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 credit losses on loans based on a number of factors. If these assumptions are incorrect, the allowance for credit losses on loans may not be sufficient to cover losses and may cause QNB to increase the allowance in the future by increasing the provision for credit losses on loans, 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, 2025, our lending limit per borrower was approximately $30,154,000. 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.
At December 31, 2025, the Bank had $3,587,000 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 $2,064,000 non-controlling investment in a discrete class of non-voting limited liability company membership nterests
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 (1.5108 as of December 23, 2025), which is periodically adjusted to reflect VISA’s ongoing litigation costs. There is a very limited market for this stock, as only current owners of Class B-2 shares are permitted to transact in Class B-2. Due to the lack of orderly trades and public information of such trades, Visa Class B-2 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, 2025, there was no impairment associated with these securities.
Our assets at December 31, 2025 included a deferred tax asset and we may not be able to realize the full benefit of that asset.
As of December 31, 2025, QNB had a net deferred tax asset of $13,993,000. Our ability to realize these tax benefits ultimately depends on the existence of sufficient taxable income of the appropriate character (ordinary income or capital gains) within the applicable carryback and carryforward periods provided under the tax law. Estimating whether the deferred tax asset will be realized requires us to exercise significant judgment and is inherently uncertain because it requires the prediction of future occurrences. The deferred tax asset may be reduced in the future if estimates of future income, our tax planning strategies, or tax rate changes resulting from Federal tax reform do not support the amount of the deferred tax asset. If it is determined in the future that a valuation allowance of the deferred tax asset is necessary, we may incur a charge to earnings and a reduction to regulatory capital for the amount included in any such allowance.
A disruption in components of our business infrastructure resulting from financial or technological difficulties of our third- party vendors on which we rely could adversely affect our business.
Third parties provide key components of our business infrastructure, such as Internet connections, software platforms and network access. Any disruption in Internet, network access or other voice or data communication services provided by these third parties or any failure of these third parties to handle current or higher volumes of use could adversely affect the ability to deliver products and services to clients and otherwise to conduct business. Disruptions or failures in the business infrastructure or operating systems that support our business and customers, or cyber-attacks or security breaches of the networks, systems, or devices that our customers use to access our products and services, could damage our reputation, cause us to incur additional expenses, result in losses, or subject us to regulatory sanctions or additional regulatory scrutiny, any of which could adversely affect our results of operations or financial condition.
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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 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
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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, 2025, 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 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
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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.
We may be unsuccessful in integrating the operations of the businesses we acquire or expect to acquire in the future, including our pending acquisition of Victory and Victory Bank.
From time to time, we evaluate the potential acquisition of businesses that we believe will complement our existing business. The impact of future acquisitions on our growth strategy depends on the successful integration of these acquisitions. There are numerous risks and challenges to the successful integration of acquired businesses, including the following: the potential for unexpected costs, delays and challenges that may arise in integrating acquisitions into our existing business; limitations on our ability to realize the expected cost savings and synergies from an acquisition; challenges related to integrating acquired operations, including our ability to retain key employees and maintain relationships with significant customers and depositors; challenges related to the integration of businesses that operate in new geographic areas, including difficulties in identifying and gaining access to customers in new markets; and discovery of previously unknown liabilities following an acquisition associated with the acquired business. If we are unable to successfully integrate the businesses that we acquire, including our pending acquisition of Victory and Victory Bank, which is expected to close, during the second quarter of 2026, subject to customary closing conditions, our business, financial condition and results of operations may be materially adversely affected.
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.
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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 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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ITEM 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 610 shareholders of record as of February 28, 2026.
The following table sets forth the high and low bid and ask stock prices for QNB common stock on a quarterly basis during 2025 and 2024. 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, 2025.
(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 $2.3 billion (individually ranging from $104 million to $27.2 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© 2026
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 Company uses non-GAAP financial information in its analysis of performance. These non-GAAP ratios and calculations provide a better understanding of ongoing operations and comparability with prior period results by showing the effects of significant gains and charges in the periods presented. The Company believes that investors may use these non-GAAP measures to analyze the Company's financial performance without the impact of unusual items or events that may obscure trends. This non-GAAP data is not a substitute for GAAP results and should be considered in addition to results prepared in accordance with GAAP. Non-GAAP financial measures include risks as companies might calculate these measures differently and persons might disagree as to the appropriateness of items included in these measures. Please see table below, "Impact of Merger-Related Costs--GAAP to Non-GAAP Measure Reconciliation."
In 2025, the Company changed its calculation of average assets and average equity to include the impact of accumulated other comprehensive income (loss), net of tax, to align its calculation with its peer group. Prior period information has been restated for this new calculation; specifically impacting the non-GAAP performance ratios for return on average assets and return on average equity.
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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 6.07 5.49 4.77 3.78 8.62
On September 23, 2025, QNB Corp. and The Victory Bancorp, Inc. (Victory) announced a definitive agreement under which QNB will acquire Victory in an all-stock transaction, creating a bank holding company with nearly $2.4 billion in assets.
Upon the completion of the merger, the pro-forma post-merger shareholder ownership split would be approximately 77.2% for QNB
and 22.8% for Victory. The transaction is expected to close in the second quarter of 2026, subject to satisfaction
of customary closing conditions. Results for the year-ended December 31, 2025 included significant merger-related costs that are non-recurring of $1,138,000; the costs are not normal recurring operating expenses. The following table shows calculated impact of the merger-related costs on net income and ratios, reconciling GAAP to non-GAAP measurements:
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Impact of Merger-Related Costs--GAAP to Non-GAAP Measure Reconciliation
(Dollars in thousands, except per share data)
Twelve months ended,
Income tax benefit (27 ) — (27 )
Merger-related costs, net of tax 1,111 — 1,111
Share and Per Share Data:
Basic:
EPS using Net income (GAAP) $ 3.79 $ 3.12 $ 0.67
Fully-diluted:
EPS using Net income (GAAP) $ 3.78 $ 3.12 $ 0.66
Selected Ratios:
Return on Average Assets (ROAA):
ROAA using Net income (GAAP) 0.74 % 0.65 % 9 bp
Return on Average Equity (ROAE):
Net income for the year ended December 31, 2025 was $14,090,000, or $3.78 per share on a diluted basis. This compares to 2024 net income of $11,448,000 or $3.12 per share on a diluted basis and 2023 net income of $9,483,000, or $2.63 per share on a diluted basis. Excluding the impact of the merger-related costs net of tax, diluted earnings per share was $4.08 for the year-ended December 31, 2025. 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 0.74%, 0.65% and 0.57% in 2025, 2024, and 2023, respectively, and return on average shareholders’ equity was 12.28%, 11.78% and 11.90%, respectively, during those same periods. Return on average assets, excluding the impact of the merger-related cost, for the year ended December 31, 2025 was 0.80%. Return on average equity, excluding the impact of the merger-related cost, for the year-ended December 31, 2025 was 13.24%.
The Bank contributed $18,193,000 to net income for the year ended December 31, 2025 compared to $12,237,000 for the same period in 2024; whereas the holding company contributed a net loss of $4,103,000 to consolidated net income for the year ended December 31, 2025 compared to net loss of $789,000 for the same period in 2024. The increase at the Bank was primarily due to improvement in net interest margin. The decrease at the holding company resulted primarily from an increase in interest expense related to the issuance of subordinated debt in 2024 and merger-related expenses.
2025 versus 2024
The results for 2025 include the following significant components:
•
Net interest income increased $8,367,000, or 19.5%, to $51,229,000 for 2025.
•
The net interest margin on a tax-equivalent basis increased 29 basis points to 2.72% for 2025 from 2.43% for 2024.
•
Provision for credit losses was $449,000 for 2025, compared with a reversal of the provision for credit losses was $68,000 for 2024.
