased $666,000, or 20.7%. There was an increase of $499,000 in write-offs primarily due to fraud on customer accounts. Director fees increase $74,000 primarily due to additional expense related to the QNB Corp. 2023 Non-Employee Director Compensation Plan. Business development expenses increased $49,000 as in-person meetings increased. There was a $43,000 increase in loan work-out costs as there was a large recovery in 2022 of $45,000 to reimburse the Bank for insurance costs.

Income Taxes

Applicable income tax expense and effective tax rates were $2,911,000, or 20.3% for 2024, $2,244,000, or 19.1% for 2023 and $3,665,000, or 18.7% for 2022. The primary reason for the increased effective tax rate for 2023 over 2022 was due to a decrease in allowable tax-exempt interest due to higher disallowed interest expense related to a higher cost of funds and an increase in the valuation allowance. The primary reason for the increased effective tax rate for 2022 over 2021 was due to the state taxes on the realized gains on equity sales securities in 2022.

QNB expects the effective tax rate in 2025 to be less than the 21% corporate rate, due to its holdings of tax-free assets, including municipal bonds, municipal loans, and life insurance contracts. For a more comprehensive analysis of income tax expense and deferred taxes, refer to Note 12 in the Notes to Consolidated Financial Statements.

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Financial Condition

ASSETS

The following table presents total assets at the dates indicated:

Change from prior year

Cash and interest-earning deposits

Total cash and cash equivalents decreased $11,944,000 to $50,713,000 at December 31, 2024 from $62,657,000 at December 31, 2023. QNB had interest-bearing balances at the Federal Reserve Bank of $35,867,000 compared with $48,755,000 and interest-bearing balances in a brokerage account of $3,414,000 compared with $565,000 at December 31, 2024 and December 31, 2023, respectively. At December 31, 2024 and December 31, 2023 there was $0 and $1,850,000, respectively, held as collateral against the fair value swaps held a correspondent bank. Net cash was provided by operating and financing activities. Proceeds received from deposit growth and net proceeds from the issuance of long-term and subordinated debt more than offset loan growth and net repayment of short-term borrowings, excess funds were used to purchase investment securities. The maturity, prepayment and sales of investment securities were also reinvested in investment securities.

Investment Securities and Other Short-Term Investments

At December 31, 2024 and 2023, QNB had no Federal funds sold.

QNB accounts for its investments by classifying securities into four categories. Debt securities that are bought and held principally for the purpose of selling them in the near term are classified as trading securities and reported at fair value, with unrealized gains and losses included in earnings. Debt securities that QNB has the positive intent and ability to hold to maturity are classified as held-to-maturity securities and reported at amortized cost. Debt securities not classified as either held-to-maturity securities or trading securities are classified as available-for-sale securities and reported at fair value, with unrealized gains and losses, net of tax, excluded from earnings and reported as a separate component of shareholders’ equity. Equity investments with readily determinable fair values are measured at fair value with changes in fair value recognized in net income. Management determines the appropriate classification of securities at the time of purchase.

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Investment Portfolio History

Investment Securities Available-for-Sale

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

Equity Investments

Investments Available-For-Sale Debt Securities

Available-for-sale investment securities include securities that management intends to use as part of its liquidity and asset/liability management strategy. These securities may be sold in response to changes in market interest rates, changes in the securities prepayment or credit risk, the need for liquidity, or growth in loan demand. At December 31, 2024, the fair value of investment debt securities available-for-sale, including the impact of fair value hedges, was $546,559,000, or $79,832,000 less the amortized cost of $626,391,000. This compares to a fair value of $490,182,000, or $85,996,000 less the amortized cost of $576,178,000, at December 31, 2023. The available-for-sale portfolio had a weighted average maturity of approximately 6.6 years at December 31, 2024 and 6.9 years at December 31, 2023 and a weighted average tax-equivalent yield of 2.40% and 1.81% at December 31, 2024 and 2023, respectively.

