10-Q

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                               June 30, 2013                                                                                            

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)
Registrant's Telephone Number, Including Area Code	(215) 538-5600

Not Applicable     

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

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes _✔No

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

Large accelerated filer ____                         Accelerated filer         

Non-accelerated filer ____                           Smaller Reporting Company✔

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 July 31, 2013
Common Stock, par value $0.625	3,253,559

1

QNB CORP. AND SUBSIDIARY

FORM 10-Q

QUARTER ENDED JUNE 30, 2013

INDEX

PART I - FINANCIAL INFORMATION

 

ITEM 1.	CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)	PAGE
	Consolidated Balance Sheets at June 30, 2013 and December 31, 2012	3
	Consolidated Statements of Income for the Three and Six Months Ended June 30, 2013 and 2012	4
	Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2013 and 2012	5
	Consolidated Statement of Shareholders’ Equity for the Six Months Ended June 30, 2013	6
	Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2013 and 2012	7
	Notes to Consolidated Financial Statements	8
ITEM 2.	MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	42
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK	71
ITEM 4.	CONTROLS AND PROCEDURES	71
PART II - OTHER INFORMATION
ITEM 1.	LEGAL PROCEEDINGS	72
ITEM 1A.	RISK FACTORS	72
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	72
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	72
ITEM 4.	MINE SAFETY DISCLOSURES	72
ITEM 5.	OTHER INFORMATION	72
ITEM 6.	EXHIBITS	73
SIGNATURES
CERTIFICATIONS

2

QNB Corp. and Subsidiary

CONSOLIDATED BALANCE SHEETS

 

	(in thousands, except share data) (unaudited)
	June 30, 2013			December 31, 2012
Assets
Cash and due from banks	$	11,940		$	14,859
Interest-bearing deposits in banks		3,957			594
Total cash and cash equivalents		15,897			15,453
Investment securities
Available-for-sale (amortized cost $383,419 and $394,750)		380,364			401,502
Held-to-maturity (fair value $163 and $166)		146			146
Restricted investment in bank stocks		1,837			2,244
Loans held-for-sale		1,328			1,616
Loans receivable		489,215			477,733
Allowance for loan losses		(9,431	)		(9,772	)
Net loans		479,784			467,961
Bank-owned life insurance		10,226			10,074
Premises and equipment, net		9,600			8,973
Accrued interest receivable		2,981			2,803
Other assets		8,666			9,102
Total assets	$	910,829		$	919,874
Liabilities
Deposits
Demand, non-interest bearing	$	74,682		$	73,685
Interest-bearing demand		197,738			191,335
Money market		65,810			76,047
Savings		204,510			191,337
Time		162,082			173,889
Time of $100,000 or more		91,091			95,345
Total deposits		795,913			801,638
Short-term borrowings		32,851			32,488
Long-term debt		5,282			5,287
Accrued interest payable		407			487
Other liabilities		2,140			2,351
Total liabilities		836,593			842,251
Shareholders' Equity
Common stock, par value $0.625 per share; authorized 10,000,000 shares; 3,418,128 shares and 3,392,572 shares issued; 3,253,559 and 3,228,003 shares outstanding		2,136			2,121
Surplus		13,304			12,787
Retained earnings		63,288			60,735
Accumulated other comprehensive (loss) income, net of tax		(2,016	)		4,456
Treasury stock, at cost; 164,569 shares		(2,476	)		(2,476	)
Total shareholders' equity		74,236			77,623
Total liabilities and shareholders' equity	$	910,829		$	919,874

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

3

QNB Corp. and Subsidiary

CONSOLIDATED STATEMENTS OF INCOME

	(in thousands, except share data - unaudited)
	Three Months Ended June 30,					Six Months Ended June 30,
	2013			2012		2013			2012
Interest income
Interest and fees on loans	$	5,594		$	6,163	$	11,170		$	12,441
Interest and dividends on investment securities:
Taxable		1,351			1,558		2,745			3,200
Tax-exempt		672			693		1,371			1,397
Interest on interest-bearing balances and other interest income		7			10		14			19
Total interest income		7,624			8,424		15,300			17,057
Interest expense
Interest on deposits
Interest-bearing demand		156			159		302			326
Money market		35			66		73			137
Savings		202			315		426			630
Time		494			612		1,015			1,241
Time of $100,000 or more		311			375		636			749
Interest on short-term borrowings		27			26		53			53
Interest on long-term debt		63			95		126			339
Total interest expense		1,288			1,648		2,631			3,475
Net interest income		6,336			6,776		12,669			13,582
Provision for loan losses		100			-		100			300
Net interest income after provision for loan losses		6,236			6,776		12,569			13,282
Non-interest income
Total other-than-temporary impairment loss on investment securities		(43	)		-		(43	)		-
Less: Portion of loss recognized in other comprehensive income (before taxes)		-			-		-			-
Net other-than temporary impairment losses on investment securities		(43	)		-		(43	)		-
Net gain on sale of investment securities		136			141		559			530
Net gain on investment securities		93			141		516			530
Fees for services to customers		369			345		735			684
ATM and debit card		378			367		730			731
Bank-owned life insurance		75			78		149			156
Merchant Income		101			101		182			186
Net gain on sale of loans		98			231		323			458
Other		125			63		352			147
Total non-interest income		1,239			1,326		2,987			2,892
Non-interest expense
Salaries and employee benefits		2,673			2,548		5,232			5,174
Net occupancy		415			397		851			821
Furniture and equipment		417			373		830			703
Marketing		251			256		490			457
Third party services		386			365		760			704
Telephone, postage and supplies		159			156		340			306
State taxes		173			167		345			327
FDIC insurance premiums		183			162		353			342
Other		434			404		830			845
Total non-interest expense		5,091			4,828		10,031			9,679
Income before income taxes		2,384			3,274		5,525			6,495
Provision for income taxes		490			769		1,223			1,519
Net income	$	1,894		$	2,505	$	4,302		$	4,976
Earnings per share - basic	$	0.58		$	0.79	$	1.33		$	1.56
Earnings per share - diltued	$	0.58		$	0.78	$	1.32		$	1.55
Cash dividends per share	$	0.27		$	0.26	$	0.54		$	0.52

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

4

QNB Corp. and Subsidiary

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

	(in thousands - unaudited)
Three months ended June 30,	2013									2012
	Before tax amount			Tax expense (benefit)			Net of tax amount			Before tax amount			Tax expense (benefit)			Net of tax amount
Net income	$	2,384		$	490		$	1,894		$	3,274		$	769		$	2,505
Other comprehensive income:
Net unrealized holding gains on securities:
Unrealized holding (losses) gains arising during the period		(8,231	)		(2,799	)		(5,432	)		396			135			261
Reclassification adjustment for gains included in net income		(93	)		(32	)		(61	)		(141	)		(48	)		(93	)
Other comprehensive (loss) income		(8,324	)		(2,831	)		(5,493	)		255			87			168
Total comprehensive (loss) income	$	(5,940	)	$	(2,341	)	$	(3,599	)	$	3,529		$	856		$	2,673

Six months ended June 30,	2013									2012
	Before tax amount			Tax expense (benefit)			Net of tax amount			Before tax amount			Tax expense (benefit)			Net of tax amount
Net income	$	5,525		$	1,223		$	4,302		$	6,495		$	1,519		$	4,976
Other comprehensive income:
Net unrealized holding gains on securities:
Unrealized holding (losses) gains arising during the period		(9,291	)		(3,159	)		(6,132	)		494			168			326
Reclassification adjustment for gains included in net income		(516	)		(176	)		(340	)		(530	)		(180	)		(350	)
Other comprehensive (loss) income		(9,807	)		(3,335	)		(6,472	)		(36	)		(12	)		(24	)
Total comprehensive (loss) income	$	(4,282	)	$	(2,112	)	$	(2,170	)	$	6,459		$	1,507		$	4,952

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

5

QNB Corp. and Subsidiary

CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY

(in thousands, except share data - unaudited)	Number of Shares Outstanding		Common Stock		Surplus		Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Treasury Stock			Total
Balance, December 31, 2012		3,228,003	$	2,121	$	12,787	$	60,735		$	4,456		$	(2,476	)	$	77,623
Net income				-		-		4,302			-			-			4,302
Other comprehensive loss, net of tax				-		-		-			(6,472	)		-			(6,472	)
Cash dividends declared ($0.54 per share)				-		-		(1,749	)		-			-			(1,749	)
Stock issued in connection with dividend reinvestment and stock purchase plan		19,498		12		436		-			-			-			448
Stock issued for employee stock purchase plan		1,913		1		39		-			-			-			40
Stock issued for options exercised		4,145		2		10		-			-			-			12
Tax benefit of stock options exercised				-		2		-			-			-			2
Stock-based compensation expense				-		30		-			-			-			30
Balance, June 30, 2013		3,253,559	$	2,136	$	13,304	$	63,288		$	(2,016	)	$	(2,476	)	$	74,236

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)
Six months ended June 30,	2013			2012
Operating Activities
Net income	$	4,302		$	4,976
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		567			472
Provision for loan losses		100			300
Net gain on investment securities available-for-sale		(516	)		(530	)
Net loss (gain) on sale of repossessed assets		85			(5	)
Net gain on sale of loans		(323	)		(458	)
Proceeds from sales of residential mortgages held-for-sale		10,955			11,942
Origination of residential mortgages held-for-sale		(10,344	)		(11,138	)
Income on bank-owned life insurance		(149	)		(156	)
Stock-based compensation expense		30			42
Deferred income tax provision		41			(47	)
Net (decrease) increase in income taxes payable		(45	)		70
Net increase in accrued interest receivable		(178	)		(17	)
Amortization of mortgage servicing rights and change in valuation allowance		24			95
Net amortization of premiums and discounts on investment securities		1,073			958
Net decrease in accrued interest payable		(80	)		(280	)
Decrease (increase) in other assets		3,650			(316	)
Decrease in other liabilities		(211	)		(64	)
Net cash provided by operating activities		8,981			5,844
Investing Activities
Proceeds from payments, maturities and calls of investment securities available-for-sale		79,731			78,563
held-to-maturity		-			1,040
Proceeds from the sale of investment securities available-for-sale		12,387			15,798
Purchases of investment securities available-for-sale		(81,345	)		(105,528	)
Proceeds from redemption of investment in restricted bank stock		479			139
Purchase of restricted bank stock		(72	)		-
Net increase in loans		(11,959	)		(1,933	)
Net purchases of premises and equipment		(1,194	)		(1,112	)
Proceeds from sales of repossessed assets		50			215
Net cash used in investing activities		(1,923	)		(12,818	)
Financing Activities
Net increase in non-interest bearing deposits		997			3,006
Net (decrease) increase in interest-bearing deposits		(6,722	)		27,289
Net increase in short-term borrowings		363			2,549
Repayments of long-term debt		(5	)		(15,006	)
Tax benefit from exercise of stock options		2			4
Cash dividends paid, net of reinvestment		(1,559	)		(1,500	)
Proceeds from issuance of common stock		310			340
Net cash (used in) provided by financing activities		(6,614	)		16,682
Increase in cash and cash equivalents		444			9,708
Cash and cash equivalents at beginning of year		15,453			10,555
Cash and cash equivalents at end of period	$	15,897		$	20,263
Supplemental Cash Flow Disclosures
Interest paid	$	2,711		$	3,755
Income taxes paid		1,225			1,490
Non-cash transactions:
Transfer of loans to repossessed assets or other real estate owned		36			532

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 2012 Annual Report incorporated in the Form 10-K. Operating results for the three and six month periods ended June 30, 2013 are not necessarily indicative of the results that may be expected for the year ending December 31, 2013.

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 interim 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.

The Company has evaluated events and transactions occurring subsequent to the balance sheet date of June 30, 2013, for items that should potentially be recognized or disclosed in these financial statements.

2. RECENT ACCOUNTING PRONOUNCEMENTS

In February 2013, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2013-02, Comprehensive Income (Topic 220):  Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income.  The amendments in this guidance require an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required under U.S. generally accepted accounting principles (GAAP) to be reclassified in its entirety to net income.  For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference other disclosures required under U.S. GAAP that provide additional detail about those amounts. This amendment is effective prospectively for reporting periods beginning after December 15, 2012 for public companies. The application of this standard did not have a material impact on the Company’s financial statements, but it did result in additional required disclosures that can be found in Note 6.

8

QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Unaudited)

3. STOCK-BASED COMPENSATION AND SHAREHOLDERS’ EQUITY

QNB sponsors stock-based compensation plans, administered by a Board Committee, under which both qualified and non-qualified stock options may be granted periodically to certain employees. 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 approximately $24,000 and $26,000 for the three months ended June 30, 2013 and 2012, respectively, and $30,000 and $42,000 for the six months ended June 30, 2013 and 2012, respectively. As of June 30, 2013, there was approximately $121,000 of unrecognized compensation cost related to unvested share-based compensation award grants that is expected to be recognized over the next 31 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 1998 Plan authorized the issuance of 220,500 shares. The time period during which any option is exercisable under the Plan is determined by the Committee but shall not commence before the expiration of six months after the date of grant or continue beyond the expiration of ten years after the date the option is awarded. The granted options vest ratably over a three-year period. As of June 30, 2013, there were 225,058 options granted, 30,444 options forfeited, 164,814 options exercised and 29,800 options outstanding under this Plan. The 1998 Plan expired on March 10, 2008.

The 2005 Plan authorizes the issuance of 200,000 shares. The terms of the 2005 Plan are identical to the 1998 Plan, except options expire five years after the grant date. As of June 30, 2013, there were 143,200 options granted, 45,000 options forfeited, 11,100 options exercised, and 87,100 options outstanding under this Plan. The 2005 Plan expires March 15, 2015.

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 numerous assumptions, many of which are highly subjective in nature.

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

Six months ended June 30,	2013			2012
Risk free interest rate		0.35	%		0.39	%
Dividend yield		4.26			4.68
Volatility		34.10			33.81
Expected life (years)		5.00			5.00

The risk-free interest rate was selected based upon yields of U.S. Treasury issues with a term approximating the expected life of the option being valued. Historical information was the primary 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 first six months of 2013 and 2012 was $4.52 and $3.81, respectively.

9

QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Unaudited)

3. STOCK-BASED COMPENSATION AND SHAREHOLDERS’ EQUITY (continued)

Stock option activity during the six months ended June 30, 2013 is as follows:

 

		Number of options			Weighted average exercise price		Weighted average remaining contractual term (in years)		Aggregate intrinsic value
Outstanding at December 31, 2012			128,225			22.72
	Granted		20,000			23.20
	Exercised		(28,725	)		20.35
	Forfeited		(2,600	)		19.79
Outstanding at June 30, 2013			116,900		$	23.45		2.41	$	370
Exercisable at June 30, 2013			55,900		$	25.52		1.16	$	190

4. SHARE REPURCHASE PLAN

The Board of Directors has authorized the repurchase of up to 100,000 shares of its common stock in open market or privately negotiated transactions. The repurchase authorization does not bear a termination date. There were no shares repurchased during the six months ended June 30, 2013. As of June 30, 2013, 57,883 shares were repurchased under this authorization at an average price of $16.97 and a total cost of $982,000.

5. EARNINGS PER SHARE

The following sets forth the computation of basic and diluted earnings per share:

 

	Three months ended June 30,				Six months ended June 30,
	2013		2012		2013		2012
Numerator for basic and diluted earnings per share - net income	$	1,894	$	2,505	$	4,302	$	4,976
Denominator for basic earnings per share - weighted average shares outstanding		3,243,867		3,190,552		3,238,020		3,185,728
Effect of dilutive securities - employee stock options		12,088		17,774		11,048		14,865
Denominator for diluted earnings per share - adjusted weighted average shares outstanding		3,255,955		3,208,326		3,249,068		3,200,593
Earnings per share - basic	$	0.58	$	0.79	$	1.33	$	1.56
Earnings per share - diluted	$	0.58	$	0.78	$	1.32	$	1.55

There were 49,800 stock options that were anti-dilutive for both the three and six-month periods ended June 30, 2013. There were 52,300 stock options that were anti-dilutive for both the three and six-month periods ended June 30, 2012. These stock options were not included in the above calculation.

10

QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Unaudited)

6. COMPREHENSIVE INCOME

The following shows the components of accumulated other comprehensive income at June 30, 2013 and December 31, 2012:

	June 30, 2013			December 31, 2012
Unrealized net holding (losses) gains on available-for-sale securities	$	(2,184	)	$	7,736
Unrealized losses on available-for-sale securities for which a portion of an other-than-temporary impairment loss has been recognized in earnings		(871	)		(984	)
Accumulated other comprehensive (loss) income		(3,055	)		6,752
Tax effect		1,039			(2,296	)
Accumulated other comprehensive (loss) income, net of tax	$	(2,016	)	$	4,456

The following table presents amounts reclassified out of accumulated other comprehensive income for the six months ended June 30, 2013:

Details about accumulated other comprehensive income	Amount reclassified from accumulated other comprehensive income			Affected line item in the statement of income
Unrealized net holding gains on available-for-sale securities	$	559		Net gain on sale of investment securities
Other-than-temporary losses on investment securities		(43	)	Net other-than-temporary impairment losses on investment securities
		516
Tax effect		(176	)	Provision for income taxes
Total reclass out of accumulated other comprehensive income, net of tax	$	340		Net of tax

7. INVESTMENT SECURITIES

The amortized cost and estimated fair values of investment securities available-for-sale at June 30, 2013 and December 31, 2012 were as follows:

June 30, 2013	Fair value		Gross unrealized holding gains		Gross unrealized holding losses		Amortized cost
U.S. Government agency securities	$	70,474	$	251	$	1,455	$	71,678
State and municipal securities		86,715		1,472		1,331		86,574
U.S. Government agencies and sponsored enterprises (GSEs):
Mortgage-backed securities		126,945		1,493		1,694		127,146
Collateralized mortgage obligations (CMOs)		85,678		679		1,483		86,482
Pooled trust preferred securities		2,091		81		1,509		3,519
Corporate debt securities		3,991		16		31		4,006
Equity securities		4,470		526		70		4,014
Total investment securities available-for-sale	$	380,364	$	4,518	$	7,573	$	383,419

11

QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Unaudited)

7. INVESTMENT SECURITIES (continued)

 

December 31, 2012	Fair value		Gross unrealized holding gains		Gross unrealized holding losses		Amortized cost
U.S. Government agency securities	$	104,130	$	750	$	19	$	103,399
State and municipal securities		86,789		3,141		91		83,739
U.S. Government agencies and sponsored enterprises (GSEs):
Mortgage-backed securities		107,973		3,169		33		104,837
Collateralized mortgage obligations (CMOs)		94,091		1,188		155		93,058
Pooled trust preferred securities		1,962		51		1,608		3,519
Corporate debt securities		2,502		44		-		2,458
Equity securities		4,055		402		87		3,740
Total investment securities available-for-sale	$	401,502	$	8,745	$	1,993	$	394,750

The amortized cost and estimated fair value of securities available-for-sale by contractual maturity at June 30, 2013 are shown in the following table. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Securities are assigned to categories based on contractual maturity except for mortgage-backed securities and CMOs which are based on the estimated average life of these securities and municipal securities that have been pre-refunded.

June 30, 2013	Fair value		Amortized cost
Due in one year or less	$	9,498	$	9,349
Due after one year through five years		202,245		201,228
Due after five years through ten years		119,304		122,291
Due after ten years		44,847		46,537
Equity securities		4,470		4,014
Total investment securities available-for-sale	$	380,364	$	383,419

Proceeds from sales of investment securities available-for-sale were approximately $12,387,000 and $15,798,000 for the six months ended June 30, 2013 and 2012, respectively.

At June 30, 2013 and December 31, 2012, investment securities available-for-sale totaling approximately $163,410,000 and $170,433,000, respectively, were pledged as collateral for repurchase agreements and deposits of public funds.

The following table presents information related to the Company’s gains and losses on the sales of equity and debt securities, and losses recognized for the other-than-temporary impairment of these investments. Gains and losses on available-for-sale securities are computed on the specific identification method and included in non-interest income. Gross realized losses on equity and debt securities are net of other-than-temporary impairment charges:

12

QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Unaudited)

7. INVESTMENT SECURITIES (continued)

	Six months ended June 30, 2013									Six months ended June 30, 2012
	Gross realized gains		Gross realized losses		Other-than- temporary impairment losses			Net gains		Gross realized gains		Gross realized losses			Other-than- temporary impairment losses		Net gains
Equity securities	$	369	$	-	$	(43	)	$	326	$	427	$	-		$	-	$	427
Debt securities		190		-		-			190		107		(4	)		-		103
Total	$	559	$	-	$	(43	)	$	516	$	534	$	(4	)	$	-	$	530

The tax expense applicable to the net realized gains for the six-month periods ended June 30, 2013 and 2012 amounted to approximately $176,000 and $180,000, respectively.

QNB recognizes OTTI for debt securities classified as available-for-sale in accordance with FASB ASC 320, Investments – Debt and Equity Securities, which requires that we assess whether we intend to sell or it is more likely than not that the Company will be required to sell a security before recovery of its amortized cost basis less any current-period credit losses. For debt securities that are considered other-than-temporarily impaired and that we do not intend to sell and will not be required to sell prior to recovery of our amortized cost basis, the amount of the impairment is separated into the amount that is credit related (credit loss component) and the amount due to all other factors. The credit loss component is recognized in earnings and is the difference between the security’s amortized cost basis and the present value of its expected future cash flows discounted at the security’s effective yield. The remaining difference between the security’s fair value and the present value of future expected cash flows is due to factors that are not credit related and, therefore, is not required to be recognized as a loss in the income statement, but is recognized in other comprehensive income. For equity securities, once a decline in value is determined to be other-than-temporary, the value of the equity security is reduced to fair value and a corresponding charge to earnings is recognized. QNB believes that we will fully collect the carrying value of securities on which we have recorded a non-credit related impairment in other comprehensive income.

The following table presents a roll forward of the credit loss component recognized in earnings. The credit loss component of the amortized cost represents the difference between the present value of expected future cash flows and the amortized cost basis of the security prior to considering credit losses. The beginning balance represents the credit loss component for debt securities for which OTTI occurred prior to the beginning of the year. Credit-impaired debt securities must be presented in two components based upon whether the current period is the first time the debt security was credit-impaired (initial credit impairment) or is not the first time the debt security was credit-impaired (subsequent credit impairments). No credit impairments were recognized on debt securities in the first six months of 2013 or 2012.

The following table presents a summary of the cumulative credit-related other-than-temporary impairment charges recognized as components of earnings for debt securities still held by QNB:

Six months ended June 30,	2013		2012
Balance, beginning of period	$	1,271	$	1,279
Reductions: gain on payoff		-		-
Additions:
Initial credit impairments		-		-
Subsequent credit impairments		-		-
Balance, end of period	$	1,271	$	1,279

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QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Unaudited)

7. INVESTMENT SECURITIES (continued)

The amortized cost and estimated fair values of investment securities held-to-maturity at June 30, 2013 and December 31, 2012 were as follows:

 

Held-To-Maturity
	June 30, 2013								December 31, 2012
	Amortized cost		Gross unrealized holding gains		Gross unrealized holding losses		Fair value		Amortized cost		Gross unrealized holding gains		Gross unrealized holding losses		Fair value
State and municipal securities	$	146	$	17		-	$	163	$	146	$	20		-	$	166

The amortized cost and estimated fair value of securities held-to-maturity by contractual maturity at June 30, 2013 are shown in the following table. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

June 30, 2013	Fair value		Amortized cost
Due in one year or less		-		-
Due after one year through five years	$	163	$	146
Due after five years through ten years		-		-
Due after ten years		-		-
Total investment securities held-to-maturity	$	163	$	146

There were no sales of investment securities classified as held-to-maturity during the six months ended June 30, 2013 or 2012.

The following table indicates the length of time individual securities have been in a continuous unrealized loss position at June 30, 2013 and December 31, 2012:

June 30, 2013
			Less than 12 months				12 months or longer				Total
	No. of securities		Fair value		Unrealized losses		Fair value		Unrealized losses		Fair value		Unrealized losses
U.S. Government agency securities		43	$	53,172	$	1,455		-		-	$	53,172	$	1,455
State and municipal securities		73		32,706		1,331		-		-		32,706		1,331
U.S. Government agencies and sponsored enterprises (GSEs):
Mortgage-backed securities		45		68,335		1,694		-		-		68,335		1,694
Collateralized mortgage obligations (CMOs)		45		57,461		1,458	$	1,507	$	25		58,968		1,483
Pooled trust preferred securities		5		-		-		1,708		1,509		1,708		1,509
Corporate debt securities		3		2,972		31		-		-		2,972		31
Equity securities		6		675		47		133		23		808		70
Total		220	$	215,321	$	6,016	$	3,348	$	1,557	$	218,669	$	7,573

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Unaudited)

7. INVESTMENT SECURITIES (continued)

December 31, 2012
			Less than 12 months				12 months or longer				Total
	No. of securities		Fair value		Unrealized losses		Fair value		Unrealized losses		Fair value		Unrealized losses
U.S. Government agency securities		4	$	3,992	$	19		-		-	$	3,992	$	19
State and municipal securities		15		6,472		91		-		-		6,472		91
U.S. Government agencies and sponsored enterprises (GSEs):
Mortgage-backed securities		9		13,439		33		-		-		13,439		33
Collateralized mortgage obligations (CMOs)		19		28,396		155		-		-		28,396		155
Pooled trust preferred securities		5		-		-	$	1,609	$	1,608		1,609		1,608
Equity securities		7		587		45		272		42		859		87
Total		59	$	52,886	$	343	$	1,881	$	1,650	$	54,767	$	1,993

Management evaluates debt securities, which are comprised of U.S. Government agencies, state and municipalities, mortgage-backed securities, CMOs and corporate debt securities, for other-than-temporary impairment and considers the current economic conditions, the length of time and the extent to which the fair value has been less than cost, interest rates and the bond rating of each security. The unrealized losses at June 30, 2013 in U.S. Government securities, state and municipal securities, mortgage-backed securities, CMOs and corporate debt securities are primarily the result of rising interest rates late in the second quarter. If held to maturity, these bonds will mature at par, and QNB will not realize a loss. The Company has the intent to hold the securities and does not believe it will be required to sell the securities before recovery occurs.

QNB holds seven pooled trust preferred securities as of June 30, 2013. These securities have a total amortized cost of approximately $3,519,000 and a fair value of $2,091,000. Five of the seven securities have been in an unrealized loss position for more than twelve months. All of the pooled trust preferred securities are available-for-sale securities and are carried at fair value.

The following table provides additional information related to pooled trust preferred securities (PreTSLs) as of June 30, 2013:

Deal	Class	Book value		Fair value		Unrealized gains (losses)			Realized OTTI credit loss (YTD 2013)		Total recognized OTTI credit loss			Moody's /Fitch ratings	Current number of performing banks		Current number of performing insurance companies		Actual deferrals and defaults as a % of total collateral			Total performing collateral as a % of outstanding bonds
PreTSL IV	Mezzanine*	$	243	$	201	$	(42	)	$	-	$	(1	)	Caa2/CCC		5		-		18.0	%		139.5	%
PreTSL V	Mezzanine*		-		-		-			-		(118	)	C/D		-		-		100.0			12.5
PreTSL XVII	Mezzanine		752		439		(313	)		-		(222	)	C/C		30		4		38.8			71.2
PreTSL XIX	Mezzanine		988		431		(557	)		-		-		C/C		35		13		22.9			81.8
PreTSL XXV	Mezzanine		766		356		(410	)		-		(222	)	C/C		41		6		33.5			79.8
PreTSL XXVI	Mezzanine		469		282		(187	)		-		(270	)	C/C		40		7		30.2			83.5
PreTSL XXVI	Mezzanine		301		382		81			-		(438	)	C/C		40		7		30.2			83.5
		$	3,519	$	2,091	$	(1,428	)	$	-	$	(1,271	)

Mezzanine* - only class of bonds still outstanding (represents the senior-most obligation of the trust)

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 QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Unaudited)

7. INVESTMENT SECURITIES (continued)

The market for these securities at June 30, 2013 is not active and markets for similar securities also are not active. The inactivity was evidenced first by a significant widening of the bid-ask spread in the brokered markets in which pooled trust preferred securities trade and then by a significant decrease in the volume of trades relative to historical levels. The new issue market is also inactive and the market values for these securities (and any securities other than those issued or guaranteed by U.S. Government agencies) are depressed relative to historical levels. In today’s market, a low market price for a particular bond may only provide evidence of a recent widening of corporate spreads in general versus being an indicator of credit problems with a particular issuer. Lack of liquidity in the market for trust preferred collateralized debt obligations, credit rating downgrades and market uncertainties related to the financial industry are all factors contributing to the temporary impairment of these securities. Although these securities are classified as available-for-sale, the Company has the intent to hold the securities and does not believe it will be required to sell the securities before recovery occurs. As illustrated in the table above, these securities are comprised mainly of securities issued by banks, and to a lesser degree, insurance companies. QNB owns the mezzanine tranches of these securities.

On a quarterly basis we evaluate our debt securities for other-than-temporary impairment (OTTI), which involves the use of a third-party valuation firm to assist management with the valuation. When evaluating these investments a credit-related portion and a non-credit related portion of OTTI are determined. The credit related portion is recognized in earnings and represents the expected shortfall in future cash flows. The non-credit related portion is recognized in other comprehensive income and represents the difference between the book value and the fair value of the security less any current quarter credit related impairment. For the six months ended June 30, 2013, no other-than-temporary impairment charges representing credit impairment were recognized on our pooled trust preferred collateralized debt obligations. A discounted cash flow analysis provides the best estimate of credit related OTTI for these securities. Additional information related to this analysis follows:

All of the pooled trust preferred collateralized debt obligations held by QNB are rated lower than AA and are measured for OTTI within the scope of ASC 325 (formerly known as EITF 99-20), Recognition of Interest Income and Impairment on Purchased Beneficial Interests and Beneficial Interests That Continue to be Held by a Transferor in Securitized Financial Assets, and Amendments to the Impairment Guidance of EITF Issue No. 99-20 (formerly known as EITF 99-20-1). QNB performs a discounted cash flow analysis on all of its impaired debt securities to determine if the amortized cost basis of an impaired security will be recovered. In determining whether a credit loss exists, QNB uses its best estimate of the present value of cash flows expected to be collected from the debt security and discounts them at the effective yield implicit in the security at the date of acquisition or the prospective yield for those securities with prior OTTI charges. The discounted cash flow analysis is considered to be the primary evidence when determining whether credit related other-than-temporary impairment exists.

Results of a discounted cash flow test are significantly affected by other variables such as the estimate of future cash flows (including prepayments), credit worthiness of the underlying banks and insurance companies and determination of probability and severity of default of the underlying collateral. The following provides additional information for each of these variables:

●  Estimate of Future Cash Flows – Cash flows are constructed in an INTEXcalc valuation model. INTEX is a proprietary cash flow model recognized as the industry standard for analyzing all types of structured debt products. It includes each deal’s structural features updated with trustee information, including asset-by-asset detail, as it becomes available. The modeled cash flows are then used to determine if all the scheduled principal and interest payments of the investments will be returned. For purposes of the cash flow analysis, relatively modest rates of prepayment were forecasted (ranging from 0-1%). In addition to the base prepayment assumption, due to the recent enactment of the Dodd-Frank financial legislation additional prepayment analysis was performed. First, trust preferred securities issued by banks with more than $15 billion in total assets at December 31, 2009 were identified. The current credit rating of these institutions was reviewed and it was assumed that any issuer with an investment grade credit rating would prepay their issuance as soon as possible, or July 1, 2015 for bank holding company subsidiaries of foreign banking organizations that have relied on Supervision and Regulation Letter SR-01-1. For those institutions rated below investment grade the holding companies’ approximate cost of long-term funding given their rating and marketplace interest rate was estimated. The following assumption was made; any holding company that could refinance for a cost savings of more than 2% will refinance and will do so as soon as possible, or July 1, 2015. Finally, for issuers not impacted by the Tier 1 regulatory capital legislation enacted by the Dodd-Frank act, we identified the issuers that have shown a recent history of prepayment of both floating rate and fixed rate issues and assumed these issuers will prepay as soon as possible.

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QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Unaudited)

7. INVESTMENT SECURITIES (continued)

●  Credit Analysis – A quarterly credit evaluation is performed for the companies comprising the collateral across the various pooled trust preferred securities. This credit evaluation considers all available evidence and focuses on capitalization, asset quality, profitability, liquidity, stock price performance, whether the institution has received TARP funding and whether the institution has shown the ability to raise capital. 

●  Probability of Default – A near-term probability of default is determined for each issuer based on its financial condition and is used to calculate the expected impact of future deferrals and defaults on the expected cash flows. Each issuer in the collateral pool is assigned a near-term probability of default based on individual performance and financial characteristics. Various studies suggest that the rate of bank failures between 1934 and 2008 were approximately 0.36%. Thus, in addition to the specific bank default assumptions used for the near term, future defaults on the individual banks in the analysis for 2013 and beyond the rate used is calculated based on using the above mentioned thirty-six basis points and factoring that number based on a comparison of key financial ratios of active individual issuers without a short-term probability of default compared to all FDIC insured banks.  

●  Severity of Loss – In addition to the probability of default discussed above, a severity of loss (projected recovery) is determined in all cases. In the current analysis, the severity of loss ranges from 0% to 100% depending on the estimated credit worthiness of the individual issuer, with a 95% severity of loss utilized for defaults projected in 2013 and thereafter. 

In addition to the above factors, the evaluation of impairment also includes a stress test analysis which provides an estimate of future risk for each tranche. This stressed breakpoint is then compared to the level of assets with credit concerns in each tranche. This comparison allows management to identify those pools that are at a greater risk for a future adverse change in cash flows so the asset quality in those pools can be monitored more closely for potential deterioration of credit quality.

Based upon the analysis performed by management as of June 30, 2013, it is probable that we will collect all contractual principal and interest payments on one of our seven pooled trust preferred securities, PreTSL XIX. The expected principal shortfall on the remaining pooled trust preferred securities has resulted in credit related other-than-temporary impairment charges in previous years. All of these pooled trust preferred securities held by QNB could be subject to additional writedowns in the future if additional deferrals and defaults occur.

8. LOANS & ALLOWANCE FOR LOAN LOSSES

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off are stated at the principal amount outstanding, net of deferred loan fees and costs. Interest income is accrued on the principal amount outstanding. Loan origination and commitment fees and related direct costs are deferred and amortized to income over the term of the respective loan and loan commitment period as a yield adjustment.

17

QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Unaudited)

8. LOANS & ALLOWANCE FOR LOAN LOSSES (continued)

Loans held-for-sale consists of residential mortgage loans that are carried at the lower of aggregate cost or fair value. Net unrealized losses, if any, are recognized through a valuation allowance charged to income. Gains and losses on residential mortgages held-for-sale are included in non-interest income.

QNB maintains an allowance for loan losses, which is intended to absorb probable known and inherent losses in the outstanding loan portfolio. The allowance is reduced by actual credit losses and is increased by the provision for loan losses and recoveries of previous losses. The provisions for loan losses are charged to earnings to bring the total allowance for loan losses to a level considered necessary by management.

The allowance for loan losses is based on management’s continuing review and evaluation of the loan portfolio. The level of the allowance is determined by assigning specific reserves to individually identified problem credits and general reserves to all other loans. For such loans that are also classified as impaired, an allowance is established when the discounted cash flows (or collateral value) of the impaired loan is lower than the carrying value of that loan. The portion of the allowance that is allocated to internally criticized and non-accrual loans is determined by estimating the inherent loss on each credit after giving consideration to the value of underlying collateral. The general component covers pools of loans by loan class including commercial loans not considered impaired, as well as smaller balance homogeneous loans, such as residential real estate, home equity and other consumer loans. These pools of loans are evaluated for loss exposure based upon historical loss rates. These loss rates are based on a three year history of charge-offs and are more heavily weighted for recent experience for each of these categories of loans, adjusted for qualitative factors. These qualitative risk factors include:

1.  Lending policies and procedures, including underwriting standards and collection, charge-off and recovery practices.  

2.  Effect of external factors, such as legal and regulatory requirements. 

3.  National, regional, and local economic and business conditions as well as the condition of various market segments, including the value of underlying collateral for collateral dependent loans. 

4.  Nature and volume of the portfolio including growth. 

5.  Experience, ability, and depth of lending management and staff. 

6.  Volume and severity of past due, classified and nonaccrual loans. 

7.  Quality of the Company’s loan review system, and the degree of oversight by the Company’s Board of Directors. 

8.  Existence and effect of any concentrations of credit and changes in the level of such concentrations. 

Each factor is assigned a value to reflect improving, stable or declining conditions based on management’s best judgment using relevant information available at the time of the evaluation.

An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.

Management emphasizes loan quality and close monitoring of potential problem credits. Credit risk identification and review processes are utilized in order to assess and monitor the degree of risk in the loan portfolio. QNB’s lending and credit administration staff are charged with reviewing the loan portfolio and identifying changes in the economy or in a borrower’s circumstances which may affect the ability to repay debt or the value of pledged collateral. A loan classification and review system exists that identifies those loans with a higher than normal risk of uncollectibility. Each commercial loan is assigned a grade based upon an assessment of the borrower’s financial capacity to service the debt and the presence and value of collateral for the loan. An independent loan review group tests risk assessments and evaluates the adequacy of the allowance for loan losses. Management meets monthly to review the credit quality of the loan portfolio and quarterly to review the allowance for loan losses.

18

 QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Unaudited)

8. LOANS & ALLOWANCE FOR LOAN LOSSES (continued)

In addition, various regulatory agencies, as an integral part of their examination process, periodically review QNB’s allowance for loan losses. Such agencies may require QNB to recognize additions to the allowance based on their judgments using information available to them at the time of their examination.

Management believes that it uses the best information available to make determinations about the adequacy of the allowance and that it has established its existing allowance for loan losses in accordance with GAAP. If circumstances differ substantially from the assumptions used in making determinations, future adjustments to the allowance for loan losses may be necessary and results of operations could be affected. Because future events affecting borrowers and collateral cannot be predicted with certainty, there can be no assurance that increases to the allowance will not be necessary should the quality of any loans deteriorate as a result of the factors discussed above.

Major classes of loans are as follows:

 

	June 30, 2013		December 31, 2012
Commercial:
Commercial and industrial	$	111,619	$	100,063
Construction		10,557		11,061
Secured by commercial real estate		192,689		192,867
Secured by residential real estate		44,102		41,003
State and political subdivisions		32,552		34,256
Loans to depository institutions		2,250		3,250
Indirect lease financing		8,703		9,685
Retail:
1-4 family residential mortgages		27,774		28,733
Home equity loans and lines		56,777		54,860
Consumer		2,186		2,012
Total loans		489,209		477,790
Net unearned costs (fees)		6		(57	)
Loans receivable	$	489,215	$	477,733

Loans secured by commercial real estate include all loans collateralized at least in part by commercial real estate. These loans may not be for the expressed purpose of conducting commercial real estate transactions.

Overdrafts are reclassified as loans and are included in consumer loans above and total loans on the balance sheet. At June 30, 2013 and December 31, 2012, overdrafts were approximately $83,000 and $103,000, respectively.

QNB generally lends in its trade area which is comprised of Quakertown and the surrounding communities. To a large extent, QNB makes loans collateralized at least in part by real estate. Its lending activities could be affected by changes in the general economy, the regional economy, or real estate values. Other than disclosed in the table above, at June 30, 2013, there were no concentrations of loans exceeding 10% of total loans.

The Company engages in a variety of lending activities, including commercial, residential real estate and consumer transactions. The Company focuses its lending activities on individuals, professionals and small to medium sized businesses. Risks associated with lending activities include economic conditions and changes in interest rates, which can adversely impact both the ability of borrowers to repay their loans and the value of the associated collateral.

19

 QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Unaudited)

8. LOANS & ALLOWANCE FOR LOAN LOSSES (continued)

Commercial and industrial loans, commercial real estate loans, construction loans and residential real estate loans with a business purpose are generally perceived as having more risk of default than residential real estate loans with a personal purpose and consumer loans. These types of loans involve larger loan balances to a single borrower or groups of related borrowers and are more susceptible to a risk of loss during a downturn in the business cycle. These loans may involve greater risk because the availability of funds to repay these loans depends on the successful operation of the borrower’s business. The assets financed are used within the business for its ongoing operation. Repayment of these kinds of loans generally comes from the cash flow of the business or the ongoing conversions of assets, such as accounts receivable and inventory, to cash. Typical collateral for commercial and industrial loans includes the borrower’s accounts receivable, inventory and machinery and equipment. Commercial real estate and residential real estate loans secured for a business purpose are originated primarily within the eastern Pennsylvania market area at conservative loan-to-value ratios and often backed by the individual guarantees of the borrowers or owners. Repayment of this kind of loan is dependent upon either the ongoing cash flow of the borrowing entity or the resale of or lease of the subject property. Commercial real estate loans may be affected to a greater extent than residential loans by adverse conditions in real estate markets or the economy because commercial real estate borrowers’ ability to repay their loans depends on successful development of their properties, as well as the factors affecting residential real estate borrowers.

Loans to state and political subdivisions are tax-exempt or taxable loans to municipalities, school districts and housing and industrial development authorities. These loans can be general obligations of the municipality or school district repaid through their taxing authority, revenue obligations repaid through the income generated by the operations of the authority, such as a water or sewer authority, or loans issued to a housing and industrial development agency, for which a private corporation is responsible for payments on the loans.

Loans to depository institutions consist of a loan to a commercial bank in Lehigh County, Pennsylvania. This loan is secured by shares of common stock of the borrowing institution.

Indirect lease financing receivables represent loans to small businesses that are collateralized by equipment. These loans tend to have higher risk characteristics but generally provide higher rates of return. These loans are originated by a third party and purchased by QNB based on criteria specified by QNB. The criteria include minimum credit scores of the borrower, term of the lease, type and age of equipment financed and geographic area. The geographic area primarily represents states contiguous to Pennsylvania. QNB is not the lessor and does not service these loans.

The Company originates fixed-rate and adjustable-rate real estate-residential mortgage loans for personal purposes that are secured by first liens on the underlying 1-4 family residential properties. Credit risk exposure in this area of lending is minimized by the evaluation of the credit worthiness of the borrower, including debt-to-income ratios, credit scores and adherence to underwriting policies that emphasize conservative loan-to-value ratios of generally no more than 80%. Residential mortgage loans granted in excess of the 80% loan-to-value ratio criterion are generally insured by private mortgage insurance.

The real estate-home equity portfolio consists of fixed-rate home equity loans and variable-rate home equity lines of credit. Risks associated with loans secured by residential properties are generally lower than commercial loans and include general economic risks, such as the strength of the job market, employment stability and the strength of the housing market. Since most loans are secured by a primary or secondary residence, the borrower’s continued employment is the greatest risk to repayment.

The Company offers a variety of loans to individuals for personal and household purposes. Consumer loans are generally considered to have greater risk than first or second mortgages on real estate because they may be unsecured, or, if they are secured, the value of the collateral may be difficult to assess and is more likely to decrease in value than real estate.

20

 QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Unaudited)

8. LOANS & ALLOWANCE FOR LOAN LOSSES (continued)

Credit risk in this portfolio is controlled by conservative underwriting standards that consider debt-to-income levels and the creditworthiness of the borrower and, if secured, collateral values.

The Company employs an eight (8) grade risk rating system related to the credit quality of commercial loans, loans to state and political subdivisions and indirect lease financing of which the first four categories are pass categories (credits not adversely rated). The following is a description of the internal risk ratings and the likelihood of loss related to each risk rating.

1 - Excellent - no apparent risk

2 - Good - minimal risk

3 - Acceptable - average risk

4 - Watch List - greater than average risk

5 - Special Mention - potential weaknesses

6 - Substandard - well defined weaknesses

7 - Doubtful - full collection unlikely

8 - Loss - considered uncollectible

The Company maintains a loan review system, which allows for a periodic review of our loan portfolio and the early identification of potential problem loans. Each loan officer assigns a rating to all loans in the portfolio at the time the loan is originated. Loans with risk ratings of one through three are reviewed annually based on the borrower’s fiscal year. Loans with risk ratings of four are reviewed every six to twelve months based on the dollar amount of the relationship with the borrower. Loans with risk ratings of five through eight are reviewed at least quarterly, and as often as monthly, at management’s discretion. The Company also utilizes an outside loan review firm to review the portfolio on a semi-annual basis to provide the Board of Directors and senior management an independent review of the Bank’s loan portfolio on an ongoing basis. These reviews are designed to recognize deteriorating credits in their earliest stages in an effort to reduce and control risk in the lending function as well as identifying potential shifts in the quality of the loan portfolio. The examinations by the outside loan review firm include the review of lending activities with respect to underwriting and processing new loans, monitoring the risk of existing loans and to provide timely follow-up and corrective action for loans showing signs of deterioration in quality. In addition, the outside firm reviews the methodology for the allowance for loan losses to determine compliance to policy and regulatory guidance.

