QNB Corp.

08/10/2026 | Press release | Distributed by Public on 08/10/2026 13:47

Quarterly Report for Quarter Ending June 30, 2026 (Form 10-Q)

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".

On April 1, 2026, QNB closed the acquisition of Victory Bancorp, Inc. ("Victory"), a highly complementary community banking franchise headquartered in Limerick, Pennsylvania, creating a franchise with nearly $2.4 billion in assets and expanding our presence deeper into Montgomery County. This strategic combination brings together two relationship-focused institutions with shared values, similar operating cultures, and strong community ties. Results for the three and six months of 2026 include three months of post-merger activity related to the acquisition of Victory.

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

The Company uses non-GAAP financial information in its analysis of performance. These non-GAAP ratios and calculations provide a better understanding of ongoing operations and comparability with prior period results by showing the effects of significant gains and charges in the periods presented. The Company believes that investors may use these non-GAAP measures to analyze the Company's financial performance without the impact of unusual items or events that may obscure trends. This non-GAAP data is not a substitute for GAAP results and should be considered in addition to results prepared in accordance with GAAP. Non-GAAP financial measures

include risks as companies might calculate these measures differently and persons might disagree as to the appropriateness of items included in these measures. Please see table under the RESULTS OF OPERATIONS - OVERVIEW section,"Impact of Merger-Related Costs--GAAP to Non-GAAP Measure Reconciliation."

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 2025 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, 2025, which is incorporated herein by reference. Some of these policies were impacted by the acquisition of Victory; the updates are details in Note 2 of this Form 10-Q. Some of these policies are particularly sensitive requiring significant judgments, estimates and assumptions.

RESULTS OF OPERATIONS - OVERVIEW

Results for the three and six months of 2026 include three months of post-merger activity related to the acquisition of Victory. QNB reported net income for the second quarter of 2026 of $3,015,000, or $0.60 per share on a diluted basis, compared to net income of $3,883,000, or $1.04 per share on a diluted basis, for the same period in 2025. For the three-month period of 2026, net income included after-tax merger-related cost of $2,227,000. The merger-related costs are significant one-time costs, related to the acquisition of Victory and are not normal recurring operating expenses. Adjusted diluted earnings per share excluding the impact of the merger-related cost for the three-month period of 2026 was $1.05.

QNB reported net income for the six months ended June 2026 of $5,780,000, or $1.32 per share on a diluted basis, compared to net income of $6,461,000, or $1.74 per share on a diluted basis, for the same period in 2025. For the six-month period of 2026, net income included after-tax merger-related cost of $3,249,000. Adjusted diluted earnings per share excluding the impact of the merger-related cost for the six-month period of 2026 was $2.06.


The following table shows calculated impact of the merger-related costs on net income and ratios, reconciling GAAP to non-GAAP measurements:

Impact of Merger-Related Costs--GAAP to Non-GAAP Measure Reconciliation

(Dollars in thousands, except per share data)

For the Three Months Ended June 30,

For the Six Months Ended June 30,

For the period:

2026

2025

Variance

2026

2025

Variance

Net income (GAAP)

$

3,015

$

3,883

$

(868

)

$

5,780

$

6,461

$

(681

)

Merger-related costs

3,084

-

3,084

3,972

-

3,972

Income tax benefit

(857

)

-

(857

)

(723

)

-

(723

)

Merger-related costs, net of tax

2,227

-

2,227

3,249

-

3,249

Net income excluding impact of merger-related costs (Non-GAAP)

$

5,242

$

3,883

$

1,359

$

9,029

$

6,461

$

2,568

Share and Per Share Data:

Basic:

EPS using Net income (GAAP)

$

0.61

$

1.05

$

(0.44

)

$

1.32

$

1.74

$

(0.42

)

EPS using Net income excluding impact of merger-related costs (Non-GAAP)

$

1.06

$

1.05

$

0.01

$

2.07

$

1.74

$

0.33

Fully-diluted:

EPS using Net income (GAAP)

$

0.60

$

1.04

$

(0.44

)

$

1.32

$

1.74

$

(0.42

)

EPS using Net income excluding impact of merger-related costs (Non-GAAP)

$

1.05

$

1.04

$

0.01

$

2.06

$

1.74

$

0.32

Average common shares outstanding:

Basic

4,968,665

3,710,878

4,368,001

3,705,396

Diluted

5,001,610

3,724,808

4,390,153

3,718,513

Selected Ratios:

Return on Average Assets (ROAA):

ROAA using Net income (GAAP)

0.50

%

0.83

%

-33 bp

0.54

%

0.69

%

-15 bp

ROAA using Net income excluding impact of merger-related costs (Non-GAAP)

0.88

%

0.83

%

5 bp

0.85

%

0.69

%

16 bp

Return on Average Equity (ROAE):

ROAE using Net income (GAAP)

6.65

%

14.25

%

-760 bp

7.38

%

12.02

%

-464 bp

ROAE using Net income excluding impact of merger-related costs (Non-GAAP)

11.56

%

14.25

%

-269 bp

11.54

%

12.02

%

-48 bp

Average Assets

$

2,395,752

$

1,887,138

$

2,154,199

$

1,880,127

AverageEquity

$

181,911

$

109,299

$

157,846

$

108,406

The Bank contributed $4,575,000 to net income for the three months ended June 30, 2026 compared to $4,679,000 for the same period 2025; and the holding company had a negative contribution of $1,560,000 to net income for the three months ended June 30, 2026 compared to a negative contribution of $796,000 for the same period of 2025. The operating performance of the Bank included three months of post-merger activity and improved for the quarter ended June 30, 2026, in comparison with the same period in 2025, due primarily to improvement in the interest margin causing a $6,072,000 increase in net interest income and a $499,000 increase in non-interest income; this was partly offset by an increase in non-interest expense of $6,377,000 of which $2,677,000 was due to

merger-related costs. The contribution from QNB Corp., which included three months of post-merger activity, for the quarter ended June 30, 2026, declined compared with the same period in 2025, primarily due to a decrease in net interest income of $373,000, related to the subordinated debt acquired in the acquisition, and an increase in non-interest expense of $509,000, primarily due to merger-related expenses of $407,000.

The Bank contributed $8,334,000 of net income for the six months ended June 30 2026 compared to $7,971,000 for the same period 2025; and the holding company had a negative contribution of $2,554,000 to net income for the six months ended June 30, 2026 compared to a negative contribution of $1,510,000 for the same period 2025. The improved results at the Bank were primarily due to improvement in the interest margin causing a $7,671,000 increase in net interest income and a $728,000 increase in non-interest income; this was partly offset by and an increase in non-interest expense of $7,877,000, of which $3,299,000 was related to merger-related costs. The change in contribution from QNB Corp. is primarily due to a decrease in net interest income of $400,000 and an increase in non-interest expense of $790,000, primarily due to merger-related expenses of $673,000.

