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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may declare without prior regulatory approval. At December 31, 2025, the retained earnings of the Bank totaling $153,739,000 was available for dividends without prior Pennsylvania Department of Banking approval, subject to the regulatory capital requirements discussed below. Under the Federal Deposit Insurance Act, an insured depository institution may not pay a dividend if, after the payment of the dividend, the institution would be undercapitalized under the FDIC’s prompt corrective action rules. In addition, Federal banking agencies have the authority to restrict dividend payments under certain circumstances if such payments are not consistent with the capital needs and financial condition of the institution. It is the policy of the Federal Reserve that a bank holding company generally should not maintain its existing rate of cash dividends on common stock unless the net income available to common shareholders over the prior four quarters, net of dividends previously paid during that period, has been sufficient to fully fund the dividends and the prospective rate of earnings retention appears consistent with the company’s capital needs, asset quality, and overall financial condition. QNB paid dividends to its shareholders of $1.52 per share, $1.48 per share, and $1.44 per share, in 2025, 2024, and 2023, respectively.
QNB is subject to various regulatory capital requirements as issued by Federal regulatory authorities. Regulatory capital is defined in terms of Tier 1 capital and Tier 2. Risk-based capital ratios are expressed as a percentage of risk-weighted assets. Risk-weighted assets are determined by assigning various weights to all assets and off-balance sheet arrangements, such as letters of credit and loan commitments, based on associated risk. QNB is subject to various regulatory capital requirements as issued by Federal regulatory authorities.
Minimum requirements for both the quantity and quality of capital held by banks are as follows: Common equity Tier 1 capital to risk-weighted assets of 4.5%; Tier 1 capital to risk-weighted assets of 6.0%; Total Capital to risk-weighted assets of 8.0%; and Tier 1 leverage ratio of 4.0%. The capital conservation buffer, comprised of common equity Tier 1 capital, was established above the regulatory minimum capital requirements at 2.5%.
The Federal Deposit Insurance Corporation Improvement Act of 1991 established five capital level designations for insured institutions ranging from “well capitalized” to “critically undercapitalized.” At December 31, 2025 and 2024, management believes that the Company and the Bank met all capital adequacy requirements to which they are subject and have met the “well capitalized” criteria.
Capital Analysis
Regulatory Capital
Net unrealized securities losses, net of tax 46,470 62,646
Deferred tax assets on net operating loss — —
Disallowed goodwill and other disallowed intangible assets — -
Allowable portion:
Allowance for credit losses on loans and unfunded commitments 9,291 8,831
Quarterly average assets for leverage capital purposes $ 1,951,115 $ 1,908,914
Capital Ratios
Common equity tier I capital / risk-weighted assets 12.39 % 12.02 %
Tier 1 capital / risk-weighted assets 12.39 % 12.02 %
Total regulatory capital / risk-weighted assets 15.86 % 15.56 %
Tier 1 capital / average assets (leverage ratio) 9.02 % 8.70 %
Material Cash Requirements from Known Contractual and Other Obligations
QNB has various financial obligations, including contractual obligations and commitments, which may require future cash payments.
The following table presents, as of December 31, 2025, significant contractual obligations to third parties by payment date and the amounts and expected maturities of significant commitments. Further discussion of the nature of each obligation can be found in the
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Notes to Consolidated Financial Statements. The Company’s reserve for credit losses on unfunded commitments totaled $76,000 at December 31, 2025 compared to $87,000 at December 31, 2024.
(a)
Includes available amounts for overdraft protection program in one year or less
Commitments to extend credit, including loan commitments, standby letters of credit, and commercial letters of credit do not necessarily represent future cash requirements, as these commitments often expire without being drawn upon. The Company does not currently have any commitments for significant capital expenditures or other purchase obligations.
RECENTLY ISSUED ACCOUNTING STANDARDS
Refer to Note 1 of the Notes to Consolidated Financial Statements for discussion of recently issued accounting standards.