The following tables present the classes of the loan portfolio summarized by the aggregate pass rating and the classified ratings of special mention, substandard and doubtful within the Company’s internal risk rating system as of June 30, 2013 and December 31, 2012:

June 30, 2013	Pass		Special mention		Substandard		Doubtful		Total
Commercial:
Commercial and industrial	$	104,329	$	1,363	$	5,927	$	-	$	111,619
Construction		7,572		920		2,065		-		10,557
Secured by commercial real estate		161,592		4,118		26,979		-		192,689
Secured by residential real estate		39,413		27		4,662		-		44,102
State and political subdivisions		30,239		-		2,313		-		32,552
Loans to depository institutions		2,250		-		-		-		2,250
Indirect lease financing		8,471		-		232		-		8,703
	$	353,866	$	6,428	$	42,178	$	-	$	402,472

21

 QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Unaudited)

8. LOANS & ALLOWANCE FOR LOAN LOSSES (continued)

December 31, 2012	Pass		Special mention		Substandard		Doubtful		Total
Commercial:
Commercial and industrial	$	88,427	$	3,843	$	7,763	$	30	$	100,063
Construction		5,558		1,513		3,990		-		11,061
Secured by commercial real estate		157,678		7,493		27,696		-		192,867
Secured by residential real estate		36,078		1,199		3,726		-		41,003
State and political subdivisions		32,303		-		1,953		-		34,256
Loans to depository institutions		3,250		-		-		-		3,250
Indirect lease financing		9,329		-		356		-		9,685
	$	332,623	$	14,048	$	45,484	$	30	$	392,185

For retail loans, the Company evaluates credit quality based on the performance of the individual credits. The following tables present the recorded investment in the retail classes of the loan portfolio based on payment activity as of June 30, 2013 and December 31, 2012:

June 30, 2013	Performing		Non- performing		Total
Retail:
1-4 family residential mortgages	$	27,454	$	320	$	27,774
Home equity loans and lines		56,538		239		56,777
Consumer		2,186		-		2,186
	$	86,178	$	559	$	86,737

December 31, 2012	Performing		Non- performing		Total
Retail:
1-4 family residential mortgages	$	28,398	$	335	$	28,733
Home equity loans and lines		54,514		346		54,860
Consumer		2,012		-		2,012
	$	84,924	$	681	$	85,605

The performance and credit quality of the loan portfolio is also monitored by analyzing the age of the loans receivable as determined by the length of time a recorded payment is past due. The following table presents the classes of the loan portfolio summarized by the past due status as of June 30, 2013 and December 31, 2012:

22

 QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Unaudited)

8. LOANS & ALLOWANCE FOR LOAN LOSSES (continued)

June 30, 2013	30-59 days past due		60-89 days past due		90 days or more past due		Total past due loans		Current		Total loans receivable
Commercial:
Commercial and industrial	$	306	$	37		-	$	343	$	111,276	$	111,619
Construction		-		-		-		-		10,557		10,557
Secured by commercial real estate		244		440	$	4,332		5,016		187,673		192,689
Secured by residential real estate		1,401		537		-		1,938		42,164		44,102
State and political subdivisions		27		-		425		452		32,100		32,552
Loans to depository institutions		-		-		-		-		2,250		2,250
Indirect lease financing		50		52		32		134		8,569		8,703
Retail:
1-4 family residential mortgages		-		-		153		153		27,621		27,774
Home equity loans and lines		117		91		28		236		56,541		56,777
Consumer		28		6		-		34		2,152		2,186
	$	2,173	$	1,163	$	4,970	$	8,306	$	480,903	$	489,209

December 31, 2012	30-59 days past due		60-89 days past due		90 days or more past due		Total past due loans		Current		Total loans receivable
Commercial:
Commercial and industrial	$	76		-		-	$	76	$	99,987	$	100,063
Construction		-		-		-		-		11,061		11,061
Secured by commercial real estate		407	$	1,460	$	3,097		4,964		187,903		192,867
Secured by residential real estate		44		523		293		860		40,143		41,003
State and political subdivisions		71		1		-		72		34,184		34,256
Loans to depository institutions		-		-		-		-		3,250		3,250
Indirect lease financing		344		80		35		459		9,226		9,685
Retail:
1-4 family residential mortgages		-		197		-		197		28,536		28,733
Home equity loans and lines		152		153		197		502		54,358		54,860
Consumer		33		11		-		44		1,968		2,012
	$	1,127	$	2,425	$	3,622	$	7,174	$	470,616	$	477,790

23

 QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Unaudited)

8. LOANS & ALLOWANCE FOR LOAN LOSSES (continued)

The following tables disclose the recorded investment in loans receivable that are either on non-accrual status or past due 90 days or more and still accruing interest as of June 30, 2013 and December 31, 2012:

June 30, 2013	90 days or more past  due (still accruing)		Non-accrual
Commercial:
Commercial and industrial		-	$	5,535
Construction		-		2,029
Secured by commercial real estate		-		6,408
Secured by residential real estate		-		2,698
State and political subdivisions	$	425		-
Loans to depository institutions		-		-
Indirect lease financing		17		72
Retail:
1-4 family residential mortgages		-		320
Home equity loans and lines		-		239
Consumer		-		-
	$	442	$	17,301

December 31, 2012	90 days or more past due (still accruing)		Non-accrual
Commercial:
Commercial and industrial	$	-	$	6,174
Construction		-		2,480
Secured by commercial real estate		-		6,748
Secured by residential real estate		-		2,390
State and political subdivisions		-		1
Loans to depository institutions		-		-
Indirect lease financing		-		98
Retail:
1-4 family residential mortgages		-		335
Home equity loans and lines		-		346
Consumer		-		-
	$	-	$	18,572

24

 QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Unaudited)

8. LOANS & ALLOWANCE FOR LOAN LOSSES (continued)

Activity in the allowance for loan losses for the three months ended June 30, 2013 and 2012 are as follows:

Three months ended June 30, 2013	Balance, beginning of period		Provision for (credit to) loan losses			Charge-offs			Recoveries		Balance, end of period
Commercial:
Commercial and industrial	$	2,314	$	(328	)		-		$	8	$	1,994
Construction		230		12			-			-		242
Secured by commercial real estate		3,873		42			-			1		3,916
Secured by residential real estate		1,146		246			-			45		1,437
State and political subdivisions		257		20			-			-		277
Loans to depository institutions		10		-			-			-		10
Indirect lease financing		179		(29	)		-			6		156
Retail:
1-4 family residential mortgages		300		(11	)		-			-		289
Home equity loans and lines		714		24		$	(79	)		5		664
Consumer		29		5			(13	)		7		28
Unallocated		299		119		N/A			N/A			418
	$	9,351	$	100		$	(92	)	$	72	$	9,431

Three months ended June 30, 2012	Balance, beginning of period		Provision for (credit to) loan losses			Charge-offs			Recoveries		Balance, end of period
Commercial:
Commercial and industrial	$	3,317	$	164		$	(74	)	$	60	$	3,467
Construction		333		20			-			-		353
Secured by commercial real estate		3,126		2			-			62		3,190
Secured by residential real estate		773		88			(50	)		-		811
State and political subdivisions		301		(79	)		-			-		222
Loans to depository institutions		20		-			-			-		20
Indirect lease financing		238		21			(13	)		22		268
Retail:
1-4 family residential mortgages		303		(5	)		-			2		300
Home equity loans and lines		547		37			(1	)		12		595
Consumer		17		10			(11	)		2		18
Unallocated		481		(258	)	N/A			N/A			223
	$	9,456	$	-		$	(149	)	$	160	$	9,467

25

 QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Unaudited)

8. LOANS & ALLOWANCE FOR LOAN LOSSES (continued)

Activity in the allowance for loan losses for the six months ended June 30, 2013 and 2012 are as follows:

Six months ended June 30, 2013	Balance, beginning of period		Provision for (credit to) loan losses			Charge-offs			Recoveries		Balance, end of period
Commercial:
Commercial and industrial	$	2,505	$	(526	)		-		$	15	$	1,994
Construction		209		33			-			-		242
Secured by commercial real estate		3,795		120			-			1		3,916
Secured by residential real estate		1,230		498		$	(336	)		45		1,437
State and political subdivisions		260		17			-			-		277
Loans to depository institutions		15		(5	)		-			-		10
Indirect lease financing		168		(27	)		(1	)		16		156
Retail:
1-4 family residential mortgages		324		(35	)		-			-		289
Home equity loans and lines		582		248			(172	)		6		664
Consumer		27		16			(34	)		19		28
Unallocated		657		(239	)	N/A			N/A			418
	$	9,772	$	100		$	(543	)	$	102	$	9,431

Six months ended June 30, 2012	Balance, beginning of period		Provision for (credit to) loan losses			Charge-offs			Recoveries		Balance, end of period
Commercial:
Commercial and industrial	$	2,959	$	520		$	(74	)	$	62	$	3,467
Construction		556		(203	)		-			-		353
Secured by commercial real estate		3,124		4			-			62		3,190
Secured by residential real estate		746		151			(86	)		-		811
State and political subdivisions		195		27			-			-		222
Loans to depository institutions		20		-			-			-		20
Indirect lease financing		312		(47	)		(23	)		26		268
Retail:
1-4 family residential mortgages		249		70			(21	)		2		300
Home equity loans and lines		625		(23	)		(19	)		12		595
Consumer		20		13			(20	)		5		18
Unallocated		435		(212	)	N/A			N/A			223
	$	9,241	$	300		$	(243	)	$	169	$	9,467

 

As previously discussed, the Company maintains a loan review system, which includes a continuous review of the loan portfolio by internal and external parties to aid in the early identification of potential impaired loans. A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for

26

 QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Unaudited)

8. LOANS & ALLOWANCE FOR LOAN LOSSES (continued)

commercial loans, loans to state and political subdivisions and indirect lease financing loans by using 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.

Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual consumer and residential mortgage loans for impairment disclosures, unless such loans are part of a larger relationship that is impaired, or are classified as a troubled debt restructuring.

An allowance for loan losses is established for an impaired loan if its carrying value exceeds its estimated fair value. The estimated fair values of the majority of the Company’s impaired loans are measured based on the estimated fair value of the loan’s collateral.

For commercial loans secured by real estate, estimated fair values are determined primarily through third-party appraisals. When a real estate secured loan becomes impaired, a decision is made regarding whether an updated certified appraisal of the real estate is necessary. This decision is based on various considerations, including the age of the most recent appraisal, the loan-to-value ratio based on the original appraisal and the condition of the property. Appraised values are discounted to arrive at the estimated selling price of the collateral, which is considered to be the estimated fair value. The discounts also include estimated costs to sell the property.

For commercial loans secured by non-real estate collateral, such as accounts receivable, inventory and equipment, estimated fair values are determined based on the borrower’s financial statements, inventory reports, accounts receivable agings or equipment appraisals or invoices. Indications of value from these sources are generally discounted based on the age of the financial information or the quality of the assets.

From time to time, QNB may extend, restructure, or otherwise modify the terms of existing loans, on a case-by-case basis, to remain competitive and retain certain customers, as well as assist other customers that may be experiencing financial difficulties. A loan is considered to be a troubled debt restructuring (“TDR”) loan when the Company grants a concession to the borrower because of the borrower’s financial condition that it would not otherwise consider. Such concessions include the reduction of interest rates, forgiveness of principal or interest, or other modifications of interest rates to less than the current market rate for new obligations with similar risk. Loans classified as TDRs are considered non-performing and are also designated as impaired.

The concessions made for TDRs involve lowering the monthly payments on loans through periods of interest only payments, a reduction in interest rate below a market rate or an extension of the term of the loan without a corresponding adjustment to the risk premium reflected in the interest rate, or a combination of these three methods. The restructurings rarely result in the forgiveness of principal or accrued interest. If the borrower has demonstrated performance under the previous terms and our underwriting process shows the borrower has the capacity to continue to perform under the restructured terms, the loan will continue to accrue interest. Non-accruing restructured loans may be returned to accrual status when there has been a sustained period of repayment performance (generally six consecutive months of payments) and both principal and interest are deemed collectible. TDR loans that are in compliance with their modified terms and that yield a market rate may be removed from the TDR status after a period of performance.

QNB assesses all loan restructurings under the guidance of ASU 2011-02. Performing TDRs (not reported as non-accrual or past due 90 days or more and still accruing) totaled $4,294,000 and $2,578,000 as of June 30, 2013 and December 31, 2012, respectively. Non-performing TDRs totaled $3,234,000 and $3,299,000 as of June 30, 2013 and December 31, 2012, respectively. All TDRs are included in impaired loans presented in the section above.

27

 QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Unaudited)

8. LOANS & ALLOWANCE FOR LOAN LOSSES (continued)

The following table presents loans by loan class modified as TDRs during the three and six months ended June 30, 2013 and 2012. The pre-modification and post-modification outstanding recorded investments disclosed in the tables below, represent carrying amounts immediately prior to the modification and at June 30, 2013 and 2012.

Three months ended June 30,	2013						2012
	Number of contracts		Pre- modification outstanding recorded investment		Post- modification outstanding recorded investment		Number of contracts		Pre- modification outstanding recorded investment		Post- modification outstanding recorded investment
Commercial:
Commercial and industrial		-		-		-		2	$	482	$	476
Secured by commercial real estate		-		-		-		1		2,380		2,380
Retail:
1-4 family residential mortgages		-		-		-		1		145		141
Home equity loans and lines		1	$	28	$	28		-		-		-
		1	$	28	$	28		4	$	3,007	$	2,997

Six months ended June 30,	2013						2012
	Number of contracts		Pre- modification outstanding recorded investment		Post- modification outstanding recorded investment		Number of contracts		Pre- modification outstanding recorded investment		Post- modification outstanding recorded investment
Commercial:
Commercial and industrial		-		-		-		2	$	482	$	476
Secured by commercial real estate		1	$	1,822	$	1,822		1		2,380		2,380
Retail:
1-4 family residential mortgages		-		-		-		1		145		141
Home equity loans and lines		1		28		28		1		38		38
		2	$	1,850	$	1,850		5	$	3,045	$	3,035

The TDR concessions made during the six months ended June 30, 2013 involved an interest only repayment period on the loans. There was no specific reserve for loan losses allocated to the loans modified as TDRs during the six months ended June 30, 2013. Any required specific reserves are included in the allowance for loan losses for loans individually evaluated for impairment. There were no charge-offs resulting from loans modified as TDRs during the six months ended June 30, 2013 or 2012.

There were no loans modified as TDRs within 12 months prior to June 30, 2013 for which there was a payment default (30 days or more past due) during the six months ended June 30, 2013.

28

 QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Unaudited)

8. LOANS & ALLOWANCE FOR LOAN LOSSES (continued)

The following tables present the balance in the allowance for loan losses at June 30, 2013 and December 31, 2012 disaggregated on the basis of the Company’s impairment method by class of loans receivable along with the balance of loans receivable by class, excluding unearned fees and costs, disaggregated on the basis of the Company’s impairment methodology:

	Allowance for Loan Losses						Loans Receivable
June 30, 2013	Balance		Balance related to loans individually evaluated for impairment		Balance related to loans collectively evaluated for impairment		Balance		Balance individually evaluated for impairment		Balance collectively evaluated for impairment
Commercial:
Commercial and industrial	$	1,994	$	652	$	1,342	$	111,619	$	5,882	$	105,737
Construction		242		-		242		10,557		2,065		8,492
Secured by commercial real estate		3,916		850		3,066		192,689		15,633		177,056
Secured by residential real estate		1,437		534		903		44,102		3,836		40,266
State and political subdivisions		277		-		277		32,552		1,807		30,745
Loans to depository institutions		10		-		10		2,250		-		2,250
Indirect lease financing		156		7		149		8,703		72		8,631
Retail:
1-4 family residential mortgages		289		67		222		27,774		440		27,334
Home equity loans and lines		664		71		593		56,777		267		56,510
Consumer		28		-		28		2,186		-		2,186
Unallocated		418	N/A		N/A		N/A		N/A		N/A
	$	9,431	$	2,181	$	6,832	$	489,209	$	30,002	$	459,207

	Allowance for Loan Losses						Loans Receivable
December 31, 2012	Balance		Balance related to loans individually evaluated for impairment		Balance related to loans collectively evaluated for impairment		Balance		Balance individually evaluated for impairment		Balance collectively evaluated for impairment
Commercial:
Commercial and industrial	$	2,505	$	1,309	$	1,196	$	100,063	$	7,753	$	92,310
Construction		209		-		209		11,061		3,990		7,071
Secured by commercial real estate		3,795		619		3,176		192,867		14,931		177,936
Secured by residential real estate		1,230		543		687		41,003		2,843		38,160
State and political subdivisions		260		-		260		34,256		1,849		32,407
Loans to depository institutions		15		-		15		3,250		-		3,250
Indirect lease financing		168		13		155		9,685		98		9,587
Retail:
1-4 family residential mortgages		324		90		234		28,733		456		28,277
Home equity loans and lines		582		127		455		54,860		384		54,476
Consumer		27		-		27		2,012		-		2,012
Unallocated		657	N/A		N/A		N/A		N/A		N/A
	$	9,772	$	2,701	$	6,414	$	477,790	$	32,304	$	445,486

29

QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Unaudited) 

8. LOANS & ALLOWANCE FOR LOAN LOSSES (continued)

The following tables summarize additional information in regards to impaired loans by loan portfolio class as of June 30, 2013 and December 31, 2012:

June 30, 2013	Recorded investment (after charge-offs)		Unpaid principal balance		Related allowance		Average recorded investment		Interest income recognized
With no specific allowance recorded:
Commercial:
Commercial and industrial	$	4,153	$	4,548	$	-
Construction		2,065		2,302		-
Secured by commercial real estate		12,339		13,184		-
Secured by residential real estate		1,444		1,467		-
State and political subdivisions		1,807		1,807		-
Loans to depository institutions		-		-		-
Indirect lease financing		39		44		-
Retail:
1-4 family residential mortgages		166		187		-
Home equity loans and lines		196		222		-
Consumer		-		-		-
	$	22,209	$	23,761	$	-
With an allowance recorded:
Commercial:
Commercial and industrial	$	1,729	$	1,902	$	652
Construction		-		-		-
Secured by commercial real estate		3,294		3,799		850
Secured by residential real estate		2,392		2,512		534
State and political subdivisions		-		-		-
Loans to depository institutions		-		-		-
Indirect lease financing		33		35		7
Retail:
1-4 family residential mortgages		274		285		67
Home equity loans and lines		71		79		71
Consumer		-		-		-
	$	7,793	$	8,612	$	2,181
Total:
Commercial:
Commercial and industrial	$	5,882	$	6,450	$	652	$	6,771	$	12
Construction		2,065		2,302		-		3,865		28
Secured by commercial real estate		15,633		16,983		850		14,117		197
Secured by residential real estate		3,836		3,979		534		2,811		17
State and political subdivisions		1,807		1,807		-		1,826		33
Loans to depository institutions		-		-		-		-		-
Indirect lease financing		72		79		7		78		-
Retail:
1-4 family residential mortgages		440		472		67		448		3
Home equity loans and lines		267		301		71		323		1
Consumer		-		-		-		-		-
	$	30,002	$	32,373	$	2,181	$	30,239	$	291

 

30

QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Unaudited) 

8. LOANS & ALLOWANCE FOR LOAN LOSSES (continued)

December 31, 2012	Recorded investment (after charge-offs)		Unpaid principal balance		Related allowance		Average recorded investment		Interest income recognized
With no specific allowance recorded:
Commercial:
Commercial and industrial	$	5,241	$	5,477	$	-
Construction		3,990		4,170		-
Secured by commercial real estate		11,392		12,128		-
Secured by residential real estate		897		912		-
State and political subdivisions		1,849		1,850		-
Loans to depository institutions		-		-		-
Indirect lease financing		37		44		-
Retail:
1-4 family residential mortgages		181		198		-
Home equity loans and lines		184		196		-
Consumer		-		-		-
	$	23,771	$	24,975	$	-
With an allowance recorded:
Commercial:
Commercial and industrial	$	2,512	$	2,687	$	1,309
Construction		-		-		-
Secured by commercial real estate		3,539		4,023		619
Secured by residential real estate		1,946		2,024		543
State and political subdivisions		-		-		-
Loans to depository institutions		-		-		-
Indirect lease financing		61		67		13
Retail:
1-4 family residential mortgages		275		287		90
Home equity loans and lines		200		214		127
Consumer		-		-		-
	$	8,533	$	9,302	$	2,701
Total:
Commercial:
Commercial and industrial	$	7,753	$	8,164	$	1,309	$	7,657	$	74
Construction		3,990		4,170		-		4,972		111
Secured by commercial real estate		14,931		16,151		619		14,883		541
Secured by residential real estate		2,843		2,936		543		2,439		47
State and political subdivisions		1,849		1,850		-		1,478		64
Loans to depository institutions		-		-		-		-		-
Indirect lease financing		98		111		13		86		-
Retail:
1-4 family residential mortgages		456		485		90		518		5
Home equity loans and lines		384		410		127		510		5
Consumer		-		-
	$	32,304	$	34,277	$	2,701	$	32,543	$	847

31

QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Unaudited) 

9. FAIR VALUE MEASUREMENTS AND DISCLOSURES

Financial Accounting Standards Board (FASB) ASC 820, Fair Value Measurements and Disclosures, defines fair value as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants (fair values are not adjusted for transaction costs). ASC 820 also establishes a framework (fair value hierarchy) for measuring fair value under GAAP, and expands disclosures about fair value measurements.

ASC 820 establishes a fair value hierarchy that prioritizes the inputs to valuation methods used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are as follows:

Level 1:   Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.  

Level 2:   Quoted prices in markets that are not active, or inputs that are observable either directly or indirectly, for substantially the full term of the asset or liability.  

Level 3:   Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported with little or no market activity). 

An asset’s or liability’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.

The measurement of fair value should be consistent with one of the following valuation techniques: market approach, income approach, and/or cost approach. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities (including a business). For example, valuation techniques consistent with the market approach often use market multiples derived from a set of comparables. Multiples might lie in ranges with a different multiple for each comparable. The selection of where within the range the appropriate multiple falls requires judgment, considering factors specific to the measurement (qualitative and quantitative). Valuation techniques consistent with the market approach include matrix pricing. Matrix pricing is a mathematical technique used principally to value debt securities without relying exclusively on quoted prices for the specific securities, but rather by relying on the security’s relationship to other benchmark quoted securities.

32

QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Unaudited) 

9. FAIR VALUE MEASUREMENTS AND DISCLOSURES (continued)

The following table sets forth QNB’s financial assets measured at fair value on a recurring and nonrecurring basis and the fair value measurements by level within the fair value hierarchy as of June 30, 2013:

June 30, 2013	Quoted prices in active markets for identical assets (Level 1)		Significant other observable input (Level 2)		Significant unobservable inputs (Level 3)		Balance at end of period
Recurring fair value measurements
Securities available-for-sale
U.S. Government agency securities		-	$	70,474		-	$	70,474
State and municipal securities		-		86,715		-		86,715
U.S. Government agencies and sponsored enterprises (GSEs):
Mortgage-backed securities		-		126,945		-		126,945
Collateralized mortgage obligations (CMOs)		-		85,678		-		85,678
Pooled trust preferred securities		-		-	$	2,091		2,091
Corporate debt securities		-		3,991		-		3,991
Equity securities	$	4,470		-		-		4,470
Total securities available-for-sale	$	4,470	$	373,803	$	2,091	$	380,364
Total recurring fair value measurements	$	4,470	$	373,803	$	2,091	$	380,364
Nonrecurring fair value measurements
Impaired loans		-		-	$	5,612	$	5,612
Mortgage servicing rights		-		-		504		504
Loans held-for-sale		-	$	1,328		-		1,328
Other real estate owned	$	110		-		-		110
Total nonrecurring fair value measurements	$	110	$	1,328	$	6,116	$	7,554

There were no transfers in and out of Level 1 and Level 2 fair value measurements during the six months ended June 30, 2013. There were also no transfers in or out of level 3 for the same period. There were no losses included in earnings attributable to the change in unrealized gains or losses relating to the available-for-sale securities above with fair value measurements utilizing significant unobservable inputs for the six-month periods ended June 30, 2013 and 2012, respectively

33

QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Unaudited) 

9. FAIR VALUE MEASUREMENTS AND DISCLOSURES (continued)

The following table sets forth QNB’s financial assets measured at fair value on a recurring and nonrecurring basis, the fair value measurements by level within the fair value hierarchy as of December 31, 2012:

December 31, 2012	Quoted prices in active markets for identical assets (Level 1)		Significant other observable input (Level 2)		Significant unobservable inputs (Level 3)		Balance at end of period
Recurring fair value measurements
Securities available-for-sale
U.S. Government agency securities		-	$	104,130		-	$	104,130
State and municipal securities		-		86,789		-		86,789
U.S. Government agencies and sponsored enterprises (GSEs):
Mortgage-backed securities		-		107,973		-		107,973
Collateralized mortgage obligations (CMOs)		-		94,091		-		94,091
Pooled trust preferred securities		-		-	$	1,962		1,962
Corporate debt securities		-		2,502		-		2,502
Equity securities	$	4,055		-		-		4,055
Total securities available-for-sale	$	4,055	$	395,485	$	1,962	$	401,502
Total recurring fair value measurements	$	4,055	$	395,485	$	1,962	$	401,502
Nonrecurring fair value measurements
Impaired loans	$	-	$	-	$	5,832	$	5,832
Mortgage servicing rights		-		-		448		448.00
Total nonrecurring fair value measurements	$	-	$	-	$	6,280	$	6,280

The following table presents additional quantitative information about assets measured at fair value on a nonrecurring basis and for which QNB has utilized Level 3 inputs to determine fair value:

	Quantitative information about Level 3 fair value measurements
June 30, 2013	Fair value		Valuation techniques	Unobservable input	Value or range of values
Impaired loans	$	5,612	Appraisal of collateral (1)	Appraisal adjustments (2)	0%	to	-30%
				Liquidation expenses (2)	0%	to	-10%
Mortgage servicing rights (yrs)	$	504	Discounted cash flow	Remaining term	1	-	30
				Discount rate	10%	to	12%

(1)  Fair value is primarily determined through appraisals of the underlying collateral by independent parties, which generally includes various level 3 inputs which are not always identifiable.

(2) Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses.The range is presented as a percent of the initial appraised value.

The following table presents additional information about the securities available-for-sale measured at fair value on a recurring basis and for which QNB utilized significant unobservable inputs (Level 3 inputs) to determine fair value for the six months ended June 30, 2013:

34

QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Unaudited) 

9. FAIR VALUE MEASUREMENTS AND DISCLOSURES (continued)

	Fair value measurements using significant unobservable inputs (Level 3)
Balance, beginning of year	$	1,962
Settlements		-
Total gains or losses (realized/unrealized)
Included in earnings		-
Included in other comprehensive income		129
Transfers in and/or out of Level 3		-
Balance, June 30, 2013	$	2,091

 

The Level 3 securities consist of seven collateralized debt obligation securities, PreTSL securities, which are backed by trust preferred securities issued by banks, thrifts, and insurance companies. The market for these securities at June 30, 2013 is not active and markets for similar securities also are not active. The inactivity was evidenced first by a significant widening of the bid-ask spread in the brokered markets in which PreTSLs trade and then by a significant decrease in the volume of trades relative to historical levels. The new issue market is also inactive and there are currently very few market participants who are willing and or able to transact for these securities.

Given conditions in the debt markets today and the absence of observable transactions in the secondary and new issue markets, we determined:

●  The few observable transactions and market quotations that are available are not reliable for purposes of determining fair value at June 30, 2013;  

●  An income valuation approach technique (present value technique) that maximizes the use of relevant observable inputs and minimizes the use of unobservable inputs will be equally or more representative of fair value than the market approach valuation technique used at prior measurement dates; and  

●  PreTSLs will be classified within Level 3 of the fair value hierarchy because significant adjustments are required to determine fair value at the measurement date. 

The Bank is aware of several factors indicating that recent transactions of PreTSL securities are not orderly including an increased spread between bid/ask prices, lower sales transaction volumes for these types of securities, and a lack of new issuances. As a result, the Bank engaged an independent third party to value the securities using a discounted cash flow analysis. The estimated cash flows are based on specific assumptions about defaults, deferrals and prepayments of the trust preferred securities underlying each PreTSL. The resulting collateral cash flows are allocated to the bond waterfall using the INTEXcalc valuation model.

The estimates for the conditional default rates (CDR) are based on the payment characteristics of the trust preferred securities themselves (e.g. current, deferred, or defaulted) as well as the financial condition of the trust preferred issuers in the pool. A near-term CDR for each issuer in the pool is estimated based on their financial condition using key financial ratios relating to the financial institution’s capitalization, asset quality, profitability and liquidity. In addition to the specific bank default assumptions, overall deal default rates are modeled. In 2013 and beyond, the CDR rate is calculated based upon a comparison of key financial ratios of active individual issuers without a short-term probability of default compared to all FDIC insured banks. To derive this long-term default rate, a comparison of certain key financial ratios of the active issuers in the security to all FDIC insured banks is reviewed. The active issuers are summarized by creating a weighted average based on issue size, then divided into categories based upon their status of deferral and whether or not a specific default assumption has been assigned to the issuer. To ensure an accurate comparison, the standard deviation across the issuers for each ratio is calculated and any issuer that falls more than three standard deviations above or below the average for that ratio is removed.

35

QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Unaudited) 

9. FAIR VALUE MEASUREMENTS AND DISCLOSURES (continued)

The base loss severity assumption and long-term loss severity assumptions are modeled at 95%. The severity factor for near-term CDRs is vectored to reflect the relative expected performance of the institutions modeled to default, with lower forecasted severities used for the higher quality institutions.

Prepayments are modeled to take into account the disruption in the asset-backed securities marketplace and the lack of new pooled trust preferred issuances. For purposes of the cash flow analysis, relatively modest rates of prepayment were forecasted (ranging from 0-1%). In addition to the base prepayment assumption, due to the recent enactment of the Dodd-Frank financial legislation additional prepayment analysis was performed. First, all fixed rate trust preferred securities issued by banks with more than $15 billion in total assets at December 31, 2009 were identified. The current credit rating of these institutions was reviewed and it was assumed that any issuer with an investment grade credit rating would prepay their issuance as soon as possible, or July 1, 2015 for bank holding company subsidiaries of foreign banking organizations that have relied on Supervision and Regulation Letter SR-01-1. For those institutions rated below investment grade the holding companies’ approximate cost of long-term funding given their rating and marketplace interest rate was estimated. The following assumption was made; any holding company that could refinance for a cost savings of more than 2% will refinance and will do so as soon as possible, or July 1, 2015. Finally, for issuers not impacted by the Tier 1 regulatory capital legislation enacted by the Dodd-Frank Act, the issuers that have shown a recent history of prepayment of both floating rate and fixed rate issues were identified and it was assumed these issuers will prepay as soon as possible.

The internal rate of return is the pre-tax yield used to discount the best estimate of future cash flows after credit losses. The cash flows have been discounted using estimated market discount rates of 3-month LIBOR plus spreads ranging from 4.16% to 9.42%. The determination of appropriate market discount rates involved the consideration of the following:

●  the time value of money 

●  the price for bearing uncertainty in cash flows 

●  other factors that would be considered by market participants 

The analysis of discount rates involved the review of corporate bond spreads for banks, U.S. Treasury yields, credit default swap rates for financial companies (utilized as a proxy for credit), the swap/LIBOR yield curve and the characteristics of the individual securities being valued.

The following information should not be interpreted as an estimate of the fair value of the entire Company since a fair value calculation is only provided for a limited portion of QNB’s assets and liabilities. Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between QNB’s disclosures and those of other companies may not be meaningful.

The following methods and assumptions were used to estimate the fair values of each major classification of financial instrument and non-financial asset at June 30, 2013 and December 31, 2012:

Cash and cash equivalents, accrued interest receivable and accrued interest payable (carried at cost): The carrying amounts reported in the balance sheet approximate those assets’ fair value.

Investment securities available for sale (carried at fair value) and held-to-maturity (carried at amortized cost): The fair value of securities are determined by obtaining quoted market prices on nationally recognized securities exchanges (Level 1), or matrix pricing (Level 2), which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted market prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted prices. Level 2 debt securities are valued by a third-party pricing service commonly used in the banking industry. Level 2 fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution date, market consensus prepayment speeds, credit information and the security’s terms and conditions, among other things. For certain securities which are not traded in active markets or are subject to transfer restrictions, valuations are adjusted to reflect illiquidity and/or non-transferability, and such adjustments are generally based on available market evidence (Level 3). In the absence of such evidence, management’s best estimate is used. Management’s best estimate consists of both internal and external support on certain Level 3 investments. Cash flow models using a present value formula that includes assumptions market participants would use along with indicative exit pricing obtained from broker/dealers (where available) were used to support fair values of certain Level 3 investments.

36

QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Unaudited) 

9. FAIR VALUE MEASUREMENTS AND DISCLOSURES (continued)

Restricted investment in bank stocks (carried at cost): The fair value of stock in Atlantic Central Bankers Bank and the Federal Home Loan Bank is the carrying amount, based on redemption provisions, and considers the limited marketability of such securities.

Loans Held for Sale (carried at lower of cost or fair value): The fair value of loans held for sale is determined, when possible, using quoted secondary market prices. If no such quoted prices exist, the fair value of a loan is determined using quoted prices for a similar loan or loans, adjusted for the specific attributes of that loan.

Loans Receivable (carried at cost): The fair values of loans are estimated using discounted cash flow analyses, using market rates at the balance sheet date that reflect the credit and interest rate-risk inherent in the loans. Projected future cash flows are calculated based upon contractual maturity or call dates, projected repayments and prepayments of principal. Generally, for variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values.

Impaired Loans (generally carried at fair value): Impaired loans are loans, in which the Company has measured impairment generally based on the fair value of the loan’s collateral. Fair value is generally determined based upon independent third-party appraisals of the properties, or discounted cash flows based upon the expected proceeds. These assets are included as Level 3 fair values, based upon the lowest level of input that is significant to the fair value measurements.

Mortgage Servicing Rights (carried at lower of cost or fair value): The fair value of mortgage servicing rights is based on a valuation model that calculates the present value of estimated net servicing income. The mortgage servicing rights are stratified into tranches based on predominant characteristics, such as interest rate, loan type and investor type. The valuation incorporates assumptions that market participants would use in estimating future net servicing income.

Foreclosed assets (other real estate owned and repossessed assets): Foreclosed assets are the only non-financial assets valued on a non-recurring basis which are held by the Company at fair value, less cost to sell. At foreclosure or repossession, if the fair value, less estimated costs to sell, of the collateral acquired (real estate, vehicles, equipment) is less than the Company’s recorded investment in the related loan, a write-down is recognized through a charge to the allowance for loan losses. Additionally, valuations are periodically performed by management and any subsequent reduction in value is recognized by a charge to income. The fair value of foreclosed assets held-for-sale is estimated using Level 3 inputs based on observable market data.

Deposit liabilities (carried at cost): The fair value of deposits with no stated maturity (e.g. demand deposits, interest-bearing demand accounts, money market accounts and savings accounts) are by definition, equal to the amount payable on demand at the reporting date (i.e. their carrying amounts). This approach to estimating fair value excludes the significant benefit that results from the low-cost funding provided by such deposit liabilities, as compared to alternative sources of funding. Deposits with a stated maturity (time deposits) have been valued using the present value of cash flows discounted at rates approximating the current market for similar deposits.

37

QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Unaudited) 

9. FAIR VALUE MEASUREMENTS AND DISCLOSURES (continued)

Short-term borrowings (carried at cost): The carrying amount of short-term borrowings approximates their fair values.

Long-term debt (carried at cost): The fair values of FHLB advances and securities sold under agreements to repurchase are estimated using discounted cash flow analysis, based on quoted prices for new long-term debt with similar credit risk characteristics, terms and remaining maturity. These prices obtained from this active market represent a fair value that is deemed to represent the transfer price if the liability were assumed by a third party.

Off-balance-sheet instruments (disclosed at cost): The fair values for the Bank’s off-balance sheet instruments (lending commitments and letters of credit) are based on fees currently charged in the market to enter into similar agreements, taking into account, the remaining terms of the agreements and the counterparties’ credit standing.

Management uses its best judgment in estimating the fair value of the Company’s financial instruments; however, there are inherent weaknesses in any estimation technique. Therefore, for substantially all financial instruments, the fair value estimates herein are not necessarily indicative of the amounts the Company could have realized in a sales transaction on the dates indicated. The estimated fair value amounts have been measured as of the respective period ends and have not been re-evaluated or updated for purposes of these financial statements subsequent to those respective dates. As such, the estimated fair values of these financial instruments subsequent to the respective reporting dates may be different than the amounts reported at each period end.

The estimated fair values and carrying amounts of the Company’s financial and off-balance sheet instruments are summarized as follows:

					Fair value measurements
June 30, 2013	Carrying amount		Fair value		Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
Financial assets
Cash and cash equivalents	$	15,897	$	15,897	$	15,897		-		-
Investment securities available-for-sale		380,364		380,364		4,470	$	373,803	$	2,091
Investment securities held-to-maturity		146		163		-		163		-
Restricted investment in bank stocks		1,837		1,837		1,837		-		-
Loans held-for-sale		1,328		1,328		-		1,328		-
Net loans		479,784		481,469		-		-		481,469
Mortgage servicing rights		504		576		-		-		576
Accrued interest receivable		2,981		2,981		-		2,981		-
Financial liabilities
Deposits with no stated maturities	$	542,740	$	542,740	$	542,740		-	$	-
Deposits with stated maturities		253,173		256,933		-	$	256,933		-
Short-term borrowings		32,851		32,851		32,851		-		-
Long-term debt		5,282		5,412		-		5,412		-
Accrued interest payable		407		407		-		407		-
Off-balance sheet instruments
Commitments to extend credit	$	-	$	-	$	-	$	-	$	-
Standby letters of credit		-		-		-		-		-

 

38

QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Unaudited) 

9. FAIR VALUE MEASUREMENTS AND DISCLOSURES (continued)

					Fair value measurements
December 31, 2012	Carrying amount		Fair value		Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
Financial assets
Cash and cash equivalents	$	15,453	$	15,453	$	15,453		-		-
Investment securities available-for-sale		401,502		401,502		4,055	$	395,485	$	1,962
Investment securities held-to-maturity		146		166		-		166		-
Restricted investment in bank stocks		2,244		2,244		2,244		-		-
Loans held-for-sale		1,616		1,674		-		1,674		-
Net loans		467,961		474,330		-		-		474,330
Mortgage servicing rights		448		464		-		-		464
Accrued interest receivable		2,803		2,803		-		2,803		-
Financial liabilities
Deposits with no stated maturities	$	532,404	$	532,404	$	532,404		-	$	-
Deposits with stated maturities		269,234		273,878		-	$	273,878		-
Short-term borrowings		32,488		32,488		32,488		-		-
Long-term debt		5,287		5,694		-		5,694		-
Accrued interest payable		487		487		-		487		-
Off-balance sheet instruments
Commitments to extend credit	$	-	$	-	$	-	$	-	$	-
Standby letters of credit		-		-		-		-		-

 

10. OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS AND GUARANTEES

In the normal course of business there are various legal proceedings, commitments, and contingent liabilities which are not reflected in the financial statements. Management does not anticipate any material losses as a result of these transactions and activities. They include, among other things, commitments to extend credit and standby letters of credit. The maximum exposure to credit loss, which represents the possibility of sustaining a loss due to the failure of the other parties to a financial instrument to perform according to the terms of the contract, is represented by the contractual amount of these instruments. QNB uses the same lending standards and policies in making credit commitments as it does for on-balance sheet instruments. The activity is controlled through credit approvals, control limits, and monitoring procedures.

A summary of the Bank's financial instrument commitments is as follows:

	June 30, 2013		December 31, 2012
Commitments to extend credit and unused lines of credit	$	148,511	$	138,425
Standby letters of credit		5,624		5,332
Total financial instrument commitments	$	154,135	$	143,757

 

39

QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Unaudited) 

10. OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS AND GUARANTEES (continued)

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require the payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. QNB evaluates each customer’s creditworthiness on a case-by-case basis.

Standby letters of credit are conditional commitments issued by the Bank to guarantee the financial or performance obligation of a customer to a third party. QNB’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for standby letters of credit is represented by the contractual amount of those instruments. The Bank uses the same credit policies in making conditional obligations as it does for on-balance sheet instruments. These standby letters of credit expire within three years. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending other loan commitments. The Bank requires collateral and personal guarantees supporting these letters of credit as deemed necessary. Management believes that the proceeds obtained through a liquidation of such collateral and the enforcement of personal guarantees would be sufficient to cover the maximum potential amount of future payments required under the corresponding guarantees. The amount of the liability as of June 30, 2013 and December 31, 2012 for guarantees under standby letters of credit issued is not material.

The amount of collateral obtained for letters of credit and commitments to extend credit is based on management’s credit evaluation of the customer. Collateral varies, but may include real estate, accounts receivable, marketable securities, pledged deposits, inventory or equipment.

11. REGULATORY RESTRICTIONS

Dividends payable by the Company and the Bank are subject to various limitations imposed by statutes, regulations and policies adopted by bank regulatory agencies. Under Pennsylvania banking law, the Bank is subject to certain restrictions on the amount of dividends that it may declare without prior regulatory approval. Under Federal Reserve regulations, the Bank is limited as to the amount it may lend affiliates, including QNB Corp., unless such loans are collateralized by specific obligations.

Both the Company and the Bank are subject to regulatory capital requirements administered by Federal banking agencies. Failure to meet minimum capital requirements can initiate actions by regulators that could have an effect on the financial statements. Under the framework for prompt corrective action, both the Company and the Bank must meet capital guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance-sheet items. The capital amounts and classification are also subject to qualitative judgments by the regulators. Management believes, as of June 30, 2013, that the Company and the Bank met capital adequacy requirements to which they were subject.

As of the most recent notification, the primary regulator of the Bank considered it to be “well capitalized” under the regulatory framework. There are no conditions or events since that notification that management believes have changed the classification. To be categorized as well capitalized, the Company and the Bank must maintain minimum ratios as set forth in the following table.

40

QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Unaudited) 

11. REGULATORY RESTRICTIONS (continued)

	Capital levels
	Actual					Adequately capitalized					Well capitalized
As of June 30, 2013	Amount		Ratio			Amount		Ratio			Amount		Ratio
Total risk-based capital (to risk-weighted assets):
Consolidated	$	84,026		13.92	%	$	48,295		8.00	%	N/A		N/A
Bank		79,049		13.19			47,944		8.00		$	59,930		10.00	%
Tier I capital (to risk-weighted assets):
Consolidated		76,252		12.63			24,148		4.00		N/A		N/A
Bank		71,534		11.94			23,972		4.00			35,958		6.00
Tier I capital (to average assets):
Consolidated		76,252		8.37			36,423		4.00		N/A		N/A
Bank		71,534		7.90			36,239		4.00			45,299		5.00

	Capital levels
	Actual					Adequately capitalized					Well capitalized
As of December 31, 2012	Amount		Ratio			Amount		Ratio			Amount		Ratio
Total risk-based capital (to risk-weighted assets):
Consolidated	$	80,758		13.60	%	$	47,490		8.00	%	N/A		N/A
Bank		76,154		12.92			47,170		8.00		$	58,963		10.00	%
Tier I capital (to risk-weighted assets):
Consolidated		73,167		12.33			23,745		4.00		N/A		N/A
Bank		68,754		11.66			23,585		4.00			35,378		6.00
Tier I capital (to average assets):
Consolidated		73,167		7.96			36,762		4.00		N/A		N/A
Bank		68,754		7.51			36,602		4.00			45,752		5.00

41

QNB CORP. AND SUBSIDIARY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

QNB Corp. (herein referred to as QNB or the Company) is a bank holding company headquartered in Quakertown, Pennsylvania. The Company, through its wholly-owned subsidiary, QNB Bank (the Bank), has been serving the residents and businesses of Bucks, Montgomery and southern Lehigh counties in Pennsylvania since 1877. The Bank is a locally managed community bank that provides a full range of commercial and retail banking and retail brokerage services.

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

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 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, and including the risk factors identified in Item 1A of QNB’s 2012 Form 10-K, could affect the future financial results of the Company and its subsidiary 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 the Company’s line of business; 

•  The risk that the Federal Deposit Insurance Corporation (FDIC) could levy additional insurance assessments on all insured institutions in order to replenish the Deposit Insurance Fund based on the level of bank failures in the future; 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.

42

QNB CORP. AND SUBSIDIARY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The discussion and analysis of the financial condition and results of operations are based on the consolidated financial statements of QNB, which are prepared in accordance with U.S. generally accepted accounting principles (GAAP) and predominant practices within the banking industry. The preparation of these consolidated financial statements requires QNB to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. QNB evaluates estimates on an on-going basis, including those related to the determination of the allowance for loan losses, the determination of the valuation of other real estate owned and foreclosed assets, other-than-temporary impairments on investment securities, the valuation of deferred tax assets, stock-based compensation and income taxes. QNB bases its estimates on historical experience and various other factors and assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Other-Than-Temporary Investment Security Impairment

Securities are evaluated periodically to determine whether a decline in their value is other-than-temporary. Management utilizes criteria such as the magnitude and duration of the decline, in addition to the reasons underlying the decline, to determine whether the loss in value is other-than-temporary. The term “other-than-temporary” is not intended to indicate that the decline is permanent, but indicates that the prospect for a near-term recovery of value is not necessarily favorable, or that there is a lack of evidence to support a realizable value equal to or greater than the carrying value of the investment. For equity securities, once a decline in value is determined to be other-than-temporary, the value of the equity security is reduced and a corresponding charge to earnings is recognized.

The Company follows accounting guidance related to the recognition and presentation of other-than-temporary impairment that specifies (a) if a company does not have the intent to sell a debt security prior to recovery and (b) it is more likely than not that it will not have to sell the debt security prior to recovery, the security would not be considered other-than-temporarily impaired unless there is a credit loss. When an entity does not intend to sell the security, and it is more likely than not, the entity will not have to sell the security before recovery of its cost basis, it will recognize the credit component of an other-than-temporary impairment of a debt security in earnings and the remaining portion in other comprehensive income. For held-to-maturity debt securities, the amount of other-than-temporary impairment recorded in other comprehensive income for the noncredit portion of a previous other-than-temporary impairment is amortized prospectively over the remaining life of the security on the basis of the timing of future estimated cash flows of the security.

During the second quarter of 2013, there was a $43,000 other-than-temporary impairment (OTTI) charge on an equity security that had been in an unrealized loss position in excess of 20% for six months. There were no credit-related OTTI charges in the first half of 2012.

Allowance for Loan Losses

QNB considers that the determination of the allowance for loan losses involves a higher degree of judgment and complexity than its other significant accounting policies. The allowance for loan losses is calculated with the objective of maintaining a level believed by management to be sufficient to absorb probable known and inherent losses in the outstanding loan portfolio. The allowance is reduced by actual credit losses and is increased by the provision for loan losses and recoveries of previous losses. The provisions for loan losses are charged to earnings to bring the total allowance for loan losses to a level considered necessary by management.

The allowance for loan losses is based on management’s continual review and evaluation of the loan portfolio. The level of the allowance is determined by assigning specific reserves to individually identified problem credits and general reserves to all other loans. The portion of the allowance that is allocated to impaired loans is determined by estimating the inherent loss on each credit after giving consideration to the value of underlying collateral. The general reserves are based on the composition and risk characteristics of the loan portfolio, including the nature of the loan portfolio, credit concentration trends, delinquency and loss experience, as well as other qualitative factors such as current economic trends.

43

QNB CORP. AND SUBSIDIARY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

Management emphasizes loan quality and close monitoring of potential problem credits. Credit risk identification and review processes are utilized in order to assess and monitor the degree of risk in the loan portfolio. QNB’s lending and credit administration staff are charged with reviewing the loan portfolio and identifying changes in the economy or in a borrower’s circumstances which may affect the ability to repay debt or the value of pledged collateral. A loan classification and review system exists that identifies those loans with a higher than normal risk of uncollectibility. Each commercial loan is assigned a grade based upon an assessment of the borrower’s financial capacity to service the debt and the presence and value of collateral for the loan. An independent loan review group tests risk assessments and evaluates the adequacy of the allowance for loan losses. Management meets monthly to review the credit quality of the loan portfolio and quarterly to review the allowance for loan losses.

In addition, various regulatory agencies, as an integral part of their examination process, periodically review QNB’s allowance for loan losses. Such agencies may require QNB to recognize additions to the allowance based on their judgments about information available to them at the time of their examination.