Net income expressed as an annualized rate of return on average assets and average shareholders' equity was 0.50% and 6.65%, respectively, for the quarter ended June 30, 2026, compared with 0.83% and 14.25%, respectively, for the quarter ended June 30, 2025. Return on average assets and return on average shareholders' equity, excluding the impact of the merger-related cost, for the three-month period of 2026 was 0.88% and 11.56%, respectively. Net income expressed as an annualized rate of return on average assets and average shareholders' equity was 0.54% and 7.38%, respectively, for the six months ended June 30, 2026, compared with 0.69% and 12.02%, respectively, for the six months ended June 30, 2025. Return on average assets and return on average shareholders' equity, excluding the impact of the merger-related cost, for the six-month period of 2026 was 0.85% and 11.54%, respectively.

Total assets as of June 30, 2026 were $2,398,970,000, compared with $1,906,005,000 at December 31, 2025. Loans receivable at June 30, 2026 were $1,716,599,000; excluding the $408,379,000 in acquired loans, QNB recognized a $46,146,000, or 3.7%, increase from $1,262,074,000 at December 31, 2025. Total deposits of $2,067,151,000 at June 30, 2026 increased $15,475,000, excluding the $409,165,000 in deposits acquired, compared with total deposits of $1,642,511,000 at December 31, 2025.

Results for the three and six months ended June 30, 2026 include the following significant components:

•
Net interest income increased $5,699,000 to $18,351,000 and increased $7,271,000 to $31,460,000 for the three and six months ended June 30, 2026, respectively, and includes three months of post-merger activity related to the acquisition of Victory.
•
Net interest margin on a tax-equivalent basis increased 47 basis points for the quarter to 3.16% compared to 2.69% for the same period in 2025. Net interest margin on a tax-equivalent basis increased 40 basis points for the six months ended June 30, 2026 to 3.00% compared to 2.60% for the same period in 2025.
•
QNB recorded a $218,000 provision for credit losses on loans for the second quarter of 2026, compared with a $145,000 reversal of its provision for credit losses on loans for the second quarter of 2025. QNB recorded $521,000 in its provision for credit losses on loans for the six months ended June 30, 2026, compared with $406,000 for the same period in 2025.
•
Non-interest income increased $487,000, to $2,139,000 for the second quarter and $704,000, to $3,940,000 for the six months ended June 30, 2026 compared with the same periods in 2025. Excluding realized and unrealized gains on securities and swap termination loss, non-interest income increased $426,000 to $2,078,000 for the second quarter of 2026 compared to $1,652,000 for the same period in 2025; and increased $643,000, to $3,879,000 for the six months ended June 30, 2026 compared with $3,236,000 the same period in 2025.
•
Non-interest expense increased $6,874,000 to $16,436,000 for the second quarter of 2026 compared with the same period in 2025. Non-interest expense, excluding merger-related costs increased $3,790,000 to $13,352,000 for the second quarter of 2026 compared with the same period in 2025. Non-interest expense increased $1,769,000 to $11,138,000 for the second quarter of 2026 compared with the same period in 2025. Non-interest expense, excluding merger-related costs increased $4,671,000 to $23,602,000 for the six months ended June 30, 2026 compared with the same period in 2025. Non-interest expense includes three months of post-merger activity related to the acquisition of Victory.
•
Total non-performing loans, comprised of loans on non-accrual status, were $10,418,000, or 0.61% of loans receivable at June 30, 2026, compared to $8,793,000, or 0.70% of loans receivable at December 31, 2025. Net loan recoveries for the six months ended June 30, 2026 were $14,000, compared with net recoveries of $19,000 for the same period in 2025.

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- and six-month periods ended June 30, 2026 and 2025.

For the Three Months Ended June 30,

For the Six Months Ended June 30,

2026

2025

2026

2025

Total interest income

$

30,631

$

23,110

$

53,107

$

45,308

Total interest expense

12,280

10,458

21,647

21,119

Net interest income

18,351

12,652

31,460

24,189

Tax-equivalent adjustment

83

100

230

240

Net interest income (fully taxable-equivalent)

$

18,434

$

12,752

$

31,690

$

24,429

Net interest income is the primary source of operating income for QNB. Net interest income is interest income, dividends, fees on earning assets and the amortization and accretion of fair value premiums and discounts on acquired earnings assets, less interest expense incurred funding sources and the amortization and accretion of fair value premiums and discounts on acquired interest-bearing liabilities. 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.

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

For the Three Months Ended

June 30, 2026

June 30, 2025

Average

Average

Average

Average

Balance

Rate

Interest

Balance

Rate

Interest

Assets

Federal funds sold

$

1,163

3.63

%

$

11

$

-

-

%

$

-

Investment securities (AFS & Equity):

U.S. Treasury securities

20,812

3.68

191

21,032

4.24

223

U.S. Government agencies

75,972

1.18

224

75,963

1.18

224

State and municipal

104,927

2.35

617

105,090

2.88

756

Mortgage-backed and CMOs

318,255

1.95

1,551

354,349

2.46

2,184

Corporate debt securities and money market funds

67,798

5.90

1,000

64,694

6.38

1,031

Equity securities

103

-

-

-

-

-

Total investment securities

587,867

2.44

3,583

621,128

2.84

4,418

Loans:

Commercial real estate

1,276,622

6.31

20,097

863,096

5.94

12,775

Residential real estate

122,950

4.63

1,424

114,600

4.38

1,255

Home equity loans

102,997

6.13

1,575

70,666

6.41

1,130

Commercial and industrial

181,167

7.12

3,213

145,261

7.41

2,682

Consumer loans

5,328

7.59

101

3,355

7.70

65

Tax-exempt loans

21,242

5.31

281

19,347

4.23

205

Total loans, net of unearned income*

1,710,306

6.26

26,691

1,216,325

5.97

18,112

Other earning assets

45,439

4.05

429

61,355

4.45

680

Total earning assets

2,344,775

5.26

30,714

1,898,808

4.90

23,210

Cash and due from banks

28,030

13,806

Accumulated other comprehensive loss, net of tax

(45,720

)

(59,921

)

Allowance for credit losses on loans

(12,668

)

(9,376

)

Other assets

81,335

43,821

Total assets

$

2,395,752

$

1,887,138

Liabilities and Shareholders' Equity

Interest-bearing deposits:

Interest-bearing demand

$

483,798

1.19

%

1,438

$

376,735

0.94

%

888

Municipals

150,200

3.26

1,222

146,214

3.92

1,427

Money market

386,952

2.79

2,691

259,621

2.88

1,862

Savings

352,087

1.55

1,361

281,076

1.29

901

Time < $250

358,826

3.30

2,956

334,437

3.79

3,159

Time > $250

82,968

3.56

736

51,832

4.08

527

Total interest-bearing deposits

1,814,831

2.30

10,404

1,449,915

2.42

8,764

Short-term borrowings

69,006

3.46

596

70,942

3.90

689

Long-term debt

-

-

-

5,495

4.79

67

Subordinated debt

53,991

9.48

1,280

39,141

9.58

938

Total borrowings

122,997

6.12

1,876

115,578

5.88

1,694

Total interest-bearing liabilities

1,937,828

2.54

12,280

1,565,493

2.68

10,458

Non-interest-bearing deposits

259,935

198,075

Other liabilities

16,078

14,271

Shareholders' equity

181,911

109,299

Total liabilities and shareholders' equity

$

2,395,752

$

1,887,138

Net interest rate spread

2.72

%

2.22

%

Margin/net interest income

3.16

%

$

18,434

2.69

%

$

12,752

For the Six Months Ended June 30,

June 30, 2026

June 30, 2025

Average

Average

Average

Average

Balance

Rate

Interest

Balance

Rate

Interest

Assets

Federal funds sold

$

585

3.63

%

$

11

$

-

-

%

$

-

Investment securities (AFS & Equity):

U.S. Treasury securities

20,819

3.70

382

20,596

4.31

440

U.S. Government agencies

75,971

1.18

448

75,962

1.18

448

State and municipal

104,727

2.33

1,220

105,172

2.87

1,510

Mortgage-backed and CMOs

321,556

1.93

3,099

358,969

2.45

4,392

Corporate debt securities

69,230

5.86

2,028

63,128

6.62

2,089

Equity securities

52

-

-

-

-

-

Total investment securities

592,355

2.42

7,177

623,827

2.85

8,879

Loans:

Commercial real estate

1,094,783

6.18

33,541

860,363

5.82

24,844

Residential real estate

122,661

4.59

2,816

114,436

4.36

2,493

Home equity loans

89,839

6.00

2,674

69,327

6.41

2,204

Commercial and industrial

161,296

7.08

5,661

146,962

7.41

5,399

Consumer loans

4,137

7.70

158

3,400

7.69

130

Tax-exempt loans

20,444

5.09

516

19,073

4.19

397

Total loans, net of unearned income*

1,493,160

6.13

45,366

1,213,561

5.89

35,467

Other earning assets

41,293

3.82

783

54,536

4.44

1,202

Total earning assets

2,127,393

5.06

53,337

1,891,924

4.85

45,548

Cash and due from banks

20,505

13,517

Accumulated other comprehensive loss, net of tax

(45,094

)

(59,954

)

Allowance for credit losses on loans

(10,992

)

(9,059

)

Other assets

62,387

43,699

Total assets

$

2,154,199

$

1,880,127

Liabilities and Shareholders' Equity

Interest-bearing deposits:

Interest-bearing demand

$

441,756

1.08

%

2,369

$

378,504

0.98

%

1,832

Municipals

142,712

3.23

2,285

147,887

3.93

2,883

Money market

321,450

2.69

4,294

257,952

2.88

3,680

Savings

318,359

1.43

2,264

280,371

1.29

1,794

Time < $250

337,703

3.34

5,594

333,536

3.89

6,442

Time > $250

71,069

3.59

1,266

50,317

4.19

1,045

Total interest-bearing deposits

1,633,049

2.23

18,072

1,448,567

2.46

17,676

Short-term borrowings

76,249

3.59

1,358

59,300

3.90

1,145

Long-term debt

-

-

-

17,735

4.74

423

Subordinated debt

46,681

9.50

2,217

39,117

9.59

1,875

Total borrowings

122,930

5.86

3,575

116,152

5.98

3,443

Total interest-bearing liabilities

1,755,979

2.49

21,647

1,564,719

2.72

21,119

Non-interest-bearing deposits

224,958

192,067

Other liabilities

15,416

14,935

Shareholders' equity

157,846

108,406

Total liabilities and shareholders' equity

$

2,154,199

$

1,880,127

Net interest rate spread

2.57

%

2.13

%

Margin/net interest income

3.00

%

$

31,690

2.60

%

$

24,429

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 and six months ended June 30, 2026 and 2025.

Non-accrual loans are included in earning assets.

* Includes loans held-for-sale

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

For the Six Months Ended

June 30, 2026 compared

June 30, 2026 compared

to June 30, 2025

to June 30, 2025

Total

Due to change in:

Total

Due to change in:

Change

Volume

Rate

Change

Volume

Rate

Interest income:

Federal funds sold

$

11

$

11

$

-

$

11

$

11

$

-

Investment securities (AFS & Equity):

U.S. Treasury securities

(32

)

(3

)

(29

)

(58

)

5

(63

)

U.S. Government agencies

-

-

-

-

-

-

State and municipal

(139

)

(1

)

(138

)

(290

)

(7

)

(283

)

Mortgage-backed and CMOs

(633

)

(224

)

(409

)

(1,293

)

(458

)

(835

)

Corporate debt securities and money market funds

(31

)

49

(80

)

(61

)

202

(263

)

Equity securities

-

-

-

-

-

-

Total Investment securities (AFS & Equity)

(835

)

(179

)

(656

)

(1,702

)

(258

)

(1,444

)

Loans:

Commercial real estate

7,322

6,121

1,201

8,697

6,769

1,928

Residential real estate

169

92

77

323

179

144

Home equity loans

445

516

(71

)

470

651

(181

)

Commercial and industrial

531

663

(132

)

262

526

(264

)

Consumer loans

36

38

(2

)

28

28

-

Tax-exempt loans

76

19

57

119

28

91

Total Loans

8,579

7,449

1,130

9,899

8,181

1,718

Other earning assets

(251

)

(205

)

(46

)

(419

)

(292

)

(127

)

Total interest income

7,504

7,076

428

7,789

7,642

147

Interest expense:

Interest-bearing deposits:

Interest-bearing demand

550

252

298

537

306

231

Municipals

(205

)

39

(244

)

(598

)

(101

)

(497

)

Money market

829

913

(84

)

614

906

(292

)

Savings

460

228

232

470

243

227

Time < $250

(203

)

229

(432

)

(848

)

80

(928

)

Time > $250

209

316

(107

)

