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Section 1: 10-Q (10-Q)

qnbc-10q_20200331.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended             March 31, 2020            

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from               to              

Commission file number 0-17706

 

QNB Corp.

(Exact Name of Registrant as Specified in Its Charter)

 

 

Pennsylvania

 

23-2318082

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

 

15 North Third Street, P.O. Box 9005 Quakertown, PA

 

18951-9005

(Address of Principal Executive Offices)

 

(Zip Code)

 

(215) 538-5600

Registrant's Telephone Number, Including Area Code

 

Not Applicable

Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report.

 

 

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

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange on which registered

Common Stock

 

QNBC

 

N/A

 

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

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

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

Large accelerated filer

 

Accelerated filer

Non-accelerated filer

 

Smaller Reporting Company

Emerging growth company

 

 

 

 

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

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

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

 

Class

 

Outstanding at May 1, 2020

Common Stock, par value $0.625

 

3,530,670

 

1


 

QNB CORP. AND SUBSIDIARY

FORM 10-Q

QUARTER ENDED MARCH 31, 2020

INDEX

 

 

 

PART I - FINANCIAL INFORMATION

 

 

 

 

 

 

 

ITEM 1.

 

CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

PAGE

 

 

 

 

 

 

 

Consolidated Balance Sheets at March 31, 2020 and December 31, 2019

 

3

 

 

 

 

 

 

 

Consolidated Statements of Income for the Three Months Ended March 31, 2020 and 2019

 

4

 

 

 

 

 

 

 

Consolidated Statements of Comprehensive Income (Loss) for the Three Months Ended March 31, 2020 and 2019

 

5

 

 

 

 

 

 

 

Consolidated Statement of Shareholders’ Equity for the Three Months Ended March 31, 2020 and 2019

 

6

 

 

 

 

 

 

 

Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2020 and 2019

 

7

 

 

 

 

 

 

 

Notes to Consolidated Financial Statements

 

8

 

 

 

 

 

ITEM 2.

 

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

36

 

 

 

 

 

ITEM 3.

 

QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

 

52

 

 

 

 

 

ITEM 4.

 

CONTROLS AND PROCEDURES

 

52

 

 

 

 

 

 

 

PART II - OTHER INFORMATION

 

 

 

 

 

 

 

ITEM 1.

 

LEGAL PROCEEDINGS

 

53

 

 

 

 

 

ITEM 1A.

 

RISK FACTORS

 

53

 

 

 

 

 

ITEM 2.

 

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

53

 

 

 

 

 

ITEM 3.

 

DEFAULTS UPON SENIOR SECURITIES

 

54

 

 

 

 

 

ITEM 4.

 

MINE SAFETY DISCLOSURES

 

54

 

 

 

 

 

ITEM 5.

 

OTHER INFORMATION

 

54

 

 

 

 

 

ITEM 6.

 

EXHIBITS

 

55

 

 

 

 

 

SIGNATURES

 

 

 

 

 

 

 

CERTIFICATIONS

 

 

 

 

 

2


QNB Corp. and Subsidiary

 

CONSOLIDATED BALANCE SHEETS

 

 

 

(in thousands, except share data)

 

 

 

(current period unaudited)

 

 

 

March 31, 2020

 

 

December 31, 2019

 

Assets

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

12,071

 

 

$

12,398

 

Interest-bearing deposits in banks

 

 

34,418

 

 

 

5,210

 

Total cash and cash equivalents

 

 

46,489

 

 

 

17,608

 

Investments:

 

 

 

 

 

 

 

 

Available-for-sale (amortized cost $321,188 and $349,385)

 

 

327,325

 

 

 

349,710

 

Equity securities (cost of $12,246 and $9,053)

 

 

9,417

 

 

 

9,164

 

Restricted investment in stocks

 

 

1,000

 

 

 

1,073

 

Loans held-for-sale

 

 

216

 

 

 

977

 

Loans receivable

 

 

821,283

 

 

 

820,616

 

Allowance for loan losses

 

 

(10,334

)

 

 

(9,887

)

Net loans

 

 

810,949

 

 

 

810,729

 

