Item 2. Management’s Discussion and Analysis
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
QNB Corp. is a bank holding company headquartered in Quakertown, Pennsylvania. QNB Corp., through its wholly-owned subsidiary, the Bank, has been serving the residents and businesses of upper Bucks, northern Montgomery and southern Lehigh counties in Pennsylvania since 1877. Due to its limited geographic area, growth is pursued through expansion of existing customer relationships and building new relationships by stressing a consistent high level of service at all points of contact. The Bank is a locally managed community bank that provides a full range of commercial and retail banking and retail brokerage services. The consolidated entity is referred to herein as “QNB” or the “Company”.
Tabular information presented throughout management’s discussion and analysis, other than share and per share data, is presented in thousands of dollars.
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FORWARD-LOOKING STATEMENTS
In addition to historical information, this document contains forward-looking statements. Forward-looking statements are typically identified by words or phrases such as “believe,” “expect,” “anticipate,” “intend,” “estimate,” “project” and variations of such words and similar expressions, or future or conditional verbs such as “will,” “would,” “should,” “could,” “may” or similar expressions. The U.S. Private Securities Litigation Reform Act of 1995 provides a safe harbor in regard to the inclusion of forward-looking statements in this document and documents incorporated by reference.
Shareholders should note that many factors, some of which are discussed elsewhere in this document and in the documents that are incorporated by reference, including the risk factors identified in Item 1A of QNB’s 2023 Form 10-K, could affect the future financial results of QNB and could cause those results to differ materially from those expressed in the forward-looking statements contained or incorporated by reference in this document. These factors include, but are not limited, to the following:
• Volatility in interest rates and shape of the yield curve;
• Credit risk;
• Liquidity risk;
• Operating, legal and regulatory risks;
• Economic, political and competitive forces affecting QNB’s business, including the effects of inflation;
• The effects of unforeseen external events, including acts of terrorism, natural disasters, and pandemics; and
• The risk that the analysis of these risks and forces could be incorrect, and/or that the strategies developed to address them could be unsuccessful.
QNB cautions that these forward-looking statements are subject to numerous assumptions, risks and uncertainties, all of which change over time, and QNB assumes no duty to update forward-looking statements. Management cautions readers not to place undue reliance on any forward-looking statements. These statements speak only as of the date of this report on Form 10-Q, even if subsequently made available by QNB on its website or otherwise, and they advise readers that various factors, including those described above, could affect QNB’s financial performance and could cause actual results or circumstances for future periods to differ materially from those anticipated or projected. Except as required by law, QNB does not undertake, and specifically disclaims any obligation, to publicly release any revisions to any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Disclosure of our significant accounting policies is included in Note 1 to the consolidated financial statements of the Annual Report on Form 10-K for the year ended December 31, 2023, which is incorporated herein by reference. Some of these policies are particularly sensitive requiring significant judgments, estimates and assumptions.
RESULTS OF OPERATIONS - OVERVIEW
QNB reported net income for the first quarter of 2024 of $2,594,000, or $0.71 per share on a diluted basis, compared to net income of $4,118,000, or $1.15 per share on a diluted basis, for the same period in 2023. The Bank contributed $2,331,000 to net income for the three months ended March 31, 2024 compared to $4,287,000 for the same period 2023; and the holding company contributed $263,000 to net income for the three months ended March 31, 2024 compared to a negative $169,000 for the same period 2023. The results at the Bank were primarily due to net interest margin compression, a decrease in the amount of reversal in the provision for credit losses on loans and commitments and an increase in non-interest expense. The results at the holding company are due primarily to gains on sales of equity securities included in the investment portfolio.
Net income expressed as an annualized rate of return on average assets and average shareholders’ equity was 0.59% and 6.53%, respectively, for the quarter ended March 31, 2024 compared with 0.97% and 10.81%, respectively, for the quarter ended March 31, 2023.
Total assets as of March 31, 2024 were $1,716,081,000, compared with $1,706,318,000 at December 31, 2023. Loans receivable at March 31, 2024 were $1,122,616,000, a $29,083,000 increase from $1,093,533,000 at December 31, 2023. Total deposits of $1,536,188,000 at March 31, 2024 increased $47,475,000 compared with total deposits of $1,488,713,000 at December 31, 2023.
Results for the three months ended March 31, 2024 include the following significant components:
• Net interest income decreased $249,000, or 2.39%, to $10,168,000 for the three months ended March 31, 2024.
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• Net interest margin on a tax-equivalent basis decreased 16 basis points to 2.39% for the quarter compared to 2.55% for the same period 2023.
• QNB reversed $93,000 in its provision for credit losses on loans for the quarter ended March 31, 2024 compared with a reversal of $1,783,000 for the same period in 2023.
• Non-interest income increased $617,000, to $1,836,000 for the first quarter compared with the same period in 2023. Excluding realized and unrealized gains (losses) on securities and gains on sales of loans, non-interest income decreased $147,000, or 9.1%, to $1,474,000 for the quarter compared with the same period in 2023.
• Non-interest expense increased $633,000 to $8,833,000 for the quarter compared to the same period in 2023.
• Total non-performing loans, comprised of loans on non-accrual status, were $2,001,000, or 0.18% of loans receivable at March 31, 2024, compared to $1,940,000, or 0.18% of loans receivable at December 31, 2023. Net loan charge-offs for the three months ended March 31, 2024 were $21,000, compared with recoveries of $532,000 for the same period in 2023.
These items, as well as others, are explained more thoroughly in the next sections.
NET INTEREST INCOME
QNB earns its net income primarily through the Bank. Net interest income, or the spread between the interest, dividends and fees earned on loans and investment securities and the expense incurred on deposits and other interest-bearing liabilities, is the primary source of operating income for QNB. Management seeks to achieve sustainable and consistent earnings growth while maintaining adequate levels of capital and liquidity and limiting its exposure to credit and interest rate risk levels approved by the Board of Directors.
The following table presents the adjustment to convert net interest income to net interest income on a fully taxable-equivalent basis for the three-month periods ended March 31, 2024 and 2023.
For the Three Months Ended March 31,
2024
2023
Total interest income
$
19,569
$
15,463
Total interest expense
9,401
5,046
Net interest income
10,168
10,417
Tax-equivalent adjustment
141
150
Net interest income (fully taxable-equivalent)
$
10,309
$
10,567
Net interest income is the primary source of operating income for QNB. Net interest income is interest income, dividends, and fees on earning assets, less interest expense incurred for funding sources. Earning assets primarily include loans, investment securities, interest bearing balances at the Federal Reserve Bank and Federal funds sold. Sources used to fund these assets include deposits and borrowed funds. Net interest income is affected by changes in interest rates, the volume and mix of earning assets and interest-bearing liabilities, and the amount of earning assets funded by non-interest-bearing deposits.