221

431

(210

)

Total interest-bearing deposits

1,640

1,977

(337

)

396

1,865

(1,469

)

Short-term borrowings

(93

)

(18

)

(75

)

213

328

(115

)

Long-term debt

(67

)

(67

)

-

(423

)

(423

)

-

Subordinated debt

342

356

(14

)

342

363

(21

)

Total borrowings

182

271

(89

)

132

268

(136

)

Total interest expense

1,822

2,248

(426

)

528

2,133

(1,605

)

Net interest income

$

5,682

$

4,828

$

854

$

7,261

$

5,509

$

1,752

Average earning assets and interest-bearing liabilities for the three and six months ended June 30, 2026 include the three-month impact of acquiring $434,318,000 in interest-earnings assets and $352,654,000 in interest-bearing liabilities which include the cancellation of

$3,000,0000 in subordinated notes owned by QNB and issued by Victory on the acquisition date. Additionally, total average assets, average liabilities and average equity for the three and six months ended June 30, 2026 include the three-month impact of the acquisition on non-earning assets of $37,735,000, non-interest bearing liabilities of $72,296,000 and equity of $47,103,000.

Net Interest Income and Net Interest Margin - Quarterly Comparison

Average earning assets for the second quarter of 2026 were $2,344,775,000, an increase of $445,967,000, or 23.5%, from the second quarter of 2025, with average loans increasing $493,981,000, or 40.6%, and average investment securities decreasing $33,261,000, or 5.4%, over the same period in 2025. Average loans as a percentage of average earning assets was 72.9% for the second quarter of 2026, compared to 64.1% for the second quarter of 2025. On the funding side, average deposits increased $426,776,000, or 25.9%, to $2,074,766,000 for the second quarter of 2026. Average short-term borrowed funds, which consisted primarily of average commercial repurchase agreements and FHLB borrowings, decreased $1,936,000 to $69,006,000 for the second quarter of 2026 compared to $70,942,000 for the same period in 2025. Subordinated debt increased $14,850,000, as a result of the Victory Merger, to $53,991,000.

The net interest margin for the second quarter of 2026 increased 47 basis points to 3.16% from 2.69% for the same period in 2025. Competition for quality loans and deposits in our local market continues to exert pressure on the net interest margin. Repricing strategies on loans and deposits have had a positive impact on the net interest margin.

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 $7,504,000, or 32.3%, to $30,714,000 for the second quarter of 2026; and total interest expense increased $1,822,000, or 17.4%, to $12,280,000.

The yield on earning assets on a tax-equivalent basis increased 36 basis points to 5.26% from 4.90% for the same period in 2025. The cost of interest-bearing liabilities declined 14 basis points to 2.54% for the second quarter of 2026, compared with 2.68% for the same period in 2025.

QNB acquired $3,000,0000 in federal funds from Victory; these funds matured in the second quarter of 2026.

Interest income on investment securities decreased $835,000 when comparing the second quarters of 2026 and 2025. The average yield on the investment portfolio was 2.44% for the second quarter of 2026 compared with 2.84% for the same period in 2025, a decrease of 40 basis points. Average securities for the three and six months ended June 30, 2026 include the three-month impact of acquiring $15,605,000 in securities from the acquisition and the cancellation of $3,000,000 subordinated note owned by QNB and issued by Victory.

The yield on U.S. Treasury securities was 3.68% for the second quarter of 2026 compared to 4.24% for the same period in 2025. The 56 basis-point decline in rate and the average balances decrease of $220,000 caused the decrease in interest income of $32,000. The average balances of U.S. Government agency securities increased $9,000 as the average rate remained unchanged at 1.18%.

Interest income on municipal securities, which are primarily tax-exempt, decreased $139,000 due to a 53 basis-point decrease in rate, and a $163,000 decrease in average balances. 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 decreased $633,000 and average balances decreased $36,094,000 and the yield decreased 51 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.

Interest income on corporate debt and mutual funds decreased $31,000 as average balances increased $3,104,000 and the average yield decreased 48 basis points.

Average loans the three and six months ended June 30, 2026 include the three-month impact of acquiring $408,379,000 in loans from the acquisition of Victory. Income on loans increased $8,579,000 to $26,691,000 when comparing the second quarters of 2026 and 2025, with a $493,981,000 increase in average balances contributing to an increase in interest income of $7,449,000 and a 29-basis point increase in yield contributing to a $1,130,000 increase in interest income.

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 $7,322,000 when comparing the second quarters of 2026 and

2025, primarily due to a $413,526,000 increase in average balances contributing to an increase in interest income of $6,121,000 and a 37-basis point increase in rate from 5.94% in 2025 to 6.31% contributing to an increase of $1,201,000 to interest income.

Income on commercial and industrial loans increased $531,000 when comparing the second quarters of 2026 and 2025. The average yield on these loans decreased 29 basis points to 7.12% resulting in a decrease in income of $132,000; this was offset by an average balances increased $35,906,000, to $181,167,000 for the second quarter of 2026 resulting in a $663,000 increase in interest income. Many of the loans in this category are indexed to the prime interest rate.

Tax-exempt loan income increased $76,000 for the second quarter of 2026 compared to the same period in 2025. Average balances increased $1,895,000 to $21,242,000 for the second quarter of 2026. The yield on municipal loans increased 108 basis points, to 5.31% for the second quarter of 2026, compared with the same period in 2025.

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 $169,000 when comparing the second quarter of 2026 to the same period in 2025. Average residential mortgage loan balances increased by $8,350,000, or 7.3%, to $122,950,000 for the second quarter of 2026 compared to the same period in 2025, which contributed a $92,000 increase in interest income. The average yield on the portfolio increased 25 basis points and contributed an increase of $77,000 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 2026 period by $32,331,000 to $102,997,000, contributing to a $516,000 increase in interest income; this was partly offset by an average yield decrease of 28 basis points causing a $71,000 decrease in interest income. The yield on the consumer portfolio decreased 11 basis points to 7.59% for the second quarter of 2026 and there was a $1,973,000 increase in average balances resulting in a net $36,000 increase in interest income.

Earning assets are funded by deposits and borrowed funds. Average interest-bearing deposits for the three and six months ended June 30, 2026 include the three-month impact of acquiring $338,004,000 from the acquisition of Victory. Average borrowings for the three and six months ended June 30, 2026 include the three-month impact of acquiring $14,650,000 in subordinated debt from the acquisition of Victory. Interest expense increased $1,822,000, when comparing the second quarter of 2026 to the same period in 2025. Interest expense on interest-bearing deposits increased $1,640,000 to $10,404,000 when comparing the second quarters of 2026 and 2025, with a net $364,916,000 increase in average balances contributing to a net increase in interest expense of $1,977,000 and a 12-basis point decrease in yield contributing to a $337,000 decrease in interest expense.