At December 31, 2024, approximately 78% of QNB’s investment securities available-for-sale were either U.S. Government agency debt securities, U.S. Government agency issued mortgage-backed securities or CMOs. As of December 31, 2024, QNB held no securities of any one issue or any one issuer (excluding the U.S. Government and its agencies) that were in excess of 10% of shareholders’ equity.

The QNB investment portfolio represents a significant portion of earning assets and interest income. QNB actively manages the investment portfolio in an attempt to maximize earnings, while considering liquidity needs, interest rate risk and credit risk. The decrease of the investment portfolio as a percent of total assets in 2024 is due to the proceeds from payments, maturities and sales being used to fund loan growth. During 2024, $130,679,000 of investment securities available-for-sale were purchased compared with $14,381,000 during 2023. Proceeds from the sale of investment securities available-for-sale were $13,139,000 during 2024 compared with $33,213,000 during 2023. Proceeds from maturities, calls and prepayments were $64,959,000 during 2024 compared with $50,042,000 during 2023.

Treasury securities had a fair value of $18,010,000 at December 31, 2024 compared to $6,451,000 at December 31, 2023. Excess cash at the holding company was invested in short-term Treasury securities in 2024.

The balance of U.S. Government agency securities decreased $7,214,000 to $66,908,000 at December 31, 2024 and represents 12.2% of the available-for-sale investment portfolio, compared with 15.1% at December 31, 2023. U.S. Government agency issued CMO and MBS balances increased $45,945,000 to $360,156,000 and represents 65.9% of the available-for-sale portfolio compared with 64.1% at December 31, 2023. These bonds provide monthly cash flow to be reinvested in either loans or other securities, potentially at higher yields as rates increase.

The balance of municipal securities decreased $2,837,000 to $86,352,000 at December 31, 2024, representing 15.8% of the available-for-sale portfolio compared with 18.2% at December 31, 2023. QNB focuses on the financial performance of the underlying issuer for municipal bond purchases in addition to the bond rating of the issuer or the rating of bond insurer, if present.

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QNB owns one collateralized debt obligations (“CDO”) in the form of a pooled trust preferred security and is included in the Corporate debt category. The security is comprised of securities issued by banks or bank holding companies. QNB owns the mezzanine tranche of this security. The security is structured so that the senior and mezzanine tranches are protected from defaults by over-collateralization and cash flow default protection provided by subordinated tranches. The trust preferred security the Bank continues to hold has a carrying balance of $51,000 at December 31, 2024 and represents the senior-most obligation of the trust. There was no credit-related impairment charge during 2024, 2023 or 2020. Future estimates of fair value of the remaining security could require recording additional impairment charges through earnings. For additional detail on these securities see Note 18 of the Notes to Consolidated Financial Statements.

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

Investment Portfolio Maturities and Weighted Average Yields

Investment Securities Available-for-Sale

U.S. Treasuries

Weighted average yield 4.62 % — — — 4.62 %

U.S. Government agency:

Weighted average yield — 1.08 % 1.51 % — 1.17 %

State and municipal:

Mortgage-backed:

Collateralized mortgage obligations (CMOs):

Corporate debt and money market funds:

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

Investments in Equity Securities

Equity securities decreased $5,910,000 to $0 at December 31, 2024 from $5,910,000 at December 31, 2023. Proceeds from the sale of equity securities were $8,880,000, including a net gain of $2,015,000, and purchased $1,170,000 in equities during 2024. QNB completed the exchange offer to convert the Bank's Visa B-1 shares to B-2 and C shares in the second quarter of 2024; QNB sold the Visa Class C shares in the fourth quarter of 2024 and realized a gain of $1,498,000.

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Increases and decreases in the fair value of equity securities were recognized in net income. QNB sold its equity portfolio during 2024, reducing the volatility to earnings. However, QNB still has unconverted Visa B-2 shares, as discussed in Note 1, that in the future could be converted to equity securities with a readily determinable fair value. At December 31, 2023, the fair value of the equity securities was $5,910,000, or $215,000 above the cost of $5,695,000.