For purposes of this discussion, interest income and the average yield earned on loans and investment securities are adjusted to a tax-equivalent basis as detailed in the tables that appear above. This adjustment to interest income is made for analysis purposes only. Interest income is increased by the amount of savings of Federal income taxes, which QNB realizes by investing in certain tax-exempt state and municipal securities and by making loans to certain tax-exempt organizations. In this way, the ultimate economic impact of earnings from various assets can be more easily compared.
The net interest rate spread is the difference between average rates received on earning assets and average rates paid on interest-bearing liabilities, while the net interest rate margin, which includes interest-free sources of funds, is net interest income expressed as a percentage of average interest-earning assets. The Asset/Liability and Investment Management Committee works to manage and maximize the net interest margin for the Company.
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Average Balances, Rate, and Interest Income and Expense Summary (Tax-Equivalent Basis)
For the Three Months Ended
March 31, 2024
March 31, 2023
Average
Average
Average
Average
Balance
Rate
Interest
Balance
Rate
Interest
Assets
Investment securities (AFS & Equity):
U.S. Treasury securities
$
6,782
5.33
%
$
90
$
269
1.49
%
$
1
U.S. Government agencies
84,951
1.17
248
101,943
1.11
283
State and municipal
108,173
3.42
924
111,150
2.23
621
Mortgage-backed and CMOs
365,983
2.59
2,373
417,137
1.62
1,685
Corporate debt securities and money market funds
6,707
5.59
94
6,636
4.40
73
Equities
6,019
3.71
56
12,096
3.39
101
Total investment securities
578,615
2.62
3,785
649,231
1.70
2,764
Loans:
Commercial real estate
775,135
5.34
10,300
681,615
4.52
7,602
Residential real estate
108,922
3.92
1,066
105,698
3.55
937
Home equity loans
62,269
6.81
1,055
56,645
6.23
870
Commercial and industrial
140,293
7.50
2,615
152,756
8.22
3,096
Consumer loans
3,644
8.10
73
4,089
6.73
68
Tax-exempt loans
18,641
3.82
177
20,591
3.49
177
Total loans, net of unearned income*
1,108,904
5.54
15,286
1,021,394
5.06
12,750
Other earning assets
46,645
5.51
639
7,001
5.71
99
Total earning assets
1,734,164
4.57
19,710
1,677,626
3.77
15,613
Cash and due from banks
12,769
12,881
Allowance for loan losses
(8,946
)
(9,937
)
Other assets
40,598
38,597
Total assets
$
1,778,585
$
1,719,167
Liabilities and Shareholders' Equity
Interest-bearing deposits:
Interest-bearing demand
$
321,904
0.80
%
643
$
317,615
0.39
%
302
Municipals
131,887
4.81
1,577
111,954
3.89
1,075
Money market
227,872
3.56
2,015
130,627
1.06
342
Savings
298,353
1.28
949
406,072
1.08
1,077
Time < $100
157,712
3.76
1,473
101,208
1.53
382
Time $100 through $250
127,613
4.34
1,377
97,617
3.02
727
Time > $250
49,756
4.22
522
27,723
1.80
123
Total interest-bearing deposits
1,315,097
2.62
8,556
1,192,816
1.37
4,028
Short-term borrowings
87,441
2.88
625
134,918
2.99
995
Long-term debt
20,000
4.36
220
5,833
1.57
23
Total interest-bearing liabilities
1,422,538
2.66
9,401
1,333,567
1.53
5,046
Non-interest-bearing deposits
182,595
221,948
Other liabilities
13,713
9,149
Shareholders' equity
159,739
154,503
Total liabilities and shareholders' equity
$
1,778,585
$
1,719,167
Net interest rate spread
1.91
%
2.24
%
Margin/net interest income
2.39
%
$
10,309
2.55
%
$
10,567
Tax-exempt securities and loans were adjusted to a tax-equivalent basis and are based on the marginal Federal corporate tax rate of 21 percent for three months ended March 31, 2024 and 2023.
Non-accrual loans are included in earning assets.
* Includes loans held-for-sale
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Rate/Volume Analysis. The following table shows the fully taxable equivalent effect of changes in volumes and rates on interest income and interest expense. Changes in net interest income that could not be specifically identified as either a rate or volume change were allocated to changes in volume.
For the Three Months Ended
March 31, 2024 compared
to March 31, 2023
Total
Due to change in:
Change
Volume
Rate
Interest income:
Investment securities (AFS & Equity):
U.S. Treasury securities
$
89
$
24
$
65
U.S. Government agencies
(35
)
(47
)
12
State and municipal
303
(16
)
319
Mortgage-backed and CMOs
688
(207
)
895
Corporate debt securities and money market funds
21
1
20
Equities
(45
)
(50
)
5
Total Investment securities (AFS & Equity)
1,021
(295
)
1,316
Loans:
Commercial real estate
2,698
1,116
1,582
Residential real estate
129
29
100
Home equity loans
185
95
90
Commercial and industrial
(481
)
(229
)
(252
)
Consumer loans
5
(7
)
12
Tax-exempt loans
—
(16
)
16
Total Loans
2,536
988
1,548
Other earning assets
540
563
(23
)
Total interest income
4,097
1,256
2,841
Interest expense:
Interest-bearing deposits:
Interest-bearing demand
341
7
334
Municipals
502
203
299
Money market
1,673
261
1,412
Savings
(128
)
(279
)
151
Time < $100
1,091
218
873
Time $100 through $250
650
231
419
Time > $250
399
99
300
Total interest-bearing deposits
4,528
740
3,788
Short-term borrowings
(370
)
(345
)
(25
)
Long-term debt
197
56
141
Total interest expense
4,355
451
3,904
Net interest income
$
(258
)
$
805
$
(1,063
)
Net Interest Income and Net Interest Margin – Quarterly Comparison
Average earning assets for the first quarter of 2024 were $1,734,164,000, an increase of $56,538,000, or 3.4%, from the first quarter of 2023, with average loans increasing $87,510,000, or 8.6%, average other interest earning assets increasing $39,644,000, primarily interest-earnings cash at the Federal Reserve Bank, and average investment securities decreasing $70,616,000, or 10.9%, over the same period in 2023. Cash generated from repayments on the investment portfolio supported loan growth. Average loans as a percent of average earning assets was 63.9% for the first quarter of 2024, compared with 60.9% for the first quarter of 2023. On the funding side, average deposits increased $82,928,000, or 5.9%, to $1,497,692,000 for the first quarter of 2024 primarily due to an increase in time deposits and money market products. Average short-term borrowed funds, which consisted primarily of average commercial repurchase agreements, short-term Federal Reserve Bank ("FRB") borrowing and over-night FHLB borrowings, decreased $47,477,000 to $87,441,000 during the first quarter of 2024 compared to $134,918,000 for the same period in 2023.