Average interest-bearing demand accounts increased $107,063,000 to $483,798,000 for the second quarter of 2026 and the average rate paid on these deposits increased 25 basis points; interest expense on interest-bearing demand accounts increased $550,000 to $1,438,000 for the same period. Average non-interest-bearing demand accounts increased $61,860,000 to $259,935,000 for the second quarter of 2026. Average money market accounts increased $127,331,000 to $386,952,000 for the second quarter of 2026 compared with the same period in 2025. Interest expense on money market accounts increased $829,000 to $2,691,000, and the average interest rate paid on money market accounts decreased nine basis points to 2.79% for the second quarter of 2026. 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 decreased $205,000 to $1,222,000 for the second quarter of 2026. The average interest rate paid on municipal interest-bearing demand accounts decreased 66 basis points to 3.26% for the second quarter of 2026 over the same quarter of 2025, and average balances increased $3,986,000 to $150,200,000. 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 increased $460,000 when comparing the second quarter of 2026 to the same quarter of 2025. The average interest rate paid on savings accounts increased 26 basis points to 1.55% for the second quarter of 2026 compared to 1.29% for the same period in 2025. Average savings balances increased $71,011,000 to $352,087,000 for the second quarter of 2026. QNB's online e-Savings product is the largest category of savings deposits, with average balances for the second quarter of 2026 of $216,625,000 compared to $208,239,000 in the same period of 2025. The average yield paid on these accounts was 1.70% for the both second quarters of 2026 and 2025. Other savings account average balances, increased $62,625,000 when comparing the second quarter of 2026 compared to the same period in 2025 and interest expense increased $423,000.

Interest expense on time deposits totaled $3,692,000 for the second quarter of 2026 compared to $3,686,000 in 2025. Average total time deposits increased $55,525,000 to $441,794,000 for the second quarter of 2026. 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.

Approximately $416,806,000, or 96%, of time deposits at June 30, 2026 will mature over the next 12 months. The average rate paid on these time deposits is approximately 3.34%. 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 and short-term FHLB borrowing. Interest expense on short-term borrowings decreased $93,000 for the second quarter of 2026 to $596,000 when compared to the same period in 2025. When comparing these same periods, average balances decreased $1,936,000 to $69,006,000 and average rate decreased 46 basis points to 3.45%.

Average long-term borrowings decreased $5,495,000 as short-term borrowing were used to payoff maturing long-term borrowings during the past year.

QNB Corp. issued $40,000,000 of subordinated debt in 2024 and acquired $17,650,000 of subordinated debt from Victory in the Victory Merger; $3,000,0000 of subordinated debt issued by Victory was owned by QNB and cancelled as of the merger date. The average carrying value net of deferred costs was $53,991,000 for the second quarter of 2026 compared to $39,141,000 for same period in 2025. The average yield decreased ten basis points from 9.58% to 9.48%.

Net Interest Income and Net Interest Margin - Six-Month Comparison

For the six-month period ended June 30, 2026 average earnings assets increased $235,469,000, or 12.4%, to $2,127,393,000, with average loans increasing 23.0%, average investment securities decreasing 5.0%, and average total deposits increasing $217,373,000, or 13.2%, to $1,858,007,000, compared to the same period in 2025. The net interest margin on a tax-equivalent basis was 3.00% for the six-month period ended June 30, 2026, a 40-basis point increase from the same period in 2025.

Total interest income on a tax-equivalent basis increased $7,789,000, or 17.1%, to $53,337,000, when comparing the six-month periods ended June 30, 2026 and June 30, 2025 due to an increase in volume and rate on loans. Interest income on loans increased $8,181,000 as a result of volume and increased $1,718,000 as a result of yields. The analysis of the six-month periods is similar to what was described in the quarterly analysis. The yield on earning assets increased from 4.85% to 5.06% for the six-month periods with the yield on loans up 24 basis points to 6.13%.

Total interest expense increased $528,000 for the six-month period ended June 30, 2026 compared with the same period in 2025 attributable to an increase in volume. Average interest-bearing liabilities increased $191,260,000 and the average rate paid on interest-bearing liabilities decreased 23 basis points to 2.49% for the six-month period ended June 30, 2026 versus the same period in 2025.

Average interest-bearing deposits increased $184,482,000 and the related interest expense increased $396,000 for the six-month period ended June 30, 2026 versus the same period in 2025. The average balance of total short-term borrowings increased $16,949,000 primarily due to an increase in FHLB borrowings of $19,667,000. Long-term borrowing average balance decreased $17,735,000 and interest expense decreased $423,000 due to maturity. Subordinated debt average balance increased $7,564,000 and interest expense increased $342,000 for the six-month period ended June 30, 2026 compared to the same period of 2025.



PROVISION FOR CREDIT LOSSES, ALLOWANCE FOR CREDIT LOSSES ON LOANS AND ALLOWANCE FOR CREDIT LOSSES ON UNUSED COMMITMENTS

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 recorded a $521,000 provision for credit losses on loans for the six months ended June 30, 2026, through the allowance for credit losses on loans, compared to a $406,000 provision for credit losses for the same period in 2025. QNB recorded a provision of $1,000 for the allowance for credit losses for unused commitments in the six months ended June 30, 2026 compared to a reversal in provision of $2,000 for the same period in 2025.

QNB recorded a $3,020,000 allowance for credit losses on loans and a $144,000 allowance for credit losses on unused commitments due to the Victory Merger.

QNB's allowance for credit losses on loans of $12,770,000 represents 0.74% of loans receivable at June 30, 2026 compared with an allowance for credit losses on loans of $9,215,000, or 0.73% of loans receivable, at December 31, 2025, and $9,169,000, or 0.75%, at June 30, 2025. Management believes the allowance for credit losses on loans at June 30, 2026 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 recoveries were $14,000 for the six months ended June 30, 2026 compared to net recoveries of $19,000 for the six months ended June 30, 2025. Charge-offs of $44,000 during the six months ended June 30, 2026 consisted of overdrafts of $26,000, a real estate loan secured by junior lien on 1-4 family property of $4,000 and other consumer and student loans of $14,000. Recoveries of approximately $58,000 during the six months ended June 30, 2026 consisted of $45,000 in repayments from borrowers of previously charged-off credits and overdrafts recoveries of $13,000.