Management believes that it uses the best information available to make determinations about the adequacy of the allowance and that it has established its existing allowance for loan losses in accordance with GAAP. If circumstances differ substantially from the assumptions used in making determinations, future adjustments to the allowance for loan losses may be necessary and results of operations could be affected. Because future events affecting borrowers and collateral cannot be predicted with certainty, increases to the allowance may be necessary should the quality of any loans deteriorate as a result of the factors discussed above.

Foreclosed Assets

Assets acquired through, or in lieu of, loan foreclosure are held-for-sale and are initially recorded at fair value less cost to sell at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value less cost to sell. Revenue and expenses and changes in the valuation allowance are included in net expenses from foreclosed assets.

Stock-Based Compensation

QNB sponsors stock-based compensation plans, administered by a board committee, under which both qualified and non-qualified stock options may be granted periodically to certain employees. QNB accounts for all awards granted under stock-based compensation plans in accordance with ASC 718, Compensation-Stock Compensation. Compensation cost has been measured using the fair value of an award on the grant date and is recognized over the service period, which is usually the vesting period. The fair value of each option is amortized into compensation expense on a straight-line basis between the grant date for the option and each vesting date. QNB estimates the fair value of stock options on the date of the grant using the Black-Scholes option pricing model. The model requires the use of numerous assumptions, many of which are highly subjective in nature.

Income Taxes

QNB accounts for income taxes under the asset/liability method in accordance with income tax accounting guidance, ASC 740, Income Taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, as well as operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is established against deferred tax assets when, in the judgment of management, it is more likely than not that such deferred tax assets will not become available. Because the judgment about the level of future taxable income is dependent to a great extent on matters that may, at least in part, be beyond QNB’s control, it is at least reasonably possible that management’s judgment about the need for a valuation allowance for deferred tax assets could change in the near term.

44

QNB CORP. AND SUBSIDIARY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

RESULTS OF OPERATIONS - OVERVIEW

QNB reported net income for the second quarter of 2013 of $1,894,000, or $0.58 per share on a diluted basis. This compares to net income of $2,505,000, or $0.78 per share on a diluted basis, for the same period in 2012.

For the six month period ended June 30, 2013, QNB reported net income of $4,302,000, or $1.32 per share on a diluted basis. This compares to net income of $4,976,000, or $1.55 per share on a diluted basis, reported for the six month period ended June 30, 2012.

Net income expressed as an annualized rate of return on average assets and average shareholders’ equity was 0.83% and 9.99%, respectively, for the quarter ended June 30, 2013 compared with 1.16% and 14.54%, respectively, for the quarter ended June 30, 2012. For the six month periods the annualized rate of return on average assets and average shareholders’ equity was 0.96% and 11.52%, respectively, for the period ended June 30, 2013 compared with 1.15% and 14.62%, respectively, for the period ended June 30, 2012.

The quarterly comparison reflects:

●  a decrease in net interest income and the net interest margin resulting from continued downward pressure on yields on earning assets,  

●  costs related to asset quality comprised of a higher provision for loan losses resulting primarily from growth in the loan portfolio between March 31, 2013 and June 30, 2013 and a write-down of a property classified as other real estate owned, 

●  a decline in gains recognized on the sale of residential mortgages and investment securities,  

●  ongoing costs associated with two new branch locations,  

●  an increase in fee income from deposit accounts, and 

●  an increase in income from QNB Financial Services 

The six month comparison reflects these same items except for the provision for loan losses was reduced by $200,000 when comparing the six month periods.

Total assets as of June 30, 2013 were $910,829,000, compared with $919,874,000 at December 31, 2012. Total loans at June 30, 2013 were $489,215,000, compared with $477,733,000 at December 31, 2012, and total deposits at June 30, 2013 were $795,913,000, compared with $801,638,000 at December 31, 2012.

Net Interest Income and Net Interest Margin

Net interest income for the quarter ended June 30, 2013 totaled $6,336,000, a decrease of $440,000, or 6.5%, over the same period in 2012. On a linked quarter basis, net interest income increased $3,000 from the $6,333,000 reported for the first quarter of 2013. Average earning assets for the second quarter of 2013 were $877,849,000, an increase of $36,288,000, or 4.3%, from the second quarter of 2012, with average investment securities increasing $39,988,000, or 11.6%, and average loans increasing $2,511,000, or 0.5%, over the same period. On the funding side, average deposits increased $27,435,000, or 3.6%, to $797,661,000 for the second quarter of 2013 with growth occurring in average non-interest and interest-bearing checking accounts, municipal deposits and savings accounts.

45

QNB CORP. AND SUBSIDIARY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

The prolonged low interest rate environment has continued to exert pressure on asset yields and the net interest margin as longer term assets reprice to lower interest rate levels while funding costs are near their implied floors. In addition, the change in the mix of earning assets with investment securities representing a larger proportion of earning assets has also impacted the average yield on earning assets and the net interest margin. The net interest margin for the second quarter of 2013 was 3.12% compared to 3.49% for the second quarter of 2012 and 3.17% for the first quarter of 2013. The average rate earned on earning assets declined 57 basis points from 4.28% for the second quarter of 2012 to 3.71% for the second quarter of 2013. When comparing the change in the yield on earning assets between the two second quarter periods, loans and investment securities declined from 5.29% and 3.03%, respectively, for the second quarter of 2012 to 4.76% and 2.47%, respectively, for the second quarter of 2013, a decline of 53 basis points and 56 basis points, respectively. In comparison, the cost of interest-bearing liabilities declined 22 basis points from 0.90% to 0.68% over the same time periods. The interest rate paid on interest-bearing deposits declined by 21 basis points to 0.66% for the second quarter of 2013 compared to the second quarter of 2012.

For the six month period ended June 30, 2013 net interest income was $12,669,000, a decrease of $913,000, or 6.7%, lower than the $13,582,000 reported for the first half of 2012. For the six month period ending June 30, 2013 average earning assets increased $36,701,000, or 4.4%, to $875,557,000, with average investment securities increasing 13.4% and average loans decreasing 0.9%. Average total deposits increased $34,143,000, or 4.5%, to $796,229,000 for the six-month period ended June 30, 2013 compared to the same period in 2012. The net interest margin on a tax-equivalent basis was 3.15% for the six-month period ended June 30, 2013 compared with 3.51% for the same period in 2012.

Asset Quality, Provision for Loan Loss and Allowance for Loan Loss

QNB closely monitors the quality of its loan portfolio and considers many factors when performing a quarterly analysis of the appropriateness of the allowance for loan losses and calculating the required provision for loan losses. This analysis considers a number of relevant factors including: specific impairment reserves, historical loan loss experience, general economic conditions, levels of and trends in delinquent and non-performing loans, levels of classified loans, trends in the growth rate of loans and concentrations of credit.

Asset quality has stabilized over the past several quarters with the reduction in the level of non-accrual loans being offset by an increase in restructured loans. Total non-performing assets were $25,191,000 at June 30, 2013 compared with $24,273,000 at December 31, 2012 and $23,990,000 at June 30, 2012. Included in this classification are non-performing loans, non-accrual pooled trust preferred securities, other real estate owned (OREO) and repossessed assets. Total non-performing loans, which represent loans on non-accrual status, loans past due more than 90 days and still accruing interest and troubled debt restructured loans were $22,037,000, or 4.49% of total loans, at June 30, 2013 compared with $21,150,000, or 4.41% of total loans, at December 31, 2012 and $20,824,000, or 4.23% of total loans, at June 30, 2012. Loans on non-accrual status were $17,301,000 at June 30, 2013 compared with $18,572,000 at December 31, 2012 and $16,264,000 at June 30, 2012. 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.

QNB had other real estate owned and other repossessed assets of $1,063,000 as of June 30, 2013 compared with $1,161,000 at December 31, 2012 and $1,151,000 at June 30, 2012. Non-accrual pooled trust preferred securities are carried at fair value which was $2,091,000, $1,962,000, and $2,015,000 at June 30, 2013, December 31, 2012 and June 30, 2012, respectively. The increase in the balance of non-accrual pooled trust preferred securities reflects an improvement in the fair value of these securities and not the purchase of additional securities.

QNB recorded a provision for loan losses of $100,000 in the second quarter of 2013. There was no provision for loan losses in either the first quarter of 2013 or the second quarter of 2012. For the six month periods ended June 30, 2013 and 2012 the provision for loan losses was $100,000 and $300,000, respectively. The provision for loan losses for the second quarter of 2013 is primarily a function of the growth in the loan portfolio between March 31, 2013 and June 30, 2013 while the reduction in the provision when comparing the six month periods reflects a reduction in classified loans.

46

QNB CORP. AND SUBSIDIARY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

QNB's allowance for loan losses of $9,431,000 represents 1.92% of total loans at June 30, 2013 compared to an allowance for loan losses of $9,772,000, or 2.05% of total loans, at December 31, 2012 and $9,467,000, or 1.92% of total loans, at June 30, 2012.

Non-Interest Income

Total non-interest income was $1,239,000 for the second quarter of 2013, a decrease of $87,000 compared with the same period in 2012. Net gains on the sale of residential mortgage loans for the second quarter of 2013 was $133,000 less than the second quarter of 2012. During the second quarter of 2013 mortgage interest rates increased significantly in reaction to the possible tapering of the purchase of mortgage-backed securities by the Federal Reserve Bank. This resulted in a slowdown of mortgage refinancing activity as well as losses on loans with fixed interest rates that were originated but not yet sold. A $38,000 charge was taken to reflect the fair market value of these loans that were held-for-sale at the end of June. Net gains on investment securities accounts for $48,000 of the total decrease in non-interest income compared to the second quarter of 2012. QNB recorded $93,000 of net gains on investment securities during the second quarter of 2013, which included a $43,000 other-than-temporary impairment charge recorded on an equity security. This compares to net gains of $141,000 recognized in the second quarter of 2012. Also during the second quarter of 2013 a $90,000 impairment charge was taken to write-down a property classified as other real estate owned. This property was sold in July 2013. In comparison, net gains of $10,000 were recorded on the sale of other real estate owned during the second quarter of 2012.

Positively impacting non-interest income when comparing the two quarters was higher mutual fund and annuity income and mortgage servicing income. During the fourth quarter of 2012, QNB changed vendors related to the mutual fund and annuity income and now provides securities and advisory services under the name of QNB Financial Services through Investment Professionals, Inc., a registered Broker/Dealer and Registered Investment Advisor. There has been a significant increase in revenue as a result of the change, contributing an additional $112,000 in revenue to the quarter. Some of this additional revenue would be offset by additional salary and benefit expense and operating costs recorded in non-interest expense. Mortgage servicing fees were $38,000 higher quarter over quarter primarily related to a small reversal of a portion of the valuation allowance related to the fair value of mortgage servicing rights as calculated by an independent third-party. In 2013, a $21,000 valuation allowance was required in the second quarter of 2012. Fees for services to customers, primarily overdraft charges, contributed an additional $24,000 to the second quarter of 2013 when compared to the same period in prior year.

Total non-interest income for the six month periods ended June 30, 2013 and 2012 was $2,987,000 and $2,892,000, respectively, an increase of $95,000, or 3.3%. Revenue from QNB Financial Services contributed an additional $196,000 in non-interest income when comparing the six month periods while mortgage servicing income contributed an additional $73,000. Service charges on deposit accounts increased $51,000 while income from QNB’s investment in a title company increased $38,000. Partially offsetting these increases was a $135,000 reduction in net gains on the sale of residential mortgage loans and an $89,000 increase in net losses on other real estate owned.

47

QNB CORP. AND SUBSIDIARY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

Non-Interest Expense

Total non-interest expense was $5,091,000 for the second quarter of 2013, an increase of $263,000, or 5.4%, compared to $4,828,000 for the second quarter of 2012. Salaries and benefits expense increased $125,000, or 4.9%, when comparing the two quarters due to an additional eleven full-time equivalent employees. The increase in employees was primarily related to the opening of two new branch locations in the first quarter of 2013 as well as two additional employees related to QNB Financial Services. The second quarter of 2012 included an accrual for incentive compensation of approximately $90,000. There was no accrual for incentive compensation in 2013. Net occupancy and furniture and equipment expense increased $62,000, or 8.1%. The majority of this increase relates to the two new locations as well as an increase in equipment maintenance costs.

Total non-interest expense was $10,031,000 for the six-month period ended June 30, 2013 compared to $9,679,000 for the same period in 2012, an increase of $352,000, or 3.6%. Salary and benefits expense increased $58,000, as the impact of the new hires noted above was primarily offset by the impact of the lack of an accrual for incentive compensation. Net occupancy and furniture and equipment expense increased $157,000 to $1,681,000 for the six month period ended June 30, 2013 compared to the same period in 2012. The opening of the two new branches in the first quarter of 2013 as well as an increase in building and equipment repairs and maintenance costs contributed to the increase in this category. Marketing expense increased $33,000 while expenses associated with outsourced third party services increased $56,000 when comparing the six month periods.

These items noted in the foregoing overview, as well as others, will be discussed and analyzed more thoroughly in the next sections.

48

QNB CORP. AND SUBSIDIARY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

Average Balances, Rate, and Interest Income and Expense Summary (Tax-Equivalent Basis)
	Three Months Ended
	June 30, 2013								June 30, 2012
	Average Balance			Average Rate			Interest		Average Balance			Average Rate			Interest
Assets
Federal funds sold	$	-			-		$	-	$	-			-		$	-
Investment securities:
U.S. Government agencies		78,600			1.28	%		252		66,503			1.58	%		263
State and municipal		85,504			4.76	%		1,018		77,183			5.44	%		1,050
Mortgage-backed and CMOs		210,474			2.00	%		1,055		191,948			2.58	%		1,238
Pooled trust preferred securities		3,519			0.18	%		2		3,611			0.24	%		2
Corporate debt securities		3,422			2.11	%		18		2,456			4.06	%		25
Equities		3,860			3.52	%		34		3,690			4.40	%		40
Total investment securities		385,379			2.47	%		2,379		345,391			3.03	%		2,618
Loans:
Commercial real estate		249,290			4.90	%		3,046		253,350			5.37	%		3,382
Residential real estate		28,406			4.45	%		316		27,443			5.43	%		372
Home equity loans		51,532			4.11	%		527		50,735			4.51	%		569
Commercial and industrial		110,010			4.26	%		1,169		100,585			4.69	%		1,173
Indirect lease financing		9,311			10.40	%		242		11,783			10.14	%		299
Consumer loans		2,258			6.48	%		36		2,200			12.00	%		66
Tax-exempt loans		32,056			4.89	%		391		34,256			5.38	%		458
Total loans, net of unearned income*		482,863			4.76	%		5,727		480,352			5.29	%		6,319
Other earning assets		9,607			0.31	%		7		15,818			0.26	%		10
Total earning assets		877,849			3.71	%		8,113		841,561			4.28	%		8,947
Cash and due from banks		11,096								10,905
Allowance for loan losses		(9,360	)							(9,608	)
Other assets		30,980								29,098
Total assets	$	910,565							$	871,956
Liabilities and Shareholders' Equity
Interest-bearing deposits:
Interest-bearing demand	$	110,649			0.24	%		66	$	99,061			0.32	%		78
Municipals		82,151			0.44	%		90		55,634			0.59	%		81
Money market		68,695			0.21	%		35		73,556			0.36	%		66
Savings		200,525			0.40	%		202		189,545			0.67	%		315
Time		167,102			1.19	%		494		182,594			1.35	%		612
Time of $100,000 or more		94,374			1.32	%		311		102,897			1.46	%		375
Total interest-bearing deposits		723,496			0.66	%		1,198		703,287			0.87	%		1,527
Short-term borrowings		28,961			0.38	%		27		21,596			0.49	%		26
Long-term debt		5,284			4.75	%		63		7,932			4.75	%		95
Total interest-bearing liabilities		757,741			0.68	%		1,289		732,815			0.90	%		1,648
Non-interest-bearing deposits		74,165								66,939
Other liabilities		2,605								2,919
Shareholders' equity		76,054								69,283
Total liabilities and shareholders' equity	$	910,565							$	871,956
Net interest rate spread					3.03	%							3.38	%
Margin/net interest income					3.12	%	$	6,825					3.49	%	$	7,299

Tax-exempt securities and loans were adjusted to a tax-equivalent basis and are based on the marginal Federal corporate tax rate of 34 percent.

Non-accrual loans and investment securities are included in earning assets.
* Includes loans held-for-sale

 

49

QNB CORP. AND SUBSIDIARY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

Average Balances, Rate, and Interest Income and Expense Summary (Tax-Equivalent Basis)
	Six Months Ended
	June 30, 2013								June 30, 2012
	Average Balance			Average Rate			Interest		Average Balance			Average Rate			Interest
Assets
Federal funds sold	$	-			-		$	-	$	-			-		$	-
Investment securities:
U.S. Government agencies		88,314			1.22	%		540		66,044			1.71	%		566
State and municipal		84,937			4.89	%		2,078		76,832			5.51	%		2,116
Mortgage-backed and CMOs		205,260			2.06	%		2,119		190,224			2.66	%		2,526
Pooled trust preferred securities		3,519			0.18	%		3		3,625			0.23	%		4
Corporate debt securities		2,900			2.86	%		42		2,456			4.07	%		50
Equities		3,668			3.10	%		56		3,488			4.29	%		74
Total investment securities		388,598			2.49	%		4,838		342,669			3.11	%		5,336
Loans:
Commercial real estate		248,513			4.97	%		6,121		255,035			5.40	%		6,847
Residential real estate		28,458			4.56	%		649		27,298			5.25	%		717
Home equity loans		51,119			4.18	%		1,060		51,286			4.56	%		1,162
Commercial and industrial		104,866			4.34	%		2,257		98,930			4.83	%		2,378
Indirect lease financing		9,647			9.94	%		480		11,969			9.68	%		579
Consumer loans		2,229			6.52	%		72		2,254			13.10	%		147
Tax-exempt loans		32,364			4.98	%		799		34,546			5.40	%		927
Total loans, net of unearned income*		477,196			4.83	%		11,438		481,318			5.33	%		12,757
Other earning assets		9,763			0.31	%		14		14,869			0.26	%		19
Total earning assets		875,557			3.75	%		16,290		838,856			4.34	%		18,112
Cash and due from banks		11,139								10,770
Allowance for loan losses		(9,504	)							(9,476	)
Other assets		30,734								28,755
Total assets	$	907,926							$	868,905
Liabilities and Shareholders' Equity
Interest-bearing deposits:
Interest-bearing demand	$	109,204			0.24	%		129	$	97,445			0.33	%		158
Municipals		80,835			0.43	%		173		54,989			0.62	%		168
Money market		71,486			0.21	%		73		75,845			0.36	%		137
Savings		199,241			0.43	%		426		183,288			0.69	%		630
Time		169,292			1.21	%		1,015		183,331			1.36	%		1,241
Time of $100,000 or more		94,719			1.35	%		636		102,061			1.48	%		749
Total interest-bearing deposits		724,777			0.68	%		2,452		696,959			0.89	%		3,083
Short-term borrowings		28,369			0.38	%		53		21,248			0.50	%		53
Long-term debt		5,285			4.75	%		126		14,115			4.75	%		339
Total interest-bearing liabilities		758,431			0.70	%		2,631		732,322			0.95	%		3,475
Non-interest-bearing deposits		71,452								65,127
Other liabilities		2,748								3,020
Shareholders' equity		75,295								68,436
Total liabilities and shareholders' equity	$	907,926							$	868,905
Net interest rate spread					3.05	%							3.39	%
Margin/net interest income					3.15	%	$	13,659					3.51	%	$	14,637
Tax-exempt securities and loans were adjusted to a tax-equivalent basis and are based on the marginal Federal corporate tax rate of 34 percent. Non-accrual loans and investment securities are included in earning assets. * Includes loans held-for-sale

 

50

QNB CORP. AND SUBSIDIARY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

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.

	Three Months Ended									Six Months Ended
	June 30, 2013 compared									June 30, 2013 compared
	to June 30, 2012									to June 30, 2012
	Total			Due to change in:						Total			Due to change in:
	Change			Volume			Rate			Change			Volume			Rate
Interest income:
Federal funds sold	$	-		$	-		$	-		$	-		$	-		$	-
Investment securities:
U.S. Government agencies		(11	)		48			(59	)		(26	)		191			(217	)
State and municipal		(32	)		112			(144	)		(38	)		224			(262	)
Mortgage-backed and CMOs		(183	)		120			(303	)		(407	)		199			(606	)
Pooled trust preferred securities		-			1			(1	)		(1	)		-			(1	)
Corporate debt securities		(7	)		10			(17	)		(8	)		9			(17	)
Equities		(6	)		2			(8	)		(18	)		4			(22	)
Loans:
Commercial real estate		(336	)		(45	)		(291	)		(726	)		(193	)		(533	)
Residential real estate		(56	)		13			(69	)		(68	)		30			(98	)
Home equity loans		(42	)		10			(52	)		(102	)		(8	)		(94	)
Commercial and industrial		(4	)		114			(118	)		(121	)		136			(257	)
Indirect lease financing		(57	)		(63	)		6			(99	)		(112	)		13
Consumer loans		(30	)		1			(31	)		(75	)		(2	)		(73	)
Tax-exempt loans		(67	)		(28	)		(39	)		(128	)		(60	)		(68	)
Other earning assets		(3	)		(4	)		1			(5	)		(8	)		3
Total interest income		(834	)		291			(1,125	)		(1,822	)		410			(2,232	)
Interest expense:
Interest-bearing demand		(12	)		9			(21	)		(29	)		19			(48	)
Municipals		9			40			(31	)		5			78			(73	)
Money market		(31	)		(4	)		(27	)		(64	)		(8	)		(56	)
Savings		(113	)		20			(133	)		(204	)		53			(257	)
Time		(118	)		(50	)		(68	)		(226	)		(98	)		(128	)
Time of $100,000 or more		(64	)		(31	)		(33	)		(113	)		(56	)		(57	)
Short-term borrowings		1			9			(8	)		-			18			(18	)
Long-term debt		(32	)		(32	)		-			(213	)		(213	)		-
Total interest expense		(360	)		(39	)		(321	)		(844	)		(207	)		(637	)
Net interest income	$	(474	)	$	330		$	(804	)	$	(978	)	$	617		$	(1,595	)

51

QNB CORP. AND SUBSIDIARY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

NET INTEREST INCOME

The following table presents the adjustment to convert net interest income to net interest income on a fully taxable-equivalent basis for the three and six month periods ended June 30, 2013 and 2012.

	Three months ended June 30,				Six months ended June 30,
	2013		2012		2013		2012
Total interest income	$	7,624	$	8,424	$	15,300	$	17,057
Total interest expense		1,288		1,648		2,631		3,475
Net interest income		6,336		6,776		12,669		13,582
Tax-equivalent adjustment		489		523		990		1,055
Net interest income (fully taxable-equivalent)	$	6,825	$	7,299	$	13,659	$	14,637

Net interest income is the primary source of operating income for QNB. Net interest income is interest income, dividends, and fees on earning assets, less interest expense incurred for funding sources. Earning assets primarily include loans, investment securities, interest bearing balances at the Federal Reserve Bank (Fed) 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.

Quarter to Quarter Comparison

Net interest income for the quarter ended June 30, 2013 totaled $6,336,000, a decrease of $440,000, or 6.5%, over the same period in 2012. On a tax-equivalent basis, net interest income decreased $474,000, or 6.5%, from $7,229,000 for the three months ended June 30, 2012 to $6,825,000 for the same period ended June 30, 2013.

The decline in net interest income is primarily a result of the prolonged period of extremely low interest rates which has exerted downward pressure on yields on earning assets, primarily loans and investment securities. The impact of lower yields on earning assets over the past year has exceeded the impact on funding costs resulting in a decline in the net interest margin. The net interest margin for the second quarter of 2013 was 3.12%, a decline of 37 basis points from the 3.49% recorded in the second quarter of 2012. Another factor negatively impacting the net interest margin is the change in the mix of earning assets. While loan demand showed signs of improving during the second quarter of 2013, the growth in investment securities, which tend to earn a lower yield than loans, was still significantly greater than loans. Average earning assets grew by $36,288,000, or 4.3%, when comparing the second quarter of 2013 to the same period in 2012, with average investment securities increasing $39,988,000, or 11.6%, and average loans increasing by $2,511,000, or 0.5%. Partially offsetting the growth in these categories of earning assets was a $6,810,000 reduction in cash held at the Federal Reserve earning 0.25%. On the funding side, average deposits increased $27,435,000, or 3.6%, with average transaction accounts increasing $51,450,000, or 10.6%. The growth in transaction accounts was broad based across all product lines, except for money market accounts. Short-term borrowings, primarily commercial sweep accounts, contributed an additional $7,365,000 in additional funding. Offsetting a portion of this growth was a decline in average time deposits of $24,015,000, or 8.4%, when comparing the second quarter 2013 with the same period in 2012.

52

QNB CORP. AND SUBSIDIARY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

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 decreased $833,000, or 9.3%, to $8,114,000 for the second quarter of 2013, while total interest expense decreased $359,000, or 21.8%, to $1,289,000. Volume growth in earning assets contributed an additional $292,000 of interest income but was offset by a decline in interest income of $1,125,000 resulting from lower interest rates. With regard to interest expense, lower funding costs (interest rates paid) resulted in a decline in interest expense of $321,000 which was coupled with a $32,000 decrease in interest expense resulting from the decline in the volume of long-term debt.

The yield on earning assets on a tax-equivalent basis decreased 57 basis points from 4.28% for the second quarter of 2012 to 3.71% for the second quarter of 2013 and also declined by 9 basis points from the 3.80% reported for the first quarter of 2013. As noted earlier the long period of historically low interest rates has resulted in a significant amount of higher yielding bonds with call features being called and prepayments on mortgage-related securities increasing, with these proceeds being reinvested in lower yielding investment securities. In addition, new loans are being originated at significantly lower rates, variable rate loans are repricing lower and many customers with fixed rates are requesting that their rates be modified lower. Also negatively impacting net interest income, the yield on earning assets and the net interest margin are nonaccrual loans which increased slightly from $16,264,000 at June 30, 2012 to $17,301,000 at June 30, 2013.

In comparison, the rate paid on interest-bearing liabilities decreased 22 basis points from 0.90% for the second quarter of 2012 to 0.68% for the second quarter of 2013 and decreased 4 basis points when compared to 0.72% reported in the first quarter of 2013.

Interest income on investment securities decreased $239,000 when comparing the two quarters as the increase in average balances could not offset the 56 basis point decline in the average yield of the portfolio. The average yield on the investment portfolio was 2.47% for the second quarter of 2013 compared with 3.03% for the second quarter of 2012. As noted previously, the decline in the yield on the investment portfolio is the result of the reinvestment of the cash flow into lower yielding securities. The growth in the investment portfolio was primarily in high-quality U.S. Government agency and agency issued mortgage-backed and CMO securities as well as in tax-exempt state and municipal bonds.

Income on Government agency securities decreased $11,000, as the 18.2% growth in average balances was offset by a 30 basis point decline in the yield from 1.58% for the second quarter of 2012 to 1.28% for the same period in 2013. Most of the bonds in the agency portfolio have call features ranging from three months to three years, many of which were exercised as a result of the low interest rate environment. The proceeds from these called bonds as well as liquidity from deposit growth were reinvested in securities with significantly lower yields. With the run up in interest rates towards the tail end of the second quarter of 2013 bonds that were expected to be called during 2013 have now extended into 2014. However, current rates on agency bonds are now at a point that the yield on this portfolio should stabilize and potentially increase.

Interest income on tax-exempt municipal securities decreased $32,000 as the 10.8% growth in average balances was offset by a 68 basis point decline in yield. The yield on the municipal portfolio was 4.76% for the second quarter of 2013 compared to 5.44% for the second quarter of 2013. QNB had purchased many municipal securities when rates were significantly higher. These bonds have either reached maturity or their call dates and are being replaced with municipal bonds with lower yields. Typically QNB purchased municipal bonds with 10-15 year maturities; however, given the current rate environment has shortened the maturity range to between 5-7 years with call dates between 2-4 years.

53

QNB CORP. AND SUBSIDIARY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

Interest income on mortgage-backed securities and CMOs decreased $183,000. Average balances increased $18,526,000, or 9.7%, to $210,474,000 when comparing the two periods and contributed $120,000 in additional income. The yield on the mortgage-backed and CMO portfolio decreased 58 basis points from 2.58% for the second quarter of 2012 to 2.00% for the second quarter of 2013, resulting in a $303,000 reduction in interest income. This portfolio was expanded because it provides higher yields relative to agency bonds and also provides monthly cash flow which can be used for liquidity purposes or can be reinvested when interest rates eventually increase. With the historically low interest rate environment mortgage refinancing activity over the past three years was significant resulting in an increase in prepayments on these securities. Since most of these securities were purchased at a premium, prepayments result in a shorter amortization period of this premium and therefore a reduction in income. With the increase in interest rates, mortgage prepayments should slow down and yields should increase.

Income on loans decreased $591,000 to $5,728,000 when comparing the second quarters of 2013 and 2012 with the decline in the portfolio yield being the reason. The yield on the loan portfolio decreased 53 basis points to 4.76% when comparing the same periods, resulting in a reduction in interest income of $594,000. When comparing the two quarters average balances increased 0.5% resulting in an increase of $3,000 in interest income. As a result of the decline in market rates and an increase in competition for quality loans, QNB lowered the rates offered on new loans and reduced rates on some existing loans.

The largest category of the loan portfolio is commercial real estate loans. This category of loans includes commercial purpose loans secured by either commercial properties such as office buildings, factories, warehouses, 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 decreased $336,000 and was impacted by both the decline in yield and a decrease in average balances. The yield on commercial real estate loans was 5.37% for the second quarter of 2013, a decrease of 47 basis points from the 5.37% reported for the second quarter of 2012. Average balances decreased $4,060,000, or 1.6%, to $249,290,000, for the three months ended June 30, 2013 compared with the same quarter in 2012.

Income on commercial and industrial loans, the second largest category, decreased only $4,000 as the decline in yield was offset by an increase in average balances. Average commercial and industrial loans increased $9,425,000, or 9.4%, to $110,010,000 for the second quarter of 2013. The average yield on these loans decreased 43 basis points to 4.26% resulting in a decrease in income of $118,000. Many of the loans in this category are indexed to the prime interest rate and have floors.

Income on home equity loans declined by $41,000 when comparing the second quarter of 2013 and 2012. During the second quarter of 2013, QNB began to offer very attractive rates on both variable rate and fixed rate home equity loans in an attempt to increase demand. As a result average home equity loans increased $797,000, or 1.6%, to $51,532,000 for the second quarter of 2013. From December 31, 2012 to June 30, 2013 home equity loans have increased 3.5% to $56,777,000. The yield on the home equity portfolio decreased 40 basis points to 4.11%. The demand for home equity loans declined during prior periods as home values fell preventing some homeowners from having equity in their homes to borrow against while others took advantage of the low interest rates on mortgages and refinanced their home equity loans into a new mortgage. With the recent rise in mortgage interest rates and an improvement in home values it is expected that the demand for home equity loans will continue to improve.

54

QNB CORP. AND SUBSIDIARY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

Given the low yields on investment securities, management decided to retain some 15 year mortgages to borrowers with high credit scores and low loan to value ratios. As a result, average residential mortgage loans secured by first lien 1-4 family residential mortgages increased by $963,000, or 3.5%, to $28,406,000 for the second quarter of 2013. During this same period the average yield on the portfolio declined by 98 basis points to 4.45% for the second quarter of 2013. The net result was a decrease in interest income of $56,000.

For the most part, earning assets are funded by deposits, which increased on average by $27,435,000, or 3.6%, to $797,661,000 and by borrowed funds which increased on average by $4,717,00 to $34,245,000, when comparing the second quarters of 2013 and 2012. Total interest expense decreased $359,000 to $1,289,000 for the second quarter of 2013 with interest expense on total deposits accounting for $328,000 of the decline. The rate paid on interest-bearing liabilities decreased 22 basis points from 0.90% for the second quarter of 2012 to 0.68% for the second quarter of 2013. During this same period, the rate paid on interest-bearing deposits decreased 21 basis points from 0.87% to 0.66%. These yields will most likely not decline much further as deposit rates are close to reaching an inherent floor.

Consistent with prior quarters, the growth in deposits when comparing the second quarter of 2013 with the second quarter of 2012 was in accounts with greater liquidity, such as non-interest-bearing and interest-bearing demand, interest-bearing municipal accounts, and savings deposits. Average non-interest-bearing demand accounts increased $7,226,000, or 10.8%, to $74,165,000 for the second quarter of 2013. QNB has been very successful in increasing business checking accounts as balances in these accounts have increased by $8,105,000, or 16.8%, when comparing the two quarters. Average interest-bearing demand accounts increased $11,588,000, or 11.7%, to $110,649,000 for the second quarter of 2013 compared to the same quarter of 2012; however, interest expense on interest-bearing demand accounts decreased $12,000 to $66,000 for the second quarter of 2013 as the average rate paid decreased from 0.32% for the second quarter of 2012 to 0.24% for the second quarter of 2013. Included in this category is QNB-Rewards checking, a higher-rate checking account product. The decrease in interest expense and the average rate paid on interest-bearing demand accounts is primarily the result of a reduction in the rate paid on QNB-Rewards checking. The rate paid on this account for the second quarter of 2012 was 1.25% on balances up to $25,000 and 0.50% for balances over $25,000 compared to 1.00% on balances up to $25,000 and 0.25% for balances over $25,000 during the second quarter of 2013. In order to receive the high rate a customer must receive an electronic statement, have one direct deposit or other ACH transaction and have at least 12 check card purchase transactions post and clear per statement cycle. For the second quarter of 2013, the average balance in this product was $31,767,000 and the related interest expense was $55,000 for an average yield of 0.69%. In comparison, the average balance of the QNB-Rewards accounts for the second quarter of 2012 was $29,693,000 with a related interest expense of $68,000 and an average rate paid of 0.92%. Even with the reduction in the rates paid on the QNB-Rewards product, the yield of 1.00% for the first $25,000 and 0.25% on balances over $25,000, assuming qualifications are met, is still an attractive rate relative to competitors’ offerings as well as other QNB products. This product also generates fee income through the use of the check card. The average balance of other interest-bearing demand accounts included in this category increased from $69,368,000 for the second quarter of 2012 to $78,882,000 for the second quarter of 2013. The average rate paid on these balances increased slightly from 0.05% to 0.06% for the three month periods June 30, 2012 and 2013, respectively.

Interest expense on municipal interest-bearing demand accounts increased $9,000 to $90,000 for the second quarter of 2013. The average balance of municipal interest-bearing demand accounts increased $26,517,000, or 47.7%, while the average interest rate paid on these accounts decreased from 0.59% for the second quarter of 2012 to 0.44% for the second quarter of 2013. Most of these accounts are tied directly to the Federal funds rate with most having rate floors between 0.25% and 0.50%. QNB was successful in increasing their relationships with several of these customers over the past year, accounting for the increase in balances. The yield on these accounts should decline in the third quarter as most of the floors were reduced to between 0.25% and 0.35%. In addition the balance should increase significantly during the third quarter as taxes are received by the school districts.

55

QNB CORP. AND SUBSIDIARY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

Average money market accounts decreased $4,861,000, or 6.6%, to $68,695,000 for the second quarter of 2013 compared with the same period in 2012. When comparing these same periods interest expense on money market accounts decreased $30,000 to $36,000 and the average interest rate paid declined 15 basis points to 0.21% for the second quarter of 2013. The decline in interest expense and the rate paid is a function of the low interest rate environment.

The QNB online eSavings account, introduced approximately three years ago, has been extremely successful and is the main reason for the growth of savings accounts to $204,510,000 at June 30, 2013. As market rates declined, the eSavings interest rate paid was also reduced and declined from 0.90% at March 31, 2012 to 0.75% at June 30, 2012 to 0.50% at June 30, 2013. The average yield paid on these accounts was 0.50% for the second quarter of 2013 compared with a yield of 0.84% for the second quarter of 2012. The average balance of this product was $150,874,000 for the second quarter of 2013 compared to $140,847,000 for the second quarter of 2012 and contributed to the $10,980,000, or 5.8%, increase in total average savings accounts when comparing the two quarters. Traditional statement savings accounts, passbook savings and club accounts are also included in the savings category and increased $953,000, or 2.0%, when comparing the second quarter 2013 average to the same 2012 quarter. The average rate paid on total savings accounts decreased 27 basis points from 0.67% for the second quarter of 2012 to 0.40% for the second quarter of 2013 and interest expense decreased 35.9% from $315,000 to $202,000 over the same period.

The repricing of time deposits at lower rates continues to have the greatest impact on total interest expense. Total interest expense on time deposits decreased $182,000, or 18.4%, to $805,000 for the second quarter of 2013. Average total time deposits decreased by $24,015,000, or 8.4%, to $261,476,000 for the second quarter of 2013. Similar to fixed-rate loans and investment securities, time deposits reprice over time and, therefore, have less of an immediate impact on costs in either a rising or falling rate environment. Unlike loans and investment securities, however, the maturity and repricing characteristics of time deposits tend to be shorter. Over the course of 2012 and the first six months of 2013 a significant amount of time deposits have continued to reprice lower as rates have declined. The average rate paid on time deposits decreased from 1.39% to 1.23% when comparing the second quarter of 2012 to the same period in 2013.

Approximately $117,487,000, or 46.4%, of time deposits at June 30, 2013 will reprice or mature over the next 12 months. The average rate paid on these time deposits is approximately 0.73%. Given the short-term nature of QNB’s time deposit portfolio and the current rates being offered, it is likely that the average rate paid on time deposits may continue to decline slightly in the near term as higher costing time deposits are repriced lower. However, given the short-term nature of these deposits interest expense could increase if short-term time deposit rates were to increase suddenly.

Short-term borrowings are primarily comprised of sweep accounts structured as repurchase agreements with commercial customers. Interest expense on short-term borrowings increased slightly from $26,000 for the second quarter of 2012 to $27,000 for the second quarter of 2013. When comparing these same periods average balances increased from $21,596,000 to $28,961,000 while the average rate paid declined from 0.49% to 0.38%.

QNB had $5,284,000 and $7,932,000 of long-term debt at an average rate of 4.75% for the second quarter of 2013 and 2012, respectively. In April 2012, $15,000,000 of debt at a rate of 4.75% matured and was repaid resulting in the reduction of average balances. As a result interest expense declined from $95,000 for the second quarter of 2012 to $63,000 for the second quarter of 2013. In April, 2014, $5,000,000 in debt at a rate of 4.75% will mature which should further reduce interest expense.

Six Month Comparison

For the six month period ended June 30, 2013 net interest income was $12,669,000, a decrease of $913,000, or 6.7%, lower than the $13,582,000 reported for the first half of 2012. On a tax-equivalent basis net interest income declined $978,000, or 6.7%, to $13,659,000. For the six month period ending June 30, 2013 average earning assets increased $36,701,000, or 4.4%, to $875,557,000, with average investment securities increasing $45,929,000, or 13.4%, to $388,598,000 and average loans decreasing $4,122,000, or 0.9%, to $477,196,000. Average total deposits increased $34,143,000, or 4.5%, to $796,229,000 for the six-month period ended June 30, 2013 compared to the same period in 2012. The net interest margin on a tax-equivalent basis was 3.15% for the six-month period ended June 30, 2013 compared with 3.51% for the same period in 2012.

56

QNB CORP. AND SUBSIDIARY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

Total interest income on a tax-equivalent basis decreased $1,822,000, from $18,112,000 to $16,290,000, when comparing the six-month periods ended June 30, 2012 and June 30, 2013 as the additional interest income generated from the growth in earning assets was offset by the impact of declining yields on those assets. Interest income increased $410,000 as a result of volume increases but declined $2,232,000 as a result of lower yields. The analysis of the six-month comparison periods is similar to what was described in the quarterly analysis; strong deposit growth combined with minimal loan demand has resulted in significant growth of the investment securities portfolio. These factors when combined with the historically low interest rate environment and the repricing of earning assets has resulted in a decline in net interest income and the net interest margin. 

The yield on earning assets decreased from 4.34% to 3.75% for the six-month periods with the yield on loans decreasing from 5.33% to 4.83% during this time. The yield on investments decreased from 3.11% to 2.49% when comparing the six-month periods. As discussed previously, the decline in yields reflects the impact of historically low levels of interest rates over the past several years.

Total interest expense decreased $844,000, from $3,475,000 for the six-month period ended June 30, 2012 to $2,631,000, for the six-month period ended June 30, 2013. Most of the decrease in interest expense was a result of lower rates paid on deposits, especially time deposits and Online eSavings deposits. Interest expense on interest-bearing deposits declined by $631,000, with interest expense on time deposits and savings deposits declining $339,000 and $204,000, respectively. The average rate paid on time deposits decreased 14 basis points from 1.40% to 1.26% while the average rate paid on savings deposits decreased from 0.69% to 0.43% when comparing the six-month periods ended June 30, 2012 and 2013. The average balance of total time deposits declined $21,381,000, or 7.5%, to $264,011,000 for the six months ended June 30, 2013 compared with the similar 2012 period.

While the average balances on time deposits declined when comparing the six-month periods, the average balances of transaction accounts increased significantly as customers sought the liquidity of these accounts as well as the higher rate being offered on the QNB-Rewards checking product and the Online eSavings product. The average balance of non-interest and interest-bearing transaction accounts increased $55,524,000, or 11.6% to $532,218,000 for the six-months ended June 30, 2013. Interest expense on interest-bearing demand deposits decreased $29,000, as the 9 basis point decrease in the average rate paid more than offset the impact on interest expense of the $11,759,000, or 12.1%, increase in average balances. The interest rate paid on interest-bearing demand accounts decreased from 0.33% for the first half of 2012 to 0.24% for the first half of 2013. As discussed previously, a reduction in the rate paid on the QNB-Rewards checking account was the primary factor for the decrease in cost of funds in this category.

Interest expense on municipal deposits increased by $5,000 to $173,000 for the six months ended June 30, 2013 as the $25,846,000 or 47.0% increase in balances offset the 19 basis point decline in the average rate paid. Interest expense on money market accounts declined by $64,000 to $73,000 for the six month period ended June 30 2013 as the average rate paid declined from 0.36% for the first half of 2012 to 0.21% for the first half of 2013. The impact of lower rates combined with the impact of the 5.7% decrease in average balances accounted for the reduced expense. Average savings account balances increased $15,953,000, or 8.7%, to $199,241,000 while the average rate paid decreased from 0.69% to 0.43%. The combination of these elements resulted in a $204,000 decrease in interest expense on savings accounts.

57

QNB CORP. AND SUBSIDIARY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

Also contributing to the reduction in interest expense, when comparing the six-month periods, was lower expense on long-term debt. Interest expense on long-term debt declined by $213,000, primarily the result of the repayment of $15,000,000 in April 2012 as discussed previously. The average balance of long-term debt was $5,285,000 for the first half of 2013 compared to $14,115,000 for the same period in 2012.

PROVISION FOR LOAN LOSSES AND ALLOWANCE FOR LOAN LOSSES

The provision for loan losses represents management's determination of the amount necessary to be charged to operations to bring the allowance for loan losses to a level that represents management’s best estimate of the known and inherent losses in the existing loan portfolio. Management believes that it uses the best information available to make determinations about the adequacy of the allowance and that it has established its existing allowance for loan losses in accordance with U.S. generally accepted accounting principles (GAAP). The determination of an appropriate level for the allowance for loan losses is based upon an analysis of the risks inherent in QNB’s loan portfolio. Management, in determining the allowance for loan losses, makes significant estimates and assumptions. Since the allowance for loan losses is dependent, to a great extent, on conditions that may be beyond QNB’s control, it is at least reasonably possible that management’s estimates of the allowance for loan losses and actual results could differ. In addition, various regulatory agencies, as an integral part of their examination process, periodically review QNB’s allowance for 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.

Management closely monitors the quality of its loan portfolio and performs a quarterly analysis of the appropriateness of the allowance for loan losses. This analysis considers a number of relevant factors including: specific impairment reserves, historical loan loss experience, general economic conditions, levels of and trends in delinquent and non-performing loans, levels of classified loans, trends in the growth rate of loans and concentrations of credit.

Economic conditions over the past four years have contributed to high rates of unemployment and a softening of the residential and commercial real estate markets. These factors have had a negative impact on both consumers and small businesses and have contributed to higher than historical levels of net charge-offs and increases in specific reserves and in non-performing, impaired and classified loans. These factors and continued concerns related to economic conditions have resulted in elevated levels of the provision for loan losses and the allowance for loan losses. Since December 31, 2008, the start of the financial crisis, QNB has increased its allowance for loan losses from $3,836,000, or 0.95% of total loans, to $9,431,000, or 1.92% of total loans at June 30, 2013. Over the past year the allowance for loan losses has been relatively stable representing $9,772,000, or 2.05% of total loans at December 31, 2012, and $9,467,000, or 1.92% of total loans at June 30, 2012. The allowance for loan losses at June 30, 2013 is at a level that QNB management believes is adequate as of that date based on its analysis of known and inherent losses in the portfolio.

QNB recorded a provision for loan losses of $100,000 in the second quarter of 2013. There was no provision for loan losses in either the first quarter of 2013 or the second quarter of 2012. For the six month periods ended June 30, 2013 and 2012 the provision for loan losses was $100,000 and $300,000, respectively. Net loan charge-offs were $20,000 for the second quarter of 2013, or 0.02% annualized of total average loans, compared with net recoveries of $12,000 for the second quarter of 2012, or -0.01% annualized of total average loans. For the six month periods ended June 30, 2013 and 2012 net loan charge-offs were $441,000, or 0.19% annualized, and $73,000, or 0.03% annualized, respectively.

At June 30, 2013, non-performing loans totaled $22,037,000, as compared to $21,150,000 at December 31, 2012 and $20,824,000 at June 30, 2012. Non-performing loans have risen somewhat from 4.23% of total loans at June 30, 2012 to 4.49% at June 30, 2013. This increase was primarily the result of a$1,822,000 loan that was restructured to allow for a period of interest only payments during the first quarter of 2013. Loans on non-accrual status were $17,301,000 at June 30, 2013 compared with $18,572,000 at December 31, 2012 and $16,264,000 at June 30, 2012. Loans are placed on non-accrual status immediately if, in the opinion of management, collection is doubtful, or when principal or interest is past due 90 days or more and collateral is insufficient to cover principal and interest. In cases where there is a collateral shortfall on non-accrual loans, specific impairment reserves have been established based on the updated collateral values even if the borrower continues to pay in accordance with the terms of the agreement. Of the total amount of non-accrual loans at June 30, 2013, $11,394,000, or approximately 66%, were current or past due less than 30 days at quarter end. While total non-performing loans have increased when comparing the second quarter of 2013 with the second quarter of the prior year, loans classified as substandard or doubtful, which includes non-performing loans, continues to improve. At June 30, 2013 substandard or doubtful loans totaled $42,178,000, a reduction of $8,698,000 from $50,876,000 as of June 30, 2012.