The net interest margin for the first quarter of 2024 decreased 16 basis points to 2.39% from 2.55% for the same period in 2023. Competition for quality loans and deposits in our local market continues to exert pressure on the net interest margin. The increases in interest rates starting in March 2022 have compressed the net interest margin as QNB had been liability sensitive; QNB entered into
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interest rate hedging derivatives during the second quarter of 2023 moving QNB to be asset sensitive. The swap added 28 basis points to the net interest margin for the first quarter of 2024. The net interest margin is expected to improve as loans and deposits reprice.
The Rate-Volume Analysis tables, as presented on a tax-equivalent basis, highlight the impact of changing rates and volumes on interest income and interest expense. Total interest income on a tax-equivalent basis increased $4,097,000, or 26.2%, to $19,710,000 for the first quarter of 2024; total interest expense increased $4,355,000 to $9,401,000.
The yield on earning assets on a tax-equivalent basis increased 80 basis points to 4.57% for the first quarter of 2024, from 3.77% for the first quarter of 2023. The cost of interest-bearing liabilities was 2.66% for the first quarter of 2024, compared with 1.53% for the same period in 2023.
Interest income on investment securities (available-for-sale and equity) increased $1,021,000 when comparing the quarters ended March 31, 2024 and 2023. The average yield on the investment portfolio was 2.62% for the first quarter of 2024 compared with 1.70% for the same period in 2023, an increase of 92 basis points of which the interest rate swaps contributed 85 basis points.
The yield on U.S. Treasury securities was 5.33% for the first quarter of 2024 compared to 1.49% for the same period in 2023. The yield on U.S. Government agency securities increased six basis points offset by a decrease in average balances of $16,992,000, for a net reduction in interest income of $35,000.
Interest income on municipal securities, which are primarily tax-exempt, increased $303,000 due to a 119 basis-point increase in rate, partly offset by a $2,977,000 decrease in average balances. The rate and interest income increases on municipal securities was positively impacted by the interest rate swap, contributing to 120 basis points of the increase in rate. Typically, QNB purchases municipal bonds with 10- to 20-year maturities and may have call dates between 2-10 years.
Interest income on mortgage-backed securities and CMOs increased $688,000 while average balances decreased $51,154,000 and yield increased 97 basis points. The rate and interest income increases on mortgage-backed securities were positively impacted by the interest rate swap, contributing 99 basis points. This portfolio generally provides higher yields relative to agency bonds and also provides monthly cash flow which can be used for liquidity purposes or can be reinvested as interest rates increase. Since most of these securities were purchased at a premium, any prepayments result in a shorter amortization period of this premium and therefore a reduction in income.
The dividend yield on equities increased 32 basis points as average balances decreased $6,077,000. Proceeds from sales of equities were reinvested in higher yielding treasury securities.
Income on loans increased $2,536,000 to $15,286,000 when comparing the first quarters of 2024 and 2023, with an $87,510,000 increase in average balances contributing to an increase in interest income of $988,000 and a 48-basis point increase in yield contributing to a $1,548,000 increase in interest income. Higher interest rates during the repricing period were partially offset by competitive pressures that compressed the yields on new loans.
The largest category of the loan portfolio is commercial real estate loans. This category of loans includes commercial purpose loans secured by either commercial properties such as office buildings, factories, warehouses, hotels and restaurants, medical facilities and retail establishments, or residential real estate, usually the residence of the business owner. The category also includes construction and land development loans. Income on commercial real estate loans increased $2,698,000 when comparing the first quarters of 2024 and 2023, primarily due to an 82-basis point increase in rate from 4.52% in 2023 to 5.34% and increased average balances of $93,520,000, or 13.7%.
Income on commercial and industrial loans decreased $481,000 when comparing the first quarters of 2024 and 2023. The average yield on these loans decreased 72 basis points to 7.50% resulting in a decrease in income of $252,000; average balances decreased $12,463,000, to $140,293,000 for the first quarter of 2024 resulting in a $229,000 decrease in interest income. The first quarter of 2023 included interest recovered on a nonaccrual loan that paid off; without this interest, the rate was 7.42% for the 2023 period. Many of the loans in this category are indexed to the prime interest rate.
Tax-exempt loan income remained level at $177,000 for the first quarter of 2024 compared to the same period in 2023. Average balances decreased $1,950,000, or 9.5%, to $18,641,000 for the first quarter of 2024. The yield on municipal loans increased 33 basis points, to 3.82% for the first quarter of 2024, compared with the same period in 2023.
QNB desires to be the “local consumer lender of choice”, focusing its retail lending efforts on product offerings and marketing and promotion. Interest income on residential mortgage loans secured by first lien 1-4 family increased $129,000 when comparing the first quarter of 2024 to the same period in 2023. Average residential mortgage loan balances increased by $3,224,000, or 3.1%, to $108,922,000 for the first quarter of 2024 compared to the same period in 2023, which contributed a $29,000 increase in interest income.
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The average yield on the portfolio increased 37 basis points and contributed an increase of $100,000 to interest income. QNB chose to retain certain mortgage loans instead of selling them in the secondary market, as the yield on our originated mortgages was higher than comparable mortgage-backed securities. Average home equity loans increased during the 2024 period by $5,624,000 to $62,269,000; interest income increased $185,000 as the average yield increased 58 basis points to 6.81%. The yield on the consumer portfolio increased 137 basis points to 8.10% for the first quarter of 2024 and there was a $445,000 decrease in average balances resulting in a net $5,000 increase in interest income. The decrease in student loan balances of $470,000 was partially offset by an increase in consumer installment loans.