Bank-owned life insurance

 

 

11,559

 

 

 

11,490

 

Premises and equipment, net

 

 

16,417

 

 

 

15,608

 

Accrued interest receivable

 

 

3,023

 

 

 

2,828

 

Net deferred tax assets

 

 

1,007

 

 

 

1,441

 

Other assets

 

 

4,608

 

 

 

4,395

 

Total assets

 

$

1,232,010

 

 

$

1,225,023

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

Deposits

 

 

 

 

 

 

 

 

Demand, non-interest bearing

 

$

146,143

 

 

$

146,270

 

Interest-bearing demand

 

 

339,049

 

 

 

332,918

 

Money market

 

 

81,564

 

 

 

75,634

 

Savings

 

 

261,690

 

 

 

247,462

 

Time

 

 

115,936

 

 

 

120,917

 

Time of $100 or more

 

 

99,139

 

 

 

114,659

 

Total deposits

 

 

1,043,521

 

 

 

1,037,860

 

Short-term borrowings

 

 

43,265

 

 

 

55,931

 

Long-term debt

 

 

10,000

 

 

 

 

Accrued interest payable

 

 

507

 

 

 

909

 

Other liabilities

 

 

10,104

 

 

 

9,606

 

Total liabilities

 

 

1,107,397

 

 

 

1,104,306

 

 

 

 

 

 

 

 

 

 

Shareholders' Equity

 

 

 

 

 

 

 

 

Common stock, par value $0.625 per share;

 

 

 

 

 

 

 

 

authorized 10,000,000 shares; 3,695,239 shares and  3,684,336

 

 

 

 

 

 

 

 

shares issued; 3,530,670 and 3,519,767 shares outstanding

 

 

2,309

 

 

 

2,303

 

Surplus

 

 

21,537

 

 

 

21,261

 

Retained earnings

 

 

98,395

 

 

 

99,372

 

Accumulated other comprehensive gain, net of tax

 

 

4,848

 

 

 

257

 

Treasury stock, at cost; 164,569 shares

 

 

(2,476

)

 

 

(2,476

)

Total shareholders' equity

 

 

124,613

 

 

 

120,717

 

Total liabilities and shareholders' equity

 

$

1,232,010

 

 

$

1,225,023

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

3


QNB Corp. and Subsidiary

CONSOLIDATED STATEMENTS OF INCOME

 

(in thousands, except per share data - unaudited)

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended March 31,

 

 

 

2020

 

 

2019

 

Interest income

 

 

 

 

 

 

 

 

Interest and fees on loans

 

$

9,376

 

 

$

9,223

 

Interest and dividends on investment securities (Available-for-sale & Equity):

 

 

 

 

 

 

 

 

Taxable

 

 

1,565

 

 

 

1,614

 

Tax-exempt

 

 

350

 

 

 

426

 

Interest on interest-bearing balances and other interest income

 

 

40

 

 

 

26

 

Total interest income

 

 

11,331

 

 

 

11,289

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

 

 

 

 

 

 

Interest on deposits

 

 

 

 

 

 

 

 

Interest-bearing demand

 

 

580

 

 

 

693

 

Money market

 

 

147

 

 

 

285

 

Savings

 

 

368

 

 

 

408

 

Time

 

 

463

 

 

 

419

 

Time of $100,000 or more

 

 

501

 

 

 

458

 

Interest on short-term borrowings

 

 

92

 

 

 

190

 

Interest on long-term debt

 

 

17

 

 

 

 

Total interest expense

 

 

2,168

 

 

 

2,453

 

Net interest income

 

 

9,163

 

 

 

8,836

 

Provision for loan losses

 

 

500

 

 

 

225

 

Net interest income after provision for loan losses

 

 

8,663

 

 

 

8,611

 

 

 

 

 

 

 

 

 

 

Non-interest income

 

 

 

 

 

 

 

 

Net gain on sales of  investments available-for-sale and equity securities

 

 

 

 

 

6

 

Unrealized (loss) gain on investment equity securities

 

 

(2,940

)

 

 

976

 

Fees for services to customers

 

 

411

 