•
Non-interest income for 2025 was $6,957,000, an increase of $44,000, or 0.6%, compared with 2024.
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•
Non-interest expense for 2025 was $39,807,000, an increase of $4,323,000, or 12.2%, compared with 2024. Excluding merger-related costs, non-interest expense for 2025 was $38,669,000, an increase of $3,185,000, or 9.0%, compared with 2024.
•
Total investment securities decreased $3,729,000, or 0.7%, from December 31, 2024.
•
Loans receivable grew $46,026,000, or 3.8%, from December 31, 2024.
•
Deposits increased $13,970,000, or 0.9%, from December 31, 2024.
•
The holding company issued $40,000,000 in subordinated debt in 2024. Other long-term debt decreased $30,000,000 and short-term borrowings increased $26,757,000, comparing 2025 to 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 $8,793,000, or 0.70% of total loans receivable at December 31, 2024, compared with $1,975,000, or 0.16% of total loans receivable at December 31, 2024. Net recoveries for 2025 were $11,000, or 0.00% of average total loans for 2025, as compared with net charge-offs for 2024 were $59,000, or 0.01% of average total loans for 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. 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.
These items, as well as others, will be explained more thoroughly in the next sections.
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, 2025, 2024, and 2023.
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 of Philadelphia. 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.
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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.
2025 versus 2024
On a tax-equivalent basis, net interest income for 2025 increased $8,256,000, or 19.0%, to $51,676,000. The net interest margin, which increased 29 basis points to 2.72%, was favorably impacted by increased rates on and volume of loans. The average rate earned on earning assets increased 17 basis points from 4.73% for 2024 to 4.90% for 2025 with the yield on loans increasing 42 basis points. The yield on investment securities increased six basis points and was favorably impacted by increased yields on U.S. Government agencies and corporate debt securities, partly offset by decreased rates on U.S. Treasuries, state and municipal securities and mortgage-backed securities, causing a decrease in interest income of $1,289,000; the yield was favorably impacted by an increase in average volume of $37,458,000 contributing to a $2,687,000 increase in interest income. The yield on loans was favorably impacted by increased rates on commercial and residential real estate and tax-exempt loan categories, partly offset by rate a decrease in rate on home equity, commercial and industrial and consumer loan categories, contributing to a net $3,666,000 increase in interest income. This was also favorably impacted by a $74,759,000 net increase in average volume, of which $65,392,000 was related to an increase in average commercial real estate loans contributing $3,614,000 in interest income, an increase of $5,570,000 in residential real estate loans average balances contributing $230,000 in interest income, and an increase of $5,566,000 in home equity loans average balances contributing an increase of $379,000 in interest income. The yield on total average interest-bearing liabilities decreased 16 basis points from 2.80% for 2024 to 2.64% for 2025. The growth in loans was funded by the growth in deposits of $88,474,000, or 5.6%. The average rate paid on interest-bearing deposits decreased from 2.71% to 2.40% for the same time periods, respectively, contributing to a decrease in interest expense of $4,749,000; this was partly offset by $82,107,000 increase in average interest-bearing deposits resulting in additional interest expense of $2,406,000. The average rate paid on total borrowings increased from 4.16% to 6.00% for the same time periods, respectively, and contributed to an $809,000 increase in interest expense; average volume increased $14,887,000 and contributed to an increase in interest expense of $1,737,000. Loan and deposit growth was partially offset by the competitive local interest rate market for quality loans and deposits. Net interest spread increased 33 basis points to 2.26% for 2025 compared to 1.93% for 2024.
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.
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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:
Accumulated other comprehensive loss, net of tax (56,407 ) (65,087 ) (77,428 )
Allowance for credit losses on loans (9,140 ) (8,965 ) (8,820 )
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):
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 $8,459,000 to $93,085,000 for 2025, while total interest expense increased $203,000 to $41,409,000. Volume growth in earning assets contributed an additional $6,655,000 of interest income and interest rate increases contributed an additional $1,804,000 of interest income. Rate-related interest expense decreased $3,940,000, while volume-related interest expense increased $4,143,000.
Investments
2025 versus 2024
Interest income on available-for-sale and equity investment securities increased $1,398,000 when comparing the two years. The rate on securities increased six basis-points and was negatively impacted by the interest-rate swap that had a more positive impact on the yield in 2024 than 2025. The average yield on the available-for-sale and equity investment portfolio increased to 2.81% for 2025 compared to 2.75% for 2024.
Income on U.S. Government agency securities yields were 1.18% for 2025 compared to 1.17% for 2024. Most of the bonds in the agency portfolio have call features ranging from three months to three years, none of which were exercised during 2025. Average
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balances, which decreased $4,368,000, reduced interest income by $51,000; partly offset by $5,000 increase in interest income due to rate.
Interest income on state and municipal securities decreased $687,000. Average balances, which decreased $1,792,000, reduced interest income by $61,000. The decrease in yield of 59 basis points from 3.39% in 2024 to 2.80% in 2025 caused a $626,000 decrease to interest income. The rate on the municipal securities, excluding the impact of the interest rate swap, remained unchanged at 2.22%. The impact of the swap was a positive 58 basis points in 2025 and a positive 118 basis points in 2024, this decrease is the primary cause of the 59-basis-point decrease in the yield. 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 decreased $1,172,000. The rate on the mortgage-backed securities and CMOs, excluding the impact of the interest rate swap, increased 29 basis points from 1.69% in 2024 to 1.98% in 2025. The impact of the swap was a positive 43 basis points in 2025 and a positive 98 basis points in 2024, a decrease of 55 basis points. The net change to rate was a negative 27 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 $3,186,000 due to an increase in average balances of $47,798,000 and in yield from 5.76% for 2024 to 6.42% for 2025. Proceeds from the 2024 issuance of subordinated debt were invested in high-yielding securities during 2024 and 2025.
Excess cash at the holding company was invested in U.S. Treasury securities. The 82 basis-point decrease in yield was more than offset by the $9,059 increase in average balances, resulting in a $283,000 increase in interest income on U.S. Treasury securities.
Dividend income on equities decreased $166,000. The equity portfolio was sold during 2024.
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.
Income on U.S. Government agency securities yields were 1.17% for 2024 compared to 1.11% for 2023. 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 were 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.
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 in 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.
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Loans
2025 versus 2024
The largest category of the loan portfolio is commercial real estate loans. This category of loans includes commercial purpose loans secured by either commercial properties such as office buildings, hotels, factories, warehouses, medical facilities and retail establishments, or residential real estate, usually the residence of the business owner or investment properties. The category also includes construction and land development loans. Income on commercial real estate loans increased $7,389,000. The increase in average balances of $65,392,000, or 8.1%, contributed an increase in interest income of $3,614,000; the 43-basis-point increase in yield, from 5.53% in 2024 to 5.96% in 2025 contributed $3,775,000 to the increase in interest income.
Income on commercial and industrial loans, the second largest category, decreased $434,000 with average balances decreasing $2,575,000 resulting in a decrease to interest income of $193,000 and an average yield decrease of 17 basis points to 7.35% in 2025 from 7.52% in 2024, contributing to a $241,000 decrease in interest income. Many of the loans in this category are indexed to the prime interest rate.
Tax-exempt loan income increased $129,000 to $850,000 in 2025. When comparing the same periods, average balances increased $1,175,000 to $19,682,000, which contributed a $46,000 increase in interest income. The average yield on the tax-exempt loan portfolio increased from 3.90% for 2024 to 4.32% for 2025, resulting in an increase in interest income of $83,000.
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 $10,767,000 and interest income for retail lending increased $1,796,000 in 2025 compared with 2024, driven by a 65 basis-point increase in yield.