Earning assets are funded by deposits and borrowed funds. Interest expense increased $4,355,000, when comparing the first quarter of 2024 to the same period in 2023. QNB experienced an increase in all deposit categories except non-interest-bearing checking and savings accounts. Average non-interest-bearing demand accounts decreased $39,353,000 to $182,595,000 for the first quarter of 2024. Average savings balances decreased $107,719,000 to $298,353,000. QNB offered several new interest-bearing demand and money market products offering higher yields to retain large depositors and reduce the reliance on higher-cost short-term borrowings. Average interest-bearing demand accounts increased $4,289,000, or 1.4%, to $321,904,000 for the first quarter of 2024 and the average rate paid on these deposits increased 41 basis points; interest expense on interest-bearing demand accounts increased $341,000 to $643,000 for the same period. Average money market accounts increased $97,245,000, or 74.4%, to $227,872,000 for the first quarter of 2024 compared with the same period in 2023. Interest expense on money market accounts increased $1,673,000 to $2,015,000, and the average interest rate paid on money market accounts increased 250 basis points to 3.56% for the first quarter of 2024. Most of the balances in this category are in products that pay tiered rates based on account balances.
Interest expense on municipal interest-bearing demand accounts increased $502,000 to $1,577,000 for the first quarter of 2024. The average interest rate paid on municipal interest-bearing demand accounts increased 92 basis points to 4.81% for the first quarter of 2024 over the same quarter of 2023, and average balances increased $19,933,000, or 17.8%, to $131,887,000. Many of these accounts are indexed to the Federal funds rate with rate floors. Municipal deposits are seasonal in nature and are received during the second and third quarters as tax receipts are collected and are withdrawn over the course of the year.
Interest expense on savings accounts decreased $128,000 when comparing the first quarter of 2024 to the same quarter of 2023. The average interest rate paid on savings accounts increased 20 basis points to 1.28% for the first quarter of 2024. When comparing these same periods, average savings accounts decreased $107,719,000, or 26.5%, to $298,353,000 for the first quarter of 2024 primarily due to decreases in the e-Savings product. QNB’s online e-Savings product is the largest category of savings deposits, with average balances for the first quarter of 2024 of $217,409,000 compared to $304,409,000 in the same period of 2023. The average yield paid on these accounts was 1.71% for the first quarter of 2024 and 1.35% for the same period in 2023. Traditional statement savings accounts, passbook savings and club accounts are also included in the savings category and average balances in these types of savings accounts decreased $20,719,000 when comparing the first quarter of 2024 to the same period in 2023.
Interest expense on time deposits totaled $3,372,000 for the first quarter of 2024 compared to $1,232,000 in 2023. Average total time deposits increased $108,533,000 to $335,081,000 for the first quarter of 2024. As with fixed-rate loans and investment securities, these deposits reprice over time and, therefore, have less of an immediate impact on costs in either a rising or falling rate environment; however, the maturity and repricing characteristics of time deposits tend to be shorter. The average rate paid on total time deposits increased 186 basis points from 2.19% to 4.05% when comparing the first quarter of 2024 to the same period in 2023.
Approximately $303,251,000, or 85%, of time deposits at March 31, 2024 will mature over the next 12 months. The average rate paid on these time deposits is approximately 4.49%. The yield on the time deposit portfolio may change in the next quarter as short-term time deposits reprice; however, given the short-term nature of these deposits, interest expense may increase if short-term time deposit rates were to increase suddenly or if customers select higher paying time deposits.
Short-term borrowings are comprised of sweep accounts structured as repurchase agreements with our commercial customers, overnight FHLB borrowing and short-term FRB borrowing. Interest expense on short-term borrowings decreased $370,000 for the first quarter of 2024 to $625,000 when compared to the same period in 2023. When comparing these same periods, average balances decreased $47,477,000 to $87,441,000. The yield on customer repos increased 52 basis points for the first quarter of 2024 to 1.58%. There were no FHLB borrowings during 2024. The yield on the short-term FHLB borrowing was 4.84% for the first quarter of 2023 and average balances were $59,742,000. During the first quarter of 2023, QNB borrowed $50,000,000 from the FRB under its Bank Term Funding Program and locked in a rate of 4.39%; there are no pre-payment penalties. The FRB borrowings were paid off during the first quarter of 2024 but carried an average balance of $40,110,000 for the first quarter of 2024 compared to an average balance of $8,889,000 for the same period in 2023. During the second quarter of 2023, QNB borrowed long-term debt of $20,000,000 to lock in borrowing at a lower yield than short-term borrowings.
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PROVISION FOR CREDIT LOSSES, ALLOWANCE FOR CREDIT LOSSES ON LOANS AND ALLOWANCE FOR CREDIT LOSSES ON UNUSED COMMITMENTS
On January 1, 2023, the Company adopted ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326), as amended ("ASU 326") , which replaces the incurred loss methodology with an expected credit losses (“CECL”) for financial instruments held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts. On January 1, 2023, QNB recorded a decrease to its allowance for credit losses on loans of $989,000 and an increase to its allowance for credit losses on unused commitments of $5,000.
The provision for credit losses represents management's determination of the amount necessary to be charged to operations to bring the allowance for credit losses on loans and the allowance for credit losses on unused commitments to amounts that are intended to absorb historical loss experience, current conditions and reasonable and supportable forecasts, in the outstanding loan portfolio and the unused commitments. Management believes that it uses the best information available to make determinations about the adequacy of these allowances and that it has established its existing allowances for credit losses on loan and on unused commitments in accordance with U.S. GAAP. The determination of an appropriate level for the allowance for credit losses on loans and the allowance for credit losses on unused commitments are based upon an analysis of the risks inherent in QNB’s loan portfolio.
Since the allowance for credit losses on loans and the reserve on unused commitments is dependent, to a great extent, on conditions that may be beyond QNB’s control, it is at least reasonably possible that management’s calculations and actual results could differ. In addition, various regulatory agencies, as an integral part of their examination process, periodically review QNB’s allowance for credit losses on loans. Such agencies may require QNB to recognize changes to the allowance based on their judgments about information available to them at the time of their examination. Actual loan losses, net of recoveries, serve to reduce the allowance.
Based on this analysis, QNB reversed $93,000 in the provision for credit losses for the three months ended March 31, 2024, through the allowance for credit losses on loans, compared to a reversal of $1,783,000 through the provision for credit losses for the same period in 2023. QNB recorded a provision of $7,000 for the allowance for credit losses for unused commitments in the three months ended March 31, 2024 compared to a reversal of $22,000 for the same period in 2023.
QNB's allowance for credit losses on loans of $8,738,000 represents 0.78% of loans receivable at March 31, 2024 compared with an allowance for credit losses on loans of $8,852,000 or 0.81% of loans receivable, at December 31, 2023, and $8,191,000, or 0.81%, at March 31, 2023. Management believes the allowance for credit losses on loans at March 31, 2024 is adequate as of that date based on its analysis of historical loss experience, current conditions and reasonable and supportable forecasts in the portfolio.