The equities portfolio comprises blue-chip large-capitalized stocks, providing a taxable equivalent dividend yield of 3.88%.

Loans

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

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

QNB manages the risk associated with commercial loans by having lenders work in tandem with credit analysts while maintaining independence between personnel. In addition, a Bank loan committee and a committee of the Board of Directors review and approve certain loan requests on a weekly basis. Other than disclosed in the forthcoming Loan Portfolio Table, at December 31, 2024, there was a concentration of loans to lessors of residential buildings and dwellings of 21.9% of total loans and to lessors of nonresidential buildings of 23.3% of total loans, compared with 21.5% and 24.7% of total loans, respectively, at December 31, 2023.

QNB’s commercial lending activity is focused on small businesses within the local community. Commercial purpose loans are generally perceived as having more risk of default than residential real estate loans with a personal purpose and consumer loans. These types of loans involve larger loan balances to a single borrower or group of related borrowers and are more susceptible to a risk of loss during a downturn in the business cycle. These loans may involve greater risk because the availability of funds to repay these loans depends on the successful operation of the borrower’s business. The assets financed are used within the business for its ongoing operation. Repayment of these types of loans generally comes from the cash flow of the business or the ongoing conversions of assets, such as accounts receivable and inventory, to cash. Commercial and industrial loans represent commercial purpose loans that are either secured by collateral other than real estate or unsecured.

Commercial loans secured by commercial real estate include commercial purpose loans collateralized at least in part by commercial real estate. Some of these loans may not be for the express purpose of conducting commercial real estate transactions. Commercial loans secured by residential real estate are commercial purpose loans generally secured by the business owner’s residence or residential investment properties owned by the borrower and rented to tenants. Commercial loans secured by either commercial real estate or residential real estate are originated primarily within the Eastern Pennsylvania market area, are within the Bank’s underwriting criteria, and generally include the guarantee of the borrowers. Repayment of this kind of loan is dependent upon either the ongoing cash flow of the borrowing entity or the resale of or lease of the subject property. Commercial real estate and commercial construction loans may be affected to a greater extent than residential loans by adverse conditions in real estate markets or the economy because commercial real estate borrowers’ ability to repay their loans depends on successful development of their properties.

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

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The Company originates fixed rate and adjustable-rate residential real estate loans that are secured by the underlying 1-4 family residential properties. Credit risk exposure in this area of lending is minimized by the evaluation of the credit worthiness of the borrower, including debt-to-income ratios, credit scores and adherence to underwriting policies that emphasize conservative loan-to-value ratios of generally no more than 80%. To reduce interest rate risk, qualifying originations of fixed-rate loans to individuals for 1-4 family residential mortgages with maturities of 15 years or greater are generally sold in the secondary market. Mortgage loan origination activity increased in 2024 with $1,851,000 in residential mortgages originated for sale compared with $1,522,000 for 2023. There were $664,000 residential mortgage loans held-for-sale at December 31, 2024 and $549,000 at December 31, 2023. Loan held for sale are carried at the lower of aggregate cost or market.

The home equity portfolio consists of fixed-rate home equity loans and variable rate home equity lines of credit. These loans are often in a junior lien position and therefore carry a higher risk than first lien 1-4 family residential loans. Risks associated with loans secured by residential properties, either first lien residential mortgages or home equity loans and lines, are generally lower than commercial loans and include general economic risks, such as the strength of the job market, employment stability and the strength of the housing market. Since most loans are secured by a primary or secondary residence, the borrower’s continued employment is the greatest risk to repayment.

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

Total loan receivables at December 31, 2024 were $1,216,048,000, an increase of $122,515,000, or 11.2%, from December 31, 2023. A key financial ratio, loans to deposits was 74.7% at December 31, 2024, compared with 73.5% at December 31, 2023. QNB continues to be committed to make loans available to credit worthy consumers and businesses.