CRITICAL ACCOUNTING ESTIMATES
Disclosure of the Company’s significant accounting policies is included in Note 1 to Consolidated Financial Statements. Additional information is contained in Management’s Discussion and Analysis and the Notes to Consolidated Financial Statements for the most sensitive of these issues. The discussion and analysis of the financial condition and results of operations are based on the Consolidated Financial Statements of QNB, which are prepared in accordance with US GAAP and predominant practices within the banking industry. The preparation of these Consolidated Financial Statements requires QNB to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. QNB evaluates estimates on an on-going basis, including those related to the determination of the allowance for credit losses on investments, loans and unused commitments, the determination of the valuation of other real estate owned, the determination of impairment of securities and restricted stock, the valuation of deferred tax assets, stock-based compensation and income taxes. QNB bases its estimates on historical experience and various other factors and assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Impairment on Securities and Restricted Stock
Securities are evaluated periodically to determine whether a decline in their value is impairment. Management utilizes criteria such as the magnitude and duration of the decline, in addition to the reasons underlying the decline, to determine whether the loss in value is impairment. The term “impairment” is not intended to indicate that the decline is permanent but indicates that the prospect for a near-term recovery of value is not necessarily favorable, or that there is a lack of evidence to support a realizable value equal to or greater than the carrying value of the investment.
The Company follows the accounting guidance in Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 326-30 as it relates to the recognition and presentation of impairment. This accounting guidance specifies that (a) if a company does not have the intent to sell a debt security prior to recovery and (b) it is more likely than not that it will not have to sell the debt security prior to recovery, the security would not be considered impaired unless there is a credit loss. When an entity does not intend to sell the security, and it is more likely than not, the entity will not have to sell the security before recovery of its cost basis, it will recognize the credit component of an impairment of a debt security in earnings and the remaining portion in other comprehensive income. For held-to-maturity debt securities, the amount of an impairment recorded in other comprehensive income for the non-credit portion of a previous impairment should be amortized prospectively over the remaining life of the security on the basis of future estimated cash flows of the security. For equity securities without a readily determinable market value, once a decline in value is determined to be an impairment, the value of the equity security is reduced to fair value and a corresponding charge to earnings is recognized.
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Allowance for Credit Losses on Loans and Unused Commitments
The Company maintains an allowance for credit losses on loans and unused commitments, which is intended to absorb probable known and inherent losses in the outstanding loan portfolio. The allowance for credit losses is calculated with the objective of maintaining a level believed by management to be sufficient to absorb probable known and inherent losses in the outstanding loan portfolio.
The allowance for credit losses is measured on a pool basis when similar risk characteristics exist. The Company establishes a general valuation allowance for performing loans, including non-accrual student loans. QNB calculates each pool's historical loss rate using a full economic cycle of loan balance and historical loss experienced. The general component is adjusted for qualitative factors including concentrations and economic forecast.
The level of the allowance is determined by assigning specific reserves to all non-accrual loans, except the homogeneous pool of student loans which are measured in the general reserve. An allowance on these non-accrual loans is established when the discounted cash flows (or collateral value) of the loan is lower than the carrying value of that loan. The portion of the allowance that is allocated to non-accrual loans is determined by estimating the inherent loss on each credit after giving consideration to the value of underlying collateral.
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 in accordance with U.S. GAAP. If circumstances differ substantially from the assumptions used in making determinations, future adjustments to the allowance for credit losses may be necessary and results of operations could be affected. Because future events affecting borrowers and collateral cannot be predicted with certainty, increases to the allowance may be necessary should the quality of any loans deteriorate as a result of the factors discussed above.
Stock-Based Compensation
QNB sponsored stock-based compensation plans, administered by a Board committee, under which both qualified and non-qualified stock options may be granted periodically to certain employees. QNB accounts for all awards granted under stock-based compensation plans in accordance with ASC 718, Compensation – Stock Compensation. Compensation cost has been measured using the fair value of an award on the grant date and is recognized over the service period, which is usually the vesting period. The fair value of each option is amortized into compensation expense on a straight-line basis between the grant date for the option and each vesting date. QNB estimates the fair value of stock options on the date of the grant using the Black-Scholes option pricing model. The model requires the use of numerous assumptions, many of which are highly subjective in nature.