 

 

393

 

ATM and debit card

 

 

488

 

 

 

470

 

Retail brokerage and advisory

 

 

113

 

 

 

141

 

Bank-owned life insurance

 

 

68

 

 

 

68

 

Merchant

 

 

91

 

 

 

75

 

Net gain on sale of loans

 

 

81

 

 

 

21

 

Other

 

 

117

 

 

 

159

 

Total non-interest income

 

 

(1,571

)

 

 

2,309

 

 

 

 

 

 

 

 

 

 

Non-interest expense

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

4,072

 

 

 

3,781

 

Net occupancy

 

 

523

 

 

 

505

 

Furniture and equipment

 

 

675

 

 

 

557

 

Marketing

 

 

322

 

 

 

237

 

Third party services

 

 

454

 

 

 

440

 

Telephone, postage and supplies

 

 

195

 

 

 

199

 

State taxes

 

 

243

 

 

 

171

 

FDIC insurance premiums

 

 

137

 

 

 

130

 

Other

 

 

657

 

 

 

704

 

Total non-interest expense

 

 

7,278

 

 

 

6,724

 

Income before income taxes

 

 

(186

)

 

 

4,196

 

Provision for income taxes

 

 

(406

)

 

 

817

 

Net income

 

$

220

 

 

$

3,379

 

Earnings per share - basic

 

$

0.06

 

 

$

0.97

 

Earnings per share - diluted

 

$

0.06

 

 

$

0.97

 

Cash dividends per share

 

$

0.34

 

 

$

0.33

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

4


QNB Corp. and Subsidiary

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

 

 

 

(in thousands - unaudited)

 

 

 

2020

 

 

2019

 

For the Three Months Ended March 31,

 

Before

tax

amount

 

 

Tax

expense

(benefit)

 

 

Net of

tax

amount

 

 

Before

tax

amount

 

 

Tax

expense

(benefit)

 

 

Net of

tax

amount

 

Net (loss) income

 

$

(186

)

 

$

(406

)

 

$

220

 

 

$

4,196

 

 

$

817

 

 

$

3,379

 

Other comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net unrealized holding gains (losses) on available-for-sale securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized holding gains arising during the period

 

 

5,812

 

 

 

1,221

 

 

 

4,591

 

 

 

4,391

 

 

 

922

 

 

 

3,469

 

Reclassification adjustment for losses included in net income

 

 

 

 

 

 

 

 

 

 

 

39

 

 

 

8

 

 

 

31

 

Other comprehensive income

 

 

5,812

 

 

 

1,221

 

 

 

4,591

 

 

 

4,430

 

 

 

930

 

 

 

3,500

 

Total comprehensive income

 

$

5,626

 

 

$

815

 

 

$

4,811

 

 

$

8,626

 

 

$

1,747

 

 

$

6,879

 

 

Tax rate of 21% for 2020 and  2019

The accompanying notes are an integral part of the consolidated financial statements

5


QNB Corp. and Subsidiary

 

CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY

 

Three month ended March 31, 2020 and 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

Number of

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

 

 

(unaudited)

 

Shares

 

 

Common

 

 

 

 

 

 

Retained

 

 

Comprehensive

 

 

Treasury

 

 

 

 

 

(in thousands, except share and per share data)

 

Outstanding

 

 

Stock

 

 

Surplus

 

 

Earnings

 

 

Income (Loss)

 

 

Stock

 

 

Total

 

Balance, December 31, 2019

 

 

3,519,767

 

 

$

2,303

 

 

$

21,261

 

 

$

99,372

 

 

$

257

 

 

$

(2,476

)

 

$

120,717

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

220

 

 

 

 

 

 

 

 

 

220

 

Other comprehensive income, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4,591

 

 

 

 

 

 

4,591

 

Cash dividends declared ($0.34 per share)

 

 

 

 

 

 

 

 

 

 

 

 

(1,197

)

 

 

 

 

 

 

 

 

(1,197

)

Stock issued in connection with dividend

   reinvestment and stock purchase plan

 

 

7,782

 

 

 

4

 

 

 

216

 

 