Average residential mortgage loans secured by first lien 1-4 family residential mortgages increased by $5,570,000, or 5.0%, to $115,890,000 for 2025. The average yield on the residential real estate portfolio increased 35 basis points to 4.47% for 2025 compared to 4.12% for 2024. Overall, interest income for this segment grew $635,000 in 2025.
Income on home equity loans increased by $1,201,000 when comparing 2025 and 2024. During 2025 and 2024, QNB offered attractive rates on both variable rate and fixed rate home equity loans. Average balances in home equity loans increased $5,566,000, or 8.5%, to $71,280,000 when comparing 2025 and 2024. The yield on the home equity portfolio decreased 49 basis points to 6.32% 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 decreased $40,000. Consumer loans at QNB experienced a decline in average balances in 2025 of $369,000, or 10.2%, 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 $261,000 and interest income decreased $46,000 when comparing 2025 and 2024. Student loans are primarily variable rate loans and interest income was unfavorably impacted by a 132 basis-point decrease in rate.
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 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.
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.
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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 average balances decreased $302,000 and interest income decreased $2,000 when comparing 2024 and 2023. Student loans interest income was favorably impacted by a 160 basis-point increase in rate.
Deposits and Borrowings
2025 versus 2024
Total interest expense for 2025 was $41,409,000 compared with $41,206,000 for 2024, an increase of $203,000. Interest expense on deposits decreased $2,343,000 and interest expense on borrowed funds increased $2,546,000 when comparing the two years. The rate paid on interest-bearing deposits decreased 31 basis points; the rate paid on borrowings increased 184 basis points, when comparing the two periods.
Average non-interest-bearing demand accounts increased $6,367,000, or 3.4%, to $194,892,000 for 2025. Average interest-bearing demand accounts increased $34,609,000, or 10.0%, to $381,199,000 for 2025 compared with 2024, with interest expense on interest-bearing demand accounts increasing $481,000 to $3,706,000 for 2025. The average rate paid increased four basis points to 0.97% for 2025 compared to 0.93% for 2024. Interest-bearing business demand average balances increased by $28,976,000, or 25.8%, and related interest expense increased $491,000, while the yield decreased 16 basis points, 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 2025, the average balance in this product was $91,929,000 and the related interest expense was $360,000 for an average cost of funds of 0.39%. In comparison, the average balance in this product for 2024 was $91,932,000 and the related interest expense was $373,000 for an average cost of funds of 0.41%. The rate paid on the QNB-Rewards product, assuming qualifications are met, is attractive relative to competitors’ offerings as well as other QNB products. This product also generates fee income through the use of the debit card. The average balance of other interest-bearing demand accounts included in this category increased from $142,347,000 for 2024 to $147,983,000 for 2025. The average rate paid on these balances was 0.05% in 2024 and 2025.
Average money market accounts increased $22,130,000, or 9.3%, to $259,201,000 for 2025 compared with 2024. Interest expense on money market accounts decreased $869,000 to $7,312,000 for 2025 compared with 2024. The average interest rate paid on money market accounts was 2.82% for 2025, a decrease of 63 basis points compared with 2024.
Interest expense on municipal interest-bearing demand accounts decreased $801,000 to $5,993,000 for 2025. The average balance of municipal interest-bearing demand accounts increased $12,799,000, or 8.7%, to $159,245,000 and the average interest rate paid on these accounts decreased 88 basis points to 3.76% for 2025 from 4.64% for 2024. 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 $1,187,000, or 0.6%, to $206,682,000 in 2025 compared with $207,869,000 in 2024. The average cost of funds on these accounts was 1.70% for 2025 and 1.71% for 2024. 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 $4,612,000, or 6.0%, to $72,530,000. The average rate paid on traditional savings accounts was 0.11% for 2025, a one basis-point decrease from 0.12% for 2024 and interest expense decreased $14,000, to $77,000 from $91,000 over the same period.
Interest expense on time deposits decreased $1,094,000, to $14,531,000 in 2025, due to a 49-basis-point decrease in yield from 4.27% in 2024 to 3.78% in 2025, partly offset by an $18,368,000 increase in average balances in 2025 to $384,219,000. 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.
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Approximately $360,511,000, or 95.9%, in time deposits will reprice or mature over the next 12 months. The average rate paid on these time deposits is approximately 3.52%.
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 2025 of $19,328,000, $37,253,000 and $1,000, respectively. Interest expense on short-term borrowings increased $955,000 to $2,103,000 when comparing the two years. During this period average balances of repurchase agreements decreased $19,127,000 with a 63 basis-point increase in average rate paid, resulting in a decrease of cost of funds of $229,000. The average balances of borrowings from the FHLB increased $37,155,000 with a 73-basis-point decrease in average rate paid, resulting in an increase in cost of funds of $1,623,000. The average balances of FRB short-term borrowings decreased $9,972,000 resulting in a decrease in cost of funds of $439,000.
Average long-term debt decreased $19,074,000 in 2025 to $8,795,000 with a seven basis-point increase in average yield from 4.67% in 2024 to 4.74% in 2025.
During the third quarter of 2024, the QNB Corp. issued $40,000,000 of subordinated debt; the carrying value net of deferred costs was $39,268,000 at December 31, 2025. The average yield of 9.44% for 2025 and 9.34% for 2024 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 decreased 16 basis points to 2.64% for 2025.
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.
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. For 2024, the average balance in the QNB-Rewards checking 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 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.
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. 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 traditional 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.
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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.
The average yield of 9.34% on subordinated debt includes the amortization of the deferred costs.
The yield on interest-bearing liabilities increased 69 basis points to 2.80% for 2024.
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 provision for credit losses on loans of $460,000 for the twelve months ended December 31, 2025 compared to a reversal of the provision for credit losses on loans of $49,000 for the twelve-month period ended December 31, 2024 and a reversal of the provision for credit losses on loans of $828,000 for the twelve-month period ended December 31, 2023. QNB recorded a reversal of the provision for credit losses on unused commitments of $11,000 during 2025, a reversal of the provision for credit losses on unused commitments of $19,000 during 2024 and a reversal of the provision for credit losses on unused commitments of $16,000 during 2023. Net loan recoveries were $11,000 in 2025, or 0.00% of average loans receivable, compared to loan charge-offs of $59,000, or 0.01% of total average loans for 2024, and net loan recoveries of $238,000, or 0.02% of total average loans for 2023. The majority of the recoveries during 2025, 2024 and 2023, were on these previously charged off commercial loans and student loans. 2025 was partly offset and 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 2026.
Non-Interest Income
Non-interest income comparison
Change from prior year
$ Change % Change
N/M - Not Meaningful
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2025 versus 2024
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 $6,957,000 in 2025 compared with $6,913,000 in 2024, an increase of $44,000, or 0.6%. Excluding the unrealized (losses) gains on equity securities and gains (losses) on sales of investment securities, noninterest income was $6,957,000 in 2025 compared to $6,209,000 in 2024, a decrease of $748,000, or 12.0%.
Fees for services to customers are primarily comprised of service charges on deposit accounts. These fees were $1,986,000 for 2025, an increase of $216,000 from 2024. Overdraft income, which represented approximately 75% of total fees for services to customers in both 2025 and 2024, increased by $161,000, or 12.1%, when comparing 2025 to 2024. The increasein overdraft income primarily reflects an increase in the number of overdraft occurrences. Other fees for services increased $55,000 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 $2,991,000 in 2025, an increase of $251,000 from the amount recorded in 2024. Debit card interchange income increased $250,000 to $2,945,000 in 2025, while ATM surcharge income and monthly card fee income increased $1,000 to $46,000. 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 $648,000 for 2025 compared with $476,000 for 2024, an increase of $172,000, or 36.1%. Advisory fees increased $23,000 comparing 2025 to 2024 due to an increase in client balances. 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 $149,000 in 2025 over 2024. In 2025, the net income provided by QNB Financial Services was $185,000, compared with $112,000 in net income for 2024.