Non-performing assets were $10,418,000 at June 30, 2026 compared to $8,793,000 as of December 31, 2025 and $8,947,000 at June 30, 2025. Total non-performing loans, which represent loans on non-accrual status and loans past due 90 days or more and still accruing interest, were 0.61% of loans receivable at June 30, 2026, 0.70% at December 31, 2025 and 0.73% of loans receivable at June 30, 2025. The increase was primarily due to two commercial and one retail customer. At June 30, 2026, $7,832,000, or approximately 75% of the loans classified as non-accrual, are current or past due less than 30 days. 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. Commercial loans classified as substandard or doubtful loans totaled $49,156,000 at June 30, 2026, compared with $39,219,000 at December 31, 2025, an increase of $9,937,000 which includes $6,475,000 of commercial real estate loans and $3,808,000 of commercial and industrial loans acquired.

QNB had no loans past due 90 days or more and still accruing interest at June 30, 2026, December 31, 2025, or June 30, 2025. Total loans 30 days or more past due, which includes non-accrual loans by actual number of days delinquent, represented 0.46% of loans receivable at June 30, 2026 compared with 0.14% at December 31, 2025, and 0.98% at June 30, 2025.

There was one loan modification to a borrower experiencing financial difficulty identified during the six months ended June 30, 2026. The loan continues to be reported as accruing. The loan was modified to interest only payments for three months and one month deferred payment. QNB had no other real estate owned or repossessed assets at June 30, 2026, December 31, 2025 or June 30, 2025.

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:

June 30,

December 31,

June 30,

2026

2025

2025

Non-accrual loans

$

10,418

$

8,793

$

8,947

Loans past due 90 days or more and still accruing interest

-

-

-

Total non-performing loans

10,418

8,793

8,947

Total non-performing assets

$

10,418

$

8,793

$

8,947

Total loans (excluding loans held-for-sale):

Average total loans (YTD)

$

1,492,696

$

1,225,178

$

1,213,173

Total loans

1,716,599

1,262,074

1,218,539

Allowance for credit losses on loans

12,770

9,215

9,169

Allowance for loan losses to:

Non-performing loans

122.58

%

104.80

%

102.48

%

Total loans (excluding held-for-sale)

0.74

%

0.73

%

0.75

%

Average total loans (excluding held-for-sale)

0.86

%

0.75

%

0.76

%

Non-performing loans / total loans (excluding held-for-sale)

0.61

%

0.70

%

0.73

%

Non-performing assets / total assets

0.43

%

0.46

%

0.47

%

An analysis of net loan charge-offs (recoveries) for the three and six months ended June 30, 2026 compared to the same periods in

2025 is as follows:

For the Three Months Ended June 30,

For the Six Months Ended June 30,

2026

2025

2026

2025

Net charge-offs (recoveries)

$

(1

)

$

(16

)

$

(14

)

$

(19

)

Net annualized charge-offs (recoveries) to:

Total loans

0.00

%

(0.01

)%

0.00

%

0.00

%

Average total loans excluding held-for-sale

0.00

%

(0.01

)%

0.00

%

0.00

%

Allowance for loan losses

(0.03

)%

(0.70

)%

(0.22

)%

(0.42

)%

At June 30, 2026 and December 31, 2025, the recorded investment in collateral dependent loans totaled $10,418,000 and $8,793,000 of which $10,151,000 and $1,704,000, respectively, required no specific allowance for loan loss. The recorded investment in collateral dependent loans requiring an allowance for loan losses was $267,000 and $7,089,000 at June 30, 2026 and December 31, 2025, respectively, and the related allowance for loan losses associated with these loans was $167,000 and $1,649,000, respectively. See Note 9 to the Notes to Consolidated Financial Statements for additional detail of collateral dependent loans.

NON-INTEREST INCOME

Total non-interest income for 2026 includes three months of impact from the acquisition of Victory.

Non-Interest Income Comparison

For the Three Months Ended June 30,

Change from prior year

For the Six Months Ended June 30,

Change from prior year

2026

2025

Amount

Percent

2026

2025

Amount

Percent

Fees for services to customers

$

658

$

485

$

173

35.7

%

$

1,171

$

932

$

239

25.6

%

ATM and debit card

811

724

87

12.0

1,552

1,380

172

12.5

Retail brokerage and advisory

148

140

8

5.7

351

281

70

24.9

Bank-owned life insurance

133

81

52

64.2

225

168

57

33.9

Merchant

81

82

(1

)

(1.2

)

163

157

6

3.8

Net gain on sale of securities

96

-

96

100.0

96

-

96

100.0

Net unrealized gain on equity securities

268

-

268

100.0

268

-

268

100.0

Net loss on interest-rate swap termination

(303

)

-

(303

)

(100.0

)

(303

)

-

(303

)

(100.0

)

Net gain on sale of loans

36

4

32

800.0

44

22

22

N/M

Other

211

136

75

55.1

373

296

77

26.0

Total

$

2,139

$

1,652

$

487

29.5

%

$

3,940

$

3,236

$

704

21.8

%

Quarter to Quarter Comparison

Total non-interest income was $2,139,000 for the second quarter of 2026 compared with $1,652,000 for the same period in 2025. The Bank completed the exchange offer to convert its Visa B-2 shares to B-3 and C shares; the Bank subsequently converted one-third of the Visa C shares to Visa A shares and recorded a $268,000 unrealized gain. Non-interest income for the three-months ended June 30, 2026 also included $96,000 of realized gains on the sales of investment securities and a $303,000 loss on the termination of an interest-rate swap acquired in the acquisition.

QNB originates residential mortgage loans for sale in the secondary market. Net gain on sale of loans was $36,000 for the second quarter of 2026 compared to a net gain $4,000 in the second quarter of 2025. The net gain or loss 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 and includes any lower-of-cost-market on the loans held-for-sale. Residential mortgage loans to be sold are identified at origination.

Fees for services to customers increased $173,000 for the quarter ended June, 2026, as overdraft fees increased $46,000 and other deposit-related fees increased $127,000.

QNB provides securities and advisory services under the name QNB Financial Services. Retail brokerage and advisory fees increased $8,000 for the second quarter of 2026 compared to the same period in 2025. Advisory fees increased $31,000 and transactional fees decreased $23,000 for the second quarter of 2026 compared with the same period in 2025.

ATM and debit card income increased $87,000 due to usage and merchant fees remained level for the second quarter of 2026 compared with the same period in 2025. Bank-owned life insurance income increased $52,000. Other non-interest income increased $75,000 primarily due to increases in letter of credit fees of $44,000, mortgage and other loan servicing fees of $7,000, and credit card income of $7,000.