Income Taxes
QNB accounts for income taxes under the asset/liability method in accordance with income tax accounting guidance, ASC 740 – Income Taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, as well as operating loss and tax-credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is established against deferred tax assets when, in the judgment of management, it is more likely than not that such deferred tax assets will not become available. Because the judgment about the level of future taxable income is dependent to a great extent on matters that may, at least in part, be beyond QNB’s control, it is at least reasonably possible that management’s judgment about the need for a valuation allowance for deferred taxes could change in the near term.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk reflects the risk of economic loss resulting from changes in interest rates and market prices. QNB’s primary market risk exposure is interest rate risk and liquidity risk. QNB’s liquidity position was discussed in a prior section.
QNB’s largest source of revenue is net interest income, which is subject to changes in market interest rates. Interest rate risk management seeks to minimize the effect of interest rate changes on net interest margins and interest rate spreads and to provide growth in net interest income through periods of changing interest rates. QNB’s Asset/Liability and Investment Management Committee (“ALCO”) is responsible for managing interest rate risk and for evaluating the impact of changing interest rate conditions on net interest income.
QNB uses computer simulation analysis to measure the sensitivity of projected earnings to changes in interest rates. Simulation considers current balance sheet volumes and the scheduled repricing dates, instrument level optionality, and maturities of assets and liabilities. It incorporates assumptions for growth, changes in the mix of assets and liabilities, prepayments, and average rates earned and paid. Based on this information, management uses the model to project net interest income under multiple interest rate scenarios.
A balance sheet is considered asset sensitive when its assets (investment securities and loans) reprice faster than its interest-bearing liabilities (deposits and borrowings). An asset sensitive balance sheet will produce relatively higher net interest income when interest rates rise and less net interest income when they decline. A balance sheet is considered liability sensitive when its liabilities (deposits and borrowings) reprice faster or to a greater extent than its earning assets (loans and securities). A liability sensitive balance sheet will produce relatively less net interest income when interest rates rise and more net interest income when they decline. Based on our simulation analysis, management believes QNB’s interest sensitivity position at December 31, 2025 is relatively asset sensitive. Management expects market interest rates to decrease in the next 12 months, based on the economic environment and policy of the Federal Reserve.
The following table shows the estimated impact of changes in interest rates on net interest income as of December 31, 2025 and 2024 assuming instantaneous rate shocks, and consistent levels of assets and liabilities. Net interest income for the subsequent twelve months is projected to increase when interest rates are higher than current rates.
Estimated change in net interest income
Change in interest rates December 31,
Computations of future effects of hypothetical interest rate changes are based on numerous assumptions and should not be relied upon as indicative of actual results. Assets and liabilities may react differently than projected to changes in market interest rates. The interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while rates on other types of assets and liabilities may lag changes in market interest rates. Interest rate shifts may not be parallel.
Changes in interest rates can cause substantial changes in the amount of prepayments of loans and mortgage-backed securities, which may in turn affect QNB’s interest rate sensitivity position. Additionally, credit risk may rise if an interest rate increase adversely affects the ability of borrowers to service their debt. At December 31, 2025 and December 31, 2024, QNB had two derivatives designated as fair value hedging instruments, these interest rate swaps had a notional value of $276,364,000.
QNB is not subject to foreign currency exchange or commodity price risk.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following audited financial statements are set forth in this Annual Report on Form 10-K on the following pages:
Consolidated Balance Sheets Page 57
Consolidated Statements of Income Page 58
Consolidated Statements of Comprehensive Income Page 59
Consolidated Statements of Shareholders’ Equity Page 60
Consolidated Statements of Cash Flows Page 61
Notes to Consolidated Financial Statements Page 62
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Management’s Report on Internal Control over Financial Reporting
March 16, 2026
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to consolidated financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2025, in relation to criteria for effective internal control over financial reporting as described in “Internal Control Integrated Framework (2013),” issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on this assessment, management concludes that, as of December 31, 2025, the Company’s system of internal control over financial reporting is effective and meets the criteria of the “Internal Control Integrated Framework (2013).”