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 2025 was $338,000 compared to $332,000 for 2024.
Merchant income represents fees charged to merchants for the Bank’s handling of credit card or charge sales. Merchant income was $321,000 for 2025, a decrease of $27,000 compared to the amount reported in 2024.
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 were $919,000 for the year ended December 31, 2024, there were no sales in 2025. Net gains from sales of equity securities were $2,015,000 in 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. QNB sold its other equity securities and realized a gain of $517,000 during the twelve months ended December 31, 2024. Net loss on the sale of fixed income securities was $1,096,000 for 2024. QNB improved the efficiency of its investment portfolio by executing sales of low yielding fixed rate available-for-sale securities during. QNB sold both state and municipal securities and mortgage-backed and CMO securities totaling $13,139,000 during 2024. Unrealized losses on equity securities of $215,000 were recorded during 2024.
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 $63,000 and $29,000 for 2025 and 2024, respectively. Mortgage financing activity was greater in 2025, due to
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available properties. Proceeds from the sale of residential mortgages were $2,254,000 and $1,765,000 for the years ended December 31, 2025 and 2024, respectively. Included in the gains on the sale of residential mortgages in 2025 and 2024 are $17,000 and $13,000, respectively, related to the recognition of mortgage servicing assets.
QNB retains servicing rights for residential mortgages sold in the secondary market. A servicing fee is retained on all mortgage loans sold and serviced. QNB recognizes its obligation to service financial assets that are retained in a transfer of assets in the form of a servicing asset. The servicing asset is amortized in proportion to, and over, the period of net servicing income or loss. On a quarterly basis, servicing assets are assessed for impairment based on their fair value. Mortgage servicing income of $105,000 for 2025 and $116,000 for 2024 is included in other non-interest income.
Other non-interest income, excluding mortgage servicing income, was $505,000 for 2025, an increase of $107,000 from the amount recorded in 2024. Letter of credit fees increased $46,000 and title company income increased $20,000 when comparing 2025 to 2024.
2024 versus 2023
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.
Fees for services to customers 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. Other fees for services increased $119,000 primarily due to the increase in deposit accounts.
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.
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 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 BOLI policies during 2024 was $332,000 compared to $320,000 for 2023. Merchant income was $348,000 for 2024, a decrease of $46,000 compared to the amount reported in 2023.
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 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 was $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 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.
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.
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Non-Interest Expense
Non-interest expense comparison
Change from prior year
$ Change % Change
2025 versus 2024
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 $39,807,000 in 2025, an increase of $4,323,000, or 12.2%, from the $35,484,000 in 2024. 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 2025, 2024 and 2023 were 67.9%, 70.5%, and 74.8%, respectively. The favorable decrease in the 2025 efficiency ratio is primarily due to an increase in tax-equivalent net interest income of $8,256,000 in 2025 over 2024.
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 2025 was $21,261,000, an increase of $1,520,000, or 7.7%, compared with $19,741,000 reported in 2024. Salary expense and related payroll taxes for 2025 were $18,337,000, an increase of $1,455,000, or 8.6%, compared with $16,882,000 reported in 2024, due to annual salary increased and a $684,000 increase in bonus and related tax expense due to performance factors being met or exceeded. Benefit expense for 2025 was $2,924,000, an increase of $65,000, or 2.3%, from the amount recorded in 2024. Medical premiums decreased $53,000 primarily due to a decrease in claims. Retirement plan matching and safe harbor increased $47,000 compared to 2024. QNB utilized unvested forfeited 401(k) contributions to offset retirement plan matching in 2025 and 2024. 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 $157,000 for the year ended December 31, 2025 compared to $136,000 for the year ended December 31, 2024.
Net occupancy and furniture and equipment expense increased $574,000, to $6,754,000 when comparing 2025 to 2024, due primarily to increased software maintenance.
Marketing expense was $1,038,000 for 2025, a $6,000 decrease from the expense recorded in 2024. 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 $26,000 in 2025 Advertising and sales promotions costs increased $20,000 in 2025 over 2024.
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 information technology services, correspondent banking services, statement printing and mailing, investment security safekeeping and supply management services. Third party services increased $474,000 primarily due to an increase of $325,000 in information technology services.
Telephone, postage and supplies expense increased $6,000 to $511,000 in 2025 compared with 2024, primarily due to an increase in telephone costs 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 decreased $123,000 in 2025 as there was a higher assessment rate during 2024.
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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 $947,000 and $577,000 for the years 2025 and 2024, 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.
Merger-related costs are not normal recurring operating expenses. The costs during 2025 of $1,138,000 were related to securing the fairness opinion and preparing and reviewing definitive transaction documents, such as the merger agreement, ensuring regulatory compliance. Approximately 89% of these costs are not deductible for income tax purposes.
Other operating expenses for the twelve months ended December 31, 2025 increased $370,000, or 10.0%. There was an increase of $226,000 in director fees as fees were bought in line with peers. There was an increase of $68,000 in write-offs primarily due to fraud on customer and $69,000 increase in business development costs.
2024 versus 2023
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 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 were $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. 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. Public relations expense decreased $28,000 in 2024 Advertising and sales promotions costs increased $119,000 in 2024 over 2023.
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.
FDIC insurance premium expense increased $98,000 in 2024 over 2023 due to an increase in capital.
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.
Income Taxes
Applicable income tax expense and effective tax rates were $3,840,000, or 21.4% for 2025, $2,911,000, or 20.3% for 2024 and $2,244,000, or 19.1% for 2023. The primary reason for the increased effective tax rate for 2025 over 2024 was due to non-taxable merger-related cost in 2025 and an increase in the valuation allowance. The primary reason for the increased effective tax rate for 2024 over 2023 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.
QNB expects the effective tax rate in 2026 to be higher than the 21% corporate rate, due to anticipated non-deductible merger-related costs, partly offset by 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
Allowance for credit losses on loans (9,215 ) (8,744 ) (471 ) -5.4
Cash and Interest-earning Deposits
Total cash and cash equivalents decreased $416,000 to $50,297,000 at December 31, 2025 from $50,713,000 at December 31, 2024. QNB had interest-bearing balances at the Federal Reserve Bank of $34,780,000 compared with $35,867,000 and interest-bearing balances in a brokerage account of $627,000 compared with $3,414,000 at December 31, 2025 and December 31, 2024, respectively. At December 31, 2025 and December 31, 2024 there was $1,800,000 and $0, 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 short-term borrowings more than offset the repayment of long-term debt, excess funds were used support loan. The maturity, prepayment and sales of investment securities were used to reinvest in higher-yielding securities and to support loan growth.
Investment Securities and Other Short-Term Investments
At December 31, 2025 and 2024, 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.
Investment Portfolio History
Investment Securities Available-for-Sale
U.S. Government agencies and sponsored enterprises (GSEs):
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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, 2025, the fair value of investment debt securities available-for-sale, including the impact of fair value hedges, was $542,830,000, or $59,217,000 less than the amortized cost of $602,047,000. This compares to a fair value of $546,559,000, or $79,832,000 less than the amortized cost of $626,391,000, at December 31, 2024. The available-for-sale portfolio had a weighted average maturity of approximately 6.0 years at December 31, 2025 and 6.6 years at December 31, 2024 and a weighted average tax-equivalent yield of 2.81% and 2.40% at December 31, 2025 and 2024, respectively.