58

QNB CORP. AND SUBSIDIARY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

QNB had $442,000 of loans past due 90 days or more and still accruing interest at June 30, 2013 compared to none at December 31, 2012 and $475,000 at June 30, 2012. Total loans 30 days or more past due, which includes non-accrual loans by actual number of days delinquent, represented 1.70% of total loans at June, 2013 compared with 1.50% at December 31, 2012 and 1.20% at June 30, 2012.

A loan is considered impaired, based on current information and events, if it is probable that QNB will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and shortfalls on a case-by-case basis, taking into consideration all the circumstances surrounding the loan and the borrower, including length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for commercial loans and indirect lease financing 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. At June 30, 2013 and December 31, 2012, the recorded investment in loans for which impairment has been identified totaled $30,002,000 and $32,304,000 of which $22,182,000 and $23,771,000, respectively, required no specific allowance for loan loss. The recorded investment in impaired loans requiring an allowance for loan losses was $7,820,000 and $8,533,000 at June 30, 2013 and December 31, 2012, respectively. At June 30, 2013 and December 31, 2012, the related allowance for loan losses associated with these loans was $2,181,000 and $2,701,000, respectively. Most of the loans that have been identified as impaired are collateral-dependent. See Note 8 to the Notes to Consolidated Financial Statements for additional detail of impaired loans.

59

QNB CORP. AND SUBSIDIARY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

The following table shows detailed information and ratios pertaining to the Company’s loan and asset quality:

	June 30,			December 31,			June 30,
	2013			2012			2012
Non-accrual loans	$	17,301		$	18,572		$	16,264
Loans past due 90 days or more and still accruing interest		442			-			475
Troubled debt restructured loans (not already included above)		4,294			2,578			4,085
Total non-performing loans		22,037			21,150			20,824
Other real estate owned and repossessed assets		1,063			1,161			1,151
Non-accrual investment securities		2,091			1,962			2,015
Total non-performing assets	$	25,191		$	24,273		$	23,990
Total loans (excluding loans held-for-sale):
Average total loans (YTD)	$	476,130		$	480,068		$	480,455
Total loans		489,215			477,733			491,263
Allowance for loan losses		9,431			9,772			9,467
Allowance for loan losses to:
Non-performing loans		42.79	%		46.20	%		45.47	%
Total loans		1.92	%		2.05	%		1.92	%
Average total loans		1.98	%		2.04	%		1.97	%
Non-performing loans to total loans		4.49	%		4.41	%		4.23	%
Non-performing assets to total assets		2.77	%		2.64	%		2.70	%

An analysis of loan charge-offs for the three and six months ended June 30, 2013 compared to 2012 is as follows:

	Three months ended June 30,						Six months ended June 30,
	2013			2012			2013			2012
Net charge-offs	$	20		$	(12	)	$	441		$	73
Net charge-offs (annualized) to:
Total loans		0.02	%		-0.01	%		0.18	%		0.03	%
Average total loans		0.02	%		-0.01	%		0.19	%		0.03	%
Allowance for loan losses		0.87	%		-0.50	%		9.44	%		1.55	%

60

QNB CORP. AND SUBSIDIARY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

NON-INTEREST INCOME

Non-Interest Income Comparison
	Three months				Change from						Six months				Change from
	ended June 30,				prior year						ended June 30,				prior year
	2013		2012		Amount			Percent			2013		2012		Amount			Percent
Net gain on investment securities	$	93	$	141	$	(48	)		-34.0	%	$	516	$	530	$	(14	)		-2.6	%
Fees for services to customers		369		345		24			7.0	%		735		684		51			7.5	%
ATM and debit card		378		367		11			3.0	%		730		731		(1	)		-0.1	%
Bank-owned life insurance		75		78		(3	)		-3.8	%		149		156		(7	)		-4.5	%
Merchant income		101		101		-			0.0	%		182		186		(4	)		-2.2	%
Net gain on sale of loans		98		231		(133	)		-57.6	%		323		458		(135	)		-29.5	%
Other		125		63		62			98.4	%		352		147		205			139.5	%
Total	$	1,239	$	1,326	$	(87	)		-6.6	%	$	2,987	$	2,892	$	95			3.3	%

QNB, through its core banking business, generates various fees and service charges. Total non-interest income includes service charges on deposit accounts, ATM and check card income, income on bank-owned life insurance, merchant income and gains and losses on the sale of investment securities and residential mortgage loans.

Quarter to Quarter Comparison

Total non-interest income for the second quarter of 2013 was $1,239,000, a decrease of $87,000, compared to $1,326,000 for the second quarter of 2012.

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 in an effort 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. Net investment securities gains were $93,000 for the quarter ended June 30, 2013 compared to $141,000 for the comparable quarter in 2012. Included in the second quarter of 2013 securities gains were $107,000 recorded on the sale of equity securities and $28,000 on sales of bonds, primarily mortgaged-backed securities and collateralized mortgage obligations. In the second quarter of 2012, QNB recorded gains of $40,000 on the sale of equity securities and $101,000 on the sale of bonds. There was a $43,000 credit-related OTTI charges during the second quarter of 2013. There were no OTTI charges in the second quarter of 2012.

Fees for services to customers were $369,000 for the second quarter of 2013, a $24,000, or 7.0%, increase from the same period in 2012. Overdraft income, representing approximately 64% of total fees for services to customers during the second quarter of 2013, increased by $24,000. The increase in overdraft income primarily reflects the positive impact of the introduction of an overdraft protection program on net overdraft income as the program reduced the amount of overdraft fees forgiven.

The net gain on residential mortgage sales is directly related to the volume of mortgages sold and the timing of the sales relative to the interest rate environment. Residential mortgage loans to be sold are identified at origination. Net gains on the sale of residential mortgage loans for the second quarter of 2013 was $133,000, or 57.6%, less than the second quarter of the prior year. During the second quarter of 2013 mortgage interest rates increased significantly in reaction to the possible tapering of the purchase of mortgage-backed securities by the Federal Reserve Bank. This resulted in a slowdown of mortgage refinancing activity as well as losses on loans with fixed interest rates that were originated but not yet sold. A $38,000 charge was taken to reflect the fair market value of these loans that were held-for-sale at the end of June. The volume of loan sales was also less than prior year. Proceeds from the sale of residential mortgages were $4,380,000 and $6,451,000 for the second quarters of 2013 and 2012, respectively.

61

QNB CORP. AND SUBSIDIARY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

There was a $62,000 increase in other non-interest income related to improved mortgage servicing income, title company income and mutual fund and annuity income. During the fourth quarter of 2012, QNB changed vendors related to the mutual fund and annuity income and now provides securities and advisory services under the name of QNB Financial Services through Investment Professionals, Inc., a registered Broker/Dealer and Registered Investment Advisor. There has been a significant increase in revenue as a result of the change which contributed an additional $112,000 to the quarter. Mortgage servicing fees were $38,000 higher quarter over quarter primarily related to a small reversal of a portion of the valuation allowance related to the fair value of mortgage servicing rights as calculated by an independent third-party in 2013. This compares to a $21,000 valuation allowance was required in the second quarter of 2012. When QNB sells its residential mortgages in the secondary market, it retains servicing rights. A normal servicing fee is retained on all mortgage loans sold and serviced. QNB recognizes its obligation to service financial assets that are retained in a transfer of assets in the form of a servicing asset. The servicing asset is amortized in proportion to, and over, the period of net servicing income or loss. On a quarterly basis, servicing assets are assessed for impairment based on their fair value. The timing of mortgage payments and delinquencies also impacts the amount of servicing fees recorded. QNB also provides title insurance as a member of Laurel Abstract Company LLC. Title company income also increased $9,000 when comparing the second quarter of 2013 to 2012. Offsetting some of these increases noted above was a $90,000 valuation allowance recorded on a property classified as other real estate owned. This property was sold in July 2013. In comparison, net gains of $10,000 were recorded on the sale of other real estate owned during the second quarter of 2012.

Six-Month Comparison

Total non-interest income for the six month periods ended June 30, 2013 and 2012 was $2,987,000 and $2,892,000, respectively. Excluding net gains on investment securities and loans for both periods total non-interest income was $2,148,000 and $1,904,000, an increase of $244,000, or 12.8%.

Fees for services to customers increased $51,000, or 7.5%, to $735,000 for the six-month period ended June 30, 2013. Similar to the quarter, the majority of the increase related to an increase in overdraft service charges and a reduction in waived overdraft charges.

Net gains on the sale of loans decreased $135,000, or 29.5%, when comparing the six months ended June 30, 2013 to the same period in 2012. Proceeds from the sale of residential mortgages were $10,955,000 and $11,942,000 for the periods ended June 30, 2013 and 2012, respectively. Although the total proceeds from loan sales did decline significantly from prior year, smaller gains per loan (or losses) due to the interest rate environment at the time of sale were the biggest contributors to the decline.

Other non-interest income increased $205,000, to $352,000, when comparing the six-month periods ended June 30, 2013 and 2012. Similar to the quarter comparison, revenue from QNB Financial Services, income from mutual fund and annuity sales, was the biggest contributor with an additional $196,000 in non-interest income when comparing the six month periods while mortgage servicing income contributed an additional $73,000. During the first six months of 2013 QNB was able to reverse $24,000 of the valuation allowance recorded on mortgage servicing assets during previous years. This compares to a valuation allowance of $22,000 recorded during the first half of 2012. A slowdown in mortgage refinance activity during 2013 has also resulted in a $24,000 reduction in amortization of the mortgage servicing asset. In addition, title company income increased $38,000. Offsetting a portion of these increases was an $89,000 increase in net losses on other real estate owned primarily related to the valuation allowance discussed for the quarter.

62

QNB CORP. AND SUBSIDIARY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

NON-INTEREST EXPENSE

Non-Interest Expense Comparison
	Three months				Change from						Six months				Change from
	ended June 30,				prior year						ended June 30,				prior year
	2013		2012		Amount			Percent			2013		2012		Amount			Percent
Salaries and employee benefits	$	2,673	$	2,548	$	125			4.9	%	$	5,232	$	5,174	$	58			1.1	%
Net occupancy		415		397		18			4.5	%		851		821		30			3.7	%
Furniture and equipment		417		373		44			11.8	%		830		703		127			18.1	%
Marketing		251		256		(5	)		-2.0	%		490		457		33			7.2	%
Third-party services		386		365		21			5.8	%		760		704		56			8.0	%
Telephone, postage and supplies		159		156		3			1.9	%		340		306		34			11.1	%
State taxes		173		167		6			3.6	%		345		327		18			5.5	%
FDIC insurance premiums		183		162		21			13.0	%		353		342		11			3.2	%
Other		434		404		30			7.4	%		830		845		(15	)		-1.8	%
Total	$	5,091	$	4,828	$	263			5.4	%	$	10,031	$	9,679	$	352			3.6	%

Non-interest expense is comprised of costs related to salaries and employee benefits, net occupancy, furniture and equipment, marketing, third party services, FDIC insurance premiums, regulatory assessments and taxes and various other operating expenses.

Quarter to Quarter Comparison

Total non-interest expense was $5,091,000 for the second quarter of 2013, an increase of $263,000, or 5.4%, compared to the second quarter of 2012. QNB’s overhead efficiency ratio, which represents the percentage of each dollar of revenue that is used for non-interest expense, is calculated by taking non-interest expense divided by net operating revenue on a tax-equivalent basis. The Bank’s efficiency ratios were 67.3% and 59.8% for the three months ended June 30, 2013 and 2012, respectively, and compare favorably with Pennsylvania commercial banks with assets between $500 million and $1 billion which had an average efficiency ratio of 70.8% for the first quarter of 2013, the most recent period available.

Salaries and benefits is 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 for the second quarter of 2013 were $2,673,000, an increase of $125,000, or 4.9%, from the $2,548,000 reported in the second quarter of 2012. The main reason for the increase was an additional eleven full-time equivalent employees primarily related to the opening of two new branch locations in the first quarter of 2013 as well as two additional employees for QNB Financial Services. Offsetting some of this increase was the elimination of an incentive compensation accrual in 2013 compared to expense of approximately $90,000 in the second quarter of 2012. In addition to the $97,000 increase related to salaries and related taxes, medical premiums and claims increased $33,000 comparing the second quarter of 2013 to 2012.

Net occupancy as well as furniture and fixtures expense increased $62,000, or 8.1%. The majority of this increase was attributable to higher depreciation and amortization expense, and equipment maintenance costs. Much of the increase was related to the opening of two new locations during the first quarter, a full-service branch in Colmar, PA and a business office in Warminster, PA.

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, statement printing and mailing, investment security safekeeping and supply management services. Third party services expense increased $21,000, or 5.8%, to $386,000 for the three months ended June 30, 2013 when compared to the same period in 2012. The largest contributor to the increase in this category was related to the cost of a consultant utilized to assist with a Gramm-Leach-Bliley (GLBA) risk assessment for the Bank.

63

QNB CORP. AND SUBSIDIARY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

FDIC insurance premium expense increased $21,000, or 13.0%, to $183,000, when comparing the three months ended June 30, 2013 to the same period in 2012. The higher expense reflects an increase in quarterly average assets as well as a small increase in the rate charged.

Other non-interest expense increased $30,000, or 7.4%, to $434,000 for the second quarter of 2013. Contributing to the increase are higher expenses associated with check cards, foreclosure and repossessed asset, seminars and Director fees.

Six-Month Comparison

Total non-interest expense was $10,031,000 for the six-month period ended June 30, 2013, an increase of $352,000, or 3.6%, compared to the first half of 2012. 

Salaries and benefits expense increased $58,000, or 1.1%, to $5,232,000 for the six months ended June 30, 2013 compared to the same period in 2012. Salary expense and related taxes increased $39,000 during the period to $4,483,000. Similar to the quarter, a nine person increase in full-time equivalent employees contributed to the increase in costs. Prior year included an accrual of approximately $187,000 related to incentive compensation. Comparing the six month periods, benefits expense increased $19,000, to $749,000.

Net occupancy and furniture and equipment expense increased $157,000, or 10.3%, to $1,681,000 for the first half of 2013. As was the case for the quarter most of the increase pertains to higher depreciation and amortization costs primarily related to the two new locations opened in 2013. Higher costs related to building repairs and maintenance were offset by lower branch rent costs, primarily related to a refund of excess common area maintenance costs charged in prior years due to an error by the landlord. Higher equipment maintenance costs of $40,000 also contributed to the higher expense for the quarter. The majority of these additional costs relate to programs utilized for compliance and overdraft protection.

Marketing expense increased $33,000, or 17.2%, to $490,000 for the six months ended June 30, 2013. Increases in advertising, public relations, research and sales promotions which were higher in large part as a result of the two new locations mentioned previously that opened in the first quarter. Donations costs were also higher when compared to the first half of 2012. QNB contributes to many not-for-profit organizations and clubs and sponsors many local events in the communities it serves.

Third party services expense increased $56,000, or 8.0%, to $704,000 for the six months ended June 30, 2013 when compared to the same period in 2012. The largest contributors to the increase in this category were:

●  third party IT services ($25,000) related to increased expenses related to outsourced email and online/mobile banking; 

●  other third party services ($26,000) attributable to higher costs for interest rate risk analysis and investment security research; and 

●  consultant expense ($13,000) for GLBA risk assessment as noted previously.  

These increases were partially offset by lower legal expenses for the first half of 2013 compared to 2012.

Telephone, postage and supplies expense was $34,000, or 11.1%, higher for the first half of 2013 when compared to the first half of 2012. Much of the increase was attributable to the Colmar and Warminster locations opened in early 2013.

64

QNB CORP. AND SUBSIDIARY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

INCOME TAXES

QNB utilizes an asset and liability approach for financial accounting and reporting of income taxes. As of June 30, 2013, QNB’s net deferred tax asset was $4,970,000. The primary components of deferred taxes are a deferred tax asset of $3,207,000 relating to the allowance for loan losses, a deferred tax asset of $1,039,000 resulting from unrealized losses on available for sale securities, a deferred tax asset of $156,000 generated by OTTI charges on equity securities and a deferred tax asset of $432,000 related to OTTI charges on trust preferred securities. As of June 30, 2012, QNB’s net deferred tax asset was $1,220,000. The primary components of deferred taxes was a deferred tax asset of $3,219,000 relating to the allowance for loan losses, a deferred tax asset of $121,000 generated by OTTI charges on equity securities and a deferred tax asset of $435,000 related to OTTI charges on trust preferred securities. Partially offsetting these deferred tax assets was a deferred tax liability of $2,391,000 resulting from unrealized gains on available-for-sale securities. The increase in the amount of the deferred tax asset when comparing the balance at June 30, 2013 and 2012 is primarily related to the change from an unrealized gain position on the available-for-sale investment portfolio at June 30, 2012 to an unrealized loss position on the available-for-sale portfolio at June 30, 2013. This change was principally related to the impact of rising interest rates, particularly towards the end of the second quarter of 2013.

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. The net deferred tax asset is included in other assets on the consolidated balance sheet.

Applicable income tax expense was $490,000 for the three-month period ended June 30, 2013 compared to $769,000 for the three-month period ended June 30, 2012. The effective tax rate for second quarter of 2013 was 20.6% compared with 23.5% for the second quarter of 2012. For the six-month periods ended June 30, 2013 and 2012 applicable income taxes and the effective tax rates were $1,223,000, or 22.1% and $1,519,000, or 23.4%, respectively. The lower income tax expense and lower effective tax rates in 2013 is a function of lower pretax net income.

FINANCIAL CONDITION ANALYSIS

The following balance sheet analysis compares average balance sheet data for the six months ended June 30, 2013 and 2012, as well as the period ended balances as of June 30, 2013 and December 31, 2012.

Average earning assets for the six-month period ended June 30, 2013 increased $36,701,000, or 4.4%, to $875,557,000 from $838,856,000 for the six months ended June 30, 2012. The mix of earning assets has changed somewhat when comparing the two periods. Average loans decreased $4,122,000, or 0.9%, while average investment securities increased $45,929,000, or 13.4%. Average loans represented 54.5% of earning assets for the first six months of 2013, while average investment securities represented 44.4% of earning assets for the same period. This compares to 57.4% and 40.9%, respectively, for the first half of 2012. Average other earning assets, which includes Federal Reserve deposits, decreased $5,106,000, or 34.3%, when comparing these same periods. Given the slow-down in loan growth and the relatively low yield of 0.25% on interest-bearing deposits at the Federal Reserve Bank, the decision was made to try and stay as fully invested as possible, while still retaining adequate liquidity.

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. Loan growth over the past 12 months has remained relatively flat. Businesses and consumers appear to be holding off investing in new equipment or any other type of financing and are paying down their lines with excess cash. Despite the lack of demand QNB is committed to make credit available to its customers.

65

QNB CORP. AND SUBSIDIARY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

Average total commercial loans decreased $5,090,000, or 1.3%, when comparing the first six months of 2013 to the first six months of 2012. Commercial and industrial loans increased $5,936,000, or 6.0%, to $104,866,000. Commercial and industrial loans represent commercial purpose loans that are either secured by collateral other than real estate or unsecured. Many of these loans are for operating lines of credit. Average loans secured by real estate, either commercial or residential properties decreased $6,522,000, or 2.6%, when comparing the average balances for the six-month periods while average tax-exempt loans to state and municipal organizations decreased $2,182,000, or 6.3%, over the same time period. Average indirect lease financing loans decreased $2,322,000, or 19.4%, when comparing the first half of 2013 to 2012. The decline in balances is a result of fewer opportunities to purchase good quality leases.

Average residential real estate loans increased $1,160,000, or 4.3%, to $28,458,000 for the first six months of 2013 as historically low interest rates have resulted in an increase in residential mortgage activity. This increase represents fixed rate loans primarily loans with a 15 year maturity, low loan-to-values and excellent credit. Despite this increase, QNB sells most of its fixed rate originations to Freddie Mac.

Total investment securities were $380,510,000 at June 30, 2013 and $401,648,000 at December 31, 2012. Since December 31, 2012 decreases in U.S. Government and agency securities were replaced with mortgage-backed securities that are backed by U.S. Government and agencies and sponsored enterprises (GSEs).

QNB does own CDOs in the form of pooled trust preferred securities. These securities are comprised mainly of securities issued by banks or bank holding companies, and to a lesser degree, insurance companies. QNB owns the mezzanine tranches of these securities. These securities are structured so that the senior and mezzanine tranches are protected from defaults by over-collateralization and cash flow default protection provided by subordinated tranches. QNB holds seven of these securities with an amortized cost of $3,519,000 and a fair value of $2,091,000 at June 30, 2013. There was no credit-related other-than-temporary impairment charge in the first half of 2013 or 2012. It is possible that future calculations could require recording additional other-than-temporary impairment charges through earnings. For additional detail on these securities see Note 7 Investment Securities and Note 9 Fair Value Measurements and Disclosures.

For the most part, earning assets are funded by deposits. Total average deposits increased $34,143,000, or 4.5%, to $796,229,000 for the first six months of 2013 compared to the first six months of 2012. Customers are continuing to look for the safety and stability of a strong local community bank as opposed to the volatility of the equity markets and the uncertainty of the larger regional and national banks. The opening of the two new locations in early 2013 should result in additional loan and deposit growth.

Average interest-bearing demand and municipal accounts increased $ 11,759,000, or 12.1%, and $25,846,000, or 47.0%, respectively, when comparing the first six months of 2013 and 2012. Business accounts are the primary factor behind the growth of the interest-bearing demand accounts while the growth in relationships with a couple of school districts contributed to the increase in municipal balances. Average savings balances increased $15,953,000, or 8.7%, to $199,241,000 for the first half of 2013 due to the continued success of QNB’s Online eSavings. The growth in this product, while still strong, has slowed over the past year. Average non-interest bearing demand accounts increased $6,325,000, or 9.7%, when comparing the six month periods. Total average time deposits decreased $21,381,000, or 7.5%, when comparing the six month periods as customers continue to look for the liquidity of transaction accounts and are hesitant to lock in longer term deposits at low rates.

Total assets at June 30, 2013 were $910,829,000 compared with $919,874,000 at December 31, 2012. During the second quarter of 2013 the demand for loans began to pick up resulting in an $11,482,000, or 2.4%, increase in total loans between December 31, 2012 and June 30, 2013. Total loans at June 30, 2013 were $489,215,000. In contrast total securities declined by $21,138,000, or 5.3%, to $380,510,000 at June 30, 2013. The increase in interest rates during the latter part of the second quarter of 2013 contributed to the decline in investment securities as the fair value of the portfolio declined from a gain of $6,752,000 at December 31, 2012 to a loss of $3,055,000 at June 30, 2013. This also negatively impacted shareholder’s equity as accumulated other comprehensive income, net of tax, went from a gain of $4,456,000 at December 31, 2012 to a loss of $2,016,000 at June 30, 2013.

66

QNB CORP. AND SUBSIDIARY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

On the liability side, total deposits decreased by $5,725,000, or 0.7% to $795,913,000 at June 30, 2013 compared to the December 31, 2012 balances. Savings accounts increased $13,173,000, or 6.9%, to $204,510,000 at June 30, 2013 and interest-bearing demand accounts, including municipal deposits, increased $6,403,000, or 3.3% to $197,738,000 at June 30, 2013. These increases were offset as money market accounts, primarily business accounts, decreased $10,237,000, or 13.5%, from $76,047,000 at December 31, 2012 to $65,810,000 at June 30, 2013. Time deposits decreased $16,061,000, or 6.0%, from $269,234,000 at December 31, 2012 to $253,173,000 at June 30, 2013 as customers continue to look for liquidity in anticipation of rising interest rates. It is anticipated that total deposits will increase significantly during the third quarter as tax money is received by the local school districts. These deposits are short-term and will flow out over the next year as the schools use the funds for operations. These deposits do provide incremental income as they are invested in short-term investment securities but will further reduce the net interest margin as the spread earned is significantly less than the current net interest margin.

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 in an attempt 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, 2013, the Bank had a maximum borrowing capacity with the FHLB of approximately $214,076,000. The maximum borrowing capacity changes as a function of qualifying collateral assets. QNB has no outstanding borrowings with the FHLB at June 30, 2013. In addition, the Bank maintains two unsecured Federal funds lines with two correspondent banks totaling $26,000,000. At June 30, 2013, there were no outstanding borrowings under these lines. Future availability under these lines is subject to the policies of the granting banks and may be withdrawn. As part of its contingency funding plan, QNB successfully tested its ability to borrow from these sources during the fourth quarter of 2012.

Total cash and cash equivalents, available-for-sale investment securities and loans held-for-sale totaled $397,589,000 and $418,571,000 at June 30, 2013 and December 31, 2012, respectively. The sources and level of liquidity maintained should be adequate to meet normal fluctuations in loan demand or deposit withdrawals. Despite the recent increase in interest rates, particularly in the 5 to 10 year part of the yield curve, it is still anticipated that the investment portfolio will continue to provide sufficient liquidity as municipal bonds are called and as cash flow on mortgage-backed and CMO securities continues to be steady. In the event that interest rates would continue to increase the cash flow available from the investment portfolio could decrease.

Approximately $163,410,000 and $170,433,000 of available-for-sale securities at June 30, 2013 and December 31, 2012, respectively, were pledged as collateral for repurchase agreements and deposits of public funds.

67

QNB CORP. AND SUBSIDIARY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

As an additional source of liquidity, QNB is a member of the Certificate of Deposit Account Registry Service (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. During the third quarter of 2011, QNB began offering Insured Cash Sweep (ICS), 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, 2013 was $74,236,000, or 8.15% of total assets, compared to shareholders' equity of $77,623,000, or 8.44% of total assets, at December 31, 2012. Shareholders’ equity at June 30, 2013 included a negative adjustment of $2,016,000 and December 31, 2012 included a positive adjustment of $4,456,000 related to unrealized holding gains, net of taxes, on investment securities available-for-sale. Without these adjustments, shareholders' equity to total assets would have been 8.37% and 7.95% at June 30, 2013 and December 31, 2012, respectively.

Average shareholders' equity and average total assets were $75,295,000 and $907,926,000 for the first six months of 2013, an increase of 7.3% and 1.6%, respectively, from the averages for the year ended December 31, 2012. The ratio of average total equity to average total assets was 8.29% for the first half of 2013 compared to 7.86% for all of 2012.

QNB is subject to various regulatory capital requirements as issued by Federal regulatory authorities. Regulatory capital is defined in terms of Tier I capital (shareholders’ equity excluding unrealized gains or losses on available-for-sale debt securities and disallowed intangible assets), Tier II capital, which includes the allowable portion of the allowance for loan losses which is limited to 1.25% of risk-weighted assets and a portion of the unrealized gains on equity securities, and total capital (Tier I plus Tier II). 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. Regulators have also adopted minimum Tier I leverage ratio standards, which measure the ratio of Tier I capital to total quarterly average assets.

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QNB CORP. AND SUBSIDIARY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

The following table sets forth consolidated information for QNB Corp.:

	June 30,			December 31,
Capital Analysis	2013			2012
Tier I
Shareholders' equity	$	74,236		$	77,623
Net unrealized securities losses (gains), net of tax		2,016			(4,456	)
Total Tier I risk-based capital		76,252			73,167
Tier II
Allowable portion: Allowance for loan losses		7,569			7,449
Unrealized gains on equity securities, net of tax		205			142
Total risk-based capital	$	84,026		$	80,758
Risk-weighted assets	$	603,693		$	593,630
Average assets	$	910,565		$	919,040
	June 30,			December 31,
Capital Ratios	2013			2012
Tier I capital/risk-weighted assets		12.63	%		12.33	%
Total risk-based capital/risk-weighted assets		13.92	%		13.60	%
Tier I capital/average assets (leverage ratio)		8.37	%		7.96	%

The minimum regulatory capital ratios are 4.00% for Tier I, 8.00% for the total risk-based capital and 4.00% for leverage. All capital ratios have improved from December 31, 2012 as the Tier I and total risk based capital levels have increased to a greater degree than the risk-weighted assets. In addition, quarterly average assets have declined since year end.

During the first quarter of 2010, QNB began offering a Dividend Reinvestment and Stock Purchase Plan (the “Plan”) to provide participants a convenient and economical method for investing cash dividends paid on the Company’s common stock in additional shares at a discount. The Plan also allows participants to make additional cash purchases of stock at a discount. Stock purchases under the Plan contributed $448,000 to capital during first six months of 2013.

The Board of Directors has authorized the repurchase of up to 100,000 shares of its common stock in open market or privately negotiated transactions. The repurchase authorization does not bear a termination date. As of June 30, 2013, 57,883 shares were repurchased under this authorization at an average price of $16.97 and a total cost of $982,000. There has been no additional shares repurchased under the plan since the first quarter of 2009.

 

Continuing to impact risk-weighted assets is the $27,618,000 of risk-weighted assets due to mezzanine tranches of pooled trust preferred securities that were downgraded below investment grade during the first quarter of 2009. Although the amortized cost of these securities was only $3,275,000 at June 30, 2013, regulatory guidance required an additional $24,343,000 to be included in risk-weighted assets. The Bank utilized the method as outlined in the Call Report Instructions for an available-for-sale bond that has not triggered the Low Level Exposure (LLE) rule. The mezzanine tranches of CDOs that utilized this method of risk-weighting are five out of seven pooled trust preferred securities (PreTSLs) held by the Bank as of June 30, 2013. The other two pooled trust preferred securities have only one tranche remaining so the treatment noted above does not apply.

The Federal Deposit Insurance Corporation Improvement Act of 1991 established five capital level designations ranging from "well capitalized" to "critically undercapitalized." At June 30, 2013 and December 31, 2012, management believes that the Company and the Bank met all capital adequacy requirements to which they are subject and have met the "well capitalized" criteria which requires minimum Tier I and total risk-based capital ratios of 6.00% and 10.00%, respectively, and a leverage ratio of 5.00%.

69

QNB CORP. AND SUBSIDIARY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

In June 2012, the Federal bank regulatory agencies issued a series of proposed revisions to the agencies’ capital adequacy guidelines and prompt corrective action rules, which were designed to enhance such requirements and implement the revised standards of the Basel Committee on Banking Supervision, commonly referred to as Basel III. In July 2013, the Federal bank regulatory agencies adopted final rules, which differ in certain respects from the June 2012 proposals.

The July 2013 final rules generally implement higher minimum capital requirements, add a new common equity tier 1 capital requirement, and establish criteria that instruments must meet to be considered common equity tier 1 capital, additional tier 1 capital or tier 2 capital. The new minimum capital to risk-adjusted assets requirements are a common equity tier 1 capital ratio of 4.5% (6.5% to be considered “well capitalized”) and a tier 1 capital ratio of 6.0%, increased from 4.0% (and increased from 6.0% to 8.0% to be considered “well capitalized”); the total capital ratio remains at 8.0% under the new rules (10.0% to be considered “well capitalized”). Under the new rules, in order to avoid limitations on capital distributions (including dividend payments and certain discretionary bonus payments to executive officers), a banking organization must hold a capital conservation buffer comprised of common equity tier 1 capital above its minimum risk-based capital requirements in an amount greater than 2.5% of total risk-weighted assets. The new minimum capital requirements are effective on January 1, 2015. The capital contribution buffer requirements phase in over a three-year period beginning January 1, 2016.

The July 2013 final rules include three significant changes from the June 2012 proposals:

(i)  the final rules do not change the current risk weighting for residential mortgage exposures;  

(ii)  the final rules permit institutions, other than certain large institutions, to elect to continue to treat certain components of accumulated other comprehensive income as permitted under the current general risk-based capital rules, and not reflect unrealized gains and losses on available-for-sale securities in common equity tier 1 calculations; and  

(iii)  the final rules permit institutions with less than $15.0 billion in assets to grandfather certain non-qualifying capital instruments (including trust preferred securities) issued prior to May 19, 2009 into tier 1 capital.  

QNB will continue to analyze these new rules and their effects on the business, operations and capital levels of the Company and the Bank.

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ITEM 3.     QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.

The information required in response to this item is set forth in Item 2, above.

ITEM 4.     CONTROLS AND PROCEDURES

We maintain a system of controls and procedures designed to provide reasonable assurance as to the reliability of the consolidated financial statements and other disclosures included in this report, as well as to safeguard assets from unauthorized use or disposition. We evaluated the effectiveness of the design and operation of our disclosure controls and procedures under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective as of the end of the period covered by this report. No changes were made to our internal control over financial reporting during the fiscal quarter covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

71

QNB CORP. AND SUBSIDIARY

PART II. OTHER INFORMATION

JUNE 30, 2013

Item 1. Legal Proceedings None.

Item 1A. Risk Factors There were no material changes to the Risk Factors described in Item 1A in QNB’s Annual Report on Form 10-K for the period ended December 31, 2012. 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Period	Total Number of Shares Purchased		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plan		Maximum Number of Shares that may yet be Purchased Under the Plan
April 1, 2013 through April 30, 2013		-		-		-		42,117
May 1, 2013 through May 31, 2013		-		-		-		42,117
June 1, 2013 through June 30, 2013		-		-		-		42,117
Total		-		-		-		42,117
(1) Transactions are reported as of settlement dates.
(2) QNB’s current stock repurchase plan was approved by its Board of Directors and announced on January 24, 2008 and subsequently increased on February 9, 2009.
(3) The total number of shares approved for repurchase under QNB’s current stock repurchase plan is 100,000.
(4) QNB’s current stock repurchase plan has no expiration date.
(5) QNB has no stock repurchase plan that it has determined to terminate or under which it does not intend to make further purchases.

Item 3. Default Upon Senior Securities None. 

Item 4. Mine Safety Disclosures None. 

Item 5. Other Information None. 

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Item 6. Exhibits

Exhibit 3(i)  Articles of Incorporation of Registrant, as amended. (Incorporated by reference to Exhibit 3(i) of Registrants Form DEF 14-A filed with the Commission on April 15, 2005). 

Exhibit 3(ii)  Bylaws of Registrant, as amended. (Incorporated by reference to Exhibit 3(ii) of Registrants Form 8-K filed with the Commission on January 23, 2006). 

Exhibit 11  Statement Re: Computation of Earnings Per Share. (Included in Part I, Item I, hereof.) 

Exhibit31.1   Section 302 Certification of Chief Executive Officer

Exhibit 31.2  Section 302 Certification of Chief Financial Officer 

Exhibit 32.1  Section 906 Certification of Chief Executive Officer 

Exhibit 32.2  Section 906 Certification of Chief Financial Officer 

The following Exhibits are being furnished* as part of this report:

No.         Description

101.INS  XBRL Instance Document.*

101.SCH  XBRL Taxonomy Extension Schema Document.*

101.CAL  XBRL Taxonomy Extension Calculation Linkbase Document.*

101.LAB  XBRL Taxonomy Extension Label Linkbase Document.*

101.PRE  XBRL Taxonomy Extension Presentation Linkbase Document.*

101.DEF  XBRL Taxonomy Extension Definitions Linkbase Document.*

*  These interactive data files are being furnished as part of this Quarterly Report, and, in accordance with Rule 402 of Regulation S-T, shall not be deemed filed for purposes of Section 11 or 12 of the Securities Act of 1933, as amended, or Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability under those sections. 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.

	QNB Corp.
Date:       August 14, 2013	By:	/s/ David W. Freeman
		David W. Freeman
		Chief Executive Officer

Date:       August 14, 2013	By:	/s/ Bret H. Krevolin
		Bret H. Krevolin
		Chief Financial Officer

EX-31

Exhibit 31.1

CERTIFICATION

I, David W. Freeman, certify that:

1. I have reviewed this quarterly report on Form 10-Q of QNB Corp.

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report.

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report.

4. The Registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles;

(c) Evaluated the effectiveness of the Registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and

5. The Registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant's auditors and the audit committee of Registrant's board of directors (or persons performing the equivalent function):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant's ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal control over financial reporting.

Date:            August 14, 2013	By:	/s/ David W. Freeman
		David W. Freeman
		Chief Executive Officer

EX-31

Exhibit 31.2

CERTIFICATION

I, Bret H. Krevolin, certify that:

1. I have reviewed this quarterly report on Form 10-Q of QNB Corp.

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report.

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report.

4. The Registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles;

(c) Evaluated the effectiveness of the Registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and

5. The Registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant's auditors and the audit committee of Registrant's board of directors (or persons performing the equivalent function):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant's ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal control over financial reporting.

Date:            August 14, 2013	By:	/s/ Bret H. Krevolin
		Bret H. Krevolin
		Chief Financial Officer

EX-32

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350

AS ADDED BY

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report on Form 10-Q of QNB Corp. (the Company) for the period ended June 30, 2013, as filed with the Securities and Exchange Commission (the Report), I, David W. Freeman, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as added by § 906 of the Sarbanes-Oxley Act of 2002, that this periodic report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in this report fairly presents, in all material respects, the financial condition and results of operations of the issuer.

Date:            August 14, 2013	By:	/s/ David W. Freeman
		David W. Freeman
		Chief Executive Officer

EX-32

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350

AS ADDED BY

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report on Form 10-Q of QNB Corp. (the Company) for the period ended June 30, 2013, as filed with the Securities and Exchange Commission (the Report), I, Bret H. Krevolin, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as added by § 906 of the Sarbanes-Oxley Act of 2002, that this periodic report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in this report fairly presents, in all material respects, the financial condition and results of operations of the issuer.

Date:            August 14, 2013	By:	/s/ Bret H. Krevolin
		Bret H. Krevolin
		Chief Financial Officer

XML

Note 8 - Loans & Allowance for Loan Losses

6 Months Ended

Jun. 30, 2013

Receivables [Abstract]

Loans, Notes, Trade and Other Receivables Disclosure [Text Block]

8. LOANS & ALLOWANCE FOR LOAN LOSSES

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off are stated at the principal amount outstanding, net of deferred loan fees and costs. Interest income is accrued on the principal amount outstanding. Loan origination and commitment fees and related direct costs are deferred and amortized to income over the term of the respective loan and loan commitment period as a yield adjustment.

Loans held-for-sale consists of residential mortgage loans that are carried at the lower of aggregate cost or fair value. Net unrealized losses, if any, are recognized through a valuation allowance charged to income. Gains and losses on residential mortgages held-for-sale are included in non-interest income.

QNB maintains an allowance for loan losses, which is intended to absorb probable known and inherent losses in the outstanding loan portfolio. The allowance is reduced by actual credit losses and is increased by the provision for loan losses and recoveries of previous losses. The provisions for loan losses are charged to earnings to bring the total allowance for loan losses to a level considered necessary by management.

The allowance for loan losses is based on management’s continuing review and evaluation of the loan portfolio. The level of the allowance is determined by assigning specific reserves to individually identified problem credits and general reserves to all other loans. For such loans that are also classified as impaired, an allowance is established when the discounted cash flows (or collateral value) of the impaired loan is lower than the carrying value of that loan. The portion of the allowance that is allocated to internally criticized and non-accrual loans is determined by estimating the inherent loss on each credit after giving consideration to the value of underlying collateral. The general component covers pools of loans by loan class including commercial loans not considered impaired, as well as smaller balance homogeneous loans, such as residential real estate, home equity and other consumer loans. These pools of loans are evaluated for loss exposure based upon historical loss rates. These loss rates are based on a three year history of charge-offs and are more heavily weighted for recent experience for each of these categories of loans, adjusted for qualitative factors. These qualitative risk factors include:

1. Lending policies and procedures, including underwriting standards and collection, charge-off and recovery practices.

2. Effect of external factors, such as legal and regulatory requirements.

3. National, regional, and local economic and business conditions as well as the condition of various market segments, including the value of underlying collateral for collateral dependent loans.

4. Nature and volume of the portfolio including growth.

5. Experience, ability, and depth of lending management and staff.

6. Volume and severity of past due, classified and nonaccrual loans.

7. Quality of the Company’s loan review system, and the degree of oversight by the Company’s Board of Directors.

8. Existence and effect of any concentrations of credit and changes in the level of such concentrations.

Each factor is assigned a value to reflect improving, stable or declining conditions based on management’s best judgment using relevant information available at the time of the evaluation.

An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.

Management emphasizes loan quality and close monitoring of potential problem credits. Credit risk identification and review processes are utilized in order to assess and monitor the degree of risk in the loan portfolio. QNB’s lending and credit administration staff are charged with reviewing the loan portfolio and identifying changes in the economy or in a borrower’s circumstances which may affect the ability to repay debt or the value of pledged collateral. A loan classification and review system exists that identifies those loans with a higher than normal risk of uncollectibility. Each commercial loan is assigned a grade based upon an assessment of the borrower’s financial capacity to service the debt and the presence and value of collateral for the loan. An independent loan review group tests risk assessments and evaluates the adequacy of the allowance for loan losses. Management meets monthly to review the credit quality of the loan portfolio and quarterly to review the allowance for loan losses.

In addition, various regulatory agencies, as an integral part of their examination process, periodically review QNB’s allowance for loan losses. Such agencies may require QNB to recognize additions to the allowance based on their judgments using information available to them at the time of their examination.

Management believes that it uses the best information available to make determinations about the adequacy of the allowance and that it has established its existing allowance for loan losses in accordance with GAAP. If circumstances differ substantially from the assumptions used in making determinations, future adjustments to the allowance for loan losses may be necessary and results of operations could be affected. Because future events affecting borrowers and collateral cannot be predicted with certainty, there can be no assurance that increases to the allowance will not be necessary should the quality of any loans deteriorate as a result of the factors discussed above.

Major classes of loans are as follows:

	June 30, 2013		December 31, 2012
Commercial:
Commercial and industrial	$	111,619	$	100,063
Construction		10,557		11,061
Secured by commercial real estate		192,689		192,867
Secured by residential real estate		44,102		41,003
State and political subdivisions		32,552		34,256
Loans to depository institutions		2,250		3,250
Indirect lease financing		8,703		9,685
Retail:
1-4 family residential mortgages		27,774		28,733
Home equity loans and lines		56,777		54,860
Consumer		2,186		2,012
Total loans		489,209		477,790
Net unearned costs (fees)		6		(57	)
Loans receivable	$	489,215	$	477,733

Loans secured by commercial real estate include all loans collateralized at least in part by commercial real estate. These loans may not be for the expressed purpose of conducting commercial real estate transactions.

Overdrafts are reclassified as loans and are included in consumer loans above and total loans on the balance sheet. At June 30, 2013 and December 31, 2012, overdrafts were approximately $83,000 and $103,000, respectively.

QNB generally lends in its trade area which is comprised of Quakertown and the surrounding communities. To a large extent, QNB makes loans collateralized at least in part by real estate. Its lending activities could be affected by changes in the general economy, the regional economy, or real estate values. Other than disclosed in the table above, at June 30, 2013, there were no concentrations of loans exceeding 10% of total loans.

The Company engages in a variety of lending activities, including commercial, residential real estate and consumer transactions. The Company focuses its lending activities on individuals, professionals and small to medium sized businesses. Risks associated with lending activities include economic conditions and changes in interest rates, which can adversely impact both the ability of borrowers to repay their loans and the value of the associated collateral.

Commercial and industrial loans, commercial real estate loans, construction loans and residential real estate loans with a business purpose are generally perceived as having more risk of default than residential real estate loans with a personal purpose and consumer loans. These types of loans involve larger loan balances to a single borrower or groups of related borrowers and are more susceptible to a risk of loss during a downturn in the business cycle. These loans may involve greater risk because the availability of funds to repay these loans depends on the successful operation of the borrower’s business. The assets financed are used within the business for its ongoing operation. Repayment of these kinds of loans generally comes from the cash flow of the business or the ongoing conversions of assets, such as accounts receivable and inventory, to cash. Typical collateral for commercial and industrial loans includes the borrower’s accounts receivable, inventory and machinery and equipment. Commercial real estate and residential real estate loans secured for a business purpose are originated primarily within the eastern Pennsylvania market area at conservative loan-to-value ratios and often backed by the individual guarantees of the borrowers or owners. Repayment of this kind of loan is dependent upon either the ongoing cash flow of the borrowing entity or the resale of or lease of the subject property. Commercial real estate loans may be affected to a greater extent than residential loans by adverse conditions in real estate markets or the economy because commercial real estate borrowers’ ability to repay their loans depends on successful development of their properties, as well as the factors affecting residential real estate borrowers.

Loans to state and political subdivisions are tax-exempt or taxable loans to municipalities, school districts and housing and industrial development authorities. These loans can be general obligations of the municipality or school district repaid through their taxing authority, revenue obligations repaid through the income generated by the operations of the authority, such as a water or sewer authority, or loans issued to a housing and industrial development agency, for which a private corporation is responsible for payments on the loans.

Loans to depository institutions consist of a loan to a commercial bank in Lehigh County, Pennsylvania. This loan is secured by shares of common stock of the borrowing institution.

Indirect lease financing receivables represent loans to small businesses that are collateralized by equipment. These loans tend to have higher risk characteristics but generally provide higher rates of return. These loans are originated by a third party and purchased by QNB based on criteria specified by QNB. The criteria include minimum credit scores of the borrower, term of the lease, type and age of equipment financed and geographic area. The geographic area primarily represents states contiguous to Pennsylvania. QNB is not the lessor and does not service these loans.

The Company originates fixed-rate and adjustable-rate real estate-residential mortgage loans for personal purposes that are secured by first liens on the underlying 1-4 family residential properties. Credit risk exposure in this area of lending is minimized by the evaluation of the credit worthiness of the borrower, including debt-to-income ratios, credit scores and adherence to underwriting policies that emphasize conservative loan-to-value ratios of generally no more than 80%. Residential mortgage loans granted in excess of the 80% loan-to-value ratio criterion are generally insured by private mortgage insurance.

The real estate-home equity portfolio consists of fixed-rate home equity loans and variable-rate home equity lines of credit. Risks associated with loans secured by residential properties are generally lower than commercial loans and include general economic risks, such as the strength of the job market, employment stability and the strength of the housing market. Since most loans are secured by a primary or secondary residence, the borrower’s continued employment is the greatest risk to repayment.

The Company offers a variety of loans to individuals for personal and household purposes. Consumer loans are generally considered to have greater risk than first or second mortgages on real estate because they may be unsecured, or, if they are secured, the value of the collateral may be difficult to assess and is more likely to decrease in value than real estate.

Credit risk in this portfolio is controlled by conservative underwriting standards that consider debt-to-income levels and the creditworthiness of the borrower and, if secured, collateral values.

The Company employs an eight (8) grade risk rating system related to the credit quality of commercial loans, loans to state and political subdivisions and indirect lease financing of which the first four categories are pass categories (credits not adversely rated). The following is a description of the internal risk ratings and the likelihood of loss related to each risk rating.