 

 

 

 

 

 

 

 

 

 

220

 

Stock issued for options exercised

 

 

3,121

 

 

 

2

 

 

 

35

 

 

 

 

 

 

 

 

 

 

 

 

37

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

 

25

 

 

 

 

 

 

 

 

 

 

 

 

25

 

Balance, March 31, 2020

 

 

3,530,670

 

 

$

2,309

 

 

$

21,537

 

 

$

98,395

 

 

$

4,848

 

 

$

(2,476

)

 

$

124,613

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

Number of

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

 

 

(unaudited)

 

Shares

 

 

Common

 

 

 

 

 

 

Retained

 

 

Comprehensive

 

 

Treasury

 

 

 

 

 

(in thousands, except share and per share data)

 

Outstanding

 

 

Stock

 

 

Surplus

 

 

Earnings

 

 

Income (Loss)

 

 

Stock

 

 

Total

 

Balance, December 31, 2018

 

 

3,484,080

 

 

$

2,280

 

 

$

20,041

 

 

$

91,635

 

 

$

(7,132

)

 

$

(2,476

)

 

$

104,348

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

3,379

 

 

 

 

 

 

 

 

 

3,379

 

Other comprehensive loss, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,500

 

 

 

 

 

 

3,500

 

Cash dividends declared ($0.33 per share)

 

 

 

 

 

 

 

 

 

 

 

 

(1,151

)

 

 

 

 

 

 

 

 

(1,151

)

Stock issued in connection with dividend

   reinvestment and stock purchase plan

 

 

6,646

 

 

 

4

 

 

 

231

 

 

 

 

 

 

 

 

 

 

 

 

235

 

Stock issued for options exercised

 

 

3,209

 

 

 

2

 

 

 

20

 

 

 

 

 

 

 

 

 

 

 

 

22

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

 

27

 

 

 

 

 

 

 

 

 

 

 

 

27

 

Balance, March 31, 2019

 

 

3,493,935

 

 

$

2,286

 

 

$

20,319

 

 

$

93,863

 

 

$

(3,632

)

 

$

(2,476

)

 

$

110,360

 

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

 

6


QNB Corp. and Subsidiary

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

 

(in thousands, unaudited)

 

For the three months ended March 31,

 

2020

 

 

2019

 

Operating Activities

 

 

 

 

 

 

 

 

Net income

 

$

220

 

 

$

3,379

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

498

 

 

 

385

 

Provision for loan losses

 

 

500

 

 

 

225

 

Net gain on sales of debt and equity securities

 

 

 

 

 

(6

)

Net unrealized loss (gain) on equity securities

 

 

2,940

 

 

 

(976

)

Net gain on sale of loans

 

 

(81

)

 

 

(21

)

Proceeds from sales of residential mortgages held-for-sale

 

 

2,498

 

 

 

675

 

Origination of residential mortgages held-for-sale

 

 

(1,656

)

 

 

(654

)

Increase in cash surrender value of bank-owned life insurance

 

 

(68

)

 

 

(68

)

Stock-based compensation expense

 

 

25

 

 

 

27

 

Deferred income tax (benefit) provision

 

 

(787

)

 

 

511

 

Net increase in income taxes payable

 

 

380

 

 

 

279

 

Net increase in accrued interest receivable

 

 

(196

)

 

 

(1,360

)

Amortization of mortgage servicing rights and change in valuation allowance

 

 

21

 

 

 

11

 

Net amortization of premiums and discounts on investment securities

 

 

412

 

 

 

345

 

Net (decrease) increase in accrued interest payable

 

 

(402

)

 

 

1

 

Operating lease payments

 

 

(161

)

 

 

(133

)

Decrease (increase) in other assets

 

 

668

 

 

 

(826

)

Decrease in other liabilities

 

 

(2,714

)

 

 

(490

)

Net cash provided by operating activities

 

 

2,097

 

 

 

1,304

 

Investing Activities

 

 

 

 

 

 

 

 

Proceeds from payments, maturities and calls of investments available-for-sale

 

 

54,977

 

 

 

8,541

 

Proceeds from the sale of investments available-for-sale

 