At December 31, 2025, approximately 74% 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, 2025, QNB held no securities of any one issue or any one issuer (excluding the U.S. Treasury, 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 percentage of total assets in 2025 is due to the proceeds from payments, maturities and sales being used to fund loan growth. During 2025, $80,940,000 of investment securities available-for-sale were purchased compared with $130,679,000 during 2024. Proceeds from the sale of investment securities available-for-sale were $13,139,000 during 2024 compared with no sales during 2025. Proceeds from maturities, calls and prepayments were $104,326,000 during 2025 compared with $64,959,000 during 2024.
Treasury securities had a fair value of $21,583,000 at December 31, 2025 compared to $18,010,000 at December 31, 2024. Excess cash at the holding company was invested in short-term Treasury securities in 2025 and 2024.
The balance of U.S. Government agency securities increased $3,942,000 to $70,850,000 at December 31, 2025 and represents 13.0% of the available-for-sale investment portfolio, compared with 12.2% at December 31, 2024. U.S. Government agency issued CMO and MBS balances decreased $28,745,000 to $331,411,000 and represents 61.0% of the available-for-sale portfolio compared with 65.9% at December 31, 2024. 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 increased $2,435,000 to $88,787,000 at December 31, 2025, representing 16.4% of the available-for-sale portfolio compared with 15.8% at December 31, 2024. 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.
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 $50,000 at December 31, 2025 and represents the senior-most obligation of the trust. There was no credit-related impairment charge during 2025, 2024 or 2023. 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 in the following table 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.
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Investment Portfolio Maturities and Weighted Average Yields
Investment Securities Available-for-Sale
U.S. Treasuries
Weighted average yield 3.81 % — — — 3.81 %
U.S. Government agency:
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
The equity securities portfolio was sold in 2024. 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.
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.
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
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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 in 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, 2025, there was a concentration of loans to lessors of residential buildings and dwellings of 22.6% of total loans and to lessors of nonresidential buildings of 23.5% of total loans, compared with 21.9% and 23.3% of total loans, respectively, at December 31, 2024.
QNB’s commercial lending activity is focused on small businesses within the local community. Commercial purpose loans are generally perceived as having more risk of default than residential real estate loans with a personal purpose and consumer loans. These types of loans involve larger loan balances to a single borrower or group of related borrowers and are more susceptible to a risk of loss during a downturn in the business cycle. These loans may involve greater risk because the availability of funds to repay these loans depends on the successful operation of the borrower’s business. The assets financed are used within the business for its ongoing operation. Repayment of these types of loans generally comes from the cash flow of the business or the ongoing conversions of assets, such as accounts receivable and inventory, to cash. Commercial and industrial loans represent commercial purpose loans that are either secured by collateral other than real estate or unsecured.
Commercial loans secured by commercial real estate include commercial purpose loans collateralized at least in part by commercial real estate. Some of these loans may not be for the express purpose of conducting commercial real estate transactions. Commercial loans secured by residential real estate are commercial purpose loans generally secured by the business owner’s residence or residential investment properties owned by the borrower and rented to tenants. Commercial loans secured by either commercial real estate or residential real estate are originated primarily within the Eastern Pennsylvania market area, are within the Bank’s underwriting criteria, and generally include the guarantee of the borrowers. Repayment of this kind of loan is dependent upon either the ongoing cash flow of the borrowing entity or the resale of or lease of the subject property. Commercial real estate and commercial construction loans may be affected to a greater extent than residential loans by adverse conditions in real estate markets or the economy because commercial real estate borrowers’ ability to repay their loans depends on successful development of their properties.
Loans to state and political subdivisions are tax-exempt or taxable loans to municipalities, school districts and housing and industrial development authorities. These loans can be general obligations of the municipality or school district repaid through their taxing authority, revenue obligations repaid through the income generated by the operations of the authority, such as a water or sewer authority, or loans issued to a housing and industrial development agency, for which a private corporation is responsible for payments on the loans.
The Company originates fixed rate and adjustable-rate residential real estate loans that are secured by the underlying 1-4 family residential properties. Credit risk exposure in this area of lending is minimized by the evaluation of the credit worthiness of the borrower, including debt-to-income ratios, credit scores and adherence to underwriting policies that emphasize conservative loan-to-value ratios of generally no more than 80%. To reduce interest rate risk, qualifying originations of fixed-rate loans to individuals for 1-4 family residential mortgages with maturities of 15 years or greater are generally sold in the secondary market. Mortgage loan origination activity increased in 2025 with $2,254,000 in residential mortgages originated for sale compared with $1,851,000 for 2024. There were $246,000 residential mortgage loans held-for-sale at December 31, 2025 and $664,000 at December 31, 2024. 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, 2025 were $1,262,074,000, an increase of $46,048,000, or 3.8%, from December 31, 2024. A key financial ratio, loans to deposits was 76.8% at December 31, 2025, compared with 74.7% at December 31, 2024. QNB continues to be committed to make loans available to credit worthy consumers and businesses.
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Loan Portfolio
Commercial:
Retail:
Loan Maturities and Interest Sensitivity
Loans due after one year
Commercial:
Retail:
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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 42 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, 2025 and 2024. 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 53.8% and 50.6% of the portfolio at December 31, 2025 and December 31, 2024, respectively, as the balances in this sector grew by $64,129,000, or 10.4%, from $614,806,000 at December 31, 2024 to $678,935,000 at December 31, 2025. 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 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 2025, 2024 or 2023.
Commercial loans secured by residential real estate, which includes first lien, junior lien and revolving lines loans, increased by $13,758,000, or 12.0%, to $128,427,000 at December 31, 2025 and at 10.2% remained fairly level with the overall portfolio compared to 9.4% at December 31, 2024. Non-accrual commercial loans secured by residential real estate were $556,000, $535,000, and $165,000 at December 31, 2025, 2024, and 2023, respectively. There were no charge-offs in this category over the past three years. Net recoveries were $10,000 in 2025, $10,000 in 2024 and $10,000 in 2023.
Commercial and industrial loans, the second largest sector of the portfolio, experienced a decrease in balances of $13,735,000, or 9.0%, to $139,452,000 at December 31, 2025. Commercial and industrial loans represented 11.0% of the portfolio at year-end 2025 compared with 12.6% at December 31, 2024. 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 2025, nonaccrual commercial and industrial loan balances increased $512,000 to $539,000, the majority of which is due to one loan being placed on nonaccrual status of $554,000. During 2024, nonaccrual commercial and industrial loan balances decreased $284,000 to $27,000, the majority of which is due to one loan returning to 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.
Construction and land development loans decreased 27.5% to $93,862,000, or 7.5% of the portfolio at December 31, 2025, from $129,464,000, or 10.6% of the portfolio at December 31, 2024. 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. There was one construction loan on non-accrual of $6,296,000 at December 31, 2025, this was the first loan placed on nonaccrual status in this category since 2014.
Loans to state and political subdivisions increased $2,963,000, or 16.8%, to $20,646,000 at December 31, 2025 from $17,683,000 at December 31, 2024. This sector increased to 1.6% of the total loan portfolio at December 31, 2024 from 1.4% at December 31, 2024. Many municipalities, counties and school districts refinanced their existing bonds or bank debt due to rate.
Residential mortgage loans secured by first lien balances increased by $5,336,000, or 4.7%, to $119,759,000 at December 31, 2025 from $114,423,000 at December 31, 2024. In 2025 and 2024, QNB retained some adjustable and fixed rate mortgages to borrowers with high credit scores and low loan-to-value ratios.
Balances in home equity loans and lines, including first lien, junior lien and revolving line loans, increased $7,304,000, or 10.6%, to $76,188,000 at December 31, 2025. During 2025, QNB continued to offer very attractive rates on both variable and fixed rate home equity loans and lines. These attractive rates, along with excellent customer service, including quick turnaround time, resulted in new originations in home equity loans. QNB expects demand for home equity loans will increase as rates normalize and debt consolidation into mortgage loans decline.