1 - Excellent - no apparent risk

2 - Good - minimal risk

3 - Acceptable - average risk

4 - Watch List - greater than average risk

5 - Special Mention - potential weaknesses

6 - Substandard - well defined weaknesses

7 - Doubtful - full collection unlikely

8 - Loss - considered uncollectible

The Company maintains a loan review system, which allows for a periodic review of our loan portfolio and the early identification of potential problem loans. Each loan officer assigns a rating to all loans in the portfolio at the time the loan is originated. Loans with risk ratings of one through three are reviewed annually based on the borrower’s fiscal year. Loans with risk ratings of four are reviewed every six to twelve months based on the dollar amount of the relationship with the borrower. Loans with risk ratings of five through eight are reviewed at least quarterly, and as often as monthly, at management’s discretion. The Company also utilizes an outside loan review firm to review the portfolio on a semi-annual basis to provide the Board of Directors and senior management an independent review of the Bank’s loan portfolio on an ongoing basis. These reviews are designed to recognize deteriorating credits in their earliest stages in an effort to reduce and control risk in the lending function as well as identifying potential shifts in the quality of the loan portfolio. The examinations by the outside loan review firm include the review of lending activities with respect to underwriting and processing new loans, monitoring the risk of existing loans and to provide timely follow-up and corrective action for loans showing signs of deterioration in quality. In addition, the outside firm reviews the methodology for the allowance for loan losses to determine compliance to policy and regulatory guidance.

The following tables present the classes of the loan portfolio summarized by the aggregate pass rating and the classified ratings of special mention, substandard and doubtful within the Company’s internal risk rating system as of June 30, 2013 and December 31, 2012:

June 30, 2013	Pass		Special mention		Substandard		Doubtful		Total
Commercial:
Commercial and industrial	$	104,329	$	1,363	$	5,927	$	-	$	111,619
Construction		7,572		920		2,065		-		10,557
Secured by commercial real estate		161,592		4,118		26,979		-		192,689
Secured by residential real estate		39,413		27		4,662		-		44,102
State and political subdivisions		30,239		-		2,313		-		32,552
Loans to depository institutions		2,250		-		-		-		2,250
Indirect lease financing		8,471		-		232		-		8,703
	$	353,866	$	6,428	$	42,178	$	-	$	402,472

December 31, 2012	Pass		Special mention		Substandard		Doubtful		Total
Commercial:
Commercial and industrial	$	88,427	$	3,843	$	7,763	$	30	$	100,063
Construction		5,558		1,513		3,990		-		11,061
Secured by commercial real estate		157,678		7,493		27,696		-		192,867
Secured by residential real estate		36,078		1,199		3,726		-		41,003
State and political subdivisions		32,303		-		1,953		-		34,256
Loans to depository institutions		3,250		-		-		-		3,250
Indirect lease financing		9,329		-		356		-		9,685
	$	332,623	$	14,048	$	45,484	$	30	$	392,185

For retail loans, the Company evaluates credit quality based on the performance of the individual credits. The following tables present the recorded investment in the retail classes of the loan portfolio based on payment activity as of June 30, 2013 and December 31, 2012:

June 30, 2013	Performing		Non- performing		Total
Retail:
1-4 family residential mortgages	$	27,454	$	320	$	27,774
Home equity loans and lines		56,538		239		56,777
Consumer		2,186		-		2,186
	$	86,178	$	559	$	86,737

December 31, 2012	Performing		Non- performing		Total
Retail:
1-4 family residential mortgages	$	28,398	$	335	$	28,733
Home equity loans and lines		54,514		346		54,860
Consumer		2,012		-		2,012
	$	84,924	$	681	$	85,605

The performance and credit quality of the loan portfolio is also monitored by analyzing the age of the loans receivable as determined by the length of time a recorded payment is past due. The following table presents the classes of the loan portfolio summarized by the past due status as of June 30, 2013 and December 31, 2012:

June 30, 2013	30-59 days past due		60-89 days past due		90 days or more past due		Total past due loans		Current		Total loans receivable
Commercial:
Commercial and industrial	$	306	$	37		-	$	343	$	111,276	$	111,619
Construction		-		-		-		-		10,557		10,557
Secured by commercial real estate		244		440	$	4,332		5,016		187,673		192,689
Secured by residential real estate		1,401		537		-		1,938		42,164		44,102
State and political subdivisions		27		-		425		452		32,100		32,552
Loans to depository institutions		-		-		-		-		2,250		2,250
Indirect lease financing		50		52		32		134		8,569		8,703
Retail:
1-4 family residential mortgages		-		-		153		153		27,621		27,774
Home equity loans and lines		117		91		28		236		56,541		56,777
Consumer		28		6		-		34		2,152		2,186
	$	2,173	$	1,163	$	4,970	$	8,306	$	480,903	$	489,209

December 31, 2012	30-59 days past due		60-89 days past due		90 days or more past due		Total past due loans		Current		Total loans receivable
Commercial:
Commercial and industrial	$	76		-		-	$	76	$	99,987	$	100,063
Construction		-		-		-		-		11,061		11,061
Secured by commercial real estate		407	$	1,460	$	3,097		4,964		187,903		192,867
Secured by residential real estate		44		523		293		860		40,143		41,003
State and political subdivisions		71		1		-		72		34,184		34,256
Loans to depository institutions		-		-		-		-		3,250		3,250
Indirect lease financing		344		80		35		459		9,226		9,685
Retail:
1-4 family residential mortgages		-		197		-		197		28,536		28,733
Home equity loans and lines		152		153		197		502		54,358		54,860
Consumer		33		11		-		44		1,968		2,012
	$	1,127	$	2,425	$	3,622	$	7,174	$	470,616	$	477,790

The following tables disclose the recorded investment in loans receivable that are either on non-accrual status or past due 90 days or more and still accruing interest as of June 30, 2013 and December 31, 2012:

June 30, 2013	90 days or more past  due (still accruing)		Non-accrual
Commercial:
Commercial and industrial		-	$	5,535
Construction		-		2,029
Secured by commercial real estate		-		6,408
Secured by residential real estate		-		2,698
State and political subdivisions	$	425		-
Loans to depository institutions		-		-
Indirect lease financing		17		72
Retail:
1-4 family residential mortgages		-		320
Home equity loans and lines		-		239
Consumer		-		-
	$	442	$	17,301

December 31, 2012	90 days or more past due (still accruing)		Non-accrual
Commercial:
Commercial and industrial	$	-	$	6,174
Construction		-		2,480
Secured by commercial real estate		-		6,748
Secured by residential real estate		-		2,390
State and political subdivisions		-		1
Loans to depository institutions		-		-
Indirect lease financing		-		98
Retail:
1-4 family residential mortgages		-		335
Home equity loans and lines		-		346
Consumer		-		-
	$	-	$	18,572

Activity in the allowance for loan losses for the three months ended June 30, 2013 and 2012 are as follows:

Three months ended June 30, 2013	Balance, beginning of period		Provision for (credit to) loan losses			Charge-offs			Recoveries		Balance, end of period
Commercial:
Commercial and industrial	$	2,314	$	(328	)		-		$	8	$	1,994
Construction		230		12			-			-		242
Secured by commercial real estate		3,873		42			-			1		3,916
Secured by residential real estate		1,146		246			-			45		1,437
State and political subdivisions		257		20			-			-		277
Loans to depository institutions		10		-			-			-		10
Indirect lease financing		179		(29	)		-			6		156
Retail:
1-4 family residential mortgages		300		(11	)		-			-		289
Home equity loans and lines		714		24		$	(79	)		5		664
Consumer		29		5			(13	)		7		28
Unallocated		299		119		N/A			N/A			418
	$	9,351	$	100		$	(92	)	$	72	$	9,431

Three months ended June 30, 2012	Balance, beginning of period		Provision for (credit to) loan losses			Charge-offs			Recoveries		Balance, end of period
Commercial:
Commercial and industrial	$	3,317	$	164		$	(74	)	$	60	$	3,467
Construction		333		20			-			-		353
Secured by commercial real estate		3,126		2			-			62		3,190
Secured by residential real estate		773		88			(50	)		-		811
State and political subdivisions		301		(79	)		-			-		222
Loans to depository institutions		20		-			-			-		20
Indirect lease financing		238		21			(13	)		22		268
Retail:
1-4 family residential mortgages		303		(5	)		-			2		300
Home equity loans and lines		547		37			(1	)		12		595
Consumer		17		10			(11	)		2		18
Unallocated		481		(258	)	N/A			N/A			223
	$	9,456	$	-		$	(149	)	$	160	$	9,467

Activity in the allowance for loan losses for the six months ended June 30, 2013 and 2012 are as follows:

Six months ended June 30, 2013	Balance, beginning of period		Provision for (credit to) loan losses			Charge-offs			Recoveries		Balance, end of period
Commercial:
Commercial and industrial	$	2,505	$	(526	)		-		$	15	$	1,994
Construction		209		33			-			-		242
Secured by commercial real estate		3,795		120			-			1		3,916
Secured by residential real estate		1,230		498		$	(336	)		45		1,437
State and political subdivisions		260		17			-			-		277
Loans to depository institutions		15		(5	)		-			-		10
Indirect lease financing		168		(27	)		(1	)		16		156
Retail:
1-4 family residential mortgages		324		(35	)		-			-		289
Home equity loans and lines		582		248			(172	)		6		664
Consumer		27		16			(34	)		19		28
Unallocated		657		(239	)	N/A			N/A			418
	$	9,772	$	100		$	(543	)	$	102	$	9,431

Six months ended June 30, 2012	Balance, beginning of period		Provision for (credit to) loan losses			Charge-offs			Recoveries		Balance, end of period
Commercial:
Commercial and industrial	$	2,959	$	520		$	(74	)	$	62	$	3,467
Construction		556		(203	)		-			-		353
Secured by commercial real estate		3,124		4			-			62		3,190
Secured by residential real estate		746		151			(86	)		-		811
State and political subdivisions		195		27			-			-		222
Loans to depository institutions		20		-			-			-		20
Indirect lease financing		312		(47	)		(23	)		26		268
Retail:
1-4 family residential mortgages		249		70			(21	)		2		300
Home equity loans and lines		625		(23	)		(19	)		12		595
Consumer		20		13			(20	)		5		18
Unallocated		435		(212	)	N/A			N/A			223
	$	9,241	$	300		$	(243	)	$	169	$	9,467

As previously discussed, the Company maintains a loan review system, which includes a continuous review of the loan portfolio by internal and external parties to aid in the early identification of potential impaired loans. A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for

commercial loans, loans to state and political subdivisions and indirect lease financing loans by using 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.

Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual consumer and residential mortgage loans for impairment disclosures, unless such loans are part of a larger relationship that is impaired, or are classified as a troubled debt restructuring.

An allowance for loan losses is established for an impaired loan if its carrying value exceeds its estimated fair value. The estimated fair values of the majority of the Company’s impaired loans are measured based on the estimated fair value of the loan’s collateral.

For commercial loans secured by real estate, estimated fair values are determined primarily through third-party appraisals. When a real estate secured loan becomes impaired, a decision is made regarding whether an updated certified appraisal of the real estate is necessary. This decision is based on various considerations, including the age of the most recent appraisal, the loan-to-value ratio based on the original appraisal and the condition of the property. Appraised values are discounted to arrive at the estimated selling price of the collateral, which is considered to be the estimated fair value. The discounts also include estimated costs to sell the property.

For commercial loans secured by non-real estate collateral, such as accounts receivable, inventory and equipment, estimated fair values are determined based on the borrower’s financial statements, inventory reports, accounts receivable agings or equipment appraisals or invoices. Indications of value from these sources are generally discounted based on the age of the financial information or the quality of the assets.

From time to time, QNB may extend, restructure, or otherwise modify the terms of existing loans, on a case-by-case basis, to remain competitive and retain certain customers, as well as assist other customers that may be experiencing financial difficulties. A loan is considered to be a troubled debt restructuring (“TDR”) loan when the Company grants a concession to the borrower because of the borrower’s financial condition that it would not otherwise consider. Such concessions include the reduction of interest rates, forgiveness of principal or interest, or other modifications of interest rates to less than the current market rate for new obligations with similar risk. Loans classified as TDRs are considered non-performing and are also designated as impaired.

The concessions made for TDRs involve lowering the monthly payments on loans through periods of interest only payments, a reduction in interest rate below a market rate or an extension of the term of the loan without a corresponding adjustment to the risk premium reflected in the interest rate, or a combination of these three methods. The restructurings rarely result in the forgiveness of principal or accrued interest. If the borrower has demonstrated performance under the previous terms and our underwriting process shows the borrower has the capacity to continue to perform under the restructured terms, the loan will continue to accrue interest. Non-accruing restructured loans may be returned to accrual status when there has been a sustained period of repayment performance (generally six consecutive months of payments) and both principal and interest are deemed collectible. TDR loans that are in compliance with their modified terms and that yield a market rate may be removed from the TDR status after a period of performance.

QNB assesses all loan restructurings under the guidance of ASU 2011-02. Performing TDRs (not reported as non-accrual or past due 90 days or more and still accruing) totaled $4,294,000 and $2,578,000 as of June 30, 2013 and December 31, 2012, respectively. Non-performing TDRs totaled $3,234,000 and $3,299,000 as of June 30, 2013 and December 31, 2012, respectively. All TDRs are included in impaired loans presented in the section above.

The following table presents loans by loan class modified as TDRs during the three and six months ended June 30, 2013 and 2012. The pre-modification and post-modification outstanding recorded investments disclosed in the tables below, represent carrying amounts immediately prior to the modification and at June 30, 2013 and 2012.

Three months ended June 30,	2013						2012
	Number of contracts		Pre- modification outstanding recorded investment		Post- modification outstanding recorded investment		Number of contracts		Pre- modification outstanding recorded investment		Post- modification outstanding recorded investment
Commercial:
Commercial and industrial		-		-		-		2	$	482	$	476
Secured by commercial real estate		-		-		-		1		2,380		2,380
Retail:
1-4 family residential mortgages		-		-		-		1		145		141
Home equity loans and lines		1	$	28	$	28		-		-		-
		1	$	28	$	28		4	$	3,007	$	2,997

Six months ended June 30,	2013						2012
	Number of contracts		Pre- modification outstanding recorded investment		Post- modification outstanding recorded investment		Number of contracts		Pre- modification outstanding recorded investment		Post- modification outstanding recorded investment
Commercial:
Commercial and industrial		-		-		-		2	$	482	$	476
Secured by commercial real estate		1	$	1,822	$	1,822		1		2,380		2,380
Retail:
1-4 family residential mortgages		-		-		-		1		145		141
Home equity loans and lines		1		28		28		1		38		38
		2	$	1,850	$	1,850		5	$	3,045	$	3,035

The TDR concessions made during the six months ended June 30, 2013 involved an interest only repayment period on the loans. There was no specific reserve for loan losses allocated to the loans modified as TDRs during the six months ended June 30, 2013. Any required specific reserves are included in the allowance for loan losses for loans individually evaluated for impairment. There were no charge-offs resulting from loans modified as TDRs during the six months ended June 30, 2013 or 2012.

There were no loans modified as TDRs within 12 months prior to June 30, 2013 for which there was a payment default (30 days or more past due) during the six months ended June 30, 2013.

The following tables present the balance in the allowance for loan losses at June 30, 2013 and December 31, 2012 disaggregated on the basis of the Company’s impairment method by class of loans receivable along with the balance of loans receivable by class, excluding unearned fees and costs, disaggregated on the basis of the Company’s impairment methodology:

	Allowance for Loan Losses						Loans Receivable
June 30, 2013	Balance		Balance related to loans individually evaluated for impairment		Balance related to loans collectively evaluated for impairment		Balance		Balance individually evaluated for impairment		Balance collectively evaluated for impairment
Commercial:
Commercial and industrial	$	1,994	$	652	$	1,342	$	111,619	$	5,882	$	105,737
Construction		242		-		242		10,557		2,065		8,492
Secured by commercial real estate		3,916		850		3,066		192,689		15,633		177,056
Secured by residential real estate		1,437		534		903		44,102		3,836		40,266
State and political subdivisions		277		-		277		32,552		1,807		30,745
Loans to depository institutions		10		-		10		2,250		-		2,250
Indirect lease financing		156		7		149		8,703		72		8,631
Retail:
1-4 family residential mortgages		289		67		222		27,774		440		27,334
Home equity loans and lines		664		71		593		56,777		267		56,510
Consumer		28		-		28		2,186		-		2,186
Unallocated		418	N/A		N/A		N/A		N/A		N/A
	$	9,431	$	2,181	$	6,832	$	489,209	$	30,002	$	459,207

	Allowance for Loan Losses						Loans Receivable
December 31, 2012	Balance		Balance related to loans individually evaluated for impairment		Balance related to loans collectively evaluated for impairment		Balance		Balance individually evaluated for impairment		Balance collectively evaluated for impairment
Commercial:
Commercial and industrial	$	2,505	$	1,309	$	1,196	$	100,063	$	7,753	$	92,310
Construction		209		-		209		11,061		3,990		7,071
Secured by commercial real estate		3,795		619		3,176		192,867		14,931		177,936
Secured by residential real estate		1,230		543		687		41,003		2,843		38,160
State and political subdivisions		260		-		260		34,256		1,849		32,407
Loans to depository institutions		15		-		15		3,250		-		3,250
Indirect lease financing		168		13		155		9,685		98		9,587
Retail:
1-4 family residential mortgages		324		90		234		28,733		456		28,277
Home equity loans and lines		582		127		455		54,860		384		54,476
Consumer		27		-		27		2,012		-		2,012
Unallocated		657	N/A		N/A		N/A		N/A		N/A
	$	9,772	$	2,701	$	6,414	$	477,790	$	32,304	$	445,486

The following tables summarize additional information in regards to impaired loans by loan portfolio class as of June 30, 2013 and December 31, 2012:

June 30, 2013	Recorded investment (after charge-offs)		Unpaid principal balance		Related allowance		Average recorded investment		Interest income recognized
With no specific allowance recorded:
Commercial:
Commercial and industrial	$	4,153	$	4,548	$	-
Construction		2,065		2,302		-
Secured by commercial real estate		12,339		13,184		-
Secured by residential real estate		1,444		1,467		-
State and political subdivisions		1,807		1,807		-
Loans to depository institutions		-		-		-
Indirect lease financing		39		44		-
Retail:
1-4 family residential mortgages		166		187		-
Home equity loans and lines		196		222		-
Consumer		-		-		-
	$	22,209	$	23,761	$	-
With an allowance recorded:
Commercial:
Commercial and industrial	$	1,729	$	1,902	$	652
Construction		-		-		-
Secured by commercial real estate		3,294		3,799		850
Secured by residential real estate		2,392		2,512		534
State and political subdivisions		-		-		-
Loans to depository institutions		-		-		-
Indirect lease financing		33		35		7
Retail:
1-4 family residential mortgages		274		285		67
Home equity loans and lines		71		79		71
Consumer		-		-		-
	$	7,793	$	8,612	$	2,181
Total:
Commercial:
Commercial and industrial	$	5,882	$	6,450	$	652	$	6,771	$	12
Construction		2,065		2,302		-		3,865		28
Secured by commercial real estate		15,633		16,983		850		14,117		197
Secured by residential real estate		3,836		3,979		534		2,811		17
State and political subdivisions		1,807		1,807		-		1,826		33
Loans to depository institutions		-		-		-		-		-
Indirect lease financing		72		79		7		78		-
Retail:
1-4 family residential mortgages		440		472		67		448		3
Home equity loans and lines		267		301		71		323		1
Consumer		-		-		-		-		-
	$	30,002	$	32,373	$	2,181	$	30,239	$	291

December 31, 2012	Recorded investment (after charge-offs)		Unpaid principal balance		Related allowance		Average recorded investment		Interest income recognized
With no specific allowance recorded:
Commercial:
Commercial and industrial	$	5,241	$	5,477	$	-
Construction		3,990		4,170		-
Secured by commercial real estate		11,392		12,128		-
Secured by residential real estate		897		912		-
State and political subdivisions		1,849		1,850		-
Loans to depository institutions		-		-		-
Indirect lease financing		37		44		-
Retail:
1-4 family residential mortgages		181		198		-
Home equity loans and lines		184		196		-
Consumer		-		-		-
	$	23,771	$	24,975	$	-
With an allowance recorded:
Commercial:
Commercial and industrial	$	2,512	$	2,687	$	1,309
Construction		-		-		-
Secured by commercial real estate		3,539		4,023		619
Secured by residential real estate		1,946		2,024		543
State and political subdivisions		-		-		-
Loans to depository institutions		-		-		-
Indirect lease financing		61		67		13
Retail:
1-4 family residential mortgages		275		287		90
Home equity loans and lines		200		214		127
Consumer		-		-		-
	$	8,533	$	9,302	$	2,701
Total:
Commercial:
Commercial and industrial	$	7,753	$	8,164	$	1,309	$	7,657	$	74
Construction		3,990		4,170		-		4,972		111
Secured by commercial real estate		14,931		16,151		619		14,883		541
Secured by residential real estate		2,843		2,936		543		2,439		47
State and political subdivisions		1,849		1,850		-		1,478		64
Loans to depository institutions		-		-		-		-		-
Indirect lease financing		98		111		13		86		-
Retail:
1-4 family residential mortgages		456		485		90		518		5
Home equity loans and lines		384		410		127		510		5
Consumer		-		-
	$	32,304	$	34,277	$	2,701	$	32,543	$	847

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Note 8 - Loans & Allowance for Loan Losses (Details) - Loans by Loan Class Modified as TDRs (USD $) In Thousands, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2013	Jun. 30, 2012	Jun. 30, 2013	Jun. 30, 2012
Commercial:
Number of Contracts	1	4	2	5
Pre-Modification Outstanding Recorded Investment	$ 28	$ 3,007	$ 1,850	$ 3,045
Post-Modification Outstanding Recorded Investment	28	2,997	1,850	3,035
Commercial:Commercial and Industrial [Member]
Commercial:
Number of Contracts	0	2	0	2
Pre-Modification Outstanding Recorded Investment	0	482	0	482
Post-Modification Outstanding Recorded Investment	0	476	0	476
Commercial:Secured by Commercial Real Estate [Member]
Commercial:
Number of Contracts	0	1	1	1
Pre-Modification Outstanding Recorded Investment	0	2,380	1,822	2,380
Post-Modification Outstanding Recorded Investment	0	2,380	1,822	2,380
Retail:1-4 Family Residential Mortgages [Member]
Commercial:
Number of Contracts	0	1	0	1
Pre-Modification Outstanding Recorded Investment	0	145	0	145
Post-Modification Outstanding Recorded Investment	0	141	0	141
Retail Home Equity Loans And Lines [Member]
Commercial:
Number of Contracts	1	0	1	1
Pre-Modification Outstanding Recorded Investment	28	0	28	38
Post-Modification Outstanding Recorded Investment	$ 28	$ 0	$ 28	$ 38

XML

Consolidated Statements of Income (Unaudited) (USD $) In Thousands, except Per Share data, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2013	Jun. 30, 2012	Jun. 30, 2013	Jun. 30, 2012
Interest income
Interest and fees on loans	$ 5,594	$ 6,163	$ 11,170	$ 12,441
Interest and dividends on investment securities:
Taxable	1,351	1,558	2,745	3,200
Tax-exempt	672	693	1,371	1,397
Interest on interest-bearing balances and other interest income	7	10	14	19
Total interest income	7,624	8,424	15,300	17,057
Interest on deposits
Interest-bearing demand	156	159	302	326
Money market	35	66	73	137
Savings	202	315	426	630
Time	494	612	1,015	1,241
Time of $100,000 or more	311	375	636	749
Interest on short-term borrowings	27	26	53	53
Interest on long-term debt	63	95	126	339
Total interest expense	1,288	1,648	2,631	3,475
Net interest income	6,336	6,776	12,669	13,582
Provision for loan losses	100	0	100	300
Net interest income after provision for loan losses	6,236	6,776	12,569	13,282
Non-interest income
Total other-than-temporary impairment loss on investment securities	(43)		(43)
Net other-than temporary impairment losses on investment securities	(43)		(43)
Net gain on sale of investment securities	136	141	559	530
Net gain on investment securities	93	141	516	530
Fees for services to customers	369	345	735	684
ATM and debit card	378	367	730	731
Bank-owned life insurance	75	78	149	156
Merchant Income	101	101	182	186
Net gain on sale of loans	98	231	323	458
Other	125	63	352	147
Total non-interest income	1,239	1,326	2,987	2,892
Non-interest expense
Salaries and employee benefits	2,673	2,548	5,232	5,174
Net occupancy	415	397	851	821
Furniture and equipment	417	373	830	703
Marketing	251	256	490	457
Third party services	386	365	760	704
Telephone, postage and supplies	159	156	340	306
State taxes	173	167	345	327
FDIC insurance premiums	183	162	353	342
Other	434	404	830	845
Total non-interest expense	5,091	4,828	10,031	9,679
Income before income taxes	2,384	3,274	5,525	6,495
Provision for income taxes	490	769	1,223	1,519
Net income	$ 1,894	$ 2,505	$ 4,302	$ 4,976
Earnings per share - basic (in Dollars per share)	$ 0.58	$ 0.79	$ 1.33	$ 1.56
Earnings per share - diltued (in Dollars per share)	$ 0.58	$ 0.78	$ 1.32	$ 1.55
Cash dividends per share (in Dollars per share)	$ 0.27	$ 0.26	$ 0.54	$ 0.52

XML

Note 1 - Basis of Presentation

6 Months Ended

Jun. 30, 2013

Disclosure Text Block [Abstract]

Basis of Presentation and Significant Accounting Policies [Text Block]

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 2012 Annual Report incorporated in the Form 10-K. Operating results for the three and six month periods ended June 30, 2013 are not necessarily indicative of the results that may be expected for the year ending December 31, 2013.

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 interim 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.

The Company has evaluated events and transactions occurring subsequent to the balance sheet date of June 30, 2013, for items that should potentially be recognized or disclosed in these financial statements.

XML

Note 7 - Investment Securities (Tables)

6 Months Ended

Jun. 30, 2013

Note 7 - Investment Securities (Tables) [Line Items]

Schedule of Unrealized Loss on Investments [Table Text Block]

June 30, 2013
			Less than 12 months				12 months or longer				Total
	No. of securities		Fair value		Unrealized losses		Fair value		Unrealized losses		Fair value		Unrealized losses
U.S. Government agency securities		43	$	53,172	$	1,455		-		-	$	53,172	$	1,455
State and municipal securities		73		32,706		1,331		-		-		32,706		1,331
U.S. Government agencies and sponsored enterprises (GSEs):
Mortgage-backed securities		45		68,335		1,694		-		-		68,335		1,694
Collateralized mortgage obligations (CMOs)		45		57,461		1,458	$	1,507	$	25		58,968		1,483
Pooled trust preferred securities		5		-		-		1,708		1,509		1,708		1,509
Corporate debt securities		3		2,972		31		-		-		2,972		31
Equity securities		6		675		47		133		23		808		70
Total		220	$	215,321	$	6,016	$	3,348	$	1,557	$	218,669	$	7,573

December 31, 2012
			Less than 12 months				12 months or longer				Total
	No. of securities		Fair value		Unrealized losses		Fair value		Unrealized losses		Fair value		Unrealized losses
U.S. Government agency securities		4	$	3,992	$	19		-		-	$	3,992	$	19
State and municipal securities		15		6,472		91		-		-		6,472		91
U.S. Government agencies and sponsored enterprises (GSEs):
Mortgage-backed securities		9		13,439		33		-		-		13,439		33
Collateralized mortgage obligations (CMOs)		19		28,396		155		-		-		28,396		155
Pooled trust preferred securities		5		-		-	$	1,609	$	1,608		1,609		1,608
Equity securities		7		587		45		272		42		859		87
Total		59	$	52,886	$	343	$	1,881	$	1,650	$	54,767	$	1,993

Deal	Class	Book value		Fair value		Unrealized gains (losses)			Realized OTTI credit loss (YTD 2013)		Total recognized OTTI credit loss			Moody's /Fitch ratings	Current number of performing banks		Current number of performing insurance companies		Actual deferrals and defaults as a % of total collateral			Total performing collateral as a % of outstanding bonds
PreTSL IV	Mezzanine*	$	243	$	201	$	(42	)	$	-	$	(1	)	Caa2/CCC		5		-		18.0	%		139.5	%
PreTSL V	Mezzanine*		-		-		-			-		(118	)	C/D		-		-		100.0			12.5
PreTSL XVII	Mezzanine		752		439		(313	)		-		(222	)	C/C		30		4		38.8			71.2
PreTSL XIX	Mezzanine		988		431		(557	)		-		-		C/C		35		13		22.9			81.8
PreTSL XXV	Mezzanine		766		356		(410	)		-		(222	)	C/C		41		6		33.5			79.8
PreTSL XXVI	Mezzanine		469		282		(187	)		-		(270	)	C/C		40		7		30.2			83.5
PreTSL XXVI	Mezzanine		301		382		81			-		(438	)	C/C		40		7		30.2			83.5
		$	3,519	$	2,091	$	(1,428	)	$	-	$	(1,271	)

Available-for-sale Securities [Member]

Note 7 - Investment Securities (Tables) [Line Items]

Unrealized Gain (Loss) on Investments [Table Text Block]

June 30, 2013	Fair value		Gross unrealized holding gains		Gross unrealized holding losses		Amortized cost
U.S. Government agency securities	$	70,474	$	251	$	1,455	$	71,678
State and municipal securities		86,715		1,472		1,331		86,574
U.S. Government agencies and sponsored enterprises (GSEs):
Mortgage-backed securities		126,945		1,493		1,694		127,146
Collateralized mortgage obligations (CMOs)		85,678		679		1,483		86,482
Pooled trust preferred securities		2,091		81		1,509		3,519
Corporate debt securities		3,991		16		31		4,006
Equity securities		4,470		526		70		4,014
Total investment securities available-for-sale	$	380,364	$	4,518	$	7,573	$	383,419

December 31, 2012	Fair value		Gross unrealized holding gains		Gross unrealized holding losses		Amortized cost
U.S. Government agency securities	$	104,130	$	750	$	19	$	103,399
State and municipal securities		86,789		3,141		91		83,739
U.S. Government agencies and sponsored enterprises (GSEs):
Mortgage-backed securities		107,973		3,169		33		104,837
Collateralized mortgage obligations (CMOs)		94,091		1,188		155		93,058
Pooled trust preferred securities		1,962		51		1,608		3,519
Corporate debt securities		2,502		44		-		2,458
Equity securities		4,055		402		87		3,740
Total investment securities available-for-sale	$	401,502	$	8,745	$	1,993	$	394,750

Investments Classified by Contractual Maturity Date [Table Text Block]

June 30, 2013	Fair value		Amortized cost
Due in one year or less	$	9,498	$	9,349
Due after one year through five years		202,245		201,228
Due after five years through ten years		119,304		122,291
Due after ten years		44,847		46,537
Equity securities		4,470		4,014
Total investment securities available-for-sale	$	380,364	$	383,419

Realized Gain (Loss) on Investments [Table Text Block]

	Six months ended June 30, 2013									Six months ended June 30, 2012
	Gross realized gains		Gross realized losses		Other-than- temporary impairment losses			Net gains		Gross realized gains		Gross realized losses			Other-than- temporary impairment losses		Net gains
Equity securities	$	369	$	-	$	(43	)	$	326	$	427	$	-		$	-	$	427
Debt securities		190		-		-			190		107		(4	)		-		103
Total	$	559	$	-	$	(43	)	$	516	$	534	$	(4	)	$	-	$	530

Other than Temporary Impairment, Credit Losses Recognized in Earnings [Table Text Block]

Six months ended June 30,	2013		2012
Balance, beginning of period	$	1,271	$	1,279
Reductions: gain on payoff		-		-
Additions:
Initial credit impairments		-		-
Subsequent credit impairments		-		-
Balance, end of period	$	1,271	$	1,279

Held-to-maturity Securities [Member]

Note 7 - Investment Securities (Tables) [Line Items]

Unrealized Gain (Loss) on Investments [Table Text Block]

Held-To-Maturity
	June 30, 2013								December 31, 2012
	Amortized cost		Gross unrealized holding gains		Gross unrealized holding losses		Fair value		Amortized cost		Gross unrealized holding gains		Gross unrealized holding losses		Fair value
State and municipal securities	$	146	$	17		-	$	163	$	146	$	20		-	$	166

Investments Classified by Contractual Maturity Date [Table Text Block]

June 30, 2013	Fair value		Amortized cost
Due in one year or less		-		-
Due after one year through five years	$	163	$	146
Due after five years through ten years		-		-
Due after ten years		-		-
Total investment securities held-to-maturity	$	163	$	146

XML

Note 9 - Fair Value Measurements and Disclosures (Details) (USD $)	6 Months Ended
	Jun. 30, 2013
Note 9 - Fair Value Measurements and Disclosures (Details) [Line Items]
Fair Value, Assets, Level 1 to Level 2 Transfers, Amount (in Dollars)	$ 0
Fair Value, Assets, Level 2 to Level 1 Transfers, Amount (in Dollars)	0
Fair Value, Measurement with Unobservable Inputs Reconciliation, Recurring Basis, Asset Transfers Into Level 3 (in Dollars)	0
Fair Value, Measurement with Unobservable Inputs Reconciliation, Recurring Basis, Asset, Transfers out of Level 3 (in Dollars)	0
Fair Value Inputs, Loss Severity	95.00%
Threshold for Identifying Banks with Trust Preferred Securities (in Dollars)	$ 15,000,000,000
Minimum Cost Saving for Refinance	2.00%
Pooled Trust Preferred Securities [Member]
Note 9 - Fair Value Measurements and Disclosures (Details) [Line Items]
Available-for-sale Securities, number	seven
Pooled Trust Preferred Securities [Member] | Minimum [Member]
Note 9 - Fair Value Measurements and Disclosures (Details) [Line Items]
Fair Value Inputs, Prepayment Rate	0.00%
Pooled Trust Preferred Securities [Member] | Maximum [Member]
Note 9 - Fair Value Measurements and Disclosures (Details) [Line Items]
Fair Value Inputs, Prepayment Rate	1.00%
Minimum [Member]
Note 9 - Fair Value Measurements and Disclosures (Details) [Line Items]
Fair Value Inputs, Loss Severity	0.00%
Fair Value Inputs, Prepayment Rate	0.00%
Fair Value Inputs, Discount Rate	4.16%
Maximum [Member]
Note 9 - Fair Value Measurements and Disclosures (Details) [Line Items]
Fair Value Inputs, Loss Severity	100.00%
Fair Value Inputs, Prepayment Rate	1.00%
Fair Value Inputs, Discount Rate	9.42%

XML

Note 9 - Fair Value Measurements and Disclosures

6 Months Ended

Jun. 30, 2013

Fair Value Disclosures [Abstract]

Fair Value Disclosures [Text Block]

9. FAIR VALUE MEASUREMENTS AND DISCLOSURES

Financial Accounting Standards Board (FASB) ASC 820, Fair Value Measurements and Disclosures, defines fair value as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants (fair values are not adjusted for transaction costs). ASC 820 also establishes a framework (fair value hierarchy) for measuring fair value under GAAP, and expands disclosures about fair value measurements.

ASC 820 establishes a fair value hierarchy that prioritizes the inputs to valuation methods used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are as follows:

Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

Level 2: Quoted prices in markets that are not active, or inputs that are observable either directly or indirectly, for substantially the full term of the asset or liability.

Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported with little or no market activity).

An asset’s or liability’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.

The measurement of fair value should be consistent with one of the following valuation techniques: market approach, income approach, and/or cost approach. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities (including a business). For example, valuation techniques consistent with the market approach often use market multiples derived from a set of comparables. Multiples might lie in ranges with a different multiple for each comparable. The selection of where within the range the appropriate multiple falls requires judgment, considering factors specific to the measurement (qualitative and quantitative). Valuation techniques consistent with the market approach include matrix pricing. Matrix pricing is a mathematical technique used principally to value debt securities without relying exclusively on quoted prices for the specific securities, but rather by relying on the security’s relationship to other benchmark quoted securities.

The following table sets forth QNB’s financial assets measured at fair value on a recurring and nonrecurring basis and the fair value measurements by level within the fair value hierarchy as of June 30, 2013:

June 30, 2013	Quoted prices in active markets for identical assets (Level 1)		Significant other observable input (Level 2)		Significant unobservable inputs (Level 3)		Balance at end of period
Recurring fair value measurements
Securities available-for-sale
U.S. Government agency securities		-	$	70,474		-	$	70,474
State and municipal securities		-		86,715		-		86,715
U.S. Government agencies and sponsored enterprises (GSEs):
Mortgage-backed securities		-		126,945		-		126,945
Collateralized mortgage obligations (CMOs)		-		85,678		-		85,678
Pooled trust preferred securities		-		-	$	2,091		2,091
Corporate debt securities		-		3,991		-		3,991
Equity securities	$	4,470		-		-		4,470
Total securities available-for-sale	$	4,470	$	373,803	$	2,091	$	380,364
Total recurring fair value measurements	$	4,470	$	373,803	$	2,091	$	380,364
Nonrecurring fair value measurements
Impaired loans		-		-	$	5,612	$	5,612
Mortgage servicing rights		-		-		504		504
Loans held-for-sale		-	$	1,328		-		1,328
Other real estate owned	$	110		-		-		110
Total nonrecurring fair value measurements	$	110	$	1,328	$	6,116	$	7,554

There were no transfers in and out of Level 1 and Level 2 fair value measurements during the six months ended June 30, 2013. There were also no transfers in or out of level 3 for the same period. There were no losses included in earnings attributable to the change in unrealized gains or losses relating to the available-for-sale securities above with fair value measurements utilizing significant unobservable inputs for the six-month periods ended June 30, 2013 and 2012, respectively

The following table sets forth QNB’s financial assets measured at fair value on a recurring and nonrecurring basis, the fair value measurements by level within the fair value hierarchy as of December 31, 2012:

December 31, 2012	Quoted prices in active markets for identical assets (Level 1)		Significant other observable input (Level 2)		Significant unobservable inputs (Level 3)		Balance at end of period
Recurring fair value measurements
Securities available-for-sale
U.S. Government agency securities		-	$	104,130		-	$	104,130
State and municipal securities		-		86,789		-		86,789
U.S. Government agencies and sponsored enterprises (GSEs):
Mortgage-backed securities		-		107,973		-		107,973
Collateralized mortgage obligations (CMOs)		-		94,091		-		94,091
Pooled trust preferred securities		-		-	$	1,962		1,962
Corporate debt securities		-		2,502		-		2,502
Equity securities	$	4,055		-		-		4,055
Total securities available-for-sale	$	4,055	$	395,485	$	1,962	$	401,502
Total recurring fair value measurements	$	4,055	$	395,485	$	1,962	$	401,502
Nonrecurring fair value measurements
Impaired loans	$	-	$	-	$	5,832	$	5,832
Mortgage servicing rights		-		-		448		448.00
Total nonrecurring fair value measurements	$	-	$	-	$	6,280	$	6,280

The following table presents additional quantitative information about assets measured at fair value on a nonrecurring basis and for which QNB has utilized Level 3 inputs to determine fair value:

	Quantitative information about Level 3 fair value measurements
June 30, 2013	Fair value		Valuation techniques	Unobservable input	Value or range of values
Impaired loans	$	5,612	Appraisal of collateral (1)	Appraisal adjustments (2)	0%	to	-30%
				Liquidation expenses (2)	0%	to	-10%
Mortgage servicing rights (yrs)	$	504	Discounted cash flow	Remaining term	1	-	30
				Discount rate	10%	to	12%

(1) Fair value is primarily determined through appraisals of the underlying collateral by independent parties, which generally includes various level 3 inputs which are not always identifiable.

(2) Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses.The range is presented as a percent of the initial appraised value.

The following table presents additional information about the securities available-for-sale measured at fair value on a recurring basis and for which QNB utilized significant unobservable inputs (Level 3 inputs) to determine fair value for the six months ended June 30, 2013:

	Fair value measurements using significant unobservable inputs (Level 3)
Balance, beginning of year	$	1,962
Settlements		-
Total gains or losses (realized/unrealized)
Included in earnings		-
Included in other comprehensive income		129
Transfers in and/or out of Level 3		-
Balance, June 30, 2013	$	2,091

The Level 3 securities consist of seven collateralized debt obligation securities, PreTSL securities, which are backed by trust preferred securities issued by banks, thrifts, and insurance companies. The market for these securities at June 30, 2013 is not active and markets for similar securities also are not active. The inactivity was evidenced first by a significant widening of the bid-ask spread in the brokered markets in which PreTSLs trade and then by a significant decrease in the volume of trades relative to historical levels. The new issue market is also inactive and there are currently very few market participants who are willing and or able to transact for these securities.

Given conditions in the debt markets today and the absence of observable transactions in the secondary and new issue markets, we determined:

● The few observable transactions and market quotations that are available are not reliable for purposes of determining fair value at June 30, 2013;

● An income valuation approach technique (present value technique) that maximizes the use of relevant observable inputs and minimizes the use of unobservable inputs will be equally or more representative of fair value than the market approach valuation technique used at prior measurement dates; and

● PreTSLs will be classified within Level 3 of the fair value hierarchy because significant adjustments are required to determine fair value at the measurement date.

The Bank is aware of several factors indicating that recent transactions of PreTSL securities are not orderly including an increased spread between bid/ask prices, lower sales transaction volumes for these types of securities, and a lack of new issuances. As a result, the Bank engaged an independent third party to value the securities using a discounted cash flow analysis. The estimated cash flows are based on specific assumptions about defaults, deferrals and prepayments of the trust preferred securities underlying each PreTSL. The resulting collateral cash flows are allocated to the bond waterfall using the INTEXcalc valuation model.

The estimates for the conditional default rates (CDR) are based on the payment characteristics of the trust preferred securities themselves (e.g. current, deferred, or defaulted) as well as the financial condition of the trust preferred issuers in the pool. A near-term CDR for each issuer in the pool is estimated based on their financial condition using key financial ratios relating to the financial institution’s capitalization, asset quality, profitability and liquidity. In addition to the specific bank default assumptions, overall deal default rates are modeled. In 2013 and beyond, the CDR rate is calculated based upon a comparison of key financial ratios of active individual issuers without a short-term probability of default compared to all FDIC insured banks. To derive this long-term default rate, a comparison of certain key financial ratios of the active issuers in the security to all FDIC insured banks is reviewed. The active issuers are summarized by creating a weighted average based on issue size, then divided into categories based upon their status of deferral and whether or not a specific default assumption has been assigned to the issuer. To ensure an accurate comparison, the standard deviation across the issuers for each ratio is calculated and any issuer that falls more than three standard deviations above or below the average for that ratio is removed.

The base loss severity assumption and long-term loss severity assumptions are modeled at 95%. The severity factor for near-term CDRs is vectored to reflect the relative expected performance of the institutions modeled to default, with lower forecasted severities used for the higher quality institutions.

Prepayments are modeled to take into account the disruption in the asset-backed securities marketplace and the lack of new pooled trust preferred issuances. For purposes of the cash flow analysis, relatively modest rates of prepayment were forecasted (ranging from 0-1%). In addition to the base prepayment assumption, due to the recent enactment of the Dodd-Frank financial legislation additional prepayment analysis was performed. First, all fixed rate trust preferred securities issued by banks with more than $15 billion in total assets at December 31, 2009 were identified. The current credit rating of these institutions was reviewed and it was assumed that any issuer with an investment grade credit rating would prepay their issuance as soon as possible, or July 1, 2015 for bank holding company subsidiaries of foreign banking organizations that have relied on Supervision and Regulation Letter SR-01-1. For those institutions rated below investment grade the holding companies’ approximate cost of long-term funding given their rating and marketplace interest rate was estimated. The following assumption was made; any holding company that could refinance for a cost savings of more than 2% will refinance and will do so as soon as possible, or July 1, 2015. Finally, for issuers not impacted by the Tier 1 regulatory capital legislation enacted by the Dodd-Frank Act, the issuers that have shown a recent history of prepayment of both floating rate and fixed rate issues were identified and it was assumed these issuers will prepay as soon as possible.

The internal rate of return is the pre-tax yield used to discount the best estimate of future cash flows after credit losses. The cash flows have been discounted using estimated market discount rates of 3-month LIBOR plus spreads ranging from 4.16% to 9.42%. The determination of appropriate market discount rates involved the consideration of the following:

● the time value of money

● the price for bearing uncertainty in cash flows

● other factors that would be considered by market participants

The analysis of discount rates involved the review of corporate bond spreads for banks, U.S. Treasury yields, credit default swap rates for financial companies (utilized as a proxy for credit), the swap/LIBOR yield curve and the characteristics of the individual securities being valued.

The following information should not be interpreted as an estimate of the fair value of the entire Company since a fair value calculation is only provided for a limited portion of QNB’s assets and liabilities. Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between QNB’s disclosures and those of other companies may not be meaningful.

The following methods and assumptions were used to estimate the fair values of each major classification of financial instrument and non-financial asset at June 30, 2013 and December 31, 2012:

Cash and cash equivalents, accrued interest receivable and accrued interest payable (carried at cost): The carrying amounts reported in the balance sheet approximate those assets’ fair value.

Investment securities available for sale (carried at fair value) and held-to-maturity (carried at amortized cost): The fair value of securities are determined by obtaining quoted market prices on nationally recognized securities exchanges (Level 1), or matrix pricing (Level 2), which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted market prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted prices. Level 2 debt securities are valued by a third-party pricing service commonly used in the banking industry. Level 2 fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution date, market consensus prepayment speeds, credit information and the security’s terms and conditions, among other things. For certain securities which are not traded in active markets or are subject to transfer restrictions, valuations are adjusted to reflect illiquidity and/or non-transferability, and such adjustments are generally based on available market evidence (Level 3). In the absence of such evidence, management’s best estimate is used. Management’s best estimate consists of both internal and external support on certain Level 3 investments. Cash flow models using a present value formula that includes assumptions market participants would use along with indicative exit pricing obtained from broker/dealers (where available) were used to support fair values of certain Level 3 investments.

Restricted investment in bank stocks (carried at cost): The fair value of stock in Atlantic Central Bankers Bank and the Federal Home Loan Bank is the carrying amount, based on redemption provisions, and considers the limited marketability of such securities.

Loans Held for Sale (carried at lower of cost or fair value): The fair value of loans held for sale is determined, when possible, using quoted secondary market prices. If no such quoted prices exist, the fair value of a loan is determined using quoted prices for a similar loan or loans, adjusted for the specific attributes of that loan.

Loans Receivable (carried at cost): The fair values of loans are estimated using discounted cash flow analyses, using market rates at the balance sheet date that reflect the credit and interest rate-risk inherent in the loans. Projected future cash flows are calculated based upon contractual maturity or call dates, projected repayments and prepayments of principal. Generally, for variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values.

Impaired Loans (generally carried at fair value): Impaired loans are loans, in which the Company has measured impairment generally based on the fair value of the loan’s collateral. Fair value is generally determined based upon independent third-party appraisals of the properties, or discounted cash flows based upon the expected proceeds. These assets are included as Level 3 fair values, based upon the lowest level of input that is significant to the fair value measurements.