 

5,975

 

 

 

11,192

 

Proceeds from the sale of equity securities

 

 

 

 

 

358

 

Purchases of investments available-for-sale

 

 

(32,167

)

 

 

(17,898

)

Purchases of equity securities

 

 

(3,193

)

 

 

(398

)

Proceeds from redemption of investment in restricted stock

 

 

1,495

 

 

 

2,063

 

Purchases of restricted stock

 

 

(1,422

)

 

 

(2,504

)

Net increase in loans

 

 

(720

)

 

 

(19,124

)

Net purchases of premises and equipment

 

 

(216

)

 

 

(431

)

Net cash provided (used) in investing activities

 

 

24,729

 

 

 

(18,201

)

Financing Activities

 

 

 

 

 

 

 

 

Net (decrease) increase in non-interest bearing deposits

 

 

(127

)

 

 

11,355

 

Net increase in interest-bearing deposits

 

 

5,788

 

 

 

7,661

 

Net decrease in short-term borrowings

 

 

(12,666

)

 

 

(975

)

Increase in long-term debt

 

 

10,000

 

 

 

 

Cash dividends paid, net of reinvestment

 

 

(1,054

)

 

 

(1,015

)

Proceeds from issuance of common stock

 

 

114

 

 

 

121

 

Net cash provided by financing activities

 

 

2,055

 

 

 

17,147

 

Increase (decrease) in cash and cash equivalents

 

 

28,881

 

 

 

250

 

Cash and cash equivalents at beginning of year

 

 

17,608

 

 

 

13,458

 

Cash and cash equivalents at end of period

 

$

46,489

 

 

$

13,708

 

Supplemental Cash Flow Disclosures

 

 

 

 

 

 

 

 

Interest paid

 

$

2,570

 

 

$

2,453

 

Net income taxes paid

 

 

 

 

 

28

 

Non-cash transactions:

 

 

 

 

 

 

 

 

Unsettled trades to purchase securities

 

 

(1,000

)

 

 

(2,238

)

Unsettled trades to sell securities

 

 

 

 

 

4,303

 

Right-of-use assets obtained in exchange for new operating lease liabilities

 

 

1,086

 

 

 

 

 

The accompanying notes are an integral part of the consolidated financial statements

 

 

 

7


QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

1. BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements include the accounts of QNB Corp. and its wholly-owned subsidiary, QNB Bank (the “Bank”). The consolidated entity is referred to herein as “QNB” or the “Company”. All significant intercompany accounts and transactions are eliminated in the consolidated financial statements.

These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in QNB's 2019 Annual Report incorporated in the Form 10-K. Operating results for the three-month period ended March 31, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020.

The unaudited consolidated financial statements reflect all adjustments which, in the opinion of management, are necessary for a fair presentation of the results of operations for the period and are of a normal and recurring nature.

Tabular information, other than share and per share data, is presented in thousands of dollars.

In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities at the dates of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from such estimates.

QNB has evaluated events and transactions occurring subsequent to the balance sheet date of March 31, 2020 for items that should potentially be recognized or disclosed in these consolidated financial statements.