As of December 31, 2025 the balance of student loans was $1,228,000, a decrease of $216,000 compared with December 31, 2024. In 2013, QNB reentered the private student loan market through a relationship with a third party. These student loans are either fixed or variable rate with the rate dependent on the credit scores of the student and/or the cosigner. Student loan balances will decline, as their balances are no longer insured, and QNB ceased funding originations through the third party during 2019 and forward.
Overdrafts increased $43,000, to $252,000 at December 31, 2025. Other consumer loan balances decreased $327,000 to $1,455,000 at December 31, 2025.
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Non-Performing Assets
Non-performing assets include non-performing loans, OREO and repossessed assets. Non-performing assets totaled $8,793,000, or 0.46% of total assets at December 31, 2025 compared to the $1,975,000, or 0.11% of total assets at December 31, 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 $8,793,000, or 0.70% of total loans receivable at December 31, 2025 compared with 1,975,000, or 0.16% of total loans receivable at December 31, 2024. Loans on non-accrual status were $8,793,000 at December 31, 2025 compared $1,975,000 at December 31, 2024. The increase was primarily due to $7,394,000 being placed on nonaccrual; partially offset by paydowns of $576,000. Specific impairment reserves have been established based on updated collateral values even if the borrower continues to pay in accordance with the terms of the agreement. Of the total amount of non-accrual loans at December 31, 2025, $7,763,000, or approximately 88% of the loans classified as non-accrual, are current or past due less than 30 days.
QNB had no loans 90 days or more past due and still accruing at December 31, 2025 or at December 31, 2024. Total loans that are 30 days or more past due decreased $424,000 to $1,763,000, representing 0.14% of total loans at December 31, 2025 compared with $2,187,000, representing 0.18% of total loans at December 31, 2024.
QNB held no OREO at December 31, 2025 or 2024. There were no repossessed assets as of December 31, 2025 or 2024.
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Non-Performing Assets
Loans past due 90 days or more and accruing
Commercial:
Commercial and industrial $ — $ — $ — $ — $ —
Construction and land development — — — — —
Real estate secured by multi-family properties — — — — —
Real estate secured by owner-occupied properties — — — — —
Real estate secured by other commercial properties — — — — —
Revolving real estate secured by 1-4 family properties-business — — — — —
Real estate secured by 1st lien on 1-4 family properties-business — — — — —
Real estate secured by junior lien on 1-4 family properties-business — — — — —
State and political subdivisions — — — — —
Retail:
1-4 family residential mortgages — — — — —
Revolving home equity secured by 1-4 family properties-personal — — — — —
Real estate secured by 1st lien on 1-4 family properties-personal — — — — —
Real estate secured by junior lien on 1-4 family properties-personal — — — — —
Student loans — — — — —
Overdrafts — — — — —
Other consumer — — — — —
Total loans past due 90 days or more and accruing — — — — —
Non-accrual loans
Commercial:
Construction and land development 6,296 — — — —
Real estate secured by multi-family properties — — — — —
Real estate secured by other commercial properties — — — 1,165 1,279
Revolving real estate secured by 1-4 family properties-business — — — 76 93
State and political subdivisions — — — — —
Retail:
Construction-individual — — — — —
Troubled debt restructured loans, not included above N/A N/A N/A 4,301 4,142
Additional loan quality information can be found in Note 5 of the Notes to the Consolidated Financial Statements included in Item 8 of this Form 10-K. Management’s view is that loans classified as substandard or doubtful that are not included in the past due, non-accrual or restructured categories are potential problem loans. For some of these loans, management may have knowledge of possible credit problems that will cause management to question the ability of the borrowers to comply with the present loan repayment terms. Commercial loans classified as substandard or doubtful, which includes non-performing loans, continue to show improvement. At December 31, 2025, commercial substandard or doubtful loans totaled $39,217,000, an increase of $4,916,000 from the $34,301,000,
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reported as of December 31, 2024. The increase was primarily due to one commercial customer with balance of $10,100,000 downgraded from a pass category; partly offset my payments; most of these loans are secured by real estate.
Allowance for Credit Losses on Loans
QNB adopted ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326), as amended ("ASU 326"), which replaces the incurred loss methodology with expected credit loss (“CECL”), using the modified retrospective method. QNB recorded a reduction in its allowance for credit losses on loans of $1,089,000 as of January 1, 2023 for the cumulative effect of adopting ASU 326. Since the implementation of ASU 326 on January 1, 2023, the Company may make loan modifications to borrowers experiencing financial difficulty ("FDM"). A FDM could involve principal forgiveness, term extension, an other-than-insignificant payment delay, interest rate reduction or exchanging or paying off existing debt for new debt with the Company. The effect of most modifications made to borrowers experiencing financial difficulty is already included in the allowance for credit losses because of the measurement methodologies used to estimate the allowance, a change to the allowance for credit losses is generally not recorded upon modification.
The allowance for credit losses on loans ("ACL") represents management’s best estimate of expected credit losses in the existing loan portfolio, based on historical experience, current conditions and reasonable and supportable forecasts. Management believes that it uses the best information available to make determinations about the adequacy of the allowance and that it has established its existing allowance for credit losses on loans in accordance with U.S. generally accepted accounting principles (“US GAAP”). Since the ACL is dependent on conditions that may be beyond QNB’s control, it is at least reasonably possible that management’s estimates of the ACL and actual results could differ. In addition, various regulatory agencies, as an integral part of their examination process, periodically review QNB’s ACL. Such agencies may require QNB to recognize changes to the ACL based on their judgments about information available to them at the time of their examination. Actual credit losses on loans, net of recoveries, serve to reduce the allowance.
Management closely monitors the quality of its loan portfolio and performs a quarterly analysis of the appropriateness of the ACL. This analysis considers a number of relevant factors including specific impairment reserves, historical loan loss experience, general economic conditions, levels of and trends in delinquent and non-performing loans, levels of classified loans, trends in the growth rate of loans, and concentrations of credit.
Asset and credit quality remained strong in QNB's market area in 2025. The ACL level stated as a percentage of loans receivable increased from 0.72% at December 31, 2024 to 0.73% at December 31, 2025. The ACL on loans increased to $9,215,000 at year-end 2025 from $8,744,000 at year-end 2024.
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Allowance for Credit Losses on Loans Allocation
Balance at end of period applicable to:
Commercial:
Retail:
Construction-individual 3 0.2 — — — — — — — 0.3
Gross loans represent loans before unamortized net loan fees and costs. Percent gross loans lists the percentage of each loan type to total loans.
A loan is considered impaired, based on current information and events, if it is probable that QNB will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls may not be classified as impaired. Management determines the significance of payment delays and shortfalls on a case-by-case basis, taking into consideration all the circumstances surrounding the loan and the borrower, including length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis for commercial loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral, if the loan is collateral dependent. Upon the adoption of CECL, performing troubled debt restructured loans are no longer considered impaired. At December 31, 2025 and 2024, the recorded investment in collateral dependent loans totaled $8,793,000 and $1,964,000, respectively, of which $1,704,000 and $1,618,000, respectively, required no specific ACL. The recorded investment in collateral dependent loans requiring a specific ACL was $7,089,000 and $357,000 at December 31, 2025 and 2024, respectively. At December 31, 2024 and 2023, the related ACL associated with these loans was $1,649,000 and $357,000, respectively. See Note 5 to the Notes to Consolidated Financial Statements included in Item 8 of this Form 10-K for additional detail of impaired loans.