Mortgage Servicing Rights (carried at lower of cost or fair value): The fair value of mortgage servicing rights is based on a valuation model that calculates the present value of estimated net servicing income. The mortgage servicing rights are stratified into tranches based on predominant characteristics, such as interest rate, loan type and investor type. The valuation incorporates assumptions that market participants would use in estimating future net servicing income.

Foreclosed assets (other real estate owned and repossessed assets): Foreclosed assets are the only non-financial assets valued on a non-recurring basis which are held by the Company at fair value, less cost to sell. At foreclosure or repossession, if the fair value, less estimated costs to sell, of the collateral acquired (real estate, vehicles, equipment) is less than the Company’s recorded investment in the related loan, a write-down is recognized through a charge to the allowance for loan losses. Additionally, valuations are periodically performed by management and any subsequent reduction in value is recognized by a charge to income. The fair value of foreclosed assets held-for-sale is estimated using Level 3 inputs based on observable market data.

Deposit liabilities (carried at cost): The fair value of deposits with no stated maturity (e.g. demand deposits, interest-bearing demand accounts, money market accounts and savings accounts) are by definition, equal to the amount payable on demand at the reporting date (i.e. their carrying amounts). This approach to estimating fair value excludes the significant benefit that results from the low-cost funding provided by such deposit liabilities, as compared to alternative sources of funding. Deposits with a stated maturity (time deposits) have been valued using the present value of cash flows discounted at rates approximating the current market for similar deposits.

Short-term borrowings (carried at cost): The carrying amount of short-term borrowings approximates their fair values.

Long-term debt (carried at cost): The fair values of FHLB advances and securities sold under agreements to repurchase are estimated using discounted cash flow analysis, based on quoted prices for new long-term debt with similar credit risk characteristics, terms and remaining maturity. These prices obtained from this active market represent a fair value that is deemed to represent the transfer price if the liability were assumed by a third party.

Off-balance-sheet instruments (disclosed at cost): The fair values for the Bank’s off-balance sheet instruments (lending commitments and letters of credit) are based on fees currently charged in the market to enter into similar agreements, taking into account, the remaining terms of the agreements and the counterparties’ credit standing.

Management uses its best judgment in estimating the fair value of the Company’s financial instruments; however, there are inherent weaknesses in any estimation technique. Therefore, for substantially all financial instruments, the fair value estimates herein are not necessarily indicative of the amounts the Company could have realized in a sales transaction on the dates indicated. The estimated fair value amounts have been measured as of the respective period ends and have not been re-evaluated or updated for purposes of these financial statements subsequent to those respective dates. As such, the estimated fair values of these financial instruments subsequent to the respective reporting dates may be different than the amounts reported at each period end.

The estimated fair values and carrying amounts of the Company’s financial and off-balance sheet instruments are summarized as follows:

					Fair value measurements
June 30, 2013	Carrying amount		Fair value		Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
Financial assets
Cash and cash equivalents	$	15,897	$	15,897	$	15,897		-		-
Investment securities available-for-sale		380,364		380,364		4,470	$	373,803	$	2,091
Investment securities held-to-maturity		146		163		-		163		-
Restricted investment in bank stocks		1,837		1,837		1,837		-		-
Loans held-for-sale		1,328		1,328		-		1,328		-
Net loans		479,784		481,469		-		-		481,469
Mortgage servicing rights		504		576		-		-		576
Accrued interest receivable		2,981		2,981		-		2,981		-
Financial liabilities
Deposits with no stated maturities	$	542,740	$	542,740	$	542,740		-	$	-
Deposits with stated maturities		253,173		256,933		-	$	256,933		-
Short-term borrowings		32,851		32,851		32,851		-		-
Long-term debt		5,282		5,412		-		5,412		-
Accrued interest payable		407		407		-		407		-
Off-balance sheet instruments
Commitments to extend credit	$	-	$	-	$	-	$	-	$	-
Standby letters of credit		-		-		-		-		-

					Fair value measurements
December 31, 2012	Carrying amount		Fair value		Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
Financial assets
Cash and cash equivalents	$	15,453	$	15,453	$	15,453		-		-
Investment securities available-for-sale		401,502		401,502		4,055	$	395,485	$	1,962
Investment securities held-to-maturity		146		166		-		166		-
Restricted investment in bank stocks		2,244		2,244		2,244		-		-
Loans held-for-sale		1,616		1,674		-		1,674		-
Net loans		467,961		474,330		-		-		474,330
Mortgage servicing rights		448		464		-		-		464
Accrued interest receivable		2,803		2,803		-		2,803		-
Financial liabilities
Deposits with no stated maturities	$	532,404	$	532,404	$	532,404		-	$	-
Deposits with stated maturities		269,234		273,878		-	$	273,878		-
Short-term borrowings		32,488		32,488		32,488		-		-
Long-term debt		5,287		5,694		-		5,694		-
Accrued interest payable		487		487		-		487		-
Off-balance sheet instruments
Commitments to extend credit	$	-	$	-	$	-	$	-	$	-
Standby letters of credit		-		-		-		-		-

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Note 8 - Loans & Allowance for Loan Losses (Details) - Loan Portfolio Summarized by the Aggregate Pass Ratings (USD $) In Thousands, unless otherwise specified	Jun. 30, 2013	Dec. 31, 2012
Commercial:
Loans	$ 489,209	$ 477,790
Commercial:Commercial and Industrial [Member] | Pass [Member]
Commercial:
Loans	104,329	88,427
Commercial:Commercial and Industrial [Member] | Special Mention [Member]
Commercial:
Loans	1,363	3,843
Commercial:Commercial and Industrial [Member] | Substandard [Member]
Commercial:
Loans	5,927	7,763
Commercial:Commercial and Industrial [Member] | Doubtful [Member]
Commercial:
Loans	0	30
Commercial:Commercial and Industrial [Member]
Commercial:
Loans	111,619	100,063
Commercial:Construction [Member] | Pass [Member]
Commercial:
Loans	7,572	5,558
Commercial:Construction [Member] | Special Mention [Member]
Commercial:
Loans	920	1,513
Commercial:Construction [Member] | Substandard [Member]
Commercial:
Loans	2,065	3,990
Commercial:Construction [Member] | Doubtful [Member]
Commercial:
Loans	0	0
Commercial:Construction [Member]
Commercial:
Loans	10,557	11,061
Commercial:Secured by Commercial Real Estate [Member] | Pass [Member]
Commercial:
Loans	161,592	157,678
Commercial:Secured by Commercial Real Estate [Member] | Special Mention [Member]
Commercial:
Loans	4,118	7,493
Commercial:Secured by Commercial Real Estate [Member] | Substandard [Member]
Commercial:
Loans	26,979	27,696
Commercial:Secured by Commercial Real Estate [Member] | Doubtful [Member]
Commercial:
Loans	0	0
Commercial:Secured by Commercial Real Estate [Member]
Commercial:
Loans	192,689	192,867
Commercial Secured By Residential Real Estate [Member] | Pass [Member]
Commercial:
Loans	39,413	36,078
Commercial Secured By Residential Real Estate [Member] | Special Mention [Member]
Commercial:
Loans	27	1,199
Commercial Secured By Residential Real Estate [Member] | Substandard [Member]
Commercial:
Loans	4,662	3,726
Commercial Secured By Residential Real Estate [Member] | Doubtful [Member]
Commercial:
Loans	0	0
Commercial Secured By Residential Real Estate [Member]
Commercial:
Loans	44,102	41,003
State And Political Subdivisions [Member] | Pass [Member]
Commercial:
Loans	30,239	32,303
State And Political Subdivisions [Member] | Special Mention [Member]
Commercial:
Loans	0	0
State And Political Subdivisions [Member] | Substandard [Member]
Commercial:
Loans	2,313	1,953
State And Political Subdivisions [Member] | Doubtful [Member]
Commercial:
Loans	0	0
State And Political Subdivisions [Member]
Commercial:
Loans	32,552	34,256
Loans To Depository Institutions [Member] | Pass [Member]
Commercial:
Loans	2,250	3,250
Loans To Depository Institutions [Member] | Special Mention [Member]
Commercial:
Loans	0	0
Loans To Depository Institutions [Member] | Substandard [Member]
Commercial:
Loans	0	0
Loans To Depository Institutions [Member] | Doubtful [Member]
Commercial:
Loans	0	0
Loans To Depository Institutions [Member]
Commercial:
Loans	2,250	3,250
Indirect Lease Financing [Member] | Pass [Member]
Commercial:
Loans	8,471	9,329
Indirect Lease Financing [Member] | Special Mention [Member]
Commercial:
Loans	0	0
Indirect Lease Financing [Member] | Substandard [Member]
Commercial:
Loans	232	356
Indirect Lease Financing [Member] | Doubtful [Member]
Commercial:
Loans	0	0
Indirect Lease Financing [Member]
Commercial:
Loans	8,703	9,685
Excluding Retail Loans [Member] | Pass [Member]
Commercial:
Loans	353,866	332,623
Excluding Retail Loans [Member] | Special Mention [Member]
Commercial:
Loans	6,428	14,048
Excluding Retail Loans [Member] | Substandard [Member]
Commercial:
Loans	42,178	45,484
Excluding Retail Loans [Member] | Doubtful [Member]
Commercial:
Loans	0	30
Excluding Retail Loans [Member]
Commercial:
Loans	$ 402,472	$ 392,185

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Note 9 - Fair Value Measurements and Disclosures (Details) - Financial Assets Measured at Fair Value on a Recurring and Nonrecurring Basis (USD $)	Jun. 30, 2013	Dec. 31, 2012
Securities available-for-sale
Securities available-for-sale	$ 380,364,000	$ 401,502,000
Recurring fair value measurements	380,364,000	401,502,000
Nonrecurring fair value measurements
Nonrecurring fair value measurements	7,554,000	6,280,000
US Government Agencies Debt Securities [Member] | Fair Value, Inputs, Level 2 [Member]
Securities available-for-sale
Securities available-for-sale	70,474,000	104,130,000
US Government Agencies Debt Securities [Member]
Securities available-for-sale
Securities available-for-sale	70,474,000	104,130,000
State and Municipal [Member] | Fair Value, Inputs, Level 2 [Member]
Securities available-for-sale
Securities available-for-sale	86,715,000	86,789,000
State and Municipal [Member]
Securities available-for-sale
Securities available-for-sale	86,715,000	86,789,000
Mortgage-backed Securities, Issued by US Government Sponsored Enterprises [Member] | Fair Value, Inputs, Level 2 [Member]
Securities available-for-sale
Securities available-for-sale	126,945,000	107,973,000
Mortgage-backed Securities, Issued by US Government Sponsored Enterprises [Member]
Securities available-for-sale
Securities available-for-sale	126,945,000	107,973,000
Collateralized Mortgage Obligations [Member] | Fair Value, Inputs, Level 2 [Member]
Securities available-for-sale
Securities available-for-sale	85,678,000	94,091,000
Collateralized Mortgage Obligations [Member]
Securities available-for-sale
Securities available-for-sale	85,678,000	94,091,000
Pooled Trust Preferred Securities [Member] | Fair Value, Inputs, Level 3 [Member]
Securities available-for-sale
Securities available-for-sale	2,091,000	1,962,000
Pooled Trust Preferred Securities [Member]
Securities available-for-sale
Securities available-for-sale	2,091,000	1,962,000
Corporate Debt Securities [Member] | Fair Value, Inputs, Level 2 [Member]
Securities available-for-sale
Securities available-for-sale	3,991,000	2,502,000
Corporate Debt Securities [Member]
Securities available-for-sale
Securities available-for-sale	3,991,000	2,502,000
Equity Securities [Member] | Fair Value, Inputs, Level 1 [Member]
Securities available-for-sale
Securities available-for-sale	4,470,000	4,055,000
Equity Securities [Member]
Securities available-for-sale
Securities available-for-sale	4,470,000	4,055,000
Impaired Loans [Member] | Fair Value, Inputs, Level 3 [Member]
Nonrecurring fair value measurements
Nonrecurring fair value measurements	5,612,000	5,832,000
Impaired Loans [Member]
Nonrecurring fair value measurements
Nonrecurring fair value measurements	5,612,000	5,832,000
Mortgage Servicing Rights [Member] | Fair Value, Inputs, Level 3 [Member]
Nonrecurring fair value measurements
Nonrecurring fair value measurements	504,000	448,000
Mortgage Servicing Rights [Member]
Nonrecurring fair value measurements
Nonrecurring fair value measurements	504,000	448,000
Loans Held For Sale [Member] | Fair Value, Inputs, Level 2 [Member]
Nonrecurring fair value measurements
Nonrecurring fair value measurements	1,328,000
Loans Held For Sale [Member]
Nonrecurring fair value measurements
Nonrecurring fair value measurements	1,328,000
OREO [Member] | Fair Value, Inputs, Level 1 [Member]
Nonrecurring fair value measurements
Nonrecurring fair value measurements	110,000
OREO [Member]
Nonrecurring fair value measurements
Nonrecurring fair value measurements	110,000
Fair Value, Inputs, Level 1 [Member]
Securities available-for-sale
Securities available-for-sale	4,470,000	4,055,000
Recurring fair value measurements	4,470,000	4,055,000
Nonrecurring fair value measurements
Nonrecurring fair value measurements	110,000
Fair Value, Inputs, Level 2 [Member]
Securities available-for-sale
Securities available-for-sale	373,803,000	395,485,000
Recurring fair value measurements	373,803,000	395,485,000
Nonrecurring fair value measurements
Nonrecurring fair value measurements	1,328,000
Fair Value, Inputs, Level 3 [Member]
Securities available-for-sale
Securities available-for-sale	2,091,000	1,962,000
Recurring fair value measurements	2,091,000	1,962,000
Nonrecurring fair value measurements
Nonrecurring fair value measurements	$ 6,116,000	$ 6,280,000

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Note 7 - Investment Securities (Details) - Amortized Cost and Estimated Fair Values of Investment Securities Available-for-Sale (USD $)	6 Months Ended	12 Months Ended
	Jun. 30, 2013	Dec. 31, 2012
Note 7 - Investment Securities (Details) - Amortized Cost and Estimated Fair Values of Investment Securities Available-for-Sale [Line Items]
Fair value	$ 380,364,000	$ 401,502,000
Gross unrealized holding gains	4,518,000	8,745,000
Gross unrealized holding losses	7,573,000	1,993,000
Amortized cost	383,419,000	394,750,000
US Government Agencies Debt Securities [Member]
Note 7 - Investment Securities (Details) - Amortized Cost and Estimated Fair Values of Investment Securities Available-for-Sale [Line Items]
Fair value	70,474,000	104,130,000
Gross unrealized holding gains	251,000	750,000
Gross unrealized holding losses	1,455,000	19,000
Amortized cost	71,678,000	103,399,000
State and Municipal [Member]
Note 7 - Investment Securities (Details) - Amortized Cost and Estimated Fair Values of Investment Securities Available-for-Sale [Line Items]
Fair value	86,715,000	86,789,000
Gross unrealized holding gains	1,472,000	3,141,000
Gross unrealized holding losses	1,331,000	91,000
Amortized cost	86,574,000	83,739,000
Mortgage-backed Securities, Issued by US Government Sponsored Enterprises [Member]
Note 7 - Investment Securities (Details) - Amortized Cost and Estimated Fair Values of Investment Securities Available-for-Sale [Line Items]
Fair value	126,945,000	107,973,000
Gross unrealized holding gains	1,493,000	3,169,000
Gross unrealized holding losses	1,694,000	33,000
Amortized cost	127,146,000	104,837,000
Collateralized Mortgage Obligations [Member]
Note 7 - Investment Securities (Details) - Amortized Cost and Estimated Fair Values of Investment Securities Available-for-Sale [Line Items]
Fair value	85,678,000	94,091,000
Gross unrealized holding gains	679,000	1,188,000
Gross unrealized holding losses	1,483,000	155,000
Amortized cost	86,482,000	93,058,000
Pooled Trust Preferred Securities [Member]
Note 7 - Investment Securities (Details) - Amortized Cost and Estimated Fair Values of Investment Securities Available-for-Sale [Line Items]
Fair value	2,091,000	1,962,000
Gross unrealized holding gains	81,000	51,000
Gross unrealized holding losses	1,509,000	1,608,000
Amortized cost	3,519,000	3,519,000
Corporate Debt Securities [Member]
Note 7 - Investment Securities (Details) - Amortized Cost and Estimated Fair Values of Investment Securities Available-for-Sale [Line Items]
Fair value	3,991,000	2,502,000
Gross unrealized holding gains	16,000	44,000
Gross unrealized holding losses	31,000	0
Amortized cost	4,006,000	2,458,000
Equity Securities [Member]
Note 7 - Investment Securities (Details) - Amortized Cost and Estimated Fair Values of Investment Securities Available-for-Sale [Line Items]
Fair value	4,470,000	4,055,000
Gross unrealized holding gains	526,000	402,000
Gross unrealized holding losses	70,000	87,000
Amortized cost	$ 4,014,000	$ 3,740,000

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Note 10 - Off-Balance-Sheet Financial Instruments and Guarantees (Tables)

6 Months Ended

Jun. 30, 2013

Commitments and Contingencies Disclosure [Abstract]

Schedule of Fair Value, Off-balance Sheet Risks [Table Text Block]

	June 30, 2013		December 31, 2012
Commitments to extend credit and unused lines of credit	$	148,511	$	138,425
Standby letters of credit		5,624		5,332
Total financial instrument commitments	$	154,135	$	143,757

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Note 9 - Fair Value Measurements and Disclosures (Tables)

6 Months Ended

Jun. 30, 2013

Fair Value Disclosures [Abstract]

Fair Value Measurements, Recurring and Nonrecurring [Table Text Block]

June 30, 2013	Quoted prices in active markets for identical assets (Level 1)		Significant other observable input (Level 2)		Significant unobservable inputs (Level 3)		Balance at end of period
Recurring fair value measurements
Securities available-for-sale
U.S. Government agency securities		-	$	70,474		-	$	70,474
State and municipal securities		-		86,715		-		86,715
U.S. Government agencies and sponsored enterprises (GSEs):
Mortgage-backed securities		-		126,945		-		126,945
Collateralized mortgage obligations (CMOs)		-		85,678		-		85,678
Pooled trust preferred securities		-		-	$	2,091		2,091
Corporate debt securities		-		3,991		-		3,991
Equity securities	$	4,470		-		-		4,470
Total securities available-for-sale	$	4,470	$	373,803	$	2,091	$	380,364
Total recurring fair value measurements	$	4,470	$	373,803	$	2,091	$	380,364
Nonrecurring fair value measurements
Impaired loans		-		-	$	5,612	$	5,612
Mortgage servicing rights		-		-		504		504
Loans held-for-sale		-	$	1,328		-		1,328
Other real estate owned	$	110		-		-		110
Total nonrecurring fair value measurements	$	110	$	1,328	$	6,116	$	7,554

December 31, 2012	Quoted prices in active markets for identical assets (Level 1)		Significant other observable input (Level 2)		Significant unobservable inputs (Level 3)		Balance at end of period
Recurring fair value measurements
Securities available-for-sale
U.S. Government agency securities		-	$	104,130		-	$	104,130
State and municipal securities		-		86,789		-		86,789
U.S. Government agencies and sponsored enterprises (GSEs):
Mortgage-backed securities		-		107,973		-		107,973
Collateralized mortgage obligations (CMOs)		-		94,091		-		94,091
Pooled trust preferred securities		-		-	$	1,962		1,962
Corporate debt securities		-		2,502		-		2,502
Equity securities	$	4,055		-		-		4,055
Total securities available-for-sale	$	4,055	$	395,485	$	1,962	$	401,502
Total recurring fair value measurements	$	4,055	$	395,485	$	1,962	$	401,502
Nonrecurring fair value measurements
Impaired loans	$	-	$	-	$	5,832	$	5,832
Mortgage servicing rights		-		-		448		448.00
Total nonrecurring fair value measurements	$	-	$	-	$	6,280	$	6,280

Fair Value Inputs, Assets, Quantitative Information [Table Text Block]

	Quantitative information about Level 3 fair value measurements
June 30, 2013	Fair value		Valuation techniques	Unobservable input	Value or range of values
Impaired loans	$	5,612	Appraisal of collateral (1)	Appraisal adjustments (2)	0%	to	-30%
				Liquidation expenses (2)	0%	to	-10%
Mortgage servicing rights (yrs)	$	504	Discounted cash flow	Remaining term	1	-	30
				Discount rate	10%	to	12%

Fair Value, Liabilities Measured on Recurring Basis, Unobservable Input Reconciliation [Table Text Block]

	Fair value measurements using significant unobservable inputs (Level 3)
Balance, beginning of year	$	1,962
Settlements		-
Total gains or losses (realized/unrealized)
Included in earnings		-
Included in other comprehensive income		129
Transfers in and/or out of Level 3		-
Balance, June 30, 2013	$	2,091

Fair Value, by Balance Sheet Grouping [Table Text Block]

					Fair value measurements
June 30, 2013	Carrying amount		Fair value		Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
Financial assets
Cash and cash equivalents	$	15,897	$	15,897	$	15,897		-		-
Investment securities available-for-sale		380,364		380,364		4,470	$	373,803	$	2,091
Investment securities held-to-maturity		146		163		-		163		-
Restricted investment in bank stocks		1,837		1,837		1,837		-		-
Loans held-for-sale		1,328		1,328		-		1,328		-
Net loans		479,784		481,469		-		-		481,469
Mortgage servicing rights		504		576		-		-		576
Accrued interest receivable		2,981		2,981		-		2,981		-
Financial liabilities
Deposits with no stated maturities	$	542,740	$	542,740	$	542,740		-	$	-
Deposits with stated maturities		253,173		256,933		-	$	256,933		-
Short-term borrowings		32,851		32,851		32,851		-		-
Long-term debt		5,282		5,412		-		5,412		-
Accrued interest payable		407		407		-		407		-
Off-balance sheet instruments
Commitments to extend credit	$	-	$	-	$	-	$	-	$	-
Standby letters of credit		-		-		-		-		-

					Fair value measurements
December 31, 2012	Carrying amount		Fair value		Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
Financial assets
Cash and cash equivalents	$	15,453	$	15,453	$	15,453		-		-
Investment securities available-for-sale		401,502		401,502		4,055	$	395,485	$	1,962
Investment securities held-to-maturity		146		166		-		166		-
Restricted investment in bank stocks		2,244		2,244		2,244		-		-
Loans held-for-sale		1,616		1,674		-		1,674		-
Net loans		467,961		474,330		-		-		474,330
Mortgage servicing rights		448		464		-		-		464
Accrued interest receivable		2,803		2,803		-		2,803		-
Financial liabilities
Deposits with no stated maturities	$	532,404	$	532,404	$	532,404		-	$	-
Deposits with stated maturities		269,234		273,878		-	$	273,878		-
Short-term borrowings		32,488		32,488		32,488		-		-
Long-term debt		5,287		5,694		-		5,694		-
Accrued interest payable		487		487		-		487		-
Off-balance sheet instruments
Commitments to extend credit	$	-	$	-	$	-	$	-	$	-
Standby letters of credit		-		-		-		-		-

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Note 8 - Loans & Allowance for Loan Losses (Details) (USD $)	3 Months Ended		6 Months Ended
	Jun. 30, 2013	Jun. 30, 2012	Jun. 30, 2013	Jun. 30, 2012	Dec. 31, 2012
Note 8 - Loans & Allowance for Loan Losses (Details) [Line Items]
Bank Overdrafts	$ 83,000		$ 83,000		$ 103,000
Provision for Loan and Lease Losses	100,000	0	100,000	300,000
Financing Receivables, Impaired, Troubled Debt Restructuring, Write-down			0	0
Financing Receivable, Modifications, Subsequent Default, Number of Contracts			0
Performing [Member]
Note 8 - Loans & Allowance for Loan Losses (Details) [Line Items]
Financing Receivable, Modifications, Recorded Investment	4,294,000		4,294,000		2,578,000
Nonperforming [Member]
Note 8 - Loans & Allowance for Loan Losses (Details) [Line Items]
Financing Receivable, Modifications, Recorded Investment	3,234,000		3,234,000		3,299,000
Loans Modified as TDRs [Member]
Note 8 - Loans & Allowance for Loan Losses (Details) [Line Items]
Provision for Loan and Lease Losses			$ 0

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Note 5 - Earnings Per Share (Details) - Computation of Basic and Diluted Earnings Per Share (USD $) In Thousands, except Share data, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2013	Jun. 30, 2012	Jun. 30, 2013	Jun. 30, 2012
Computation of Basic and Diluted Earnings Per Share [Abstract]
Numerator for basic and diluted earnings per share - net income (in Dollars)	$ 1,894	$ 2,505	$ 4,302	$ 4,976
Denominator for basic earnings per share - weighted average shares outstanding	3,243,867	3,190,552	3,238,020	3,185,728
Effect of dilutive securities - employee stock options	12,088	17,774	11,048	14,865
Denominator for diluted earnings per share - adjusted weighted average shares outstanding	3,255,955	3,208,326	3,249,068	3,200,593
Earnings per share - basic (in Dollars per share)	$ 0.58	$ 0.79	$ 1.33	$ 1.56
Earnings per share - diluted (in Dollars per share)	$ 0.58	$ 0.78	$ 1.32	$ 1.55

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Note 7 - Investment Securities (Details) - Gross Realized Losses on Equity and Debt Securities and Other Than Temporary Impairment (USD $) In Thousands, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2013	Jun. 30, 2012	Jun. 30, 2013	Jun. 30, 2012
Note 7 - Investment Securities (Details) - Gross Realized Losses on Equity and Debt Securities and Other Than Temporary Impairment [Line Items]
Gross realized gains			$ 559	$ 534
Gross realized losses			0	(4)
Other-than-temporary impairment losses			(43)	0
Net gains	93	141	516	530
Equity Securities [Member]
Note 7 - Investment Securities (Details) - Gross Realized Losses on Equity and Debt Securities and Other Than Temporary Impairment [Line Items]
Gross realized gains			369	427
Gross realized losses			0	0
Other-than-temporary impairment losses			(43)	0
Net gains			326	427
Debt Securities [Member]
Note 7 - Investment Securities (Details) - Gross Realized Losses on Equity and Debt Securities and Other Than Temporary Impairment [Line Items]
Gross realized gains			190	107
Gross realized losses			0	(4)
Other-than-temporary impairment losses			0	0
Net gains			$ 190	$ 103

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Note 8 - Loans & Allowance for Loan Losses (Details) - Retail Loans by Credit Quality (USD $) In Thousands, unless otherwise specified	Jun. 30, 2013	Dec. 31, 2012
Retail:
Loans	$ 489,209	$ 477,790
Retail:1-4 Family Residential Mortgages [Member] | Performing Financing Receivable [Member]
Retail:
Loans	27,454	28,398
Retail:1-4 Family Residential Mortgages [Member] | Nonperforming Financing Receivable [Member]
Retail:
Loans	320	335
Retail:1-4 Family Residential Mortgages [Member]
Retail:
Loans	27,774	28,733
Retail Home Equity Loans And Lines [Member] | Performing Financing Receivable [Member]
Retail:
Loans	56,538	54,514
Retail Home Equity Loans And Lines [Member] | Nonperforming Financing Receivable [Member]
Retail:
Loans	239	346
Retail Home Equity Loans And Lines [Member]
Retail:
Loans	56,777	54,860
Retail:Consumer [Member] | Performing Financing Receivable [Member]
Retail:
Loans	2,186	2,012
Retail:Consumer [Member]
Retail:
Loans	2,186	2,012
Total Retail Loans [Member] | Performing Financing Receivable [Member]
Retail:
Loans	86,178	84,924
Total Retail Loans [Member] | Nonperforming Financing Receivable [Member]
Retail:
Loans	559	681
Total Retail Loans [Member]
Retail:
Loans	$ 86,737	$ 85,605

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Note 3 - Stock-based Compensation and Shareholders' Equity (Details) - Stock Option Activity (USD $) In Thousands, except Share data, unless otherwise specified	6 Months Ended
	Jun. 30, 2013
Stock Option Activity [Abstract]
Outstanding at December 31, 2012	128,225
Outstanding at December 31, 2012 (in Dollars per share)	$ 22.72
Outstanding at June 30, 2013	116,900
Outstanding at June 30, 2013 (in Dollars per share)	$ 23.45
Outstanding at June 30, 2013	2 years 149 days
Outstanding at June 30, 2013 (in Dollars)	$ 370
Exercisable at June 30, 2013	55,900
Exercisable at June 30, 2013 (in Dollars per share)	$ 25.52
Exercisable at June 30, 2013	1 year 58 days
Exercisable at June 30, 2013 (in Dollars)	$ 190
Granted	20,000
Granted (in Dollars per share)	$ 23.20
Exercised	(28,725)
Exercised (in Dollars per share)	$ 20.35
Forfeited	(2,600)
Forfeited (in Dollars per share)	$ 19.79

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Note 7 - Investment Securities (Details) - Amortized Cost and Estimated Fair Value of Securities Held-to-Maturity by Contractual Maturityaturity a (USD $) In Thousands, unless otherwise specified	Jun. 30, 2013	Dec. 31, 2012
Amortized Cost and Estimated Fair Value of Securities Held-to-Maturity by Contractual Maturityaturity a [Abstract]
Due in one year or less	$ 0
Due in one year or less	0
Due after one year through five years	163
Due after one year through five years	146
Due after five years through ten years	0
Due after five years through ten years	0
Due after ten years	0
Due after ten years	0
Total investment securities held-to-maturity	163	166
Total investment securities held-to-maturity	$ 146	$ 146

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Note 8 - Loans & Allowance for Loan Losses (Tables)

6 Months Ended

Jun. 30, 2013

Note 8 - Loans & Allowance for Loan Losses (Tables) [Line Items]

Schedule of Accounts, Notes, Loans and Financing Receivable [Table Text Block]

	June 30, 2013		December 31, 2012
Commercial:
Commercial and industrial	$	111,619	$	100,063
Construction		10,557		11,061
Secured by commercial real estate		192,689		192,867
Secured by residential real estate		44,102		41,003
State and political subdivisions		32,552		34,256
Loans to depository institutions		2,250		3,250
Indirect lease financing		8,703		9,685
Retail:
1-4 family residential mortgages		27,774		28,733
Home equity loans and lines		56,777		54,860
Consumer		2,186		2,012
Total loans		489,209		477,790
Net unearned costs (fees)		6		(57	)
Loans receivable	$	489,215	$	477,733

Financing Receivable Credit Quality Indicators [Table Text Block]

June 30, 2013	Pass		Special mention		Substandard		Doubtful		Total
Commercial:
Commercial and industrial	$	104,329	$	1,363	$	5,927	$	-	$	111,619
Construction		7,572		920		2,065		-		10,557
Secured by commercial real estate		161,592		4,118		26,979		-		192,689
Secured by residential real estate		39,413		27		4,662		-		44,102
State and political subdivisions		30,239		-		2,313		-		32,552
Loans to depository institutions		2,250		-		-		-		2,250
Indirect lease financing		8,471		-		232		-		8,703
	$	353,866	$	6,428	$	42,178	$	-	$	402,472

December 31, 2012	Pass		Special mention		Substandard		Doubtful		Total
Commercial:
Commercial and industrial	$	88,427	$	3,843	$	7,763	$	30	$	100,063
Construction		5,558		1,513		3,990		-		11,061
Secured by commercial real estate		157,678		7,493		27,696		-		192,867
Secured by residential real estate		36,078		1,199		3,726		-		41,003
State and political subdivisions		32,303		-		1,953		-		34,256
Loans to depository institutions		3,250		-		-		-		3,250
Indirect lease financing		9,329		-		356		-		9,685
	$	332,623	$	14,048	$	45,484	$	30	$	392,185

Past Due Financing Receivables [Table Text Block]

June 30, 2013	30-59 days past due		60-89 days past due		90 days or more past due		Total past due loans		Current		Total loans receivable
Commercial:
Commercial and industrial	$	306	$	37		-	$	343	$	111,276	$	111,619
Construction		-		-		-		-		10,557		10,557
Secured by commercial real estate		244		440	$	4,332		5,016		187,673		192,689
Secured by residential real estate		1,401		537		-		1,938		42,164		44,102
State and political subdivisions		27		-		425		452		32,100		32,552
Loans to depository institutions		-		-		-		-		2,250		2,250
Indirect lease financing		50		52		32		134		8,569		8,703
Retail:
1-4 family residential mortgages		-		-		153		153		27,621		27,774
Home equity loans and lines		117		91		28		236		56,541		56,777
Consumer		28		6		-		34		2,152		2,186
	$	2,173	$	1,163	$	4,970	$	8,306	$	480,903	$	489,209

December 31, 2012	30-59 days past due		60-89 days past due		90 days or more past due		Total past due loans		Current		Total loans receivable
Commercial:
Commercial and industrial	$	76		-		-	$	76	$	99,987	$	100,063
Construction		-		-		-		-		11,061		11,061
Secured by commercial real estate		407	$	1,460	$	3,097		4,964		187,903		192,867
Secured by residential real estate		44		523		293		860		40,143		41,003
State and political subdivisions		71		1		-		72		34,184		34,256
Loans to depository institutions		-		-		-		-		3,250		3,250
Indirect lease financing		344		80		35		459		9,226		9,685
Retail:
1-4 family residential mortgages		-		197		-		197		28,536		28,733
Home equity loans and lines		152		153		197		502		54,358		54,860
Consumer		33		11		-		44		1,968		2,012
	$	1,127	$	2,425	$	3,622	$	7,174	$	470,616	$	477,790

Schedule of Financing Receivables, Non Accrual Status [Table Text Block]

June 30, 2013	90 days or more past  due (still accruing)		Non-accrual
Commercial:
Commercial and industrial		-	$	5,535
Construction		-		2,029
Secured by commercial real estate		-		6,408
Secured by residential real estate		-		2,698
State and political subdivisions	$	425		-
Loans to depository institutions		-		-
Indirect lease financing		17		72
Retail:
1-4 family residential mortgages		-		320
Home equity loans and lines		-		239
Consumer		-		-
	$	442	$	17,301

December 31, 2012	90 days or more past due (still accruing)		Non-accrual
Commercial:
Commercial and industrial	$	-	$	6,174
Construction		-		2,480
Secured by commercial real estate		-		6,748
Secured by residential real estate		-		2,390
State and political subdivisions		-		1
Loans to depository institutions		-		-
Indirect lease financing		-		98
Retail:
1-4 family residential mortgages		-		335
Home equity loans and lines		-		346
Consumer		-		-
	$	-	$	18,572

Allowance for Credit Losses on Financing Receivables [Table Text Block]

Three months ended June 30, 2013	Balance, beginning of period		Provision for (credit to) loan losses			Charge-offs			Recoveries		Balance, end of period
Commercial:
Commercial and industrial	$	2,314	$	(328	)		-		$	8	$	1,994
Construction		230		12			-			-		242
Secured by commercial real estate		3,873		42			-			1		3,916
Secured by residential real estate		1,146		246			-			45		1,437
State and political subdivisions		257		20			-			-		277
Loans to depository institutions		10		-			-			-		10
Indirect lease financing		179		(29	)		-			6		156
Retail:
1-4 family residential mortgages		300		(11	)		-			-		289
Home equity loans and lines		714		24		$	(79	)		5		664
Consumer		29		5			(13	)		7		28
Unallocated		299		119		N/A			N/A			418
	$	9,351	$	100		$	(92	)	$	72	$	9,431

Three months ended June 30, 2012	Balance, beginning of period		Provision for (credit to) loan losses			Charge-offs			Recoveries		Balance, end of period
Commercial:
Commercial and industrial	$	3,317	$	164		$	(74	)	$	60	$	3,467
Construction		333		20			-			-		353
Secured by commercial real estate		3,126		2			-			62		3,190
Secured by residential real estate		773		88			(50	)		-		811
State and political subdivisions		301		(79	)		-			-		222
Loans to depository institutions		20		-			-			-		20
Indirect lease financing		238		21			(13	)		22		268
Retail:
1-4 family residential mortgages		303		(5	)		-			2		300
Home equity loans and lines		547		37			(1	)		12		595
Consumer		17		10			(11	)		2		18
Unallocated		481		(258	)	N/A			N/A			223
	$	9,456	$	-		$	(149	)	$	160	$	9,467

Six months ended June 30, 2013	Balance, beginning of period		Provision for (credit to) loan losses			Charge-offs			Recoveries		Balance, end of period
Commercial:
Commercial and industrial	$	2,505	$	(526	)		-		$	15	$	1,994
Construction		209		33			-			-		242
Secured by commercial real estate		3,795		120			-			1		3,916
Secured by residential real estate		1,230		498		$	(336	)		45		1,437
State and political subdivisions		260		17			-			-		277
Loans to depository institutions		15		(5	)		-			-		10
Indirect lease financing		168		(27	)		(1	)		16		156
Retail:
1-4 family residential mortgages		324		(35	)		-			-		289
Home equity loans and lines		582		248			(172	)		6		664
Consumer		27		16			(34	)		19		28
Unallocated		657		(239	)	N/A			N/A			418
	$	9,772	$	100		$	(543	)	$	102	$	9,431

Six months ended June 30, 2012	Balance, beginning of period		Provision for (credit to) loan losses			Charge-offs			Recoveries		Balance, end of period
Commercial:
Commercial and industrial	$	2,959	$	520		$	(74	)	$	62	$	3,467
Construction		556		(203	)		-			-		353
Secured by commercial real estate		3,124		4			-			62		3,190
Secured by residential real estate		746		151			(86	)		-		811
State and political subdivisions		195		27			-			-		222
Loans to depository institutions		20		-			-			-		20
Indirect lease financing		312		(47	)		(23	)		26		268
Retail:
1-4 family residential mortgages		249		70			(21	)		2		300
Home equity loans and lines		625		(23	)		(19	)		12		595
Consumer		20		13			(20	)		5		18
Unallocated		435		(212	)	N/A			N/A			223
	$	9,241	$	300		$	(243	)	$	169	$	9,467

Troubled Debt Restructurings on Financing Receivables [Table Text Block]

Three months ended June 30,	2013						2012
	Number of contracts		Pre- modification outstanding recorded investment		Post- modification outstanding recorded investment		Number of contracts		Pre- modification outstanding recorded investment		Post- modification outstanding recorded investment
Commercial:
Commercial and industrial		-		-		-		2	$	482	$	476
Secured by commercial real estate		-		-		-		1		2,380		2,380
Retail:
1-4 family residential mortgages		-		-		-		1		145		141
Home equity loans and lines		1	$	28	$	28		-		-		-
		1	$	28	$	28		4	$	3,007	$	2,997

Six months ended June 30,	2013						2012
	Number of contracts		Pre- modification outstanding recorded investment		Post- modification outstanding recorded investment		Number of contracts		Pre- modification outstanding recorded investment		Post- modification outstanding recorded investment
Commercial:
Commercial and industrial		-		-		-		2	$	482	$	476
Secured by commercial real estate		1	$	1,822	$	1,822		1		2,380		2,380
Retail:
1-4 family residential mortgages		-		-		-		1		145		141
Home equity loans and lines		1		28		28		1		38		38
		2	$	1,850	$	1,850		5	$	3,045	$	3,035

Schedule of Credit Losses Related to Financing Receivables, Current and Noncurrent [Table Text Block]

	Allowance for Loan Losses						Loans Receivable
June 30, 2013	Balance		Balance related to loans individually evaluated for impairment		Balance related to loans collectively evaluated for impairment		Balance		Balance individually evaluated for impairment		Balance collectively evaluated for impairment
Commercial:
Commercial and industrial	$	1,994	$	652	$	1,342	$	111,619	$	5,882	$	105,737
Construction		242		-		242		10,557		2,065		8,492
Secured by commercial real estate		3,916		850		3,066		192,689		15,633		177,056
Secured by residential real estate		1,437		534		903		44,102		3,836		40,266
State and political subdivisions		277		-		277		32,552		1,807		30,745
Loans to depository institutions		10		-		10		2,250		-		2,250
Indirect lease financing		156		7		149		8,703		72		8,631
Retail:
1-4 family residential mortgages		289		67		222		27,774		440		27,334
Home equity loans and lines		664		71		593		56,777		267		56,510
Consumer		28		-		28		2,186		-		2,186
Unallocated		418	N/A		N/A		N/A		N/A		N/A
	$	9,431	$	2,181	$	6,832	$	489,209	$	30,002	$	459,207

	Allowance for Loan Losses						Loans Receivable
December 31, 2012	Balance		Balance related to loans individually evaluated for impairment		Balance related to loans collectively evaluated for impairment		Balance		Balance individually evaluated for impairment		Balance collectively evaluated for impairment
Commercial:
Commercial and industrial	$	2,505	$	1,309	$	1,196	$	100,063	$	7,753	$	92,310
Construction		209		-		209		11,061		3,990		7,071
Secured by commercial real estate		3,795		619		3,176		192,867		14,931		177,936
Secured by residential real estate		1,230		543		687		41,003		2,843		38,160
State and political subdivisions		260		-		260		34,256		1,849		32,407
Loans to depository institutions		15		-		15		3,250		-		3,250
Indirect lease financing		168		13		155		9,685		98		9,587
Retail:
1-4 family residential mortgages		324		90		234		28,733		456		28,277
Home equity loans and lines		582		127		455		54,860		384		54,476
Consumer		27		-		27		2,012		-		2,012
Unallocated		657	N/A		N/A		N/A		N/A		N/A
	$	9,772	$	2,701	$	6,414	$	477,790	$	32,304	$	445,486

Impaired Financing Receivables [Table Text Block]

June 30, 2013	Recorded investment (after charge-offs)		Unpaid principal balance		Related allowance		Average recorded investment		Interest income recognized
With no specific allowance recorded:
Commercial:
Commercial and industrial	$	4,153	$	4,548	$	-
Construction		2,065		2,302		-
Secured by commercial real estate		12,339		13,184		-
Secured by residential real estate		1,444		1,467		-
State and political subdivisions		1,807		1,807		-
Loans to depository institutions		-		-		-
Indirect lease financing		39		44		-
Retail:
1-4 family residential mortgages		166		187		-
Home equity loans and lines		196		222		-
Consumer		-		-		-
	$	22,209	$	23,761	$	-
With an allowance recorded:
Commercial:
Commercial and industrial	$	1,729	$	1,902	$	652
Construction		-		-		-
Secured by commercial real estate		3,294		3,799		850
Secured by residential real estate		2,392		2,512		534
State and political subdivisions		-		-		-
Loans to depository institutions		-		-		-
Indirect lease financing		33		35		7
Retail:
1-4 family residential mortgages		274		285		67
Home equity loans and lines		71		79		71
Consumer		-		-		-
	$	7,793	$	8,612	$	2,181
Total:
Commercial:
Commercial and industrial	$	5,882	$	6,450	$	652	$	6,771	$	12
Construction		2,065		2,302		-		3,865		28
Secured by commercial real estate		15,633		16,983		850		14,117		197
Secured by residential real estate		3,836		3,979		534		2,811		17
State and political subdivisions		1,807		1,807		-		1,826		33
Loans to depository institutions		-		-		-		-		-
Indirect lease financing		72		79		7		78		-
Retail:
1-4 family residential mortgages		440		472		67		448		3
Home equity loans and lines		267		301		71		323		1
Consumer		-		-		-		-		-
	$	30,002	$	32,373	$	2,181	$	30,239	$	291

December 31, 2012	Recorded investment (after charge-offs)		Unpaid principal balance		Related allowance		Average recorded investment		Interest income recognized
With no specific allowance recorded:
Commercial:
Commercial and industrial	$	5,241	$	5,477	$	-
Construction		3,990		4,170		-
Secured by commercial real estate		11,392		12,128		-
Secured by residential real estate		897		912		-
State and political subdivisions		1,849		1,850		-
Loans to depository institutions		-		-		-
Indirect lease financing		37		44		-
Retail:
1-4 family residential mortgages		181		198		-
Home equity loans and lines		184		196		-
Consumer		-		-		-
	$	23,771	$	24,975	$	-
With an allowance recorded:
Commercial:
Commercial and industrial	$	2,512	$	2,687	$	1,309
Construction		-		-		-
Secured by commercial real estate		3,539		4,023		619
Secured by residential real estate		1,946		2,024		543
State and political subdivisions		-		-		-
Loans to depository institutions		-		-		-
Indirect lease financing		61		67		13
Retail:
1-4 family residential mortgages		275		287		90
Home equity loans and lines		200		214		127
Consumer		-		-		-
	$	8,533	$	9,302	$	2,701
Total:
Commercial:
Commercial and industrial	$	7,753	$	8,164	$	1,309	$	7,657	$	74
Construction		3,990		4,170		-		4,972		111
Secured by commercial real estate		14,931		16,151		619		14,883		541
Secured by residential real estate		2,843		2,936		543		2,439		47
State and political subdivisions		1,849		1,850		-		1,478		64
Loans to depository institutions		-		-		-		-		-
Indirect lease financing		98		111		13		86		-
Retail:
1-4 family residential mortgages		456		485		90		518		5
Home equity loans and lines		384		410		127		510		5
Consumer		-		-
	$	32,304	$	34,277	$	2,701	$	32,543	$	847

Total Retail Loans [Member]

Note 8 - Loans & Allowance for Loan Losses (Tables) [Line Items]

Financing Receivable Credit Quality Indicators [Table Text Block]

June 30, 2013	Performing		Non- performing		Total
Retail:
1-4 family residential mortgages	$	27,454	$	320	$	27,774
Home equity loans and lines		56,538		239		56,777
Consumer		2,186		-		2,186
	$	86,178	$	559	$	86,737

December 31, 2012	Performing		Non- performing		Total
Retail:
1-4 family residential mortgages	$	28,398	$	335	$	28,733
Home equity loans and lines		54,514		346		54,860
Consumer		2,012		-		2,012
	$	84,924	$	681	$	85,605

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Consolidated Statements of Comprehensive Income (Unaudited) (Parentheticals) (USD $)	3 Months Ended		6 Months Ended
	Jun. 30, 2013	Jun. 30, 2012	Jun. 30, 2013	Jun. 30, 2012
Net income, tax expense (benefit)	$ 490,000	$ 769,000	$ 1,223,000	$ 1,519,000
Net income, net of income tax	1,894,000	2,505,000	4,302,000	4,976,000
Unrealized holding (losses) gains arising during the period, tax	(2,799,000)	135,000	(3,159,000)	168,000
Unrealized holding (losses) gains arising during the period, net of tax	(5,432,000)	261,000	(6,132,000)	326,000
Reclassification adjustment for gains included in net income, tax	(32,000)	(48,000)	(176,000)	(180,000)
Reclassification adjustment for gains included in net income, net of tax	(61,000)	(93,000)	(340,000)	(350,000)
Other comprehensive loss, tax	(2,831,000)	87,000	(3,335,000)	(12,000)
Other comprehensive loss, net of tax	(5,493,000)	168,000	(6,472,000)	(24,000)
Total comprehensive income, tax	(2,341,000)	856,000	(2,112,000)	1,507,000
Total comprehensive income, net of tax	$ (3,599,000)	$ 2,673,000	$ (2,170,000)	$ 4,952,000

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Consolidated Statement of Shareholders' Equity (Unaudited) (Parentheticals) (USD $)	6 Months Ended
	Jun. 30, 2013
Cash dividends declared per share	$ 0.54

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Note 2 - Recent Accounting Pronouncements

6 Months Ended

Jun. 30, 2013

New Accounting Pronouncements and Changes in Accounting Principles [Abstract]

New Accounting Pronouncements and Changes in Accounting Principles [Text Block]

2. RECENT ACCOUNTING PRONOUNCEMENTS

In February 2013, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2013-02, Comprehensive Income (Topic 220):  Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income.  The amendments in this guidance require an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required under U.S. generally accepted accounting principles (GAAP) to be reclassified in its entirety to net income.  For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference other disclosures required under U.S. GAAP that provide additional detail about those amounts. This amendment is effective prospectively for reporting periods beginning after December 15, 2012 for public companies. The application of this standard did not have a material impact on the Company’s financial statements, but it did result in additional required disclosures that can be found in Note 6.