/s/ David W. Freeman /s/ Jeffrey Lehocky
David W. Freeman Jeffrey Lehocky
Chief Executive Officer Chief Financial Officer
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Report of Independent Registered Public Accounting Firm
Shareholders and the Board of Directors of QNB Corp.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of QNB Corp. and subsidiary (the "Company") as of December 31, 2025 and 2024, the related consolidated statements of income, comprehensive income (loss), shareholders' equity, and cash flows, for each of the three years in the period ended December 31, 2025, and the related notes (collectively referred to as the "consolidated financial statements"). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2025 and 2024, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2025, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company's consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates
Allowance for Credit Losses (ACL) on Loans Receivable – Qualitative Factors
Critical Audit Matter Description
As disclosed in Notes 1 and 5 to the Company's consolidated financial statements, the Company accounts for credit losses under ASC 326, Financial Instruments – Credit Losses. ASC 326 requires the measurement of current estimate of lifetime credit losses inherent in the loan portfolio at the balance sheet date. As described in the notes, the ACL consists of two components: a specific reserve based on the analysis of individually evaluated loans, and a general reserve that is measured on a pool basis for loans sharing similar risk characteristics (“general valuation allowance”). The Company estimates the ACL for the general valuation allowance via a quantitative analysis and qualitative factors both which consider relevant available information from internal and external sources related to past events and current conditions, as well as the incorporation of reasonable and supportable forecasts.
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The determination of qualitative factor adjustments involves a high degree of management judgement. Management has identified risk factors related to concentrations of credit and economic data as areas where the historical data requires adjustment to reflect current and expected conditions. Changes to these qualitative factors could have a material impact on the Company's financial results.
We have identified auditing the qualitative factors as a critical audit matter as management's determination of the qualitative factors is subjective and involves significant management judgments. Our audit procedures related to the qualitative factors involved a high degree of auditor judgement and significant auditor effort was required in evaluating the audit evidence obtained related to the qualitative factor adjustments.
How We Addressed the Matter in Our Audit
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. Our audit procedures related to the qualitative factors included the following, among others:
Substantively testing the appropriateness of the judgment and assumptions used in management's estimation process for developing the qualitative factor adjustments, including:
•
Assessing whether all relevant factors have been considered that affect the collectability of the loan portfolio;
•
Evaluation of the relevance and reliability of underlying internal and external data inputs used as a basis for the qualitative factor adjustments and corroboration of these inputs by comparison to the Company's historical loan portfolio performance, and third-party macroeconomic data;
•
Recalculation of the allowance for credit loss and allocation of qualitative loss factors to the appropriate loan segments
/s/ Baker Tilly US, LLP
Allentown, Pennsylvania
March 16, 2026
We have served as the Company's auditor since 2007.
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CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
Assets
Investment securities:
Restricted investment in stocks 6,663 5,436
Allowance for credit losses on loans (9,215 ) (8,744 )
Liabilities
Deposits
Shareholders' Equity
Accumulated other comprehensive loss, net of tax (46,470 ) (62,646 )
The accompanying notes are an integral part of the consolidated financial statements.
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CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
Interest income
Interest and dividends on investment securities (AFS & Equity):
Interest expense
Interest on deposits
Interest on subordinated debt 3,750 1,260 —
Provision (reversal of provision) for credit losses 449 (68 ) (844 )
Non-interest income
Net unrealized (loss) gain on investment equity securities — (215 ) 250
Net gain (loss) on sale of investment securities — 919 (2,077 )
Net gain (loss) on investment securities — 704 (1,827 )
Net gain on sale of loans 63 29 16
Non-interest expense
Merger-Related 1,138 — —
Earnings per share - basic $ 3.79 $ 3.12 $ 2.63
Earnings per share - diluted $ 3.78 $ 3.12 $ 2.63
The accompanying notes are an integral part of the consolidated financial statements.
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CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
Other comprehensive income:
Net unrealized holding gain on available-for-sale securities:
The accompanying notes are an integral part of the consolidated financial statements.