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Allowance for Credit Losses on Loans
Allowance for credit losses on loans:
Charge-offs
Commercial:
Commercial and industrial — 23 313 38 —
Construction and land development — — — — —
Real estate secured by multi-family properties — — — — —
Real estate secured by owner-occupied properties — — — — —
Real estate secured by other commercial properties — — — — —
Revolving real estate secured by 1-4 family properties-business — — — — —
Real estate secured by 1st lien on 1-4 family properties-business — — — — 38
Real estate secured by junior lien on 1-4 family properties-business — — — — —
State and political subdivisions — — — — —
Retail:
1-4 family residential mortgages — — — — —
Revolving home equity secured by 1-4 family properties-personal — — — — 49
Real estate secured by 1st lien on 1-4 family properties-personal — — — — —
Real estate secured by junior lien on 1-4 family properties-personal — — — — —
Recoveries
Commercial:
Construction and land development — — — — —
Real estate secured by multi-family properties — — — — —
Real estate secured by owner-occupied properties — — — — —
Real estate secured by other commercial properties 31 — — — —
Revolving real estate secured by 1-4 family properties-business — — — — —
Real estate secured by 1st lien on 1-4 family properties-business 10 10 10 - 21
Real estate secured by junior lien on 1-4 family properties-business — — — 45 —
State and political subdivisions — — — — —
Retail:
1-4 family residential mortgages — 4 — — —
Revolving home equity secured by 1-4 family properties-personal — — — — —
Real estate secured by 1st lien on 1-4 family properties-personal — — — —
Real estate secured by junior lien on 1-4 family properties-personal 6 — 6 — 7
(Reversal) provision for credit losses on loans 460 (49 ) (828 ) (850 ) 458
Total loans (excluding loans held-for-sale)
Ratios:
Net charge-offs (recoveries) to:
Allowance for credit losses on loan to:
Average loans (excluding loans held-for-sale) 0.75 % 0.76 % 0.85 % 1.09 % 1.21 %
QNB had net loan recoveries of $11,000, or 0.00% of average loans for 2025 compared to net charge-offs of $59,000, or 0.01% of average loans for 2024 and net recoveries of $238,000, or 0.02% of average loans for 2023. The majority of charge-offs recorded during these periods had specific reserves established during the allowance for credit losses on loans calculation process prior to the decision to charge-off the loan.
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Management believes the ACL of $9,215,000 is adequate as of December 31, 2025, in relation to the estimate of known and inherent losses in the portfolio.
Premises and equipment
Premises and equipment include a right-of-use asset of $2,087,000 and $2,618,000 at December 31, 2025 and December 31, 2024 respectively. The discount rates used in determining the initial value of the right of use assets are based on the FHLB Amortizing Fixed Loan Rate for the term of each lease. QNB typically enters into lease agreements with an initial term of 5 to 10 years and subsequent additional optional terms in increments of 5 years. The lease agreements also contain termination options. None of the leases contain purchase options and none transfer the ownership of the leased asset. QNB has renewed two operating leases during 2024; there were no renewals in 2025. Operating lease liabilities are included with “Other liabilities” on the Consolidated Balance Sheets. All operating lease costs are included in non-interest expense within “Net occupancy” on the Consolidated Statements of Income. Other premises and equipment, net of depreciation increased $162,000 to $14,799,000 at December 31, 2025; this was primarily due to renovations to currently owned properties.
Other assets
Other assets decreased $6,951,000 from $26,061,000 at December 31, 2024 to $19,110,000 at December 31, 2025. Most of the decrease in other assets relates to a decrease to the deferred tax asset resulting from the fair value adjustment on interest rate swaps and the fair value of investment securities available-for-sale. The detail of the net deferred tax asset can be found in Note 12 in the Notes to Consolidated Financial Statements.
LIABILITIES
The following table presents total liabilities at the dates indicated:
Change from prior year
Deposits
QNB primarily attracts deposits from within its market area by offering various deposit products. These deposits are in the form of time deposits, which include certificates of deposit and individual retirement accounts (“IRAs”) which have a stated maturity, and non-maturity deposit accounts, which include non-interest-bearing demand accounts, interest-bearing demand accounts, money market accounts and savings accounts.
Total deposits increased $13,970,000, or 0.9%, to $1,642,511,000 at December 31, 2025. The mix of deposits continues to be impacted by customers’ reactions to the competition, regulations and the interest rate environment. Many customers are looking for transaction accounts that provide liquidity and pay a reasonable amount of interest, while others look for high rate. Time deposit balances decreased $5,661,000, or 1.5% between 2024 and 2025, as customers took advantage of a higher rate environment's impact on pricing of transaction account.. Customers appear to be looking for the safety of FDIC insured deposits and the stability of a strong local community bank.
Non-interest-bearing demand accounts increased $6,458,000 to $189,957,000 at December 31, 2025. These deposits are both retail and commercial checking accounts and are volatile depending on the timing of deposits and withdrawals. QNB has been successful in attracting new customers and expanding relationships with existing customers, which provides an opportunity for fee income.
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Interest-bearing demand accounts, retail and business interest-checking and municipal accounts, decreased $2,992,000, or 0.6%, to $534,854,000 at December 31, 2025. QNB has been successful in maintaining relationships with several school districts and municipalities as well as expanding existing relationships, the balances in these accounts are seasonal in nature and can be volatile on a daily basis. Most of the school district taxes are collected during the third quarter of the year and are disbursed over a nine-month period. Municipal accounts balances decreased $16,664,000, or 10.8% at December 31, 2025 over 2024. Business accounts increased from $144,540,000 at December 31, 2024 to $147,491,000, or 2.0%, at December 31, 2025. Retail checking accounts increased $10,721,000 to $249,778,000 at December 31, 2025. QNB continues to open a significant number of new checking accounts; additionally, customers may choose to switch products.
Money Market accounts increased $10,449,000 from $250,293,000 at December 31, 2024 to $260,742,000 at December 31, 2025. Money market products offering higher yields to retain large depositors and reduce the reliance on higher-cost short-term borrowings were offered to both retail and business customers. Personal money market accounts increased $9,281,000 to $113,906,000 at December 31, 2025. Business money market accounts increased $1,168,000, to $146,836,000 at December 31, 2025.
Total savings account balances increased $5,716,000, or 2.1%, to $281,161,000 at December 31, 2025. This increase is due primarily to an increase of $5,686,000, or 2.8%, in the online eSavings accounts over December 31, 2024.
Total time deposit account balances were $375,797,000 at December 31, 2025, a decrease of $5,661,000, or 1.5%, from the amount reported at December 31, 2024. QNB was able to retain many maturing deposits during 2025 by offering competitive rates and many current customers moved balances to more liquid accounts.
Maturity of Time Deposits of $250,000 or More
To continue to attract and retain deposits, QNB plans to remain competitive with respect to rates and to continue to deliver products with terms and features that appeal to customers. The QNB Rewards checking, high yield money market accounts and time deposits are examples of such products.
The following table presents trends in balances and yield on the major deposit groups.
Average Deposits by Major Classification
Balance Rate Balance Rate Balance Rate
Short-term borrowings
Short-term borrowings comprising commercial sweep accounts, overnight and short-term FHLB borrowings and short-term FRB borrowings, increased $26,757,000, or 49.7%, to $80,601,000 at December 31, 2025. Commercial sweep accounts decreased $4,035,000 from $18,636,000 at December 31, 2024 to $14,601,000 at December 31, 2025. There were $11,000,000 in overnight FHLB borrowings and $55,000,000 in short-term FHLB borrowings outstanding at December 31, 2025 compared to $25,208,000 in overnight FHLB borrowings and $10,000,000 in short-term FHLB borrowings outstanding at December 31, 2024. The FHLB borrowings were used to support loan growth.
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Long-term debt
Long-term debt is comprised of $30,000,0000 in FHLB borrowings at December 31, 2024, these borrowings matured in 2025; there were no long-term borrowings at December 31, 2025.