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Consolidated Statements of Cash Flows (Unaudited) (USD $)	6 Months Ended
	Jun. 30, 2013	Jun. 30, 2012
Operating Activities
Net income	$ 4,302,000	$ 4,976,000
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	567,000	472,000
Provision for loan losses	100,000	300,000
Net gain on investment securities available-for-sale	(516,000)	(530,000)
Net loss (gain) on sale of repossessed assets	85,000	(5,000)
Net gain on sale of loans	(323,000)	(458,000)
Proceeds from sales of residential mortgages held-for-sale	10,955,000	11,942,000
Origination of residential mortgages held-for-sale	(10,344,000)	(11,138,000)
Income on bank-owned life insurance	(149,000)	(156,000)
Stock-based compensation expense	30,000	42,000
Deferred income tax provision	41,000	(47,000)
Net (decrease) increase in income taxes payable	(45,000)	70,000
Net increase in accrued interest receivable	(178,000)	(17,000)
Amortization of mortgage servicing rights and change in valuation allowance	24,000	95,000
Net amortization of premiums and discounts on investment securities	1,073,000	958,000
Net decrease in accrued interest payable	(80,000)	(280,000)
Decrease (increase) in other assets	3,650,000	(316,000)
Decrease in other liabilities	(211,000)	(64,000)
Net cash provided by operating activities	8,981,000	5,844,000
Investing Activities
Proceeds from payments, maturities and calls of investment securities available-for-sale	79,731,000	78,563,000
held-to-maturity		1,040,000
Proceeds from the sale of investment securities available-for-sale	12,387,000	15,798,000
Purchases of investment securities available-for-sale	(81,345,000)	(105,528,000)
Proceeds from redemption of investment in restricted bank stock	479,000	139,000
Purchase of restricted bank stock	(72,000)
Net increase in loans	(11,959,000)	(1,933,000)
Net purchases of premises and equipment	(1,194,000)	(1,112,000)
Proceeds from sales of repossessed assets	50,000	215,000
Net cash used in investing activities	(1,923,000)	(12,818,000)
Financing Activities
Net increase in non-interest bearing deposits	997,000	3,006,000
Net (decrease) increase in interest-bearing deposits	(6,722,000)	27,289,000
Net increase in short-term borrowings	363,000	2,549,000
Repayments of long-term debt	(5,000)	(15,006,000)
Tax benefit from exercise of stock options	2,000	4,000
Cash dividends paid, net of reinvestment	(1,559,000)	(1,500,000)
Proceeds from issuance of common stock	310,000	340,000
Net cash (used in) provided by financing activities	(6,614,000)	16,682,000
Increase in cash and cash equivalents	444,000	9,708,000
Cash and cash equivalents at beginning of year	15,453,000	10,555,000
Cash and cash equivalents at end of period	15,897,000	20,263,000
Supplemental Cash Flow Disclosures
Interest paid	2,711,000	3,755,000
Income taxes paid	1,225,000	1,490,000
Non-cash transactions:
Transfer of loans to repossessed assets or other real estate owned	$ 36,000	$ 532,000

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Note 7 - Investment Securities (Details) - Credit-Related Other-Than-Temporary Impairment (USD $) In Thousands, unless otherwise specified	6 Months Ended
	Jun. 30, 2013	Jun. 30, 2012
Credit-Related Other-Than-Temporary Impairment [Abstract]
Balance, beginning of period	$ 1,271	$ 1,279
Reductions: gain on payoff	0	0
Additions:
Initial credit impairments	0	0
Subsequent credit impairments	0	0
Balance, end of period	$ 1,271	$ 1,279

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Note 11 - Regulatory Restrictions (Tables)

6 Months Ended

Jun. 30, 2013

Disclosure Text Block [Abstract]

Schedule of Compliance with Regulatory Capital Requirements under Banking Regulations [Table Text Block]

	Capital levels
	Actual					Adequately capitalized					Well capitalized
As of June 30, 2013	Amount		Ratio			Amount		Ratio			Amount		Ratio
Total risk-based capital (to risk-weighted assets):
Consolidated	$	84,026		13.92	%	$	48,295		8.00	%	N/A		N/A
Bank		79,049		13.19			47,944		8.00		$	59,930		10.00	%
Tier I capital (to risk-weighted assets):
Consolidated		76,252		12.63			24,148		4.00		N/A		N/A
Bank		71,534		11.94			23,972		4.00			35,958		6.00
Tier I capital (to average assets):
Consolidated		76,252		8.37			36,423		4.00		N/A		N/A
Bank		71,534		7.90			36,239		4.00			45,299		5.00

	Capital levels
	Actual					Adequately capitalized					Well capitalized
As of December 31, 2012	Amount		Ratio			Amount		Ratio			Amount		Ratio
Total risk-based capital (to risk-weighted assets):
Consolidated	$	80,758		13.60	%	$	47,490		8.00	%	N/A		N/A
Bank		76,154		12.92			47,170		8.00		$	58,963		10.00	%
Tier I capital (to risk-weighted assets):
Consolidated		73,167		12.33			23,745		4.00		N/A		N/A
Bank		68,754		11.66			23,585		4.00			35,378		6.00
Tier I capital (to average assets):
Consolidated		73,167		7.96			36,762		4.00		N/A		N/A
Bank		68,754		7.51			36,602		4.00			45,752		5.00

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Note 4 - Share Repurchase Plan (Details) (USD $)	6 Months Ended
	Jun. 30, 2013
Disclosure Text Block Supplement [Abstract]
Stock Repurchase Program, Number of Shares Authorized to be Repurchased	100,000
Stock Repurchased During Period, Shares	0
Stock Repurchased Since Inception, Shares	57,883
Treasury Stock, Average Cost Per Share	16.97
Stock Repurchased Since Inception, Value (in Dollars)	$ 982,000

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Note 7 - Investment Securities (Details) (USD $)	3 Months Ended		6 Months Ended
	Jun. 30, 2013	Jun. 30, 2012	Jun. 30, 2013	Jun. 30, 2012	Dec. 31, 2012
Note 7 - Investment Securities (Details) [Line Items]
Proceeds from Sale of Available-for-sale Securities			$ 12,387,000	$ 15,798,000
Available-for-sale Securities Pledged as Collateral	163,410,000		163,410,000		170,433,000
Other Comprehensive Income (Loss), Reclassification Adjustment from AOCI for Sale of Securities, Tax	(32,000)	(48,000)	(176,000)	(180,000)
Available-for-sale Securities, Amortized Cost Basis	383,419,000		383,419,000		394,750,000
Available-for-sale (amortized cost $383,419 and $394,750)	380,364,000		380,364,000		401,502,000
Threshold for Identifying Banks with Trust Preferred Securities (in Dollars)			15,000,000,000
Minimum Cost Saving for Refinance	2.00%		2.00%
Fair Value Inputs, Loss Severity			95.00%
Pooled Trust Preferred Securities [Member]
Note 7 - Investment Securities (Details) [Line Items]
Available-for-sale Securities, Amortized Cost Basis	3,519,000		3,519,000		3,519,000
Available-for-sale (amortized cost $383,419 and $394,750)	$ 2,091,000		$ 2,091,000		$ 1,962,000
Available-for-sale, Securities in Unrealized Loss Positions, Qualitative Disclosure, Number of Positions, Greater than or Equal to One Year	5		5
Pooled Trust Preferred Securities [Member] | Minimum [Member]
Note 7 - Investment Securities (Details) [Line Items]
Fair Value Inputs, Prepayment Rate			0.00%
Pooled Trust Preferred Securities [Member] | Maximum [Member]
Note 7 - Investment Securities (Details) [Line Items]
Fair Value Inputs, Prepayment Rate			1.00%
Minimum [Member]
Note 7 - Investment Securities (Details) [Line Items]
Fair Value Inputs, Prepayment Rate			0.00%
Fair Value Inputs, Loss Severity			0.00%
Maximum [Member]
Note 7 - Investment Securities (Details) [Line Items]
Fair Value Inputs, Prepayment Rate			1.00%
Fair Value Inputs, Loss Severity			100.00%

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Note 8 - Loans & Allowance for Loan Losses (Details) - Impaired Loans (USD $) In Thousands, unless otherwise specified	6 Months Ended	12 Months Ended
	Jun. 30, 2013	Dec. 31, 2012
Commercial:
Recorded Investment (after charge-offs)	$ 22,209	$ 23,771
Unpaid Principal Balance	23,761	24,975
Commercial:
Recorded Investment (after charge-offs)	7,793	8,533
Unpaid principal balance with an allowance recorded	8,612	9,302
Related allowance	2,181	2,701
Commercial:
Recorded investment (after charge-offs)	30,002	32,304
Unpaid principal balance	32,373	34,277
Related Allowance	2,181	2,701
Average recorded investment	30,239	32,543
Interest income recognized	291	847
Commercial:Commercial and Industrial [Member]
Commercial:
Recorded Investment (after charge-offs)	4,153	5,241
Unpaid Principal Balance	4,548	5,477
Commercial:
Recorded Investment (after charge-offs)	1,729	2,512
Unpaid principal balance with an allowance recorded	1,902	2,687
Related allowance	652	1,309
Commercial:
Recorded investment (after charge-offs)	5,882	7,753
Unpaid principal balance	6,450	8,164
Related Allowance	652	1,309
Average recorded investment	6,771	7,657
Interest income recognized	12	74
Commercial:Construction [Member]
Commercial:
Recorded Investment (after charge-offs)	2,065	3,990
Unpaid Principal Balance	2,302	4,170
Commercial:
Recorded Investment (after charge-offs)	0	0
Unpaid principal balance with an allowance recorded	0	0
Related allowance	0	0
Commercial:
Recorded investment (after charge-offs)	2,065	3,990
Unpaid principal balance	2,302	4,170
Related Allowance	0	0
Average recorded investment	3,865	4,972
Interest income recognized	28	111
Commercial:Secured by Commercial Real Estate [Member]
Commercial:
Recorded Investment (after charge-offs)	12,339	11,392
Unpaid Principal Balance	13,184	12,128
Commercial:
Recorded Investment (after charge-offs)	3,294	3,539
Unpaid principal balance with an allowance recorded	3,799	4,023
Related allowance	850	619
Commercial:
Recorded investment (after charge-offs)	15,633	14,931
Unpaid principal balance	16,983	16,151
Related Allowance	850	619
Average recorded investment	14,117	14,883
Interest income recognized	197	541
Commercial Secured By Residential Real Estate [Member]
Commercial:
Recorded Investment (after charge-offs)	1,444	897
Unpaid Principal Balance	1,467	912
Commercial:
Recorded Investment (after charge-offs)	2,392	1,946
Unpaid principal balance with an allowance recorded	2,512	2,024
Related allowance	534	543
Commercial:
Recorded investment (after charge-offs)	3,836	2,843
Unpaid principal balance	3,979	2,936
Related Allowance	534	543
Average recorded investment	2,811	2,439
Interest income recognized	17	47
State And Political Subdivisions [Member]
Commercial:
Recorded Investment (after charge-offs)	1,807	1,849
Unpaid Principal Balance	1,807	1,850
Commercial:
Recorded Investment (after charge-offs)	0	0
Unpaid principal balance with an allowance recorded	0	0
Related allowance	0	0
Commercial:
Recorded investment (after charge-offs)	1,807	1,849
Unpaid principal balance	1,807	1,850
Related Allowance	0	0
Average recorded investment	1,826	1,478
Interest income recognized	33	64
Loans To Depository Institutions [Member]
Commercial:
Recorded Investment (after charge-offs)	0	0
Unpaid Principal Balance	0	0
Commercial:
Recorded Investment (after charge-offs)	0	0
Unpaid principal balance with an allowance recorded	0	0
Related allowance	0	0
Commercial:
Recorded investment (after charge-offs)	0	0
Unpaid principal balance	0	0
Related Allowance	0	0
Average recorded investment	0	0
Interest income recognized	0	0
Indirect Lease Financing [Member]
Commercial:
Recorded Investment (after charge-offs)	39	37
Unpaid Principal Balance	44	44
Commercial:
Recorded Investment (after charge-offs)	33	61
Unpaid principal balance with an allowance recorded	35	67
Related allowance	7	13
Commercial:
Recorded investment (after charge-offs)	72	98
Unpaid principal balance	79	111
Related Allowance	7	13
Average recorded investment	78	86
Interest income recognized	0	0
Retail:1-4 Family Residential Mortgages [Member]
Commercial:
Recorded Investment (after charge-offs)	166	181
Unpaid Principal Balance	187	198
Commercial:
Recorded Investment (after charge-offs)	274	275
Unpaid principal balance with an allowance recorded	285	287
Related allowance	67	90
Commercial:
Recorded investment (after charge-offs)	440	456
Unpaid principal balance	472	485
Related Allowance	67	90
Average recorded investment	448	518
Interest income recognized	3	5
Retail Home Equity Loans And Lines [Member]
Commercial:
Recorded Investment (after charge-offs)	196	184
Unpaid Principal Balance	222	196
Commercial:
Recorded Investment (after charge-offs)	71	200
Unpaid principal balance with an allowance recorded	79	214
Related allowance	71	127
Commercial:
Recorded investment (after charge-offs)	267	384
Unpaid principal balance	301	410
Related Allowance	71	127
Average recorded investment	323	510
Interest income recognized	1	5
Retail:Consumer [Member]
Commercial:
Recorded Investment (after charge-offs)	0	0
Unpaid Principal Balance	0	0
Commercial:
Recorded Investment (after charge-offs)	0	0
Unpaid principal balance with an allowance recorded	0	0
Related allowance	0	0
Commercial:
Recorded investment (after charge-offs)	0	0
Unpaid principal balance	0	0
Related Allowance	0	0
Average recorded investment	0	0
Interest income recognized	$ 0	$ 0

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Note 8 - Loans & Allowance for Loan Losses (Details) - Past Due Loans (USD $) In Thousands, unless otherwise specified	Jun. 30, 2013	Dec. 31, 2012
Commercial:
30-59 days past due	$ 2,173	$ 1,127
60-89 days past due	1,163	2,425
90 days or more past due	4,970	3,622
Total past due loans	8,306	7,174
Current	480,903	470,616
Loans	489,209	477,790
Commercial:Commercial and Industrial [Member]
Commercial:
30-59 days past due	306	76
60-89 days past due	37	0
90 days or more past due		0
Total past due loans	343	76
Current	111,276	99,987
Loans	111,619	100,063
Commercial:Construction [Member]
Commercial:
30-59 days past due	0	0
60-89 days past due	0	0
90 days or more past due	0	0
Total past due loans	0	0
Current	10,557	11,061
Loans	10,557	11,061
Commercial:Secured by Commercial Real Estate [Member]
Commercial:
30-59 days past due	244	407
60-89 days past due	440	1,460
90 days or more past due	4,332	3,097
Total past due loans	5,016	4,964
Current	187,673	187,903
Loans	192,689	192,867
Commercial Secured By Residential Real Estate [Member]
Commercial:
30-59 days past due	1,401	44
60-89 days past due	537	523
90 days or more past due	0	293
Total past due loans	1,938	860
Current	42,164	40,143
Loans	44,102	41,003
State And Political Subdivisions [Member]
Commercial:
30-59 days past due	27	71
60-89 days past due	0	1
90 days or more past due	425	0
Total past due loans	452	72
Current	32,100	34,184
Loans	32,552	34,256
Loans To Depository Institutions [Member]
Commercial:
30-59 days past due	0	0
60-89 days past due	0	0
90 days or more past due	0	0
Total past due loans	0	0
Current	2,250	3,250
Loans	2,250	3,250
Indirect Lease Financing [Member]
Commercial:
30-59 days past due	50	344
60-89 days past due	52	80
90 days or more past due	32	35
Total past due loans	134	459
Current	8,569	9,226
Loans	8,703	9,685
Retail:1-4 Family Residential Mortgages [Member]
Commercial:
30-59 days past due		0
60-89 days past due		197
90 days or more past due	153	0
Total past due loans	153	197
Current	27,621	28,536
Loans	27,774	28,733
Retail Home Equity Loans And Lines [Member]
Commercial:
30-59 days past due	117	152
60-89 days past due	91	153
90 days or more past due	28	197
Total past due loans	236	502
Current	56,541	54,358
Loans	56,777	54,860
Retail:Consumer [Member]
Commercial:
30-59 days past due	28	33
60-89 days past due	6	11
90 days or more past due	0	0
Total past due loans	34	44
Current	2,152	1,968
Loans	$ 2,186	$ 2,012

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Note 7 - Investment Securities (Details) - Pooled Trust Preferred Securities (USD $)	6 Months Ended
	Jun. 30, 2013		Jun. 30, 2012	Dec. 31, 2012
Note 7 - Investment Securities (Details) - Pooled Trust Preferred Securities [Line Items]
Book value	$ 383,419,000			$ 394,750,000
Fair value	380,364,000			401,502,000
Total recognized OTTI credit loss	(43,000)		0
Pretsl Iv [Member]
Note 7 - Investment Securities (Details) - Pooled Trust Preferred Securities [Line Items]
Class	Mezzanine*	[1]
Book value	243,000
Fair value	201,000
Unrealized gains (losses)	(42,000)
Realized OTTI credit loss	0
Total recognized OTTI credit loss	(1,000)
Moody's/Fitch ratings	Caa2/CCC
Current number of performing banks	5
Current number of performing insurance companies	0
Actual deferrals and defaults as a % of total collateral	18.00%
Total performing collateral as a % of outstanding bonds	139.50%
Pretsl V [Member]
Note 7 - Investment Securities (Details) - Pooled Trust Preferred Securities [Line Items]
Class	Mezzanine*	[1]
Book value	0
Fair value	0
Unrealized gains (losses)	0
Realized OTTI credit loss	0
Total recognized OTTI credit loss	(118,000)
Moody's/Fitch ratings	C/D
Current number of performing banks	0
Current number of performing insurance companies	0
Actual deferrals and defaults as a % of total collateral	100.00%
Total performing collateral as a % of outstanding bonds	12.50%
Pretsl Xvii [Member]
Note 7 - Investment Securities (Details) - Pooled Trust Preferred Securities [Line Items]
Class	Mezzanine
Book value	752,000
Fair value	439,000
Unrealized gains (losses)	(313,000)
Realized OTTI credit loss	0
Total recognized OTTI credit loss	(222,000)
Moody's/Fitch ratings	C/C
Current number of performing banks	30
Current number of performing insurance companies	4
Actual deferrals and defaults as a % of total collateral	38.80%
Total performing collateral as a % of outstanding bonds	71.20%
Pretsl Xix [Member]
Note 7 - Investment Securities (Details) - Pooled Trust Preferred Securities [Line Items]
Class	Mezzanine
Book value	988,000
Fair value	431,000
Unrealized gains (losses)	(557,000)
Realized OTTI credit loss	0
Total recognized OTTI credit loss	0
Moody's/Fitch ratings	C/C
Current number of performing banks	35
Current number of performing insurance companies	13
Actual deferrals and defaults as a % of total collateral	22.90%
Total performing collateral as a % of outstanding bonds	81.80%
Pretsl Xxv [Member]
Note 7 - Investment Securities (Details) - Pooled Trust Preferred Securities [Line Items]
Class	Mezzanine
Book value	766,000
Fair value	356,000
Unrealized gains (losses)	(410,000)
Realized OTTI credit loss	0
Total recognized OTTI credit loss	(222,000)
Moody's/Fitch ratings	C/C
Current number of performing banks	41
Current number of performing insurance companies	6
Actual deferrals and defaults as a % of total collateral	33.50%
Total performing collateral as a % of outstanding bonds	79.80%
Pretsl Xxvi [Member]
Note 7 - Investment Securities (Details) - Pooled Trust Preferred Securities [Line Items]
Class	Mezzanine
Book value	469,000
Fair value	282,000
Unrealized gains (losses)	(187,000)
Realized OTTI credit loss	0
Total recognized OTTI credit loss	(270,000)
Moody's/Fitch ratings	C/C
Current number of performing banks	40
Current number of performing insurance companies	7
Actual deferrals and defaults as a % of total collateral	30.20%
Total performing collateral as a % of outstanding bonds	83.50%
PreTSL XXVII [Member]
Note 7 - Investment Securities (Details) - Pooled Trust Preferred Securities [Line Items]
Class	Mezzanine
Book value	301,000
Fair value	382,000
Unrealized gains (losses)	81,000
Realized OTTI credit loss	0
Total recognized OTTI credit loss	(438,000)
Moody's/Fitch ratings	C/C
Current number of performing banks	40
Current number of performing insurance companies	7
Actual deferrals and defaults as a % of total collateral	30.20%
Total performing collateral as a % of outstanding bonds	83.50%
Pooled Trust Preferred Securities [Member]
Note 7 - Investment Securities (Details) - Pooled Trust Preferred Securities [Line Items]
Book value	3,519,000			3,519,000
Fair value	2,091,000			1,962,000
Unrealized gains (losses)	(1,428,000)
Realized OTTI credit loss	0
Total recognized OTTI credit loss	$ (1,271,000)

[1] Mezzanine* - only class of bonds still outstanding (represents the senior-most obligation of the trust)

XML

Consolidated Balance Sheets (Current Period Unaudited) (Parentheticals) (USD $) In Thousands, except Share data, unless otherwise specified	Jun. 30, 2013	Dec. 31, 2012
Available-for-sale, Amortized Cost (in Dollars)	$ 383,419	$ 394,750
Held-to-maturity, fair value (in Dollars)	$ 163	$ 166
Common stock, par value (in Dollars per share)	$ 0.625	$ 0.625
Common stock, shares authorized	10,000,000	10,000,000
Common stock, shares issued	3,418,128	3,392,572
Common stock, shares outstanding	3,253,559	3,228,003
Treasury stock, shares	164,569	164,569

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Note 5 - Earnings Per Share

6 Months Ended

Jun. 30, 2013

Earnings Per Share [Abstract]

Earnings Per Share [Text Block]

5. EARNINGS PER SHARE

The following sets forth the computation of basic and diluted earnings per share:

	Three months ended June 30,				Six months ended June 30,
	2013		2012		2013		2012
Numerator for basic and diluted earnings per share - net income	$	1,894	$	2,505	$	4,302	$	4,976
Denominator for basic earnings per share - weighted average shares outstanding		3,243,867		3,190,552		3,238,020		3,185,728
Effect of dilutive securities - employee stock options		12,088		17,774		11,048		14,865
Denominator for diluted earnings per share - adjusted weighted average shares outstanding		3,255,955		3,208,326		3,249,068		3,200,593
Earnings per share - basic	$	0.58	$	0.79	$	1.33	$	1.56
Earnings per share - diluted	$	0.58	$	0.78	$	1.32	$	1.55

There were 49,800 stock options that were anti-dilutive for both the three and six-month periods ended June 30, 2013. There were 52,300 stock options that were anti-dilutive for both the three and six-month periods ended June 30, 2012. These stock options were not included in the above calculation.

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Consolidated Statements of Comprehensive Income (Unaudited) (USD $) In Thousands, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2013	Jun. 30, 2012	Jun. 30, 2013	Jun. 30, 2012
Net income	$ 2,384	$ 3,274	$ 5,525	$ 6,495
Net unrealized holding gains on securities:
Unrealized holding (losses) gains arising during the period	(8,231)	396	(9,291)	494
Reclassification adjustment for gains included in net income	(93)	(141)	(516)	(530)
Other comprehensive (loss) income	(8,324)	255	(9,807)	(36)
Total comprehensive (loss) income	$ (5,940)	$ 3,529	$ (4,282)	$ 6,459

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Note 9 - Fair Value Measurements and Disclosures (Details) - Quantitative Information about Assets Measured at Fair Value (USD $)			6 Months Ended																		6 Months Ended
	Jun. 30, 2013	Dec. 31, 2012	Jun. 30, 2013 Appraisal Adjustments [Member] Impaired Loans [Member]		Jun. 30, 2013 Appraisal Adjustments [Member] Minimum [Member] Impaired Loans [Member]	Jun. 30, 2013 Appraisal Adjustments [Member] Maximum [Member] Impaired Loans [Member]	Jun. 30, 2013 Liquidation Expenses [Member] Impaired Loans [Member]		Jun. 30, 2013 Liquidation Expenses [Member] Minimum [Member] Impaired Loans [Member]	Jun. 30, 2013 Liquidation Expenses [Member] Maximum [Member] Impaired Loans [Member]	Jun. 30, 2013 Remaining Term [Member] Mortgage Servicing Rights [Member]	Jun. 30, 2013 Remaining Term [Member] Minimum [Member] Mortgage Servicing Rights [Member]	Jun. 30, 2013 Remaining Term [Member] Maximum [Member] Mortgage Servicing Rights [Member]	Jun. 30, 2013 Discount Rate [Member] Mortgage Servicing Rights [Member]	Jun. 30, 2013 Discount Rate [Member] Minimum [Member] Mortgage Servicing Rights [Member]	Jun. 30, 2013 Discount Rate [Member] Maximum [Member] Mortgage Servicing Rights [Member]	Jun. 30, 2013 Impaired Loans [Member]	Dec. 31, 2012 Impaired Loans [Member]	Jun. 30, 2013 Mortgage Servicing Rights [Member]	Dec. 31, 2012 Mortgage Servicing Rights [Member]	Jun. 30, 2013 Minimum [Member]	Jun. 30, 2013 Maximum [Member]
Fair Value Inputs, Assets, Quantitative Information [Line Items]
Assets, Fair Value Disclosure, Nonrecurring (in Dollars)	$ 7,554,000	$ 6,280,000	$ 5,612,000								$ 504,000						$ 5,612,000	$ 5,832,000	$ 504,000	$ 448,000
Valuation techniques			Appraisal of collateral (1)	[1]							Discounted cash flow
Unobservable input			Appraisal adjustments (2)	[2]			Liquidation expenses (2)	[2]			Remaining term			Discount rate
Value of Range of Values - Minimum					0.00%	(30.00%)			0.00%	(10.00%)					10.00%	12.00%					4.16%	9.42%
Mortgage servicing rights (yrs) (in Dollars)	$ 7,554,000	$ 6,280,000	$ 5,612,000								$ 504,000						$ 5,612,000	$ 5,832,000	$ 504,000	$ 448,000
Mortgage servicing rights (yrs)			Appraisal of collateral (1)	[1]							Discounted cash flow
Mortgage servicing rights (yrs)			Appraisal adjustments (2)	[2]			Liquidation expenses (2)	[2]			Remaining term			Discount rate
Mortgage servicing rights (yrs)												1 year	30 years

[1] Fair value is primarily determined through appraisals of the underlying collateral by independent parties, which generally includes various level 3 inputs which are not always identifiable.

[2] Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses.The range is presented as a percent of the initial appraised value.

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Consolidated Balance Sheets (Current Period Unaudited) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2013	Dec. 31, 2012
Assets
Cash and due from banks	$ 11,940	$ 14,859
Interest-bearing deposits in banks	3,957	594
Total cash and cash equivalents	15,897	15,453
Investment securities
Available-for-sale (amortized cost $383,419 and $394,750)	380,364	401,502
Held-to-maturity (fair value $163 and $166)	146	146
Restricted investment in bank stocks	1,837	2,244
Loans held-for-sale	1,328	1,616
Loans receivable	489,215	477,733
Allowance for loan losses	(9,431)	(9,772)
Net loans	479,784	467,961
Bank-owned life insurance	10,226	10,074
Premises and equipment, net	9,600	8,973
Accrued interest receivable	2,981	2,803
Other assets	8,666	9,102
Total assets	910,829	919,874
Deposits
Demand, non-interest bearing	74,682	73,685
Interest-bearing demand	197,738	191,335
Money market	65,810	76,047
Savings	204,510	191,337
Time	162,082	173,889
Time of $100,000 or more	91,091	95,345
Total deposits	795,913	801,638
Short-term borrowings	32,851	32,488
Long-term debt	5,282	5,287
Accrued interest payable	407	487
Other liabilities	2,140	2,351
Total liabilities	836,593	842,251
Shareholders' Equity
Common stock, par value $0.625 per share; authorized 10,000,000 shares; 3,418,128 shares and 3,392,572 shares issued; 3,253,559 and 3,228,003 shares outstanding	2,136	2,121
Surplus	13,304	12,787
Retained earnings	63,288	60,735
Accumulated other comprehensive (loss) income, net of tax	(2,016)	4,456
Treasury stock, at cost; 164,569 shares	(2,476)	(2,476)
Total shareholders' equity	74,236	77,623
Total liabilities and shareholders' equity	$ 910,829	$ 919,874

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Note 8 - Loans & Allowance for Loan Losses (Details) - Non-Accrual Loans (USD $) In Thousands, unless otherwise specified	Jun. 30, 2013	Dec. 31, 2012
Commercial:
90 days or more past due and still accruing	$ 442	$ 0
Non-accrual	17,301	18,572
Commercial:Commercial and Industrial [Member]
Commercial:
90 days or more past due and still accruing	0	0
Non-accrual	5,535	6,174
Commercial:Construction [Member]
Commercial:
90 days or more past due and still accruing	0	0
Non-accrual	2,029	2,480
Commercial:Secured by Commercial Real Estate [Member]
Commercial:
90 days or more past due and still accruing	0	0
Non-accrual	6,408	6,748
Commercial Secured By Residential Real Estate [Member]
Commercial:
90 days or more past due and still accruing	0	0
Non-accrual	2,698	2,390
State And Political Subdivisions [Member]
Commercial:
90 days or more past due and still accruing	425	0
Non-accrual	0	1
Loans To Depository Institutions [Member]
Commercial:
90 days or more past due and still accruing	0	0
Non-accrual	0	0
Indirect Lease Financing [Member]
Commercial:
90 days or more past due and still accruing	17	0
Non-accrual	72	98
Retail:1-4 Family Residential Mortgages [Member]
Commercial:
90 days or more past due and still accruing	0	0
Non-accrual	320	335
Retail Home Equity Loans And Lines [Member]
Commercial:
90 days or more past due and still accruing	0	0
Non-accrual	239	346
Retail:Consumer [Member]
Commercial:
90 days or more past due and still accruing	0	0
Non-accrual	$ 0	$ 0

XML

Note 3 - Stock-based Compensation and Shareholders' Equity (Details) (USD $)	3 Months Ended		6 Months Ended			186 Months Ended	6 Months Ended	102 Months Ended
	Jun. 30, 2013	Jun. 30, 2012	Jun. 30, 2013	Jun. 30, 2012	Dec. 31, 2012	Jun. 30, 2013 1998 Plan [Member]	Jun. 30, 2013 2005 Plan [Member]	Jun. 30, 2013 2005 Plan [Member]
Note 3 - Stock-based Compensation and Shareholders' Equity (Details) [Line Items]
Employee Benefits and Share-based Compensation (in Dollars)	$ 24,000	$ 26,000	$ 30,000	$ 42,000
Employee Service Share-based Compensation, Nonvested Awards, Compensation Not yet Recognized, Stock Options (in Dollars)	$ 121,000		$ 121,000
Employee Service Share-based Compensation, Nonvested Awards, Compensation Cost Not yet Recognized, Period for Recognition			31 months
Share-based Compensation Arrangement by Share-based Payment Award, Number of Shares Authorized						220,500	200,000	200,000
Share-based Compensation Arrangement by Share-based Payment Award, Award Vesting Period						3 years
Share-based Compensation Arrangement by Share-based Payment Award, Options, Grants in Period, Gross			20,000			225,058		143,200
Share-based Compensation Arrangement by Share-based Payment Award, Options, Forfeitures and Expirations in Period						30,444		45,000
Share-based Compensation Arrangement by Share-based Payment Award, Options, Exercises in Period			28,725			164,814		11,100
Share-based Compensation Arrangement by Share-based Payment Award, Options, Outstanding, Number	116,900		116,900		128,225	29,800	87,100	87,100
Share-based Compensation Arrangement by Share-based Payment Award, Terms of Award							The terms of the 2005 Plan are identical to the 1998 Plan, except options expire five years after the grant date.
Share-based Compensation Arrangement by Share-based Payment Award, Options, Grants in Period, Weighted Average Grant Date Fair Value (in Dollars per share)			$ 4.52	$ 3.81

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Note 6 - Comprehensive Income (Tables)

6 Months Ended

Jun. 30, 2013

Disclosure Text Block [Abstract]

Schedule of Accumulated Other Comprehensive Income (Loss) [Table Text Block]

	June 30, 2013			December 31, 2012
Unrealized net holding (losses) gains on available-for-sale securities	$	(2,184	)	$	7,736
Unrealized losses on available-for-sale securities for which a portion of an other-than-temporary impairment loss has been recognized in earnings		(871	)		(984	)
Accumulated other comprehensive (loss) income		(3,055	)		6,752
Tax effect		1,039			(2,296	)
Accumulated other comprehensive (loss) income, net of tax	$	(2,016	)	$	4,456

Details about accumulated other comprehensive income	Amount reclassified from accumulated other comprehensive income			Affected line item in the statement of income
Unrealized net holding gains on available-for-sale securities	$	559		Net gain on sale of investment securities
Other-than-temporary losses on investment securities		(43	)	Net other-than-temporary impairment losses on investment securities
		516
Tax effect		(176	)	Provision for income taxes
Total reclass out of accumulated other comprehensive income, net of tax	$	340		Net of tax

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Note 7 - Investment Securities (Details) - Securities in a Continuous Unrealized Loss Position (USD $) In Thousands, unless otherwise specified	6 Months Ended	12 Months Ended
	Jun. 30, 2013	Dec. 31, 2012
Note 7 - Investment Securities (Details) - Securities in a Continuous Unrealized Loss Position [Line Items]
No. of securities	220	59
Securities in an unrealized loss position less than 12 months fair value	$ 215,321	$ 52,886
Securities in an unrealized loss position less than 12 months unrealized losses	6,016	343
Securities in an unrealized loss position 12 months or longer fair value	3,348	1,881
Securities in an unrealized loss position 12 months or longer unrealized losses	1,557	1,650
Securities in an unrealized loss position fair value	218,669	54,767
Securities in an unrealized loss position unrealized losses	7,573	1,993
US Government Agencies Debt Securities [Member]
Note 7 - Investment Securities (Details) - Securities in a Continuous Unrealized Loss Position [Line Items]
No. of securities	43	4
Securities in an unrealized loss position less than 12 months fair value	53,172	3,992
Securities in an unrealized loss position less than 12 months unrealized losses	1,455	19
Securities in an unrealized loss position 12 months or longer fair value	0	0
Securities in an unrealized loss position 12 months or longer unrealized losses	0	0
Securities in an unrealized loss position fair value	53,172	3,992
Securities in an unrealized loss position unrealized losses	1,455	19
State and Municipal [Member]
Note 7 - Investment Securities (Details) - Securities in a Continuous Unrealized Loss Position [Line Items]
No. of securities	73	15
Securities in an unrealized loss position less than 12 months fair value	32,706	6,472
Securities in an unrealized loss position less than 12 months unrealized losses	1,331	91
Securities in an unrealized loss position 12 months or longer fair value		0
Securities in an unrealized loss position 12 months or longer unrealized losses		0
Securities in an unrealized loss position fair value	32,706	6,472
Securities in an unrealized loss position unrealized losses	1,331	91
Mortgage-backed Securities, Issued by US Government Sponsored Enterprises [Member]
Note 7 - Investment Securities (Details) - Securities in a Continuous Unrealized Loss Position [Line Items]
No. of securities	45	9
Securities in an unrealized loss position less than 12 months fair value	68,335	13,439
Securities in an unrealized loss position less than 12 months unrealized losses	1,694	33
Securities in an unrealized loss position 12 months or longer fair value	0	0
Securities in an unrealized loss position 12 months or longer unrealized losses	0	0
Securities in an unrealized loss position fair value	68,335	13,439
Securities in an unrealized loss position unrealized losses	1,694	33
Collateralized Mortgage Obligations [Member]
Note 7 - Investment Securities (Details) - Securities in a Continuous Unrealized Loss Position [Line Items]
No. of securities	45	19
Securities in an unrealized loss position less than 12 months fair value	57,461	28,396
Securities in an unrealized loss position less than 12 months unrealized losses	1,458	155
Securities in an unrealized loss position 12 months or longer fair value	1,507	0
Securities in an unrealized loss position 12 months or longer unrealized losses	25	0
Securities in an unrealized loss position fair value	58,968	28,396
Securities in an unrealized loss position unrealized losses	1,483	155
Pooled Trust Preferred Securities [Member]
Note 7 - Investment Securities (Details) - Securities in a Continuous Unrealized Loss Position [Line Items]
No. of securities	5	5
Securities in an unrealized loss position less than 12 months fair value	0	0
Securities in an unrealized loss position less than 12 months unrealized losses	0	0
Securities in an unrealized loss position 12 months or longer fair value	1,708	1,609
Securities in an unrealized loss position 12 months or longer unrealized losses	1,509	1,608
Securities in an unrealized loss position fair value	1,708	1,609
Securities in an unrealized loss position unrealized losses	1,509	1,608
Corporate Debt Securities [Member]
Note 7 - Investment Securities (Details) - Securities in a Continuous Unrealized Loss Position [Line Items]
No. of securities	3
Securities in an unrealized loss position less than 12 months fair value	2,972
Securities in an unrealized loss position less than 12 months unrealized losses	31
Securities in an unrealized loss position fair value	2,972
Securities in an unrealized loss position unrealized losses	31
Equity Securities [Member]
Note 7 - Investment Securities (Details) - Securities in a Continuous Unrealized Loss Position [Line Items]
No. of securities	6	7
Securities in an unrealized loss position less than 12 months fair value	675	587
Securities in an unrealized loss position less than 12 months unrealized losses	47	45
Securities in an unrealized loss position 12 months or longer fair value	133	272
Securities in an unrealized loss position 12 months or longer unrealized losses	23	42
Securities in an unrealized loss position fair value	808	859
Securities in an unrealized loss position unrealized losses	$ 70	$ 87

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Note 8 - Loans & Allowance for Loan Losses (Details) - Allowance for Loan Losses Disaggregated by Impairment Method (USD $) In Thousands, unless otherwise specified	Jun. 30, 2013	Mar. 31, 2013	Dec. 31, 2012	Jun. 30, 2012	Mar. 31, 2012	Dec. 31, 2011
Commercial:
Allowance for loan losses	$ 9,431	$ 9,351	$ 9,772	$ 9,467	$ 9,456	$ 9,241
Allowance for loan losses, related to loans individually evaluated for impairment	2,181		2,701
Allowance for loan losses, related to loans collectively evaluated for impairment	6,832		6,414
Loans receivable balance	489,209		477,790
Loans receivable balance, related to loans individually evaluated for impairment	30,002		32,304
Loans receivable balance, related to loans collectively evaluated for impairment	459,207		445,486
Commercial:Commercial and Industrial [Member]
Commercial:
Allowance for loan losses	1,994	2,314	2,505	3,467	3,317	2,959
Allowance for loan losses, related to loans individually evaluated for impairment	652		1,309
Allowance for loan losses, related to loans collectively evaluated for impairment	1,342		1,196
Loans receivable balance	111,619		100,063
Loans receivable balance, related to loans individually evaluated for impairment	5,882		7,753
Loans receivable balance, related to loans collectively evaluated for impairment	105,737		92,310
Commercial:Construction [Member]
Commercial:
Allowance for loan losses	242	230	209	353	333	556
Allowance for loan losses, related to loans individually evaluated for impairment	0		0
Allowance for loan losses, related to loans collectively evaluated for impairment	242		209
Loans receivable balance	10,557		11,061
Loans receivable balance, related to loans individually evaluated for impairment	2,065		3,990
Loans receivable balance, related to loans collectively evaluated for impairment	8,492		7,071
Commercial:Secured by Commercial Real Estate [Member]
Commercial:
Allowance for loan losses	3,916	3,873	3,795	3,190	3,126	3,124
Allowance for loan losses, related to loans individually evaluated for impairment	850		619
Allowance for loan losses, related to loans collectively evaluated for impairment	3,066		3,176
Loans receivable balance	192,689		192,867
Loans receivable balance, related to loans individually evaluated for impairment	15,633		14,931
Loans receivable balance, related to loans collectively evaluated for impairment	177,056		177,936
Commercial Secured By Residential Real Estate [Member]
Commercial:
Allowance for loan losses	1,437	1,146	1,230	811	773	746
Allowance for loan losses, related to loans individually evaluated for impairment	534		543
Allowance for loan losses, related to loans collectively evaluated for impairment	903		687
Loans receivable balance	44,102		41,003
Loans receivable balance, related to loans individually evaluated for impairment	3,836		2,843
Loans receivable balance, related to loans collectively evaluated for impairment	40,266		38,160
State And Political Subdivisions [Member]
Commercial:
Allowance for loan losses	277	257	260	222	301	195
Allowance for loan losses, related to loans individually evaluated for impairment			0
Allowance for loan losses, related to loans collectively evaluated for impairment	277		260
Loans receivable balance	32,552		34,256
Loans receivable balance, related to loans individually evaluated for impairment	1,807		1,849
Loans receivable balance, related to loans collectively evaluated for impairment	30,745		32,407
Loans To Depository Institutions [Member]
Commercial:
Allowance for loan losses	10	10	15	20	20	20
Allowance for loan losses, related to loans individually evaluated for impairment	0		0
Allowance for loan losses, related to loans collectively evaluated for impairment	10		15
Loans receivable balance	2,250		3,250
Loans receivable balance, related to loans collectively evaluated for impairment	2,250		3,250
Indirect Lease Financing [Member]
Commercial:
Allowance for loan losses	156	179	168	268	238	312
Allowance for loan losses, related to loans individually evaluated for impairment	7		13
Allowance for loan losses, related to loans collectively evaluated for impairment	149		155
Loans receivable balance	8,703		9,685
Loans receivable balance, related to loans individually evaluated for impairment	72		98
Loans receivable balance, related to loans collectively evaluated for impairment	8,631		9,587
Retail:1-4 Family Residential Mortgages [Member]
Commercial:
Allowance for loan losses	289	300	324	300	303	249
Allowance for loan losses, related to loans individually evaluated for impairment	67		90
Allowance for loan losses, related to loans collectively evaluated for impairment	222		234
Loans receivable balance	27,774		28,733
Loans receivable balance, related to loans individually evaluated for impairment	440		456
Loans receivable balance, related to loans collectively evaluated for impairment	27,334		28,277
Retail Home Equity Loans And Lines [Member]
Commercial:
Allowance for loan losses	664	714	582	595	547	625
Allowance for loan losses, related to loans individually evaluated for impairment	71		127
Allowance for loan losses, related to loans collectively evaluated for impairment	593		455
Loans receivable balance	56,777		54,860
Loans receivable balance, related to loans individually evaluated for impairment	267		384
Loans receivable balance, related to loans collectively evaluated for impairment	56,510		54,476
Retail:Consumer [Member]
Commercial:
Allowance for loan losses	28	29	27	18	17	20
Allowance for loan losses, related to loans individually evaluated for impairment	0		0
Allowance for loan losses, related to loans collectively evaluated for impairment	28		27
Loans receivable balance	2,186		2,012
Loans receivable balance, related to loans collectively evaluated for impairment	2,186		2,012
Unallocated [Member]
Commercial:
Allowance for loan losses	$ 418	$ 299	$ 657	$ 223	$ 481	$ 435

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Note 7 - Investment Securities (Details) - Amortized Cost and Estimated Fair Value of Securities Available-for-Sale by Contractual Maturity (USD $) In Thousands, unless otherwise specified	Jun. 30, 2013	Dec. 31, 2012
Amortized Cost and Estimated Fair Value of Securities Available-for-Sale by Contractual Maturity [Abstract]
Due in one year or less	$ 9,498
Due in one year or less	9,349
Due after one year through five years	202,245
Due after one year through five years	201,228
Due after five years through ten years	119,304
Due after five years through ten years	122,291
Due after ten years	44,847
Due after ten years	46,537
Equity securities	4,470
Equity securities	4,014
Total investment securities available-for-sale	380,364	401,502
Total investment securities available-for-sale	$ 383,419	$ 394,750

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Note 6 - Comprehensive Income (Details) - Components of Accumulated Other Comprehensive Income (USD $) In Thousands, unless otherwise specified	Jun. 30, 2013	Dec. 31, 2012
Components of Accumulated Other Comprehensive Income [Abstract]
Unrealized net holding (losses) gains on available-for-sale securities	$ (2,184)	$ 7,736
Unrealized losses on available-for-sale securities for which a portion of an other-than-temporary impairment loss has been recognized in earnings	(871)	(984)
Accumulated other comprehensive (loss) income	(3,055)	6,752
Tax effect	1,039	(2,296)
Accumulated other comprehensive (loss) income, net of tax	$ (2,016)	$ 4,456

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Note 6 - Comprehensive Income (Details) - Amounts Reclassified Out of Accumulated Other Comprehensive Income (USD $) In Thousands, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2013	Jun. 30, 2012	Jun. 30, 2013	Jun. 30, 2012
Note 6 - Comprehensive Income (Details) - Amounts Reclassified Out of Accumulated Other Comprehensive Income [Line Items]
Other-than-temporary losses on investment securities			$ 43	$ 0
Tax effect	(490)	(769)	(1,223)	(1,519)
Total reclass out of accumulated other comprehensive income, net of tax	1,894	2,505	4,302	4,976
Amount Reclassified From Accumulated Other Comprehensive Income [Member]
Note 6 - Comprehensive Income (Details) - Amounts Reclassified Out of Accumulated Other Comprehensive Income [Line Items]
Unrealized net holding gains on available-for-sale securities			559
Other-than-temporary losses on investment securities			(43)
			516
Tax effect			(176)
Total reclass out of accumulated other comprehensive income, net of tax			$ 340

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Note 4 - Share Repurchase Plan

6 Months Ended

Jun. 30, 2013

Disclosure Text Block Supplement [Abstract]

Treasury Stock [Text Block]

4. SHARE REPURCHASE PLAN

The Board of Directors has authorized the repurchase of up to 100,000 shares of its common stock in open market or privately negotiated transactions. The repurchase authorization does not bear a termination date. There were no shares repurchased during the six months ended June 30, 2013. As of June 30, 2013, 57,883 shares were repurchased under this authorization at an average price of $16.97 and a total cost of $982,000.