Six-Month Comparison

Total non-interest income was $3,940,000 for the six months ended June 30, 2026 compared with $3,236,000 for the same period of 2025, an increase of $704,000, compared to the same period of 2025. There was a $268,000 gain related to the conversion of Visa shares, $96,000 of realized gains on the sales of investment securities and a $303,000 loss on the termination of an interest-rate swap as discussed in the three-month comparison.

Net gain on sale of loans was $44,000 for the six months ended June 30, 2026 compared to a net gain $22,000 for the same period of 2025. Fees for service to customers increased $239,000 for the six months ended June 30, 2026, as overdraft fees increased $97,000 and other deposit-related fees increased $142,000.

Retail brokerage and advisory fees increased $70,000 for the six months ended June 30, 2026 compared to the same period in 2025. Advisory fees increased $57,000 and transactional fees increased $13,000 for the six months ended June 30, 2026 compared with the same period in 2025.

ATM and debit card income increased $172,000 due to usage and merchant fees increased $6,000 for the six months ended June 30, 2026 compared with the same period in 2025. Other non-interest income increased $77,000, primarily due to increases in letter of credit fees of $44,000, title company income of $17,000 and credit card income of $13,000.

NON-INTEREST EXPENSE

Total non-interest expense for 2026 includes three months of impact from the acquisition of Victory.

Non-Interest Expense Comparison

For the Three Months Ended June 30,

Change from prior year

For the Six Months Ended June 30,

Change from prior year

2026

2025

Amount

Percent

2026

2025

Amount

Percent

Salaries and employee benefits

$

7,200

$

5,251

$

1,949

37.1

%

$

12,816

$

10,283

$

2,533

24.6

%

Net occupancy

767

546

221

40.5

1,452

1,160

292

25.2

Furniture and equipment

1,422

1,135

287

25.3

2,629

2,257

372

16.5

Marketing

242

250

(8

)

(3.2

)

600

439

161

36.7

Third-party services

1,193

788

405

51.4

2,007

1,450

557

38.4

Telephone, postage and supplies

150

120

30

25.0

273

244

29

11.9

State taxes

441

236

205

86.9

646

503

143

28.4

FDIC insurance premiums

302

269

33

12.3

494

543

(49

)

(9.0

)

Merger-related expenses

3,084

-

3,084

N/M

3,972

-

3,972

N/M

Other

1,635

967

668

69.1

2,685

2,052

633

30.8

Total

$

16,436

$

9,562

$

6,874

71.9

%

$

27,574

$

18,931

$

8,643

45.7

%

Quarter to Quarter Comparison

Total non-interest expense was $16,436,000 for the second quarter of 2026, an increase of $6,874,000 compared to the second quarter of 2025. For the three-month period of 2026, non-interest expense included merger-related cost of $3,084,000. Excluding merger-related costs, noninterest expense increased $3,790,000 for the second quarter of 2026, compared to the same period in 2025.

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 $1,949,000 to $7,200,000 when comparing the two quarters. Salary expense and related payroll taxes increased $1,570,000 to $6,017,000 during the second quarter of 2026 compared to the same period in 2025. Medical and dental premiums, net of employee contributions, increased $253,000 and retirement expense increased $121,000 when comparing the two quarters.

Net occupancy and furniture and equipment expenses combined increased $508,000 when comparing the second quarters of 2026 and 2025. This is due primarily to increased software maintenance expense. Marketing expense remained fairly flat.

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 $405,000 due to consulting costs. State taxes increased $205,000 due to the timing of tax credits received for qualified charitable contributions. FDIC insurance premiums increased $33,000.

Other non-interest expense increased $668,000 due to the amortization of the core deposit intangible related to the Victory acquisition of $332,000, and increase in director fees of $65,000, business development of $82,000, debit card expense of $50,000, bank service fees of $42,000, courier expense of $36,000, and make-whole agreement reserve related to the Visa share exchange of $23,000.

Six-Month Comparison

Total non-interest expense was $27,574,000 for the six months ended June 30, 2026, an increase of $8,643,000 compared to the same period of 2025. For the six-month period of 2026, non-interest expense included merger-related cost of $3,972,000. Excluding merger-related costs, noninterest expense increased $4,671,000 for the six months ended June 30, 2026, compared to the same period in 2025.

Salaries and benefits expense increased $2,533,000 to $12,816,000 when comparing the six months ended June 30, 2026 to the same period in 2025. Salary expense and related payroll taxes increased $2,031,000 to $10,822,000 during the six months ended June 30, 2026 compared to the same period in 2025. Medical and dental premiums, net of employee contributions, increased $365,000 and retirement expense increased $135,000 when comparing the six-month periods.

Net occupancy and furniture and equipment expenses combined increased $664,000 when comparing the six months ended June 30, 2026 to the same period in 2025. This is due primarily to increased software maintenance expense. Marketing expense increased $161,000 due public relations and advertising expense when comparing the six-month periods.

Third party services expense increased $557,000 due to consulting costs. State taxes increased $143,000 due to the timing of tax credits received for qualified charitable contributions. FDIC insurance premiums decreased $49,000 due to a decrease in the assessment rate.

Other non-interest expense increased $633,000, due to the reasons described above in the quarter-to-quarter comparison.

INCOME TAXES

QNB utilizes an asset and liability approach for financial accounting and reporting of income taxes. As of June 30, 2026, QNB's net deferred tax asset was $13,384,000. The primary components of deferred taxes are deferred tax assets of which $12,550,000 relates to investment securities fair value adjustments, $2,749,000 relates to the allowance for credit losses on loans and $974,000 related to a federal net operating loss related to the acquisition of Victory, partly offset by a deferred tax liability on the core deposit intangible, resulting from the acquisition of Victory, of $1,546,000, deferred loan costs of $609,000 and depreciation of $597,000. As of December 31, 2025, QNB's net deferred tax asset was $13,993,000 of which $12,747,000 is related to investment securities fair value adjustment and $1,984,000 related to the allowance for credit losses on loans, partly offset by a deferred tax liability on deferred loan costs of $581,000. The decrease in the balance of net deferred tax assets when comparing June 30, 2026 to December 31, 2025 was $609,000.

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 except for a $1,112,000 deferred tax asset related to a state net operating loss.

Applicable income tax expense was $817,000 for the quarter ended June 30, 2026, compared to $1,005,000 for the quarter ended June 30, 2025. The effective tax rate for the second quarter of 2026 was 21.3% compared with 20.6% for the same period in 2025. Applicable income tax expense was $1,524,000 for the six months ended June 30, 2026, compared to $1,629,000 for the same period in 2025. The effective tax rate for the six months ended June 30, 2026 was 20.9% compared with 20.1% for the same period in 2025. The increase in the tax rates for 2026 were due to non-taxable merger-related expenses.