Subordinated debt
On August 30, 2024, the Company entered into Subordinated Note Purchase Agreements with certain qualified institutional buyers and accredited investors (collectively, the "Subordinated Note Purchasers") pursuant to which the Company issued and sold $40.0 million in aggregate principal amount of its 8.875% Fixed-to-Floating Rate Subordinated Notes due 2034 (the "Subordinated Notes"). The Subordinated Notes mature on September 1, 2034 and bear interest at a fixed annual rate of 8.875%, payable semi-annually in arrears, to but excluding September 1, 2029. From and including September 1, 2029 to but excluding the maturity date or early redemption date, the interest rate will reset quarterly to an interest rate per annum initially equal to the then-current three-month Secured Overnight Financing Rate published by the Federal Reserve Bank of New York plus 545 basis points, payable quarterly in arrears. The Company is entitled to redeem the Subordinated Notes, in whole or in part, at any time on or after September 1, 2029, and to redeem the Subordinated Notes at any time in whole upon certain other events. Any redemption of the Subordinated Notes will be subject to prior regulatory approval to the extent required. The carrying cost of the Subordinated Notes on the balance sheet represents the outstanding balance of the notes of $40,000,000 net of unamortized origination costs of $732,000 which are amortized to interest expense through September 1, 2029.
Other liabilities
Other liabilities comprise accrued expenses including salaries, post-retirement life insurance benefits and income taxes, operating lease liability, deferred revenue, and ATM/debit card processing clearing. These balances increased $500,000, to $9,012,000 at December 31, 2025.
SHAREHOLDERS’ EQUITY
The following table presents total shareholders’ equity at the dates indicated:
Change from prior year
Total shareholders’ equity increased $26,214,000, or 25.4%, to $129,563,000 at December 31, 2025 with an improvement in the negative impact of the market value of available-for-sale securities, net of tax, adjustment contributing $21,294,000 and a reduction in the market value on the fair value hedge, net of tax, of $5,118,000. Retained earnings increased $8,439,000 due to net income of $14,090,000, partly offset by dividends declared of $5,651,000. The dividend reinvestment and stock purchase plan, employee stock purchase plan, employee stock incentive plan and the non-employee compensation plan contributed $1,599,000.
Accumulated other comprehensive loss improved from a loss of $62,646,000 to a loss of $46,470,000, resulting from the fair value of the available-for-sale investment portfolio primarily due to an improvement in market values and the impact of the market value on the fair value hedge, net of tax.
QNB offers a Dividend Reinvestment and Stock Purchase Plan (the “Plan”) to provide participants a convenient and economical method for investing cash dividends paid on the Company’s common stock in additional shares. The Plan also allows participants to make additional cash purchases of stock. Stock purchases under the Plan contributed $838,000 and $873,000 to capital during 2025 and 2024, respectively.
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The Board of Directors has authorized the repurchase of up to 200,000 shares of QNB’s common stock in open market or privately negotiated transactions. The repurchase authorization does not bear a termination date. As of December 31, 2024, a total of 102,000 shares were repurchased under this authorization at an average price of $24.93 and a total cost of $2,543,000.
Liquidity and Capital Resources
Liquidity Management
Liquidity represents an institution’s ability to generate cash or otherwise obtain funds at reasonable rates to satisfy demand for loans and deposit withdrawals. QNB attempts to manage its mix of cash and interest-bearing balances, Federal funds sold and investment securities to match the volatility, seasonality, interest sensitivity and growth trends of its loans and deposits. The Company manages its liquidity risk by measuring and monitoring its liquidity sources and estimated funding needs. Liquidity is provided from asset sources through repayments and maturities of loans and investment securities. The portfolio of investment securities classified as available for sale and QNB's policy of selling certain residential mortgage originations in the secondary market also provide sources of liquidity. Core deposits and cash management repurchase agreements have historically been the most significant funding source for QNB. These deposits and repurchase agreements are generated from a base of consumers, businesses and public funds primarily located in the Company’s market area.
An additional source of liquidity is provided by the Bank’s membership in the FHLB. At December 31, 2025, the Bank’s total maximum borrowing capacity at the FHLB was $484,377,000 of which $418,037,000 remained available. The Bank had $66,000,000 in overnight and short-term borrowings at year-end 2025, related interest payable of $323,000 and other commitments of $17,000. The maximum borrowing capacity changes depending upon the Bank’s level of qualifying collateral assets. In addition, the Bank maintains unsecured Federal funds lines with four correspondent banks totaling $86,000,000. At December 31, 2025 and 2024, there were no outstanding borrowings under these lines. Future availability under these lines is subject to the policies of the granting banks and may be withdrawn. As part of its contingency funding plan, QNB successfully tested its ability to borrow from these sources during 2025.
Total cash and cash equivalents, equity and available-for-sale securities and loans held-for-sale totaled $593,373,000 at December 31, 2025 and $597,936,000 at December 31, 2024, of which $234,159,000 and $241,586,000, respectively, were pledged as collateral for repurchase agreements and public deposits. This decrease in liquid sources is primarily the result of maturities of available-for-sale securities. Management anticipates that these liquid sources are adequate to meet normal fluctuations in loan demand or deposit withdrawals. It is anticipated that the investment portfolio will continue to provide sufficient liquidity as municipal bonds are called and as principal and interest payments on mortgage-backed and CMO securities provide steady cash flow. Increases in interest rates, however, result in decreased cash flow available from the investment portfolio.
QNB is a member of the Certificate of Deposit Account Registry Services (“CDARS”) program offered by the Promontory Interfinancial Network, LLC. CDARS is a funding and liquidity management tool used by banks to access funds and manage their balance sheet. At December 31, 2025 approximately 18% of QNB deposits were uninsured or not collateralized, CDARS enables financial institutions to provide customers with full FDIC insurance on time deposits over $250,000 that are placed in the program. QNB also has available Insured Cash Sweep (“ICS”), another program through Promontory Interfinancial Network, LLC, which is a product similar to CDARS, but one that provides liquidity like a money market or savings account. QNB had $14,879,000 in CDARS time deposits at December 31, 2025 compared to $14,749,000 at December 31, 2024.
Capital Resources
A strong capital position is fundamental to support continued growth and profitability and to serve the needs of depositors. QNB’s shareholders’ equity at December 31, 2025 was $129,563,000, or 6.80% of total assets, compared with shareholders’ equity of $103,349,000, or 5.52% of total assets, at December 31, 2024. Shareholders’ equity at December 31, 2025 included a negative $45,142,000 related to unrealized holding losses, net of taxes, on investment securities available for sale and a negative $1,328,000, net of taxes, related to unrealized holding gains on fair value hedges, compared to a negative $66,436,000 related to unrealized holding losses, net of taxes, on investment securities available for sale and a positive $3,790,000, net of taxes, related to unrealized holding losses on fair value hedges at December 31, 2024. Excluding these adjustments, shareholders’ equity to total assets would have been 9.02% and 8.59% at December 31, 2025 and 2024, respectively.
Average shareholders’ equity and average total assets were $114,782,000 and $1,891,737,000 for 2025, an increase of 6.8% and 18.1%, respectively, from 2024 average equity and average total assets of $97,217,000 and $1,770,563,000, respectively. The ratio of average total equity to total average assets was 6.07% for 2025, compared with 5.49% for 2024.
QNB is subject to restrictions on the payment of dividends to its shareholders pursuant to the Pennsylvania Business Corporation Law of 1988 as amended (the BCL). The BCL operates generally to preclude dividend payments, if the effect thereof would render QNB insolvent, as defined. As a practical matter, QNB’s payment of dividends is contingent upon its ability to obtain funding in the form of dividends from the Bank. Under Pennsylvania banking law, the Bank is subject to certain restrictions on the amount of dividends that it
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