Net charge-offs were $21,000 for the three months ended March 31, 2024 compared to net recoveries of $532,000 for the three months ended March 31, 2023. Charge-offs consisted of overdrafts of $33,000 and student and other consumer loans of $14,000. Recoveries of approximately $26,000 during the three months ended March 31, 2024 consisted of $18,000 in repayments from borrowers of previously charged-off credits and overdrafts recoveries of $8,000. Annualized net charge-offs as a percentage of average loans receivable were 0.01% for the three months ended March 31, 2024, compared to annualized net recoveries of 0.21% for the three months ended March 31, 2023.
Non-performing assets were $2,001,000 at March 31, 2024 compared to $1,940,000 as of December 31, 2023 and $4,561,000 at March 31, 2023. Total non-performing loans, which represent loans on non-accrual status, loans past due 90 days or more and still accruing interest and restructured loans, were 0.18% of loans receivable at March 31, 2024, 0.18% at December 31, 2023, and 0.45% of loans receivable at March 31, 2023. In cases where there is a collateral shortfall on non-accrual loans, specific impairment reserves have been established based on updated collateral values even if the borrower continues to pay in accordance with the terms of the agreement. At March 31, 2024, $1,192,000, or approximately 60%, of the loans classified as non-accrual are current or past due less than 30 days. Commercial loans classified as substandard or doubtful totaled $11,852,000, an increase of $242,000 from the $11,610,000 reported at December 31, 2023 and a decrease of $1,727,000, or 12.7%, from the $13,579,000 reported at March 31, 2023. The increase in classified loans since December 31, 2023 was due to two relationships downgraded, partially offset by repayments; and the decrease since March 31, 2023 is primarily due to repayments and pay-offs on existing substandard loans.
QNB had no loans past due 90 days or more and still accruing interest at March 31, 2024, December 31, 2023, or March 31, 2023. Total loans 30 days or more past due, which includes non-accrual loans by actual number of days delinquent, represented 0.37% of loans receivable at March 31, 2024 compared with 1.15% at December 31, 2023, and 0.60% at March 31, 2023. The December 31, 2023 past-dues included one large relationship past maturity and in the process of refinancing.
There were no troubled debt modifications identified during the three months ended March 31, 2024 or 2023. QNB had no other real estate owned or repossessed assets at March 31, 2024, December 31, 2023 or March 31, 2023.
46
A loan is considered collateral dependent, based on current information and events, if it is probable that QNB will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining if a loan is collateral dependent include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not collateral dependent. Management determines the significance of payment delays and shortfalls on a case-by-case basis, taking into consideration all the circumstances surrounding the loan and the borrower, including length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. Deficiency is measured on a loan-by-loan basis for all non-accrual loans, except student loans, by either the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral if the loan is collateral dependent.
The following table shows detailed information and ratios pertaining to the Company’s loan and asset quality:
March 31,
December 31,
March 31,
2024
2023
2023
Non-accrual loans
$
2,001
$
1,940
$
4,561
Loans past due 90 days or more and still accruing interest
—
—
—
Troubled debt restructured loans (not already included above)
—
—
—
Total non-performing loans
2,001
1,940
4,561
Total non-performing assets
$
2,001
$
1,940
$
4,561
Total loans (excluding loans held-for-sale):
Average total loans (YTD)
$
1,108,836
$
1,040,121
$
1,021,265
Total loans
1,122,616
1,093,533
1,011,956
Allowance for credit losses on loans
8,738
8,852
8,191
Allowance for loan losses to:
Non-performing loans
436.68
%
456.29
%
179.59
%
Total loans (excluding held-for-sale)
0.78
%
0.81
%
0.81
%
Average total loans (excluding held-for-sale)
0.79
%
0.85
%
0.80
%
Non-performing loans / total loans (excluding held-for-sale)
0.18
%
0.18
%
0.45
%
Non-performing assets / total assets
0.12
%
0.11
%
0.28
%
An analysis of net loan charge-offs (recoveries) for the three months ended March 31, 2024 compared to 2023 is as follows:
For the Three Months Ended March 31,
2024
2023
Net charge-offs (recoveries)
$
21
$
(532
)
Net annualized charge-offs (recoveries) to:
Total loans
0.01
%
(0.21
%)
Average total loans excluding held-for-sale
0.01
%
(0.21
%)
Allowance for loan losses
0.96
%
(26.05
%)
At March 31, 2024 and December 31, 2023, the recorded investment in loans for which impairment has been identified totaled $1,990,000 and $1,923,000 of which $1,688,000 and $1,451,000, respectively, required no specific allowance for loan loss. The recorded investment in impaired loans requiring an allowance for loan losses was $302,000 and $472,000 at March 31, 2024 and December 31, 2023, respectively, and the related allowance for loan losses associated with these loans was $137,000 and $308,000, respectively. Most of the loans that have been identified as impaired are collateral-dependent. See Note 8 to the Notes to Consolidated Financial Statements for additional detail of impaired loans.
47
NON-INTEREST INCOME
Non-Interest Income Comparison
For the Three Months Ended March 31,
Change from prior year
2024
2023
Amount
Percent
Net gain on sales of investment securities
$
377
$
(465
)
$
842
-181.1
%
Unrealized gain (loss) on investment equity securities
(30
)
57
(87
)
(152.6
)
Fees for services to customers
420
402
18
4.5
ATM and debit card
636
659
(23
)
(3.5
)
Retail brokerage and advisory
93
234
(141
)
(60.3
)
Bank-owned life insurance
94
86
8
9.3
Merchant
99
93
6
6.5
Net gain on sale of loans
15
6
9
150.0
Other
132
147
(15
)
(10.2
)
Total
$
1,836
$
1,219
$
617
50.6
%
Quarter to Quarter Comparison
Total non-interest income for the first quarter of 2024 was $1,836,000, an increase of $617,000, compared to $1,219,000 for the first quarter of 2023. Excluding realized and unrealized gains (losses) on securities and loans, non-interest income decreased $147,000, or 9.1%, to $1,474,000 for the quarter ended March 31, 2024 compared with the same period in 2023.
During the first quarter of 2024, unrealized losses on investment equity securities of $30,000 were recorded compared to unrealized gains of $57,000 in the same period of 2023. The unrealized losses and gains for the three months ended March 31, 2024 and 2023 resulted from the change in the fair value of the equities included in the investment portfolio. The equities portfolio comprises blue-chip large-capitalized stocks, providing a year-to-date taxable equivalent dividend yield of 3.71%. The estimated cumulative contribution (realized and unrealized net gains (losses), plus dividends) of the equity portfolio to earnings per share from January 1, 2011 through March 31, 2024 is $2.57 per diluted share. Details of the equity portfolio’s contribution to net income since January 1, 2017 is detailed in the following table.