Subsequent Events

On March 11, 2020, the disease caused by the coronavirus was declared a pandemic by the World Health Organization (the “COVID-19 Pandemic”).   QNB, its employees, customers and shareholders are being impacted by the COVID-19 Pandemic.  QNB immediately activated portions of its business continuity program to prepare for possible alternate work arrangements and loss of staff due to illness.  QNB has provided several solutions to maintain the health and safety of its employees, customers and shareholders.   Nine branches are servicing customers primarily via drive-up window; customers may also make an appointment for in-branch service.  Drive-ups are operating under normal or expanded hours.  Night Drops remain available 24/7.  Three of QNB’s twelve offices do not offer drive-up service.  Our Quakertown Commons Office in the GIANT Food Store is temporarily closed. Our Allentown and Warminster Offices remain available for restricted access (one customer at a time) during normal business hours.  Because banking was designated an essential service by Governor Wolf, access to safe deposit boxes or to conduct any other in-person transaction can be arranged by appointment only.   All visitors to any QNB office will be required to wear face masks upon entering the building, in accordance with the state mandates. All QNB employees are required to wear face masks when working on company premises.  Employees with remote access are strongly encouraged to work from home.  QNB has not incurred any significant disruptions to its business continuity.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act was signed into law.  As permitted under Section 4013 of the CARES Act, QNB continues to provide customers experiencing financial hardship caused by the COVID-19 Pandemic, solutions to help them through this difficult period.  Upon requests from customers, QNB has provided: payment deferment for mortgage and consumer loans with no late fee during the deferment period; has granted foreclosure and motor vehicle repossession reprieve; and will not adversely impact credit reporting for customers who were granted relief on mortgage or consumer loans.  None of these modifications are considered troubled-debt restructuring as the customers were not experiencing financial difficulty prior to COVID-19 Pandemic.  As of May 5, 2020, QNB has granted modifications to approximately 18% of the March 31, 2020 commercial portfolio and granted modifications to approximately 3% of the March 31, 2020 retail portfolio,  related to the COVID-19 Pandemic.

As provided under the CARES Act, the U.S. Small Business Administration (“SBA”) and Treasury have implemented the Paycheck Protection Program (“PPP”) which is designed to assist small businesses and their employees during this crisis. This program provides small businesses with payroll assistance in the form of a 100% guaranteed loan from SBA. Eligible borrowers can receive up to 2.5 times their monthly average payroll expenses for the prior year.  Congress originally approved $349 billion for this program as part of the CARES Act. The first round of funding was quickly exhausted by April 16, 2020 and Congress worked to provide an additional $310 billion in funding which was approved on April 23, 2020.  The SBA reopened its portal to begin accepting PPP loans for approval on Monday, April 27, 2020.  As of May 5, 2020, under the first and second rounds of SBA funding, QNB closed 412 loans

8

 


QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

totaling $71,941,000.   QNB continues to process new applications.  Funds are primarily being transferred into the borrowers’ deposit  accounts and disbursement on these PPP loan proceeds are being funded by cash held at the Federal Reserve and proceeds from calls and payments of investment securities.  QNB has ample resources to cover future disbursements through short-term Federal Home Loan Bank (“FHLB”) advances and participation in the Federal Reserve’s Paycheck Protection Program Liquidity Facility (“PPPLF”), if necessary.

The full impact of the COVID-19 Pandemic is unknown and rapidly evolving.  Uncertainties exist related to the duration of the COVID-19 Pandemic and its potential effects on QNB’s customers and prospects, including impacts on national and local economies, unemployment, maintaining  a competent workforce, and disruptions in the supply chain.   There are no assurances as to how the COVID-19 Pandemic might affect QNB’s loan, investment and deposit portfolios.  

 

2. RECENT ACCOUNTING PRONOUNCEMENTS 

On June 16, 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326) (CECL). The new guidance requires organizations to measure all expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts.

To that end, the new guidance:

 

Eliminates the probable initial recognition threshold in current U.S. generally accepted accounting principles (“U.S. GAAP”) and, instead, reflects an organization’s current estimate of all expected credit losses over the contractual term of its financial assets

 

Broadens the information an entity can consider when measuring credit losses to include forward-looking information

 

Increases usefulness of the financial statements by requiring timely inclusion of forecasted information in forming expectations of credit losses

 

Increases comparability of purchased financial assets with credit deterioration (PCD assets) with other purchased assets that do not have credit deterioration as well as originated assets because credit losses that are expected will be recorded through an allowance for credit losses for all assets

 

Increases users’ understanding of underwriting standards and credit quality trends by requiring additional information about credit quality indicators by year of origination (vintage)

 

For available-for-sale debt securities, aligns the income statement recognition of credit losses with the reporting period in which changes occur by recording credit losses (and subsequent changes in credit losses) through an allowance rather than a write down

The new guidance affects organizations that hold financial assets and net investments in leases that are not accounted for at fair value with changes in fair value reported in net income.  The new guidance affects loans, debt securities, trade receivables, net investments in leases, off-balance-sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash.