Loan Portfolio

Commercial:

Retail:

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Loan Maturities and Interest Sensitivity

Loans due after one year

Commercial:

Retail:

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

The Allowance for Credit Losses on Loans Allocation table on Page 40 shows the percentage composition of the loan portfolio over the past five years. There was little change in the composition of the portfolio between the periods ended December 31, 2024 and 2023. Loans secured by commercial real estate, including loans secured by multi-family, owner-occupied and other commercial properties, remained the largest sector of the portfolio amounting to 50.6% and 48.9% of the portfolio at December 31, 2024 and December 31, 2023, respectively, as the balances in this sector grew by $79,817,000, or 14.9%, from $534,989,000 at December 31, 2023 to $614,806,000 at December 31, 2024. While loans secured by commercial real estate represent a significant portion of the total portfolio, the collateral is diversified, including investment properties, manufacturing facilities, office buildings, hospitality properties, hospitals, retirement and nursing home facilities, warehouses and owner-occupied facilities. Commercial real estate loans have drawn the attention of the regulators in recent years as a potential source of risk. QNB monitors these types of loans closely, obtaining updated appraisals on loans classified substandard or worse. As detailed in the Allowance for Credit Losses on Loans table, QNB had no charge-offs in this category in 2024, 2023 or 2022.

Commercial loans secured by residential real estate, which includes first lien, junior lien and revolving lines loans, increased by $2,210,000, or 2.0%, to $114,669,000 at December 31, 2024 and at 9.4% remained fairly level with the overall portfolio compared to 10.3% at December 31, 2023. Some of the properties that serve as collateral for these loans are located outside the Bank’s market area and have experienced vacancies and significant declines in market value in prior years. Non-accrual commercial loans secured by residential real estate were $535,000, $165,000, and $365,000 at December 31, 2024, 2023, and 2022, respectively. Charge-offs in this category have significantly decreased over the past three years. Net recoveries of $10,000 in 2024, compared to net recoveries of $10,000 in 2023 and net recoveries of $45,000 in 2022. In 2024, $5,000 in net recoveries were on out-of-market properties compared with $5,000 in net recoveries in 2023 and $41,000 of the net charge-offs in 2022.

Commercial and industrial loans, the second largest sector of the portfolio, experienced an increase in balances of $16,101,000, or 11.7%, to $153,187,000 at December 31, 2024. Commercial and industrial loans represented 12.6% of the portfolio at year-end 2024 compared with 12.5% at December 31, 2023. This category of loans generally presents a greater risk than loans secured by real estate since these loans are either secured by accounts receivable, inventory or equipment, or are unsecured. During 2024, nonaccrual commercial and industrial loan balances decreased $284,000 to $27,000, the majority of which is due to one loan returning accrual status of $278,000. During 2023, nonaccrual commercial and industrial loan balances decreased $1,264,000 to $311,000, the majority of which is due to paydowns of $1,264,000. During 2022, nonaccrual commercial and industrial loan balances decreased $1,794,000 to $1,575,000, the majority of which is due to paydowns of $1,811,000. In 2024, 2023 and 2022, there were net recoveries of $29,000, $348,000 and $268,000, respectively.

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Construction and land development loans increased 11.4% to $129,464,000, or 10.6% of the portfolio at December 31, 2024, from $116,173,000, or 10.6% of the portfolio at December 31, 2023. These loans are primarily to developers and builders for the construction of residential units or commercial buildings or to businesses for the construction of owner-occupied facilities. This portfolio is diversified among different types of collateral including: 1-4 family residential, medical and retirement home facilities, office buildings, hotels and land for development loans. Construction loans are generally made only on projects that have municipal approval. These loans are usually originated to include a short construction period followed by permanent financing provided through a commercial mortgage after construction is complete. Once construction is complete, the balance is moved to the appropriate secured by commercial real estate category if the permanent financing is provided by the Bank. There were no charge-offs in the construction loan portfolio since 2011, and no construction loans on non-accrual since 2014.