Net Income (Expense) on Equity Securities
For the Year Ended December 31,
For the Three Months Ended March 31,
2017
2018
2019
2020
2021
2022
2023
2024
2023
Equity Securities:
Tax-equivalent dividends*
$
249
$
300
$
274
$
392
$
437
$
399
$
320
$
56
$
101
Net gain (loss) on sales
1,557
(79
)
1,781
585
1,788
405
(19
)
377
(208
)
Impairment
(80
)
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
Unrealized (loss) gain
N/A
(336
)
770
(47
)
926
(1,026
)
250
(30
)
57
Tax-equivalent income before tax
1,726
(115
)
2,825
930
3,151
(222
)
551
403
(50
)
Tax expense (benefit)*
700
(33
)
816
269
910
(64
)
159
111
(14
)
Net income
$
1,026
$
(82
)
$
2,009
$
661
$
2,241
$
(158
)
$
392
$
292
$
(36
)
Earnings per share - basic
$
0.30
$
(0.02
)
$
0.57
$
0.19
$
0.63
$
(0.04
)
$
0.11
$
0.08
$
(0.01
)
Earnings per share - diluted
$
0.30
$
(0.02
)
$
0.57
$
0.19
$
0.63
$
(0.04
)
$
0.11
$
0.08
$
(0.01
)
Tax-equivalent yield*
3.49
%
3.08
%
3.31
%
3.54
%
3.02
%
3.32
%
4.22
%
3.71
%
3.39
%
*Based on Federal tax rates of 21%.
QNB originates residential mortgage loans for sale in the secondary market. Net gains on sale of loans was $15,000 for first quarter of 2024; compared to $6,000 in the first quarter of 2023. The net gain on residential mortgage sales is directly related to the volume of mortgages sold and the timing of the sales relative to the interest rate environment. Residential mortgage loans to be sold are identified at origination.
Fees for services to customers increased $18,000 to $420,000 for the first quarter of 2024, due primarily to an increase in net overdraft income of $6,000 and other deposit fees of $18,000. ATM and debit card income decreased $23,000 to $636,000 for the first quarter of 2024, compared to the same period in 2023.
QNB provides securities and advisory services under the name QNB Financial Services. Retail brokerage and advisory fees decreased for the first quarter of 2024 compared to the same period in 2023. Advisory fees decreased $98,000 for the first quarter of 2024 compared with the same period in 2023 and transactional fees decreased $43,000 due to a decrease in client balances following employee turnover.
Other non-interest income decreased $15,000 primarily due to a reduction in mortgage services fees of $10,000.
48
NON-INTEREST EXPENSE
Non-Interest Expense Comparison
For the Three Months Ended March 31,
Change from prior year
2024
2023
Amount
Percent
Salaries and employee benefits
$
4,974
$
4,563
$
411
9.0
%
Net occupancy
578
540
38
7.0
Furniture and equipment
937
837
100
11.9
Marketing
266
203
63
31.0
Third-party services
624
609
15
2.5
Telephone, postage and supplies
126
167
(41
)
(24.6
)
State taxes
100
124
(24
)
(19.4
)
FDIC insurance premiums
345
175
170
97.1
Other
883
982
(99
)
(10.1
)
Total
$
8,833
$
8,200
$
633
7.7
%
Quarter to Quarter Comparison
Total non-interest expense was $8,833,000 for the first quarter of 2024, an increase of $633,000 compared to the first quarter of 2023.
Salaries and benefits comprise the largest component of non-interest expense. QNB monitors, through the use of various surveys, the competitive salary and benefit information in its markets and makes adjustments when appropriate. Salaries and benefits expense increased $411,000, or 9.0%, to $4,974,000 when comparing the two quarters. Salary expense and related payroll taxes increased $178,000 to $4,145,000 during the first quarter of 2024 compared to the same period in 2023 due to pay increases and filling open positions. Medical and dental premiums, net of employee contributions, increased $180,000 when comparing the two quarters due to medical claims. Retirement and post-retirement costs increased $50,000.
Net occupancy and furniture and equipment expenses combined increased $138,000, or 10.0%, when comparing the first quarters of 2024 and 2023. This is due primarily to increased software maintenance expense. Marketing expense increased $63,000, or 31.0%, to $266,000 for the quarter ended March 31, 2024, due to timing of promotions and community support donations.
Third-party services are comprised of professional services, including legal, accounting, auditing and consulting services, as well as fees paid to outside vendors for support services of day-to-day operations. These support services include correspondent banking services, IT services, statement printing and mailing, investment security safekeeping and supply management services. Third party services expense increased $15,000. Telephone, postage and supplies expense decreased $41,000 primarily due to a reduction in postage and mailing expenses as there was an increase in the use of electronic delivery. State taxes decreased $24,000, or 19.4%, due to the timing of tax credits received for qualified charitable contributions. FDIC insurance premiums increased $170,000 due to an increase in the assessment rate.
Other non-interest expense decreased $99,000, or 10.1%, due to a $161,000 decrease in write-offs primarily due to fraud on customer accounts, partly offset by an increase in debit card expense of $53,000 and business development costs of $24,000.
INCOME TAXES
QNB utilizes an asset and liability approach for financial accounting and reporting of income taxes. As of March 31, 2024, QNB’s net deferred tax asset was $19,029,000. The primary components of deferred taxes are deferred tax assets of which $18,630,000 relates to investment securities fair value adjustments and $1,835,000 relates to the allowance for credit losses on loans, partly offset by a deferred tax liability on interest rate swap fair value adjustments of $933,000. As of December 31, 2023, QNB’s net deferred tax asset was $19,290,000 of which $17,692,000 is related to investment securities fair value adjustment and $1,859,000 relates to the allowance for credit losses on loans. The decrease in the balance of net deferred tax assets when comparing March 31, 2024 to December 31, 2023 of $261,000 is due to the unrealized gains on interest rate swaps contributing a reduction of $1,300,000, partly offset by a reduction in unrealized losses on available for sale securities contributing $938,000.
The realizability of deferred tax assets is dependent upon a variety of factors, including the generation of future taxable income, the existence of taxes paid and recoverable, the reversal of deferred tax liabilities and tax planning strategies. Based upon these and other factors, management believes it is more likely than not that QNB will realize the benefits of these remaining deferred tax assets.
Applicable income tax expense was $663,000 for the quarter ended March 31, 2024, compared to $1,123,000 for the quarter and March 31, 2023. The effective tax rate for the first quarter ended March 31, 2024 was 20.4% compared with 21.4% for the same period in 2023.