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Note 11 - Regulatory Restrictions (Details) - Capital Ratios and the Regulatory Minimum Requirements (USD $) In Thousands, unless otherwise specified	Jun. 30, 2013	Dec. 31, 2012
Consolidated Entities [Member]
Total risk-based capital (to risk-weighted assets):
Total risk-based capital actual (in Dollars)	$ 84,026	$ 80,758
Total risk-based capital (to risk-weighted assets) actual	13.92%	13.60%
Total risk-based capital for capital adequacy (in Dollars)	48,295	47,490
Total risk-based capital (to risk-weighted assets) for capital adequacy	8.00%	8.00%
Tier I capital (to risk-weighted assets):
Tier I risk-based capital actual (in Dollars)	76,252	73,167
Tier I capital (to risk-weighted assets) actual	12.63%	12.33%
Tier I risk-based capital for capital adequacy (in Dollars)	24,148	23,745
Tier I capital (to risk-weighted assets) for capital adequacy	4.00%	4.00%
Tier I capital (to average assets):
Tier I leverage capital actual (in Dollars)	76,252	73,167
Tier I capital (to average assets) actual	8.37%	7.96%
Tier I leverage capital for capital adequacy (in Dollars)	36,423	36,762
Tier I capital (to average assets) for capital adequacy	4.00%	4.00%
Bank [Member]
Total risk-based capital (to risk-weighted assets):
Total risk-based capital actual (in Dollars)	79,049	76,154
Total risk-based capital (to risk-weighted assets) actual	13.19%	12.92%
Total risk-based capital for capital adequacy (in Dollars)	47,944	47,170
Total risk-based capital (to risk-weighted assets) for capital adequacy	8.00%	8.00%
Total risk-based capital to be well capitalized (in Dollars)	59,930	58,963
Total risk-based capital (to risk-weighted assets) to be well capitalized	10.00%	10.00%
Tier I capital (to risk-weighted assets):
Tier I risk-based capital actual (in Dollars)	71,534	68,754
Tier I capital (to risk-weighted assets) actual	11.94%	11.66%
Tier I risk-based capital for capital adequacy (in Dollars)	23,972	23,585
Tier I capital (to risk-weighted assets) for capital adequacy	4.00%	4.00%
Tier I risk-based capital to be well capitalized (in Dollars)	35,958	35,378
Tier I capital (to risk-weighted assets) to be well capitalized	6.00%	6.00%
Tier I capital (to average assets):
Tier I leverage capital actual (in Dollars)	71,534	68,754
Tier I capital (to average assets) actual	7.90%	7.51%
Tier I leverage capital for capital adequacy (in Dollars)	36,239	36,602
Tier I capital (to average assets) for capital adequacy	4.00%	4.00%
Tier I leverage capital to be well capitalized (in Dollars)	$ 45,299	$ 45,752
Tier I capital (to average assets) to be well capitalized	5.00%	5.00%

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Note 3 - Stock-based Compensation and Shareholders' Equity (Details) - Assumptions Used in Option Pricing Model	6 Months Ended
	Jun. 30, 2013	Jun. 30, 2012
Assumptions Used in Option Pricing Model [Abstract]
Risk free interest rate	0.35%	0.39%
Dividend yield	4.26%	4.68%
Volatility	34.10%	33.81%
Expected life (years)	5 years	5 years

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Note 7 - Investment Securities (Details) - Amortized Cost and Estimated Fair Values of Investment Securities Held-to-Maturity (USD $) In Thousands, unless otherwise specified	6 Months Ended	12 Months Ended
	Jun. 30, 2013	Dec. 31, 2012
Note 7 - Investment Securities (Details) - Amortized Cost and Estimated Fair Values of Investment Securities Held-to-Maturity [Line Items]
State and municipal securities	$ 146	$ 146
State and municipal securities	163	166
State and Municipal [Member]
Note 7 - Investment Securities (Details) - Amortized Cost and Estimated Fair Values of Investment Securities Held-to-Maturity [Line Items]
State and municipal securities	146	146
State and municipal securities	17	20
State and municipal securities	163	166
State and municipal securities	$ 0	$ 0

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Note 7 - Investment Securities

6 Months Ended

Jun. 30, 2013

Investments, Debt and Equity Securities [Abstract]

Investments in Debt and Marketable Equity Securities (and Certain Trading Assets) Disclosure [Text Block]

7. INVESTMENT SECURITIES

The amortized cost and estimated fair values of investment securities available-for-sale at June 30, 2013 and December 31, 2012 were as follows:

June 30, 2013	Fair value		Gross unrealized holding gains		Gross unrealized holding losses		Amortized cost
U.S. Government agency securities	$	70,474	$	251	$	1,455	$	71,678
State and municipal securities		86,715		1,472		1,331		86,574
U.S. Government agencies and sponsored enterprises (GSEs):
Mortgage-backed securities		126,945		1,493		1,694		127,146
Collateralized mortgage obligations (CMOs)		85,678		679		1,483		86,482
Pooled trust preferred securities		2,091		81		1,509		3,519
Corporate debt securities		3,991		16		31		4,006
Equity securities		4,470		526		70		4,014
Total investment securities available-for-sale	$	380,364	$	4,518	$	7,573	$	383,419

December 31, 2012	Fair value		Gross unrealized holding gains		Gross unrealized holding losses		Amortized cost
U.S. Government agency securities	$	104,130	$	750	$	19	$	103,399
State and municipal securities		86,789		3,141		91		83,739
U.S. Government agencies and sponsored enterprises (GSEs):
Mortgage-backed securities		107,973		3,169		33		104,837
Collateralized mortgage obligations (CMOs)		94,091		1,188		155		93,058
Pooled trust preferred securities		1,962		51		1,608		3,519
Corporate debt securities		2,502		44		-		2,458
Equity securities		4,055		402		87		3,740
Total investment securities available-for-sale	$	401,502	$	8,745	$	1,993	$	394,750

The amortized cost and estimated fair value of securities available-for-sale by contractual maturity at June 30, 2013 are shown in the following table. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Securities are assigned to categories based on contractual maturity except for mortgage-backed securities and CMOs which are based on the estimated average life of these securities and municipal securities that have been pre-refunded.

June 30, 2013	Fair value		Amortized cost
Due in one year or less	$	9,498	$	9,349
Due after one year through five years		202,245		201,228
Due after five years through ten years		119,304		122,291
Due after ten years		44,847		46,537
Equity securities		4,470		4,014
Total investment securities available-for-sale	$	380,364	$	383,419

Proceeds from sales of investment securities available-for-sale were approximately $12,387,000 and $15,798,000 for the six months ended June 30, 2013 and 2012, respectively.

At June 30, 2013 and December 31, 2012, investment securities available-for-sale totaling approximately $163,410,000 and $170,433,000, respectively, were pledged as collateral for repurchase agreements and deposits of public funds.

The following table presents information related to the Company’s gains and losses on the sales of equity and debt securities, and losses recognized for the other-than-temporary impairment of these investments. Gains and losses on available-for-sale securities are computed on the specific identification method and included in non-interest income. Gross realized losses on equity and debt securities are net of other-than-temporary impairment charges:

	Six months ended June 30, 2013									Six months ended June 30, 2012
	Gross realized gains		Gross realized losses		Other-than- temporary impairment losses			Net gains		Gross realized gains		Gross realized losses			Other-than- temporary impairment losses		Net gains
Equity securities	$	369	$	-	$	(43	)	$	326	$	427	$	-		$	-	$	427
Debt securities		190		-		-			190		107		(4	)		-		103
Total	$	559	$	-	$	(43	)	$	516	$	534	$	(4	)	$	-	$	530

The tax expense applicable to the net realized gains for the six-month periods ended June 30, 2013 and 2012 amounted to approximately $176,000 and $180,000, respectively.

QNB recognizes OTTI for debt securities classified as available-for-sale in accordance with FASB ASC 320, Investments – Debt and Equity Securities, which requires that we assess whether we intend to sell or it is more likely than not that the Company will be required to sell a security before recovery of its amortized cost basis less any current-period credit losses. For debt securities that are considered other-than-temporarily impaired and that we do not intend to sell and will not be required to sell prior to recovery of our amortized cost basis, the amount of the impairment is separated into the amount that is credit related (credit loss component) and the amount due to all other factors. The credit loss component is recognized in earnings and is the difference between the security’s amortized cost basis and the present value of its expected future cash flows discounted at the security’s effective yield. The remaining difference between the security’s fair value and the present value of future expected cash flows is due to factors that are not credit related and, therefore, is not required to be recognized as a loss in the income statement, but is recognized in other comprehensive income. For equity securities, once a decline in value is determined to be other-than-temporary, the value of the equity security is reduced to fair value and a corresponding charge to earnings is recognized. QNB believes that we will fully collect the carrying value of securities on which we have recorded a non-credit related impairment in other comprehensive income.

The following table presents a roll forward of the credit loss component recognized in earnings. The credit loss component of the amortized cost represents the difference between the present value of expected future cash flows and the amortized cost basis of the security prior to considering credit losses. The beginning balance represents the credit loss component for debt securities for which OTTI occurred prior to the beginning of the year. Credit-impaired debt securities must be presented in two components based upon whether the current period is the first time the debt security was credit-impaired (initial credit impairment) or is not the first time the debt security was credit-impaired (subsequent credit impairments). No credit impairments were recognized on debt securities in the first six months of 2013 or 2012.

The following table presents a summary of the cumulative credit-related other-than-temporary impairment charges recognized as components of earnings for debt securities still held by QNB:

Six months ended June 30,	2013		2012
Balance, beginning of period	$	1,271	$	1,279
Reductions: gain on payoff		-		-
Additions:
Initial credit impairments		-		-
Subsequent credit impairments		-		-
Balance, end of period	$	1,271	$	1,279

The amortized cost and estimated fair values of investment securities held-to-maturity at June 30, 2013 and December 31, 2012 were as follows:

Held-To-Maturity
	June 30, 2013								December 31, 2012
	Amortized cost		Gross unrealized holding gains		Gross unrealized holding losses		Fair value		Amortized cost		Gross unrealized holding gains		Gross unrealized holding losses		Fair value
State and municipal securities	$	146	$	17		-	$	163	$	146	$	20		-	$	166

The amortized cost and estimated fair value of securities held-to-maturity by contractual maturity at June 30, 2013 are shown in the following table. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

June 30, 2013	Fair value		Amortized cost
Due in one year or less		-		-
Due after one year through five years	$	163	$	146
Due after five years through ten years		-		-
Due after ten years		-		-
Total investment securities held-to-maturity	$	163	$	146

There were no sales of investment securities classified as held-to-maturity during the six months ended June 30, 2013 or 2012.

The following table indicates the length of time individual securities have been in a continuous unrealized loss position at June 30, 2013 and December 31, 2012:

June 30, 2013
			Less than 12 months				12 months or longer				Total
	No. of securities		Fair value		Unrealized losses		Fair value		Unrealized losses		Fair value		Unrealized losses
U.S. Government agency securities		43	$	53,172	$	1,455		-		-	$	53,172	$	1,455
State and municipal securities		73		32,706		1,331		-		-		32,706		1,331
U.S. Government agencies and sponsored enterprises (GSEs):
Mortgage-backed securities		45		68,335		1,694		-		-		68,335		1,694
Collateralized mortgage obligations (CMOs)		45		57,461		1,458	$	1,507	$	25		58,968		1,483
Pooled trust preferred securities		5		-		-		1,708		1,509		1,708		1,509
Corporate debt securities		3		2,972		31		-		-		2,972		31
Equity securities		6		675		47		133		23		808		70
Total		220	$	215,321	$	6,016	$	3,348	$	1,557	$	218,669	$	7,573

December 31, 2012
			Less than 12 months				12 months or longer				Total
	No. of securities		Fair value		Unrealized losses		Fair value		Unrealized losses		Fair value		Unrealized losses
U.S. Government agency securities		4	$	3,992	$	19		-		-	$	3,992	$	19
State and municipal securities		15		6,472		91		-		-		6,472		91
U.S. Government agencies and sponsored enterprises (GSEs):
Mortgage-backed securities		9		13,439		33		-		-		13,439		33
Collateralized mortgage obligations (CMOs)		19		28,396		155		-		-		28,396		155
Pooled trust preferred securities		5		-		-	$	1,609	$	1,608		1,609		1,608
Equity securities		7		587		45		272		42		859		87
Total		59	$	52,886	$	343	$	1,881	$	1,650	$	54,767	$	1,993

Management evaluates debt securities, which are comprised of U.S. Government agencies, state and municipalities, mortgage-backed securities, CMOs and corporate debt securities, for other-than-temporary impairment and considers the current economic conditions, the length of time and the extent to which the fair value has been less than cost, interest rates and the bond rating of each security. The unrealized losses at June 30, 2013 in U.S. Government securities, state and municipal securities, mortgage-backed securities, CMOs and corporate debt securities are primarily the result of rising interest rates late in the second quarter. If held to maturity, these bonds will mature at par, and QNB will not realize a loss. The Company has the intent to hold the securities and does not believe it will be required to sell the securities before recovery occurs.

QNB holds seven pooled trust preferred securities as of June 30, 2013. These securities have a total amortized cost of approximately $3,519,000 and a fair value of $2,091,000. Five of the seven securities have been in an unrealized loss position for more than twelve months. All of the pooled trust preferred securities are available-for-sale securities and are carried at fair value.

The following table provides additional information related to pooled trust preferred securities (PreTSLs) as of June 30, 2013:

Deal	Class	Book value		Fair value		Unrealized gains (losses)			Realized OTTI credit loss (YTD 2013)		Total recognized OTTI credit loss			Moody's /Fitch ratings	Current number of performing banks		Current number of performing insurance companies		Actual deferrals and defaults as a % of total collateral			Total performing collateral as a % of outstanding bonds
PreTSL IV	Mezzanine*	$	243	$	201	$	(42	)	$	-	$	(1	)	Caa2/CCC		5		-		18.0	%		139.5	%
PreTSL V	Mezzanine*		-		-		-			-		(118	)	C/D		-		-		100.0			12.5
PreTSL XVII	Mezzanine		752		439		(313	)		-		(222	)	C/C		30		4		38.8			71.2
PreTSL XIX	Mezzanine		988		431		(557	)		-		-		C/C		35		13		22.9			81.8
PreTSL XXV	Mezzanine		766		356		(410	)		-		(222	)	C/C		41		6		33.5			79.8
PreTSL XXVI	Mezzanine		469		282		(187	)		-		(270	)	C/C		40		7		30.2			83.5
PreTSL XXVI	Mezzanine		301		382		81			-		(438	)	C/C		40		7		30.2			83.5
		$	3,519	$	2,091	$	(1,428	)	$	-	$	(1,271	)

Mezzanine* - only class of bonds still outstanding (represents the senior-most obligation of the trust)

The market for these securities at June 30, 2013 is not active and markets for similar securities also are not active. The inactivity was evidenced first by a significant widening of the bid-ask spread in the brokered markets in which pooled trust preferred securities trade and then by a significant decrease in the volume of trades relative to historical levels. The new issue market is also inactive and the market values for these securities (and any securities other than those issued or guaranteed by U.S. Government agencies) are depressed relative to historical levels. In today’s market, a low market price for a particular bond may only provide evidence of a recent widening of corporate spreads in general versus being an indicator of credit problems with a particular issuer. Lack of liquidity in the market for trust preferred collateralized debt obligations, credit rating downgrades and market uncertainties related to the financial industry are all factors contributing to the temporary impairment of these securities. Although these securities are classified as available-for-sale, the Company has the intent to hold the securities and does not believe it will be required to sell the securities before recovery occurs. As illustrated in the table above, these securities are comprised mainly of securities issued by banks, and to a lesser degree, insurance companies. QNB owns the mezzanine tranches of these securities.

On a quarterly basis we evaluate our debt securities for other-than-temporary impairment (OTTI), which involves the use of a third-party valuation firm to assist management with the valuation. When evaluating these investments a credit-related portion and a non-credit related portion of OTTI are determined. The credit related portion is recognized in earnings and represents the expected shortfall in future cash flows. The non-credit related portion is recognized in other comprehensive income and represents the difference between the book value and the fair value of the security less any current quarter credit related impairment. For the six months ended June 30, 2013, no other-than-temporary impairment charges representing credit impairment were recognized on our pooled trust preferred collateralized debt obligations. A discounted cash flow analysis provides the best estimate of credit related OTTI for these securities. Additional information related to this analysis follows:

All of the pooled trust preferred collateralized debt obligations held by QNB are rated lower than AA and are measured for OTTI within the scope of ASC 325 (formerly known as EITF 99-20), Recognition of Interest Income and Impairment on Purchased Beneficial Interests and Beneficial Interests That Continue to be Held by a Transferor in Securitized Financial Assets, and Amendments to the Impairment Guidance of EITF Issue No. 99-20 (formerly known as EITF 99-20-1). QNB performs a discounted cash flow analysis on all of its impaired debt securities to determine if the amortized cost basis of an impaired security will be recovered. In determining whether a credit loss exists, QNB uses its best estimate of the present value of cash flows expected to be collected from the debt security and discounts them at the effective yield implicit in the security at the date of acquisition or the prospective yield for those securities with prior OTTI charges. The discounted cash flow analysis is considered to be the primary evidence when determining whether credit related other-than-temporary impairment exists.

Results of a discounted cash flow test are significantly affected by other variables such as the estimate of future cash flows (including prepayments), credit worthiness of the underlying banks and insurance companies and determination of probability and severity of default of the underlying collateral. The following provides additional information for each of these variables:

● Estimate of Future Cash Flows – Cash flows are constructed in an INTEXcalc valuation model. INTEX is a proprietary cash flow model recognized as the industry standard for analyzing all types of structured debt products. It includes each deal’s structural features updated with trustee information, including asset-by-asset detail, as it becomes available. The modeled cash flows are then used to determine if all the scheduled principal and interest payments of the investments will be returned. For purposes of the cash flow analysis, relatively modest rates of prepayment were forecasted (ranging from 0-1%). In addition to the base prepayment assumption, due to the recent enactment of the Dodd-Frank financial legislation additional prepayment analysis was performed. First, trust preferred securities issued by banks with more than $15 billion in total assets at December 31, 2009 were identified. The current credit rating of these institutions was reviewed and it was assumed that any issuer with an investment grade credit rating would prepay their issuance as soon as possible, or July 1, 2015 for bank holding company subsidiaries of foreign banking organizations that have relied on Supervision and Regulation Letter SR-01-1. For those institutions rated below investment grade the holding companies’ approximate cost of long-term funding given their rating and marketplace interest rate was estimated. The following assumption was made; any holding company that could refinance for a cost savings of more than 2% will refinance and will do so as soon as possible, or July 1, 2015. Finally, for issuers not impacted by the Tier 1 regulatory capital legislation enacted by the Dodd-Frank act, we identified the issuers that have shown a recent history of prepayment of both floating rate and fixed rate issues and assumed these issuers will prepay as soon as possible.

● Credit Analysis – A quarterly credit evaluation is performed for the companies comprising the collateral across the various pooled trust preferred securities. This credit evaluation considers all available evidence and focuses on capitalization, asset quality, profitability, liquidity, stock price performance, whether the institution has received TARP funding and whether the institution has shown the ability to raise capital.

● Probability of Default – A near-term probability of default is determined for each issuer based on its financial condition and is used to calculate the expected impact of future deferrals and defaults on the expected cash flows. Each issuer in the collateral pool is assigned a near-term probability of default based on individual performance and financial characteristics. Various studies suggest that the rate of bank failures between 1934 and 2008 were approximately 0.36%. Thus, in addition to the specific bank default assumptions used for the near term, future defaults on the individual banks in the analysis for 2013 and beyond the rate used is calculated based on using the above mentioned thirty-six basis points and factoring that number based on a comparison of key financial ratios of active individual issuers without a short-term probability of default compared to all FDIC insured banks.

● Severity of Loss – In addition to the probability of default discussed above, a severity of loss (projected recovery) is determined in all cases. In the current analysis, the severity of loss ranges from 0% to 100% depending on the estimated credit worthiness of the individual issuer, with a 95% severity of loss utilized for defaults projected in 2013 and thereafter.

In addition to the above factors, the evaluation of impairment also includes a stress test analysis which provides an estimate of future risk for each tranche. This stressed breakpoint is then compared to the level of assets with credit concerns in each tranche. This comparison allows management to identify those pools that are at a greater risk for a future adverse change in cash flows so the asset quality in those pools can be monitored more closely for potential deterioration of credit quality.

Based upon the analysis performed by management as of June 30, 2013, it is probable that we will collect all contractual principal and interest payments on one of our seven pooled trust preferred securities, PreTSL XIX. The expected principal shortfall on the remaining pooled trust preferred securities has resulted in credit related other-than-temporary impairment charges in previous years. All of these pooled trust preferred securities held by QNB could be subject to additional writedowns in the future if additional deferrals and defaults occur.

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Note 3 - Stock-based Compensation and Shareholders' Equity

6 Months Ended

Jun. 30, 2013

Disclosure of Compensation Related Costs, Share-based Payments [Abstract]

Disclosure of Compensation Related Costs, Share-based Payments [Text Block]

3. STOCK-BASED COMPENSATION AND SHAREHOLDERS’ EQUITY

QNB sponsors stock-based compensation plans, administered by a Board Committee, under which both qualified and non-qualified stock options may be granted periodically to certain employees. 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 approximately $24,000 and $26,000 for the three months ended June 30, 2013 and 2012, respectively, and $30,000 and $42,000 for the six months ended June 30, 2013 and 2012, respectively. As of June 30, 2013, there was approximately $121,000 of unrecognized compensation cost related to unvested share-based compensation award grants that is expected to be recognized over the next 31 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 1998 Plan authorized the issuance of 220,500 shares. The time period during which any option is exercisable under the Plan is determined by the Committee but shall not commence before the expiration of six months after the date of grant or continue beyond the expiration of ten years after the date the option is awarded. The granted options vest ratably over a three-year period. As of June 30, 2013, there were 225,058 options granted, 30,444 options forfeited, 164,814 options exercised and 29,800 options outstanding under this Plan. The 1998 Plan expired on March 10, 2008.

The 2005 Plan authorizes the issuance of 200,000 shares. The terms of the 2005 Plan are identical to the 1998 Plan, except options expire five years after the grant date. As of June 30, 2013, there were 143,200 options granted, 45,000 options forfeited, 11,100 options exercised, and 87,100 options outstanding under this Plan. The 2005 Plan expires March 15, 2015.

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 numerous assumptions, many of which are highly subjective in nature.

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

Six months ended June 30,	2013			2012
Risk free interest rate		0.35	%		0.39	%
Dividend yield		4.26			4.68
Volatility		34.10			33.81
Expected life (years)		5.00			5.00

The risk-free interest rate was selected based upon yields of U.S. Treasury issues with a term approximating the expected life of the option being valued. Historical information was the primary 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 first six months of 2013 and 2012 was $4.52 and $3.81, respectively.

Stock option activity during the six months ended June 30, 2013 is as follows:

		Number of options			Weighted average exercise price		Weighted average remaining contractual term (in years)		Aggregate intrinsic value
Outstanding at December 31, 2012			128,225			22.72
	Granted		20,000			23.20
	Exercised		(28,725	)		20.35
	Forfeited		(2,600	)		19.79
Outstanding at June 30, 2013			116,900		$	23.45		2.41	$	370
Exercisable at June 30, 2013			55,900		$	25.52		1.16	$	190

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Consolidated Statement of Shareholders' Equity (Unaudited) (USD $) In Thousands, except Share data	Common Stock [Member]	Additional Paid-in Capital [Member]	Retained Earnings [Member]	Accumulated Other Comprehensive Income (Loss) [Member]	Treasury Stock [Member]	Total
Balance, December 31, 2012 at Dec. 31, 2012	$ 2,121	$ 12,787	$ 60,735	$ 4,456	$ (2,476)	$ 77,623
Balance, December 31, 2012 (in Shares) at Dec. 31, 2012	3,228,003					3,228,003
Net income			4,302			4,302
Other comprehensive loss, net of tax				(6,472)		(6,472)
Cash dividends declared ($0.54 per share)			(1,749)			(1,749)
Stock issued in connection with dividend reinvestment and stock purchase plan	12	436				448
Stock issued in connection with dividend reinvestment and stock purchase plan (in Shares)	19,498
Stock issued for employee stock purchase plan	1	39				40
Stock issued for employee stock purchase plan (in Shares)	1,913
Stock issued for options exercised	2	10				12
Stock issued for options exercised (in Shares)	4,145					28,725
Tax benefit of stock options exercised		2				2
Stock-based compensation expense		30				30
Balance, June 30, 2013 at Jun. 30, 2013	$ 2,136	$ 13,304	$ 63,288	$ (2,016)	$ (2,476)	$ 74,236
Balance, June 30, 2013 (in Shares) at Jun. 30, 2013	3,253,559					3,253,559

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Note 8 - Loans & Allowance for Loan Losses (Details) - Allowance for Loan Losses (USD $)	3 Months Ended		6 Months Ended
	Jun. 30, 2013	Jun. 30, 2012	Jun. 30, 2013	Jun. 30, 2012
Commercial:
Balance, beginning of period	$ 9,351,000	$ 9,456,000	$ 9,772,000	$ 9,241,000
Provision for (credit to) loan losses	100,000	0	100,000	300,000
Charge-offs	(92,000)	(149,000)	(543,000)	(243,000)
Recoveries	72,000	160,000	102,000	169,000
Balance, end of period	9,431,000	9,467,000	9,431,000	9,467,000
Commercial:Commercial and Industrial [Member]
Commercial:
Balance, beginning of period	2,314,000	3,317,000	2,505,000	2,959,000
Provision for (credit to) loan losses	(328,000)	164,000	(526,000)	520,000
Charge-offs	0	(74,000)	0	(74,000)
Recoveries	8,000	60,000	15,000	62,000
Balance, end of period	1,994,000	3,467,000	1,994,000	3,467,000
Commercial:Construction [Member]
Commercial:
Balance, beginning of period	230,000	333,000	209,000	556,000
Provision for (credit to) loan losses	12,000	20,000	33,000	(203,000)
Charge-offs	0	0	0	0
Recoveries	0	0	0	0
Balance, end of period	242,000	353,000	242,000	353,000
Commercial:Secured by Commercial Real Estate [Member]
Commercial:
Balance, beginning of period	3,873,000	3,126,000	3,795,000	3,124,000
Provision for (credit to) loan losses	42,000	2,000	120,000	4,000
Charge-offs	0	0	0	0
Recoveries	1,000	62,000	1,000	62,000
Balance, end of period	3,916,000	3,190,000	3,916,000	3,190,000
Commercial Secured By Residential Real Estate [Member]
Commercial:
Balance, beginning of period	1,146,000	773,000	1,230,000	746,000
Provision for (credit to) loan losses	246,000	88,000	498,000	151,000
Charge-offs	0	(50,000)	(336,000)	(86,000)
Recoveries	45,000	0	45,000	0
Balance, end of period	1,437,000	811,000	1,437,000	811,000
State And Political Subdivisions [Member]
Commercial:
Balance, beginning of period	257,000	301,000	260,000	195,000
Provision for (credit to) loan losses	20,000	(79,000)	17,000	27,000
Charge-offs	0	0	0	0
Recoveries	0	0	0	0
Balance, end of period	277,000	222,000	277,000	222,000
Loans To Depository Institutions [Member]
Commercial:
Balance, beginning of period	10,000	20,000	15,000	20,000
Provision for (credit to) loan losses	0	0	(5,000)	0
Charge-offs	0	0	0	0
Recoveries	0	0	0	0
Balance, end of period	10,000	20,000	10,000	20,000
Indirect Lease Financing [Member]
Commercial:
Balance, beginning of period	179,000	238,000	168,000	312,000
Provision for (credit to) loan losses	(29,000)	21,000	(27,000)	(47,000)
Charge-offs	0	(13,000)	(1,000)	(23,000)
Recoveries	6,000	22,000	16,000	26,000
Balance, end of period	156,000	268,000	156,000	268,000
Retail:1-4 Family Residential Mortgages [Member]
Commercial:
Balance, beginning of period	300,000	303,000	324,000	249,000
Provision for (credit to) loan losses	(11,000)	(5,000)	(35,000)	70,000
Charge-offs	0	0	0	(21,000)
Recoveries	0	2,000	0	2,000
Balance, end of period	289,000	300,000	289,000	300,000
Retail Home Equity Loans And Lines [Member]
Commercial:
Balance, beginning of period	714,000	547,000	582,000	625,000
Provision for (credit to) loan losses	24,000	37,000	248,000	(23,000)
Charge-offs	(79,000)	(1,000)	(172,000)	(19,000)
Recoveries	5,000	12,000	6,000	12,000
Balance, end of period	664,000	595,000	664,000	595,000
Retail:Consumer [Member]
Commercial:
Balance, beginning of period	29,000	17,000	27,000	20,000
Provision for (credit to) loan losses	5,000	10,000	16,000	13,000
Charge-offs	(13,000)	(11,000)	(34,000)	(20,000)
Recoveries	7,000	2,000	19,000	5,000
Balance, end of period	28,000	18,000	28,000	18,000
Unallocated [Member]
Commercial:
Balance, beginning of period	299,000	481,000	657,000	435,000
Provision for (credit to) loan losses	119,000	(258,000)	(239,000)	(212,000)
Balance, end of period	$ 418,000	$ 223,000	$ 418,000	$ 223,000

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Note 8 - Loans & Allowance for Loan Losses (Details) - Major Classes of Loans (USD $) In Thousands, unless otherwise specified	Jun. 30, 2013	Dec. 31, 2012
Commercial:
Loans	$ 489,209	$ 477,790
Net unearned costs (fees)	6	(57)
Loans receivable	489,215	477,733
Commercial:Commercial and Industrial [Member]
Commercial:
Loans	111,619	100,063
Commercial:Construction [Member]
Commercial:
Loans	10,557	11,061
Commercial:Secured by Commercial Real Estate [Member]
Commercial:
Loans	192,689	192,867
Commercial Secured By Residential Real Estate [Member]
Commercial:
Loans	44,102	41,003
State And Political Subdivisions [Member]
Commercial:
Loans	32,552	34,256
Loans To Depository Institutions [Member]
Commercial:
Loans	2,250	3,250
Indirect Lease Financing [Member]
Commercial:
Loans	8,703	9,685
Retail:1-4 Family Residential Mortgages [Member]
Commercial:
Loans	27,774	28,733
Retail Home Equity Loans And Lines [Member]
Commercial:
Loans	56,777	54,860
Retail:Consumer [Member]
Commercial:
Loans	$ 2,186	$ 2,012

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Note 5 - Earnings Per Share (Details) (Equity Option [Member])	3 Months Ended		6 Months Ended
	Jun. 30, 2013	Jun. 30, 2012	Jun. 30, 2013	Jun. 30, 2012
Equity Option [Member]
Note 5 - Earnings Per Share (Details) [Line Items]
Antidilutive Securities Excluded from Computation of Earnings Per Share, Amount	49,800	52,300	49,800	52,300

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Note 9 - Fair Value Measurements and Disclosures (Details) - Available-for-Sale Securities Measured at Fair Value Using Significant Unobservable Inputs (Fair Value, Inputs, Level 3 [Member], USD $) In Thousands, unless otherwise specified	6 Months Ended
	Jun. 30, 2013
Fair Value, Inputs, Level 3 [Member]
Fair Value, Liabilities Measured on Recurring Basis, Unobservable Input Reconciliation [Line Items]
Balance, beginning of year	$ 1,962
Settlements	0
Total gains or losses (realized/unrealized)
Included in earnings	0
Included in other comprehensive income	129
Transfers in and/or out of Level 3	0
Balance, June 30, 2013	$ 2,091

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Note 10 - Off-Balance-Sheet Financial Instruments and Guarantees

6 Months Ended

Jun. 30, 2013

Commitments and Contingencies Disclosure [Abstract]

Commitments and Contingencies Disclosure [Text Block]

10. OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS AND GUARANTEES

In the normal course of business there are various legal proceedings, commitments, and contingent liabilities which are not reflected in the financial statements. Management does not anticipate any material losses as a result of these transactions and activities. They include, among other things, commitments to extend credit and standby letters of credit. The maximum exposure to credit loss, which represents the possibility of sustaining a loss due to the failure of the other parties to a financial instrument to perform according to the terms of the contract, is represented by the contractual amount of these instruments. QNB uses the same lending standards and policies in making credit commitments as it does for on-balance sheet instruments. The activity is controlled through credit approvals, control limits, and monitoring procedures.

A summary of the Bank's financial instrument commitments is as follows:

	June 30, 2013		December 31, 2012
Commitments to extend credit and unused lines of credit	$	148,511	$	138,425
Standby letters of credit		5,624		5,332
Total financial instrument commitments	$	154,135	$	143,757

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require the payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. QNB evaluates each customer’s creditworthiness on a case-by-case basis.

Standby letters of credit are conditional commitments issued by the Bank to guarantee the financial or performance obligation of a customer to a third party. QNB’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for standby letters of credit is represented by the contractual amount of those instruments. The Bank uses the same credit policies in making conditional obligations as it does for on-balance sheet instruments. These standby letters of credit expire within three years. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending other loan commitments. The Bank requires collateral and personal guarantees supporting these letters of credit as deemed necessary. Management believes that the proceeds obtained through a liquidation of such collateral and the enforcement of personal guarantees would be sufficient to cover the maximum potential amount of future payments required under the corresponding guarantees. The amount of the liability as of June 30, 2013 and December 31, 2012 for guarantees under standby letters of credit issued is not material.

The amount of collateral obtained for letters of credit and commitments to extend credit is based on management’s credit evaluation of the customer. Collateral varies, but may include real estate, accounts receivable, marketable securities, pledged deposits, inventory or equipment.

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Note 6 - Comprehensive Income

6 Months Ended

Jun. 30, 2013

Disclosure Text Block [Abstract]

Comprehensive Income (Loss) Note [Text Block]

6. COMPREHENSIVE INCOME

The following shows the components of accumulated other comprehensive income at June 30, 2013 and December 31, 2012:

	June 30, 2013			December 31, 2012
Unrealized net holding (losses) gains on available-for-sale securities	$	(2,184	)	$	7,736
Unrealized losses on available-for-sale securities for which a portion of an other-than-temporary impairment loss has been recognized in earnings		(871	)		(984	)
Accumulated other comprehensive (loss) income		(3,055	)		6,752
Tax effect		1,039			(2,296	)
Accumulated other comprehensive (loss) income, net of tax	$	(2,016	)	$	4,456

The following table presents amounts reclassified out of accumulated other comprehensive income for the six months ended June 30, 2013:

Details about accumulated other comprehensive income	Amount reclassified from accumulated other comprehensive income			Affected line item in the statement of income
Unrealized net holding gains on available-for-sale securities	$	559		Net gain on sale of investment securities
Other-than-temporary losses on investment securities		(43	)	Net other-than-temporary impairment losses on investment securities
		516
Tax effect		(176	)	Provision for income taxes
Total reclass out of accumulated other comprehensive income, net of tax	$	340		Net of tax

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Note 5 - Earnings Per Share (Tables)

6 Months Ended

Jun. 30, 2013

Earnings Per Share [Abstract]

Schedule of Earnings Per Share, Basic and Diluted [Table Text Block]

	Three months ended June 30,				Six months ended June 30,
	2013		2012		2013		2012
Numerator for basic and diluted earnings per share - net income	$	1,894	$	2,505	$	4,302	$	4,976
Denominator for basic earnings per share - weighted average shares outstanding		3,243,867		3,190,552		3,238,020		3,185,728
Effect of dilutive securities - employee stock options		12,088		17,774		11,048		14,865
Denominator for diluted earnings per share - adjusted weighted average shares outstanding		3,255,955		3,208,326		3,249,068		3,200,593
Earnings per share - basic	$	0.58	$	0.79	$	1.33	$	1.56
Earnings per share - diluted	$	0.58	$	0.78	$	1.32	$	1.55

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Note 11 - Regulatory Restrictions

6 Months Ended

Jun. 30, 2013

Disclosure Text Block [Abstract]

Regulatory Capital Requirements under Banking Regulations [Text Block]

11. REGULATORY RESTRICTIONS

Dividends payable by the Company and the Bank are subject to various limitations imposed by statutes, regulations and policies adopted by bank regulatory agencies. Under Pennsylvania banking law, the Bank is subject to certain restrictions on the amount of dividends that it may declare without prior regulatory approval. Under Federal Reserve regulations, the Bank is limited as to the amount it may lend affiliates, including QNB Corp., unless such loans are collateralized by specific obligations.

Both the Company and the Bank are subject to regulatory capital requirements administered by Federal banking agencies. Failure to meet minimum capital requirements can initiate actions by regulators that could have an effect on the financial statements. Under the framework for prompt corrective action, both the Company and the Bank must meet capital guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance-sheet items. The capital amounts and classification are also subject to qualitative judgments by the regulators. Management believes, as of June 30, 2013, that the Company and the Bank met capital adequacy requirements to which they were subject.

As of the most recent notification, the primary regulator of the Bank considered it to be “well capitalized” under the regulatory framework. There are no conditions or events since that notification that management believes have changed the classification. To be categorized as well capitalized, the Company and the Bank must maintain minimum ratios as set forth in the following table.

	Capital levels
	Actual					Adequately capitalized					Well capitalized
As of June 30, 2013	Amount		Ratio			Amount		Ratio			Amount		Ratio
Total risk-based capital (to risk-weighted assets):
Consolidated	$	84,026		13.92	%	$	48,295		8.00	%	N/A		N/A
Bank		79,049		13.19			47,944		8.00		$	59,930		10.00	%
Tier I capital (to risk-weighted assets):
Consolidated		76,252		12.63			24,148		4.00		N/A		N/A
Bank		71,534		11.94			23,972		4.00			35,958		6.00
Tier I capital (to average assets):
Consolidated		76,252		8.37			36,423		4.00		N/A		N/A
Bank		71,534		7.90			36,239		4.00			45,299		5.00

	Capital levels
	Actual					Adequately capitalized					Well capitalized
As of December 31, 2012	Amount		Ratio			Amount		Ratio			Amount		Ratio
Total risk-based capital (to risk-weighted assets):
Consolidated	$	80,758		13.60	%	$	47,490		8.00	%	N/A		N/A
Bank		76,154		12.92			47,170		8.00		$	58,963		10.00	%
Tier I capital (to risk-weighted assets):
Consolidated		73,167		12.33			23,745		4.00		N/A		N/A
Bank		68,754		11.66			23,585		4.00			35,378		6.00
Tier I capital (to average assets):
Consolidated		73,167		7.96			36,762		4.00		N/A		N/A
Bank		68,754		7.51			36,602		4.00			45,752		5.00

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Document And Entity Information	6 Months Ended
	Jun. 30, 2013	Jul. 31, 2013
Document and Entity Information [Abstract]
Entity Registrant Name	QNB CORP
Document Type	10-Q
Current Fiscal Year End Date	--12-31
Entity Common Stock, Shares Outstanding		3,253,559
Amendment Flag	false
Entity Central Index Key	0000750558
Entity Current Reporting Status	Yes
Entity Voluntary Filers	No
Entity Filer Category	Smaller Reporting Company
Entity Well-known Seasoned Issuer	No
Document Period End Date	Jun. 30, 2013
Document Fiscal Year Focus	2013
Document Fiscal Period Focus	Q2

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Note 3 - Stock-based Compensation and Shareholders' Equity (Tables)

6 Months Ended

Jun. 30, 2013

Disclosure of Compensation Related Costs, Share-based Payments [Abstract]

Schedule of Share-based Payment Award, Stock Options, Valuation Assumptions [Table Text Block]

Six months ended June 30,	2013			2012
Risk free interest rate		0.35	%		0.39	%
Dividend yield		4.26			4.68
Volatility		34.10			33.81
Expected life (years)		5.00			5.00

Schedule of Share-based Compensation, Stock Options, Activity [Table Text Block]

		Number of options			Weighted average exercise price		Weighted average remaining contractual term (in years)		Aggregate intrinsic value
Outstanding at December 31, 2012			128,225			22.72
	Granted		20,000			23.20
	Exercised		(28,725	)		20.35
	Forfeited		(2,600	)		19.79
Outstanding at June 30, 2013			116,900		$	23.45		2.41	$	370
Exercisable at June 30, 2013			55,900		$	25.52		1.16	$	190

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Note 10 - Off-Balance-Sheet Financial Instruments and Guarantees (Details) - Financial Instrument Commitments (USD $) In Thousands, unless otherwise specified	Jun. 30, 2013	Dec. 31, 2012
Fair Value, Off-balance Sheet Risks, Disclosure Information [Line Items]
Commitments	$ 154,135	$ 143,757
Standby Letters of Credit [Member]
Fair Value, Off-balance Sheet Risks, Disclosure Information [Line Items]
Commitments	5,624	5,332
Commitments to Extend Credit [Member]
Fair Value, Off-balance Sheet Risks, Disclosure Information [Line Items]
Commitments	$ 148,511	$ 138,425

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Note 9 - Fair Value Measurements and Disclosures (Details) - Estimated Fair Values and Carrying Amounts of Financial and Off-Balance Sheet Instruments (USD $)	Jun. 30, 2013	Dec. 31, 2012	Jun. 30, 2012	Dec. 31, 2011
Financial assets
Cash and cash equivalents, carrying amount	$ 15,897,000	$ 15,453,000	$ 20,263,000	$ 10,555,000
Cash and cash equivalents, fair value	15,897,000	15,453,000
Investment securities available-for-sale	380,364,000	401,502,000
Investment securities held-to-maturity, carrying amount	146,000	146,000
Investment securities held-to-maturity, fair value	163,000	166,000
Restricted investment in bank stocks, carrying amount	1,837,000	2,244,000
Restricted investment in bank stocks, fair value	1,837,000	2,244,000
Loans held-for-sale, carrying amount	1,328,000	1,616,000
Loans held-for-sale, fair value	1,328,000	1,674,000
Net loans, carrying amount	479,784,000	467,961,000
Net loans, fair value	481,469,000	474,330,000
Mortgage servicing rights, carrying amount	504,000	448,000
Mortgage servicing rights, fair value	576,000	464,000
Accrued interest receivable, carrying amount	2,981,000	2,803,000
Accrued interest receivable, fair value	2,981,000	2,803,000
Financial liabilities
Deposits, carrying amount	795,913,000	801,638,000
Short-term borrowings, carrying amount	32,851,000	32,488,000
Short-term borrowings, fair value	32,851,000	32,488,000
Long-term debt, carrying amount	5,282,000	5,287,000
Long-term debt, fair value	5,412,000	5,694,000
Accrued interest payable, carrying amount	407,000	487,000
Accrued interest payable, fair value	407,000	487,000
Off-balance sheet instruments
Commitments to extend credit, carrying amount	0	0
Commitments to extend credit, fair value	0	0
Standby letters of credit, carrying amount	0	0
Standby letters of credit, fair value	0	0
With No Stated Maturities [Member] | Fair Value, Inputs, Level 1 [Member]
Financial liabilities
Deposits, fair value	542,740,000	532,404,000
With No Stated Maturities [Member] | Fair Value, Inputs, Level 2 [Member]
Financial liabilities
Deposits, fair value	0	0
With No Stated Maturities [Member] | Fair Value, Inputs, Level 3 [Member]
Financial liabilities
Deposits, fair value	0	0
With No Stated Maturities [Member]
Financial liabilities
Deposits, carrying amount	542,740,000	532,404,000
Deposits, fair value	542,740,000	532,404,000
With Stated Maturities [Member] | Fair Value, Inputs, Level 1 [Member]
Financial liabilities
Deposits, fair value	0	0
With Stated Maturities [Member] | Fair Value, Inputs, Level 2 [Member]
Financial liabilities
Deposits, fair value	256,933,000	273,878,000
With Stated Maturities [Member] | Fair Value, Inputs, Level 3 [Member]
Financial liabilities
Deposits, fair value	0	0
With Stated Maturities [Member]
Financial liabilities
Deposits, carrying amount	253,173,000	269,234,000
Deposits, fair value	256,933,000	273,878,000
Fair Value, Inputs, Level 1 [Member]
Financial assets
Cash and cash equivalents, fair value	15,897,000	15,453,000
Investment securities available-for-sale	4,470,000	4,055,000
Investment securities held-to-maturity, fair value	0	0
Restricted investment in bank stocks, fair value	1,837,000	2,244,000
Loans held-for-sale, fair value	0	0
Net loans, fair value	0	0
Mortgage servicing rights, fair value	0	0
Accrued interest receivable, fair value	0	0
Financial liabilities
Short-term borrowings, fair value	32,851,000	32,488,000
Long-term debt, fair value	0	0
Accrued interest payable, fair value	0	0
Off-balance sheet instruments
Commitments to extend credit, fair value	0	0
Standby letters of credit, fair value	0	0
Fair Value, Inputs, Level 2 [Member]
Financial assets
Cash and cash equivalents, fair value	0	0
Investment securities available-for-sale	373,803,000	395,485,000
Investment securities held-to-maturity, fair value	163,000	166,000
Restricted investment in bank stocks, fair value	0	0
Loans held-for-sale, fair value	1,328,000	1,674,000
Net loans, fair value	0	0
Mortgage servicing rights, fair value	0	0
Accrued interest receivable, fair value	2,981,000	2,803,000
Financial liabilities
Short-term borrowings, fair value	0	0
Long-term debt, fair value	5,412,000	5,694,000
Accrued interest payable, fair value	407,000	487,000
Off-balance sheet instruments
Commitments to extend credit, fair value	0	0
Standby letters of credit, fair value	0	0
Fair Value, Inputs, Level 3 [Member]
Financial assets
Cash and cash equivalents, fair value	0	0
Investment securities available-for-sale	2,091,000	1,962,000
Investment securities held-to-maturity, fair value	0	0
Restricted investment in bank stocks, fair value	0	0
Loans held-for-sale, fair value	0	0
Net loans, fair value	481,469,000	474,330,000
Mortgage servicing rights, fair value	576,000	464,000
Accrued interest receivable, fair value	0	0
Financial liabilities
Short-term borrowings, fair value	0	0
Long-term debt, fair value	0	0
Accrued interest payable, fair value	0	0
Off-balance sheet instruments
Commitments to extend credit, fair value	0	0
Standby letters of credit, fair value	$ 0	$ 0