On October 16, 2019, FASB adopted its August 15, 2019 proposal to delay the effective dates for certain smaller reporting companies for the implementation CECL. For public business entities that are U.S. Securities and Exchange Commission (SEC) filers, the new guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, except for smaller reporting companies, whose effective date is effective for fiscal years, and interim periods with those fiscal years, beginning after December 15, 2022. QNB continues to evaluate the impact of this new standard on its consolidated financial statements and currently anticipates a material change to its allowance for loan losses upon the eventual implementation of CECL.

On August 28, 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework — Changes to the Disclosure Requirements for Fair Value Measurement. This ASU changes the fair value measurement disclosure requirements of ASC 820. The amendments in this ASU are the result of a broader disclosure project called FASB Concepts Statement, Conceptual Framework for Financial Reporting — Chapter 8: Notes to Financial Statements, which the FASB finalized on August 28, 2018. The FASB used the guidance in the Concepts Statement to improve the effectiveness of ASC 820’s disclosure requirements. New disclosure requirements include: 1) Changes in unrealized gains or losses included in other comprehensive income (OCI) for recurring Level 3 fair value measurements held at the end of the reporting period; and 2) Explicit requirement to disclose the range and

9


QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. Disclosures eliminated include: 1) Amount of and reasons for transfers between Level 1 and Level 2; 2) Valuation processes for Level 3 fair value measurements; and 3) Policy for timing of transfers between levels of the fair value hierarchy. The ASU was effective for all entities for fiscal years beginning after December 15, 2019, including interim periods therein. The adoption of this ASU had no material impact on QNB.  

 

 

3. STOCK-BASED COMPENSATION AND SHAREHOLDERS’ EQUITY

QNB sponsors stock-based compensation plans, administered by a Board committee (the Committee), under which both qualified and non-qualified stock options may be granted periodically to certain employees. 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.

Stock-based compensation expense was $25,000 and $27,000 for the three months ended March 31, 2020 and 2019, respectively. As of March 31, 2020, there was approximately $152,000 of unrecognized compensation cost related to unvested share-based compensation award grants that is expected to be recognized over the next 35 months.

Options are granted to certain employees at prices equal to the market value of the stock on the date the options are granted. The 2005 Plan authorized the issuance of 200,000 shares. The time period during which any option is exercisable under the 2005 Plan is determined by the Committee but shall not commence before the expiration of nine months after the date of grant or continue beyond the expiration of five years after the date the option is awarded. The granted options vest after a three-year period. As of March 31, 2020, there were 184,200 options granted, 65,850 options forfeited, 118,350 options exercised, and no options outstanding under this Plan. The 2005 Plan expired on March 15, 2015.

The 2015 Plan authorizes the issuance of 300,000 shares. The terms of the 2015 Plan are identical to the 2005 Plan. There were 123,200 options granted, 2,600 options forfeited, 1,800 options exercised and 118,800 options outstanding under the 2015 Plan as of March 31, 2020. The 2015 Plan expires on February 24, 2025.  

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 estimated 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 assumptions.

The following assumptions were used in the option pricing model in determining the fair value of options granted during the period:

 

For the Three Months Ended March 31,

 

2020

 

 

2019

 

Risk free interest rate

 

 

1.52

%

 

 

2.52

%

Dividend yield

 

 

3.60

%

 

 

3.36

%

Volatility

 

 

13.46

%

 

 

16.44

%

Expected life (years)

 

 

4.03

 

 

 

4.17

 

 

The risk-free interest rate was selected based upon yields of U.S. Treasury securities with a term approximating the expected life of the option being valued. Historical information was the basis for the selection of the expected dividend yield, expected volatility and expected lives of the options.

The fair market value of options granted in the three months ended March 31, 2020 and 2019 was $2.42 and $3.96, respectively.

10


QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

Stock option activity during the three months ended March 31, 2020 and 2019 is as follows:

 

 

Number

of options

 

 

Weighted

average

exercise

price

 

 

Weighted

average

remaining

contractual term

(in years)

 

 

Aggregate

intrinsic value

 

Outstanding at December 31, 2019