49
The decrease in the effective tax rate for the three months ended March 31, 2024 is due to the state income tax at the parent company and a lower proportion of tax-exempt net interest income to income before taxes for 2024 over 2023.
FINANCIAL CONDITION ANALYSIS
Financial service organizations are challenged to demonstrate they can generate sustainable and consistent earnings growth in a dynamic operating environment. Rate competition for quality loans is anticipated to continue through 2024. It is also anticipated that the rate competition for attracting and retaining deposits may increase in the remainder of 2024, which could result in a lower net interest margin and a decline in net interest income.
QNB’s primary business is accepting deposits and making loans to meet the credit needs of the communities it serves. Loans are the most significant component of earning assets and growth in loans to small businesses and residents of these communities has been a primary focus of QNB. Inherent within the lending function is the evaluation and acceptance of credit risk and interest rate risk. QNB manages credit risk associated with its lending activities through portfolio diversification, underwriting policies and procedures and loan monitoring practices. QNB is committed to make credit available to its customers.
Total assets at March 31, 2024 were $1,716,081,000 compared with $1,706,318,000 at December 31, 2023. Cash and cash equivalents decreased $11,694,000 from $62,657,000 at December 31, 2023 to $50,963,000 at March 31, 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 and changes in spread relationships in different sectors and for liquidity purposes. Management continually reviews strategies that will result in an increase in the yield or improvement in the structure of the investment portfolio, including monitoring credit and concentration risk in the portfolio. The available-for-sale securities portfolio decreased $8,586,000, due to maturities and prepayments of $11,338,000; this was partly offset by purchases of $2,967,000 and improvement in the fair value mark of $1,728,000.
Loans receivable increased $29,083,000 with commercial loans increasing $27,511,000 to $946,926,000 at March 31, 2024, compared with $919,415,000 at year-end 2023.
Deposits grew $47,475,000 from December 31, 2023 to March 31, 2024. Non-interest-bearing demand deposits increased $3,162,000, with balances of $188,260,000 at March 31, 2024 compared with $185,098,000 at year-end 2023. Interest-bearing demand balances, excluding municipal deposits, increased $4,877,000 to $334,829,000, with increases in both personal and business interest-bearing checking products. The $12,677,000 increase in money market accounts was primarily to a new premium money market product offered to both personal and business customers. The $8,642,000 decrease in savings was primarily due to declines in the E-Savings on-line product as some of these funds moved to higher-yield certificates of deposit or the new premium money market accounts. Total time deposits increased $42,496,000 from December 31, 2023 to March 31, 2024 as customers took advantage of higher-yielding time deposits, moving from lower-yielding products. Municipal deposit balances decreased $7,095,000, to $125,665,000, during the first three months of 2024. Municipal deposits can be volatile depending on the timing of deposits and withdrawals, and the cash flow needs of the school districts or municipalities. Municipal deposits increase as tax money is received from the local school districts during second and third quarters and it is anticipated that these funds will flow out for the subsequent twelve months as the schools use the funds for operations. These deposits provide an incremental funding source as they are used to fund loans as opposed to borrowing at a higher rate; this improves the net interest margin as it increases the spread related to the net interest margin.
Short-term borrowings decreased 41.5%, from $94,094,000 at December 31, 2023 to $55,088,000 at March 31, 2024. Commercial sweep accounts increased $10,994,000; these funds may be volatile based on businesses’ receipt and disbursement of funds and is offset by business non-interest-bearing demand accounts. During the first quarter of 2023, QNB borrowed $50,000,000 from the FRB under its Bank Term Funding Program and locked in a rate of 4.39%, there are no pre-payment penalties; these borrowing were paid off during the first quarter of 2024. During the three months ended March 31, 2023, QNB borrowed long-term debt from the FHLB of $20,000,000 to lock in a low yield.
LIQUIDITY
Liquidity represents an institution’s ability to generate cash or otherwise obtain funds at reasonable rates to satisfy demand for loans and deposit withdrawals. QNB attempts to manage its mix of cash and interest-bearing balances, Federal funds sold and investment securities to match the volatility, seasonality, interest sensitivity and growth trends of its loans and deposits. The Company manages its liquidity risk by measuring and monitoring its liquidity sources and estimated funding needs. Liquidity is provided from asset sources through repayments and maturities of loans and investment securities. The portfolio of investment securities classified as available for sale and QNB's policy of selling certain residential mortgage originations in the secondary market also provide sources of liquidity. Core deposits and cash management repurchase agreements have historically been the most significant funding source for QNB. These
50
deposits and repurchase agreements are generated from a base of consumers, businesses and public funds primarily located in the Company’s market area.
Additional sources of liquidity are provided by the Bank’s membership in the FHLB. At March 31, 2024 the Bank had a maximum borrowing availability with the FHLB of approximately $388,484,000, which is net of long-term borrowing outstanding of $20,000,000, a $283,000 letter of credit and accrued interest payable. The maximum borrowing depends upon qualifying collateral assets and the Bank’s asset quality and capital adequacy. In addition, the Bank maintains unsecured Federal funds lines with four correspondent banks totaling $86,000,000. At March 31, 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.
Liquid sources of funds, including cash, available-for-sale and equity investment securities, and loans held-for-sale have decreased $20,522,000 since December 31, 2023, totaling $538,776,000 at March 31, 2024. The reduction in the liquid sources of funds is primarily due to maturities and sales of available-for-sale securities. Growth in deposits provided cash flows of $47,475,000 and net proceeds from available-for-sale investment activities provided $8,371,000; combined, the proceeds enabled the net paydown on short-term borrowings of $39,006,000 and funding for the net growth in loans of $29,104,000. Management expects these liquid sources will be adequate to meet normal fluctuations in loan demand or deposit withdrawals. The investment portfolio is expected to continue to provide sufficient liquidity, as municipal bonds are called or mature and cash flow on mortgage-backed and CMO securities continues to be steady.
Approximately $251,927,000 and $289,935,000 of available-for-sale debt securities at March 31, 2024 and December 31, 2023, respectively, were pledged as collateral for repurchase agreements and deposits of public funds and the FRB short-term borrowing. The level of pledged securities corresponds with the municipal deposit and repurchase agreement balances.
QNB is a member of the Certificate of Deposit Account Registry Services (CDARS) program offered by the Promontory Interfinancial Network, LLC. CDARS is a funding and liquidity management tool used by banks to access funds and manage their balance sheet. It enables financial institutions to provide customers with full FDIC insurance on time deposits over $250,000 that are placed in the program. QNB also has available Insured Cash Sweep (ICS), another program through Promontory Interfinancial Network, LLC, which is a product similar to CDARS, but one that provides liquidity like a money market or savings account.