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 2026. It is also anticipated that the rate competition for attracting and retaining deposits may increase in the remainder of 2026, 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 June 30, 2026 were $2,398,970,000 compared with $1,906,005,000 at December 31, 2025. QNB acquired $475,053,000 in assets due to the Victory Merger. Cash and cash equivalents increased $29,043,000 from $50,297,000 at December 31, 2025 to $79,340,000 at June 30, 2026; QNB acquired $20,550,000, net of cash paid for fractional shares due to the Victory Merger.

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 $25,852,000, due to maturities and prepayments of $68,094,000 and sales of $6,752,000; this was partly offset by purchases of $33,449,000; additionally, QNB acquired $12,605,000 in securities from Victory, which is net of the cancellation of $3,000,000 in subordinated notes issued by Victory and owned by QNB on the date on the merger.

Loans receivable increased $454,525,000; QNB acquired $408,379,000 in loans in the Victory Merger. Commercial loans increased $423,480,000, to $1,484,802,000 at June 30, 2026 compared to $1,061,322,000 at year-end 2025, and retail loans increased $31,075,000 to $232,264,000 at June 30, 2026, compared with $201,189,000 at year-end 2025.

Deposits grew $424,640,000 from December 31, 2025 to June 30, 2026; QNB acquired $409,165,000 in deposits in the Victory Merger. Non-interest-bearing demand deposits increased $76,163,000, with balances of $266,120,000 at June 30, 2026 compared with $189,957,000 at year-end 2025. Interest-bearing demand balances, excluding municipal deposits, increased $67,830,000 to $465,099,000, with increases in both business and retail interest-bearing checking products. Money market accounts increased $127,584,000, with increases in both personal and business customers. Savings increased $70,916,000 to $352,077,000 at June 30, 2026. Municipal deposit balances increased $24,213,000, to $161,798,000 from $137,585,000 at year-end. 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 6.4%, from $80,601,000 at December 31, 2025 to $75,428,000 at June 30, 2026. FHLB borrowings decreased $9,542,000. Commercial sweep accounts increased $4,369,000; these funds may be volatile based on businesses' receipt and disbursement of funds and are offset by business non-interest-bearing demand accounts.

Subordinated debt increased $14,750,000; QNB acquired subordinated debt of $14,650,00 in the Victory Merger, which is net of the cancellation of $3,000,000 of subordinated notes issued by Victory and owned by QNB at the time of the Victory Merger.

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 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 June 30, 2026, the Bank had a maximum remaining borrowing availability with the FHLB of approximately $434,069,000, which is net of short-term borrowing outstanding of $56,458,000 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 June 30, 2026, 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 increased $3,608,000 since December 31, 2025, totaling $596,981,000 at June 30, 2026. The increase in the liquid sources of funds is primarily due to an increase in cash, partly offset by decrease in investments. Cashflows from investments of $41,397,0000 provided funding for loan growth of $45,540,000. 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 continue to be steady.

Approximately $296,472,000 and $234,159,000 of available-for-sale debt securities at June 30, 2026 and December 31, 2025, 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 June 30, 2026 was $183,514,000, or 7.65% of total assets, compared with shareholders' equity of $129,563,000, or 6.80% of total assets, at December 31, 2025. Shareholders' equity at June 30, 2026 included a negative adjustment of $43,788,000 compared to a negative adjustment of $46,470,000 at December 31, 2025, related to net unrealized holding losses, net of taxes, on investment securities available-for-sale. Without these adjustments, shareholders' equity to total assets would have been 9.31% and 9.02% at June 30, 2026 and December 31, 2025, respectively.

Average shareholders' equity and average total assets, both impacted with three months post-merger activity, were $157,846,000 and $2,154,199,000 for the six months ended June 30, 2026, an increase of 45.6% and 14.6%, respectively, from the averages for the six months ended June 30, 2025. The ratio of average total equity to average total assets was 7.33% for the six months ended June 30, 2026 compared to 5.77% for the same period in 2025.

Retained earnings at June 30, 2026 were impacted by six months of net income totaling $5,780,000 offset by dividends declared and paid of $3,41,000 for the six-month period. Stock issued for the Victory Merger totaled $47,103,000. QNB offers a Dividend Reinvestment and Stock Purchase Plan (the "DRIP") to provide participants a convenient and economical method for investing cash dividends paid on the Company's common stock in additional shares. The DRIP also allows participants to make additional cash purchases of stock. Stock purchases under the DRIP contributed $396,000 to capital during the six months ended June 30, 2026. The exercise of stock options contributed $1,019,000 to capital during the six months ended June 30, 2026.

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 June 30, 2026, 102,000 shares have been repurchased since the initial authorization in 2008 at an average price of $24.93 and a total cost of $2,543,000. There were no shares repurchased during the six months ended June 30, 2026 and 2025.

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 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:

June 30,

December 31,

Capital Analysis

2026

2025

Regulatory Capital

Shareholders' equity

$

183,514

$

129,563

Net unrealized securities losses, net of tax

43,788

46,470

Deferred tax assets on net operating loss

(974

)

-

Disallowed intangible assets

(16,623

)

-

Common equity tier I capital

209,705

176,033

Tier 1 capital

209,705

176,033

Allowable portion:

Subordinated debt

48,850

40,000

Allowance for credit losses on loans and unfunded commitments

12,991

9,291

Total regulatory capital

$

271,546

$

225,324

Risk-weighted assets

$

1,899,158

$

1,420,934

Quarterly average assets for leverage capital purposes

$

2,423,875

$

1,951,115

June 30,

December 31,

Capital Ratios

2026

2025

Common equity tier I capital / risk-weighted assets

11.04

%

12.39

%

Tier 1 capital / risk-weighted assets

11.04

%

12.39

%

Total regulatory capital / risk-weighted assets

14.30

%

15.86

%

Tier 1 capital / average assets (leverage ratio)

8.65

%

9.02

%

The capital ratios at June 30, 2026 include the impact of the Victory Merger and three months of post merger activity. At June 30, 2026, all capital ratios decreased since December 31, 2025 primarily due to the apportionment of equity acquired, net of disallowed intangible assets, to risk-based assets acquired. The Company remains well-capitalized by all applicable regulatory requirements as of June 30, 2026.

QNB Corp. published this content on August 10, 2026, and is solely responsible for the information contained herein. Distributed via EDGAR on August 10, 2026 at 19:48 UTC. If you believe the information included in the content is inaccurate or outdated and requires editing or removal, please contact us at [email protected]