CAPITAL ADEQUACY
A strong capital position is fundamental to support continued growth and profitability and to serve the needs of depositors. QNB's shareholders' equity at March 31, 2024 was $93,686,000, or 5.46% of total assets, compared with shareholders' equity of $90,824,000, or 5.32% of total assets, at December 31, 2023. Shareholders’ equity at March 31, 2024 included a negative adjustment of $66,571,000 compared to a negative adjustment of $67,937,000 at December 31, 2023, related to net unrealized holding losses, net of taxes, on investment securities available-for-sale and gains on fair value hedges, net of tax. Without these adjustments, shareholders' equity to total assets would have been 8.99% and 8.95% at March 31, 2024 and December 31, 2023, respectively.
Average shareholders' equity and average total assets were $159,739,000 and $1,778,585,000 for the three months ended March 31, 2024, an increase of 3.4% and 3.5%, respectively, from the averages for the three months ended March 31, 2023. The ratio of average total equity to average total assets was 8.98% for the three months ended March 31, 2024 compared to 8.99% for the same period in 2023.
Retained earnings at March 31, 2024 were impacted by three months of net income totaling $2,594,000 offset by dividends declared and paid of $1,352,000 for the three-month period. 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 $217,000 to capital during the three months ended March 31, 2024.
The Board of Directors has authorized the repurchase of up to 200,000 shares of QNB common stock in open market or privately negotiated transactions. The repurchase authorization does not bear a termination date. As of March 31, 2024, 102,000 shares have been repurchased since the initial authorization at an average price of $24.93 and a total cost of $2,543,000.
QNB is subject to various regulatory capital requirements as issued by Federal regulatory authorities. Regulatory capital is defined in terms of Tier 1 capital and Tier 2 capital. Risk-based capital ratios are expressed as a percentage of risk-weighted assets. Risk-weighted assets are determined by assigning various weights to all assets and off-balance sheet arrangements, such as letters of credit and loan commitments, based on associated risk.
The required minimum Common equity Tier 1 capital to risk-weighted assets ratio is 4.5%, the required minimum ratio of Tier 1 capital to risk-weighted assets is 6.0%, the required minimum ratio of Total Capital to risk-weighted assets is 8.0%, and the required minimum
51
Tier 1 leverage ratio is 4.0%. A capital conservation buffer of 2.5% of risk-weighted assets also applies to avoid limitations on certain capital distributions.
The following table sets forth consolidated information for QNB:
March 31,
December 31,
Capital Analysis
2024
2023
Regulatory Capital
Shareholders' equity
$
93,686
$
90,824
Net unrealized securities losses, net of tax
66,571
67,937
Deferred tax assets on net operating loss
—
—
Disallowed intangible assets
(8
)
(8
)
Common equity tier I capital
160,249
158,753
Tier 1 capital
160,249
158,753
Allowable portion: Allowance for loan losses and reserve
for unfunded commitments
8,850
8,958
Total regulatory capital
$
169,099
$
167,711
Risk-weighted assets
$
1,314,292
$
1,281,418
Quarterly average assets for leverage capital purposes
$
1,778,577
$
1,779,619
March 31,
December 31,
Capital Ratios
2024
2023
Common equity tier I capital / risk-weighted assets
12.19
%
12.39
%
Tier 1 capital / risk-weighted assets
12.19
12.39
Total regulatory capital / risk-weighted assets
12.87
13.09
Tier 1 capital / average assets (leverage ratio)
9.01
8.90
At March 31, 2024, common equity Tier 1, Tier 1 capital, and total regulatory capital ratios slightly decreased since December 31, 2023. The Company remains well-capitalized by all applicable regulatory requirements as of March 31, 2024.
52
ITEM 3. QUANTITATIVE AND QUALITATI VE DISCLOSURE ABOUT MARKET RISK
MARKET RISK MANAGEMENT
Market risk reflects the risk of economic loss resulting from changes in interest rates and market prices. QNB’s primary market risk exposure is interest rate risk and liquidity risk. QNB’s liquidity position was discussed in a prior section.
QNB’s largest source of revenue is net interest income, which is subject to changes in market interest rates. Interest rate risk management seeks to minimize the effect of interest rate changes on net interest margins and interest rate spreads and to provide growth in net interest income through periods of changing interest rates. QNB’s Asset/Liability and Investment Management Committee (ALCO) is responsible for managing interest rate risk and for evaluating the impact of changing interest rate conditions on net interest income.
QNB uses computer simulation analysis to measure the sensitivity of projected earnings to changes in interest rates. Simulation considers current balance sheet volumes and the scheduled repricing dates, instrument level optionality, and maturities of assets and liabilities. It incorporates assumptions for growth, changes in the mix of assets and liabilities, prepayments, and average rates earned and paid. Based on this information, management uses the model to project net interest income under multiple interest rate scenarios.
A balance sheet is considered asset sensitive when its assets (investment securities and loans) reprice faster than its interest-bearing liabilities (deposits and borrowings). An asset sensitive balance sheet will produce relatively higher net interest income when interest rates rise and less net interest income when they decline. A balance sheet is considered liability sensitive when its liabilities (deposits and borrowings) reprice faster than its earning assets (investments securities and loans). A liability sensitive balance sheet will produce relatively less net interest income when interest rates rise and more net interest income when they decline. Based on our simulation analysis, management believes QNB’s interest sensitivity position at March 31, 2024 is asset sensitive. Management expects that market interest rates may increase over the next 12 months, based on the economic environment and policy of the Board of Governors of the Federal Reserve System.
The following table shows the estimated impact of changes in interest rates on net interest income as of March 31, 2024 and 2023 assuming instantaneous rate shocks, and consistent levels of assets and liabilities. Net interest income for the subsequent twelve months is projected to decrease when interest rates are higher than current rates.
Estimated Change in Net Interest Income
Changes in Interest rates
March 31,
(in basis points)
2024
2023
+300
7.43
%
-8.93
%
+200
4.96
%
-5.88
%
+100
2.52
%
-2.91
%
-100
-3.28
%
2.37
%
-200
-7.97
%
2.62
%
-300
-13.74
%
1.40
%
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 March 31, 2024, QNB had two derivatives designated as fair value hedging instruments, these interest rate swaps had a notional value of $300,000,000.
QNB is not subject to foreign currency exchange or commodity price risk.
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.